-----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, WBamuiy3GmnTpy1mDZ8TegjZ/VU3h4CLOzPHVglFyuc0KleUfFxNhj7ysOrWQzBB fsp4+025t/ie7WGCWfes1g== 0000898430-99-001127.txt : 19990326 0000898430-99-001127.hdr.sgml : 19990326 ACCESSION NUMBER: 0000898430-99-001127 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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-K SEC ACT: SEC FILE NUMBER: 001-10731 FILM NUMBER: 99572631 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-K 1 FORM 10-K DATED 12/31/98 FORM 10-K- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 ------------------------------------------------------------------ or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________________ to ______________________________ 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 Sixth Street, Los Angeles, CA 90017 --------------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (213) 972 - 4172 Registrant's telephone number, including area code ------------------------------------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered -------------------------------------------- ------------------------------------------ -------------------------------------------- ------------------------------------------ Securities pursuant to Section 12(g) of the Act: Common Stock, No Par Value --------------------------------------------------------------------------------------------- (Title of class) --------------------------------------------------------------------------------------------- (Title of class)
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. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405, 17 CFR 230.405). NOTE: If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form. APPLICABLE ONLY TO REGISTRANT INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 13,665,098 shares outstanding as of February 28, 1999. DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
Documents Incorporated by Reference Part of Form 10-K Into Which Incorporated - ----------------------------------- --------------------------------------- 1998 Annual Report to Shareholders Part II Items 6,7 and 8 and Part IV Definitive Proxy Statement for the Annual Meeting of Shareholders Filed within 120 days of the fiscal Year ended December 31, 1998 Part III
Exhibit Index on Pages 32-34 1 FORM 10-K --------- TABLE OF CONTENTS AND CROSS REFERENCE SHEET -------------------------------------------
Page in Incorporation PART I 10-K by Reference ---- ------------ Item 1. Business........................................... 4 General.......................................... 4 Lending Activities............................... 4 Competition...................................... 5 Subsidiaries..................................... 5 Supervision and Regulation....................... 6 Employees........................................ 22 Item 2. Properties......................................... 22 Item 3. Legal Proceedings.................................. 23 Item 4. Submission of Matters to a Vote of Security Holders................................. 23 Executive Officers of the Registrant .......................... 23 PART II Item 5. Market for Registrant's Common Equity and Related Security Holder Matters................ 25 Item 6. Selected Financial Data............................ 26 1998 Annual Report Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 27 1998 Annual Report Item 8. Financial Statements and Supplementary Data............................................... 27 1998 Annual Report Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................... 27 PART III Item 10. Directors and Executive Officers of the Registrant......................................... 28 1999 Proxy Statement Item 11. Executive Compensation............................. 28 1999 Proxy Statement Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 28 1999 Proxy Statement
2 Item 13. Certain Relationships and Related Transactions....................................... 28 1999 Proxy Statement PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 29 1998 Annual Report SIGNATURES..................................................... 30 EXHIBIT INDEX.................................................. 32
3 PART I - ------ Item 1 Business General - ------- GBC Bancorp (the "Company"), a California corporation incorporated in 1980, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered at 800 West 6th Street in Los Angeles, California 90017. The Company owns all of the outstanding stock of its wholly- owned subsidiary General Bank (the "Bank"), a California state-chartered bank which commenced operations in March, 1980. GBC Bancorp functions primarily as a holding company for the Bank. The Bank has conducted the business of a commercial bank since it commenced operations. The Bank is a community bank that serves individuals and small to medium-sized businesses through sixteen branch offices located in the greater Los Angeles, San Diego and Silicon Valley areas and two loan production offices, one located in Bellevue, Washington and one in New York, New York. The Bank has an operations center in Rosemead and has branches located in downtown Los Angeles, Monterey Park, Torrance, Artesia, Alhambra, City of Industry, Irvine, San Diego, Arcadia, Diamond Bar, Northridge, Orange, Cupertino, San Mateo, Fremont and San Jose. The San Jose branch was opened for business in February, 1998. The loan production offices have been established primarily to develop loans on behalf of the Bank and to act as the liaison between customers and the Bank in coordinating other banking services. The Bank offers a variety of banking services to its customers, including accepting checking, savings and time deposits; making secured and unsecured loans; offering traveler's checks, safe deposit boxes, credit cards and other fee-based services; and providing international trade-related services. Escrow services offered through its subsidiary, Southern Counties Escrow, were discontinued in the first quarter of 1999 commensurate with the decision to cease doing business as an escrow agent. Lending Activities - ------------------ The Bank's primary emphasis is on commercial and real estate lending, real estate construction lending, and, to a lesser extent, SBA lending. The Bank maintains an International Banking Division, which facilitates international trade by providing financing, letter of credit services and collections, as well as other international trade-related banking services. The Bank does not make loans to foreign banks, foreign governments or their central banks, or commercial and industrial 4 loans to entities domiciled outside of the United States, except for the extension of overdraft privileges to its foreign correspondent banks on a limited, case by case, basis. The Bank maintains a SBA lending division to provide loans for small to medium-sized businesses under the Small Business Administration 7-A guarantee program. Loans range from $50,000 to $1,000,000 with maturities from 7 to 25 years. As of December 31, 1998, the Bank's SBA servicing portfolio was approximately $45 million. Competition - ----------- The Bank actively competes for deposits and loans with other banks and financial institutions located in its service area. Interest rates, customer service and legal lending limits are the principal competitive factors, and increasing deregulation of financial institutions has expanded competition. In order to compete with other financial institutions in its service area, the Bank relies principally upon providing quality service to its customers, personal contact by its officers, directors and employees, and local promotional activity. Competitors presently include banks serving the Asian population in Southern and Northern California, as well as major banks with extensive branch systems operating over a wide geographic area. Many of the banks have greater financial resources and facilities than the Bank and many offer certain services, such as trust services, not currently offered by the Bank. Subsidiaries - ------------ Bank Subsidiaries - ----------------- GBC Investment & Consulting Company, Inc., a wholly-owned subsidiary of the Bank, was incorporated to provide specific, in-depth expertise in the areas of investment and consultation on an international and domestic basis. An office was established in Taipei, Taiwan to coordinate and develop business between the Bank and prospective customers in Taiwan and other Asian countries. As of and for the year ended December 31, 1998, GBC Investment & Consulting Company, Inc. reported total assets of $20,000, and a net loss of $44,000. GBC Leasing Company, Inc. is the Bank's leasing subsidiary. The Bank owns 90% of the voting stock of this company which was formed to acquire various assets, such as equipment on lease, promissory notes and leases and/or partnership interests in partnerships owning such types of assets, in exchange for its common stock in transfers qualifying as a tax free exchange of property, described in Section 351 of the Internal 5 Revenue Code of 1986, as amended. As of and for the year ended December 31, 1998, GBC Leasing Company, Inc. reported total assets of $746,000, and a net loss of $66,000. As of December 31, 1998, Southern Counties Escrow, a wholly owned subsidiary of the Bank, reported total assets of $321,000 and net income of $66,000. During the first quarter of 1999, the Board of Directors of Southern Counties Escrow determined it was in its best interests to cease doing business as an escrow agent, and it entered into a contract to transfer existing escrow files to a third party. Accordingly, it was resolved to take action to surrender the escrow agent license to the applicable regulatory agency. GBC Insurance Services, Inc. is a wholly-owned subsidiary of the Bank and operates exclusively as a full service insurance agent/broker to provide additional financial service to the Bank's customers. In August, 1997, the business of GBC Insurance Services, Inc. was transferred to a division of General Bank. Accordingly, the insurance subsidiary is in an inactive status and will be formally dissolved in the future. Holding Company Subsidiaries - ---------------------------- In addition to its wholly-owned bank subsidiary, the Company owns all of the outstanding stock of GBC Venture Capital, Inc. The business purpose of GBC Venture Capital, Inc. is to hold stock warrants received as part of business relationships and to make equity investments in companies and limited partnerships subject to applicable regulatory restrictions. As of, and for the year ended, December 31, 1998, GBC Venture Capital, Inc., reported total assets of $1,419,000 and net income of $48,000. Supervision and Regulation - -------------------------- General - ------- The following generally refers to certain statutes and regulations affecting the banking industry. These references provide brief summaries only and are not intended to be complete. These references are qualified in their entirety by the referenced statutes and regulations. In addition, some statutes and regulations which apply to and regulate the operation of the banking industry might exist which are not referenced below. Changes in applicable statutes and regulations may have a material effect on the business of the Company and its subsidiaries. 6 GBC Bancorp - ----------- Upon the reorganization of the Bank as a wholly-owned subsidiary, the Company became a bank holding company within the meaning of the Bank Holding Company ("BHC") Act and is subject to the supervision and regulation of the Federal Reserve Bank of San Francisco. The Company functions primarily as the sole stockholder of the Bank and establishes general policies and activities of the operating subsidiaries. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, the filing of annual, quarterly and other reports with the Securities and Exchange Commission. The Company, as a bank holding company, is subject to regulation under the BHC Act, and is registered with and subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the "Board"). The Company is required to obtain the prior approval of the Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of voting shares of any bank if, after giving effect to such acquisition, the Company would own or control, directly or indirectly, more than 5% of such bank. The BHC Act prohibits the Company from acquiring any voting shares of, interest in, or all or substantially all of the assets of a bank located outside the state of California unless the laws of such state specifically authorize such acquisition. Under the BHC Act, the Company may not engage in any business other than managing or controlling banks or furnishing services to its subsidiaries. The Company is also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company unless the company is engaged in such activities. The Board's approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices. In making such determinations, the Board considers whether the performance of such activities by the Company would offer advantages to the public, such as greater convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Further, the Board is empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. Although the entire scope of permitted activities is uncertain and cannot be predicted, the major non-banking activities that have been permitted to bank holding companies with certain limitations are: making, acquiring or servicing loans that would be made by a mortgage, finance, credit card or factoring company; operating an industrial loan company; leasing real and personal property; acting as an insurance agent, broker, or principal with respect to insurance that is directly related to the extension of credit by the bank holding company or any of its subsidiaries and limited to repayment of the credit in the event of death, disability or involuntary unemployment; issuing and selling money orders, savings bonds and traveler's checks; performing certain trust company services; 7 performing appraisals of real estate and personal property; providing investment and financial advice; providing data processing services; providing courier services; providing management consulting advice to non-affiliated depository institutions; arranging commercial real estate equity financing; providing certain securities brokerage services; underwriting and dealing in government obligations and money market instruments; providing foreign exchange advisory and transactional services; acting as a futures commission merchant; providing investment advice on financial futures and options on futures; providing consumer financial counseling; providing tax planning and preparation services; providing check guaranty services; engaging in collection agency activities; and operating a credit bureau. The Company's primary source of income is the receipt of dividends from the Bank. The Bank's ability to make such payments to the Company is subject to certain statutory and regulatory restrictions. The Company and the Bank are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, the Bank may not condition an extension of credit on a customer's obtaining other services provided by it, the Company or any other subsidiary or on a promise by the customer not to obtain other services from a competitor. As a bank holding company, the Company is required to file reports with the Board and to provide such additional information as the Board may require. The Board also has the authority to examine the Company and each of its subsidiaries with the cost thereof to be borne by the Company. In addition, bank subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealing with their holding companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral security for a loan or extension of credit to any person or company or issue a guarantee, acceptance or letter of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10% of such subsidiary's capital stock and surplus on a per affiliate basis or 20% of such subsidiary's capital stock and surplus on an aggregate affiliate basis. Such transactions must be on terms and conditions that are consistent with safe and sound banking practices. A bank and its subsidiaries generally may not purchase a low-quality asset, as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral. The BHC Act also prohibits a bank holding company or any of its subsidiaries from acquiring voting shares or substantially all the assets of any bank located in a state 8 other than the state in which the operations of the bank holding company's banking subsidiaries are principally conducted unless such acquisition is expressly authorized by statutes of the state in which the bank to be acquired is located. Legislation adopted in California permits out-of-state bank holding companies to acquire California banks. See "Effect of Governmental Policies and Recent Legislation" later in this section. The BHC Act and regulations of the Board also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock. On September 17, 1998, the Board of Directors authorized a stock repurchase program of up to 1.4 million shares of its common stock at prevailing market prices from time to time, provided: (i) such repurchases are made pursuant to Rule 10b-18 issued by the Securities and Exchange Commission under the Securities Exchange Act of 1934 and (ii) at the time of any such repurchase, the Company qualifies for the exception for well-capitalized bank holding companies in Regulation Y of the Federal Reserve Board and meets the test for distribution under the California General Corporation Law. The Board has cease and desist powers to cover parent bank holding companies and non-banking subsidiaries where action of a parent bank holding company or its non-financial institutions represent an unsafe or unsound practice or violation of law. The Board has the authority to regulate debt obligations (other than commercial paper) issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations. The ability of the Company to pay dividends to its shareholders is subject to the restrictions set forth in the California General Corporation Law (the "Corporation Law"). The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally are as follows: (i) the corporation's assets equal at least 1 1/4 times its liabilities; and (ii) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets equal at least 1 1/4 times its current liabilities. General Bank (the "Bank") - ------------------------- Banks are extensively regulated under both federal and state law. The Bank, a California state-chartered bank, is subject to primary supervision, periodic examination and regulation by the California Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation (the "FDIC"). 9 The Bank is insured by the FDIC up to a maximum of $100,000 per depositor. For this protection, the Bank, as is the case with all insured banks, is subject to the rules and regulations of the FDIC. The Bank, while not a member of the Federal Reserve System, is subject to certain regulations of the Board. Various requirements and restrictions under the laws of the state of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices. Further, the Bank is required to maintain certain levels of capital. There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Bank. California law restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank has no retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank's last preceding fiscal year only after obtaining the prior approval of the Commissioner of the DFI. The FDIC also has authority to prohibit the Bank from engaging in what, in the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, its affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of such affiliates. Such restrictions prevent affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank in any other affiliate is limited to 10 percent of the Bank's capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20 percent of the Bank's capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of the FDIC Improvement Act ("FDICIA"). 10 Potential Actions - ----------------- Commercial banking organizations, such as the Bank, may be subject to potential enforcement actions by the Board, the FDIC and the Commissioner of the DFI for unsafe or unsound practices in conducting their business or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of FDICIA. Effect of Governmental Policies and Recent Legislation - ------------------------------------------------------ Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by a bank on its deposits and its borrowings and the interest rates received by a bank on loans extended to its customers and securities held in a bank's portfolio comprise the major portion of a bank's earnings. These rates are highly sensitive to many factors that are beyond the control of a bank. Accordingly, the earnings and growth of a bank are subject to the influence of local, domestic and foreign economic conditions, including recession, unemployment and inflation. The commercial banking business is not only affected by general economic conditions but is also influenced by monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board. The Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The likelihood of any major changes and the impact such changes might have on the Company are impossible to predict. Certain of the potentially significant changes 11 which have been enacted and proposals which have been made recently are discussed below. Federal Deposit Insurance Corporation Improvement Act of 1991 - -------------------------------------------------------------- Set forth below is a brief discussion of certain portions of FDICIA and implementing regulations that have been adopted or proposed by the Board, the Comptroller of the Currency ("Comptroller"), the Office of Thrift Supervision ("OTS") and the FDIC (collectively, the "federal banking agencies"). Prompt Corrective Regulatory Action - ----------------------------------- FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions that fall below one or more prescribed minimum capital ratios. The purpose of this law is to resolve the problems of insured depository institutions at the least possible long-term cost to the appropriate deposit insurance fund. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized (significantly exceeding the required minimum capital requirements), adequately capitalized (meeting the required capital requirements), undercapitalized (failing to meet any one of the capital requirements), significantly undercapitalized (significantly below any one capital requirement) and critically undercapitalized (failing to meet all capital requirements). The federal banking agencies have issued uniform final regulations implementing the prompt corrective action provisions of FDICIA. Under the regulations, an insured depository institution will be deemed to be: . "well capitalized" if it (i) has total risk-based capital of 10 percent or greater, Tier 1 risk-based capital of 6 percent or greater and a leverage capital ratio of 5 percent or greater and (ii) is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. . "adequately capitalized" if it has total risk-based capital of 8 percent or greater, Tier 1 risk-based capital of 4 percent or greater and a leverage capital ratio of 4 percent or greater (or a leverage capital ratio of 3 percent or greater if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report examination); 12 . "undercapitalized" if it has total risk-based capital that is less than 8 percent, Tier 1 risk-based capital that is less than 4 percent or a leverage capital ratio that is less than 4 percent (or a leverage capital ratio that is less than 3 percent if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); . "significantly undercapitalized" if it has total risk-based capital that is less than 6 percent, Tier 1 risk-based capital that is less than 3 percent or a leverage capital ratio that is less than 3 percent; and . "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2 percent. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized, may be reclassified to the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, (i) determines that the institution is in an unsafe or unsound condition or (ii) deems the institution to be engaging in an unsafe or unsound practice and not to have corrected the deficiency. At each successive lower capital category, an insured depository institution is subject to more restrictions and federal banking agencies are given less flexibility in deciding how to address the problems associated with such category. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions, and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions 13 if it determines that such action will further the purpose of the prompt corrective action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers, subject to certain grandfather provisions for those elected prior to enactment of FDICIA; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by holding companies of such institutions; (ix) required divestiture of subsidiaries by such institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. The FDIC has adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and 14 credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0 percent for assets with low credit risk, such as certain U.S. Treasury securities, to 100 percent for assets with relatively high credit risk, such as business loans. In addition to the risk-based guidelines, the FDIC requires banks to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a bank rated in the highest of the five categories used by the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total assets is 3 percent. For all banks not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3 percent minimum, or 4 percent to 5 percent. In addition to these uniform risk- based capital guidelines and leverage ratios that apply across the industry, the FDIC has the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. With respect to the leverage ratio requirements for bank holding companies, in June 1998 the Board amended its Regulation Y to provide that the minimum Tier 1 leverage ratio for the most highly-rated bank holding companies, as well as those that have adopted the Board's market risk capital rule, is 3 percent, with the minimum leverage ratio for all other bank holding companies being 4 percent. The Board's adoption of this rule stemmed in large part from an interagency effort among the various regulatory agencies responsible for regulating financial institutions to streamline capital standards pursuant to section 303 of the Riegle Community Development and Regulatory Improvement Act of 1994. Work is currently in progress to complete a final rule for banks. The federal banking agencies have adopted regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the federal banking agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by- case basis by the examiner and the appropriate federal banking agency. The federal banking agencies issued a rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks 15 are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. The federal banking agencies have issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss allowances to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. Capital Adequacy Guidelines - --------------------------- The FDIC has issued guidelines to implement the risk-based capital requirements. The guidelines are intended to establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet items into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Under these guidelines, assets and credit equivalent amounts of off-balance sheet items, such as letters of credit and outstanding loan commitments, are assigned to one of several risk categories, which range from 0 percent for risk-free assets, such as cash and certain U.S. Government securities, to 100 percent for relatively high-risk assets, such as loans and investments in fixed assets, premises and other real estate owned. The aggregated dollar amount of each category is then multiplied by the risk-weight associated with that category. The resulting weighted values from each of the risk categories are then added together to determine the total risk-weighted assets. A banking organization's qualifying total capital consists of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1 capital consists primarily of common stock, related surplus and retained earnings, qualifying non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries. Intangibles, such as goodwill, are generally deducted from Tier 1 capital; however, purchased mortgage servicing rights and purchased credit card relationships may be included, subjected to certain limitations. At least 50 percent of the banking organization's total regulatory capital must consist of Tier 1 capital. Tier 2 capital may consist of: (i) the allowance for possible loan and lease losses in an amount up to 1.25 percent of risk-weighted assets; (ii) perpetual preferred stock, cumulative perpetual preferred stock and long-term stock and related surplus; (iii) hybrid capital (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus, in an amount up to 50 percent of Tier 1 capital. The inclusion of the foregoing elements of Tier 2 capital are subject to certain requirements and limitations of the federal banking agencies. 16 The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital to average total assets of 3 percent for the highest rated banks. This leverage capital ratio is only a minimum. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles are expected to maintain capital well above the minimum level. Furthermore, higher leverage capital ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of FDICIA. The regulatory Capital Guidelines as well as the actual regulatory capitalization for the Company and the Bank as of December 31, 1998 follow:
