-----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, KqGUB/FbKaIc+qRh8Q++6FjaVvCEjiUhSWzawjeqp4qOeex/GU8axe0wZcbmcC17 FOFKsQbi1MAREqz7uNHKWA== 0000912057-96-005200.txt : 19960327 0000912057-96-005200.hdr.sgml : 19960327 ACCESSION NUMBER: 0000912057-96-005200 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NASD 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10731 FILM NUMBER: 96538769 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-K405 1 10-K405 FORM 10K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission file number 0-16213 ----------------- ------- GBC BANCORP ------------ (Exact name of registrant as specified in its charter) CALIFORNIA 95-3586596 - ---------- ---------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 800 West 6th Street, Los Angeles, CA 90017 - --------------------------------------- ----- (Address of principal executive offices (Zip Code) Registrant's telephone number, including area code (213) 972-4172 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class: None Name of each exchange on which registered: None - ------------------------- ----------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value --------------------------------- (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. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [X] As of January 31, 1996, the aggregate market value of the common stock held by non-affiliates of the registrant was $119,576,403. The number of shares of common stock of the registrant outstanding as of February 29, 1996 was 6,689,589. The following documents are incorporated by reference herein: Part of Form 10-K Documents Incorporated by Reference Into which Incorporated - ----------------------------------- ------------------------ 1995 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, 1995 Part II Item 9 and Part III Exhibit Index on Pages 21-23 ----- 1 FORM 10-K TABLE OF CONTENTS AND CROSS REFERENCE SHEET
Page in Incorporation PART I 10-k by reference ------- ------------- Item 1. Business............................................. 3 Item 2. Properties........................................... 12 Item 3. Legal Proceedings.................................... 13 Item 4. Submission of Matters to a Vote of Security Holders.. 13 Executive Officers of the Registrant............................... 13 PART II Item 5. Market for Registrant's Common Equity and Related Security Holder Matters.............................. 15 Item 6. Selected Financial Data.............................. 16 1995 Annual Report Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 16 1995 Annual Report Item 8. Financial Statements and Supplementary Data.......... 16 1995 Annual Report Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 16 1996 Proxy Statement PART III Item 10. Directors and Executive Officers of the Registrant... 17 1996 Proxy Statement Item 11. Executive Compensation............................... 17 1996 Proxy Statement Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 17 1996 Proxy Statement Item 13. Certain Relationships and Related Transactions....... 17 1996 Proxy Statement PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................ 18 1995 Annual Report SIGNATURES......................................................... 19 EXHIBIT INDEX...................................................... 21
2 PART I ITEM 1 BUSINESS 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. The Company owns all of the outstanding stock of 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. Under a plan of reorganization and merger agreement dated February 23, 1981, as amended on March 31, 1981 and approved by the shareholders of General Bank, the Bank became a wholly-owned subsidiary of GBC Bancorp (the "Registrant"), and each share of common stock of the Bank was automatically converted into one share of common stock (no par value) of GBC Bancorp. The merger received regulatory approval and was consummated in October, 1981. The Bank has conducted the business of a commercial bank since March, 1980. The Bank is a community bank that serves individuals and small to medium-sized businesses through fifteen branch offices located in the greater Los Angeles, San Diego and Silicon Valley areas. On March 4, 1994, the Bank moved its headquarters to a new downtown location at 800 West 6th Street, Los Angeles, CA 90017. 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 and Fremont. 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. In addition, as of December 31, 1993, the Bank offers escrow services through its subsidiary, Southern Counties Escrow. The Bank's primary emphasis is on commercial and real estate lending, real estate construction lending, and, to a lesser extent, consumer lending and residential mortgage 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 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. 3 In November, 1989, the Bank acquired a California Small Business Administration "SBA" lending company and established an 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, 1995, the Bank's SBA servicing portfolio was approximately $83 million. The Bank currently is one of the 30 largest lenders in the Los Angeles District Office of SBA. In late 1992, the Bank established a Residential Mortgage Department to expand its product lines. During 1993, the Bank became a direct lender for the conforming loans of the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") as well as investor's jumbo loans. The servicing portfolio as of December 31, 1995 amounted to approximately $68 million. Loan originations during 1995 were approximately $55 million. In March of 1985, the Bank received approval from the California State Banking Department to engage in real estate activities pursuant to California Financial Code Section 751.3. GBC Real Estate Company, Inc., a subsidiary of the Bank, was incorporated on July 26, 1989. The enactment of the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"), among other things, phases out the ability of banks to directly or indirectly invest in real estate for non-banking purposes. In order to be in compliance, the Company will close its subsidiary, by December 31, 1996, as is required by FDICIA. No material financial impact is expected. As of December 31, 1995, the Bank's net total investment in real estate on the books of GBC Real Estate Company, Inc. was $1,954,000. This amount includes $825,000 of capitalized interest which is eliminated upon consolidation of GBC Real Estate Company with its parent, General Bank. In November of 1988, California voters passed Proposition 103 allowing state chartered banks or bank holding companies to be licensed as insurance agents or brokers. GB Insurance Services, Inc., a subsidiary of the Bank, was incorporated on March 9, 1990. Its name was changed to GBC Insurance Services, Inc. on July 17, 1990, and it obtained its state license in August, 1990 to operate exclusively as a full service insurance agent/broker to provide additional financial services to the Bank's customers. As of December 31, 1995 and for the year ended December 31, 1995, GBC Insurance Services, Inc. reported total assets of $21,000 and a net loss of $84,000, respectively. In July, 1989, GBC Investment & Consulting Company, Inc., a 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. A branch office in Taipei, Taiwan was established at the end of June, 1990 to coordinate and develop business between the Bank and prospective customers in Taiwan and other Asian countries. As of December 31, 1995 and for the year ended December 31, 1995, GBC Investment & Consulting Company, Inc. reported total assets of $16,000 and a net loss of $42,000, respectively. 4 In December, 1993, a leasing subsidiary of the Bank was formed under the name of GBC Leasing Company, Inc., 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 Revenue Code of 1986, as amended. As of December 31, 1995 and for the year ended December 31, 1995, GBC Leasing Company, Inc. reported total assets of $407,000 and a net loss of $29,000, respectively. In December, 1993, General Bank purchased Southern Counties Escrow, a 38-year old company which provides escrow services primarily for business and commercial and residential developers. As of December 31, 1995 and for the year ended December 31, 1995, Southern Counties Escrow reported total assets of $161,000 and a net income of $48,000. 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, employees and stockholders, and local promotional activity. Competitors presently include ethnic 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. Congress passed legislation in 1994 to remove geographic restrictions on bank expansion. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 removes state law barriers to acquisitions in all states and allows multi-state banking operations to merge into a single bank with interstate branches. Interstate banking and branching authority will be subject to certain conditions and restrictions, such as capital adequacy, management, and CRA compliance. The new law replaces a patchwork of state laws with a uniform federal standard. Under the law, bank holding companies will be able to acquire banks in any state, subject to certain conditions. This provision became effective one year after the date of enactment. Interstate branching will be permitted by allowing banks to merge across state lines to form a single institution. The interstate branching provisions will become effective on June 1, 1997 unless a state takes action before that time. A state can pass laws to opt out completely as long as they act before June 1, 1997. California has opted into this legislation. As a California state-chartered bank whose accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank is subject to regulation, supervision and regular examination by the California State Banking Department and by 5 the FDIC. In addition, while the Bank is not a member of the Federal Reserve System ("FRB"), it is subject to certain regulations issued by the Board of Governors of the FRB. The regulations of these agencies govern most aspects of the Bank's business, including the filing of periodic reports by the Bank, and the Bank's activities relating to dividends, investments, loans, borrowings, capital requirements, certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits and numerous other areas. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the provisions described. No assurance can be given that such statutes or regulations will not change in the future. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, including, but not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the FRB. A bank holding company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the FRB and is required to obtain FRB approval before acquiring, directly or indirectly, ownership or control of any voting shares of any bank if, after such acquisition, it would directly or indirectly own or control more than 5% of the voting stock of that bank, unless it already owns a majority of the voting stock of that bank. The BHC Act further provides that the FRB shall not approve such acquisition that would result in or further the creation of a monopoly, or the effect of which may be to substantially lessen competition, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the probable effect in meeting the convenience and needs of the community to be served. Furthermore, under the BHC Act, a bank holding company is, with limited exceptions, prohibited from engaging in any activity other than managing or controlling banks. With the prior approval of the FRB, however, a bank holding company may own shares of a company engaged in activities which the FRB determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. These activities include, but are not limited to, operating an industrial loan company, industrial bank, mortgage company, finance company, credit card company or factoring company; operating as a trust company in certain instances and/or performing data processing operations. The FRB also has determined that certain other activities are not so closely related to banking as to be a proper incident thereto within the meaning of the BHC Act. Such activities include: real estate brokerage and syndication; land development; property management; underwriting of life insurance not related to credit transactions; and, with 6 certain exceptions, securities underwriting and equity funding. In the future, the FRB may add or delete from the list of activities permissible for bank holding companies. Under the BHC Act, a bank holding company and its subsidiaries are prohibited from acquiring any voting shares of, or interest in, all or substantially all of the assets of any bank located outside the state in which the operations of the bank holding company's banking subsidiaries are principally conducted, unless the acquisition is specifically authorized by the law of the state in which the bank to be acquired is located, or unless the transaction qualifies under federal law as an "emergency interstate acquisition" of a closed or failing bank. The Bank is a member of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, the Bank pays a quarterly assessment and is subject to the rules and regulations of the FDIC pertaining to deposit insurance and other matters. Effective March 15, 1989, the FRB adopted risk-based capital guidelines for bank holding companies and the FDIC adopted such guidelines effective April 20, 1989 for insured state non-member banks such as the Bank. In general, the risk-based capital guidelines provide detailed definitions of which obligations will be treated as capital, and assign different weights to various assets and off-balance sheet items, depending upon the perceived degree of credit risk to which they expose such entities. The guidelines require a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio of 8% commencing December 31, 1992. In August, 1990, the FRB also promulgated a new minimum capital leverage standard of 3 percent Tier 1 capital to total average assets (Tier 1 leverage ratio) effective September 7, 1990. Under this new standard, the minimum Tier 1 leverage capital ratio for the most highly rated banks is at 3 percent, and all other state non-member banks, such as the Bank, are required to meet a minimum leverage ratio of not less than 4 percent. A more detailed discussion is hereby incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources" in the Company's annual report to stockholders. In August of 1989, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") was enacted. This legislation was adopted in order to reform the regulation and supervision of financial institutions and the insured deposits of financial institutions. Among other things, FIRREA gives the FDIC authority to approve changes in an institution's management in certain circumstances, imposes new limitations on certain investment activities and on certain deposit-generating activities, amends the BHC Act to permit the acquisition of both healthy and failing savings associations by bank holding companies, and prohibits a bank which is "undercapitalized" from accepting brokered deposits. Among the many major changes made by this law is a measure requiring the FDIC to assume responsibility for insuring the deposits of financial institutions formerly insured by the Federal Savings and Loan Insurance Corporation. FIRREA establishes two separate insurance funds to be administered by the FDIC. Insur- 7 ance premiums on deposit insurance will be assessed by the FDIC independently for the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund. Under FDICIA the FDIC instituted a risk-based assessment system for insured depository institutions in which the insurance premium relates to the probability that the deposit insurance fund will incur a loss with respect to the institution. On September 15, 1992, the FDIC Board of Directors agreed to a new risk-based system which went into effect January 1, 1993, and remained in effect until the permanent risk-based assessment system was implemented on January 1, 1994. To arrive at a risk-based assessment, the FDIC now places each FDIC-insured institution in one of nine risk categories using a two-step process based on capital ratios and the supervisory evaluations of the risk posed by the institution. The following table summarizes the nine risk categories and assessment rates per $100 of deposits as of December 31, 1995: Supervisory Rating ------------------------ Capital Group A B C - ------------- --- --- --- Well Capitalized $ 0 $.03 $.17 Adequately Capitalized .03 .10 .24 Undercapitalized .10 .24 .27 The three supervisory subgroups are Group "A" for financially sound institutions with only a few minor weaknesses; Group "B" for those with weaknesses which, if uncorrected, could cause substantial deterioration of the institution and increased risk to the insurance fund; and Group "C" for those with a substantial probability of loss to the fund absent effective corrective action. The capital ratios used in assigning the capital group are as follows: Well Capitalized if: (1) Total Risk-based Capital ratio is greater than or equal to 10%; and (2) Tier 1 Risk-based Capital ratio is greater than or equal to 6%; and (3) Tier 1 Leverage Capital ratio is greater than or equal to 5%. Adequately Capitalized if: (1) Total Risk-based Capital ratio is greater than or equal to 8%; and (2) Tier 1 Risk-based Capital ratio is greater than or equal to 4%; and (3) Tier 1 Leverage Capital ratio is greater than or equal to 4%. Undercapitalized if neither Well Capitalized nor Adequately Capitalized. As of January 1, 1996, the Bank is considered by the FDIC to be well capitalized with a supervisory rating of B. The Bank pays, accordingly, $0.03 assessment fee per $100 of deposits. Ratings will be confirmed based on supervisory examinations. 8 In addition, whenever the BIF falls below its designated reserve ratio, the FDIC is directed by FDICA to set semi-annual assessments in an amount necessary to increase the reserve ratio to its designated level, either within one year or in accordance with a schedule (not longer than 15 years) to be set by the FDIC. The designated reserve ratio under FDICIA is 1.25% of insured deposits or a higher percentage as determined by the FDIC Board. Under FDICIA, an insured depository institution generally may not make a capital distribution if, after making the distribution, the institution would be undercapitalized. In addition, an insured state-chartered bank, such as the Bank, may not engage as principal in any type of activity that is not permissible for a national bank, unless (1) the FDIC has determined that the activity would pose no significant risk to the deposit insurance fund, and (2) the bank is and continues to be adequately capitalized. FDICIA also limits an insured state bank's ability to acquire or retain equity investments of a type not permissible for a national bank. Among the exceptions to this rule is a provision that states that an insured state bank may invest as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation, or new construction of a qualified housing project, provided that the aggregate of the investments pursuant to this provision shall not exceed 2% of the total assets of the bank. The Bank's investment in lower income housing projects as of December 31, 1995 was 0.9% of total assets. The term "qualified housing project" means residential real estate that is intended to primarily benefit lower income people throughout the period of the investment. FDICIA also requires uniform regulations from banking agencies for real estate loans, i.e., loans secured by liens on interests in real estate or extensions of credit made for the purpose of financing the construction of a building or other improvements to real estate. In prescribing standards under the regulations, the agencies shall consider (i) the risk posed to the deposit insurance funds by such extensions of credit, (ii) the need for safe and sound operation of insured depository institutions, and (iii) the availability of credit, and no federal banking agency shall adversely evaluate an investment or a loan made by an insured depository institution, or consider such a loan to be nonperforming, solely because the loan is made to or the investment is in commercial, residential, or industrial property, unless such investment or loan may affect the institution's safety and soundness. On December 31, 1992, the FRB, FDIC and two other federal banking agencies jointly published uniform regulations pursuant to this statutory directive. The regulations require all insured depository institutions to establish and maintain written internal real estate lending policies. These policies must be consistent with safe and sound banking practice and appropriate to the size of the institution and nature and scope of its operations. The policies must establish loan portfolio diversification standards, and prudent underwriting standards (including loan-to-value limits) that are clear and