-----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, NpQusf1tmKSyFD0I5+a0WgqKTUhte27lFPCndowuJkDKcWjxPN7PZ4uY5pPmtoO4 YEvti7L3OShy7NbzhQ7ynw== 0000950150-97-000465.txt : 19970401 0000950150-97-000465.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950150-97-000465 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE 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: 97570067 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 FORM 10-K FOR THE FISCAL YEAR ENDED 12-31-96 1 FORM 10-K 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, 1996 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 Identification No.) of incorporation or organization) 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 February 28, 1997, the aggregate market value of the common stock held by non-affiliates of the registrant was $234,004,150. The number of shares of common stock of the registrant outstanding as of February 28, 1997 was 6,782,729. The following documents are incorporated by reference herein:
Part of Form 10-K Documents Incorporated by Reference Into which Incorporated - ----------------------------------- ------------------------------------ 1996 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, 1996 Part III
Exhibit Index on Pages 31-33 1 2 FORM 10-K TABLE OF CONTENTS AND CROSS REFERENCE SHEET
Page in Incorporation PART I 10-K by Reference ---- ------------ Item 1. Business........................................... 4 General....................................... 4 Lending Activities............................ 4 Competition................................... 5 Subsidiaries.................................. 5 Supervision and Regulation.................... 7 Employees..................................... 22 Item 2. Properties......................................... 22 Item 3. Legal Proceedings.................................. 23 Item 4. Submission of Matters to a Vote of Security Holders 23 PART II Item 5. Market for Registrant's Common Equity and Related Security Holders Matters........................... 24 Item 6. Selected Financial Data............................ 25 1996 Annual Report Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 25 1996 Annual Report Item 8. Financial Statements and Supplementary Data........ 25 1996 Annual Report Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 25 PART III Item 10. Directors and Executive Officers of the Registrant. 26 1997 Proxy Statement Item 11. Executive Compensation............................. 27 1997 Proxy Statement Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 27 1997 Proxy Statement Item 13. Certain Relationships and Related Transactions..... 27 1997 Proxy Statement
2 3 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 28 1996 Annual Report SIGNATURES.................................................... 29 EXHIBIT INDEX................................................. 31
3 4 PART I ITEM 1 BUSINESS GENERAL GBC Bancorp (the "Company"), a California corporation incorporated in 1980, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered at 800 West 6th Street in Los Angeles, California 90017. The Company owns all of the outstanding stock of 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, California 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. LENDING ACTIVITIES 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 4 5 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. 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, 1996, the Bank's SBA servicing portfolio was approximately $72 million. The Bank currently is the 26th largest lender 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 conforming loans as well as jumbo loans. The servicing portfolio as of December 31, 1996 amounted to approximately $59 million. Loan originations during 1996 were approximately $29 million. COMPETITION The Bank actively competes for deposits and loans with other banks and financial institutions located in its service area. Interest rates, customer service and legal lending limits are the principal competitive factors, and increasing deregulation of financial institutions has expanded competition. In order to compete with other financial institutions in its service area, the Bank relies principally upon providing quality service to its customers, personal contact by its officers, directors, 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. SUBSIDIARIES Bank Subsidiaries 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 5 6 ability of banks to directly or indirectly invest in real estate for non-banking purposes. Pursuant to a resolution of dissolution GBC Real Estate Company, Inc. was dissolved on June 10, 1996. No significant financial impact resulted from this dissolution. 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 wholly-owned 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, 1996 and for the year ended December 31, 1996, GBC Insurance Services, Inc. reported total assets of $13,000 and a net loss of $43,000, respectively. In July, 1989, GBC Investment & Consulting Company, Inc., a wholly-owned subsidiary of the Bank, was incorporated to provide specific, in-depth expertise in the areas of investment and consultation on an international and domestic basis. An office was established in Taipei, Taiwan 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, 1996 and for the year ended December 31, 1996, GBC Investment & Consulting Company, Inc. reported total assets of $16,000 and a net loss of $47,000, respectively. In December, 1993, a leasing subsidiary of the Bank was formed under the name of GBC Leasing Company, Inc. The Bank owns 90% of the voting stock of the Company which was formed to acquire various assets, such as equipment on lease, promissory notes and leases and/or partnership interests in partnerships owning such types of assets, in exchange for its common stock in transfers qualifying as a tax free exchange of property, described in Section 351 of the Internal Revenue Code of 1986, as amended. As of December 31, 1996 and for the year ended December 31, 1996, GBC Leasing Company, Inc. reported total assets of $949,000 and a net loss of $47,000, 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, 1996 and for the year ended December 31, 1996, Southern Counties Escrow reported total assets of $163,000 and a net income of $2,000. Holding Company Subsidiaries In addition to its wholly-owned bank subsidiary, the Company owns all of the outstanding stock of GBC