Minimum Well GBC General Regulatory Capitalized Bancorp Bank Requirements Requirements - ----------------------------------------------------------------------------------------------------------- Tier 1 11.06% 10.77% 4% 6% Total 14.98% 12.02% 8% 10% Leverage Ratio 9.75% 9.49% 4% 5%
As of December 31, 1998, both the Company and the Bank are considered well capitalized. Safety and Soundness Standards - ------------------------------ The federal banking agencies have adopted guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. The federal banking agencies have issued regulations prescribing uniform guidelines for real estate lending. The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. Appraisals for "real estate related financial transactions" must be conducted by either state-certified or state-licensed appraisers for transactions in excess of certain 17 amounts. State-certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state-licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the federal banking agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing of real property, and the use of real property or interests in real property for a loan or investment, including mortgage backed securities. Standards must also be prescribed for classified loans, earnings and the ratio of market value to book value for publicly traded shares. Further, FDICIA requires the federal banking agencies to establish standards prohibiting compensation, fees and benefit arrangements that are excessive or could lead to financial loss. Premiums for Deposit Insurance - ------------------------------ Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90 percent of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The FDIC also has authority to impose special assessments against insured deposits. The FDIC has implemented a final risk-based assessment system, as required by FDICIA, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," or 1.25 percent, the total amount raised from BIF's members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were 0.023 percent of deposits. In September 1995, the FDIC lowered assessments from their rates of $0.23 to $0.31 per $100 of insured deposits to rates of $0.04 to $0.31, depending on the condition of the bank, as a result of the recapitalization of BIF. In November of the same year, the FDIC voted to drop its premiums for well capitalized banks to zero effective January 1, 1996. Other banks will be charged risk-based premiums up to $0.27 per $100 of deposits. The Bank, being considered well capitalized, made zero payment as FDIC insurance premium for the year ended December 31, 1998, 18 The Deposit Insurance Fund Act of 1996 included provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and to repay outstanding bonds that were issued to recapitalize the SAIF's predecessor as a result of payments made due to the insolvency of savings and loan associations and other federally insured savings institutions in the late 1980's and early 1990's. The new law required savings and loan associations to bear the cost of recapitalizing the SAIF and, after January 1, 1997, banks must contribute towards paying off the financing bonds, including interest. For 1998, the cost to the Bank was 1.2 cents per $100 of deposits. In 2000, the banking industry will assume the bulk of the payments. The new law also aims to merge BIF and SAIF by 1999 but not until the bank and savings and loan charters are combined. The new law requires the Treasury Department to deliver to Congress comments and recommendations on combining the charters. Additionally, the new law provides "regulatory relief" for the banking industry by eliminating approximately 30 laws and regulations. The costs and benefits of the new law to the Bank can not currently be accurately predicted. Other Items - ----------- FDICIA also, among other things, (i) limits the percentage of interest paid on brokered deposits and limits the unrestricted use of such deposits to only those institutions that are well capitalized; (ii) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (iii) eliminates "pass through" deposit insurance for certain employee benefit accounts unless the depository institution is well capitalized or, under certain circumstances, adequately capitalized; (iv) prohibits insured state chartered banks from engaging as principal in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (v) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; and (vi) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution. In addition, the FDIC has issued final and proposed regulations implementing provisions of FDICIA relating to powers of insured state banks. Final regulations issued prohibit insured state banks from making equity investments of a type, or in an amount, that are not permissible for national banks. In general, equity investments include equity securities, partnership interests and equity interests in real estate. Certain regulations prohibit insured state banks from engaging as principal in any activity not permissible for a national bank, without FDIC approval. The proposal also provides that subsidiaries of insured state banks may not engage as principal in any activity that is not permissible for a subsidiary of a national bank, without FDIC approval. 19 Proposed Legislation - -------------------- In May 1998 the House of Representatives passed H.R. 10, comprehensive bank reform legislation meant to break down barriers between banking, securities and insurance established pursuant to Glass-Steagall Act restrictions first enacted in the 1930s. H.R. 10 was reintroduced in January 1999 as the Financial Services Act of 1999, but the future of the reform effort represented by such proposed legislation is uncertain. Any such future legislation, however, may have a material effect on the business of the Company and its subsidiaries. Interstate Banking and Branching - -------------------------------- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") mandates that, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain regulatory approval to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state was permitted to approve such combinations earlier than June 1, 1997, and could have adopted legislation to prohibit interstate mergers after the date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirement and conditions as for a merger transaction. California has adopted legislation which "opts California into" the Interstate Act. However, the California Legislation restricts out-of-state banks from purchasing branches or starting a de novo branch to enter the California banking market. Such banks may proceed only by way of purchases of whole banks. The Interstate Act is likely to increase competition in the Bank's market areas especially from larger financial institutions and their holding companies. It is difficult to assess the impact such increased competition will likely have on the Bank's operations. 20 The Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 (the "1995 Act") opts in early for interstate branching, allowing out-of-state banks to enter California by merging or purchasing a California bank or industrial loan company which is at least five years old. Also, the 1995 Act repeals the California Interstate (National) Banking Act of 1986, which regulated the acquisition of California banks by out-of-state bank holding companies. In addition, the 1995 Act permits California State banks, with the approval of the Department of Financial Institutions ("DFI"), to establish agency relationships with FDIC-insured banks and savings associations. Finally, the 1995 Act provides for regulatory relief, including (i) authorization for the DFI to exempt banks from the requirement of obtaining approval before establishing or relocating a branch office or place of business, (ii) repeal of the requirement of directors' oaths (California Financial Code Section 682), and (iii) repeal of the aggregate limit on real estate loans (California Financial Code Section 1230). Community Reinvestment Act and Fair Lending Developments - -------------------------------------------------------- The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (the "CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of their local community, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and the CRA into account when regulating and supervising other activities. The federal banking agencies have issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the Federal Interagency Tax Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. Hazardous Waste Clean-Up Costs - ------------------------------ Management is aware of recent legislation and cases relating to hazardous waste clean-up costs and potential liability. Based on a general survey of the loan portfolios of the Bank, management is not aware of any potential liability for hazardous waste contamination. 21 Other Regulations and Policies - ------------------------------ Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal regulations include requirements to maintain non-interest bearing reserves against deposits, limitations of the nature and amount of loans which may be made, and restrictions on payment of dividends. The Superintendent approves the number and locations of the branch offices of a bank. California law exempts banks from the usury laws. Employees - --------- As of December 31, 1998, the Bank had approximately 330 full-time equivalent employees. None of the employees are represented by labor unions. Benefit programs are available to eligible employees and include, among others, group medical-dental plans, paid sick leave, paid vacation, and a 401(k) plan. Item 2 Properties GBC Bancorp shares common quarters with General Bank at 800 West 6th Street, Los Angeles, California 90017. The Bank leases approximately 41,501 square feet of rentable area which includes the ground floor and the second, fourteenth and fifteenth floors of the building. The initial lease term will expire in the year 2009, and the Bank has two five-year options to renew the lease following the expiration date of the initial term. As of December 31, 1998, the monthly base rent for the facility is $33,319 and is payable to the lessor, Capital & Counties, USA, Inc. The monthly base rent is subject to change on specified dates during the 15-year initial lease term pursuant to the lease agreement. As of December 31, 1998, the Bank operated full-service branches at fifteen leased locations (including the 800 West 6th street, Los Angeles location which houses the downtown branch of the Bank) and one location where it owns the building and land. In addition, the Bank has certain operating and administrative departments and subsidiaries located at 4128 Temple City Boulevard, Rosemead, California, where it owns the building and land with approximately 27,600 square feet of space. The net book value of the two owned facilities (building and land) as of December 31, 1998, was $2,296,000. Expiration dates of the Bank's leases range from September, 1999 to February, 2009. All the Bank's full-service branches are located in California and all but four are in the Southern California area. 22 Item 3 Legal Proceedings In the normal course of business, the Company is subject to pending and threatened legal actions. After reviewing pending actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on the financial condition or the operations of the Company. Item 4 Submission of Matters to a Vote of Security Holders During the fourth quarter of 1998, no matters were submitted to a vote of the Company's security holders. Executive Officers of the Registrant - ------------------------------------ There are no family relationships between any of the executive officers of the Company. The following information indicates the position and age of the executive officers as of December 31, 1998, and their business experience during the prior five years: Age at December Name 31, 1998 Position/Background - ------------------- -------- ------------------------------------------------ Li-Pei Wu.......... 64 From May 1982 to present, Chief Executive Officer and from June 1984 to present, also Chairman of the Board of Bancorp and General Bank. President of Bancorp and General Bank from May 1982 to March 1998. Peter Wu........... 50 From 1979 to March 1998, Executive Vice President and since January 1995, also Chief Operating Officer, of General Bank; from 1981 to March 1998, Executive Vice President of Bancorp. Elected President and Chief Operating Officer of Bancorp and General Bank in March 1998. Presently also Secretary of Bancorp and General Bank. Peter Lowe......... 57 Executive Vice President and Chief Financial Officer of the Company and the Bank since 1994; prior thereto, Executive Vice President and Chief Financial Officer of Manufacturers Bank from 1990 to 1993. 23
Domenic Massei..... 54 Executive Vice President of the Bank since February 1999, Senior Vice President of Operations Administration of the Bank from 1989 to February 1999. William Adams... 53 Senior Vice President, Strategic Development since January 1998. Consultant for Glendale Federal Bank and Coast Federal Bank from January 1996 to January 1998. Senior Vice President, Strategic Planning and Marketing for First Executive Corp. from July 1990 to December 1995. Eddie Chang........ 43 Senior Vice President and Manager of the Real Estate Department since January 1996. From July 1995 to January 1996 Manager of the Real Estate Department. From July 1994 to July 1995 self-employed. From 1992 to July 1994, Senior Vice President and Manager of the Real Estate Department. Gloria Chen........ 56 Senior Vice President and Relationship Manager in the Corporate Lending Department since May 1997; prior thereto, Senior Vice President and Manager of the International Department at Preferred Bank from 1992 to 1997. Ming Lin Chen.... 38 Senior Vice President and Manager of International Banking Department since July 1998. From February 1997 to June 1998, Manager of SBA Loan Department and Residential Mortgage Department. Prior thereto, Marketing Director of the Bank since 1991. Sue Lai............ 46 Senior Vice President of the Corporate Lending Department since April 1997. Manager of the Corporate Lending Department since 1994. In various capacities with the Bank since 1991. Johnny Lee......... 36 Senior Vice President and Regional Manager of the Northern California Region since April 1997. In various positions with the Bank since 1990.
24 Gerard Lob......... 51 Senior Vice President and Manager of the New York loan production office since December 1997. Manager of Trade Finance at Standard Chartered Bank from 1991 to 1997. Richard Voake...... 58 Senior Vice President and Credit Administrator of the Bank since 1994, Vice President and Manager of Corporate Credit Examination from 1992 to 1994. Carl Maier......... 58 Vice President and Controller of the Bank since July 1993.
PART II ------- Item 5 Market for the Registrant's Common Equity and Related Security Holder Matters Market Information - ------------------ The common stock of the Company has been traded in the NASDAQ National Market under the symbol GBCB since November 24, 1987. The market makers for GBC Bancorp are: Herzog, Heine, Geduld, Inc., Hoefer & Arnett; Keefe, Bruyette & Woods, Inc.; Oppenheimer & Co.; Pacific Crest; and Wedbush Morgan Securities. The high and low last sale or bid prices for each quarter of the years 1998 and 1997, as reported by the NASDAQ, are as follows:
First Second Third Fourth 1998: Quarter Quarter Quarter Quarter - ----- ------- ------- ------- ------- High $33.50 $33.06 $26.38 $29.06 Low $26.50 $24.75 $19.00 $20.25 First Second Third Fourth 1997: Quarter Quarter Quarter Quarter - ----- ------- ------- ------- ------- High $18.07 $20.50 $24.50 $31.88 Low $13.63 $15.38 $20.50 $24.94
25 Where applicable the high and low last sale or bid prices have been adjusted to reflect the two for one split of stock to shareholders of record on April 30, 1998 and issued and distributed on May 15, 1998. Holders - ------- As of February 28, 1999, there were 274 holders of record of the Company's common stock according to the records of the Company's transfer agent. Dividend - -------- Cash dividends per share were declared during the most recent two years as per the following table:
First Second Third Fourth Annual Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------ 1998 $0.075 $0.075 $0.075 $0.075 $0.30 1997 $ 0.06 $ 0.06 $ 0.06 $ 0.06 $0.24
Where applicable the cash dividends per share have been adjusted to reflect the two for one split of stock to shareholders of record on April 30, 1998, and issued and distributed on May 15, 1998. The Company's subsidiary, General Bank, is limited in the payment of dividends by the Financial Code of the State of California which provides that dividends in any one year may not exceed the lesser of the Bank's undivided profits or the net income for the prior three years, less cash distributions to stockholders during such period. As of December 31, 1998, approximately $49.8 million of undivided profits of the Bank are available for dividends to the Company, subject to the subordinated debt covenant restrictions. Item 6 Selected Financial Data The selected financial data on page 36 of the Company's 1998 Annual Report to Shareholders is hereby incorporated by reference. 26 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations on pages 13 through 35 of the Company's 1998 Annual Report to Shareholders is hereby incorporated by reference. Item 8 Financial Statements and Supplementary Data The consolidated financial statements of GBC Bancorp and its subsidiaries, together with the report thereon of Deloitte & Touche LLP, on pages 37 through 65 of the Company's 1998 Annual Report to Shareholders, are hereby incorporated by reference. Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On October 22, 1998, GBC Bancorp filed a Form 8-K, reporting under item 4, Changes in Registrant's Certifying Accountant. KPMG Peat Marwick, LLP ("KPMG") was previously the principal accountants for GBC Bancorp. On October 22, 1998, KPMG's appointment as principal accountants was terminated. The Company decided to appoint, and the Board of Directors approved the appointment of Deloitte & Touche LLP to act as the Company's independent auditors for the fiscal year ending December 31, 1998. The reports of KPMG on the Company's consolidated financial statements for the years ended December 31, 1996 and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. For each of the years in the two year period ended December 31, 1997, and during the subsequent period from January 1, 1998 through October 22, 1998, there were no "Disagreements" (as such term is defined under the Federal Securities laws) with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which Disagreements, if not resolved to the satisfaction of KPMG, would have caused that firm to make reference to the subject matter of the Disagreement in connection with their reports. 27 PART III -------- Item 10 Directors and Executive Officers of the Registrant Directors of the Registrant - --------------------------- The information relating to directors of the Company under the caption "Election of Directors" appearing on page 4 of the Company's Definitive Proxy Statement, dated March 22, 1999, relating to the annual meeting of shareholders to be held on April 22, 1999, is hereby incorporated by reference. Item 11 Executive Compensation The information regarding executive compensation under the caption "Executive Compensation" appearing on pages 10 through 16 of the Company's Definitive Proxy Statement dated March 22, 1999, for the annual meeting of shareholders to be held on April 22, 1999, is hereby incorporated by reference. Item 12 Security Ownership of Certain Beneficial Owners and Management The information regarding the security ownership of certain beneficial owners and management under the caption "Shareholdings of Certain Beneficial Owners and Management" appearing on pages 2 through 3 of the Company's Definitive Proxy Statement, dated March 22, 1999, for the annual meeting of shareholders to be held on April 22, 1999, is hereby incorporated by reference. Item 13 Certain Relationships and Related Transactions The information regarding certain relationships and related transactions under the caption "Certain Transactions" appearing on page 18 of the Company's Definitive Proxy Statement dated March 22, 1999, for the annual meeting of shareholders to be held on April 22, 1999, is hereby incorporated by reference. 28 PART IV ------- Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1)(2) Financial Statements and Schedules
Page in Annual Report to Shareholders ----------------------- GBC Bancorp and subsidiaries: Independent Auditors' Report.............................. Page 65 Consolidated Balance Sheets as of December 31, 1998 and 1997..................................................... Page 37 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996......................... Page 38 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996..................................................... Page 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996......................... Page 40 Notes to Consolidated Financial Statements................ Pages 41-64
All other financial statement schedules are omitted because they are not applicable, not material or because the information is included in the financial statements or the notes thereto. (a)(3) Exhibit Index (b) Reports on Form 8-K: 1. Item 4. Changes in Registrant's Certifying Accountant, dated October 22, 1998 2. Item 5. Other Events, dated February 19, 1998 3. Item 5. Other Events, (Amendment) dated March 19, 1998 for February 19, 1998 29 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, GBC Bancorp has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: GBC BANCORP s/ Li-Pei Wu s/ Peter Lowe ----------------------- ------------------------ by: Li-Pei Wu, by: Peter Lowe, Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer Date: 03-18-99 Date: 03-24-99 ------------------ ---------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. s/ Helen Chen Date: 03-18-99 ----------------- ---------------- Helen Chen, Director s/ Thomas C. T. Chiu Date: 03-18-99 ----------------- ---------------- Thomas C. T. Chiu, Director s/ Chuang-I Lin Date: 03-18-99 ----------------- ---------------- Chuang-I Lin, Director s/ Ko-Yen Lin Date: 03-18-99 ----------------- ---------------- Ko-Yen Lin, Director s/ Ting Y. Liu Date: 03-18-99 ----------------- ---------------- Ting Y. Liu, Director s/ John Wang Date: 03-18-99 ----------------- ---------------- John Wang, Director s/ Date: ----------------- ---------------- Kenneth C. Wang, Director s/ Chien-Te Wu Date: 03-18-99 ----------------- ---------------- Chien-Te Wu, Director 30 s/ Julian Wu Date: 03-18-99 ----------------- ---------------- Julian Wu, Director s/ Li-Pei Wu Date: 03-18-99 ----------------- ---------------- Li-Pei Wu , Director s/ Peter Wu Date: 03-18-99 ----------------- ---------------- Peter Wu, Director s/ Ping C. Wu Date: 03-18-99 ----------------- ---------------- Ping C. Wu, Director s/ Date: ----------------- ---------------- Walter Wu, Director s/ Chin-Liang Yen Date: 03-18-99 ----------------- ---------------- Chin-Liang Yen, Director 31 EXHIBIT INDEX -------------
Exhibit Page Number Description Number ------- ----------- ----- 3.1 Articles of Incorporation, as amended (incorporated herein by this reference to Exhibit 3.1 on the Company's Form 8 to the Company's Annual Report on Form 10-K for year ended December 31, 1987; and to Exhibit 3.1 on the Company's Quarterly Report on form 10-Q for the quarter ended June 30, 1988) -- 3.2 Bylaws (incorporated herein by this reference to Exhibit 3.2 on the Company's Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987) -- 3.3 Amendment to bylaws of GBC Bancorp (incorporated herein by this reference to Exhibit 3.3 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.1 Lease for ground floor space at 23326 Hawthorne Boulevard, Suite 100, Torrance, California (incorporated herein by this reference to Exhibit 10.2 on the Company's Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987) -- 10.2 Lease for ground floor space at 1420 East Valley Boulevard., Alhambra, California (incorporated herein by this reference to Exhibit 10.6 on the Company's Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987) -- 10.3 Lease for ground floor space at 17271 Gale Ave., City of Industry, California (incorporated herein by this reference to Exhibit 10.7 on the Company's Form 10-K for the year ended December 31, 1988) -- 10.4 1988 Stock Option Plan (incorporated herein by this reference to Exhibit 10.1 on the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988) -- 10.5 Lease for ground floor space at 4010 Barranca Parkway, Irvine, California (incorporated herein by this reference to Exhibit 10.11 on the Company's Form 10-K for the year ended December 31, 1989) -- 10.6 Lease for ground floor space at 4688 Convoy Street, San Diego, California (incorporated herein by this reference to Exhibit 10.12 on the Company's Form 10-K for the year ended December 31, 1989) -- 10.7 Lease for ground floor space at 701 S. Atlantic Boulevard, Monterey Park, California (incorporated herein by this reference to Exhibit 10.13 on the Company's Form 10-K for the year ended December 31, 1990) -- 10.8 Lease for ground floor space at 2783 S. Diamond Bar Boulevard, Suite 8-B, Diamond Bar, California (incorporated herein by this reference to Exhibit 10.11 on the Company's Form 10-K for the year ended December 31, 1991) --
32 10.9 Employment Agreement among the Company, the Bank and Li-Pei Wu, dated as of December 19, 1991 (incorporated herein by this reference to Exhibit 10.12 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.10 Non-Qualified Stock Option Agreement between the Company and Li-Pei Wu, dated as of December 19, 1991, relating to the grant of stock options under the Company's 1988 stock option plan (incorporated herein by this reference to Exhibit 10.13 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.11 Board of Directors resolutions adopted on February 6, 1992, with respect to the GBC Bancorp Amended and Restated 1988 Stock Option Plan, which, among other things, authorize the grant of incentive stock options, eliminate certain limitations on the vesting and exercisability, and increase the maximum number of shares that may be issued thereunder (incorporated herein by this reference to Exhibit 10.14 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.12 GBC Bancorp Amended and Restated 1988 Stock Option Plan, as Exhibit 28.1 to Form S-8 Registration Statement filed with the Securities and Exchange commission on April 22, 1992, Registration Number: 33-47452 (incorporated herein by this reference to Exhibit 10.15 on the Company's Form 10-K for the year ended December 31, 1992) -- 10.13 Lease for ground floor space at 1139 West Huntington Drive, Arcadia, California (incorporated herein by this reference to Exhibit 10.16 on the Company's Form 10-K for the year ended -- December 31, 1993) 10.14 Lease for ground floor space at 2263 N. Tustin Avenue, Orange, California (incorporated herein by this reference to Exhibit 10.17 on the Company's Form 10-K for the year ended December 31, 1993) -- 10.15 Lease for office building space for ground and second floors and 14th and 15th floors located at 800 West 6th Street, Los Angeles, California (incorporated herein by this reference to Exhibit 10.19 on the Company's Form 10-K for the year ended December 31, 1993) -- 10.16 Sublease for ground floor office building space at 1420 East Valley Boulevard, Alhambra, California (incorporated herein by this reference to Exhibit 10.21 on the Company's Form 10-K for the year ended December 31, 1994) -- 10.17 Addendum to standard office lease at 4010 Barranca Parkway, Irvine, California (incorporated herein by this reference to Exhibit 10.22 on the Company's Form 10-K for the year ended December 31, 1994) -- 10.18 Lease for ground floor office building space at 9045 Corbin Avenue, Northridge, California (incorporated herein by this reference to Exhibit 10.23 on the Company's Form 10-K for the year ended December 31, 1994) --
33 10.19 Lease for office building space on first and second floors located at 10001 N. De Anza Boulevard, Cupertino, California (incorporated herein by this reference to Exhibit 10.24 on the Company's Form 10-K for the year ended December 31, 1994) -- 10.20 Lease agreement for office building space on ground floor located at 520 South El Camino Real, San Mateo, California (incorporated herein by this reference to Exhibit 10.25 on the Company's Form 10-K for the year ended December 31, 1994) -- 10.21 Lease agreement for office building space on ground floor located at 47000 Warm Springs Boulevard, Fremont, California (incorporated herein by this reference to Exhibit 10.26 on the Company's Form 10-K for the year ended December 31, 1994) -- 10.22 Purchase, Assignment and Assumption Agreement 615 dated as of December 1,1996 between Gaucho-1 Inc. and General Bank and the related Assignment and Assumption Agreement 615 dated December 27, 1996 between the same parties (incorporated herein by this reference to Exhibit 10.22 on the Company's Form 10-K for the year ended December 31, 1996) -- 10.23 Purchase Assignment and Assumption Agreement dated as of December 1, 1997 between RGL-2 Corporation and General Bank (incorporated herein by this reference to Exhibit 10.23, on the Company's Form 10-K for the year ended December 31, 1997) -- 10.24 Employment Agreement among the Company, the Bank and Li-Pei Wu, dated February 19, 1998, (incorporated herein by this reference to -- Exhibit 10 on the Company's Form 8-K dated February 19, 1998 previously filed with the Commission.) 10.25 Amendment to Employment Agreement among the Company, the Bank and Li-Pei Wu, dated March 19, 1998, (incorporated herein by this -- reference to Exhibit 10.1 on the Company's Form 8-K (Amendment) dated March 23, 1998 previously filed with the Commission.) 11 Computation of Per Share Earnings pp. 12 Computation of Ratios pp. 13 Annual Report to Shareholders pp. 21 Subsidiaries of GBC Bancorp pp. 27 Financial Data Schedule pp.