measurable. Institutions must also establish loan administration procedures for their real 9 estate portfolio that include documentation, approval and reporting requirements. These written policies are to be reviewed and approved by the institution's board of directors at least annually. An institution is expected to monitor the real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Finally, the regulations provide that the lending policies established by the institution should reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Guidelines"). In general, the Guidelines identify the loan portfolio management and underwriting considerations that should be addressed in a sound real estate lending policy. The Guidelines also address the need to establish loan administration procedures for real estate loans, and the need for an appropriate review and approval process for exceptions to the institution's general lending policies. Finally, the Guidelines provide specific guidance on loan-to-value limits for various categories of real estate loans. Pursuant to the provisions of FDICIA, the FDIC has adopted regulations limiting a bank's ability to solicit or accept brokered deposits. In general, an institution that is not well capitalized is prohibited from accepting brokered deposits. However, the FDIC may grant a waiver for institutions that are adequately capitalized. FDICIA now requires notification from a deposit broker before it may solicit or place any deposit with an insured deposit institution. FDICIA also authorizes the imposition of certain record keeping requirements regarding brokered deposits. FDICIA has also made regulatory improvements in other areas that may affect the business practices of the Bank in the years to come. In December 1991, as part of FDICIA, the Truth-in-Savings Act was enacted, which is implemented by FRB Regulation DD. Compliance was optional until June 21, 1993. The purpose of said Act and Regulation is to assist consumers in comparing deposit accounts offered by depository institutions, principally through the disclosure of fees, the annual percentage yield, the interest rate, and other account terms whenever a consumer requests the information and before an account is opened. Such legislation does not appear to have impacted the business of the Bank or the Company. The federal banking agencies issued a statement advising that, for regulatory purposes, federally supervised banks and savings associations should report deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"), beginning in 1993, although earlier application of SFAS No. 109 was permitted subject to certain limitations. The federal banking agencies have limited the deferred tax assets to amounts that can only be realized through future taxable earnings, including the implementation of a tax planning strategy, and would be limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date or (ii) 10% of Tier 1 capital. The amount of deferred taxes in excess of this limit, if any, would be deducted from Tier 1 capital and total assets in regulatory capital calculations. The federal banking agencies issued a proposal in January, 1994 seeking public comment on whether to amend their capital definitions of leverage and risk-based capital to conform such definitions to the SFAS No. 115, "Accounting for Certain Investments in 10 Debt and Equity Securities", which require an institution to recognize as a separate component of stockholders' equity the amount of unrealized gains and losses on securities, net of taxes, that are deemed to be "available for sale". In November, 1994, the federal banking agencies reversed their earlier position and announced their joint decision not to adopt SFAS No. 115 for regulatory capital purposes. Risk-based and leverage capital ratios will not reflect the impact of unrealized holding gains and losses, net of taxes, on securities classified as "available for sale". As part of the requirements of section 305 of FDICIA, the federal banking agencies issued a rule in August of 1995 amending the risk-based capital standards to include a bank's exposure to interest rate risk as a factor in evaluating capital adequacy. This rule, FDICIA 305, states that regulators will consider a bank's exposure to declines in economic value of capital due to changes in interest rates as a factor in evaluating capital adequacy. The second component of this rule addressing how regulators will calculate the economic value of capital is expected to be issued in the form of a supervisory statement that will allow a more objective assessment of an institution's interest rate risk. In August, 1994, the FDIC and the FRB approved final rules which provide that risks from credit concentrations and nontraditional activities are to be considered only as additional factors when assessing capital adequacy. No specific quantitative requirements are assigned to these risks. Although guidance has not been provided concerning the definition of "nontraditional activities", the FRB's proposed rule suggested that general indicators of "atypical" risk include: * Significant volatility in the market value and profitability of a product; * Evidence of chronic illiquidity in the market for a product or in a related financial market; * Rapid changes in new or developing products markets; and * The creation of obligations, guarantees, or other potential liabilities essential to the conduct of an activity. On December 21, 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses (the "Policy Statement"). The Policy Statement requires that federally insured depository institutions must maintain an allowance for loan and lease losses ("ALLL") adequate to absorb credit losses associated with the loan and lease portfolio, including all binding commitments to lend. The Policy Statement defines an adequate ALLL for regulatory purposes as a level that in general is no less than the sum of the following items, given the appropriate facts and circumstances as of the evaluation date: 11 (1) For loans and leases classified as substandard or doubtful, all credit losses over the remaining effective lives of those loans and leases. (2) For those loans and leases that are not classified, all estimated credit losses forecasted for the upcoming twelve months. (3) Amounts for estimated losses from transfer risk on international loans. Additionally, an adequate level of ALLL should reflect an additional margin for imprecision inherent in most estimates of expected credit losses. The Policy Statement also provides guidance to examiners in evaluating the adequacy of the ALLL. Among other things, the Policy Statement directs examiners to check the reasonableness of ALLL methodology by comparing the reported ALLL against the sum of the following amounts: (a) 50 percent of the portfolio that is classified doubtful; (b) 15 percent of the portfolio that is classified substandard; and (c) For the portions of the portfolio that have not been classified (including those loans designated special mention), estimated credit losses over the upcoming twelve months given the facts and circumstances as of the evaluation date (based on the institution's average annual rate of net charge-offs experienced over the previous two or three years on similar loans, adjusted for current conditions and trends). The Policy Statement specifies that the amount of ALLL determined by the sum of the amounts above is neither a floor nor a "safe harbor" level for an institution's ALLL. However, examiners will review a shortfall relative to this amount as indicating whether it is reasonable, supported by the weight of reliable evidence and that all relevant factors have been appropriately considered. The Company believes it is in compliance with the Policy Statement. At December 31, 1995, the Bank had 317 full-time equivalent employees. ITEM 2 PROPERTIES GBC Bancorp shares common quarters with General Bank at 800 West 6th Street, Los Angeles, California. 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. 12 As of December 31, 1995 the Bank operated full service branches at fourteen 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 in a location, where it owns the building and land with approximately 27,600 square feet of space located at 4128 Temple City Boulevard, Rosemead, California. The net book value of the two owned facilities (building and land) at December 31, 1995 was $2,484,000. Expiration dates of the Bank's leases range from July, 1997 to February, 2009. All the Bank's full-service branches are located in California and primarily in the Southern California area. Management believes that the Bank's facilities are sufficient for its needs at the present time and the foreseeable future. ITEM 3 LEGAL PROCEEDINGS The Bank is a defendant in various lawsuits arising from the normal course of business. The Company established an accrual for a potential liability that was subsequently paid out early in 1996 at the accrued amount. There were two credit-related cases where the Bank was named as defendant. Although unspecified damages, including punitive damages, were being sought, management believes that the claims are without merit. The amount of possible liabilities, if any, could not be estimated. Management believes based upon the opinion of legal counsel, that the ultimate resolution of the pending litigation will not have a material effect upon the financial position of the Company. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1995, 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 at December 31, 1995, and their business experience during the prior five years:
Age at Name Positions and Offices presently held and business experience 12/31/95 - ---- ------------------------------------------------------------ -------- Li-Pei Wu Chairman, President and Chief Executive Officer of GBC 61 Bancorp and General Bank since 1984 13 Peter Wu Secretary and Executive Vice President of GBC Bancorp 47 and Executive Vice President of General Bank since 1981, and Chief Operating Officer of General Bank since January 1, 1995 Peter Lowe Executive Vice President and Chief Financial Officer of GBC 54 Bancorp and General Bank since 1994; prior thereto, Executive Vice President and Chief Financial Officer of Manufacturers Bank since 1990 Domenic Massei Senior Vice President, Operations Administration of General 51 Bank since 1989; prior thereto, Executive Vice President and Chief Administrative Officer of Transnational Bank since 1984 Alan Thian Executive Vice President and Chief Operating Officer of GBC 43 Insurance Services, Inc., a subsidiary of General Bank, since 1992; Senior Vice President of General Bank from 1993 to present; Vice President of General Bank from 1989 to 1993; Director of United Overseas Investment, Inc. from 1978 to present Richard Voake Senior Vice President and Credit Administrator of 55 General Bank since 1994; prior thereto, Vice President and Manager of Corporate Credit Examination from 1992 to 1994; Senior Vice President of Security Pacific Corporation/Security Pacific National Bank from 1984 to 1992
14 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS MARKET INFORMATION The Company's common stock is traded on the over-the-counter market and is listed on the National Association of Securities Dealers Automated Quotations National Market System (NASDAQ). It is quoted electronically under the symbol GBCB. The market makers for GBC Bancorp are: Ernst & Company; Herzog, Heine, Geduld, Inc.; Hoefer & Arnett Inc.; Montgomery Securities; Keefe, Bruyette & Woods, Inc.; Wedbush Morgan Securities, Inc.; Itgiy Investment Technology Group, Inc. The high and low last sale or bid prices for each quarter of the years 1995 and 1994, as reported by the NASDAQ, are as follows:
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter ------- ------- ------- ------- High $14.25 $13.63 $13.50 $17.75 Low $12.97 $11.50 $10.50 $12.50 First Second Third Fourth 1994 Quarter Quarter Quarter Quarter ------- ------- ------- ------- High $16.00 $15.00 $14.63 $14.25 Low $13.25 $13.25 $13.00 $11.50
HOLDERS As of February 29, 1996, there were 352 holders of record of the Company's common stock. This number is based solely on the number of record holders and was computed by a count of such. DIVIDEND Cash dividends were declared and paid on a quarterly basis for 1995 and 1994. For the years 1995 and 1994, the quarterly cash dividends declared per share were as follows: 15
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1995 $0.08 $0.08 $0.08 $0.08 1994 $0.08 $0.08 $0.08 $0.08
On April 16, 1992, the Company declared an additional 10% stock dividend to shareholders of record on July 1, 1992, payable on July 16, 1992. The Company's subsidiary, General Bank, is limited in the payment of dividends as explained in footnote 17 on page 51 of the Company's Annual Report to Shareholders which is hereby incorporated by reference. ITEM 6 SELECTED FINANCIAL DATA The selected financial data on page 28 of the Company's Annual Report to Shareholders is hereby incorporated by reference. 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 9 through 27 of the Company's 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 KPMG Peat Marwick LLP, on pages 29 through 54 of the Company's Annual Report to Shareholders, are hereby incorporated by reference. The report of KPMG Peat Marwick LLP contains an explanatory paragraph relating to the change in accounting for certain investments in debt and equity instruments effective in 1994, and the adoption of provisions for the accounting by creditors for loan impairment and related income recognition and disclosure effective in 1995. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes of or disagreements with accountants on matters involving accounting and financial disclosure. 16 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the information relating to directors of the Company under the caption "Election of Directors" contained on pages 4 and 5 of the Company's Definitive Proxy Statement dated March 18, 1996 relating to the annual meeting of shareholders to be held on April 18, 1996, which is hereby incorporated by reference. See the information relating to executive officers of the Company which appears on page 13 and 14 of this Annual Report on Form 10-K. ITEM 11 EXECUTIVE COMPENSATION See the information regarding executive compensation under the caption "Executive Compensation" contained on pages 6 through 10 of the Company's Definitive Proxy Statement dated March 18, 1996, for the annual meeting of shareholders to be held on April 18, 1996, which is hereby incorporated by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the information regarding the security ownership of certain beneficial owners and management under the caption "Shareholdings of Certain Beneficial Owners and Management" contained on pages 2 to 4 of the Company's Definitive Proxy Statement dated March 18, 1996, for the annual meeting of shareholders to be held on April 18, 1996, which is hereby incorporated by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the information regarding certain relationships and related transactions under the caption "Certain Transactions" contained on page 12 of the Company's Definitive Proxy Statement dated March 18, 1996, for the annual meeting of shareholders to be held on April 18, 1996, which is hereby incorporated by reference. 17 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 54 Consolidated Balance Sheets as of December 31, 1995 and 1994......................................................... Page 29 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993............................. Page 30 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993......................................................... Page 31 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993............................. Page 32 Notes to Consolidated Financial Statements................... Pages 33-53 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 None 18 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/ s/ --------------------------- ------------------------------- by: Li-Pei Wu, by: Peter Lowe, President and Chief Executive Officer Executive Vice President and Chief Financial Officer Date: Date: ------------------------ ------------------------- 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/ Date: ------------------------- ----------------------- Eric W. Chang s/ Date: ------------------------- ----------------------- Helen Chen s/ Date: ------------------------- ----------------------- Thomas C. T. Chiu s/ Date: ------------------------- ----------------------- Stephen C. Huang s/ Date: ------------------------- ----------------------- Chuang-I Lin s/ Date: ------------------------- ----------------------- Ko-Yen Lin s/ Date: ------------------------- ---------------------- Ting Y. Liu s/ Date: ------------------------- ---------------------- Alan Thian s/ Date: ------------------------- ---------------------- John Wang s/ Date: ------------------------- ---------------------- Kenneth C. Wang s/ Date: ------------------------- ---------------------- Chien-Te Wu s/ Date: ------------------------- ---------------------- Julian Wu 19 s/ Date: ------------------------- ---------------------- Li-Pei Wu s/ Date: ------------------------- ---------------------- Peter Wu s/ Date: ------------------------- ---------------------- Ping C. Wu s/ Date: ------------------------- ---------------------- Walter Wu s/ Date: ------------------------- ---------------------- Chin-Liang Yen 20 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 and second floor space at 201 South Figueroa Street, Los Angeles, California (incorporated herein by this reference to Exhibit 10.1 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 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) -- 10.3 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) -- 10.4 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) -- 10.5 Lease for ground floor space at 2500 South Atlantic Boulevard, City of Commerce, California (incorporated herein by this reference to Exhibit 10.8 on the Company's Form 10-K for the year ended December 31, 1988) -- 10.6 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) -- 10.7 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) -- E - 1 10.8 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) -- 10.9 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) -- 10.11 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) -- 10.12 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) -- 10.13 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) -- 10.14 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) -- 10.15 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) -- 10.16 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) -- 10.17 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) -- 10.19 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) -- 10.21 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) -- E - 2 10.22 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) -- 10.23 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) -- 10.24 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) -- 10.25 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) -- 10.26 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) -- 13 Annual Report to Shareholders 24 22 Subsidiaries of GBC Bancorp 78 27 Financial Data Schedule 79 E - 3 EX-13 2 EXHIBIT 13 Exhibit 13 [LOGO] GBC Bancorp 1995 Annual Report - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATION Consolidated net income for GBC Bancorp and subsidiaries (the "Company") for the year ended December 31, 1995 totaled $7.6 million. This compares to net earnings of $7.5 million in 1994 and $11.9 million in 1993. Earnings per share were $1.14 for 1995 compared to $1.12 for 1994, and $1.76 for 1993. The slight increase in net income from 1994 to 1995 resulted from $3.8 million increase of net interest income and a lower effective income tax rate, which were partially offset by a $2.4 million increase in the provision for credit losses and a $1.8 million increase in non-interest expense. The increase of the provision for credit losses in 1995 was caused by the continued effect of the past increases in interest rates, and the resulting impact on the recovery of the local economy and the commercial real estate market. Charge-offs recorded in 1995 also reflect actions taken to implement the regulatory interpretation of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS 114"). Charge-offs were recognized to reduce the book value of problem loans collateralized by real estate to, or below, appraised values. Certain loans were partially charged-off so that in the future, with contractual performance, these loans will no longer be criticized by the regulators. It is believed that the accounting results in a conservative valuation of such loans. Prior to the charge-offs, the loans had allowances that represented a substantial portion of the charge-off. Net charge-offs were $24.9 million during 1995 compared to $5.1 million