Venture Capital, Inc., which was incorporated in July, 1996. The business purpose of GBC Venture Capital, Inc. is to hold stock warrants received as part of business relationships and to make equity investments in companies subject to applicable regulatory restrictions. As of December 31, 1996 and for the year ended 6 7 December 31, 1996, GBC Venture Capital, Inc., reported total assets of $153,000 and a net loss of $144,000. SUPERVISION AND REGULATION General The following generally refers to certain statutes and regulations affecting the banking industry. These references provide brief summaries only and are not intended to be complete. These references are qualified in their entirety by the referenced statutes and regulations. In addition, some statutes and regulations which apply to and regulate the operation of the banking industry might exist which are not referenced below. Changes in applicable statutes and regulations may have a material effect on the business of the Company and its subsidiaries. GBC Bancorp Upon the reorganization of the Bank as a wholly-owned subsidiary, the Company became a bank holding company within the meaning of the Bank Holding Company ("BHC") Act and is subject to the supervision and regulation of the Federal Reserve Bank of San Francisco. The Company functions primarily as the sole stockholder of the Bank and establishes general policies and activities of the operating subsidiaries. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, the filing of annual, quarterly and other reports with the Securities and Exchange Commission. The Company, as a bank holding company, is subject to regulation under the BHC Act, and is registered with and subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the "Board"). The Company is required to obtain the prior approval of the Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of voting shares of any bank if, after giving effect to such acquisition, the Company would own or control, directly or indirectly, more than 5% of such bank. The BHC Act prohibits the Company from acquiring any voting shares of, interest in, or all or substantially all of the assets of a bank located outside the state of California unless the laws of such state specifically authorize such acquisition. Under the BHC Act, the Company may not engage in any business other than managing or controlling banks or furnishing services to its subsidiaries. The Company is also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company unless the company is engaged in such activities. The Board's approval must be obtained before the shares of 7 8 any such company can be acquired and, in certain cases, before any approved company can open new offices. In making such determinations, the Board considers whether the performance of such activities by the Company would offer advantages to the public, such as greater convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Further, the Board is empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. Although the entire scope of permitted activities is uncertain and cannot be predicted, the major non-banking activities that have been permitted to bank holding companies with certain limitations are: making, acquiring or servicing loans that would be made by a mortgage, finance, credit card or factoring company; operating an industrial loan company; leasing real and personal property; acting as an insurance agent, broker, or principal with respect to insurance that is directly related to the extension of credit by the bank holding company or any of its subsidiaries and limited to repayment of the credit in the event of death, disability or involuntary unemployment; issuing and selling money orders, savings bonds and traveler's checks; performing certain trust company services; performing appraisals of real estate and personal property; providing investment and financial advice; providing data processing services; providing courier services; providing management consulting advice to non-affiliated depository institutions; arranging commercial real estate equity financing; providing certain securities brokerage services; underwriting and dealing in government obligations and money market instruments; providing foreign exchange advisory and transactional services; acting as a futures commission merchant; providing investment advice on financial futures and options on futures; providing consumer financial counseling; providing tax planning and preparation services; providing check guaranty services; engaging in collection agency activities; and operating a credit bureau. The Company's primary source of income is the receipt of dividends from the Bank. The Bank's ability to make such payments to the Company is subject to certain statutory and regulatory restrictions. The Company and the Bank are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, the Bank may not condition an extension of credit on a customer's obtaining other services provided by it, the Company or any other subsidiary or on a promise by the customer not to obtain other services from a competitor. As a bank holding company, the Company is required to file reports with the Board and to provide such additional information as the Board may require. The Board also has the authority to examine the Company and each of its subsidiaries with the cost thereof to be borne by the Company. 8 9 In addition, bank subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealing with their holding companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral security for a loan or extension of credit to any person or company or issue a guarantee, acceptance or letter of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10% of such subsidiary's capital stock and surplus on a per affiliate basis or 20% of such subsidiary's capital stock and surplus on an aggregate affiliate basis. Such transactions must be on terms and conditions that are consistent with safe and sound banking practices. A bank and its subsidiaries generally may not purchase a low-quality asset, as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral. The BHC Act also prohibits a bank holding company or any of its subsidiaries from acquiring voting shares or substantially all the assets of any bank located in a state other than the state in which the operations of the bank holding company's banking subsidiaries are principally conducted unless such acquisition is expressly authorized by statutes of the state