34 EX-11 2 COMPUTATION OF PER SHARE EARNINGS
GBC BANCORP Exhibit 11 Computation of Per Share Earnings with Common Stock Options Outstanding (Treasury Stock Method) 1998 1997 1996 Basic Diluted Basic Diluted Basic Diluted Average Shares Outstanding Common Stock 14,049,000 14,049,000 13,733,000 13,733,000 13,444,000 13,444,000 Common Stock Equivalents Stock Options - 510,000 - 692,000 - 536,000 - Assumed Repurchase of Treasury Shares - (214,000) - (291,000) - (225,000) Average Common and Common Equivalent Shares Outstanding 14,049,000 14,345,000 13,733,000 14,134,000 13,444,000 13,755,000 Income before Extraordinary Item $28,142,000 $28,142,000 $26,434,000 $26,434,000 $19,037,000 $19,037,000 Extraordinary Item $ - $ - $ (488,000) $ (488,000) $ - $ - Net Income $28,142,000 $28,142,000 $25,946,000 $25,946,000 $19,037,000 $19,037,000 Earnings Per Share: Income before Extraordinary Item $ 2.00 $ 1.96 $ 1.93 $ 1.87 $ 1.42 $ 1.39 Extraordinary Item $ - $ - $ (0.03) $ (0.03) $ - $ - Net Income $ 2.00 $ 1.96 $ 1.90 $ 1.84 $ 1.42 $ 1.39
35 EX-12 3 COMPUTATION OF RATIOS Exhibit 12 GBC BANCORP COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
(Dollars in Thousands) For the Years Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------- Income before income taxes & extraordinary item $ 44,906 $40,739 $28,216 $ 9,076 $ 9,325 Add: Interest on deposits 53,279 46,848 40,897 34,574 25,505 Interest on borrowings 3,608 2,482 2,746 2,826 3,366 Portion of rents applicable to interest * - - - - - Amortization of debt expense, discount and premium 131 93 18 18 18 -------------------------------------------------------------------- Earnings as adjusted (1) $101,924 $90,162 $71,877 $46,494 $38,214 ==================================================================== Less: Interest on deposits 53,279 46,848 40,897 34,574 25,505 -------------------------------------------------------------------- Adjusted earnings excluding interest on deposits (2) $ 48,645 $43,314 $30,980 $11,920 $12,709 ==================================================================== Fixed charges Interest on deposits $ 53,279 $46,848 $40,897 $34,574 $25,505 Interest on borrowings 3,608 2,482 2,746 2,826 3,366 Rents: Total rents net of sublease rental 2,287 2,170 2,095 2,177 1,831 Portion of rents applicable to interest * - - - - - Amortization of debt expense, discount and premium 131 93 18 18 18 Capitalized interest - - - - - -------------------------------------------------------------------- Total Fixed Charges (9) $ 59,305 $51,593 $45,756 $39,595 $30,720 ==================================================================== Fixed charges excluding interest on deposits (10) $ 6,026 $ 4,745 $ 4,859 $ 5,021 $ 5,215 -------------------------------------------------------------------- Ratio of earnings to fixed charges (1)/(9) 1.72x 1.75x 1.57x 1.17x 1.24x -------------------------------------------------------------------- Ratio of earnings to fixed charges excluding interest on deposits (2)/(10) 8.07x 9.13x 6.38x 2.37x 2.44x -------------------------------------------------------------------- Amount of coverage surplus (deficiency) $ 42,619 $38,569 $26,121 $ 6,899 $ 7,494 ==================================================================== * Portion of rents applicable to interest is deemed immaterial
36 EX-13 4 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net income for GBC Bancorp and subsidiaries (the "Company") for the year ended December 31, 1998 totaled $28,142,000. This compares to net earnings of $25,946,000 in 1997 and $19,037,000 in 1996. Diluted earnings per share were $1.96 for 1998 compared to $1.84 for 1997, and $1.39 for 1996. Earnings per share reflect the two for one split of stock to shareholders of record on April 30, 1998, and issued and distributed on May 15, 1998. The $2,196,000, or 8.5%, increase in net income from 1997 to 1998 was primarily due to the growth of net interest income and higher non-interest income, which were partially offset by higher non-interest expense and a higher provision for credit losses. Net interest income increased $7,500,000 in 1998 compared to 1997, due primarily to a $193.5 million increase in average interest earning assets. This increase was partially offset by a 20-basis point decline of the net interest spread. The net interest spread is defined as the yield on average interest earning assets less the rate paid on average interest bearing liabilities. The $1,224,000 increase of non-interest income was primarily the result of the growth of service charges and commissions. The $4,057,000 increase of non-interest expense was primarily due to the increase in salaries and employee benefits. The $500,000 increase of the provision for credit losses was primarily due to the increase in non-accrual loans from December 31, 1997 to December 31, 1998. As of December 31, 1998 and 1997, non-accrual loans were $20.8 million and $9.8 million, respectively. The balance of $20.8 million as of December 31, 1998 includes one loan in the amount of $12.6 million. Consolidated net income for the year ended December 31, 1997 totaled $25,946,000 compared to net income of $19,037,000 in 1996. The increase in net income from 1996 to 1997 resulted primarily from a lower provision for credit losses of $3,500,000 and an increase in net interest income of $7,493,000. In addition, in 1997, there were net gains on the sale of other real estate owned ("OREO") properties of $2,705,000 compared to $441,000 for 1996. Net gains on sale of OREO reduce the net other real estate owned expense which is included as a component of non-interest expense. Net Interest Income Net interest income in 1998 totaled $68,973,000 compared to net interest income of $61,473,000 in 1997. The increase was due to a $193.5 million, or 14.3%, increase in the balance of average interest earning assets to $1,546.3 million during 1998 from $1,352.8 million during 1997. The favorable impact of the growth of average interest earning assets was partially offset by a 20- basis point decline of the net interest spread. Total interest income for the year ended December 31, 1998 was $125,991,000, compared to $110,896,000 for the year ago period. The $15,095,000, or 13.6%, increase was due to the growth of average interest earning assets, referenced above. The composition of the net growth of average interest earning assets included a $108.4 million increase in loans and leases, a $109.1 million increase in the securities portfolio, and a $24.0 million decrease in federal funds sold and securities purchased under agreements to resell. However, partially offsetting the impact of this growth was a 5-basis point reduction of the yield on average interest earning assets from 8.20% in 1997 to 8.15% in 1998. The net 5-basis point decline is attributable primarily to a lower yield on loans. For the years ended December 31, 1998 and 1997, the yield on loans and leases was 10.3% and 10.5%, respectively. The 1998 yield was favorably impacted by the repayments in full of two performing loans, one of which was a restructured debt, resulting in the recognition of $1,458,000 of pretax interest income. Excluding the $1,458,000 of interest income recoveries, the yield on loans and leases for 1998 would be 10.1%, or 39-basis points less than the yield for 1997. The yield on securities also declined from 6.47% in 1997 to 6.36% in 1998. Both the decline in the yield on securities and to some extent on loans and leases was due to the movement of interest rates. The average prime rate of interest was 8.44% in 1997 compared to 8.36% in 1998. However, in the case of the yield on loans and leases, the majority of the decline is due to the repricing of loans being renewed as well as the pricing of new loans. Management has had a goal of increasing the Bank's loan to deposit ratio. As of December 31, 1998 and 1997, this ratio was 57.1% and 49.5%, respectively. The downward pressure on the yield on interest earning assets was partially offset by the change in the composition of interest earning assets. In 1998, average loans and leases, the highest yielding asset, represented 46.3% of total average interest earning assets, compared to 44.9% in 1997. Included in the 1997 average loans and leases was $22.2 million of loans to depository institutions, which are relatively low yielding. If the loans to depository institutions are excluded, average loans and leases as a percentage of total average interest earning assets was 43.3% in 1997. Federal funds sold and securities purchased under agreements to resell, the lowest yielding asset, represented 7.5% of total average interest earning assets in 1998 compared to 10.4% in 1997. Total interest expense for the year ended December 31, 1998, was $57,018,000 compared to $49,423,000 for the year ago period. The $7,595,000, or 15.4%, increase was due to a $131.9 million, or 11.7%, increase of average interest bearing liabilities and a 15-basis point increase in the cost of funds. The volume growth was due to a $114.6 million increase of average interest-bearing deposits, a $12.3 million increase of subordinated debt and a $4.9 million increase of Federal Home Loan Bank ("FHLB") advances. The cost of funds increased to 4.53% in 1998 from 4.38% in 1997. Notwithstanding the decline of the average prime rate discussed above, the average rates paid on money market and time deposits increased due to competitive pressures. In addition, the average rate paid on the subordinated debt was 8.97%, increasing the average cost of funds. The average rate paid on interest bearing deposits was 4.38% in 1998 compared to 4.26% in 1997. Upward pressure on this rate was also due to the increased percentage of total average interest bearing deposits represented by time certificates of deposit. As of December 31, 1998 and 1997, average time certificates of deposit represented 71.3% and 69.2%, respectively, of total average interest bearing deposits. As a result of both the 5-basis point reduced yield on earning assets and the 15-basis point increase of the cost of funds, the net interest spread declined 20-basis points from 3.82% in 1997 to 3.62% in 1998. The net interest margin, defined as the difference between interest income and interest expense divided by average interest earning assets, decreased to 4.46% in 1998 from 4.54% in 1997. The reduction of the net interest margin is the result of the reduced net interest spread as discussed above. The net interest margin declined less than the net interest spread due to the increased percentage of the average stockholders' equity to average total assets. For the year ended December 31, 1998 and 1997, the percentage of average stockholders' equity to average total assets was 10.0% and 9.1%, respectively. Net interest income in 1997 totaled $61,473,000 compared to net interest of $53,980,000 in 1996. The increase was due to a $115.4 million, or 9.3%, increase in the balance of average interest earning assets to $1,352.8 million during 1997 from $1,237.4 million during 1996, and a nine-basis point increase of the net interest spread. The composition of net growth of $115.4 million in the balance of average interest earning assets included an $88.7 million increase in loans and leases, a $19.8 million increase in the securities portfolio, and a $6.9 million increase in federal funds sold and securities purchased under agreements to resell. The increase of the net interest spread from 1996 to 1997 was due to a 31- basis point increase of the yield on average interest earning assets partially offset by a 22-basis point increase in the cost of funds. The increase of the yield on earning assets from 1996 to 1997 was due to the increased percentage of accruing loans and leases in interest earning assets, a decline in average non-accrual loans, and an increase in the yield on securities. The increase in the cost of funds from 1996 to 1997 was due primarily to increases in the rates paid on virtually all deposit categories and the deposit product composition, which included an increased percentage of average time certificates of deposit to average total interest bearing deposits. Time certificates of deposit represent the Bank's highest costing category of deposit products. For 1997, the net interest spread was 3.82% compared to 3.73% for 1996. For 1997, the net interest margin was 4.54% compared to 4.36% for 1996. The following table represents the net interest spread, net interest margin, average balances interest income and expense, and the average yield/rates by asset and liability component:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ (In Thousands) Balance(5) Interest Rate Balance(5) Interest Rate Balance(5) Interest Rate - ---------------------------------------------------------------------------------------------------------------- Interest-Earning Assets: Loans and Leases(1)(2) $ 715,695 $73,886 10.32% $ 607,286 $63,687 10.49% $ 518,603 $53,551 10.33% Taxable Securities 714,328 45,461 6.36 603,771 39,067 6.47 581,333 36,434 6.27 Tax-Exempt Securities(3) - - - 1,438 82 5.67 4,111 261 6.34 Federal Funds Sold and Securities Purchased Under Agreement to Resell 116,240 6,644 5.72 140,270 8,060 5.75 133,334 7,395 5.55 ----------- ------- ------ ----------- ------- ------ ----------- ------- ------ Total Interest-Earning Assets $1,546,263 125,991 8.15 1,352,765 110,896 8.20 1,237,381 97,641 7.89 ----------- ------- ------ ----------- ------- ------ ----------- ------- ------ Non-Interest-Earning As- sets: Cash and Due from Banks $ 31,334 $ 35,913 $ 37,509 Premises and Equipment, Net 5,633 5,692 6,131 Other Assets(4) 37,055 46,932 44,912 ----------- ----------- ----------- Total Non-Interest- Earning Assets 74,022 88,537 88,552 ----------- ----------- ----------- Allowance for Credit Losses (16,954) (15,830) (17,154) Deferred Loan Fees (5,287) (3,735) (3,308) ----------- ----------- ----------- Total Assets $1,598,044 $1,421,737 $1,305,471 =========== =========== =========== Interest-Bearing Liabil- ities: Deposits: Interest-Bearing Demand $ 55,631 $ 661 1.19% $ 61,004 $ 805 1.32% $ 64,247 $ 862 1.34% Money Market 206,650 6,240 3.02 167,815 4,443 2.65 149,663 3,628 2.42 Savings 86,776 2,236 2.58 110,628 3,031 2.74 131,849 3,563 2.70 Time Deposits 866,229 44,142 5.10 761,277 38,569 5.07 667,047 32,844 4.92 Federal Funds Purchased and Securities Sold Under Repurchase Agreement 553 31 5.55 381 22 5.66 20,918 1,168 5.59 Borrowings from the Federal Home Loan Bank 4,877 227 4.66 - - - - - - Subordinated Debt 38,805 3,481 8.97 26,467 2,553 9.65 15,000 1,596 10.64 ----------- ------- ------ ----------- ------- ------ ----------- ------- ------ Total Interest-Bearing Liabilities 1,259,521 57,018 4.53 1,127,572 49,423 4.38 1,048,724 43,661 4.16 ----------- ------- ------ ----------- ------- ------ ----------- ------- ------ Non-Interest-Bearing Li- abilities: Demand Deposits $ 148,436 $ 140,761 $ 132,088 Other Liabilities 30,115 23,899 18,501 ----------- ----------- ----------- Total Non-Interest Bearing Liabilities 178,551 164,660 150,589 ----------- ----------- ----------- Total Liabilities 1,438,072 1,292,232 1,199,313 Stockholders' Equity 159,972 129,505 106,158 ----------- ----------- ----------- Total Liabilities and Stockholders' Equity $1,598,044 $1,421,737 $1,305,471 =========== =========== =========== Net Interest Income/Spread $68,973 3.62% $61,473 3.82% $53,980 3.73% ======= ======= ======= Net Interest Margin 4.46% 4.54% 4.36%
(1) For the purposes of these computations, non-accrual loans are included in the daily average loan amounts outstanding. (2) Loan interest includes loan fees for the years ended December 31, 1998, 1997 and 1996 of $5,547,000, $4,554,000 and $4,150,000, respectively. (3) Tax-exempt interest income has not been adjusted to a fully taxable equivalent basis. (4) Other assets includes average other real estate owned, net, for the years ended December 31, 1998, 1997 and 1996 of $7,002,000, $13,528,000 and $11,885,000, respectively. (5) Average balances are computed based on the average of the daily ending balances. The following table sets forth a summary of the changes in interest earned and expensed resulting from changes in volume and changes in rates for the periods indicated:
Years Ended December 31, - ------------------------------------------------------------------------------ 1998 Compared 1997 Compared with 1997 with 1996 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: (In Thousands) Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------ Interest Earned on(1): Loans and Leases $11,206 $(1,006) $10,200 $ 9,289 $ 847 $10,136 Taxable Securities(2) 7,045 (652) 6,393 1,431 1,202 2,633 Tax-Exempt Securities(2) (82) - (82) (154) (25) (179) Federal Funds Sold and Securities Purchased Under Agreement to Resell (1,373) (43) (1,416) 393 272 665 -------- -------- -------- -------- ------- -------- Total Interest-Earning Assets 16,796 (1,701) 15,095 10,959 2,296 13,255 Interest Paid On(1): Deposits: Interest-Bearing Demand (68) (76) (144) (43) (14) (57) Money Market 1,118 680 1,798 459 356 815 Savings (623) (172) (795) (581) 49 (532) Time 5,347 225 5,572 4,751 974 5,725 Federal Funds Purchased and Securities Sold Under Repurchase Agreement 10 (1) 9 (1,162) 16 (1,146) Other Borrowed Funds 227 - 227 - - - Subordinated Debt 1,118 (190) 928 1,118 (161) 957 -------- -------- -------- -------- ------- -------- Total Interest-Bearing Liabilities 7,129 466 7,595 4,542 1,220 5,762 -------- -------- -------- -------- ------- -------- Change in Net Interest Income $ 9,667 $(2,167) $ 7,500 $ 6,417 $1,076 $ 7,493 ======== ======== ======== ======== ======= ========
(1) Changes in interest income and interest expense attributable to changes in rate/volume have been allocated to the change due to volume and the change due to rate in relation to the absolute dollar amount of the change in each. (2) Interest income from municipal bonds and auction preferred stocks is not adjusted to a fully taxable equivalent basis. Provision for Credit Losses For 1998, the provision for credit losses was $1,500,000 compared to $1,000,000 for 1997, representing an increase of $500,000. The $500,000 increase of the provision for credit losses was primarily due to the increase in non-accrual loans from December 31, 1997 to December 31, 1998. Year-to- date, net recoveries were $1.1 million, as compared to $0.4 million of net charge-offs for 1997. Non-accrual loans and net other real estate owned on December 31, 1998 was $27.7 million, up $10.0 million from the $17.7 million on December 31, 1997. The allowance for credit losses was $19.4 million at December 31, 1998, as compared to $17.4 million at September 30, 1998, and $16.8 million at the end of 1997. The allowance was 2.46% of loans and leases at December 31, 1998 and 2.63% at December 31, 1997. 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. At year-end, an allocation of the allowance for credit losses for a $12.6 million non-accrual loan was made based upon the estimated expected realization of collateral value from the bankruptcy proceeding associated with the borrower. As the Company cannot determine the exact timing of the liquidation of the assets nor the actual values at that time, this allocation will continue to be evaluated at the end of subsequent quarters, possibly necessitating additional provision amounts, until the credit is removed from the balance sheet. Please refer to the discussion "Allowance for Credit Losses", following. For 1997, the provision for credit losses was $1,000,000 compared to $4,500,000 for 1996, representing a decrease of $3,500,000. The decline was primarily due to a decrease in net charge-offs and the reduction of non-accrual loans. For 1997 and 1996, net charge-offs were $0.4 million and $5.0 million, respectively. As of December 31, 1997 and 1996, non-accrual loans were $9.8 million and $11.7 million, respectively. Non-Interest Income Non-interest income consists primarily of service charges on deposit accounts, gain/loss on sale of securities, fees and commissions resulting from the Bank's international activities, fees from servicing Small Business Administration (SBA) loans, and fees received from escrow services. Non-interest income in 1998 totaled $7,863,000, representing an increase of $1,224,000, or 18.4%, over $6,639,000 of non-interest income in 1997. A $736,000, or 12.8%, increase in service charges and commissions accounts for 60.1% of the total increase of non-interest income. The increase in service charges and commissions was due primarily to growth of commissions for both commercial and standby letters of credit. For the years ended December 31, 1998 and 1997, commissions for commercial and standby letters of credit totaled $2,550,000 and $1,675,000, respectively, representing an increase of $875,000, or 52.2%. A $254,000, or 39.9%, increase of other non-interest income was mainly due to the interest on a tax refund received in 1998. Non-interest income in 1997 totaled $6,639,000, representing an increase of $566,000, or 9.3%, over $6,073,000 of non-interest income in 1996. The increase was due to the $239,000 growth of service charges and commissions and the absence of net loss on the sale and write-down for other than temporary decline in value of securities available for sale. In 1996, there was a write- off from securities available for sale of a $250,000 note deemed worthless. Non-Interest Expense Non-interest expense increased $4,057,000, or 15.4%, from $26,373,000 in 1997 to $30,430,000 in 1998. Of this increase, $2,203,000 was attributed in part to the increase of salaries and employee benefits caused by a 10.0% increase in salaries. For the year ended December 31, 1998 and 1997, the average of the monthly full time equivalent number of employees was 326 and 315, respectively. In addition, expense accruals associated with the employment contract of the CEO which was effective in 1998 were recorded and are included in salaries and employee benefits. Net other real estate owned expense (income) increased $609,000 in 1998 primarily due to higher net OREO gains in 1997. Net gains/losses are included as a component of net other real estate owned expense (income). For 1998, OREO expenses of $812,000 were offset by $1,015,000 of net OREO gains and other OREO income. For 1997, higher OREO expenses of $1,893,000 were offset by higher OREO net gains of $2,705,000. Other non-interest expense which increased $840,000, or 14.0%, is comprised of a number of expense classifications. The increase was spread among the various categories and, in general, represents the growth of the Company. For the year ended December 31, 1998 and 1997, the Company's efficiency ratio (non-interest expense divided by the sum of net interest income plus non- interest income) was 39.6% and 38.7%, respectively. Non-interest expense decreased $964,000, or 3.5%, from $27,337,000 in 1996 to $26,373,000 in 1997. The decrease was primarily due to net income from OREO sales after OREO expenses partially offset by increased salaries and employee benefits. For 1997, OREO expenses of $1,893,000 were more than offset by net gains on the sale of OREO totaling $2,705,000. The $2,953,000 increase in salaries and employee benefits was primarily due to a $1,704,000 increase of incentive compensation, which is based on income before income taxes and extraordinary items, and a $902,000 increase in salary expense. The increase in salary expense is due to both salary increases in 1997 and an increased number of employees. For the year ending December 31, 1997 and 1996, the average of the monthly full time equivalent number of employees was 315 and 306, respectively. Also contributing to the decrease in non-interest expense was a $1,262,000, or 17.4%, decline of other expense from $7,260,000 for the year ended December 31, 1996 to $5,998,000 for the year ended December 31, 1997. This decrease was primarily due to reduced legal fees. For the year ended December 31, 1997 and 1996, legal fees were $510,000 and $1,372,000, respectively. The reduction of legal fees was primarily due to the decrease of non-performing assets. Provision for Income Taxes For 1998, the Company's provision for income taxes was $16,764,000, an increase of $2,459,000, or 17.2%, from $14,305,000 recorded in 1997. The effective tax rate in 1998 was 37.3% as compared to 35.1% in 1997. The increased effective tax rate was due primarily to the reduced level of low income housing ("LIH") tax credits as a percentage of pre-tax income which is due to the higher level of pre-tax income. The LIH tax credit was $2,063,000 in 1998, unchanged from 1997. For 1997, the Company's provision for income taxes was $14,305,000 representing an increase of $5,126,000, or 55.8%, from $9,179,000 recorded in 1996. The effective tax rate in 1997 was 35.1% as compared to 32.5% in 1996. As was the case in 1998, the increased effective tax rate for 1997 compared to 1996 was due to the reduced level of low income housing ("LIH") tax credits as a percentage of pre-tax income which was due to the higher level of pre-tax income. Extraordinary Item During the third quarter of 1997, the Company incurred an $841,000 prepayment premium for the early extinguishment of its $15 million subordinated debt. The prepayment premium, net of taxes of $353,000, is included in the consolidated statements of income as an extraordinary item amounting to $488,000 for the year ended December 31, 1997. Financial Condition The Company's assets totaled $1,680.8 million as of December 31, 1998, representing an increase of $171.4 million, or 11.4%, over the $1,509.4 million total assets as of December 31, 1997. The asset growth was primarily funded by an increase of total deposits of $89.1 million, an increase of $35.0 million of borrowings from the Federal Home Loan Bank, and an increase in stockholders' equity of $16.7 million. Stockholder's equity is net of a $10.4 million reduction due to the repurchase of 465,300 shares of the Company stock. 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. In addition, approximately $30 million of securities awaiting settlement as of December 31, 1998, were purchased in mid-December. The asset growth was reflected in all categories of interest-earning assets with the exception of the securities held to maturity and lower yielding federal funds sold and securities purchased under agreements to resell. Loans and leases reflected the largest growth increasing by $150.1 million. The growth of securities available for sale of $80.5 million includes $30.0 million of securities purchased but not settled as of December 31, 1998. Loans and Leases The growth of loans and leases to $788.9 million as of December 31, 1998, from $638.8 million as of December 31, 1997 represents a 23.5% increase. Commercial loans increased $75.9 million, or 32.5%, and real estate construction loans increased $87.2 million, or 96.2%. These two components of the loan portfolio were primarily responsible for the 23.5% increase of the overall loan portfolio. The commercial loan growth was mainly due to trade financing loans which increased $58.7 million, or 34.2%, from $171.8 million as of December 31, 1997 to $230.5 million as of December 31, 1998. The continued upward trend of trade financing loans reflects the positive California economy and management's objective of increased participation in the growth of international trade. Trade financing loans are made by the Bank's International Division which, in addition to granting loans to finance the import and export of goods between the United States and countries in the Pacific Rim, also provides letters of credit and other related services. The Bank does not make loans to foreign banks, foreign governments or their central banks, or commercial and industrial loans to entities domiciled outside of the United States, except for the extension of overdraft privileges to its foreign correspondent banks on a limited, case by case, basis. All transactions are U.S. dollar denominated. 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 December 31, 1998. The primary source of prepayment for substantially all of the Company's loans is from the cash flow 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. Commercial loans also includes $43.0 million of unsecured commercial loans and $35.8 million of Small Business Administration loans of which $20.6 million are government sponsor-guaranteed. As of December 31, 1998, commercial loans represented 39.2% of the total loan portfolio compared to 36.5% as of December 31, 1997. The growth of real estate construction loans was due to the growth of construction loan commitments primarily for residential but also for commercial construction. Construction loans are real estate loans secured by first trust deeds. As of December 31, 1998, construction loans totaled $177.7 million, or 22.5%, of the total loan portfolio. As of December 31, 1997, construction loans totaled $90.6 million, or 14.2%, of the total loan portfolio. Conventional real estate loans are loans, other than construction loans, secured by first trust deeds or junior real estate liens. As of December 31, 1998, conventional real estate loans totaled $263.9 million, or 33.5%, of the total loan portfolio. As of December 31, 1997 conventional real estate loans outstanding were $276.4 million, or 43.3%, of the total loan portfolio. The $12.5 million, or 4.5%, decline was due to increased competition and a number of pay-offs of existing loans during 1998. The Company's lending policy limits the loan to value ratio on conventional real estate and construction loans to a maximum of 75% of the appraised value with loans in excess of such amount being on an exception basis. The following table sets forth the breakdown by type of collateral for construction and conventional real estate loans as of December 31, 1998 and 1997:
(In Thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Conventional Conventional Construction Real Estate Construction Real Estate Project Type Loans Percentage Loans Percentage Loans Percentage Loans Percentage - -------------------------------------------------------------------------------------------------------------------------------- Residential: Single-Family $118,251 67% $ 20,904 8% $57,551 64% $ 33,064 12% Townhouse 2,505 1 885 - 3,751 4 1,154 - Condominums 17,104 10 2,567 1 9,648 11 4,564 2 Multi-Family 1,151 1 30,965 12 857 1 44,584 16 Land Development - - - - - - 2,001 1 -------- ---- -------- ---- ------- ---- -------- ---- Total Residential $139,011 79% $ 55,321 21% $71,807 80% $ 85,367 31% -------- ---- -------- ---- ------- ---- -------- ---- Non-Residential: Warehouse $ 4,150 2% $ 45,815 17% $ 2,130 2% $ 33,485 12% Retail Facilities 31,254 18 59,835 23 16,246 18 69,529 25 Industrial Use 2,570 1 29,380 11 - - 23,334 8 Office - - 23,864 10 - - 24,407 9 Hotel and Motel - - 40,854 15 - - 35,788 13 Other 752 - 8,800 3 377 - 4,440 2 -------- ---- -------- ---- ------- ---- -------- ---- Total Non-Residential $ 38,726 21% $208,548 79% $18,753 20% $190,983 69% -------- ---- -------- ---- ------- ---- -------- ---- Total $177,737 100% $263,869 100% $90,560 100% $276,350 100% ======== ==== ======== ==== ======= ==== ======== ====
Substantially all of the collateral securing construction and conventional real estate loans is located in California. However, the Bank does financing out-of-state as well. In addition, effective in 1998, the Bank has established loan production offices in the states of Washington and New York. Other loans are primarily comprised of loans secured by the Bank's time deposits. Other loans totaled $22.3 million and $24.0 million, as of December 31, 1998 and 1997, respectively. Leveraged leases are comprised primarily of two aircraft leveraged leases. In December 1997, the Company purchased a leveraged lease on a Boeing 737 with a fair value of $24.0 million and a remaining estimated economic life of 28 years. The lease term ends in March, 2016, however, the lessee has an early buy out option in the year 2011. The Company's equity investment is $6.3 million. As of December 31, 1998, the aircraft is subject to $17.3 million of third-party financing in the form of long-term debt that provides for no recourse against the Company and is secured by a first lien on the aircraft. The residual value at the end of the full-term lease is estimated to be $5.5 million. In December 1996, the Company purchased a leveraged lease on a Boeing 737 with a fair value of $24.2 million and a remaining estimated economic life of 30 years. The lease term is through the year 2012. The Company's equity investment is $5.2 million. As of December 31, 1998, the aircraft is subject to $17.5 million of third-party financing in the form of long-term debt that provides for no recourse against the Company and is secured by a first lien on the aircraft. The residual value at the end of the lease term is estimated to be $7.6 million. For federal income tax purposes, the Company has the benefit of tax deductions for depreciation on the entire leased asset and for interest paid on the long-term debt. Deferred taxes are provided to reflect the temporary differences associated with the leveraged leases. In addition to the two aircraft leveraged leases, the Company has two other leveraged leases included in loans and leases totaling $0.7 million, as of December 31, 1998. In the ordinary course of business, the Bank has granted loans to certain directors and companies with which they are associated. In the opinion of management, these loans were made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other customers. Please refer to note 5 of notes to consolidated financial statements. The following table sets forth the gross amount of loans outstanding in each category as of the dates indicated:
December 31, - ------------------------------------------------------------------------------ (In Thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------ Commercial $309,198 $233,309 $183,268 $151,709 $132,806 Real Estate-Construction 177,737 90,560 66,572 53,423 60,610 Real Estate-Conventional 263,869 276,350 273,080 239,016 281,225 Installment 37 54 86 231 377 Other Loans 22,302 23,993 22,362 22,310 25,699 Leveraged Leases 15,802 14,563 6,986 255 273 Loans to Depository Institutions - - 50,000 5,000 - -------- -------- -------- -------- -------- Total $788,945 $638,829 $602,354 $471,944 $500,990 ======== ======== ======== ======== ========
The following table shows the maturity schedule of the Company's loans outstanding as of December 31, 1998, which is based on the remaining scheduled repayments of principal. Non-accrual loans of $20.8 million are included in the "within one year" category:
After One but More Within Within than One Five Five (In Thousands) Year Years Years Total - ------------------------------------------------------------- Commercial $244,119 $ 31,435 $ 33,644 $309,198 Real Estate-Construction 104,893 72,844 - 177,737 Real Estate-Conventional 45,074 134,935 83,860 263,869 Installment 16 21 - 37 Other Loans 22,302 - - 22,302 Leveraged Leases - 661 15,141 15,802 -------- -------- -------- -------- Total $416,404 $239,896 $132,645 $788,945 ======== ======== ======== ========
As of December 31, 1998, excluding non-accrual loans, loans and leases scheduled to be repriced within one year, after one but within five years, and in more than five years, are as follows:
After More Within One but than One Within Five (In Thousands) Year Five Years Years Total - --------------------------------------------------------- Total Fixed Rate $ 28,778 $94,285 $92,642 $215,705 Total Variable Rate 552,450 - - 552,450 -------- ------- ------- -------- Total $581,228 $94,285 $92,642 $768,155 ======== ======= ======= ========
As of December 31, 1998, there were no loans held for sale. No loans held for sale were originated during 1998. $2.7 million of loans held for sale were delivered at the beginning of 1998 representing the last of the inventory of fixed rate residential mortgage loans which had been sold as of December 31, 1997. In 1997, management discontinued its operation of originating fixed rate residential mortgage loans for sale in the secondary market. In 1998, the Bank transferred its servicing rights on loans originated with servicing rights retained to a third party realizing a gain on the transaction of $338,000. This amount is included in gain on sale of loans, net, in the consolidated statements of income. As of December 31, 1998, the Bank continues to service mortgages under an FNMA contract amounting to $2.2 million. Non-Performing Assets A certain degree of risk is inherent in the extension of credit. Management believes that it has credit policies in place to assure minimizing 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 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 the underlying collateral is substantially in excess of the loan amount or 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. The amortization of any deferred loan fees is stopped. 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 against principal or reported as recoveries on amounts previously charged-off, according to management's judgment as to the collectibility of principal. The following table provides information with respect to the Company's past due loans, non-accrual loans, other real estate owned and restructured loans as of the dates indicated:
December 31, - ------------------------------------------------------------------------------ (In Thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------ Loan 90 Days or More Past Due and Still Accruing $ 780 $ 2,778 $ 6,779 $ 9 $ 999 Non-accrual Loans 20,790 9,834 11,719 43,712 46,672 ------- ------- ------- ------- ------- Total Past Due Loans 21,570 12,612 18,498 43,721 47,671 Restructured Loans 10,440 20,323 23,125 10,151 20,865 ------- ------- ------- ------- ------- Total Non-performing and Restructured Loans 32,010 32,935 41,623 53,872 68,536 Other Real Estate Owned, Net 6,885 7,871 12,988 7,686 5,051 ------- ------- ------- ------- ------- Total Non-performing Assets $38,895 $40,806 $54,611 $61,558 $73,587 ======= ======= ======= ======= ======= Non-performing Assets to Period End Loans and Leases, Net, Plus Other Real Estate Owned, Net 5.05% 6.52% 9.17% 13.39% 15.35% ======= ======= ======= ======= ======= Non-performing Assets to Total Assets 2.31% 2.70% 4.04% 5.11% 6.80% ======= ======= ======= ======= =======
Total non-performing assets decreased to $38.9 million, as of December 31, 1998, from $40.8 million as of December 31, 1997, representing a $1.9 million, or 4.7% reduction. An $11.0 million increase of non-accrual loans was more than offset by reductions in all other categories of non-performing assets but primarily the $9.9 million decline of restructured loans. Past-due loans Loans 90 days or more past due and still accruing totaled $0.8 million, as of December 31, 1998, down from $2.8 million, as of December 31, 1997. One of the two credits included in this category was renewed and removed from past-due status in January, 1999. The other credit totaling $530,000 was placed on non-accrual status in January. Non-accrual loans The following table analyzes the $11.0 million increase of non-accrual loan activity during the year:
(In Thousands) - ------------------------------------------------- Balance at December 31, 1997 $ 9,834 Add: Loans Placed on Non-accrual Status 25,629 Less: Charge-offs (2,309) Returned to Accrual Status (1,862) Repayments (8,330) Transferred to OREO (2,172) -------- Balance at December 31, 1998 $20,790 ========
The loans placed on non-accrual for 1998 totaling $25.6 million included $12.6 million related to a borrower who filed bankruptcy in the fourth quarter of 1998. The total of the borrowings is collateralized by a first deed of trust on commercial property and other assets of the borrower with a combined value deemed in excess of the loan balance. While partially collateralized with a first deed trust on real property, the $12.6 million non-accrual loan discussed above is classified as commercial in the below table. The following table breaks out the Company's non-accrual loans by loan category as of December 31, 1998 and 1997:
(In Thousands) 1998 1997 - ---------------------------------------- Commercial $19,202 $5,957 Real Estate-Construction 277 455 Real Estate-Conventional 1,309 3,414 Other Loans 2 8 ------- ------ Total $20,790 $9,834 ======= ======
The effect of non-accrual loans outstanding as of year-end on interest income for the years 1998, 1997 and 1996 is presented below:
(In Thousands) 1998 1997 1996 - ---------------------------------------------------- Contractual Interest Due $ 2,192 $ 1,954 $ 2,526 Interest recognized (1,540) (1,041) (1,470) -------- -------- -------- Net interest foregone $ 652 $ 913 $ 1,056 ======== ======== ========
Contractual interest due is based on original loan amounts. Any partial charge-offs are not considered in the determination of contractual interest due. Restructured loans The balance of restructured loans as of December 31, 1998, was $10.4 million compared to $20.3 million as of December 31, 1997, representing a $9.9 million, or 48.6%, decrease. The decline was primarily due to the pay-off of a $7.0 million restructured loan in the third quarter of 1998. 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 December 31, 1998, restructured loans consisted of eleven credits. This compares to fifteen credits as of December 31, 1997. The weighted average yield of the restructured loans as of December 31, 1998, was 9.96%. The following table breaks out the restructured loans by accrual status as of the dates indicated:
December 31, - --------------------------------------- (In Thousands) 1998 1997 - --------------------------------------- Restructured Loans: On Accrual Status $10,440 $20,323 On Non-accrual Status 505 - ------- ------- Total $10,945 $20,323 ======= =======
As of December 31, 1998, there are no commitments to lend additional funds to borrowers associated with restructured loans. The effect of restructured loans outstanding as of year-end on interest income for the years ended December 31, 1998, 1997 and 1996 is presented below:
(In Thousands) 1998 1997 1996 - ---------------------------------------------------- Contractual Interest Due $ 1,491 $ 2,242 $ 3,709 Interest recognized (1,150) (1,853) (3,113) -------- -------- -------- Net interest foregone $ 341 $ 389 $ 596 ======== ======== ========
Other real estate owned Other real estate owned, net of valuation allowance of $2.0 million, totaled $6.9 million, representing a decrease of $1.0 million, or 12.7%, from the balance of $7.9 million, net of valuation allowance of $2.1 million, as of December 31, 1997. As of December 31, 1998, OREO consisted of 22 properties, up from 17 properties, as of December 31, 1997. The following is an analysis of the change in gross OREO (OREO before valuation allowance):
(In Thousands) - ---------------------------------------------- Beginning balance, December 31, 1997 $ 9,931 Additions 2,980 Dispositions (4,026) -------- Ending balance, December 31, 1998 $ 8,885 ========
The net gain realized on the sales for 1998 was $744,000 compared to $2,705,000 for 1997. The outstanding OREO properties are all included in the Bank's market area. They include single family residences, condominiums, commercial buildings, and land. Eight 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 type of property as of the dates indicated:
December 31, - -------------------------------------------- (In Thousands) 1998 1997 - -------------------------------------------- Property Type Single-Family Residential $ 752 $ 380 Condominium 485 2,598 Multi-Family Residential - 220 Land 3,621 3,730 Retail Facilities 4,027 3,003 Less: Valuation Allowance (2,000) (2,060) -------- -------- Total $ 6,885 $ 7,871 ======== ========
As of December 31, 1998 and 1997, the land owned was primarily for residential housing development. 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 $22.3 million of net recorded investment of impaired loans as of December 31, 1998, $3.1 million is included in the balance of restructured loans and is 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 and for the dates indicated:
As of and for the Year Ended December 31, - ---------------------------------------------------------------------------- (In Thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Recorded Investment with Related Allowance $20,746 $16,095 $21,210 Recorded Investment with no Related Allowance 1,519 1,022 2,303 ------- ------- ------- Total Recorded Investment $22,265 $17,117 $23,513 Allowance on Impaired Loans 3,250 1,544 2,011 ------- ------- ------- Net Recorded Investment in Impaired Loans $19,015 $15,573 $21,502 ======= ======= ======= Average Total Recorded Investment in Impaired Loans $13,467 $22,370 $35,725 Interest Income Recognized $ 478 $ 1,508 $ 2,067
Of the amount of interest income recognized in 1998, 1997 and 1996 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 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 December 31, 1998, the balance of the allowance for credit losses was $19.4 million, representing 2.46% 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. 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 formula allowance. The 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. The ratio of the allowance to non-performing and restructured loans increased to 60.6% as of December 31, 1998 from 50.9% as of December 31, 1997. However, as a percentage of non-accrual loans, the allowance declined to 93.2% as of December 31, 1998 compared to 171% as of December 31, 1997. The erosion of this ratio is primarily due to the $12.6 million loan which became non- accrual in the fourth quarter of 1998. 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. A detailed analysis of the Company's allowance for credit losses, the recoveries on loans previously charged off, and the amount of loans and leases charged off is summarized in the following table:
(In Thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- Balance at Beginning of Year $16,776 $16,209 $16,674 $23,025 $11,977 Charge-Offs: Commercial 1,949 3,848 1,492 2,219 1,917 Real Estate 338 803 5,810 23,293 3,848 Installment & Other - 47 148 8 37 -------- -------- -------- -------- -------- Total Charge-Offs 2,287 4,698 7,450 25,520 5,802 -------- -------- -------- -------- -------- Recoveries: Commercial 901 491 315 43 423 Real Estate 2,491 3,723 2,139 553 218 Installment & Other - 51 31 3 15 -------- -------- -------- -------- -------- Total Recoveries 3,392 4,265 2,485 599 656 -------- -------- -------- -------- -------- Net Charge-Offs (Recoveries) (1,105) 433 4,965 24,921 5,146 Provision Charged to Operating Expenses 1,500 1,000 4,500 18,570 16,194 -------- -------- -------- -------- -------- Balance at End of Year $19,381 $16,776 $16,209 $16,674 $23,025 ======== ======== ======== ======== ======== Ratio of Net Charge-Offs to Average Loans and Leases Outstanding N/A 0.07% 0.96% 5.10% 1.01% ======== ======== ======== ======== ======== Allowance for Credit Losses to Year-End Loans and Leases 2.46% 2.63% 2.69% 3.53% 4.60% ======== ======== ======== ======== ======== Allowance for Credit Losses to Non-accrual Loans 93.22% 170.59% 138.31% 38.15% 49.33% ======== ======== ======== ======== ======== Allowance for Credit Losses to Non-performing and Restructured Loans 60.55% 50.94% 38.94% 30.95% 33.60% ======== ======== ======== ======== ======== Provision for Credit Losses Divided by Net Charge-offs N/A 230.95% 90.63% 74.52% 314.69% ======== ======== ======== ======== ======== Allowance for Credit Losses to Past Due Loans 89.85% 133.02% 87.63% 38.14% 48.30% ======== ======== ======== ======== ========
The net recoveries of $1.1 million in 1998, compared to net charge-offs of $0.4 million in 1997, was due in large measure to $1.7 million of recoveries on a paid off restructured loan and charge-offs of less than one half of 1997 amounts. Due to the net recoveries for 1998, ratios involving net charge-offs have been omitted. Although the Company does not normally allocate the allowance for credit losses to specific loan categories, an allocation to the major categories has been made for purposes of this report as set forth in the following table. These allocations are estimates based on historical loss experience and management's judgment. The allocation of the allowance for credit losses is not necessarily an indication that the charge-offs will occur, or if they do occur, that they will be in the proportion indicated in the following table:
December 31, - ----------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 (Dollars In Thousands) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) - ----------------------------------------------------------------------------------------------- Commercial $ 9,834 39.2% $ 6,538 36.5% $ 4,664 30.4% $ 4,239 32.2% $ 3,651 26.5% Real Estate - Construction 4,307 22.5 1,852 14.2 2,796 11.1 928 11.3 2,232 12.1 Real Estate - Conventional 4,669 33.5 7,478 43.2 8,337 45.3 11,167 50.6 16,809 56.2 Installment 1 - 1 - 1 - 3 0.1 4 0.1 Other Loans 337 2.8 372 3.8 313 3.7 280 4.7 327 5.1 Leveraged Leases 233 2.0 535 2.3 98 1.2 - - - - Loan to Despository Institutions - - - - - 8.3 - - - - Unallocated - - - - - 57 1.1 2 - ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total $19,381 100.0% $16,776 100.0% $16,209 100.0% $16,674 100.0% $23,025 100.0% ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Amount represents the allocated portion of the allowance for credit losses to the credit categories for each respective year. (2) Percentage indicated represents the proportion of each loan category to total loans for each respective year. 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 December 31, 1998, the Company recorded net unrealized holding gains of $3,172,000 on its available for sale portfolio. Included in other comprehensive income is $1,838,000, representing the net unrealized holding gains, net of tax. As of December 31, 1997, the Company had recorded net unrealized holding gains of $2,869,000 on its available for sale portfolio and included $1,663,000 in other comprehensive income representing the net unrealized holding gains, net of tax. For the year ended December 31, 1998, proceeds from the sale of securities available for sale were $257,000 from the sale of shares of common stock. The stock had been distributed from a limited partnership investment and was classified in the securities available for sale. There were no other sales of securities available for sale for the year ended December 31, 1998 and 1997. Proceeds from the sales of securities available for sale were $41,367,000 for the year ended December 31, 1996. There were no sale of securities held to maturity in 1998, 1997 or 1996. Gross realized gains on sales of securities were $107,000, $0, and $26,000, for 1998, 1997, and 1996, respectively. Gross realized losses on sales of securities were $0, $0, and $250,000, in 1998, 1997, and 1996, respectively. The 1996 gross realized losses represent the write-off of a $250,000 convertible note deemed worthless. The following table summarizes the carrying value of the Company's securities held to maturity and securities available for sale for each of the past three years:
December 31, - ---------------------------------------------------------------- (In Thousands) 1998 1997 1996 - ---------------------------------------------------------------- Securities Held to Maturity: U.S. Government Agencies $ 24,594 $ 58,003 $ - State and Municipal Securities - 2,222 Collateralized Mortgage Obligations 22 42 56 Asset Backed Securities - 9,996 -------- -------- -------- Total $ 24,616 $ 58,045 $ 12,274 ======== ======== ======== Securities Available for Sale: U. S. Treasuries $ 1,862 $ 6,900 $ 1,891 U.S. Government Agencies 59,775 220,392 160,666 Mortgage Backed Securities 73,207 57,493 51,256 Corporate Notes 34,924 9,181 19,594 Collateralized Mortgage Obligations 246,647 188,552 165,798 Asset Backed Securities 259,608 136,973 37,934 Auction Preferred Stocks - 18,500 72,450 Commercial Paper 39,860 - - Other Securities 8,289 5,669 10,232 -------- -------- -------- Total $724,172 $643,660 $519,821 ======== ======== ========
The following table shows the contractual maturities of securities as of December 31, 1998, and the weighted average yields. The actual maturities of certain securities are expected to be shorter than the contractual maturities.
After One After Five Within One but within but within After Ten Year Five Years Ten Years Years Total (Dollars in Millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - --------------------------------------------------------------------------------------------------- Securities Held to Ma- turity U.S. Government Agen- cies $ - -% $ 3.64 6.83% $20.96 6.00% $ - -% $ 24.60 6.34% Collateralized Mort- gage Obligations - - - - 0.02 6.75 - - 0.02 6.75 ------ ----- ------ ----- ------ ----- ------- ----- -------- ----- Total Securities Held to Maturity $ - -% $ 3.64 6.83% $20.98 6.26% $ - -% $ 24.62 6.34% ====== ===== ====== ===== ====== ===== ======= ===== ======== ===== Securities Available for Sale U. S. Treasuries $ 1.86 5.38% $ - -% $ - -% $ - -% $ 1.86 5.38% U.S. Government Agen- cies 39.94 5.31 17.52 6.34 - - 2.32 6.08 59.78 5.64 Mortgage Backed Secu- rities - - 5.88 6.40 16.58 6.11 50.74 5.70 73.20 5.85 Corporate Notes - - 34.93 5.78 - - - - 34.93 5.78 Collateralized Mort- gage Obligations - - - - 16.04 6.19 230.61 6.39 246.65 6.38 Asset Backed Securi- ties - - - - 2.09 6.49 257.51 6.47 259.60 6.47 Commercial Paper 39.86 5.85 - - - - - - 39.86 5.85 Other Securities 8.29 5.33 - - - - - - 8.29 5.33 ------ ----- ------ ----- ------ ----- ------- ----- ------- ----- Total Securities Avail- able for Sale $89.95 5.55% $58.33 6.01% $34.71 6.17% $541.18 6.36% $724.17 6.23% ====== ===== ====== ===== ====== ===== ======= ===== ======= =====
The following table summarizes the aggregate fair value of securities of any one issuer which exceeds ten percent of stockholders' equity as of December 31, 1998. The table excludes securities issued by the U.S. Government.