during 1994. The $3.8 million growth of net interest income was primarily the result of an increase in interest earning assets partially offset by a reduced net interest spread. The $1.8 million increase in non-interest expense was in large measure a result of the increase in salaries primarily due to both higher compensation paid to employees and a growth of personnel. As of December 31, 1995 and 1994 the full time equivalent number of employees was 317 and 289, respectively. Consolidated net income for the year ended December 31, 1994 was $7.5 million compared to net income of $11.9 million in 1993, a decline of 4.4 million, or 37%. The major factors contributing to the decline in net income were an increase in the provision for credit losses of $6.9 million and the absence of a $3.0 million gain on the sale of securities recorded in 1993, which was partially offset by a $3.7 million increase in net interest income. The increase in the amount of the provision for credit losses was caused by the weakness in the Southern California economy and the effect of higher interest rates. NET INTEREST INCOME Net interest income in 1995 totaled $47,708,000 compared to net interest income of $43,893,000 in 1994. The increase was due mainly to a $114.7 million, or 12.4%, increase in average earning assets from $925.4 million during 1994 to $1,040.1 million during 1995. The growth in average earning assets was due to an increase of $105.5 million in the securities portfolio and an increase of $28.8 million of federal funds sold and securities purchased under agreements to resell. These increases were partially offset by an $18.9 million decrease in average loans and leases. The growth was funded by increases of average interest bearing deposits of $93.6 million (primarily in savings and time certificates of deposit of less than $100,000) and an increase of non-interest bearing demand deposits of $18.2 million, partially offset by a $14.8 million reduction in other borrowings. The reduction is in part due to the maturity in the fourth quarter of a $30 million advance from the Federal Home Loan Bank. Both the yields earned on assets and the rates paid on interest bearing liabilities increased during 1995 compared to 1994. The yield on interest earning assets for 1995 was 8.18% as compared to 7.86% in 1994. The rate paid on interest bearing liabilities for 1995 was 4.31% as compared to 3.66% for 1994. The increase in both the yield and rate was primarily the result of increases in short-term interest rates. For 1995, the daily average national prime rate of interest was 8.83% compared to 7.14% for 1994, an increase of 169 basis points, or 23.7%. Net interest income in 1994 totaled $43,893,000 compared to net interest income of $40,162,000 in 1993. The increase was due mainly to a $78.1 million, or 9.2%, increase in average earning assets from $847.3 million during 1993 to $925.4 million during 1994. The growth in average earning assets was primarily in higher federal funds sold of $51.8 million with average loans and leases increasing $27.0 million. The growth was primarily funded by increases of average interest bearing deposits of $79.0 million and average non-interest bearing deposits of $20.8 million, offset by a $22.1 million reduction of average repurchase agreements. Repurchase agreements of $24.8 million matured in the second quarter of 1994 and were not renewed. 9 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- Both the yields earned on assets and the rates paid on interest bearing liabilities increased during 1994 compared to 1993. The yields on interest earning assets for 1994 was 7.86% as compared to 7.69% in 1993. The rate paid on interest bearing liabilities for 1994 was 3.66% as compared to 3.41 % for 1993. The increase in both the yield and rate was primarily the result of the rise in short-term interest rates during 1994 which saw five prime rate increases, as the Federal Reserve responded to economic growth and indications of inflationary pressures. The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yield/rates by asset and liability component:
1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ (IN THOUSANDS) BALANCE INTEREST RATE% BALANCE INTEREST RATE% BALANCE INTEREST RATE% - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans and Leases(1)(2) $ 488,274 $49,533 10.14% $507,161 $48,478 9.56% $480,223 $43,075 8.97% Taxable Securities 427,878 28,193 6.59 321,464 20,030 6.23 321,155 20,360 6.34 Tax-Exempt Securities(3) 7,081 459 6.48 8,018 520 6.49 8,718 570 6.54 Interest-Bearing Deposits 49 1 2.05 717 26 3.63 995 40 4.02 Federal Funds Sold and Security Purchased Under Agreement to Resell 116,820 6,940 5.94 88,060 3,728 4.23 36,255 1,114 3.07 ---------- ------- ----- -------- ------- ----- -------- ------- ----- TOTAL INTEREST-EARNING ASSETS 1,040,102 85,126 8.18 925,420 72,782 7.86 847,346 65,159 7.69 ---------- ------- ----- -------- ------- ----- -------- ------- ----- NON-INTEREST-EARNING ASSETS: Cash and Due from Banks $ 36,319 $ 35,711 $ 28,728 Premises and Equipment, Net 6,017 5,994 4,602 Other Assets(4) 42,285 45,455 39,588 ---------- -------- -------- TOTAL NON-INTEREST-EARNING ASSETS 84,621 87,160 72,918 Less: Allowance for Credit Losses (21,671) (15,514) (9,629) Deferred Loan Fees (3,553) (3,851) (3,835) ---------- -------- -------- Less: Valuation Allowance for Securities Available for Sale (2,035) (1,732) - ---------- -------- -------- TOTAL ASSETS $1,097,464 $991,483 $906,800 ---------- -------- -------- ---------- -------- -------- INTEREST-BEARING LIABILITIES: Deposits: Interest-Bearing Demand $ 59,625 $ 975 1.64% $ 59,623 $ 1,043 1.75% $ 57,057 $ 1,085 1.90% Money Market 132,409 3,229 2.44 134,992 3,167 2.35 113,536 2,825 2.49 Savings 140,903 4,484 3.18 107,650 2,619 2.43 98,432 2,409 2.45 Time Deposits 494,973 25,886 5.23 432,031 18,676 4.32 386,194 14,477 3.75 Federal Funds Purchased and Securities Sold Under Repurchase Agreement 2,959 172 5.81 10,299 360 3.50 32,280 1,177 3.65 Other Borrowed Funds 22,521 1,076 4.78 30,000 1,428 4.76 30,000 1,428 4.76 Subordinated Debt 15,000 1,596 10.64 15,000 1,596 10.64 15,000 1,596 10.64 ---------- ------- ----- -------- ------- ------ -------- ------- ------ TOTAL INTEREST-BEARING LIABILITIES 868,390 37,418 4.31 789,595 28,889 3.66 732,499 24,997 3.41 ---------- ------- ----- -------- ------- ------ -------- ------- ------ NON-INTEREST-BEARING LIABILITIES: Demand Deposits $ 120,902 $102,734 $81,956 Other Liabilities 14,120 8,911 9,848 ---------- -------- -------- TOTAL NON-INTEREST BEARING LIABILITIES 135,022 111,645 91,804 ---------- -------- -------- Total Liabilities 1,003,412 901,240 824,303 Shareholders' Equity 94,052 90,243 82,497 ---------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,097,464 $991,483 $906,800 ---------- -------- -------- ---------- -------- -------- NET INTEREST INCOME/SPREAD $47,708 3.87% $43,893 4.20% $40,162 4.28% ------- ------- ------- ------- ------- ------- NET INTEREST MARGIN 4.59% 4.74% 4.74%
(1) For the purposes of these computations, nonaccrual loans are included in the daily average loan amounts outstanding. (2) Loan interest includes net loan fees for the years ended December 31, 1995, 1994 and 1993 of $4,112,000, $4,096,000 and $4,208,000, respectively. (3) Tax-exempt interest income has not been adjusted to a fully taxable equivalent basis. (4) Other assets includes other real estate owned, net, for the years ended December 31, 1995, 1994 and 1993 of $5,710,000, $12,675,000 and $12,636,000, respectively. 10 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- Total interest income increased from $72,782,000 in 1994 to $85,126,000 in 1995, a $12,344,000, or 17.0% growth. The increase was due to both the $114.6 million increase in average interest earning assets and the thirty-two basis point increase of the yield on earning assets. However, the increase in the yield was less than the increase in the average prime rate of interest of 169 basis points, as a result of several factors. During 1995, average earning assets were comprised of a higher percentage of lower yielding securities and short-term federal funds and securities purchased under agreement to resell. For 1995 such percentage was 53.1% compared to 45.1% for 1994. In addition, during 1995 the average balance of non-accrual loans was $50.5 million compared to $32.3 million for 1994, representing an increase of $18.2 million, or 56.3%. Finally, during 1995 the yield on earning assets was impacted by the net effect of interest charge-offs and interest recoveries on non-accrual loans. In 1994, the net impact of interest charge-offs and interest recoveries increased interest income by $0.5 million. In 1995, the net impact of interest charge- offs and interest recoveries reduced interest income by $1.1 million. Net interest foregone on non-accrual loans was $5.9 million in 1995 compared to $3.1 million in 1994. Total interest expense increased from $28,889,000 in 1994 to $37,418,000 in 1995, an $8,529,000, or 29.5% increase. The increase was due to both the growth of $78.8 million in average interest bearing liabilities and the sixty-five basis point rate increase paid thereon. The net interest margin (defined as the difference between interest income and interest expense divided by average earning assets) for 1995 was 4.59% compared to 4.74% for 1994. The fifteen basis point decline in the net interest margin was primarily the result of a reduced net interest spread. Net interest spread is defined as the difference between the yield earned on earning assets less the rates paid on interest bearing liabilities. For 1995, the net interest spread was 3.87%, a 33 basis point, or 7.9% , decline from 4.20% for 1994. Total interest income increased from $65,159,000 in 1993 to $72,782,000 in 1994, a $7,623,000, or 11.7% growth. The increase was due to both a $78.1 million increase in average interest earning assets and the 17 basis point yield increase. Total interest expense increased from $24,997,000 in 1993 to $28,889,000 in 1994, a $3,892,000, or 15.6% increase. The increase was due to both a 7.9% increase of $57.1 million in average interest bearing liabilities and the 25 basis point rate increase paid thereon. 11 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- The following table sets forth a summary of the changes in interest earned and paid resulting from changes in volume and changes in rates for the periods indicated:
YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------- 1995 COMPARED 1994 COMPARED WITH 1994 WITH 1993 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN: DUE TO CHANGES IN: (IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE - ------------------------------------------------------------------------------------------------------- INTEREST EARNED ON (1): Loans and Leases $(1,847) $2,902 $1,055 $2,490 $2,913 $5,403 Taxable Securities(2) 6,956 1,207 8,163 20 (350) (330) Tax-Exempt Securities(2) (61) - (61) (45) (4) (49) Interest-Bearing Deposits (17) (8) (25) (10) (4) (14) Federal Funds Sold and Securities Purchased Under Agreement to Resell 1,437 1,775 3,212 2,067 547 2,614 ------- ------ ------ ------ ------ ------ TOTAL INTEREST-EARNING ASSETS 6,468 5,876 12,344 4,522 3,102 7,624 INTEREST PAID ON (1): Deposits: Interest-Bearing Demand - (66) (66) 47 (89) (42) Money Market (61) 123 62 510 (168) 342 Savings 934 931 1,865 225 (15) 210 Time 2,954 4,255 7,209 1,834 2,365 4,199 Federal Funds Purchased and Securities Sold Under Repurchase Agreements (345) 156 (189) (771) (45) (816) Other Borrowed Funds (357) 5 (352) - - - Subordinated Debt - - - - - - ------- ------ ------ ------ ------ ------ TOTAL INTEREST-BEARING LIABILITIES 3,125 5,404 8,529 1,845 2,048 3,893 ------- ------ ------ ------ ------ ------ CHANGE IN NET INTEREST INCOME $3,343 $ 472 $3,815 $2,677 $1,054 $3,731 ------- ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------
(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 BASKS. PROVISION FOR CREDIT LOSSES The provision for credit losses in 1995 was $18,570,000 as compared with $16,194,000 in 1994. The increase of the provision for credit losses was caused by the continued effect of the past increases in interest rates, and the resulting impact on the recovery of the local economy and the commercial real estate market. Charge-offs recorded in 1995 also reflect actions taken to implement the regulatory interpretation of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS 114"). Charge-offs are recognized to reduce the book value of problem loans collateralized by real estate to, or below, appraised values. Certain loans were partially changed off so that in the future, with contractual performance, these loans will no longer be criticized by the regulators. It is believed that the accounting results in a conservative valuation of such loans. Prior to the charge-offs, the loans had allowances that represented a substantial portion of the charge-off. Net charge-offs were $24.9 million during 1995 compared to $5.1 million during 1994. The provision for credit losses in 1994 was $16,194,000 as compared with $9,300,000 in 1993. The significant increase of $6,894,000, or 74.1%, was in response to management's assessment of the loan portfolio considering the weakness in the Southern California economy and the real estate market. Such assessment included the effect of higher interest rates in 1994 compared to 1993. The rate increases impacted the recovery of the local economy and the commer- 12 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- cial real estate market, affecting the financial capabilities and liquidity of the Company's borrowers and the values of the underlying collateral supporting the Company's loans. The increase also reflected the higher amount of non- performing loans and restructured loans, which increased from $38.0 million at December 31, 1993 to $68.5 million at December 31, 1994, as well as higher specific loan loss reserves. The amount of the provision for credit losses is determined by management and is based upon the quality of the loan portfolio, management's assessment of the economic environment, evaluations made by regulatory authorities, historical loan loss experience, collateral values, assessment of borrowers' ability to repay, and estimates of potential future losses. Please refer to the discussion "Allowance for Credit Losses", following. NON-INTEREST INCOME Non-interest income consists primarily of service charges on deposit accounts, gain on sale of securities, fees and commissions collected from the Bank's international activities and fees from servicing Small Business Administration (SBA) loans, and income from escrow services. Non-interest income in 1995 totaled $6,042,000, representing an increase of $106,000, or 1.8%, over $5,936,000 of non-interest income in 1994. The $106,000 increase is the result of a $175,000 increase in gains on sale of loans and an increase of $79,000 in other income (primarily income from escrow services), partially offset by reduced service charges and commissions of $183,000. The reduced service charges and commissions was primarily the result of reduced fees from servicing SBA loans. Non-interest income in 1994 totaled $5,936,000, representing a decrease of $2,350,000, or 28.4%, over $8,286,000 of non-interest income in 1993. The reduction is due mainly to the gain on sale of securities available for sale of $2,998,000 recorded in 1993. This reduction was partially offset by increases in service charges and commissions and other non-interest income. The increase of $624,000 of service charges and commissions was primarily the result of the purchase of servicing related to $77.9 million of participated SBA loans at the end of 1993. The increase of $354,000 of other non-interest income is primarily due to income from Southern Counties Escrow which was purchased as of December 31, 1993. In 1994 total escrow fees were $435,000. NON-INTEREST EXPENSE Non-interest expense increased $1,794,000, or 7.4%, from $24,310,000, in 1994 to $26,104,000 in 1995. The net increase is primarily from the growth of salaries and employee benefits, which increased from $9,883,000 in 1994 to $11,201,000 in 1995, representing a $1,318,000, or 13.3% increase. Salary expense (excluding related payroll tax and fringe benefits) increased $1,278,000 primarily due to both higher compensation paid to employees and a growth of personnel. As of December 31, 1995 and 1994 the full time equivalent number of employees was 317 and 289, respectively. Contributing also to the increase of non-interest expense was a $303,000, or 11.7%, increase in occupancy expense from $2,583,000 in 1994 to $2,886,000 in 1995. This increase primarily relates to an additional $115,000 of expense related to the lease termination of the Company's former headquarters, whose lease expired in August, 1995, and increased occupancy expense due to additional lease expense for branches opened during 1994 and 1995. Finally, other expenses increased $280,000, or 3.8% from $7,374,000 in 1994 to $7,654,000 in 1995. Other expenses is comprised of a number of expense classifications. Significantly contributing to the $280,000 increase was a $324,000 increase in professional services expense. This category includes legal fees which increased $306,000 in 1995 compared to 1994. The increase in legal fees was caused by the increase in problem loans and the resulting collection efforts, including litigation. Increases in several other categories were offset by a $492,000 decline from 1994 to 1995 of deposit insurance premiums paid to the FDIC, which was caused by lower insurance rates. Non-interest expense increased $2,298,000, or 10.4%, from $22,012,000, in 1993 to $24,310,000 in 1994. The net increase is primarily the result of increases of all non-interest expense categories except for a significant reduction of occupancy expense. Other non-interest expense, representing the largest increase, grew $1,991,000, or 37.0%, in 1994 compared to 1993. Other non-interest expense is comprised of a number of expense classifications which may vary from year 13 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- to year. Included as other non-interest expense are expenses related to real estate held for investment which increased $600,000 in 1994 as a result of a partial write-down of an investment in a low income housing project. Furniture and equipment expense increased $558,000, or 47.3%, in 1994 compared to 1993. The increase was primarily the result of the headquarters relocation, as discussed below, and opening of two branch offices in 1994. Occupancy expense declined $1,098,000 in 1994 from 1993. This was due to expense recorded in 1993 associated with the 15-year lease for its former headquarters. In 1993, future contractual lease payments on the former headquarters' location and leasehold improvements relating thereto, of $978,000 and $402,000, respectively, were charged to occupancy expense. PROVISION FOR INCOME TAXES For 1995 the Company's provision for income taxes was $1,427,000, a decrease of $369,000, or 20.6%, from $1,796,000 recorded in 1994. The effective tax rate in 1995 was 15.7% as compared to 19.3% in 1994. The reduced effective tax rate was primarily due to the realization of an increased amount of low income housing ("LIH") tax credits in 1995 compared to 1994. For 1995 the LIH tax credit was $2,093,000 compared to $1,866,000 in 1994, with the difference primarily being the recognition in 1995 of previous years' actual tax credits which exceeded the Company's estimate at December 31, 1994. For 1994 the Company's provision for income taxes was $1,796,000, a decrease of $3,400,000 or 65.4%, from $5,196,000 recorded in 1993. The reduced provision is a result of the reduced income before income taxes coupled with tax credits from investments in low income housing projects. The effective tax rate in 1994 was 19.3% as compared to 30.3% in 1993. The decrease in the effective tax rate was due to the deduction of approximately the same amount of low income housing tax credits from a reduced tax liability due to the lower amount of income before taxes. FINANCIAL CONDITION The Company's assets totaled $1,204.5 million at December 31, 1995, representing an increase of $122.9 million, or 11.4%, over the $1,081.6 million total assets at December 31, 1994. The asset growth was funded by an increase of total deposits of $112.2 million. The increase in assets primarily reflects an increase of $161.2 million in securities and federal funds sold and securities purchased under agreements to resell. This increase was partially offset by a $29.0 million, or 5.8%, decline in loans and leases outstanding from $501.0 million as of December 31, 1994 to $471.9 million as of December 31, 1995. The decrease mostly reflects the gross charge-offs of $25.5 million effected during 1995. LOANS The reduction of loans outstanding as of December 31, 1995 compared to December 31, 1994 was primarily in the conventional real estate portfolio. As of December 31, 1994 conventional real estate loans totaled $281.2 million; as of December 31, 1995, these loans totaled $239.0 million, representing a decrease of $42.2 million. Of this amount of net decrease, $21.7 million of conventional real estate loans were charged-off. The largest component of the portfolio continued to be conventional real estate loans. Conventional real estate loans are loans, other than construction loans, secured by first trust deeds or junior real estate liens. As of December 31, 1995 conventional real estate loans totaled $239.0 million, or 50.6%, of the total loan portfolio. As of December 31, 1994 conventional real estate loans outstanding were $281.2 million, or 56.1%, of the total loan portfolio. Construction loans are real estate loans secured by first trust deeds. As of December 31, 1995, construction loans totaled $53.4 million, or 11.3%, of the total loan portfolio, an 11.9% decrease from the year earlier. As of December 31, 1994, construction loans totaled $60.6 million, or 12.1%, of the total loan portfolio. The decrease is primarily the result of pay-downs. The Company limits the loan to value ratio on conventional real estate and construction loans to 75% of the appraised value. Management believes that the Company's underwriting guidelines, including collateral requirements, and the underlying values of real estate collateral, provide the Company with protection against future losses on non-performing conventional real estate and construction loans. 14 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- As the Company's borrowers have experienced the negative effects of the prolonged depressed economic conditions of the local economy, the Company has experienced an adverse impact on its real estate loan portfolio as reflected in higher delinquencies, higher levels of non-performing assets and higher levels of charge-offs. Please refer to the section "Non-performing Assets," following. The following table sets forth the breakdown by type of collateral for construction and conventional real estate loans at December 31, 1995 and 1994:
1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) CONVENTIONAL CONVENTIONAL CONSTRUCTION REAL ESTATE CONSTRUCTION REAL ESTATE PROJECT TYPE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE - ---------------------------------------------------------------------------------------------------------------------------------- RESIDENTIAL: Single-Family $20,588 38% $ 37,519 16% $10,854 18% $ 23,386 8% Condominums 19,784 37 5,406 2 28,834 48 8,244 3 Multi-Family 11,656 22 36,108 15 7,931 13 57,138 20 Land Development - - 600 - - - 7,979 3 ------- ---- -------- ---- ------- ---- -------- ---- TOTAL RESIDENTIAL $52,028 97% $ 79,633 33% $47,619 79% $ 96,747 34% ------- ---- -------- ---- ------- ---- -------- ---- NON-RESIDENTIAL: Warehouse $ - -% $ 28,794 12% $ 2,173 3% $ 27,760 10% Retail Facilities 1,395 3 55,790 24 2,969 5 61,193 22 Office - - 29,268 12 5,560 9 35,735 13 Hotel and Motel - - 42,681 18 2,289 4 57,107 20 Land Development - - - - - - - - Other - - 2,850 1 - - 2,683 1 ------- ---- -------- ---- ------- ---- -------- ---- TOTAL NON-RESIDENTIAL $ 1,395 3% $159,383 67% $12,991 21% $184,478 66% ------- ---- -------- ---- ------- ---- -------- ---- TOTAL $53,423 100% $239,016 100% $60,610 100% $281,225 100% ------- ---- -------- ---- ------- ---- -------- ---- ------- ---- -------- ---- ------- ---- -------- ----
Substantially all of the collateral securing construction and conventional real estate loans is located in California. Commercial loans include unsecured commercial loans, SBA loans of which $22.7 million are government sponsor-guaranteed, and $83.3 million of trade financing loans. As of December 31, 1995, commercial loans represented 32.2% of the total loans outstanding compared to 26.5% at December 31, 1994. The growth of commercial loans of $18.9 million was primarily from trade financing loans, which increased $14.3 million. 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. Other loans are primarily comprised of loans secured by the Bank's time deposits and unsecured express lines of credit to professional individuals. As of December 31, 1995, these loans totaled $22.6 million and $0.8 million, respectively. As of December 31, 1994 these loans totaled $23.0 million and $1.7 million, respectively. 15 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- 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 amount of loans outstanding in each category at the dates indicated:
DECEMBER 31, - ------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------- Commercial $151,709 $132,806 $126,098 $ 88,186 $ 89,370 Real Estate-Construction 53,423 60,610 79,513 78,020 95,853 Real Estate-Conventional 239,016 281,225 270,566 250,680 252,441 Installment 231 377 434 627 1,038 Other Loans 22,310 25,699 28,455 29,192 36,723 Leveraged Leases 255 273 290 - 59 Loans to Depository Institutions 5,000 - - - - -------- -------- -------- -------- -------- TOTAL $471,944 $500,990 $505,356 $446,705 $475,484 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
The following table shows the maturity schedule of the Company's loans outstanding as of December 31, 1995, which, based on remaining scheduled repayments of principal, are due within one year, after one but within five years and in more than five years. Non-accrual loans of $43,712,000 are included in the within one year category:
AFTER MORE WITHIN ONE BUT THAN ONE WITHIN FIVE (IN THOUSANDS) YEAR FIVE YEARS YEARS TOTAL - ------------------------------------------------------------------------------- Commercial $ 95,426 $ 7,303 $48,980 $151,709 Real Estate-Construction 44,389 8,712 322 53,423 Real Estate-Conventional 72,197 129,701 37,118 239,016 Installment 57 174 - 231 Other Loans & Leveraged Leases 22,310 - 255 22,565 Loans to Depository Institutions 5,000 - - 5,000 -------- -------- ------- -------- TOTAL $239,379 $145,890 $86,675 $471,944 -------- -------- ------- -------- -------- -------- ------- --------
At December 31, 1995, 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 $ 40,707 $ 40,210 $25,081 $105,998 Total Variable Rate 322,234 - - 322,234 -------- -------- ------- -------- TOTAL $362,941 $ 40,210 $25,081 $428,232 -------- -------- ------- -------- -------- -------- ------- --------
16 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- The balance of loans and leases includes loans held for sale totaling $6.3 million as of December 31, 1995. During 1995, approximately $55 million of loans held for sale were originated and approximately $47 million were sold. As of December 31, 1995, approximately $68 million of loans were serviced by the Bank for third parties. 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 underlying collateral value 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. 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, restructured loans and other real estated owned, net, as of the dates indicated:
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------ Loan 90 Days or More Past Due and Still Accruing $ 9 $ 999 $ 4,059 $ 87 $ - Non-accrual Loans 43,712 46,672 22,033 15,965 9,308 ------- ------- ------- ------- ------- Total Past Due Loans 43,721 47,671 26,092 16,052 9,308 Restructured Loans 10,151 20,865 11,898 - - ------- ------- ------- ------- ------- Total Non-performing Loans 53,872 68,536 37,990 16,052 9,308 Other Real Estate Owned, Net 7,686 5,051 15,541 14,713 6,681 ------- ------- ------- ------- ------- TOTAL NON-PERFORMING ASSETS $61,558 $73,587 $53,531 $30,765 $15,989 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- NON-PERFORMING ASSETS TO PERIOD END LOANS AND LEASES, NET, PLUS OTHER REAL ESTATE OWNED, NET 13.39% 15.35% 10.60% 6.83% 3.39% ------ ------ ------ ----- ----- ------ ------ ------ ----- -----
The Company has experienced significant increases in non-accrual loans over the last several years. From a balance at December 31, 1991 of $9.3 million, non-accrual loans increased to a level of $46.7 million as of December 31, 1994, and down to $43.7 million as of December 31, 1995. As indicated in the table below, conventional real estate and construction loans represent a large percentage of the total non-accrual loans. As of December 31, 1995 and 1994, these percentages were 91.2% and 92.6%, respectively. 17 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- The following table breaks out the Company's non-accrual loans by loan category at December 31, 1995 and 1994:
(IN THOUSANDS) 1995 1994 - ----------------------------------------------------------------- Commercial $ 3,802 $ 3,462 Real Estate-Construction 3,630 14,099 Real Estate-Conventional 36,241 29,111 Installment - - Other Loans 39 - ------- ------- TOTAL $43,712 $46,672 ------- ------- ------- -------
Non-accrual loans declined from $46.7 million as of December 31, 1994 to $43.7 million as of December 31, 1995, representing a $3 million, or 6.4% decrease. The decrease reflects charge-offs, foreclosure proceedings, and successful collection efforts. The balance of restructured loans as of December 31, 1995 was $10.2 million, comprised of nine credits, representing a decrease of $10.7 million, or 51.2%, from the balance of $20.9 million as of December 31, 1994. While six credits were restructured in 1995, several large restructured credits as of December 31, 1994 were paid off in 1995. In addition, several credits became non-accrual in 1995. A loan is categorized as restructured if the original interest rate on such loan, the repayment terms, or both, are restructured 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. There are no commitments to lend additional funds on any of the restructured loans. As of December 31, 1995, all loans were performing as per the restructured terms. In February, 1996, one loan with a balance of $1.5 million was placed on non-accrual status. The average yield on restructured loans approximated 10.19% as of December 31, 1995. Other real estate owned ("OREO"), net of valuation allowance of $0.6 million, amounted to $7.7 million at December 31, 1995, compared to $5.1 million, net of valuation allowance of $0.4 million, as of December 31, 1994. During 1995, twenty-two properties collateralizing loans were transferred at fair value to OREO, and seventeen properties were sold resulting in a net gain of $163,000. The amount of the 1995 provision for losses on other real estate owned relating to the properties disposed of in 1995 was $983,000. The total provision for 1995 was $1,504,000. The outstanding OREO properties are all included in the Bank's market area. They include single family residences, condominiums, apartment buildings, commercial buildings, and land. Two properties comprise the land category of OREO. The Company does not intend to develop these properties; rather, it will sell the land undeveloped. With the exception of a residential/commercial property, one of the land properties, all outstanding OREO properties were transferred during 1995. The following table sets forth OREO by type of property as of the dates indicated:
DECEMBER 31, - ------------------------------------------------------------ (IN THOUSANDS) 1995 1994 - ------------------------------------------------------------ PROPERTY TYPE Single-Family Residential $ 11 $ 290 Condominium 509 3,689 Multi-Family Residential 978 - Warehouse 188 245 Land for Residential 1,054 1,087 Retail Facilities 5,289 169 Office 268 - Less: Valuation Allowance (611) (429) ------- ------- TOTAL $7,686 $5,051 ------- ------- ------- -------
Management cannot predict the extent to which the current economic environment, including the real estate market, may persist 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. 18 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- The effect of non-accrual loans on interest income for the years 1995, 1994 and 1993 is presented below:
(IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------- Contractual interest due $6,969 $5,844 $2,390 Interest recognized (1,098) (2,768) (945) ------- ------- ------- NET INTEREST FOREGONE $5,871 $3,076 $1,445 ------- ------- ------- ------- ------- -------
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 on interest income for the years ended December 31, 1995, 1994 and 1993 is presented below:
(IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------- Contractual interest due $1,713 $1,888 $1,031 Interest recognized (1,150) (1,559) (911) ------- ------- ------- NET INTEREST FOREGONE $ 563 $ 329 $ 120 ------- ------- ------- ------- ------- -------
ALLOWANCE FOR CREDIT LOSSES As of December 31, 1995, the balance of the allowance for credit losses was $16.7 million, representing 3.53% of outstanding loans and leases. This compares to an allowance for credit losses of $23.0 million as of December 31, 1994, representing 4.60% of outstanding loans and leases. The explanation for the reduction of the ratio of the allowance for credit losses as a percentage of loans and leases outstanding is discussed in the following paragraphs. SFAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118, was adopted on January 1, 1995. As of December 31, 1995, the Company had $45.9 million of recorded investment in impaired loans with a related allowance for credit losses totaling $5,803,000. There were no impaired loans for which there was no related allowance for credit losses determined in accordance with SFAS 114. For the year ended December 31, 1995, the average balance of impaired loans was $44,206,000. Income recognition on impaired loans uses methods existing for non-accrual loans but can include the accrual of interest. While a loan is in 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. Interest income recognized in 1995 on the loans identified as impaired as of December 31, 1995 amounted to $808,000. Of this amount no interest was recognized using the cash basis method of recognition. The following table summarizes pertinent allowance for credit loss data. Most of the non-performing loans are collateralized by commercial real estate. Accordingly, losses are usually limited to a percentage of the principal owed the Company.
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------- End of Period Allowance to Non-performing Loans 30.95% 33.60% 31.53% 46.74% 63.49% Provision for Credit Loss as a Percentage of Net Charge-offs 0.75 3.15 1.93 1.71 1.19
19 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- The 31.0% ratio of the allowance to non-performing and restructured loans is considered adequate based on the continuing high percentage of non-performing loans collateralized by real estate. Also, in various cases, charge-offs were effected to reduce the book value of problem loans collateralized by real estate to appraised values. Such charge-offs also reflect actions taken to implement the regulatory interpretation of SFAS 114, which for collateral dependent loans require a write-down to appraised value as opposed to the establishing of an allowance for credit losses allocation. In addition, in certain instances, loans were charged off to amounts below appraised values, thereby bringing the loan to value ratio and the debt-servicing ratio into line with Bank guidelines for performing credits. During 1995, charge-offs of $25.5 million were recorded compared to $5.8 million during 1994, an increase of $19.7 million. Prior to the charge-offs, many of the loans had allowance allocations that represented a substantial portion of the specific charge-offs. Accordingly, the resultant allowance for credit losses is generally comprised of smaller allocations for those loans whose possible losses have already been realized in the form of charge-offs. Management believes that the allowance for credit losses is adequate to cover known and inherent losses related to loans and leases outstanding as of December 31, 1995. 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) 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------- Balance, at Beginning of Year $23,025 $11,977 $7,503 $5,910 $4,655 CHARGE-OFFS: Commercial 2,219 1,917 937 528 2,789 Real Estate 23,293 3,848 3,695 1,403 2,055 Installment 8 37 493 342 269 Leverage Leases - - - 59 1,550 ------- ------- ------- ------ ------ TOTAL CHARGE-OFFS 25,520 5,802 5,125 2,332 6,663 ------- ------- ------- ------ ------ RECOVERIES: Commercial 43 423 83 88 31 Real Estate 553 218 201 - 12 Installment & Other 3 15 15 7 1 ------- ------- ------- ------ ------ TOTAL RECOVERIES 599 656 299 95 44 ------- ------- ------- ------ ------ Net Charge-Offs 24,921 5,146 4,826 2,237 6,619 Provision Charged to Operating Expenses 18,570 16,194 9,300 3,830 7,874 ------- ------- ------- ------ ------ BALANCE AT END OF YEAR $16,674 $23,025 $11,977 $7,503 $5,910 ------- ------- ------- ------ ------ ------- ------- ------- ------ ------ Ratio of Net Charge-Offs to Average Loans and Leases Outstanding 5.10% 1.01% 1.00% 0.48% 1.39% ------ ------ ----- ----- ----- ------ ------ ----- ----- ----- Allowance for Credit Losses to Year-End Loans and Leases 3.53% 4.60% 2.37% 1.72% 1.27% ------ ------ ----- ----- ----- ------ ------ ----- ----- ----- Allowance for Credit Losses to Past Due Loans 38.14% 48.30% 45.90% 46.74% 63.94% ------ ------ ----- ----- ----- ------ ------ ----- ----- -----
20 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- 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, - ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 (DOLLARS IN THOUSANDS) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) - ---------------------------------------------------------------------------------------------------------------------------------- Commercial $ 4,239 32.2% $ 3,651 26.5% $ 2,405 25.0% $1,638 19.7% $ 585 18.8% Real Estate-Construction 928 11.3 2,232 12.1 1,206 15.7 1,515 17.5 1,420 20.2 Real Estate-Conventional 11,167 50.6 16,809 56.2 7,217 53.5 3,393 56.1 3,250 53.1 Installment 3 0.1 4 0.1 9 0.1 20 0.1 20 0.2 Other Loans 280 4.7 327 5.1 384 5.6 442 6.6 200 7.7 Leveraged Leases - - - - - 0.1 - - - - Unallocated 57 1.1 2 - 756 - 495 - 435 - ------- ----- ------- ----- ------- ----- ------ ----- ------ ----- TOTAL $16,674 100.0% $23,025 100.0% $11,977 100.0% $7,503 100.0% $5,910 100.0% ------- ----- ------- ----- ------- ----- ------ ----- ------ ----- ------- ----- ------- ----- ------- ----- ------ ----- ------ -----
(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, 1995 the Company recorded net unrealized holding gains of $2,978,000 on its available for sale portfolio which is included as a separate component of stockholders' equity of $1,723,000 representing the unrealized holding gain, net of taxes. There were no sales of securities available for sale for the year ended December 31, 1995. Proceeds from the sales of securities available for sale were $1,140,000 for the year ended December 31, 1994. In addition, in 1994 a $150,000 preferred stock investment in the held to maturity portfolio whose collectibility was in doubt was charged off. There were no sales of securities held to maturity in 1995 and 1994. Proceeds from the sales of securities available for sale were $86,817,000 for the year ended December 31, 1993. There were no sales of securities held to maturity in 1993. Gross realized gains on sales of securities were $0, $124,000 and $2,998,000 for 1995, 1994 and 1993, respectively. Excluding the charge-off of the preferred stock in 1994, there were no realized losses on sales of securities sustained in 1995, 1994 or 1993. On December 29, 1995, securities with amortized cost of $39.8 million were transferred from the held to maturity classification to the available for sale classification. As of December 31, 1995, these securities have a fair value of $40.2 million. Such transfer was made in accordance with recent implementation guidance issued by the Financial Accounting Standards Board ("FASB") for Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). 21 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- 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) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY U. S. Treasuries $ - $ 1,978 $ 2,008 U. S. Government Agencies - 10,726 1,133 Mortgage Backed Securities - 19,048 28,758 State and Municipal Securities 6,460 7,322 8,719 Auction Preferred Stocks - - 6,000 Commercial Paper - 2,999 2,999 Collateralized Mortgage Obligations 82 14,162 23,767 Asset Backed Securities 27,011 27,041 29,055 Other Securities - - 9,431 --------- -------- -------- TOTAL $ 33,553 $ 83,276 $111,870 --------- -------- -------- --------- -------- -------- SECURITIES AVAILABLE FOR SALE U. S. Treasuries $ 16,944 $ 37,489 $ 37,984 U. S. Government Agencies 223,528 193,458 - Mortgage Backed Securities 62,199 31,303 38,202 Corporate Notes 28,315 42,154 74,646 Collateralized Mortgage Obligations 133,957 44,408 48,277 Auction Preferred Stocks 32,200 - - Other Securities 9,998 8,423 - --------- -------- -------- TOTAL $ 507,141 $357,235 $199,109 --------- -------- -------- --------- -------- --------
The following table shows the contractual maturities of securities at December 31, 1995, and the weighted average yields. The actual maturities of certain securities are expected to be shorter than the contractual maturities.