in which the bank to be acquired is located. Legislation recently adopted in California permits out-of-state bank holding companies to acquire California banks. See "Effect of Governmental Policies and Recent Legislation" later in this section. The BHC Act and regulations of the Board also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock. The Board has cease and desist powers to cover parent bank holding companies and non-banking subsidiaries where action of a parent bank holding company or its non-financial institutions represent an unsafe or unsound practice or violation of law. The Board has the authority to regulate debt obligations (other than commercial paper) issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations. The ability of the Company to pay dividends to its shareholders is subject to the restrictions set forth in the California General Corporation Law (the "Corporation Law"). The Corporation Law provides that a Corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally are as follows: (i) the corporation's assets equal at least 1 1/4 times its liabilities; and (ii) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest 9 10 expense for such fiscal years, then the corporation's current assets equal at least 1 1/4 times its current liabilities. General Bank Banks are extensively regulated under both federal and state law. The Bank, a California state-chartered bank is subject to primary supervision, periodic examination and regulation by the Superintendent of Banks (the "Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). General Bank is insured by the FDIC, up to a maximum of $100,000 per depositor. For this protection, the Bank, as is the case with all insured banks, pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC. The Bank, while not a member of the Federal Reserve System, is subject to certain regulations of the Board. Various requirements and restrictions under the laws of the state of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices. Further, the Bank is required to maintain certain levels of capital. There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Bank. California law restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank has no retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank's last preceding fiscal year only after obtaining the prior approval of the Superintendent. The FDIC also has authority to prohibit the Bank from engaging in what, in the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstance, be such an unsafe or unsound practice. Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter or credit on behalf of, its affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of such affiliates. Such restrictions prevent affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and 10 11 investments by the Bank in any other affiliate is limited to 10 percent of such subsidiary bank's capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20 percent of such subsidiary bank's capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of the FDIC Improvement Act ("FDICIA"). Potential Actions Commercial banking organizations, such as the Bank, may be subject to potential enforcement actions by the Board, the FDIC and the Superintendent for unsafe or unsound practices in conducting their business or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of FDICIA. EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by a bank on its deposits and its other borrowings and the interest rate received by a bank on loans extended to its customers and securities held in a bank's portfolio comprise the major portion of a bank's earnings. These rates are highly sensitive to many factors that are beyond the control of a bank. Accordingly, the earnings and growth of a bank are subject to the influence of local, domestic and foreign economic conditions, including recession, unemployment and inflation. The commercial banking business is not only affected by general economic conditions but is also influenced by monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board. The Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. 11 12 From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The likelihood of any major changes and the impact such changes might have on the Company are impossible to predict. Certain of the potentially significant changes which have been enacted and proposals which have been made recently are discussed below. Federal Deposit Insurance Corporation Improvement Act of 1991 On December 19, 1991, FDICIA was enacted into law. Set forth below is a brief discussion of certain portions of this law and implementing regulations that have been adopted or proposed by the Board, the Comptroller of the Currency ("Comptroller"), the Office of Thrift Supervision ("OTS") and the FDIC (collectively, the "federal banking agencies"). Standards for Safety and Soundness FDICIA requires the federal banking agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to internal controls, loan documentation, credit underwriting, interest rate exposure and asset growth. Standards must also be prescribed for classified loans, earnings and the ratio of market value to book value for publicly traded shares. FDICIA also requires the federal banking agencies to issue uniform regulations prescribing standards for real estate lending that are to consider such factors as the risk to the deposit insurance fund, the need for safe and sound operation of insured depository institutions and the availability of credit. Further, FDICIA requires the federal banking agencies to establish standards prohibiting compensation, fees and benefit arrangements that are excessive or could lead to financial loss. Prompt Corrective Regulatory Action FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions that fall below one or more prescribed minimum capital ratios. The purpose of this law is to resolve the problems of insured depository institutions at the least possible long-term cost to the appropriate deposit insurance fund. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, 12 13 based on the level of its capital ratios; well capitalized (significantly exceeding the required minimum capital requirements), adequately capitalized (meeting the required capital requirements), undercapitalized (failing to meet any one of the capital requirements), significantly undercapitalized (significantly below any one capital requirement) and critically undercapitalized (failing to meet all capital requirements). In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of FDICIA. Under the regulations, an insured depository institution will be deemed to be: o "well capitalized" if it (I) has total risk-based capital of 10 percent or greater, Tier 1 risk-based capital of 6 percent or greater and a leverage capital ratio of 5 percent or greater and (ii) is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. o "adequately capitalized" if it has total risk-based capital of 8 percent or greater, Tier 1 risk-based capital of 4 percent or greater and a leverage capital ratio of 4 percent or greater (or a leverage capital ratio of 3 percent or greater if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report examination); o "undercapitalized" if it has total risk-based capital that is less than 8 percent, Tier 1 risk-based capital that is less than 4 percent or a leverage capital ratio that is less than 4 percent (or a leverage capital ratio that is less than 3 percent if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); o "significantly undercapitalized" if it has total risk-based capital that is less than 6 percent, Tier 1 risk-based capital that is less than 3 percent or a leverage capital ratio that is less than 3 percent; and o "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2 percent. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized, may be reclassified to the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, (i) determines that the institution is in an unsafe or unsound condition or (ii) deems the institution to be engaging in an unsafe or unsound practice and not to have corrected the deficiency. At each successive lower capital category, an insured depository institution is subject to more restrictions and federal banking agencies are given less flexibility in deciding how to address the problems associated with such category. 13 14 The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions, and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt correction action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers, subject to certain grandfather provisions for those elected prior to enactment of FDICIA; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by holding companies of such institutions; (ix) required divestiture of subsidiaries by such institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds 14 15 such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. The FDIC has adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0 percent for assets with low credit risk, such as certain U.S. Treasury securities, to 100 percent for assets with relatively high credit risk, such as business loans. In addition to the risk-based guidelines, the FDIC requires banks to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a bank rated in the highest of the five categories used by the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total assets is 3 percent. For all banks not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3 percent minimum, or 4 percent to 5 percent. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the FDIC has the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In August 1995, the federal banking agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the federal banking agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will 15 16 be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by-case basis by the examiner and the appropriate federal banking agency. In January 1995, the federal banking agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss allowances to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. Other Items FDICIA also, among other things, (i) limits the percentage of interest paid on brokered deposits and limits the unrestricted use of such deposits to only those institutions that are well capitalized; (ii) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (iii) eliminates "pass through" deposit insurance for certain employee benefit accounts unless the depository institution is well capitalized or, under certain circumstances, adequately capitalized; (iv) prohibits insured state chartered banks from engaging as principal in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (v) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; and (vi) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution. In addition, the FDIC has issued final and proposed regulations implementing provisions of FDICIA relating to powers of insured state banks. Final regulations issued in October 1992 prohibit insured state banks from making equity investments of a type, or in an amount, that are not permissible for national banks. In general, equity investments include equity securities, partnership interests and equity interests in real estate. Under the final regulations, non-permissible investments were to be divested by no later than December 19, 1996. On June 10, 1996 GBC Real Estate Company, Inc. was dissolved. 16 17 GBC Real Estate, Inc. had been incorporated to engage in real estate activities on July 26, 1989. The Bank has no non-permissible investments. Regulations issued in December 1993 prohibit insured state banks from engaging as principal in any activity not permissible for a national bank, without FDIC approval. The proposal also provides that subsidiaries of insured state banks may not engage as principal in any activity that is not permissible for a subsidiary of a national bank, without FDIC approval. Capital Adequacy Guidelines The FDIC has issued guidelines to implement the risk-based capital requirements. The guidelines are intended to establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet items into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Under these guidelines, assets and credit equivalent amounts of off-balance sheet items, such as letters of credit and outstanding loan commitments, are assigned to one of several risk categories, which range from 0 percent for risk-free assets, such as cash and certain U.S. Government securities, to 100 percent for relatively high-risk assets, such as loans and investments in fixed assets, premises and other real estate owned. The aggregated dollar amount of each category is then multiplied by the risk-weight associated with that category. The resulting weighted values from each of the risk categories are then added together to determine the total risk-weighted assets. A banking organization's qualifying total