(In Thousands) ----------------------------------------- Fair Issuer Book Value Value ----------------------------------------- Equicredit Corp. $ 18,636 $ 18,938 Industry Mortgage Co. 21,497 21,593 Provident Bank 22,407 22,546 Residential Funding Corp. 20,072 20,204 United Companies Financial 18,270 18,374 -------- -------- $100,882 $101,655 ======== ========
Residential Funding Corp. is a collateralized mortgage obligation. All other issues are triple A-rated asset backed securities collateralized with home equity mortgages. Funding Sources Deposits The Company's deposits totaled $1,380.9 million as of December 31, 1998, representing a $89.1 million, or 6.9%, increase over the $1,291.8 million total deposits as of December 31, 1997. The largest deposit growth was in interest bearing demand which increased $61.6 million, or 28.2%. Interest bearing demand included a new deposit product introduced in late 1997. Other time deposits totaled $270.5 million, as of December 31, 1998, representing a $38.4 million, or 16.6%, increase over the $232.1 million, as of December 31, 1997. The growth reflects the increase of rates paid on this deposit category in response to competitive pressures. Time certificates of deposit of $100,000 or more increased $4.6 million to $600.0 million as of December 31, 1998. Included in the year end 1998 balance is $93.0 million of deposits from the State of California up from $78.0 million, as of December 31, 1997. These deposits are collateralized at 110%, as is required for all public time deposits. The collateral provided is U.S. government agency issues. Excluding the growth of these deposits, time certificates of deposit of $100,000 or more declined $10.4 million from December 31, 1997 to December 31, 1998. During 1998, average deposits increased to $1,363.7 million from $1,241.5 million during 1997, representing an increase of $122.2 million, or 9.9%. The growth reflects the increase of rates paid on this deposit category, in response to competitive pressures. The following table sets forth the average amount of and the average rate paid on each of the following deposit categories for the years ending December 31, 1998 and 1997:
1998 1997 - ------------------------------------------------------------------------------- (In Thousands) Amount Ratio Rate Amount Ratio Rate - ------------------------------------------------------------------------------- Deposits: Noninterest-Bearing Demand Deposits $ 148,436 10.89% -% $ 140,761 11.34% -% Interest-Bearing Demand De- posits 262,281 19.23 2.63 228,819 18.43% 2.29 Saving Deposits 86,776 6.36 2.58 110,628 8.91% 2.74 Time Deposits 866,229 63.52 5.10 761,277 61.32% 5.07 ---------- ------- ----- ---------- ------- ----- Total Deposits $1,363,722 100.00% 4.38% $1,241,485 100.00% 4.26% ========== ======= ===== ========== ======= =====
The growth of deposits from the Company's customers reflects the continuing tradition of personalized services. There are 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, the depositors have generally renewed their deposits in the past at their maturity. Accordingly, the Company believes its deposit source to be stable. The following table is indicative of the length of the relationship of depositors of time certificates of deposit of $100,000 or more with the Bank as of December 31, 1998 and 1997:
(Dollars in Thousands) 1998 1997 ----------------------------------------------- Length of No. of No. of Relationship Amount Accounts Amount Accounts ----------------------------------------------- 3 years or more $335,913 1,799 $283,489 1,689 2-3 years 75,301 339 77,498 426 1-2 years 147,927 259 89,738 448 Less than 1 year 40,528 176 144,352 277 -------- ----- -------- ----- Total $599,669 2,573 $595,077 2,840 ======== ===== ======== =====
The maturity schedule of time certificates of deposit of $100,000 or more as of December 31, 1998 is as follows:
(In Thousands) Amount - ----------------------------------------- 3 Months or Less $349,390 Over 3 Months Through 6 Months 114,034 Over 6 Months Through 12 Months 135,963 Over 12 Months 282 -------- Total $599,669 ========
Other Borrowings In the fourth quarter of 1998, the Company obtained two advances from the Federal Home Loan Bank of San Francisco (the "FHLB") totaling $35.0 million, as of December 31, 1998, at a composite fixed rate of interest of 4.64%. The maturity of the advances is November 1, 2000 and April 30, 2001 in the amounts of $25 million and $10 million, respectively. 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. On July 30, 1997, the Company issued, through a public offering, $40 million of 8.375% subordinated notes due August 1, 2007. Proceeds of $38.7 million, net of underwriting discount of $1.3 million, was received by the Company. The discount is amortized as a yield adjustment over the 10 year life of the subordinated notes. The notes are not redeemable prior to August 1, 2002. Thereafter, the notes are redeemable, in whole or in part, at the option of the Company at decreasing redemption prices plus accrued interest to the date of redemption. The notes have no sinking fund. The indenture (the "Indenture") under which the notes are issued does not limit the ability of the Company or its subsidiaries to incur additional indebtedness. The Indenture provides that the Company cannot pay cash dividends or make any other distribution on, or purchase, redeem or acquire its capital stock, except that the Company may (1) declare and pay a dividend in capital stock of the Company and (2) declare and pay dividends, purchase, redeem or otherwise acquire for value its capital stock or make other distributions in cash or property other than capital stock of the Company if the amount of such dividend, purchase or distribution, together with the amount of all previous such dividends, purchases, redemptions and distributions of capital stock after December 31, 1996, would not exceed in the aggregate the sum of (a) $38 million, plus (b) 100% of the Company's consolidated net income (or minus 100% of the Company's consolidated net loss, as the case may be), based upon audited consolidated financial statements, plus (c) 100% of the net proceeds received by the Company on account of any capital stock issued by the Company (other than to a subsidiary of the Company) after December 31, 1996. The subordinated notes are included as part of the Company's total risk-based capital and further contribute to the capital strength of the Company. Capital Resources Stockholders' equity totaled $163.0 million as of December 31, 1998, an increase of $16.7 million, or 11.4%, from $146.3 million as of December 31, 1997. The increase from year-end 1997 to year-end 1998 was due to net income of $28,142,000, less cash dividends declared to shareholders of $4,213,000, plus the net change in securities' valuation of $175,000, plus the exercise of stock options and related tax benefits of $2,989,000, less the repurchase of $10,386,000 of the Company's stock. 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. As of December 31, 1998, 465,300 shares had been repurchased at an average cost of $22.32 per share. For the year ended December 31, 1998 and 1997, the ratio of the Company's average stockholders' equity to average assets was 10.01% and 9.11%, respectively. Management is committed to maintaining capital at a sufficient level to assure shareholders, customers and regulators that the Company is financially sound. Risk-based capital guidelines issued by regulatory authorities in 1989 assign risk weightings to assets and off-balance sheet items. The guidelines require a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio of 8%. Tier 1 capital consists of common stockholders' equity and non- cumulative perpetual preferred stock, less goodwill and nonqualifying intangible assets, while total capital includes other elements, primarily cumulative perpetual, long-term and convertible preferred stock, subordinated and mandatory convertible debt, plus the allowance for loan losses, within limitations. The unrealized gain/loss on debt securities available for sale, net of tax, is not included in either Tier 1 or the total capital computation. In addition, a minimum Tier 1 leverage ratio of 3% is required for the highest rated banks. All other state nonmember banks, must meet a minimum leverage ratio of not less than 4%. This ratio is defined as Tier 1 capital to average total assets, net of nonqualifying intangible assets, for the most recent quarter. During 1992, pursuant to the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), the federal banking regulators set forth the definitions for "adequately capitalized" and "well capitalized" institutions. An "adequately capitalized" institution is one that meets the minimum regulatory capital requirements. A "well capitalized" institution is one with capital ratios as shown in the following table. As of December 31, 1998, the Company's and the Bank's Tier 1 risk based capital, total risk based capital and leverage ratios exceeded the "well capitalized" ratio requirements as follows:
Minimum Well GBC Bancorp General Bank Regulatory Capitalized (In Thousands) Amount Ratio Amount Ratio Requirements Requirements ----------------------------------------------------------------------- Tier 1 $160,805 11.06% $156,333 10.77% 4% 6% Total $217,871 14.98% $174,494 12.02% 8% 10% Leverage Ratio $160,805 9.75% $156,333 9.49% 4% 5%
Asset Liability and Market Risk Management Liquidity Liquidity measures the ability of the Company to meet fluctuations in deposit levels, to fund its operations and to provide for customers' credit needs. Liquidity is monitored by management on an on-going basis. Asset liquidity is provided by cash and short-term financial instruments, which include auction preferred stocks, federal funds sold and securities purchased under agreements to resell, unpledged securities held to maturity and maturing within one year and unpledged securities available for sale. These sources of liquidity amounted to $666.7 million, or 39.7%, of total assets as of December 31, 1998 compared with $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 FHLB granted the Bank a line of credit equal to 25 percent of assets with terms up to 360 months. During the fourth quarter, the Company made two draws under this financing facility with the FHLB for a total of $35 million and a blended fixed rate of interest of 4.64%. Management believes its liquidity sources to be stable and adequate. As of December 31, 1998, total loans and leases represented 57.1% of total deposits. This compares to 49.5% as of December 31, 1997. As of December 31, 1998, management is not aware of any information, other than what is known as of year-end, that would result in or that was reasonably likely to have a material effect on the Company's liquidity and capital resources. 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 1998, General Bank declared and paid $4.2 million of cash dividends to GBC Bancorp. As of December 31, 1998, approximately $49.8 million of undivided profits of the Bank is available for dividends to the Company, subject to the subordinated debt covenant restrictions. Derivatives In October, 1997, management decided to discontinue its operation of originating fixed rate residential mortgage loans for sale in the secondary markets. Commensurate with this decision, the Company is no longer involved with derivative financial instruments as the limited involvement heretofore was for purposes of managing the interest rate risk from the origination of fixed rate residential mortgage loans for sale in the secondary markets. As of December 31, 1998 and 1997, there were no contracts outstanding. As of December 31, 1998 and 1997, there were outstanding fixed rate mortgages held for sale of $0 and $2.7 million, respectively. The outstanding fixed rate mortgages as of December 31, 1997, represented loans that had been sold pending delivery. For the years ended December 31, 1998 and 1997, the Company had realized net losses of $0 and $53,000, respectively. There were no unrealized gains or losses related to hedging contracts for the years ended December 31, 1998 and 1997. "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 are 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 December 31, 1998 there is a cumulative one year negative "gap" of $448.2 million, down from $462.7 million as of December 31, 1997. The following table indicates the Company's interest rate sensitivity position as of December 31, 1998, and is based on contractual maturities. It may not be reflective of positions in subsequent periods.
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 $ 88,053 $ 11,862 $ 58,322 $565,935 $ - $ 724,172 Securities Held to Matu- rity - - 3,644 20,972 24,616 Federal Funds Sold 101,000 - - - - 101,000 Loans and Leases(1)(2) 561,459 19,648 94,700 92,349 - 768,156 Non-Earning Assets(2) - - - - 62,880 62,880 ---------- ----------- ----------- ---------- ----------- ------------ Total Assets $750,512 $ 31,510 $ 156,666 $679,256 $ 62,880 $1,680,824 ========== =========== =========== ========== =========== ============ Source of Funds for As- sets: Deposits: Demand $ - $ - $ - $ - $ 149,397 $ 149,397 Interest Bearing Demand 280,294 - - - - 280,294 Savings 81,051 - - - - 81,051 TCD'S Under $100,000 138,308 131,137 1,047 - - 270,492 TCD'S $100,000 and Over 350,816 248,571 282 - - 599,669 ---------- ----------- ----------- ---------- ----------- ------------ Total Deposits $850,469 $ 379,708 $ 1,329 $ - $ 149,397 $1,380,903 ---------- ----------- ----------- ---------- ----------- ------------ Borrowings from the Fed- eral Home Loan Bank $ - $ - $ 35,000 $ - $ - $ 35,000 Subordinated Debt - - - 38,876 - 38,876 Other Liabilities - - - - 63,015 63,015 Stockholders' Equity - - - - 163,030 163,030 ---------- ----------- ----------- ---------- ----------- ------------ Total Liabilities and Stockholders' Equity $850,469 $ 379,708 $ 36,329 $ 38,876 $ 375,442 $1,680,824 ========== =========== =========== ========== =========== ============ Interest Sensitivity Gap $(99,957) $(348,198) $ 120,337 $640,380 $(312,562) Cumulative Interest Sen- sitivity Gap $(99,957) $(448,155) $(327,818) $312,562 - Gap Ratio (% of Total As- sets) -6.0% -20.7% 7.2% 38.1% -18.6% Cumulative Gap Ratio -6.0% -26.7% -19.5% 18.6% 0.0%
(1) Loans and leases are before unamortized deferred loan fees and allowance for credit losses. (2) Non-accrual loans are included in non-earning assets. 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, and the fair value of these instruments as of December 31, 1998:
Interest Sensitivity Period - ----------------------------------------------------------------------------------------------- Over 1 Weighted 0 to 90 91 to Year to Over Average (In Thousands) Days 365 Days 5 Years 5 Years Total Int Rate(2) Fair Value - ----------------------------------------------------------------------------------------------- Interest-Sensitive As- sets: Securities Available for Sale $127,594 $108,451 $440,202 $ 47,925 $ 724,172 6.23% $ 724,172 Securities Held to Matu- rity 18,620 5,996 - - 24,616 6.34% 24,677 Federal Funds Sold and Securities Purchased Under Agreement to Re- sell 101,000 - - - 101,000 5.67% 101,000 Loans and Leases(1) 561,459 19,648 94,700 92,349 768,156 8.86% 759,528 -------- -------- -------- -------- ---------- ---------- Total Interest-Earning Assets $808,673 $134,095 $534,902 $140,274 $1,617,944 $1,609,377 ======== ======== ======== ======== ========== ========== Interest-Sensitive Lia- bilities: Deposits: Interest Bearing Demand $ 14,603 $ 43,811 $221,880 $ - $ 280,294 2.38% $ 280,294 Savings 4,051 12,158 64,842 - 81,051 2.11% 81,051 Time Deposit of Certifi- cates 486,810 382,022 1,329 - 870,161 4.81% 871,716 -------- -------- -------- -------- ---------- ---------- Total Deposits $505,464 $437,991 $288,051 $ - $1,231,506 $1,233,061 ======== ======== ======== ======== ========== ========== Borrowing from FHLB $ - $ - $ 35,000 $ - $ 35,000 4.65% $ 34,694 Subordinated Debt $ - $ - $ - $ 38,876 $ 38,876 8.38% $ 39,402 -------- -------- -------- -------- ---------- ---------- Total Interest-Sensitive Liabilities $505,464 $437,991 $323,051 $ 38,876 $1,305,382 $1,307,157 ======== ======== ======== ======== ========== ==========
(1) Loans and leases are net of non-accrual loans and before unamortized deferred loan fees and allowance for credit losses. (2) The weighted average interest rate relates to the category of asset/liability indicated as of December 31, 1998. The rate for the subordinated debt is the stated rate of the debt outstanding as of December 31, 1998. 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 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 December 31, 1998:
Change In Interest Net Interest Market Value Of Rates (Basis Income Volatility Equity Volatility Points) December 31, 1998(1) December 31, 1998(2) -------------------------------------------------------- +200 1.4% -14.2% +100 0.8% -6.7% -100 -4.6% 3.8% -200 -10.7% 6.5%
(1) The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios. (2) The percentage change in this column represents net portfolio value of the Bank in a stable interest rate environment versus the net portfolio value in the 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 equity volatility in response to a 100 and 200 basis point increase in rates of 10% and 15%, respectively. 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 in 1999. The Bank has budgeted $100,000 of expenses related to Year 2000 compliance. Expenses to date have been approximately $21,000. 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. 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 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 the outstanding credit commitments by dollar volume at the time of the mailing. As of December 31, 1998, 98% of the questionnaires have been received and reviewed. The review process identified seven credits with commitments of $20.7 million that continue to represent potential adverse impact on credit quality if Year 2000 issues are not addressed. 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 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 Year 2000. 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 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, it is not expected that segment reporting will 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 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. SELECTED FINANCIAL DATA
Years Ended December 31, - ------------------------------------------------------------------------------------- (Dollars In Thousands, Except Per Share Data) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------- Results of Operations Interest Income $ 125,991 $ 110,896 $ 97,641 $ 85,126 $ 72,782 Interest Expense 57,018 49,423 43,661 37,418 28,889 ----------- ----------- ----------- ----------- ----------- Net Interest Income Before Provision for Credit Losses 68,973 61,473 53,980 47,708 43,893 Provision for Credit Losses 1,500 1,000 4,500 18,570 16,194 ----------- ----------- ----------- ----------- ----------- Net Interest Income After Provision for Credit Losses 67,473 60,473 49,480 29,138 27,699 Non-Interest Income 7,863 6,639 6,073 6,042 5,936 Non-Interest Expense 30,430 26,373 27,337 26,104 24,310 ----------- ----------- ----------- ----------- ----------- Income Before Income Taxes 44,906 40,739 28,216 9,076 9,325 Provision for Income Taxes 16,764 14,305 9,179 1,427 1,796 ----------- ----------- ----------- ----------- ----------- Income before Extraordinary Item 28,142 26,434 19,037 7,649 7,529 Extraordinary Charge (488) - - - ----------- ----------- ----------- ----------- ----------- Net Income $ 28,142 $ 25,946 $ 19,037 $ 7,649 $ 7,529 =========== =========== =========== =========== =========== Balance Sheet Data as of December 31 Assets $1,680,824 $1,509,437 $1,352,115 $1,204,506 $1,081,602 Loans and Leases, Net 763,650 617,605 582,507 451,891 474,276 Securities Available for Sale 724,172 643,660 519,821 507,141 357,235 Securities Held to Maturity 24,616 58,045 12,274 33,553 83,276 Deposits 1,380,903 1,291,832 1,201,513 1,046,200 934,020 Stockholders' Equity 163,030 146,323 116,636 99,477 87,683 Per Share Data(5) Earnings - Basic $ 2.00 $ 1.90 $ 1.42 $ 0.58 $ 0.57 Earnings - Diluted 1.96 1.84 1.39 0.58 0.57 Cash Dividends Declared 0.30 0.24 0.18 0.16 0.16 Year End Book Value 11.89 10.46 8.62 7.45 6.59 Average Shares Outstanding - Basic (In 000's) 14,049 13,733 13,444 13,328 13,310 Average Shares Outstanding - Diluted (In 000's) 14,345 14,134 13,755 13,365 13,338 Financial Ratios Return on Average Assets 1.76% 1.82% 1.46% 0.70% 0.76% Return on Average Stockholders' Equity 17.59 20.03 17.93 8.13 8.34 Average Stockholders' Equity to Average Assets 10.01 9.11 8.13 8.57 9.10 Net Interest Margin(1)(2) 4.46 4.54 4.36 4.59 4.74 Net Charge-Offs (Net Recoveries) to Average Loans and Leases (0.15) 0.07 0.96 5.10 1.01 Nonperforming Assets to Year End Loans and Leases, Net, Plus Other Real Estate Owned, Net(3) 5.05 6.52 9.17 13.39 15.35 Allowance for Credit Losses to Year End Loans and Leases 2.46 2.63 2.69 3.53 4.60 Cash Dividend Payout(4) 14.97 12.75 12.73 27.90 28.29
(1) Tax-exempt interest income is not adjusted to a fully taxable equivalent basis. (2) Net interest income before provision for credit losses divided by average earning assets. (3) Non-performing assets include loans 90 days past due still accruing, non- accrual loans and other real estate owned, net. (4) Cash dividend payout is computed based on the dividends declared divided by net income for the applicable year. (5) Per share data has been restated where applicable for the two for one stock split to shareholders of record on April 30, 1998, and issued and distributed on May 15, 1998. CONSOLIDATED BALANCE SHEETS
December 31, - ---------------------------------------------------------------------------- (In Thousands) 1998 1997 - ---------------------------------------------------------------------------- ASSETS Cash and Due From Banks $ 27,514 $ 32,519 Federal Funds Sold and Securities Purchased Under Agreements to Resell 101,000 108,000 Securities Available for Sale at Fair Value (Amor- tized Cost of $721,000 and $640,791 at December 31, 1998 and 1997, Respec- tively) 724,172 643,660 Securities Held to Maturity (Fair Value of $24,677 and $58,169 at December 31, 1998 and 1997, Respective- ly) 24,616 58,045 Loans and Leases 788,945 638,829 Less: Allowance for Credit Losses (19,381) (16,776) Deferred Loan Fees (5,914) (4,448) ----------- ----------- Loans and Leases, Net 763,650 617,605 Bank Premises and Equipment, Net 5,656 5,709 Other Real Estate Owned, Net 6,885 7,871 Due From Customers on Acceptances 7,249 11,768 Real Estate Held for Investment 7,034 8,360 Accrued Interest Receivable and Other Assets 13,048 15,900 ----------- ----------- Total Assets $1,680,824 $1,509,437 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 149,397 $ 149,616 Interest Bearing Demand 280,294 218,729 Savings 81,051 96,340 Time Certificates of Deposit of $100,000 or More 599,669 595,077 Other Time Deposits 270,492 232,070 ----------- ----------- Total Deposits 1,380,903 1,291,832 Borrowings from the Federal Home Loan Bank $ 35,000 $ - Subordinated Debt 38,876 38,745 Acceptances Outstanding 7,249 11,768 Liability on Securities Awaiting Settlement 30,178 - Accrued Expenses and Other Liabilities 25,588 20,769 ----------- ----------- Total Liabilities 1,517,794 1,363,114 Stockholders' Equity: Common Stock, No Par or Stated Value; 40,000,000 Authorized; 13,711,998 and 13,990,098 Shares Outstanding at December 31, 1998 and 1997, Respec- tively $ 56,303 $ 53,314 Accumulated Other Comprehensive Income 1,829 1,654 Retained Earnings 104,898 91,355 ----------- ----------- Total Stockholders' Equity 163,030 146,323 ----------- ----------- Total Liabilities and Stockholders' Equity $1,680,824 $1,509,437 =========== ===========