AFTER ONE AFTER FIVE BUT WITHIN BUT WITHIN WITHIN ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL (IN MILLIONS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ----------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY State and Municipal Securities $0.79 6.46% $5.67 6.50% $ - -% $ - -% $ 6.46 6.50% Collateralized Mortgage Obligations - - - - - - 0.08 10.11 0.08 9.91 Asset Backed Securities - - 22.98 8.79 - - 4.03 8.51 27.01 8.75 ------- ---- ------- ---- ------ ---- ------- ----- ------- ---- TOTAL SECURITIES HELD TO MATURITY $0.79 6.46% $28.65 8.33% - - $4.11 8.54% $33.55 8.32% ------- ---- ------- ---- ------ ---- ------- ----- ------- ---- ------- ---- ------- ---- ------ ---- ------- ----- ------- ---- SECURITIES AVAILABLE FOR SALE U.S. Treasuries $15.00 6.99% $1.94 5.12% $ - -% $ - -% $16.94 6.77% U.S. Government Agencies 82.53 5.95 140.78 6.38 - - 0.22 7.50 223.53 6.23 Mortgage Backed Securities - - 4.67 6.58 - - 57.53 6.29 62.20 6.32 Corporate Notes 8.17 8.41 20.14 8.08 - - - - 28.31 8.17 Collateralized Mortgage Obligations - - - - 15.98 5.71 117.98 6.17 133.96 6.12 Auction Preferred Stocks 32.20 6.25 - - - - - - 32.20 6.25 Other Securities 4.82 4.90 5.18 10.74 - - - - 10.00 7.93 ------- ---- ------ ---- ------ ---- ------- ----- ------- ---- TOTAL SECURITIES AVAILABLE FOR SALE $142.72 6.23% $172.71 6.70% $15.98 5.71% $175.73 6.21% $507.14 6.37% ------- ---- ------- ---- ------ ---- ------- ----- ------- ---- ------- ---- ------- ---- ------ ---- ------- ----- ------- ----
22 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- Other than securities issued by the U.S. Government and U.S. Government agencies, the Company does not own securities of any single issuer in excess of ten percent of stockholders' equity. DEPOSITS The Company's deposits totaled $1,046.2 million as of December 31, 1995 representing a $112.2 million, or 12.0%, increase over the $934.0 million total deposits as of December 31, 1994. The year-end balance was the first time that total deposits exceeded one billion for a reported balance sheet. All categories of deposits reflected increases with the exception of savings which declined $25.1 million, or 16.3%. The largest deposit growth was in the time certificates of deposit of $100,000 or more and other time deposits which increased $96.7 million, or 31.0%, and $34.7 million, or 25.5%, respectively. During 1995 average deposits increased to $948.8 million from $837.0 million during 1994, representing an increase of $111.8 million, or 13.4%. As of December 31, 1995, the Bank had no outstanding brokered certificates of deposit. As of December 31, 1994, the Bank had outstanding $8.5 million of brokered certificates of deposits. These brokered deposits had fixed rates of 8.6% and matured in the first quarter of 1995. The growth of deposits from the Company's customers reflects the continuing tradition of personalized services. The Company continued its expansion of operations in Northern California during 1995, during which time it opened one additional full service branch. During 1994, two branches were opened in Northern California. All branches provide deposit services. The Company believes that the majority of its deposit customers have strong ties to the Bank. There is no large concentration with any depositors and, accordingly, the Company believes its deposit source to be stable. The maturity schedule of time certificates of deposit of $100,000 or more as of December 31, 1995 is as follows:
(IN THOUSANDS) - --------------------------------------------- 3 Months or Less $166,136 Over 3 Months Through 6 Months 86,273 Over 6 Months Through 12 Months 154,960 Over 12 Months 920 -------- TOTAL $408,289 -------- --------
SHORT-TERM BORROWINGS The following table sets forth information with respect to federal funds purchased and securities sold under agreements to repurchase for the dates indicated:
(IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Balance at End of Year $24,000 $ - $24,844 Weighted Average Interest Rate at End of Year 5.75% -% 2.69% Average Amount Outstanding During the Year $ 2,959 $10,299 $32,280 Weighted Average Interest Rate During the Year 5.80% 3.50% 3.64% Maximum Amount Outstanding at Any Month-End $24,000 $25,438 $34,700
The underlying collateral pledged for the repurchase agreement is government agency securities. All collateral is maintained with Merrill Lynch, Inc. who is the counterparty to the repurchase agreement. As of December 31, 1995, the fair value of the pledged collateral totaled $27.0 million. OTHER BORROWINGS In September 1992, the Company obtained an advance from the Federal Home Loan Bank of San Francisco ("FHLB") of $30,000,000 at a 4.76% fixed rate of interest. The advance matured on October 2, 1995 and was repaid. In 1990, the Company issued $15,000,000 of subordinated debentures with a contractual annual interest rate of 10.52% and a stated maturity of September 1, 2000. REGULATORY MATTERS In August of 1995, the Bank entered into a Memorandum of Understanding ("MOU") with the Federal Deposit Insurance Corporation ("FDIC") which resulted from the FDIC's examination report of the Bank dated as of February 21, 1995. As of December 31, 1995, management believes the Bank was in compliance with the quantitative terms of the MOU, which include: (a) a $27 million reduction in adversely classified assets within 120 days following the effective date 23 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- of the MOU and a $69 million reduction within one year (as of December 31, 1995 the reduction in previously adversely classified loans was $68 million); (b) a maximum "volatile liability dependence ratio" of 30% (as of December 31, 1995, the ratio was 17.54%); (c) a minimum Tier 1 capital ratio (leverage ratio) of 7% (as of December 31, 1995, the ratio was 9.10%); (d) a $19.5 million capital injection to the Bank from its holding company, GBC Bancorp. (This capital injection was made on September 5, 1995.) The MOU also provided that the prior written consent of the FDIC would be required before the Bank could pay cash dividends, and such consent has been received for the two quarters following the August, 1995 implementation of the MOU. The MOU, among other things, also calls for limitations on new advances to borrowers with adversely classified or charged off loans, the timely and proper identification of problem loans, the establishment of a comprehensive policy for determining the adequacy of the allowance for credit losses, and the adoption of a written policy regarding internal controls and procedures. The Company's Board of Directors received a notification letter, dated April 25, 1994, from the Federal Reserve Bank of San Francisco (the "Federal Reserve") that requires the Company to inform the Federal Reserve prior to its taking any of the following actions: (a) declaring cash or in-kind dividends; (b) incurring debt; (c) repurchasing stock; (d) entering into any agreements to acquire any entities or portfolios. As of December 31, 1995 this notification letter remains in effect. In November, 1995, the Company was notified that the appointment of senior executive officers and directors was subject to review by the Federal Reserve. As of December 31, 1995, management believes it is in compliance with all terms of the MOU. Management further believes that all terms of the MOU as outlined above are being met or will be met without significant financial detriment to the Company or to the Bank. CAPITAL RESOURCES Stockholders' equity totaled $99,477,000 at December 31, 1995, an increase of $11,794,000, or 13.5%, from $87,683,000 at December 31, 1994. The increase from year-end 1994 to year-end 1995 was due to net income of $7,649,000, less cash dividends paid to shareholders of $2,134,000, plus the net change in unrealized gain/(loss) on securities available for sale, net of tax, of $5,994,000 for the year ended December 31, 1995. For the year ended December 31, 1995 the ratio of the Company's average stockholders' equity to average assets was 8.57%. For the year ended December 31, 1994 the ratio of the Company's average stockholders' equity to average assets was 9.10%. The reduction of this ratio is primarily the result of the increase of average assets. 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%. Pursuant to the terms of the MOU as described in Regulatory Matters, above, the Bank's minimum Tier 1 leverage capital ratio is 7%. 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, 1995, the Company's and the Bank's Tier 1 24 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- capital, total capital and leverage ratios exceeded the "well capitalized" ratio requirements as follows:
MINIMUM WELL GBC GENERAL REGULATORY CAPITALIZED BANCORP BANK REQUIREMENTS REQUIREMENTS - ---------------------------------------------------------------------- Tier 1 13.83% 15.26% 4% 6% Total 15.51 16.51 8 10 Leverage Ratio 8.27 9.10 4 5
LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity measures the ability of the Company to meet fluctuations in deposit levels, to fund its operations and to provide for customers' credit needs. 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 $614.0 million, or 51.1%, of total assets at December 31, 1995 compared with $427.5 million, or 39.3%, of total assets at December 31, 1994. To further supplement its liquidity, the Company has established federal funds lines with correspondent banks and three master repurchase agreements with major brokerage companies. The FHLB granted the Bank a line of credit equal to 20 percent of assets with terms up to 240 months. As of December 31, 1994, the Company had a $30,000,000 fixed rate advance outstanding under this financing availability with the FHLB, which was repaid at maturity on October 2, 1995. Management believes its liquidity sources to be stable and adequate. As of December 31, 1995, total loans and leases represented 45.1% of total deposits. This compares to 53.6% as of December 31, 1994. The decline in this ratio is primarily due to the investment of the deposit growth in the securities portfolio. 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. As of December 31, 1995, no such derivative contracts had been entered into for trading or investment purposes. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage the interest rate risk from origination of fixed rate residential mortgage loans for sale in the secondary markets. The Company utilizes Treasury note futures and forward sales of mortgage-backed securities to hedge interest rate risk associated with it residential mortgage banking activities. Futures and forward sale contracts provide for sale of the underlying securities, including mortgage-backed securities, at a specified future date, at a specified price or yield. The amount of the futures and forward sale contracts is determined by the aggregate amount of fixed rate commitments for mortgage loans that are expected to be funded plus the amount of fixed rate residential mortgages categorized as being held for sale that have not been sold. The fair value of the underlying futures and forward sale contracts is expected to move inversely to the change in fair value of the mortgage loans. The Company never intends to deliver the underlying securities that the futures and forward sale contracts commit to sell, rather it purchases offsetting contracts to eliminate the obligation. The Company is exposed to the risk that the fair value of futures contracts, being based on the value of the Treasury note will not move proportionately with the change in value of the mortgage loans being hedged. This basis risk is unpredictable and can result in economic loss to the Company. There is no basis risk related to the use of forward sale contracts on mortgage-backed securities since their fair value is based on the similar mortgage loans. However, a gain or loss will arise from the difference between the fair value and the forward sale price of the mortgage-backed security. At December 31, 1995 and 1994 there were outstanding fixed rate mortgages held for sale of $6,277,000 and $4,806,000 and a notional value of derivative instruments of $0 and $2,500,000, respectively. For the years ended December 31, 1995 and 1994 the Company had realized net gains/(losses) of $(114,294) and $29,125 with unrealized gains of $0 and $812, respectively, related to its hedging activities. 25 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- Initial margin requirements and daily calls on futures contracts are met in cash. There are no margin requirements nor daily calls on forward sale contracts since whole loans are expected to be delivered to fulfill the commitment. 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, the 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 "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. The following table indicates the Company's interest rate sensitivity position as of December 31, 1995, and 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 $150,053 $ 51,186 $172,408 $133,494 $ - $ 507,141 Securities Held to Maturity 375 410 28,652 4,116 - 33,553 Federal Funds Sold 125,000 - - - - 125,000 Loans (1) (2) 318,327 39,613 40,210 25,081 - 423,231 Loans to Depository Insititutions 5,000 - - - - 5,000 Non-Earning Assets (2) - - - - 110,581 110,581 -------- --------- -------- -------- -------- ---------- TOTAL ASSETS $598,755 $ 91,209 $241,270 $162,691 $110,581 $1,204,506 -------- --------- -------- -------- -------- ---------- -------- --------- -------- -------- -------- ---------- SOURCE OF FUNDS FOR ASSETS: Deposits: Demand $ - $ - $ - $ - $ 137,048 $ 137,048 Interest Bearing Demand 200,614 - - - - 200,614 Savings 129,202 - - - - 129,202 TCD'S Under $100,000 83,367 86,561 1,119 - - 171,047 TCD'S $100,000 and Over 320,752 86,617 920 - - 408,289 -------- --------- -------- -------- -------- ---------- TOTAL DEPOSITS $733,935 $ 173,178 $ 2,039 $ - $ 137,048 $1,046,200 -------- --------- -------- -------- -------- ---------- -------- --------- -------- -------- -------- ---------- Securities Sold Under Repurchase Agreements $ 24,000 $ - $ - $ - $ - $ 24,000 Subordinated Debt - - 15,000 - - 15,000 Other Liabilities - - - - 19,829 19,829 Stockholders' Equity - - - - 99,477 99,477 -------- --------- -------- -------- -------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $757,935 $ 173,178 $ 17,039 $ - $ 256,354 $1,204,506 -------- --------- -------- -------- -------- ---------- -------- --------- -------- -------- -------- ---------- Interest Sensitivity Gap $(159,180) $(81,969) $224,231 $162,691 $(145,773) Cumulative Interest Sensivity Gap $(159,180) $(241,149) $(16,918) $145,773 $ - Gap Ratio (% of Total Assets) -13.2% -6.8% 18.6% 13.5% -12.1% Cumulative Gap Ratio -13.2% -20.0% -1.4% 12.1% 0.0%
(1) Loans are before unamortized deferred loan fees and allowance for credit losses. (2) Non-accrual loans are included in non-earning assets. 26 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- RECENT ACCOUNTING DEVELOPMENTS ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, AN AMENDMENT OF FASB STATEMENT NO. 65 On May 12, 1995, the FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," an amendment of FASB Statement No. 65 ("SFAS 122"). This Statement provides guidance for the capitalization of originated as well as purchased mortgage servicing rights and the measurement of impairment of those rights. SFAS 122 allows for mortgage servicing rights to be capitalized when loans are sold or securitized and the servicing rights are retained. Where a definitive plan to sell or securitize mortgage loans is in place, the mortgage servicing rights will be capitalized at the date of purchase or the date of origination. Where a definitive plan is not in place, capitalization of the mortgage servicing rights will occur at the date of sale or securitization. Mortgage servicing rights are to be amortized in proportion to and over the period of estimated net servicing income. The provisions of SFAS 122 are to be applied prospectively in fiscal years beginning after December 15, 1995. The adoption is not expected to have a material impact on the financial results of the Company. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." ("SFAS 123"). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Examples are stock purchase plans, stock options, restricted stock, and stock appreciation rights. This Statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The accounting requirements of SFAS 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. The disclosure requirements of SFAS 123 are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS 123 is initially adopted for recognizing compensation cost. The Bank has not yet implemented SFAS 123 and does not believe that it will have a material adverse effect on its financial position or results of operations. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF On March 31, 1995, the FASB issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121 provides guidance for recognition and measurement of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. SFAS 121 requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required and, if so, to measure the impairment. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the asset's carrying amount, an impairment loss is recognized; if the sum of the expected future cash flows is more than the asset's carrying amount, an impairment loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. The statement also requires long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell, except for assets covered by the provisions of the Accounting Principle's Board ("APB") Opinion No. 30. SFAS 121 is effective for financial statements issued for fiscal years beginning after December 15, 1995. It is not expected that this statement will have a material impact on the Company's financial results. 27 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands, Except Per Share Data) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ RESULTS OF OPERATIONS Interest Income $ 85,126 $ 72,782 $ 65,159 $ 65,731 $ 73,683 Interest Expense 37,418 28,889 24,997 28,441 39,470 ---------- ---------- -------- -------- -------- Net Interest Income Before Provision for Credit Losses 47,708 43,893 40,162 37,290 34,213 Provision for Credit Losses 18,570 16,194 9,300 3,830 7,874 ---------- ---------- -------- -------- -------- Net Interest Income After Provision for Credit Losses 29,138 27,699 30,862 33,460 26,339 Non-Interest Income 6,042 5,936 8,286 4,420 3,863 Non-Interest Expense 26,104 24,310 22,012 18,283 15,025 ---------- ---------- -------- -------- -------- Income Before Income Taxes 9,076 9,325 17,136 19,597 15,177 Provision for Income Taxes 1,427 1,796 5,196 6,585 4,132 ---------- ---------- -------- -------- -------- Net Income $ 7,649 $ 7,529 $ 11,940 $ 13,012 $ 11,045 ---------- ---------- -------- -------- -------- ---------- ---------- -------- -------- -------- BALANCE SHEET DATA AS OF DECEMBER 31 Assets $1,204,506 $1,081,602 $957,260 $861,252 $791,547 Loans and Leases, Net 451,891 474,276 489,394 435,880 465,722 Securities Available for Sale 507,141 357,235 199,109 189,408 - Investment Securities 33,553 83,276 111,870 146,731 260,914 Deposits 1,046,200 934,020 790,575 697,020 697,508 Stockholders' Equity 99,477 87,683 86,438 76,209 64,693 PER SHARE DATA Earnings (2) $ 1.14 $ 1.12 $ 1.76 $ 1.94 $ 1.69 Cash Dividends Declared 0.32 0.32 0.32 0.32 0.32 Year End Book Value 14.89 13.17 13.00 11.51 10.81 Average Shares Outstanding (In 000's) (2) 6,729 6,720 6,774 6,707 6,543 FINANCIAL RATIOS Return on Average Assets 0.70% 0.76% 1.32% 1.59% 1.46% Return on Average Stockholders' Equity 8.13 8.34 14.47 18.25 18.14 Average Stockholders' Equity to Average Assets 8.57 9.10 9.10 8.72 8.03 Net Interest Margin (1)(3) 4.59 4.74 4.74 4.86 4.76 Net Charge-Offs to Average Loans and Leases 5.10 1.01 1.00 0.48 1.39 Non-performing Assets to Year End Loans and Leases, Net, Plus Other Real Estate Owned, net (4) 13.39 15.35 10.60 6.83 3.39 Allowance for Credit Losses to Year End Loans and Leases, Net 3.69 4.85 2.45 1.72 1.27 Cash Dividend Payout 28.07 28.57 18.18 16.49 18.96
(1) Tax-exempt interest income is not adjusted to a fully taxable equivalent basis. (2) Per share data and average shares outstanding are adjusted for common stock equivalents and to reflect the 10% stock dividend to stockholders of record on January 1, 1991 and July 1, 1992. (3) Net interest income before provision for credit losses divided by average earning assets. (4) Non-performing assets include loans 90 days past due still accruing, non-accrual loans, restructured loans and other real estate owned, net. 1995 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS
December, 31 - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and Due From Banks $ 38,837 $ 48,260 Federal Funds Sold and Securities Purchased Under Agreements to Resell 125,000 64,000 Due From Financial Institutions - Time - 99 Securities Available for Sale at Fair Value 507,141 357,235 Securities Held to Maturity 33,553 83,276 (fair value of $34,370 and $81,060 at December 31, 1995 and 1994, respectively) Loans and Leases 471,944 500,990 Less: Allowance for Credit Losses (16,674) (23,025) Deferred Loan Fees (3,379) (3,689) ---------- ---------- Loans and Leases, Net 451,891 474,276 Premises and Equipment, Net 6,101 6,139 Other Real Estate Owned, Net 7,686 5,051 Due From Customers on Acceptances 4,703 5,132 Real Estate Held for Investment 12,142 17,897 Accrued Interest Receivable and Other Assets 17,452 20,237 ---------- ---------- TOTAL ASSETS $1,204,506 $1,081,602 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Demand $ 137,048 $ 134,415 Interest Bearing Demand 200,614 197,392 Savings 129,202 154,327 Time Certificates of Deposit $100,000 or More 408,289 311,562 Other Time Deposits 171,047 136,324 ---------- ---------- TOTAL DEPOSITS 1,046,200 934,020 Federal Funds Purchased and Securities Sold under Repurchase Agreements $ 24,000 $ - Borrowings from the Federal Home Loan Bank - 30,000 Subordinated Debt 15,000 15,000 Acceptances Outstanding 4,703 5,132 Accrued Expenses and Other Liabilities 15,126 9,767 ---------- ---------- Total Liabilities 1,105,029 993,919 STOCKHOLDERS' EQUITY Common Stock, No Par or Stated Value; 20,000,000 $ 45,658 $ 45,373 Shares Authorized; 6,679,661 and 6,660,215 Shares Outstanding at December 31, 1995 and 1994, respectively Securities Valuation Allowance, Net of Tax 1,723 (4,271) Retained Earnings 52,103 46,588 Foreign Currency Translation Adjustments (7) (7) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 99,477 87,683 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,204,506 $1,081,602 ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
For The Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and Leases, Including Fees $49,533 $48,478 $43,075 Securities Available for Sale 22,161 14,018 11,933 Securities Held to Maturity 6,474 6,528 8,994 Due From Financial Institutions - Time 1 26 40 Federal Funds Sold and Securities Purchased Under Agreements to Resell 6,940 3,728 1,114 Other 17 4 3 ------- ------- ------- TOTAL INTEREST INCOME 85,126 72,782 65,159 ------- ------- ------- INTEREST EXPENSE Interest Bearing Demand 4,204 4,211 3,910 Savings 4,484 2,618 2,409 Time Certificates of Deposit $100,000 or more 17,950 14,328 11,133 Other Time Deposits 7,936 4,348 3,344 Federal Funds Purchased and Securities Sold under Repurchase Agreements 172 360 1,177 Borrowings from the Federal Home Loan Bank 1,076 1,428 1,428 Subordinated Debt 1,596 1,596 1,596 ------- ------- ------- TOTAL INTEREST EXPENSE 37,418 28,889 24,997 Net Interest Income 47,708 43,893 40,162 Provision for Credit Losses 18,570 16,194 9,300 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 29,138 27,699 30,862 ------- ------- ------- NON-INTEREST INCOME Service Charges and Commissions 5,205 5,388 4,764 Gain on Sale of Loans, Net 217 42 346 Gain on Sale of Securities Available for Sale - 124 2,998 Write Off of Securities Held to Maturity - (150) - Gain on Sale of Fixed Assets 9 - - Other 611 532 178 ------- ------- ------- TOTAL NON-INTEREST INCOME 6,042 5,936 8,286 ------- ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits 11,201 9,883 9,166 Occupancy Expense 2,886 2,583 3,681 Furniture and Equipment Expense 1,618 1,737 1,179 Other Real Estate Owned Expense, Net 2,745 2,733 2,603 Other 7,654 7,374 5,383 ------- ------- ------- TOTAL NON-INTEREST EXPENSE 26,104 24,310 22,012 ------- ------- ------- Income Before Income Taxes 9,076 9,325 17,136 Provision for Income Taxes 1,427 1,796 5,196 ------- ------- ------- NET INCOME 7,649 7,529 11,940 ------- ------- ------- ------- ------- ------- EARNINGS PER SHARE $ 1.14 $ 1.12 $ 1.76 ------- ------- ------- ------- ------- -------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 30 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Securities Foreign Valuation Currency Total Common Stock Retained Allowance, Translation Stockholders' (IN THOUSANDS) Shares Amount Earnings Net of Tax Adjustment Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31,1992 6,622 $44,841 $31,374 $ - $(6) $76,209 Stock Options Exercised 19 242 - - - 242 Common Stock Issued to Employee 401k Plan 10 146 - - - 146 Tax Benefit-Stock Options Exercised - 27 - - - 27 Net Income for the year - - 11,940 - - 11,940 Cash Dividend- $.32 per Share - - (2,125) - - (2,125) Foreign Currency Translation Adjustments - - - - (1) (1) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31,1993 6,651 $45,256 $41,189 $ - $(7) $86,438 Stock Options Exercised 3 46 - - - 46 Common Stock Issued to Employee 401k Plan 6 70 - - - 70 Tax Benefit-Stock Options Exercised - 1 - - - 1 Net Income for the year - - 7,529 - - 7,529 Cash Dividend- $.32 per Share - - (2,130) - - (2,130) Unrealized Holding Losses on Securities Available for Sale Net of Tax - - - (4,271) - (4,271) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31,1994 6,660 $45,373 $46,588 $(4,271) $(7) $87,683 Stock Options Exercised 13 173 - - - 173 Common Stock Issued to Employee 401k Plan 7 80 - - - 80 Director's Contribution - 13 - - - 13 Tax Benefit-Stock Options Exercised - 19 - - - 19 Net Income for the year - - 7,649 - - 7,649 Cash Dividend- $.32 per Share - - (2,134) - - (2,134) Net Change in Securities Valuation Allowance, Net of Tax - - - 5,994 - 5,994 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31,1995 6,680 $45,658 $52,103 $ 1,723 $(7) $99,477 ----- ------- -------- ------- ---- -------- ----- ------- -------- ------- ---- --------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 31 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 7,649 $ 7,529 $ 11,940 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,061 1,087 1,628 Net (accretion)/amortization of premiums/discounts on securities (3,193) 1,064 1,006 Writedown on real estate held for investment 1,130 1,257 599 Provision for credit losses 18,570 16,194 9,300 Provision for losses on other real estate owned 1,504 1,111 1,550 Amortization of deferred loan fees (2,589) (3,088) (3,152) Deferred Income Taxes 867 (3,202) (1,455) (Gain)/Loss on sale of loans 15 (42) (346) Gain on sale of securities available for sale - (124) (2,998) Write-off of investment securities - 150 - (Gain)/Loss on sale of other real estate owned (163) (235) 25 Gain on sale of Fixed Assets (9) - - Loans originated for sale (54,998) (28,938) - Proceeds from sales of loans originated for sale 47,770 29,009 2,816 Net increase in accrued interest receivable and other assets (327) (2,554) (800) Net increase in accrued expenses and other liabilities 3,236 1,352 2,588 Other, net (9) (2,079) 951 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 20,514 18,491 23,652 ---------- ---------- ---------- INVESTING ACTIVITIES: Purchases of securities available for sale (567,830) (251,285) (89,070) Proceeds from maturities of securities available sale 471,426 95,268 27,363 Proceeds from maturities of investment securities 70,733 31,461 84,296 Proceeds from sales of securities available for sale - 1,140 86,817 Purchase of investment securities (60,958) (12,462) (82,261) Net (increase)/decrease in loans and leases (699) 3,249 (70,683) Capitalized cost of other real estate owned - (328) (1,649) Proceeds from sales of other real estate owned 10,371 9,625 5,549 Additions to real estate investment (355) (3,342) (3,261) Proceeds from sales of real estate investment 4,980 696 - Proceeds from sale of premises and equipment 18 - 71 Purchases of premises and equipment (1,056) (2,168) (1,746) ---------- ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES (73,370) (128,146) (44,574) ---------- ---------- ---------- FINANCING ACTIVITIES: Net increase in demand, interest bearing demand and saving deposits 93,201 102,761 48,638 Net increase in time certificates of deposits 18,979 40,684 44,917 Net increase/(decrease) in federal funds purchased and securities sold under agreements to repurchase 24,000 (24,844) (9,681) Repayment of Federal Home Loan Bank advance (30,000) - - Cash dividend paid (2,134) (2,130) (2,125) Proceeds from exercise of stock options/sale of stock 288 117 415 ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 104,334 $116,588 $ 82,164 ---------- ---------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS 51,478 6,933 61,242 Cash and cash equivalents at beginning of year 112,359 105,426 44,184 ---------- ---------- ---------- Cash and cash equivalents at end of period $ 163,837 $ 112,359 $105,426 ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Year For: Interest $ 32,760 $ 28,673 $ 25,148 Income Taxes 450 5,136 5,690 ---------- ---------- ---------- ---------- ---------- ---------- NONCASH INVESTING ACTIVITIES: Loans transferred to other real estate owned $ 15,105 $ 5,926 $ 12,222 Loans transferred to premises and equipment - - 1,250 Loans to facilitate the sale of other real estate owned 822 6,373 4,900 Securities held to maturity transferred to securities available for sale 39,818 8,389 32,250 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 - -------------------------------------------------------------------------------- 1995 ANUUAL REPORT - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 1994 and 1993 data in order to conform to the current 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. General Bank (the "Bank"), the Company's 100% owned bank, conducts the business of a commercial bank serving individuals and small to medium-sized businesses through fifteen branch offices located in the greater Los Angeles, San Diego and Silicon Valley area. The Bank's deposit gathering and loan production operations are concentrated in California, particularly in Southern California. A summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements follows: CONSOLIDATION: The consolidated financial statements include the accounts of GBC Bancorp and its wholly owned subsidiary, General Bank, a California state chartered bank (the "Bank"), and the Bank's wholly owned subsidiaries, GBC Insurance Services, Inc., GBC Investment & Consulting Company, Inc., GBC Real Estate Company, Inc., GBC Leasing Company, Inc., and Southern Counties Escrow. All significant intercompany accounts and transactions have been eliminated in consolidation. SECURITIES: The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), on January 1, 1994. In accordance with SFAS 115, 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. The resulting unrealized gains or losses are recorded net of tax in stockholders' equity. 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 discount or premium on the Company's mortgage derivative investments is reviewed periodically to ensure that it does not exceed the estimated discount or premium, using current estimates of market prepayments and defaults. In the event that actual prepayments exceed the assumptions used in determining the rate of amortization or accretion, the amortization or accretion is adjusted to reflect current prepayment projections. The specific identification method is used to compute gains or losses on securities' transactions On December 29, 1995, securities with amortized cost of $39.8 million were transferred from the held to maturity classification to the available for sale classification. As of December 31, 1995, these securities have a fair value of $40.2 million. Such transfer was make in accordance with recent implementation guidance issued by the Financial Accounting Standards Board ("FASB") for Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). 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 33 - -------------------------------------------------------------------------------- GBC BANCORD - -------------------------------------------------------------------------------- discontinued and previously accrued but unpaid interest is generally reversed against income. 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 possible 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 possible 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 allowances based upon their judgments about 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. The Company adopted the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (as amended by SFAS 118), as of January 1, 1995. Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. 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 losses. Additionally, SFAS 114 eliminates the requirement that a creditor account for certain loans as foreclosed assets until the creditor has taken possession of the collateral. Income recognition on impaired loans uses methods existing for non-accrual loans but can include the accrual of interest. While a loan is in 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 loans 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 balance sheet. They are recorded at the lower of cost or fair value at the reporting date. Realized and unrealized changes in value are reported in gain/loss on sale of loans. Changes in fair value of futures contracts that hedge the loans held for sale are reported as part of the gain/loss on sale of loans and are included in the carrying amount of the loans held for sale. Please refer to note 6 of the notes to consolidated financial statement for further discussion of derivative financial instruments. 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. OTHER REAL ESTATE OWNED: Other real estate owned ("OREO") is comprised of real estate acquired through foreclosure. These assets are recorded at the lower of the carrying value of the receivable or the fair value of the related real estate. The fair value of the assets 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 received is charged to the allowance for credit losses at the time of acquisition. Any subsequent provisions for loss on OREO or gains and losses from sales and net operating expenses of such assets are charged to operations and are included in Other Real Estate Owned Expense, Net, in the accompanying consolidated statements of income. REAL ESTATE HELD FOR INVESTMENT: Real estate held for investment is carried at the lower of cost or fair value. Joint 34 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- venture investments are accounted for by the equity method of accounting. The Bank is a limited partner in partnerships that invest in low income housing projects that qualify for federal income tax credits. If the partnership interest is less than 20%, the investment is carried at cost, unless there is a decline in value which is other than temporary, in which case the decline would be reported in the consolidated statements of income. If the investment is greater than 20%, either the equity method of accounting or consolidation is followed depending upon the percentage of the investment and the extent of control exercised over the project. 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. 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 Stockholders' Equity. EARNINGS PER SHARE: Earnings per share are computed based on the weighted average shares outstanding during each year. Common stock equivalents are included in the calculations unless the effect is determined to be antidilutive or immaterial. Common stock equivalents are entirely comprised of stock options granted under an employee stock option plan. Weighted average shares outstanding were 6,886,615, 6,720,293 and 6,774,365, for the years ended December 31, 1995, 1994 and 1993, respectively. INCOME TAXES: The Company files a consolidated federal income tax return with its subsidiaries and a combined California franchise tax return. 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. STATEMENT OF CASH FLOWS: Cash and cash equivalents consist of cash and due from banks, due from financial institutions - time and Federal funds sold and securities purchased under agreements to resell. RECENT ACCOUNTING DEVELOPMENTS ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, AN AMENDMENT OF FASB STATEMENT NO. 65 On May 12, 1995, the FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement No. 65"("SFAS 122"). SFAS 122 provides guidance for the capitalization of originated as well as purchased mortgage servicing rights and the measurement of impairment of those rights. SFAS 122 allows for mortgage servicing rights to be capitalized when loans are sold or securitized and the servicing rights are retained. Where a definitive plan to sell or securitize mortgage loans is in place, the mortgage servicing rights will be capitalized at the date of purchase or the date of origination. Where a definitive plan is not in place, capitalization of the mortgage servicing rights will occur at the date of sale or securitization. Mortgage servicing rights are to be amortized in proportion to and over the period of estimated net securities income. The provisions of SFAS 122 are to be applied prospectively in fiscal years beginning after December 15, 1995. The adoption is not expected to have a material impact on the financial results of the Company. 35 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- ACCOUNTING FOR STOCK-BASED COMPENSATION In October of 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." ("SFAS 123"). SFAS 123 establishes financial accounting and reporting standards for stock- based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Examples are stock purchase plans, stock options, restricted stock, and stock appreciation rights. SFAS 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The accounting requirements of SFAS 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. The disclosure requirements of SFAS 123 are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS 123 is initially adopted for recognizing compensation cost. The Bank has not yet implemented SFAS 123 and does not believe that it will have a material adverse effect on its financial position or results of operations. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF On March 31, 1995, the FASB issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121 provides guidance for recognition and measurement of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. SFAS 121 requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required and, if so, to measure the impairment. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the asset's carrying amount, an impairment loss is recognized; if the sum of the expected future cash flows is more than the asset's carrying amount, an impairment loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. SFAS 121 also requires long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell, except for assets covered by the provisions of APB Opinion No. 30. SFAS 121 is effective for financial statements issued for fiscal years beginning after December 15, 1995. It is not expected that this statement will have a material impact on the Company's financial results. 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 $9,538,000 and $8,173,000, during 1995 and 1994, respectively. NOTE 3 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL Securities purchased under agreements to resell are collateralized by a combination of single family residential loans and commercial paper at December 31, 1995. For the year ended December 31, 1995, the maximum amounts of outstanding securities purchased under agreements to resell was $90 million. During the year ended December 31, 1995, the average amount of outstanding securities purchased under agreements to resell was $20.6 million. The average rate of interest of securities purchased under agreements to resell was 6.13% and 5.95% at December 31, 1995, and for the year ended December 31, 1995, respectively. 36 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- NOTE 4 - SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and market value of securities at December 31, 1995 and 1994 were as follows:
GROSS GROSS (IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR 1995 COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------ SECURITIES HELD TO MATURITY State and municipal Securities $ 6,460 $ 154 $ - $ 6,614 Collateralized Mortgage Obligations 82 8 - 90 Asset Backed Securities 27,011 655 - 27,666 ------------ ----------- ----------- ----------- TOTAL SECURITIES HELD TO MATURITY $ 33,553 $ 817 $ - $ 34,370 ------------ ----------- ----------- ----------- ------------ ----------- ----------- ----------- SECURITIES AVAILABLE FOR Sale U. S. Treasuries $ 16,948 $ - $ (4) $ 16,944 U.S. Government Agencies 222,578 950 - 223,528 Mortgage Backed Securities 61,987 212 - 62,199 Corporate Notes 27,016 1,299 - 28,315 Collateralized Mortgage Obligations 133,611 346 - 133,957 Auction Preferred Stock 32,200 - - 32,200 Other Securities 9,823 175 - 9,998 ------------ ----------- ----------- ----------- TOTAL SECURITIES AVAILABLE FOR SALE $ 504,163 $ 2,982 $ (4) $ 507,141 ------------ ----------- ----------- ----------- ------------ ----------- ----------- ----------- GROSS GROSS (IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR 1994 COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------ SECURITIES HELD TO MATURITY U. S. Treasuries $ 1,978 $ - $ (185) $ 1,793 U.S. Government Agencies 10,726 - (258) 10,468 Mortgage Backed Securities 19,048 - (716) 18,332 State and Municipal Securities 7,322 124 - 7,446 Commercial Paper 2,999 - - 2,999 Collateralized Mortgage Obligations 14,162 (1,356) 12,806 Asset Backed Securities 27,041 175 - 27,216 ------------ ----------- ----------- ----------- TOTAL SECURITIES HELD TO MATURITY $ 83,276 $ 299 $ (2,515) $ 81,060 ------------ ----------- ----------- ----------- ------------ ----------- ----------- ----------- SECURITIES AVAILABLE FOR SALE U. S. Treasuries $ 37,556 $ - $ (67) $ 37,489 U.S. Government Agencies 194,152 - (694) 193,458 Mortgage Backed Securities 34,141 - (2,838) 31,303 Corporate Notes 42,018 136 - 42,154 Collateralized Mortgage Obligations 48,228 - (3,820) 44,408 Other Securities 8,523 - (100) 8,423 ------------ ----------- ----------- ----------- TOTAL SECURITIES AVAILABLE FOR SALE $ 364,618 $ 136 $ (7,519) $ 357,235 ------------ ----------- ----------- ----------- ------------ ----------- ----------- -----------