See Accompanying Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, - ------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) 1998 1997 1996 - ------------------------------------------------------------------------------- INTEREST INCOME Loans and Leases, Including Fees $ 73,886 $ 63,687 $53,551 Securities Available for Sale 40,769 36,546 34,823 Securities Held to Maturity 4,685 2,598 1,868 Federal Funds Sold and Securities Purchased under Agreements to Resell 6,644 8,060 7,395 Other 7 5 4 --------- --------- -------- Total Interest Income 125,991 110,896 97,641 --------- --------- -------- INTEREST EXPENSE Interest Bearing Demand 6,901 5,248 4,490 Savings 2,236 3,031 3,563 Time Deposits of $100,000 or More 30,709 29,372 24,686 Other Time Deposits 13,433 9,197 8,158 Federal Funds Purchased and Securities Sold under Repurchase Agreements 31 22 1,168 Borrowings from the Federal Home Loan Bank 227 - - Subordinated Debt 3,481 2,553 1,596 --------- --------- -------- Total Interest Expense 57,018 49,423 43,661 Net Interest Income 68,973 61,473 53,980 Provision for Credit Losses 1,500 1,000 4,500 --------- --------- -------- Net Interest Income after Provision for Credit Losses 67,473 60,473 49,480 --------- --------- -------- NON-INTEREST INCOME Service Charges and Commissions 6,492 5,756 5,517 Gain on Sale of Loans, Net 373 224 157 Gain on Sale of Securities Available for Sale 107 - 26 Write-off of Securities - - (250) Gain on Sale of Fixed Assets - 22 14 Gain on Sale of Real Estate Investment - - 101 Other 891 637 508 --------- --------- -------- Total Non-Interest Income 7,863 6,639 6,073 --------- --------- -------- NON-INTEREST EXPENSE Salaries and Employee Benefits 18,757 16,554 13,601 Occupancy Expense 2,960 2,810 2,769 Furniture and Equipment Expense 2,078 1,823 1,696 Net Other Real Estate Owned Expense (Income) (203) (812) 2,011 Other 6,838 5,998 7,260 --------- --------- -------- Total Non-Interest Expense 30,430 26,373 27,337 --------- --------- -------- Income before Income Taxes and Extraordinary Item 44,906 40,739 28,216 Provision for Income Taxes 16,764 14,305 9,179 --------- --------- -------- Net Income before Extraordinary Item 28,142 26,434 19,037 Extraordinary Item: Early Extinguishment of Debt, Net of Taxes of $353 - (488) - --------- --------- -------- Net Income $ 28,142 $ 25,946 $19,037 ========= ========= ======== Earnings Per Share: Net Income before Extraordinary Item Basic $ 2.00 $ 1.93 $ 1.42 Diluted 1.96 1.87 1.39 --------- --------- -------- Extraordinary Item: Basic $ - $ (0.03) $ - Diluted - (0.03) - --------- --------- -------- Earnings Per Share: Basic $ 2.00 $ 1.90 $ 1.42 Diluted 1.96 1.84 1.39 ========= ========= ========
See Accompanying Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Accumulated Other Total (In Thousands, Except per Retained Comprehensive Comprehensive Stockholders' Share Amounts) Shares Amount Earnings Income Income Equity - ---------------------------------------------------------------------------------------------- Balance at December 31, 1995 13,360 $45,658 $ 52,103 $ 1,716 $ 99,477 Comprehensive Income Net Income for the year - - 19,037 - $19,037 19,037 -------- Other Comprehensive Income, Net of Tax Net Changes in Securities Valuation Allowance - - - (1,077) (1,077) (1,077) Foreign Currency Trans- lation Adjustment - - -------- Comprehensive Income $17,960 ======== Stock Options Exercised 160 1,163 - - 1,163 Common Stock Issued to Employee 401k Plan 12 150 - - 150 Tax Benefit-Stock Options Exercised - 310 - - 310 Cash Dividend-$.18 per Share - - (2,424) - (2,424) ------- ------- --------- -------- --------- Balance at December 31, 1996 13,532 $47,281 $ 68,716 $ 639 $116,636 Comprehensive Income Net Income for the year - - 25,946 - $25,946 25,946 -------- Other Comprehensive Income, Net of Tax Net Changes in Securities Valuation Allowance - - - 1,017 1,017 1,017 Foreign Currency Translation Adjustment (2) (2) (2) -------- Comprehensive Income $26,961 ======== Stock Options Exercised 458 3,192 - - 3,192 Tax Benefit-Stock Options Exercised - 2,841 - - 2,841 Comprehensive Income Cash Dividend-$.24 per Share - - (3,307) - (3,307) ------- ------- --------- -------- --------- 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 Foreign Currency Translation Adjustment - - -------- 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 ======= ======= ========= ======== =========
Disclosure of Reclassification Amount:
1998 1997 1996 - ------------------------------------------------------------------------------- Unrealized Holding Gains (Losses) Arising During Period, Net of Tax Expense (Benefit) of $172,000, $732,000 and ($770,000) in 1998, 1997 and 1996, Respectively $237 $1,017 $(1,062) Less: Reclassification Adjustment for Gains Included in Net Income, Net of Tax Expense of $45,000, $0 and $11,000 in 1998, 1997 and 1996, Respectively (62) - (15) ----- ------ -------- Net Unrealized Gains on Securities, Net of Tax Expense (Benefit) of $127,000, $732,000, and ($781,000) in 1998, 1997 and 1996, Respectively $175 $1,017 $(1,077) ===== ====== ========
See Accompanying Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, - ------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) 1998 1997 1996 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 28,142 $ 25,946 $ 19,037 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 1,269 1,195 1,122 Net Accretion of Discounts on Securities 316 (209) (1,078) Accretion of Discount on Subordinated Notes 131 55 - Writedown on Real Estate Held for Investment 1,328 1,326 1,423 Provision for Credit Losses 1,500 1,000 4,500 Provision for Losses on Other Real Estate Owned - 650 1,335 Amortization of Deferred Loan Fees (3,477) (2,353) (3,042) Deferred Income Taxes 4,558 3,490 81 Gain on Sale of Loans, Net (373) (224) (157) Gain on Sale of Securities Available for Sale (107) - (26) Write-off of Securities - - 250 Gain on Sale of Real Estate Investment - - (101) Gain on Sale of Other Real Estate Owned (744) (2,705) (441) Gain on Sale of Fixed Assets - (22) (14) Loans Originated for Sale - (40,381) (28,833) Proceeds from Sale of Loans Originated for Sale 373 39,968 33,082 Net Decrease in Accrued Interest Receivable and Other Assets 4,058 2,162 1,718 Net (Decrease)/Increase in Accrued Expenses and Other Liabilities (978) 4,686 (1,440) Other, Net (10) - 2 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 35,986 $ 34,584 $ 27,418 ---------- ---------- ---------- INVESTING ACTIVITIES: Purchases of Securities Available for Sale (457,175) (520,740) (716,415) Proceeds from Maturities of Securities Avail- able for Sale 406,322 398,744 661,329 Purchase of Securities Held to Maturity (50,090) (58,970) - Proceeds from Maturities of Securities Held to Maturity 83,779 13,313 21,314 Proceeds from Sale of Securities Available for Sale 257 - 41,367 Net Increase in Loans and Leases (144,526) (33,234) (148,266) Proceeds from Sale of Other Real Estate Owned 4,494 7,201 6,771 Capitalized Cost of Other Real Estate Owned (831) (368) (867) Proceeds from Sale of Real Estate Investments - - 1,134 Purchases of Premises and Equipment (1,258) (1,098) (838) Proceeds from Sale of Bank Premises and Equipment - 21 23 ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES $(159,028) $(195,131) $(134,448) ---------- ---------- ---------- FINANCING ACTIVITIES: Net Increase/(Decrease) in Demand, Interest Bearing Demand and Savings Deposits 46,057 (27,055) 24,876 Net Increase in Time Certificates of Deposit 43,014 117,374 130,437 Net Decrease in Federal Funds Purchased and Securities Sold Under Agreements to Repur- chase - - (24,000) Borrowings from the Federal Home Loan Bank 35,000 - - Proceeds from Issuance of Subordinated Notes, Net - 38,690 - Redemption of Subordinated Notes - (15,000) - Stock Repurchase Program (10,386) - - Cash Dividends Paid (4,024) (3,144) (2,424) Proceeds from Exercise of Stock Options/Sale of Stock 1,376 3,192 1,313 ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 111,037 $ 114,057 $ 130,202 ---------- ---------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS (12,005) (46,490) 23,172 Cash and Cash Equivalents at Beginning of Year 140,519 187,009 163,837 ---------- ---------- ---------- Cash and Cash Equivalents at End of Period $ 128,514 $ 140,519 $ 187,009 ========== ========== ========== Supplemental Disclosures of Cash Flow Infor- mation: Cash Paid During the Year For: Interest $ 56,575 $ 48,734 $ 43,814 Income Taxes 7,638 6,210 10,197 ========== ========== ========== Noncash Investing Activities: Loans Transferred to Other Real Estate Owned $ 2,149 $ 4,194 $ 17,025 Loans to Facilitate the Sale of Other Real Estate Owned 216 4,068 4,925 ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements of GBC Bancorp (the "Company") are prepared in conformity with generally accepted accounting principles and general practice within the banking industry. It is the Company's policy to consolidate all majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to 1997 and 1996 data in order to conform to the current year presentation. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported operations of the Company for the periods presented. Actual results may differ from those estimates calculated by the Company. Significant balance sheet items which could be materially affected by such estimates include loans held for investment, which are presented net of the allowance for credit losses, the valuation for other real estate owned ("OREO") and the estimated residual value of leased assets. The consolidated financial statements include the accounts of GBC Bancorp and its wholly owned subsidiaries, GBC Venture Capital, Inc., General Bank, (the "Bank"), a California state chartered bank, and the Bank's wholly owned subsidiaries, GBC Insurance Services, Inc., GBC Investment & Consulting Company, Inc., and Southern Counties Escrow. The Bank also holds 90% of the voting stock of GBC Leasing Company, Inc., which amount is not material. The Bank, the Company's 100% owned bank subsidiary, conducts the business of a commercial bank serving individuals and small to medium-sized businesses through sixteen branch offices located in the greater Los Angeles, San Diego and Silicon Valley area, and two loan production offices located in the States of Washington and New York. The Bank's deposit gathering and loan production operations are concentrated in California, particularly in Southern California. Securities Purchased Under Agreements to Resell: Securities purchased under agreements to resell are collateralized by single family residential loans. The Company invests in securities purchased under agreements to resell ("repurchase agreement") to maximize the yield on liquid assets. The Company obtains collateral for these agreements, which normally consists of single family residential mortgage loans with an agreement to sell back the same collateral. The collateral is normally held in custody of a trustee who is not a party to the transaction. The purchase is overcollateralized to ensure against unfavorable market price movements. The duration of these agreements is one business day with a roll-over under continuing contract. The counterparties to these agreements are nationally recognized investment banking firms that meet credit eligibility criteria and with whom a master repurchase agreement has been duly executed. Securities: The Company classifies its investment in debt and equity securities as held to maturity securities, trading securities and available for sale securities, as applicable. Securities available for sale are carried at fair value. Premiums and discounts on securities available for sale are amortized/accreted into interest income using a methodology which approximates a level yield. The resulting unrealized gains or losses are recorded net of tax as part of other comprehensive income. Securities held to maturity are designated as such when the Company has the positive intent and ability to hold the securities until maturity. Securities held to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts into interest income using a methodology which approximates a level yield. When a decline in value has occurred and is deemed to be other than temporary, such decline is charged to income. The specific identification method is used to compute gains or losses on securities' transactions. Loans and Related Allowance for Credit Losses: Loans are recorded in the consolidated balance sheets at principal amounts outstanding. Interest on loans is accrued daily as earned. It is generally the Company's policy to place a loan on non-accrual status in the event that the borrower is 90 days or more delinquent or earlier if the timely collection of interest and/or principal appears doubtful. When loans are placed on non-accrual status, the accrual of income is discontinued and previously accrued but unpaid interest is generally reversed against income. The amortization of any deferred loan fees is stopped. Subsequent payments are generally applied to principal or reported as recoveries on amounts previously charged-off. 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. The Company provides for credit losses by a charge to operations based upon the composition of the loan and lease portfolio, past loss experience, current economic conditions, evaluations made by regulatory authorities, and such other factors that, in management's judgment, deserve recognition in estimating probable credit losses. The allowance for credit losses is based on estimates, and ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the period in which they become known. Additionally, regulatory examiners may require the institution to recognize additions to the allowance for credit losses based upon their judgments regarding information available to them at the time of their examination. Charge-offs of loans are debited to the allowance for credit losses. Recoveries on loans previously charged off are credited to the allowance. A loan is considered impaired when it is "probable" that the Company will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The Company reviews all non-homogenous loans for impairment. Homogenous pools that the Company does not review for impairment include SBA loans and mortgage loans secured by single-family real estate. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to the provision for credit losses. Income recognition on impaired loans is similar to that for non- accrual loans but can include the accrual of interest. The accrual of interest is normally followed for those impaired loans which have been restructured with the borrower servicing the debt pursuant to the contractual terms of the restructuring. While a loan is on non-accrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining book balance of the loan (i.e., after charge-off of identified losses, if any) is deemed to be fully collectible. The Bank's determination as to the ultimate collectibility of the loan's remaining book balance must be supported by a current, well documented credit evaluation of the borrower's financial condition and prospects for repayment, including consideration of the borrower's historical repayment performance and other relevant factors. Loans Held For Sale: Loans held for sale are included in loans and leases on the consolidated balance sheets. They are recorded at the lower of aggregate cost or fair value. Realized gains and losses and unrealized losses are reported in gain/loss on sale of loans, net. In October 1997, management decided to discontinue its operation of originating fixed rate residential mortgage loans for sale in the secondary markets. In 1998, the Bank transferred its mortgage loan servicing rights to a third party. Loan Origination Fees: Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized in income over the contractual life of the loan as an adjustment of yield. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation or amortization. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives or lease terms of assets, whichever is shorter. The lease term is defined as the original lease term plus option periods with a maximum of 15 years unless there is a reason to believe that the premises will be vacated prior to the end of the lease term. Other Real Estate Owned: Other real estate owned ("OREO") is comprised of real estate acquired primarily through foreclosure proceedings. These assets are carried at the fair value minus selling costs of the related real estate. The fair value of the real estate is based upon an appraisal adjusted for estimated carrying and selling costs. The excess carrying value, if any, over the fair value of the asset upon foreclosure is charged to the allowance for credit losses at the time of acquisition. Any subsequent decline in the fair value of OREO is recognized as a charge to operations and a corresponding increase to the valuation allowance on OREO. Gains and losses from sales and net operating expenses of OREO are included in Net Other Real Estate Owned Expense (Income) in the accompanying consolidated statements of income. Real Estate Held for Investment: The Bank is a limited partner in three different partnerships that invest in low income housing projects that qualify for federal income tax credits. As further discussed in note 8 of the notes to consolidated financial statements, the partnership interests are carried at cost, at a method which approximates the equity method and at a method resulting in approximately the same treatment as if the investment had been consolidated, depending on the percentage ownership and control by the Company. Foreign Currency Translation: Assets and liabilities of the foreign office are translated to U. S. dollars at current exchange rates. Income and expense amounts are translated based on the average current exchange rates in effect during the month in which the transactions are recorded. These translation adjustments are included in the stockholders' equity section of the accompanying consolidated balance sheets. 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. Earnings per share have been restated to conform with the provisions of SFAS 128. In addition, earnings per share for 1997 and all prior periods have been restated to reflect the two for one stock split to shareholders of record on April 30, 1998 and issued and distributed on May 15, 1998. Income Taxes: The Company files a consolidated federal income tax return with its subsidiaries, a combined California franchise tax return and New York State and City tax returns. The Company records income taxes under the asset and liability method. Income tax expense is derived by establishing deferred tax assets and liabilities as of the reporting date for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's evaluation of the realizability of deferred tax assets includes consideration of the amount and timing of future reversals of existing temporary differences, as well as available taxable income in carryback years and projections of future income. Tax benefits associated with the exercise of non-qualified stock options are credited to stockholders' equity. Stock Option Plans: On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Statement 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. 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, it is not expected that segment reporting will 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 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. NOTE 2 - CASH AND DUE FROM BANKS The Company is required to maintain cash on hand and on deposit to meet reserve requirements established by the Federal Reserve Bank. Average reserve requirements were $0.4 million and $8.0 million during 1998 and 1997, respectively. NOTE 3 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL Securities purchased under agreements to resell are collateralized by single family residential loans as of December 31, 1998 and 1997. The following table indicates relevant information:
(Dollars in Thousands) 1998 1997 - ------------------------------------------------------------- Amount Outstanding as of December 31 $ 90,000 $100,000 Maximum Month End Amount Outstanding $140,000 $120,000 Average Outstanding $101,200 $112,500 Average Rate of Interest 5.67% 5.72% Average Rate of Interest as of December 31 5.60% 7.03%
The collateral is normally held in custody of a trustee who is not a party to the transaction and is overcollateralized to ensure against unfavorable market price movements. The duration of these agreements is one business day with a roll over under a continuing contract. The counterparties to these agreements are nationally recognized investment banking firms that meet credit eligibility criteria and with whom a master repurchase agreement has been duly executed. NOTE 4 - SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities as of December 31, 1998 and 1997 were as follows:
Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair 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 Paper 39,860 - - 39,860 Other Securities 8,289 - - 8,289 -------- ------ ------- -------- Total Securities Available for Sale $721,000 $3,173 $ (1) $724,172 ======== ====== ======= ======== Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair 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 Auctioned Preferred Stock 18,500 - - 18,500 Other Securities 5,669 - - 5,669 -------- ------ ------- -------- Total Securities Available for Sale $640,791 $2,869 $ - $643,660 ======== ====== ======= ========
The majority of the securities are actively traded in the secondary markets. All of the securities are rated A or better by at least one major rating service at the time of purchase. As of December 31, 1998, the yield on the collateralized mortgage obligations held to maturity and available for sale was 6.75% and 6.38%, respectively. As of December 31, 1997, the yield on collateralized mortgage obligations held to maturity and available for sale was 6.83% and 6.43%, respectively. The amortized cost and fair value of securities as of December 31, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Held to Maturity Securities Available for Sale (In Thousands) Amortized Cost Fair Value Amortized Cost Fair Value -------------------------------------------------------------------------------------------- Due in One Year or Less $ - $ - $ 89,943 $ 89,949 Due After One Year Through Five Years 3,644 3,647 58,102 58,322 Due After Five Years Through Ten Years 20,972 21,030 34,515 34,713 Due After Ten Years - - 538,440 541,188 ------------- ------------- -------------- -------------- Total $ 24,616 $ 24,677 $ 721,000 $ 724,172 ============= ============= ============== ==============
The following table summarizes the aggregate fair value of securities of any one issuer which exceeds ten percent of stockholders' equity as of December 31, 1998. Securities issued by the U.S. government are not included:
(In Thousands) - ----------------------------------------------- Fair Issuer Book Value Value - ----------------------------------------------- Equicredit Corp. $ 18,636 $ 18,938 Industry Mortgage Co. 21,497 21,593 Provident Bank 22,407 22,546 Residential Funding Corp. 20,072 20,204 United Companies Financial 18,270 18,374 -------- -------- $100,882 $101,655 ======== ========
Residential Funding Corp. is a collateralized mortgage obligation. All other issues are triple A-rated asset backed securities collateralized with home equity mortgages. Gross realized gains on sales of securities were $107,000, $0, and $26,000, for 1998, 1997, and 1996, respectively. The $107,000 represented the gain on the sale of shares of common stock. The stock had been distributed from a limited partnership and was classified in the securities available for sale. Gross realized losses on sales of securities of $250,000 was recognized in 1996 which represented the write-off of a $250,000 convertible note deemed worthless. As of December 31, 1998 and 1997, securities from the available for sale portfolio were pledged for the purposes indicated as follows:
December 31, - --------------------------------------------------- (In Millions) 1998 1997 - --------------------------------------------------- Borrowings from Federal Reserve Bank $ 18.8 $ 19.3 Public Time Deposits 117.0 85.8 FHLB Advances 58.6 - Other Purposes 11.6 2.4 ------ ------ $206.0 $107.5 ====== ======
NOTE 5 - LOANS AND LEASES AND ALLOWANCE FOR CREDIT LOSSES The composition of the Company's loan portfolio and leveraged leases as of December 31, 1998 and 1997, was as follows:
(In Thousands) 1998 1997 - ------------------------------------------------------ Commercial $309,198 $233,309 Real Estate-Construction 177,737 90,560 Real Estate-Conventional 263,869 276,350 Installment 37 54 Other Loans 22,302 23,993 Leveraged Leases 15,802 14,563 --------- --------- Total $788,945 $638,829 Less: Allowance for Credit Losses (19,381) (16,776) Deferred Loan Fees (5,914) (4,448) --------- --------- Loan and Leases, Net $763,650 $617,605 ========= =========
Construction loans are collateralized primarily by single family residences, condominiums, townhouses and multi-family buildings. Real estate loans are collateralized primarily by single family residences, condominiums, apartment complexes, industrial buildings, motels and hotels. In the ordinary course of business, the Bank has granted loans to certain directors and the companies with which they are associated. In the opinion of management, the loans were made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time of origination for comparable transactions with other customers and did not involve more than the normal risk of collectibility or present other unfavorable features. The following provides information regarding the aggregate indebtedness of related parties:
December 31, - -------------------------------------------------------- (In Thousands) 1998 1997 1996 - -------------------------------------------------------- Balance at Beginning of Year $ 4,159 $ 5,475 $ 4,787 New Loans and Advances 2,420 4,114 3,967 Repayments (4,691) (5,430) (3,279) -------- -------- -------- Balance at End of Year $ 1,888 $ 4,159 $ 5,475 ======== ======== ========
In December 1997, the Company purchased a leveraged lease on a Boeing 737 with a fair value of $24.0 million and a remaining estimated economic life of 28 years. The lease term ends in March, 2016, however, the lessee has an early buy out option in the year 2011. The Company's equity investment is $6.3 million. The aircraft is subject to $17.3 million of third-party financing in the form of long-term debt that provides for no recourse against the Company and is secured by a first lien on the aircraft. The residual value at the end of the full-term lease is estimated to be $5.5 million. In December 1996, the Company purchased a leveraged lease on a Boeing 737 with a fair value of $24.2 million and a remaining estimated economic life of 30 years. The lease term is through the year 2012. The Company's equity investment is $5.2 million. As of December 31, 1998, the aircraft is subject to $17.5 million of third-party financing in the form of long-term debt that provides for no recourse against the Company and is secured by a first lien on the aircraft. The residual value at the end of the lease term is estimated to be $7.6 million. For federal income tax purposes, the Company has the benefit of tax deductions for depreciation on the entire leased asset and for interest paid on the long-term debt. Deferred taxes are provided to reflect the temporary differences associated with the leveraged leases. The Company's net investment in leveraged leases is composed of the following elements:
December 31, - ----------------------------------------------------------------------------- (In Thousands) 1998 1997 - ----------------------------------------------------------------------------- Rentals Receivable (Net of Principal and Interest on the Nonrecourse Debt) $ 10,964 $ 10,964 Direct Cost 1,166 1,263 Estimated Residual Value of Leased Assets 13,869 13,869 Less: Unearned and Deferred Income (10,197) (11,533) --------- --------- Investment in Leveraged Leases 15,802 14,563 Less: Deferred Taxes Arising from Leveraged Leases (9,892) (3,530) --------- --------- Net Investment in Leveraged Leases $ 5,910 $ 11,033 ========= =========
During 1998, pre-tax interest income recognized for leveraged leases was $1,411,000, all of which related to the two aircraft leases. Pre-tax income recognized for leveraged leases during 1997 was $1,010,000. There was no pre- tax interest income for leveraged leases recognized during 1996. A summary of activity in the allowance for credit losses is as follows:
(In Thousands) 1998 1997 1996 - -------------------------------------------------------- Balance at Beginning of Year $16,776 $16,209 $16,674 Provision for Credit Losses 1,500 1,000 4,500 Loans and Leases Charged Off (2,287) (4,698) (7,450) Recoveries 3,392 4,265 2,485 -------- -------- -------- Balance at End of Year $19,381 $16,776 $16,209 ======== ======== ========
The following table provides information with respect to the Company's past due loans, non-accrual loans and restructured loans as of the dates indicated:
December 31, - --------------------------------------------------------------------------- (In Thousands) 1998 1997 1996 - --------------------------------------------------------------------------- Loan 90 Days or More Past Due and Still Accruing $ 780 $ 2,778 $ 6,779 Non-accrual Loans 20,790 9,834 11,719 Restructured Loans 10,440 20,323 23,125 ------- ------- ------- Total Past Due, Non-accrual and Restructured Loans $32,010 $32,935 $41,623 ======= ======= =======
The effect of non-accrual loans outstanding as of year-end on interest income for the years 1998, 1997 and 1996 is presented below:
(In Thousands) 1998 1997 1996 - ---------------------------------------------------- Contractual Interest Due $ 2,192 $ 1,954 $ 2,526 Interest Recognized (1,540) (1,041) (1,470) -------- -------- -------- Net Interest Foregone $ 652 $ 913 $ 1,056 ======== ======== ========
Contractual interest due is based on original loan amounts. Any partial charge-offs are not considered in the determination of contractual interest due. The effect of restructured loans outstanding as of year-end on interest income for the years ended December 31, 1998, 1997 and 1996 is presented below:
(In Thousands) 1998 1997 1996 - ---------------------------------------------------- Contractual Interest Due $ 1,491 $ 2,242 $ 3,709 Interest Recognized (1,150) (1,853) (3,113) -------- -------- -------- Net Interest Foregone $ 341 $ 389 $ 596 ======== ======== ========
There were no commitments to lend additional funds to borrowers associated with restructured loans, as of December 31, 1998. The following table discloses pertinent information as it relates to the Company's impaired loans as of and for the years indicated:
As of and for The Year Ended December 31, - ---------------------------------------------------------------------------- (In Thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Recorded Investment with Related Allowance $20,746 $16,095 $21,210 Recorded Investment with no Related Allowance 1,519 1,022 2,303 ------- ------- ------- Total Recorded Investment $22,265 $17,117 $23,513 Allowance on Impaired Loans 3,250 1,544 2,011 ------- ------- ------- Net Recorded Investment in Impaired Loans $19,015 $15,573 $21,502 ======= ======= ======= Average Total Recorded Investment in Impaired Loans $13,467 $22,370 $35,725 Interest Income Recognized $ 478 $ 1,508 $ 2,067
Of the amount of interest income recognized in 1998, 1997 and 1996, no interest was recognized under the cash basis method. As of December 31, 1997, there were outstanding fixed rate mortgages held for sale totaling $2.7 million. As of December 31, 1998 and 1997, the Bank was servicing approximately $2.2 million and $53.2 million of loans on behalf of third party investors, respectively. NOTE 6 - PREMISES AND EQUIPMENT A summary of premises and equipment is as follows:
December 31, - ---------------------------------------------------------------------- (In Thousands) 1998 1997 - ---------------------------------------------------------------------- Land $ 1,246 $ 1,246 Bank Premises 1,504 1,504 Leasehold Improvements 2,502 2,060 Furniture, Fixtures and Equipment 8,165 8,536 -------- -------- 13,417 13,346 Less: Accumulated Depreciation and Amortization (7,761) (7,637) -------- -------- Total $ 5,656 $ 5,709 ======== ========
The range of estimated depreciable lives is 25 years for bank premises, five to fifteen years for leasehold improvements and three to five years for furniture, fixtures and equipment. The Company conducts a portion of its operations in leased facilities under non-cancelable operating leases expiring at various dates through 2009. The following summarizes the Company's future minimum lease commitments as of December 31, 1998:
Year (In Thousands) - -------------------------- 1999 $ 2,157 2000 1,796 2001 1,609 2002 1,440 2003 1,629 Thereafter 7,233 ------- Total $15,864 =======
Net rental expense included in occupancy expense was approximately $2,287,000, $2,170,000, and $2,095,000, for the years ended December 31, 1998, 1997 and 1996, respectively. NOTE 7 - OTHER REAL ESTATE OWNED As of December 31, 1998, other real estate owned ("OREO") consisted of 22 properties with a net carrying value of $6.9 million. As of December 31, 1997 OREO consisted of seventeen properties with a net carrying value of $7.9 million. The following table sets forth OREO by type of property as of December 31, 1998 and 1997:
December 31, - -------------------------------------------- (In Thousands) 1998 1997 - -------------------------------------------- Property Type Single-Family Residential $ 752 $ 380 Condominium 485 2,598 Multi-Family Residential - 220 Land 3,621 3,730 Retail Facilities 4,027 3,003 Less: Valuation Allowance (2,000) (2,060) -------- -------- Total $ 6,885 $ 7,871 ======== ========
A summary of activity in the valuation allowance is as follows for the years indicated:
(In Thousands) 1998 1997 1996 - -------------------------------------------------------- Balance at Beginning of Year $2,060 $1,823 $ 611 Provision Charged to Operations - 650 1,335 Charge-Offs (60) (413) (123) ------- ------- ------- Balance at End of Year $2,000 $2,060 $1,823 ======= ======= =======
For the years ended December 31, 1998, 1997 and 1996, net other real estate owned expense (income) was comprised of the following:
(In Thousands) 1998 1997 1996 - ------------------------------------------------------------------------ Net Gain on Sale of Other Real Estate Owned $(744) $(2,705) $ (441) Provision for Losses on Other Real Estate Owned - 650 1,335 Net Operating Expenses 541 1,243 1,117 ------ -------- ------- Net Other Real Estate Owned Expense (Income) $(203) $ (812) $2,011 ====== ======== =======
NOTE 8 - REAL ESTATE HELD FOR INVESTMENT Real estate held for investment ("REI") at December 31, 1998 and 1997 was comprised of investments in low income housing projects. As of December 31, 1998 and 1997, the Company had three investments totaling $7.0 million and $8.4 million, respectively, in limited partnerships formed for the purpose of investing in real estate projects which qualify for low income housing tax credits. The limited partnerships will generate tax credits over a weighted average remaining period of approximately 3 1/2 years. Please refer to note 11 of the notes to consolidated financial statements for income tax effects. The following table identifies the pertinent details of the three projects as of December 31, 1998 and 1997:
(In Thousands) December 31, ------------------------------------------------- Project 1998 1997 Name % Ownership Date Acquired Amount Amount ------------------------------------------------- Liberty 7.2% Mar-90 $4,022 $5,054 Greenview 98.4% Sep-92 2,591 2,802 Las Brisas 49.5% Dec-93 421 504 ------ ------ Total $7,034 $8,360 ====== ======
The method of accounting for the Greenview investment approximates the results if the investment were consolidated. A $1.4 million first deed of trust on the Greenview property is included in accrued expenses and other liabilities on the Company's consolidated balance sheet. The cost method is used for the investment in Liberty with the investment being amortized over the remaining period that tax credits will be received. A method approximating the equity method is used for the Las Brisas investment. Expenses incurred for REI and included in other expense were $1,329,000, $1,329,000, and $1,443,000 for the years ended 1998, 1997 and 1996, respectively. REI expense includes the amortization of the investments in the real estate projects which qualify for low income housing tax credits, and totaled $1,326,000 in 1998, 1997 and 1996. NOTE 9 - DEPOSITS The Bank obtains deposits primarily through a network of sixteen full service branches located in the state of California, primarily, Southern California. Deposits obtained by the Bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, up to a maximum of $100,000 for each depositor. The following table sets forth the average amount of and the average rate paid on each of the following deposit categories for the years ending December 31, 1998 and 1997:
1998 1997 - ------------------------------------------------------------------------------ (In Thousands) Amount Ratio Rate Amount Ratio Rate - ------------------------------------------------------------------------------ Deposits: Noninterest-Bearing Demand Deposits $ 148,436 10.89% -% $ 140,761 11.34% -% Interest-Bearing Demand De- posits 262,281 19.23 2.63 228,819 18.43 2.29 Saving Deposits 86,776 6.36 2.58 110,628 8.91 2.74 Time Deposits 866,229 63.52 5.10 761,277 61.32 5.07 ---------- ------- ----- ---------- ------- ----- Total Deposits $1,363,722 100.00% 4.38% $1,241,485 100.00% 4.26% ========== ======= ===== ========== ======= =====
As of December 31 1998, and 1997, there were no brokered deposits outstanding. During 1998 and 1997, the Bank accepted deposits from the State of California. As of December 31, 1998, these deposits totaled $93.0 million. The Company has pledged securities in excess of the required amount of 110 percent of this deposit amounting to $117.0 million, as of December 31, 1998. The securities pledged are various U.S. government agency issues. 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, the depositors have generally renewed their deposits in the past at their maturity. Accordingly, the Company believes its deposit source to be stable. Deposits outstanding as of December 31, 1998, mature as follows:
(In Thousands) Amount - ------------------------------------ Immediately Withdrawable $ 510,742 Year Ending December 31: 1999 868,832 2000 1,268 2001 61 ---------- Total $1,380,903 ==========
NOTE 10 - OTHER BORROWINGS In the fourth quarter of 1998, the Company obtained two advances from the Federal Home Loan Bank of San Francisco (the "FHLB") totaling $35.0 million, as of December 31, 1998, at a composite fixed rate of interest of 4.64%. The maturity of the advances is November 1, 2000 and April 30, 2001 in the amounts of $25 million and $10 million, respectively. 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. On July 30, 1997, the Company issued, through a public offering, $40 million of 8.375% subordinated notes due August 1, 2007. Proceeds of $38.7 million, net of underwriting discount of $1.3 million, was received by the Company. The discount is amortized over the 10 year life of the subordinated notes. The notes are not redeemable prior to August 1, 2002. Thereafter, the notes are redeemable, in whole or in part, at the option of the Company at decreasing redemption prices plus accrued interest to the date of redemption. The notes have no sinking fund. The indenture (the "Indenture") under which the notes are issued does not limit the ability of the Company or its subsidiaries to incur additional indebtedness. The Indenture provides that the Company cannot pay cash dividends or make any other distribution on, or purchase, redeem or acquire its capital stock, except that the Company may (1) declare and pay a dividend in capital stock of the Company and (2) declare and pay dividends, purchase, redeem or otherwise acquire for value its capital stock or make other distributions in cash or property other than capital stock of the Company if the amount of such dividend, purchase or distribution, together with the amount of all previous such dividends, purchases, redemptions and distributions of capital stock after December 31, 1996, would not exceed in the aggregate the sum of (a) $38 million, plus (b) 100% of the Company's consolidated net income (or minus 100% of the Company's consolidated net loss, as the case may be), based upon audited consolidated financial statements, plus (c) 100% of the net proceeds received by the Company on account of any capital stock issued by the Company (other than to a subsidiary of the Company) after December 31, 1996. As of December 31, 1998, in the opinion of management, the Company was in compliance with all the terms, conditions and provisions of the Indenture. NOTE 11 - INCOME TAXES Income taxes (benefit) expense in the accompanying consolidated statements of income is comprised of the following:
Year Ended December 31, - ----------------------------------------------------------------------------- (In Thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Current Taxes: Federal $ 7,609 $ 5,316 $6,411 State 2,983 2,658 2,377 ------- -------- ------- Total 10,592 7,974 8,788 Deferred Taxes: Federal 3,422 2,895 (511) State 1,136 595 592 ------- -------- ------- Total 4,558 3,490 81 Taxes Credited to Stockholders' Equity for Exercise of Stock Options 1,614 2,841 310 ------- -------- ------- Total Provision for Income Taxes per Consolidated Statements of Income 16,764 14,305 9,179 Tax Benefit on Extraordinary item - (353) - ------- -------- ------- Total $16,764 $13,952 $9,179 ======= ======== ======= Deferred Taxes Charged/(Credited) to Shareholders' Equity Related to Available for Sale Securities $ 127 $ 732 $ (781) ======= ======== =======
Tabulated below are the significant components of the net deferred tax liability as of December 31, 1998 and December 31, 1997 (as restated for the 1997 tax return as filed and adjusted):
Year Ended December 31, - ----------------------------------------------------------------------- (In Thousands) 1998 1997 - ----------------------------------------------------------------------- Components of the Deferred Tax Asset: Provision for Credit Losses $ 8,709 $ 8,400 California Franchise Taxes 1,661 1,116 Loan Fee Income 174 174 Allowance for Other Real Estate Owned 917 756 Other 464 226 --------- --------- 11,925 10,672 Valuation Allowance - (250) --------- --------- Deferred Tax Asset, Net of Valuation Allowance 11,925 10,422 ========= ========= Components of the Deferred Tax Liability: Leveraged Leases (9,892) (4,736) Low Income Housing (4,414) (3,795) Unrealized Gain on Securities (1,334) (1,206) Discount Accretion (1,798) (1,513) --------- --------- Deferred Tax Liability (17,438) (11,250) ========= ========= Net Deferred Tax Liability $ (5,513) $ (828) ========= =========
The valuation allowance at December 31, 1997 relates to the net deductible temporary differences that cannot be realized through carrybacks to prior periods or projection of future income. As the Company believes that all deferred tax assets will ultimately be realized, the valuation allowance has been eliminated for the year ended December 31, 1998. In evaluating the reliability of its deferred tax assets, management has considered income from future operations, the turnaround of deferred tax liabilities and current and prior years' taxes paid. A reconciliation of the statutory federal corporate income tax rate to the effective income tax rate on consolidated income before income tax expense follows:
Percent of Pre-tax Earnings Year Ended December 31, - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Statutory Federal Corporate Income Tax Rate 35.0% 35.0% 35.0% State Tax, Net of Federal Income Tax Effect 6.6% 6.3% 6.8% Increase (Decrease) Resulting from: Non-taxable Interest Income on Municipal Securities and Dividend Exclusion on Auction Preferred Stocks -0.1% -1.0% -2.3% Low Income Housing Tax Credit -4.6% -4.7% -6.7% Other, Net 0.4% -0.5% -0.3% ------ ------ ------ 37.3% 35.1% 32.5% ====== ====== ======
The Company had a current income tax payable of $2,830,000 and $1,420,000 as of December 31, 1998 and 1997. NOTE 12 - EARNINGS PER SHARE The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years as indicated:
For the Year Ended 1998 For the Year Ended 1997 For the Year Ended 1996 - ----------------------------------------------------------------------------------------------------------------- Per- Per- Per- Income Share Income Share Income Share (Dollars in Thousands) (Numerator) Shares Amount (Numerator) Shares Amount (Numerator) Shares Amount - ----------------------------------------------------------------------------------------------------------------- Income before extraordinary item $28,142 $26,434 $19,037 ------- ------- ------- Basic EPS Income available to common stockholders $28,142 14,049,000 $2.00 $26,434 13,733,000 $1.93 $19,037 13,444,000 $1.42 ------- ---------- ----- ------- ---------- ----- ------- ---------- ----- Effect of Dilutive Securities Options - common stock equivalent 296,000 401,000 311,000 ---------- ---------- ---------- Diluted EPS Income available to common stockholder's plus assumed conversions $28,142 14,345,000 $1.96 $26,434 14,134,000 $1.87 $19,037 13,755,000 $1.39 ======= ========== ===== ======= ========== ===== ======= ========== =====
Where applicable, shares have been restated for the two for one stock split to shareholders of record on April 30, 1998, and issued and distributed on May 15, 1998. NOTE 13 - PENDING LITIGATION Legal Action In the normal course of business, the Company is subject to pending and threatened legal actions. After reviewing pending actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on the financial condition or the results of operations of the Company. NOTE 14 - EMPLOYEE BENEFIT PLANS Stock Option Plan The Company has an employee stock option plan for certain key employees and outside directors. Option prices under the plan must be at least equal to the fair market value per share of the stock at the date of grant. Options become vested over a four year period and include five vestings. If an option expires without having been exercised, usually two years from date of vesting, the unpurchased shares are again available for future grants. As of December 31, 1998, authorized stock option shares were 2,640,000 and 433,120 options were available for future grant. The maximum term of options granted was 10 years as of December 31, 1998 and 1997. A summary of stock option activity and related option prices for 1998, 1997 and 1996 follows. All shares and prices have been restated for the two for one stock split to shareholders of record on April 30, 1998 and issued and distributed on May 15, 1998.