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 of the two major rating services at the time of purchase. As of December 31, 1995, the yield on the collateralized mortgage obligations held to maturity and available for sale were 9.91% and 6.12%, respectively. 37 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- The amortized cost and fair value of securities at December 31, 1995, 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 $ 785 $ 790 $ 142,409 $ 142,720 Due After One Year Through Five Years 28,652 29,385 170,626 172,712 Due After Five Years Through Ten Years - - 16,300 15,978 Due After Ten Years 4,116 4,195 174,828 175,731 ----------- ----------- ----------- ----------- TOTAL $ 33,553 $ 34,370 $ 504,163 $ 507,141 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
There were no sales of securities available for sale for the year ended December 31, 1995. Proceeds from the sales of securities available for sale were $1,140,000 for the year ended December 31, 1994. In addition, in 1994 a preferred stock investment in the held to maturity portfolio whose collectibility was in doubt was charged off for a loss of $150,000. In 1995, a partial recovery amounting to $25,000 was collected on this investment. There were no sales of securities held to maturity in 1995 and 1994. Proceeds from the sales of securities available for sale were $86,817,000 for the year ended December 31, 1993. There were no sales of securities held to maturity in 1993. Gross realized gains on sales of securities were $0, $124,000 and $2,998,000 for 1995, 1994 and 1993, respectively. Excluding the charge-off of the preferred stock in 1994, there were no realized losses on sales of securities sustained in 1995, 1994 or 1993. On December 29, 1995, securities at amortized cost of $39,818,000 were transferred from the held to maturity classification to the available for sale classification. On December 31, 1995, these securities had a fair value of $40,156,000. Such transfer was made in accordance with recent implementation guidance issued by the Financial Accounting Standards Board ("FASB") for Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Securities from the available for sale portfolio having a carrying value of $42.9 million at December 31, 1995 were pledged to secure treasury, tax and loan deposits and repurchase agreements as required or permitted by law. Securities from the available for sale and held to maturity portfolios having a carrying value of $15.4 million and $0.6 million, respectively, at December 31, 1994 were pledged to secure treasury, tax and loan deposits and public funds as required or permitted by law. Securities from the available for sale and held to maturity portfolios having a carrying value of $9.1 million and $3.1 million, respectively, were pledged to secure borrowings from the Federal Reserve Bank, as of December 31, 1995. Securities from the available for sale and held to maturity portfolios having a carrying value of $42.9 million and $21.3 million, respectively, were pledged to secure borrowings from the Federal Reserve Bank and the Federal Home Loan Bank, as of December 31, 1994. On October 2, 1995, the Federal Home Loan Bank advance matured and the pledged securities were withdrawn. In addition, one U.S. Treasury security and a Government-sponsored agency security in the available for sale portfolio with a carrying value of $2.7 million were pledged for other purposes, as of December 31, 1995. 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, 1995 and 1994 was as follows:
(IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------------- Commercial $ 151,709 $ 132,806 Real Estate-Construction 53,423 60,610 Real Estate-Conventional 239,016 281,225 Installment 231 377 Other Loans 22,310 25,699 Leveraged Leases 255 273 Loans to Depository Insititutions 5,000 - ----------- ----------- TOTAL $ 471,944 $ 500,990 Less: Allowance for Credit Losses (16,674) (23,025) Deferred Loan Fees (3,379) (3,689) ----------- ----------- LOAN AND LEASES, NET $ 451,891 $ 474,276 ----------- ----------- ----------- -----------
38 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- Most of the Company's business is with customers in the state of California. Construction loans are collateralized primarily by single family residences and condominiums. Real estate loans are collateralized primarily by single family residences, condominiums, apartment complexes, industrial buildings, motels and hotels. The following table sets forth the breakdown by type of collateral for construction and conventional real estate loans at December 31, 1995 and 1994:
1995 - -------------------------------------------------------------------------------- (IN THOUSANDS) CONVENTIONAL CONSTRUCTION REAL ESTATE PROJECT TYPE LOANS PERCENTAGE LOANS PERCENTAGE - -------------------------------------------------------------------------------- Residential Single-Family $ 20,588 38% $ 37,519 16% Condominiums 19,784 37 5,406 2 Multi-Family 11,656 22 36,108 15 Land Development - - 600 - --------- --------- --------- --------- Total Residential $ 52,028 97% $ 79,633 33% --------- --------- --------- --------- --------- --------- --------- --------- Non-Residential Warehouse $ - -% $ 28,794 12% Retail Facilities 1,395 3 55,790 24 Office - - 29,268 12 Hotel and Motel - - 42,681 18 Land Development - - - - Other - - 2,850 1 --------- --------- --------- --------- Total Non-Residential $ 1,395 3% $ 159,383 67% --------- --------- --------- --------- Total $ 53,423 100% $ 239,016 100% --------- --------- --------- --------- --------- --------- --------- ---------
1994 - -------------------------------------------------------------------------------- (IN THOUSANDS) CONVENTIONAL CONSTRUCTION REAL ESTATE PROJECT TYPE LOANS PERCENTAGE LOANS PERCENTAGE - -------------------------------------------------------------------------------- Residential Single-Family $ 10,854 18% $ 23,386 8% Condominiums 28,834 48 8,244 3 Multi-Family 7,931 13 57,138 20 Land Development - - 7,979 3 --------- --------- --------- --------- Total Residential $ 47,619 79% $ 96,747 34% --------- --------- --------- --------- --------- --------- --------- --------- Non-Residential Warehouse $ 2,173 3% $ 27,760 10% Retail Facilities 2,969 5 61,193 22 Office 5,560 9 35,735 13 Hotel and Motel 2,289 4 57,107 20 Land Development - - - - Other - - 2,683 1 --------- --------- --------- --------- Total Non-Residential $ 12,991 21% $ 184,478 66% --------- --------- --------- --------- Total $ 60,610 100% $ 281,225 100% --------- --------- --------- --------- --------- --------- --------- ---------
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) 1995 1994 - -------------------------------------------------------------------------------- Balance, Beginning of Year $ 4,526 $ 11,800 New Loans and Advances 5,490 4,607 Repayments (5,229) (11,881) ---------- ---------- Balance End of Year $ 4,787 $ 4,526 ---------- ---------- ---------- ----------
A summary of activity in the allowance for credit losses is as follows:
(IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Balance, Beginning of Year $ 23,025 $ 11,977 $ 7,503 Provision Charged to Operating Expenses 18,570 16,194 9,300 Loans and Leases Charged Off (25,520) (5,802) (5,125) Recoveries 599 656 299 ---------- ---------- ---------- BALANCE, END OF YEAR $ 16,674 $ 23,025 $ 11,977 ---------- ---------- ---------- ---------- ---------- ----------
39 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- 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) 1995 1994 1993 - -------------------------------------------------------------------------------- Loan 90 Days or More Past Due and Still Accruing $ 9 $ 999 $ 4,059 Nonaccrual Loans 43,712 46,672 22,033 Restructured Loans 10,151 20,865 11,898 ---------- ---------- ---------- TOTAL PAST DUE, NONACCRUAL AND RESTRUCTURED LOANS $ 53,872 $ 68,536 $ 37,990 ---------- ---------- ---------- ---------- ---------- ----------
The effect of non-accrual loans on interest income for the years 1995, 1994 and 1993 is presented below:
(IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Contractual Interest Due $ 6,969 $ 5,844 $ 2,390 Interest recognized (1,098) (2,768) (945) ---------- ---------- ---------- NET INTEREST FOREGONE $ 5,871 $ 3,076 $ 1,445 ---------- ---------- ---------- ---------- ---------- ----------
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 on interest income for the years 1995, 1994 and 1993 is presented below:
(IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------- Contractual Interest Due $ 1,713 $ 1,888 $ 1,031 Interest recognized (1,150) (1,559) (911) ---------- ---------- ---------- NET INTEREST FOREGONE $ 563 $ 329 $ 120 ---------- ---------- ---------- ---------- ---------- ----------
There are no commitments to lend additional funds to borrowers associated with restructured loans, as of December 31, 1995. As of December 31, 1995 and 1994 there were outstanding fixed rate mortgages held for sale of $6,277,000 and $4,806,000, respectively. As of December 31, 1995, the Bank was servicing approximately $68 million of loans for third parties. SFAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118, was adopted on January 1, 1995. As of December 31, 1995, the Company had $45.9 million of recorded investment in impaired loans with a related allowance for credit losses determined in accordance with SFAS 114 totaling $5,803,000. As of December 31, 1995, impaired loans included restructured loans with a recorded investment of $4,650,000, and a related allowance for credit losses totaling $387,000. There were no impaired loans for which there was no related allowance for credit losses determined in accordance with SFAS 114. For the year ended December 31, 1995, the average balance of impaired loans was $44,206,000. Income recognition on impaired loans uses methods existing for non-accrual loans but can include the accrual of interest. While a loan is in 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. Interest income recognized in 1995 on the loans identified as impaired as of December 31, 1995 amounted to $808,000. Of this amount no interest was recognized using the cash basis method of recognition. NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage the interest rate risk from origination of fixed rate residential mortgage loans for sale in the secondary markets. 40 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- The Company utilizes Treasury note futures and forward sales of mortgage- backed securities to hedge interest rate risk associated with its residential mortgage banking activities. Futures and forward sale contracts provide for the sale of underlying securities including mortgage-backed securities at a specified future date, at a specified price or yield. The amount of the futures and forward sale contracts is determined by the aggregate amount of fixed rate commitments for mortgage loans that are expected to be funded plus the amount of fixed rate residential mortgages categorized as being held for sale that have not been sold. The fair value of the underlying futures and forward sale contracts is expected to move inversely to the change in fair value of the mortgage loans. The Company never intends to deliver the underlying securities that the futures and forward sale contracts commit to sell; rather, it purchases offsetting contracts to eliminate the obligation. The Company is exposed to the risk that the fair value of futures contracts, being based on the value of the Treasury note will not move proportionately with the change in value of the mortgage loans being hedged. This basis risk is unpredictable and can result in economic loss to the Company. There is no basis risk related to the use of forward sale contracts on mortgage-backed securities since their fair value is based on similar mortgage loans. However a gain or loss will arise from the difference between the fair value and the forward sale price of the mortgage- backed security. The counterparties to the futures and forward sale contracts are the Chicago Board of Trade ("CBOT") and the Federal Home Loan Mortgage Corporation ("FHLMC") respectively, therefore there is little or no risk of default. As of December 31, 1995 and 1994 there were outstanding fixed rate mortgages held for sale of $6,277,000 and $4,806,000 and a notional value of derivative instruments of $0 and $2,500,000, respectively. For the years ended December 31, 1995 and 1994 the Company had realized net gains/(losses) of $(114,294) and $29,125 with unrealized gains of $0 and $812, respectively, related to its hedging activities. Initial margin requirements and daily calls on futures contracts are met in cash. There are no margin requirements nor daily calls on forward sale contracts since whole loans are expected to be delivered to fulfill the commitment. 41 GBC BANCORP - -------------------------------------------------------------------------------- NOTE 7 - PREMISES AND EQUIPMENT A summary of premises and equipment is as follows:
DECEMBER 31, - ---------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - ---------------------------------------------------------------------- Land $ 1,246 $ 1,246 Bank Premises 1,504 1,430 Leasehold Improvements 2,017 1,918 Furniture, Fixtures and Equipment 7,160 6,613 ------- ------- 11,927 11,207 Less: Accumulated Depreciation and Amortization (5,826) (5,068) ------- ------- TOTAL $ 6,101 $ 6,139 ------- ------- ------- -------
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 at December 31, 1995:
YEAR (IN THOUSANDS) - ---------------------------------------------------------------------- 1996 $ 1,892 1997 1,899 1998 1,572 1999 1,627 2000 1,340 Thereafter 10,639 ------- TOTAL $18,969 ------- -------
During 1993, the Company wrote off contractual lease payments on its former headquarters' location and leasehold improvements relating thereto, of $978,000 and $402,000, respectively. Net rental expense included in occupancy expense was approximately $2,177,000, $1,831,000 and $2,544,000 for the years ended December 31, 1995, 1994 and 1993, respectively. NOTE 8 - OTHER REAL ESTATE OWNED As of December 31, 1995 other real estate owned ("OREO") consisted of fourteen properties with a net carrying value of $7,686,000. As of December 31, 1994 real estate owned consisted of ten properties with a net carrying value of $5,051,000. The following table sets forth OREO by type of property as of December 31, 1995 and 1994:
(IN THOUSANDS) 1995 1994 - ---------------------------------------------------------------------- PROPERTY TYPE Single-Family Residential $ 11 $ 290 Condominium 509 3,689 Multi-Family Residential 978 - Warehouse 188 245 Land for Residential 1,054 1,087 Retail Facilities 5,289 169 Office 268 - Less: Valuation Allowance (611) (429) ------- ------- TOTAL $ 7,686 $ 5,051 ------- ------- ------- -------
A summary of activity in the valuation allowance is as follows for the years indicated:
(IN THOUSANDS) 1995 1994 1993 - ---------------------------------------------------------------------- Balance, Beginning of Year $ 429 $ 1,458 $ 1,325 Provision Charged to Operations 1,504 1,111 1,550 Other Real Estate Owned Charged Off (1,322) (2,140) (1,417) ------- ------- ------- BALANCE, END OF YEAR $ 611 $ 429 $ 1,458 ------- ------- ------- ------- ------- -------
For the years ended December 31, 1995, 1994 and 1993, other real estate owned expenses, net, was comprised of the following:
(IN THOUSANDS) 1995 1994 1993 - ---------------------------------------------------------------------- Net Loss (Gain) on Sale of Other Real Estate Owned $ (163) $ (235) $ 25 Provision for Losses on Other Real Estate Owned 1,504 1,111 1,550 Net Operating Expenses 1,404 1,857 1,028 ------- ------- ------- OTHER REAL ESTATE OWNED EXPENSE, NET $ 2,745 $ 2,733 $ 2,603 ------- ------- ------- ------- ------- -------
42 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- NOTE 9 - REAL ESTATE HELD FOR INVESTMENT Real estate held for investment ("REI") at December 31, 1995 and 1994 included the following:
(IN THOUSANDS) 1995 1994 - ---------------------------------------------------------------------- Investments in Low Income Housing Projects $11,013 $12,063 Real Estate Development Projects 1,209 5,834 Less: Valuation Allowance (80) - ------- ------- TOTAL $12,142 $17,897 ------- ------- ------- -------
As of December 31, 1995 and 1994, the Company had investments totaling $11.0 million and $12.1 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 six years. Please refer to note 12 of the notes to consolidated financial statements for income tax effects. As of December 31, 1995 and 1994, the Company had $1.1 million and $5.8 million, respectively, in projects formed for the purpose of developing residential real estate. As of December 31, 1995, the Company had one condominium unit remaining for sale in one of its two projects and 7 units remaining in the other project with original inventories of 12 and 28 units, respectively. Expenses incurred for REI were $1,388,000, $1,300,000 and $580,000 for the years ended 1995, 1994 and 1993, respectively. Expenses for 1995 included all costs incurred for the marketing and sales of the real estate projects amounting to $258,000 and a provision for loss of $80,000 to adjust the carrying value of the projects to lower of cost or fair value. In addition, REI expense includes the depreciation of the investments in the real estate projects which qualify for low income housing tax credits, which totaled $1,050,000, $1,257,000 and $599,000 in 1995, 1994 and 1993, respectively. As of December 31, 1995, of the $11,013,000 of investments in low income housing projests, $7,791,000 was carried at cost, net of any decline in value considered to be other than temporary, and $3,222,000 was carried under the consolidation method of accounting. NOTE 10 - OTHER BORROWINGS On October 2, 1995, a $30 million advance to the Bank from the Federal Home Loan Bank ("FHLB") matured. The Bank elected to repay the advance. The $30 million was funded on September 25, 1992 at a fixed rate of interest of 4.76%. The advance was secured by the investment in stock of the FHLB and certain mortgage-backed securities. The FHLB has granted the Bank a line of credit equal to 20 percent of assets with terms up to 240 months. This line is available to the Bank subject to certain debt covenants. There were no drawings under the line outstanding at December 31, 1995. The following table sets forth information with respect to federal funds purchased and securities sold under agreements to repurchase:
(IN THOUSANDS) 1995 1994 1993 - ---------------------------------------------------------------------- Balance at End of Year $24,000 $ - $24,844 Weighted Average Interest Rate at End of Year 5.75% -% 2.69% Average Amount Outstanding During the Year $ 2,959 $10,299 $32,280 Weighted Average Interest Rate During the Year 5.80% 3.50% 3.64% Maximum Amount Outstanding at Any Month-End $24,000 $25,438 $34,700
The underlying collateral pledged for the repurchase agreement consists of government agency securities. All collateral is maintained with Merrill Lynch, Inc., who is the counterparty to the repurchase agreement. As of December 31, 1995, the fair value of the pledged collateral totaled $27.0 million. NOTE 11 - SUBORDINATED DEBT On August 31, 1990, the Company issued $15,000,000 of subordinated debentures through private placement with an annual interest rate of 10.52% and stated maturity of September 1, 2000. The table below is a summary of the required repayment schedule, as specified in the Debenture Purchase Agreement ("Agreement"). September 1, 1997 $ 3,750 September 1, 1998 3,750 September 1, 1999 3,750 September 1, 2000 3,750 ------- TOTAL $15,000 ------- -------
The Agreement includes several covenants which restrict the payment of dividends, amount of indebtedness, certain acquisitions and the sale of assets. In the opinion of management the Company was in compliance with the provisions of the Agreement as of December 31, 1995. 43 - ------------------------------------------------------------------------------ GBC BANCORP - ------------------------------------------------------------------------------ NOTE 12 - INCOME TAXES Income taxes (benefit) in the accompanying consolidated statements of income is comprised of the following:
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- CURRENT TAX (BENEFIT) EXPENSE: Federal $ (205) $3,047 $4,599 State 765 1,951 2,052 ------ ------ ------ Total 560 4,998 6,651 DEFERRED TAX (BENEFIT) EXPENSE: Federal 681 (2,293) (1,560) State 186 (909) (145) ------ ------ ------ Total 867 (3,202) (1,705) Change in valuation allowance for deferred tax asset - - 250 ------ ------ ------ Net change in net deferred tax asset 867 (3,202) (1,455) ------ ------ ------ TOTAL INCOME TAX EXPENSE $1,427 $1,796 $5,196 ------ ------ ------ ------ ------ ------ Taxes charged (credited) to shareholders'equity related to available for sale securities $4,367 $(3,112) $ - ------ ------ ------ ------ ------ ------