Range of or Number Weighted-Average Option Price of Shares Option Price Per Share ---------- ---------------- --------------- Balance at December 31, 1995 1,350,376 $ 6.78 $6.59 - $ 10.03 - ------------------------------------------------------------------------- Granted 141,000 $ 8.69 $8.69 Exercised (160,132) $ 7.27 $ 6.59 - $ 8.69 Forfeited (43,600) $ 7.56 $ 6.63 - $ 8.69 Expired (35,884) $ 7.58 $ 6.59 - $ 8.48 Balance at December 31, 1996 1,251,760 $ 6.88 $ 6.59 - $10.03 - ---------------------------- ---------- ------ --------------- Granted 100,500 $14.55 $14.25 - $15.75 Exercised (457,160) $ 6.99 $ 6.59 - $14.25 Forfeited (28,700) $ 9.79 $ 6.75 - $14.25 Expired (2,000) $ 7.39 $ 6.75 - $ 7.88 Balance at December 31, 1997 864,400 $ 7.62 $ 6.59 - $15.75 - ---------------------------- ---------- ------ --------------- Granted 478,000 $29.49 $27.13 - $31.75 Exercised (187,200) $ 7.31 $ 6.59 - $15.75 Forfeited (16,400) $21.39 $ 6.75 - $29.25 Expired (400) $27.13 $27.13 Balance at December 31, 1998 1,138,400 $16.65 $ 6.59 - $31.75 ============================ ========== ====== ===============
The following table indicates relevant information for all stock options outstanding, as of December 31, 1998:
Weighted Average Exercise Remaining Contractual Shares Price Life (in Years) --------- -------- --------------------- 476,000 $ 6.59 3.0 1,600 7.75 0.1 9,800 7.88 1.0 2,000 6.94 1.1 46,600 6.75 1.5 65,000 8.69 2.0 58,600 14.25 2.5 10,000 15.75 2.3 214,000 27.13 3.1 14,800 29.25 3.2 240,000 31.75 9.4 --------- --------- Total 1,138,400 4.2 Years ========= =========
The following table indicates relevant information for all exercisable stock options, as of December 31, 1998:
Exercise Shares Price ------- -------- 476,000 $6.59 1,600 7.75 9,800 7.88 2,000 6.94 20,400 6.75 21,800 8.69 15,400 14.25 4,000 15.75 42,800 27.13 3,600 29.25 ------- Total 597,400 =======
As of December 31, 1998, 1997 and 1996, exercisable options were 597,400, 519,400, and 737,560 shares, respectively. The weighted average exercise price for all exercisable stock options as of December 31, 1998 and 1997 was $8.56 and $6.86, respectively. Shares and exercise price have been restated for the two for one stock split to shareholders of record on April 30, 1998 and issued and distributed on May 15, 1998. Employment Agreement Mr. Li-Pei Wu served as the Chairman, President and Chief Executive Officer of Bancorp and the Bank pursuant to an employment agreement entered into on May 5, 1982, as amended on August 15, 1984, February 5, 1987 and restated on December 19, 1991 (as so amended and restated, the "Prior Agreement"). On February 19, 1998 Mr. Wu, Bancorp and the Bank entered into an employment agreement having an effective date of January 1, 1998, which agreement was modified by an amendment entered into on March 19, 1998 with an effective date of January 1, 1998 (as so amended, the "New Agreement"). The New Agreement modifies and supersedes the Prior Agreement. The incentive compensation award program provided for in the New Agreement was approved by the holders of a majority of the outstanding shares of the Company at the annual shareholders meeting held May 7, 1998. The New Agreement provides for an employment term of five (5) years, commencing January 1, 1998, and ending December 31, 2002. Pursuant to the New Agreement, Mr. Wu will serve as Chairman of the Board of Bancorp and the Bank throughout the entire term of the New Agreement, but he will serve as Chief Executive Officer of Bancorp and the Bank only through December 31, 2000. The New Agreement provides for a base annual salary of $402,336, which amount shall be adjusted on January 1, 1999, and on each anniversary thereof, by a percentage increase equal to three percent (3%) over the increase in the Consumer Price Index. The amount of Mr. Wu's base annual salary and the annual percent increase carries over from that provided for in the Prior Agreement. The New Agreement also provides for an annual incentive compensation award payable to Mr. Wu, which award is based upon a formula identical to that for the annual profit sharing award included in the Prior Agreement, to be computed as follows: (i) three percent (3%) of any amount by which the Bank's tax equivalent income before taxes exceeds ten percent (10%) of the net equity of the Bank at the beginning of that fiscal year but does not exceed fifteen percent (15%) of such net equity; and (ii) four percent (4%) of any amount by which such income exceeds fifteen percent (15%) of such net equity. In addition, Mr. Wu will be entitled to receive from each Bancorp subsidiary (other than the Bank), if any exists, an incentive compensation cash award computed in accordance with a formula identical to the one described in the preceding sentence. The aggregate incentive compensation cash award payable to Mr. Wu shall be subject to the following maximum dollar limitations commencing with the fiscal year ending December 31, 2000: (i) $1,500,000 for the fiscal year 2000; (ii) $400,000 for the fiscal year 2001; and (iii) $400,000 for the fiscal year 2002. Under the Prior Agreement, Mr. Wu was granted non-qualified options under the 1988 Stock Option Plan to purchase an aggregate of 924,000 shares of Common Stock of Bancorp at a price of $6.59 per share, exercisable in seven cumulative annual installments of 132,000 shares, the first of which became exercisable on June 1, 1992, and the remainder of which became exercisable commencing January 1, 1993, and continuing thereafter on each of the first five (5) anniversaries thereof. All such options have become exercisable and have been exercised in part, with Mr. Wu now holding unexercised options to acquire 476,000 shares of Common Stock. Pursuant to the 1988 Stock Option Plan under which Mr. Wu's options were granted, such options will expire on December 19, 2001 or, notwithstanding such expriation dates, three (3) months after the termination of Mr. Wu's employment with the Company, provided that (i) in the case of his death during such three (3)-month period or while still employed, such options would expire one (1) year after his death or (ii) in the case of termination by reason of disability, within one (1) year after such termination. Under the New Agreement, provided that Mr. Wu continues to be employed by the Company through December 19, 2001, on such date Mr. Wu will be granted a non-qualified stock option to purchase shares of GBC Common Stock equal to the aggregate of the number of shares of GBC Common Stock that are covered by the unexercised portion of Mr. Wu's December 19, 1991 non-qualified stock option as of December 31, 2000 and/or the number of shares that had been previously acquired by Mr. Wu by reason of exercising such non-qualified stock option and which shares are held by him as of December 31, 2000. The number of shares of GBC Common Stock subject to the new non-qualified stock option will be equitably adjusted in the event of any change to GBC Common Stock occurring as a result of any stock split, stock dividend, reorganization or similar transaction. The exercise price under such new option will be the fair market value of GBC Common Stock on the date of grant and such option will vest immediately. The new option will be exercisable until December 31, 2007; provided, that if Mr. Wu's employment with the Company terminates prior to December 31, 2002, the exercise period will only be three (3) months from such termination date, or, if Mr. Wu dies or becomes disabled, the exercise period will be the earlier of one (1) year from his death or disability or December 31, 2007. The New Agreement provides that commencing with the fiscal year ending December 31, 1999 Mr. Wu may elect in his discretion to receive up to one-half (1/2) of his incentive compensation cash award for any fiscal year in shares of Bancorp Common Stock. If Mr. Wu makes such an election he will receive as of the date of such election GBC Common Stock equal in value (determined as of such election date) to the portion of the cash award for which he elected to receive GBC Common Stock. In addition, he will be awarded as of such election date a vested, deferred contractual right to receive two (2) years later GBC Common Stock equal in value to the sum of fifty percent (50%) in value of the portion of the cash award for which he elected to receive GBC Common Stock plus the value of dividends that would have been paid during the two (2)-year deferral period had such GBC Common Stock actually been granted to him on the date of his election. The number of shares GBC Common Stock subject to the vested, deferred contractual right will be equitably adjusted in the event of any change to GBC Common Stock occurring as a result of any stock split, stock dividend, reorganization or similar transaction. The New Agreement further provides that during the first three (3) years of Mr. Wu's employment thereunder Bancorp shall grant to him a vested, deferred contractual right to receive one share of Bancorp Common Stock for every twenty (20) shares of Bancorp Common Stock acquired by him through exercise of his non-qualified stock option, or acquired by reason of his election to receive up to one-half (1/2) of his incentive compensation cash award for any fiscal year in Bancorp Common Stock, excluding shares for which Mr. Wu has a vested, deferred contractual right to receive, and/or of vested option shares (even though not exercised) under his non-qualified stock option that are held during the full term of the relevant fiscal year. The total number of shares to be received by Mr. Wu shall not in the aggregate exceed 100,000, which number is subject to equitable adjustment in the event of any change to GBC Common Stock occurring as a result of any stock split, stock dividend, reorganization or similar transaction. Such additional shares shall be granted on the fifth (5th) anniversary of the first (1st) day of January following the year with respect to which the contractual right to receive the additional shares was awarded (together with a further number of shares equal in value to the dividends that would have been paid on the additional shares during such five (5)-year deferral period). As in the Prior Agreement, in the event of the disability of Mr. Wu, either he or the Company may elect to terminate his employment upon six (6) months prior written notice, during which period he is entitled to his regular pay and a proportionate part of any incentive compensation award. The New Agreement gives Mr. Wu a right to at any time, with or without cause, terminate the New Agreement upon six (6) months prior written notice to the Company, during which period he is entitled to his regular pay and a proportionate part of any incentive compensation award. Under the New Agreement, at the expiration of its stated term on December 31, 2002 (other than for cause), Mr. Wu will be entitled to an annual retirement benefit equal to fifty percent (50%) of the annual base salary he earned during his final year of employment. This retirement benefit will be payable in equal monthly installments over the five (5) years following the expiration of the term of the New Agreement. The New Agreement contains a noncompetition provision whereby Mr. Wu agrees not to compete with the Company for a period of five (5) years following the date of his termination of employment under the New Agreement. In the event that Mr. Wu fails to comply with such noncompetition provision, as of the date of such failure to comply, (i) the new stock option granted to Mr. Wu on December 19, 2001, to the extent not yet exercised, or Mr. Wu's right to receive such option if not yet granted, will expire or terminate, (ii) Mr. Wu will no longer be entitled to the retirement benefit provided for under the New Agreement, to the extent not yet paid, and (iii) Mr. Wu will no longer be allowed continued use of an office and automobile. In the event of any merger or consolidation or acquisition of Bancorp or the Bank, whereby Bancorp or the Bank is not the surviving entity, or another entity or person acquires more than fifty (50%) of the outstanding Common Stock of the Bank or Bancorp in one or more transactions, or the Bank or Bancorp ceases to exist pursuant to any of such transactions (any of which herein referred to as a "Triggering Event"), under the contingency stock option granted pursuant to the Prior Agreement, provided Mr. Wu is then in the employ of the Company, Mr. Wu shall have the right to purchase 242,000 shares of Bancorp Common Stock at $1.86 per share, exercisable upon the execution of an agreement or the application to any regulatory authority for approval of or consent to any Triggering Event, such right to remain exercisable in whole or in part until 45 days after the consummation of the Triggering Event. If any Triggering Event is not consummated, such contingent option shall then not be exercisable, but shall continue in full force and effect and be exercisable upon the occurrence of any future Triggering Event. Reference Contingent Stock Option Plan, following. Contingent Stock Option Plan A contingent stock option plan issued at market is in effect which allows certain key officers of the Bank to purchase up to an aggregate of 574,900 shares (as of December 31, 1998) of the Company's authorized but unissued common stock at a price of $1.86 - $14.25 per share. The stock options may be exercised by the optionee only in the event of certain triggering events, such as a merger, sale or disposition of all of the assets by the Company, or the Bank, or any similar event in which neither the Company nor the Bank is a survivor. Each of the contingent stock options is for a term of indefinite duration, provided, however, said options shall terminate upon the death of the optionee or in the event the optionee ceases to be employed by the Company. A summary of contingent stock option activity and related option prices for 1998, 1997 and 1996 follows:
Range of or Number Weighted-Average Option Price of Shares Option Price Per Share --------- ---------------- -------------- Balance at December 31, 1995 554,900 $ 4.05 $1.86 - $10.02 --------------------------------------------------------------- Balance at December 31, 1996 554,900 $ 4.05 $1.86 - $10.02 ----------------------- ------- ------ -------------- Granted 20,000 $14.25 $14.25 Balance at December 31, 1997 574,900 $ 4.40 $1.86 - $14.25 ======================= ======= ====== ============== Balance at December 31, 1998 574,900 $ 4.40 $1.86 - $14.25 ======================= ======= ====== ==============
The following table indicates relevant information for all contingent stock options outstanding, as of December 31, 1998:
Shares Exercise Price ------- -------------- 242,000 $ 1.86 96,800 2.17 31,460 6.51 48,400 6.59 16,940 6.61 10,000 6.75 50,000 6.94 12,000 8.13 11,000 8.30 12,100 8.47 24,200 10.02 20,000 14.25 ------- Total 574,900 =======
The weighted average exercise price of all the contingent stock options outstanding was $4.40. There were no contingent stock options that were exercisable as of December 31, 1998. Pro Forma Net Income and Earnings Per Share The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for the fair value of the options granted in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and earnings per share ("EPS") would have been changed to the pro forma amounts indicated below:
(In Thousands, Except Per Share Data) 1998 1997 1996 - -------------------------------------------------- Net Income as Reported $28,142 $25,946 $19,037 Pro Forma Net Income $27,643 $25,752 $18,915 EPS as Reported - Basic $ 2.00 $ 1.90 $ 1.42 EPS as Reported - Diluted $ 1.96 $ 1.84 $ 1.39 Pro Forma EPS - Basic $ 1.97 $ 1.88 $ 1.41 Pro Forma EPS - Diluted $ 1.93 $ 1.82 $ 1.37
The Black-Scholes model was utilized for purposes of the option pricing. The volatility for the options granted in 1998, 1997 and 1996 was 28.00%, 28.38% and 30.17%, respectively. The annual dividend yield for the options granted in 1998, 1997 and 1996, was 1.17%, 0.75% and 1.30%, respectively. The expected life of the options ranged from 1 month to 10 years. The weighted average fair value at date of grant for options granted during 1998, 1997 and 1996 was $5.50, $3.58 and $2.13, respectively. The risk free interest rate was assumed at 5% for all periods. Pro forma net income reflects only options granted in 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. Pro forma net income does not reflect options granted under the contingent stock option plan as the options will become exercisable only upon the occurrence of certain triggering events the dates of which cannot be determined. General Bank 401(k) Plan In 1988, the Bank established a 401(k) Plan in which all employees of the Bank may elect to enroll each January 1 or July 1 of every year provided that they have been employed for at least one year prior to the semi-annual enrollment date. Employees may contribute up to 15 percent of their annual base salary up to limits established by the Internal Revenue Services with the Company matching 100 percent of the employee's contribution up to 5 percent of that employee's base salary. In 1998, 1997, and 1996, the Bank's contribution amounted to $240,000, $267,000, and $274,000, respectively. The reduced amounts reflect the forfeiture of non-vested dollars contributed by the employer at the time an employee terminates. Executive Incentive Savings Plan In 1992, the Board of Directors of the Bank authorized an Incentive Savings Plan which replaced the Executive Deferred Compensation Plan established in 1988. Under the plan, if any bonus or profit sharing award is received during the year by any vice president or any officer of the Bank ranking above such position (including officers who are also directors), he or she is allowed to set aside up to 30% of such bonus or profit sharing award received in the payment year, and the Bank will contribute additional funds for each participant to pay the federal income tax for the portion of the bonus or award so set aside. This arrangement is tied to a paid-up life insurance program having investment features and the participant has the right to choose different investment vehicles for the investment of the portion of the bonus or award set aside as described above. The Bank has contributed approximately $592,000, $572,000, and $271,000, to this plan in 1998, 1997 and 1996, respectively. NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The consolidated balance sheets do not reflect various commitments relating to financial instruments which are used in the normal course of business. These instruments include commitments to extend credit, letters of credit and futures contracts. Management does not anticipate that the settlement of these financial instruments will have a material adverse effect on the financial condition or the operations of the Company. These financial instruments carry various degrees of credit and market risk. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. Market risk is the possibility that future changes in the market price may render less valuable a financial instrument. The contractual amounts of commitments to extend credit and letters of credit represent the amount of credit risk. Since many of the commitments and letters of credit are expected to expire without being drawn, the contractual amounts do not necessarily represent future cash requirements. Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the borrower. The Bank receives a fee for providing a commitment. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the Bank upon the extension of credit is based on management's evaluation. Collateral held varies but may include accounts receivable, inventory, property, equipment and real estate. As of December 31, 1998, the Company's undisbursed loan commitments amounted to approximately $474.4 million, of which $161.1 million related to construction loans. As of December 31, 1997, the Company's undisbursed loan commitments amounted to approximately $365.4 million, of which $77.5 million related to construction loans. As of December 31, 1998 and 1997, $134.7 million and $111.7 million of loan commitments were related to a program to which the Bank and various other minority-owned banks participate in the granting of credit to large U.S. corporations, all of which are rated A or better by one or both of the major rating services at the time of entering into the agreement. All of the commitments are for one year or less. The Company does not anticipate funding in the majority of instances. Standby letters of credit are provided to customers to guarantee their performance, generally in the production of goods and services or under contractual commitments in the financial markets. Commercial letters of credit are issued to customers to facilitate foreign or domestic trade transactions. They represent a substitution of the Bank's credit for the customer's credit. The following is a summary of various financial instruments with off-balance sheet risk as of December 31, 1998 and 1997:
December 31, - ------------------------------------------------ (In Thousands) 1998 1997 - ------------------------------------------------ Commitments to Extend Credit $474,366 $365,358 Standby Letters of Credit 89,735 11,938 Bills of Lading Guarantee 531 531 Commercial Letters of Credits 64,578 51,074
As of December 31, 1998, commitments to fund fixed-rate loans and adjustable-rate loans were $10.3 million and $464.1 million, respectively. As of December 31, 1997, commitments to fund fixed-rate loans and adjustable-rate loans were $12.3 million and $353.1 million, respectively. NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and due from banks The carrying amount of cash and due from banks is considered fair value. Federal funds sold and securities purchased under agreements to resell Outstanding amounts under these categories were overnight transactions as of December 31, 1998 and 1997 and are considered to be carried at fair value. Securities For securities including securities held to maturity and securities available for sale, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. These portfolios were then segmented into fixed and adjustable interest rate classifications. Adjustable rate loans are considered to be carried at fair value. The fair value of fixed rate loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The entire allowance for credit losses was applied to classified loans including non-accruals. Accordingly, they are considered to be carried at fair value as the allowance for credit losses represents the estimated discount for credit risk for the applicable loans. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit liabilities The fair value of demand deposits, interest bearing demand, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated using the rates the Bank was offering as of December 31, 1998 and 1997 for deposits of similar remaining maturities. Borrowings from Federal Home Loan Bank The fair value of borrowings from Federal Home Loan Bank is estimated using a discounted cash flow model. Subordinated debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of subordinated debt. Accrued interest receivable/payable Accrued interest receivable and accrued interest payable are considered to be carried at fair value. Off Balance Sheet Financial Instruments The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value disclosed hereinafter does not reflect any premium or discount that could result from offering the instruments for sale. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in the amounts disclosed. The fair value estimates are dependent upon subjective estimates of market conditions and perceived risks of financial instruments at a point in time and involve significant uncertainties resulting in variation in estimates with changes in assumptions. The estimated fair values of the Company's financial instruments are as follows:
1998 1997 - ------------------------------------------------------------------------------ Carrying Fair Carrying Fair (In Thousands) Amount Value Amount Value - ------------------------------------------------------------------------------ Financial Assets: Cash and Due from Banks $ 27,514 $ 27,514 $ 32,519 $ 32,519 Fed Funds Sold and Securities Purchased Under Agreement to Resell 101,000 101,000 108,000 108,000 Securities Available for Sale 724,172 724,172 643,660 643,660 Securities Held to Maturity 24,616 24,677 58,045 58,169 Loans, Net 763,650 759,528 617,605 608,910 Accrued Interest Receivable 8,069 8,069 9,112 9,112 Financial Liabilities: Deposits 1,380,903 1,382,458 1,291,832 1,292,307 Borrowing from Federal Home Loan Bank 35,000 34,694 - - Subordinated Debt 38,876 39,402 38,745 42,977 Accrued Interest Payable 3,509 3,509 3,065 3,065 1998 1997 - ------------------------------------------------------------------------------ Notional Fair Notional Fair (In Thousands) Amount Value Amount Value - ------------------------------------------------------------------------------ Off-balance Sheet Financial Instruments: Commercial Letters of Credit $ 64,578 $ 161 $ 51,074 $ 128 Standby Letters of Credit 89,735 1,160 11,938 180 Bill of Lading Guarantees 531 1 531 1 Undisbursed Loans 474,366 4,155 365,358 3,633
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF GBC BANCORP (PARENT COMPANY) Condensed balance sheets as of December 31, 1998 and 1997 follow:
(Dollars in Thousands) 1998 1997 - ----------------------------------------------------------------------------- ASSETS Due From Bank Subsidiary $ 211 $ 1,221 Investment in Subsidiaries 160,000 134,995 Advance to Bank Subsidiary 40,000 45,700 Other Assets 3,452 4,722 -------- -------- Total Assets $203,663 $186,638 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Dividends Payable $ 1,028 $ 839 Other Liabilities 729 731 Subordinated Debt 38,876 38,745 -------- -------- Total Liabilities 40,633 40,315 STOCKHOLDERS' EQUITY Common stock, no par value or stated value; 40,000,000 shares authorized; 13,711,998 and 13,990,098 shares outstanding at December 31, 1998 and 1997, respectively 56,303 53,314 Retained Earnings 104,898 91,355 Accumulated Other Comprehensive Income 1,829 1,654 -------- -------- Total Stockholders' Equity 163,030 146,323 -------- -------- Total Liabilities and Stockholders' Equity $203,663 $186,638 ======== ======== Condensed statements of income for the years ended December 31, 1998, 1997, and 1996 follow: (Dollars in Thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Interest Income $ - $ 199 $ 395 Interest Income from Subsidiary Bank 2,583 1,639 106 Dividends Received from Bank 4,213 8,307 13,021 -------- -------- -------- Total Income 6,796 10,145 13,522 Interest Expense 3,481 2,553 1,596 Non-Interest Expense 139 105 130 -------- -------- -------- Total Expense 3,620 2,658 1,726 Income Before Income Taxes & Extraordinary Item 3,176 7,487 11,796 Benefit for Income Taxes (436) (394) (615) -------- -------- -------- Income Before Extraordinary Item 3,612 7,881 12,411 Extraordinary Charge - (488) - -------- -------- -------- Income Before Equity in Undistributed Earnings of Subsidiaries 3,612 7,393 12,411 Equity in Undistributed Earnings of Subsidiaries 24,530 18,553 6,626 -------- -------- -------- Net Income $28,142 $25,946 $19,037 ======== ======== ========
Condensed statements of cash flows for the years ended December 31, 1998, 1997, and 1996 follow:
(In Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 28,142 $ 25,946 $19,037 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of Discount on Subordinated Debt 131 55 - Net decrease/(increase) in other assets 2,883 5,016 (5,817) Equity in undistributed earnings of subsidiaries (24,530) (18,553) (6,626) Net increase/(decrease) in other liabilities (2) 101 571 --------- --------- -------- Net Cash Provided by Operating Activities 6,624 12,565 7,165 --------- --------- -------- INVESTING ACTIVITIES: Net (increase) in cash invested in subsidiaries 5,400 (40,647) (6,251) Proceeds from of investment securities - 5,000 - --------- --------- -------- Net Cash Provided by (Used in) Investing Activities 5,400 (35,647) (6,251) --------- --------- -------- FINANCING ACTIVITIES: Cash dividends paid (4,024) (3,144) (2,424) Proceeds from issuance of subordinated notes - 38,690 - Redemption of subordinated debt (15,000) - Proceeds from exercise of stock options/Sales of stocks 1,376 3,192 1,313 Payment to repurchase common stock (10,386) Other, net - 53 143 --------- --------- -------- Net Cash Provided by (Used in) Financing Activities (13,034) 23,791 (968) --------- --------- -------- Net change in due from bank (1,010) 709 (54) Due from bank at beginning of year 1,221 512 566 --------- --------- -------- Due from bank at end of year $ 211 $ 1,221 $ 512 ========= ========= ======== Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest $ 3,350 $ 2,279 $ 1,578 Income tax refunds (394) (615) (281)
NOTE 18 - REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998 and 1997, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. A "well capitalized" institution is one with capital ratios as shown in the following table. As of December 31, 1998, Tier 1 risk based capital, total risk based and leverage ratios for both the Company and the Bank exceeded the "well capitalized" ratio requirements as follows:
Minimum Well GBC Bancorp General Bank Regulatory Capitalized (In Thousands) Amount Ratio Amount Ratio Requirements Requirements - ------------------------------------------------------------------------- Tier 1 $160,805 11.06% $156,333 10.77% 4% 6% Total $217,871 14.98% $174,494 12.02% 8% 10% Leverage Ratio $160,805 9.75% $156,333 9.49% 4% 5%
As of December 31, 1997, Tier 1 risk based capital, total risk based capital and leverage ratios for both the Company and the Bank exceeded the "well capitalized" ratio requirements as follows:
Minimum Well GBC Bancorp General Bank Regulatory Capitalized (In Thousands) Amount Ratio Amount Ratio Requirements Requirements - ------------------------------------------------------------------------- Tier 1 $144,067 13.57% $131,702 12.45% 4% 6% Total $196,130 18.47% $144,964 13.71% 8% 10% Leverage Ratio $144,067 9.58% $131,702 8.78% 4% 5%
The Financial Code of the State of California provides that dividends paid by the Bank in any one year may not exceed the lesser of the Bank's undivided profits or the net income for the prior three years, less cash distributions to stockholders during such period. As of December 31, 1998, approximately $49.8 million of undivided profits of the Bank is available for dividends to the Company, subject to the subordinated debt covenant restrictions. NOTE 19 - OTHER NON-INTEREST EXPENSE Components of other non-interest expense in excess of 1% of the sum of total interest income and non-interest income for each period were as follows:
(In Thousands) 1998 1997 1996 - --------------------------------------------------------------- Office Supplies and Communication Expense $1,522 $1,346 $1,395 Professional Services Expense 1,606 1,380 2,428 FDIC Assessment Expense 159 148 150 Real Estate Investment Expense 1,329 1,329 1,443 Other 2,222 1,795 1,844 ------ ------ ------ Total $6,838 $5,998 $7,260 ====== ====== ======
NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended in 1998 Sept. (In Thousands, except Per Share Data) March 31 June 30 30 Dec. 31 - ------------------------------------------------------------------------------ Interest Income $29,686 $31,193 $33,342 $31,770 Interest Expense 13,717 14,509 14,703 14,089 Net Interest Income 15,969 16,684 18,639 17,681 Provision for Credit Losses - - - 1,500 Income Before Income Taxes and Extraordinary Item 10,438 10,990 12,705 10,773 Net Income 6,631 6,843 7,878 6,790 Earnings Per Share - Basic 0.47 0.48 0.56 0.49 Earnings Per Share - Diluted 0.46 0.48 0.55 0.48
Three Months Ended in 1997 Sept. (In Thousands, except Per Share Data) March 31 June 30 30 Dec. 31 - ------------------------------------------------------------------------------ Interest Income $25,734 $27,159 $28,189 $29,814 Interest Expense 11,050 11,949 12,923 13,501 Net Interest Income 14,684 15,210 15,266 16,313 Provision for Credit Losses 1,000 - - - Income Before Income Taxes and Extraordinary Item 8,418 9,989 9,748 12,584 Extraordinary Charge - - 488 - Net Income 5,744 6,460 5,858 7,884 Earnings Per Share - Basic 0.43 0.48 0.43 0.57 Earnings Per Share - Diluted 0.41 0.46 0.41 0.55
INDEPENDENT AUDITORS' REPORT To the Board of Directors of GBC Bancorp and Subsidiaries: We have audited the accompanying consolidated balance sheet of GBC Bancorp and subsidiaries (the "Company") as of December 31, 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Company for the years ended December 31, 1997 and 1996 were audited by other auditors whose report, dated January 30, 1998, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1998 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998, and the results of its operations and its cash flows for the year the ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California February 26, 1999 EX-21 5 SUBSIDIARIES OF GBC BANCORP Exhibit 21 Subsidiaries of GBC Bancorp State of Incorporation - --------------------------- ---------------------- General Bank California GBC Venture Capital, Inc. California Subsidiaries of General Bank - ---------------------------- GBC Investment & Consulting Company, Inc. California GBC Insurance Services, Inc. California Southern Counties Escrow California GBC Leasing Company, Inc. California 37 EX-27 6 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 27,514 0 101,000 0 724,172 24,616 24,677 788,945 19,381 1,680,824 1,380,903 0 98,015 38,876 0 0 56,303 106,727 1,680,824 73,886 52,098 7 125,991 53,279 57,018 68,973 0 107 30,430 44,906 28,142 0 0 28,142 2.00 1.96 4.46 20,790 780 10,440 0 16,776 2,287 3,392 19,381 19,381 0 0
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