Tabulated below are the significant components of the net deferred tax asset at December 31, 1995 and December 31, 1994 (as restated for the 1994 tax return as filed and adjusted):
Year Ended December 31, - --------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - --------------------------------------------------------------------------------------------------------- COMPONENTS OF THE DEFERRED TAX ASSET: Provision for Credit Losses $ (9,682) $(10,341) California Franchise Taxes - (205) Unrealized Loss on Securities - (3,112) Loan Fee Income (32) (176) Allowance for Other Real Estate Owned (283) (199) Other (874) (694) -------- -------- (10,871) (14,727) Valuation allowance 250 250 Deferred tax asset, net of valuation allowance (10,621) (14,477) -------- -------- -------- -------- COMPONENTS OF THE DEFERRED TAX LIABILITY: Leveraged Leases 145 45 Low Income Housing 3,213 2,843 Unrealized Gain on Securities 1,255 - Discount Accretion 1,325 1,740 California Franchise Taxes 58 - Other 761 751 -------- -------- Deferred tax liability 6,757 5,379 -------- -------- NET DEFERRED TAX LIABILITY (ASSET) $ (3,864) $ (9,098) -------- -------- -------- --------
44 - ------------------------------------------------------------------------------ 1995 ANNUAL REPORT - ------------------------------------------------------------------------------ The valuation allowance at December 31, 1995 and 1994, relates to the net deductible temporary differences that cannot be realized through carrybacks to prior periods or projection of future income. In evaluating the realizability 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 total income tax expense and the amount computed by applying the statutory federal corporate income tax rate to consolidated income before income tax expense follows:
PERCENT OF PRE-TAX EARNINGS YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- Statutory federal corporate income tax rate 35.0% 35.0% 35.0% State tax, net of federal income tax effect 6.8 7.3 7.2 INCREASE (DECREASE) RESULTING FROM: Non-taxable interest income on municipal securities and dividend exclusion on auction preferred stocks (3.6) (3.2) (2.1) Valuation allowance - - 1.5 Low income housing tax credit (23.1) (20.0) (11.4) Other, net 0.6 0.2 0.1 ------ ------ ------ 15.7% 19.3% 30.3% ------ ------ ------ ------ ------ ------
The Company had a current income tax receivable of $142,000 at December 31, 1995 and a current income tax payable of $268,000 at December 31, 1994. NOTE 13 - PENDING LITIGATION The Company is a defendant in various lawsuits arising from the normal course of business. The Company established an accrual for a potential liability that was subsequently paid out early in 1996. There were two credit-related cases where the Bank was named as defendant. Although unspecified damages, including punitive damages, were being sought, management believes that the claims were without merit. The amount of possible liabilities, if any, could not be estimated. Management believes based upon the opinion of legal counsel, that the ultimate resolution of the pending litigation will not have a material effect upon the financial position of the Company. NOTE 14 - EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN The Company has an employee stock option plan for certain key employees. 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 are exercisable in installments of 20 percent per year over a five-year period or seven cumulative years for the Company's Chairman and Chief Executive Officer ("CEO") as discussed below. If an option expires without having been exercised, the unpurchased shares are again available for future grants. As of December 31, 1995, 348,180 shares are exercisable. 45 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- A summary of stock option activity and related option prices for 1995, 1994 and 1993 follows:
1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF OPTION PRICE NUMBER OF OPTION PRICE NUMBER OF OPTION PRICE SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE - ---------------------------------------------------------------------------------------------------------------------------------- AUTHORIZED STOCK OPTION SHARES 1,320,000 1,320,000 1,320,000 --------- --------- --------- --------- --------- --------- Options Outstanding Beginning of Year 643,169 $6.61 - $20.05 643,496 $6.61 - $20.05 618,970 $6.61 -$20.05 Granted 101,000 13.50 89,500 13.25 - 15.75 77,000 15.50 - 16.25 Exercised (12,779) 13.18 - 16.95 (3,465) 12.00 - 13.23 (18,563) 6.61 - 15.91 Expired (34,160) 13.02 - 20.05 (42,895) 6.61 - 20.05 (21,920) 13.02 - 17.27 Cancelled (22,042) 13.18 - 17.05 (43,467) 13.18 - 16.95 (11,991) 13.18 - 16.95 ------- --------------- ------- --------------- ------- -------------- End of Year 675,188 $6.61 - $20.05 643,169 $6.61 - $20.05 643,496 $6.61 - $20.05 ------- ------- ------- ------- ------- ------- Reserved for Future Grants 512,818 557,616 560,754 ------- ------- ------- ------- ------- -------
On December 19, 1991, the Board of Directors of the Company amended the employment agreement of the Company's Chairman and CEO. The agreement was approved by the shareholders on March 19, 1992 and provided for an employment term of seven years, commencing January 1, 1992, and ending September 9, 1998 and renewable for a successive 12-month period. The Chairman and CEO was granted 462,000 stock options at $13.18 per share adjusted for the 10% stock dividend paid on July 15, 1992. The shares are exercisable in seven cumulative annual installments of 66,000 shares. 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 339,450 shares of the Company's authorized but unissued common stock at a price of $3.72 - - $20.04 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 or the Bank. 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 10 percent of their annual salary with the Company matching 100 percent of the employee's contribution, but no more than 5 percent of that employee's base salary. In 1995, 1994 and 1993, the Bank's contribution amounted to $203,000, $155,000 and $151,000, respectively. In 1995, there was an amendment to the General Bank 401(k) Plan, whereby a participant loan feature was added to allow participants to borrow against their own fund in case of family emergency. 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, 46 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- 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 accrued approximately $86,000, $98,000 and $193,000 related to this plan in 1995, 1994 and 1993, respectively. NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The 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 effect on the Company's financial position. 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, 1995, the Company's undisbursed loan commitments amounted to approximately $128.7 million, of which $58.2 million related to construction loans. As of December 31, 1994, the Company's undisbursed loan commitments amounted to approximately $103.3 million, of which $40.3 million related to construction loans. $53.2 million of loan commitments are 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 Company also has off-balance sheet risk associated with its involvement with its financial futures contracts. Please refer to the discussion of derivative financial instruments in note 6 of the notes to consolidated financial statements. The following is a summary of various financial instruments with off-balance sheet risk as of December 31, 1995 and 1994:
DECEMBER 31, - -------------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------------- Commitments to extend credit $128,747 $103,276 Standby letters of credit 11,867 14,368 Bills of lading guarantee 328 1,268 Commercial letters of credits 35,948 42,768 Financial futures contracts - 2,500
At December 31, 1995 commitments to fund fixed-rate loans and adjustable-rate loans were $10.9 million and $117.8 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: 47 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- CASH AND SHORT-TERM INVESTMENTS For those short-term instruments whose maturity is less than 90 days, the carrying amount is considered a reasonable estimate of 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 rate interest 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 fair value is presented net of the allowance for credit losses. 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, 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, 1995 for deposits of similar remaining maturities. BORROWINGS FROM THE FEDERAL HOME LOAN BANK, SUBORDINATED DEBT, AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. COMMITMENTS TO EXTEND CREDIT, STANDBY AND COMMERCIAL LETTERS OF CREDIT, BILLS OF LADING GUARANTEES AND FINANCIAL FUTURES CONTRACTS 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 of financial futures contracts are based on quoted market prices or dealer quotes. 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. 48 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- The estimated fair values of the Company's financial instruments as of December 31 are as follows for the years indicated:
1995 1994 - ---------------------------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and short-term investments $ 163,837 $ 163,837 $112,359 $112,359 Securities available for sale 507,141 507,141 357,235 357,235 Securities held to maturity 33,553 34,370 83,276 81,060 Loans, net 451,891 452,543 474,276 468,104 FINANCIAL LIABILITIES: Deposits 1,046,200 1,047,084 934,020 933,946 Securities sold under repurchase agreements 24,000 24,000 - - Borrowings from the Federal Home Loan Bank - - 30,000 29,484 Subordinated debt 15,000 15,915 15,000 14,430
1995 1994 - -------------------------------------------------------------------------------------------------------------------- CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR (IN THOUSANDS) AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commercial letters of credit $ 35,948 $- $ 90 $ 42,768 $- $ 107 Standby letters of credit 11,867 - 143 14,368 - 173 Bill of lading guarantees 328 - 1 1,268 - 1 Undisbursed loans 128,747 - 1,694 103,276 - 1,582 Financial futures contracts - - - 2,500 - 1
49 - -------------------------------------------------------------------------------- GBC BANCORP - -------------------------------------------------------------------------------- NOTE 17 - CONDENSED FINANCIAL INFORMATION OF GBC BANCORP (PARENT COMPANY) Condensed balance sheets as of December 31, 1995 and 1994 follow:
(DOLLARS IN THOUSANDS) 1995 1994 - --------------------------------------------------------------------------------------------- ASSETS Investment in Subsidiaries $108,578 $ 77,573 Securities Available for Sale 5,175 4,900 Advance to Bank - 19,500 Due From Bank 566 814 Other Assets 717 662 -------- -------- TOTAL ASSETS $115,036 $103,449 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Dividends Payable $ 534 $ 533 Other Liabilities 25 233 Subordinated Debt 15,000 15,000 -------- -------- TOTAL LIABILITIES 15,559 15,766 STOCKHOLDERS' EQUITY Common stock, no par value or stated value; 20,000,000 shares authorized; 6,679,661 and 6,660,215 shares outstanding at December 31, 1995 and 1994, respectively 45,658 45,373 Retained Earnings 52,103 46,588 Securities Valuation Allowance, Net of Tax 1,723 (4,271) Foreign Currency Translation Adjustment (7) (7) -------- -------- TOTAL STOCKHOLDERS' EQUITY 99,477 87,683 -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $115,036 $103,449 -------- -------- -------- --------
Condensed statements of income for the years ended December 31, 1995, 1994 and 1993 follow:
(IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Interest Income, Including Fees $1,208 $1,296 $1,021 Dividends Received from Bank 2,134 2,130 2,125 ------ ------ ------ TOTAL INCOME 3,342 3,426 3,146 Interest Expense 1,596 1,596 1,596 Non-Interest Expense 48 165 45 ------ ------ ------ TOTAL EXPENSE 1,644 1,761 1,641 Income Before Income Taxes 1,698 1,665 1,505 Benefit for Income Taxes (281) (293) (358) ------ ------ ------ Income Before Equity in Undistributed Earnings of Subsidiary 1,979 1,958 1,863 Equity in Undistributed Earnings of Subsidiary 5,670 5,571 10,077 ------ ------ ------ NET INCOME $7,649 $7,529 $11,940 ------ ------ ------ ------ ------ ------
50 - -------------------------------------------------------------------------------- 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- Condensed statements of cash flows for the years ended December 31, 1995, 1994, and 1993 follow:
(IN THOUSANDS) 1995 1994 1993 ------- ------- -------- OPERATING ACTIVITIES: NET INCOME $ 7,649 $ 7,529 $ 11,940 Adjustments to reconcile net income to net cash provided by operating activities: Net decrease/(increase) in other assets (97) 152 2,186 Equity in undistributed earnings of subsidiaries (5,670) (5,571) (10,077) Net increase/(decrease) in other liabilities (282) 65 (125) ------- ------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,600 2,175 3,924 ------- ------- -------- INVESTING ACTIVITIES: Net (increase)/decrease in cash invested in subsidiaries - 500 (5,000) ------- ------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - 500 (5,000) ------- ------- -------- FINANCING ACTIVITIES: Cash dividends paid (2,134) (2,130) (2,125) Proceeds from issuance of common stock 286 117 415 Other, net - 2 2 ------- ------- -------- NET CASH USED IN FINANCING ACTIVITIES (1,848) (2,011) (1,708) ------- ------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1) (248) 664 (2,784) Cash and cash equivalents at beginning of year (1) 814 150 2,934 ------- ------- -------- Cash and cash equivalents at end of year (1) $ 566 $ 814 $ 150 ------- ------- -------- ------- ------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the year for: Interest 1,578 1,578 1,578 Income tax refunds (293) (358) (192) (1) CASH AND CASH EQUIVALENTS CONSISTS OF DUE FROM BANK.
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, 1995 approximately $26,758,000 of undivided profits of the Bank are available for dividends to the Company, subject to the subordinated debt convenant restrictions, and subject to the prior written consent of the FDIC. 51 \ GBC BANCORP - -------------------------------------------------------------------------------- NOTE 18 - REGULATORY MATTERS In August, 1995, the Bank entered into a Memorandum of Understanding ("MOU") with the Federal Deposit Insurance Corporation ("FDIC") which resulted from the FDIC's examination report of the Bank dated as of February 21, 1995. As of December 31, 1995, management believes the Bank was in compliance with the quantitative terms of the MOU, which include: (a) a $27 million reduction in adversely classified assets within 120 days following the effective date of the MOU and a $69 million reduction within one year (as of December 31, 1995 the reduction in previously adversely classified loans was $68 million); (b) a maximum "volatile liability dependence ratio" of 30% (as of December 31, 1995, the ratio was 17.54%); (c) a minimum Tier 1 capital ratio (leverage ratio) of 7% (as of December 31, 1995, the ratio was 9.10%); (d) a $19.5 million capital injection to the Bank from its holding company, GBC Bancorp. (This capital injection was made on September 5, 1995.) The MOU also provided that the prior written consent of the FDIC would be required before the Bank could pay cash dividends, and such consent has been received for the two quarters following the implementation of the MOU. The MOU, among other things, also calls for limitations on new advances to borrowers with adversely classified or charged off loans, the timely and proper identification of problem loans, the establishment of a comprehensive policy for determining the adequacy of the allowance for credit losses, and the adoption of a written policy regarding internal controls and procedures. The Company's Board of Directors received a notification letter, dated April 25, 1994, from the Federal Reserve Bank of San Francisco (the "Federal Reserve") that requires the Company to inform the Federal Reserve prior to its taking any of the following actions: (a) declaring cash or in-kind dividends; (b) incurring debt; (c) repurchasing stock; (d) entering into any agreements to acquire any entities or portfolios. As of December 31, 1995 this notification letter remains in effect. In November, 1995, the Company was notified that the appointment of senior executive officers and directors was subject to review by the Federal Reserve. As of December 31, 1995, management believes it is in compliance with all terms of the MOU. Management further believes that all terms of the MOU as outlined above are being met or will be met without significant financial detriment to the Company or to the Bank. In August 1989, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") was enacted. This legislation was adopted in order to reform the regulation and supervision of financial institutions and the insured deposits of financial institutions. Among the many major changes made by this law is a measure requiring the FDIC to assume responsibility for insuring the deposits of financial institutions formerly insured by the Federal Savings and Loan Insurance Corporation. FIRREA establishes two separate insurance funds to be administered by the FDIC. Insurance premiums on deposit insurance will be assessed by the FDIC independently for the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund. The Omnibus Budget Reconciliation Act of 1990 revised the assessment rates. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provided for increased funding for FDIC deposit insurance and for expanded regulation of the banking industry. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital ratio categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulation. The critical capital level must be a level of tangible equity equal to at least 2% of total assets, but may be fixed at a higher level by regulation. A depository institution may be deemed to be in a capitalization category that is 52 1995 ANNUAL REPORT - -------------------------------------------------------------------------------- lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating and may be reclassified to a lower category by action based on other supervisory criteria. For an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized it must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage ratio of at least 4% (3% in some cases). NOTE 19 - SUPPLEMENTARY INFORMATION Components of other non-interest expense in excess of 1% of the sum of total interest income and non-interest income were as follows for the years indicated:
(IN THOUSANDS) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Office Supplies and Communication Expense $ 1,347 $ 1,273 $ 954 Professional Services Expense 1,756 1,432 981 FDIC Assessment Expense 1,299 1,771 1,586 Real Estate Investment Expense 1,388 1,300 580 Other 1,864 1,598 $1,282 ------- ------- ------ TOTAL $ 7,654 $ 7,374 $5,383 ------- ------- ------ ------- ------- ------
NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED IN 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - -------------------------------------------------------------------------------------------------------------- Interest Income $20,538 $21,017 $20,868 $22,703 Interest Expense 8,789 9,059 9,389 10,181 Net Interest Income 11,749 11,958 11,479 12,522 Provision for Credit Losses 5,100 5,000 5,550 2,920 Income Before Income Taxes 1,540 2,304 1,099 4,133 Net Income 1,619 1,454 881 3,695 Earnings Per Share 0.24 0.22 0.14 0.54
THREE MONTHS ENDED IN 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - -------------------------------------------------------------------------------------------------------------- Interest Income $16,690 $17,519 $18,568 $20,005 Interest Expense 6,224 7,074 7,446 8,145 Net Interest Income 10,466 10,445 11,122 11,860 Provision for Credit Losses 1,300 2,760 7,700 4,434 Gain on Sale of Securities Available for Sale 124 - - - Loss on Sale of Securities Held to Maturity - (150) - - Income Before Income Taxes 5,066 2,406 (649) 2,502 Net Income 3,515 1,896 146 1,972 Earnings Per Share 0.52 0.28 0.02 0.30
53 INDEPENDENT AUDITORS' REPORT The Board of Directors of GBC Bancorp: We have audited the accompanying consolidated balance sheets of GBC Bancorp and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GBC Bancorp and subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 of the notes to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" in 1995, and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994. KPMG Peat Marwick LLP Los Angeles, California January 18, 1996 54 EX-22 3 EXHIBIT 22 Exhibit 22 SUBSIDIARIES OF GBC BANCORP General Bank GBC Investment & Consulting Company, Inc. GBC Real Estate Company, Inc. GBC Insurance Services, Inc. Southern Counties Escrow GBC Leasing Company, Inc. EX-27 4 EXHIBIT 27
9 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 38,837 0 125,000 0 507,141 33,553 34,370 471,944 16,674 1,204,506 1,046,200 24,000 19,829 15,000 0 0 45,658 53,819 1,204,506 49,533 35,575 18 85,126 34,574 37,418 47,708 18,570 0 26,104 9,076 9,076 0 0 7,649 1.137 1.111 4.59 43,712 9 10,151 0 23,025 25,520 599 16,674 11,497 0 5,177
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