capital consists of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1 capital consists primarily of common stock, related surplus and retained earnings, qualifying non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries. Intangibles, such as goodwill, are generally deducted from Tier 1 capital; however, purchased mortgage servicing rights and purchased credit card relationships may be included, subjected to certain limitations. At least 50 percent of the banking organization's total regulatory capital must consist of Tier 1 capital. Tier 2 capital may consist of (i) the allowance for possible loan and lease losses in an amount up to 1.25 percent of risk- weighted assets; (ii) perpetual preferred stock, cumulative perpetual preferred stock and long-term stock and related surplus; (iii) hybrid capital (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus, in an amount up to 50 percent of Tier 1 capital. The inclusion of the foregoing elements of Tier 2 capital are subject to certain requirements and limitations of the federal banking agencies. 17 18 The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital to average total assets of 3 percent for the highest rated banks. This leverage capital ratio is only a minimum. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles are expected to maintain capital well above the minimum level. Furthermore, higher leverage capital ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of FDICIA. The regulatory Capital Guidelines as well as the actual capitalization for the Company and the Bank as of December 31, 1996 follow:
Minimum Well GBC General Regulatory Capitalized Bancorp Bank Requirements Requirements - ------------------------------------------------------------------------------------------- Tier 1 11.97% 11.81% 4% 6% Total 13.69% 13.06% 8% 10% Leverage Ratio 8.74% 8.61% 4% 5%
Safety and Soundness Standards In February 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. In December 1992, the federal banking agency issued final regulations prescribing uniform guidelines for real estate lending. The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. Appraisals for "real estate related financial transactions" must be conducted by either state-certified or state-licensed appraisers for transactions in excess of certain amounts. State-certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state-licensed appraiser is required for all other appraisals. However, appraisals performed in 18 19 connection with "federally related transactions" must now comply with the federal banking agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing of real property, and the use of real property or interests in real property for a loan or investment, including mortgage backed securities. Premiums for Deposit Insurance Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90 percent of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The FDIC also has authority to impose special assessments against insured deposits. The FDIC implemented a final risk-based assessment system, as required by FDICIA, effective January 1, 1994, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," or 1.25 percent, the total amount raised from BIF's members by the risk- based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were .023 percent of deposits. The FDIC, effective September 15, 1995, lowered assessments from their rates of $.23 to $.31 per $100 of insured deposits to rates of $.04 to $.31, depending on the condition of the bank, as a result of the recapitalization of BIF. On November 15, 1995, the FDIC voted to drop its premiums for well capitalized banks to zero effective January 1, 1996. Other banks will be charged risk-based premiums up to $.27 per $100 of deposits. Governor Pete Wilson recently signed Assembly Bill 3351 (the "Banking Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by the California State Banking Department (the "Department"), effective July 1, 1997, which creates the California Department of Financial Institutions ("DFI") to be headed by a Commissioner of Financial Institutions out of the existing Department which regulates state chartered commercial banks and trust companies in California. The Banking Consolidation Bill, among other provisions, also (i) transfers regulatory jurisdiction over state chartered savings and loan associations from the Department of Savings and Loans ("DSL") to the newly created DFI and abolishes the DSL; (ii) transfers regulatory jurisdiction over state chartered industrial loan companies 19 20 and credit unions from the Department of Corporations to the newly-created DFI; and (iii) establishes within the DFI separate divisions for credit unions, commercial banks, industrial loan companies and savings and loans. As the Banking Consolidation Bill has only recently been enacted, it is impossible to predict with any degree of certainty what impact it will have on the banking industry in general and the Bank in particular. Congress has recently passed, and President Clinton has signed into law, provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and to repay outstanding bonds that were issued to recapitalize the SAIF's successor as a result of payments made due to the insolvency of savings and loan associations and other federally insured savings institutions in the late 1980's and early 1990's. The new law required savings and loan associations to bear the cost of recapitalizing the SAIF and, after January 1, 1997, banks must contribute towards paying off the financing bonds, including interest. For 1997, the cost to the Bank is 1.3 cents per $100 of deposits. In 2000, the banking industry will assume the bulk of the payments. The new law also aims to merge BIF and SAIF by 1999 but not until the bank and savings and loan charters are combined. The Treasury Department has until March 31, 1997 to deliver to Congress comments and recommendations on combining the charters. Additionally, the new law provides "regulatory relief" for the banking industry by eliminating approximately 30 laws and regulations. The costs and benefits of the new law to the Bank can not currently be accurately predicted. Interstate Banking and Branching On September 29, 1994, the President signed into law the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain regulatory approval to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after the date in that state or in other states by that state's banks. The same concentration limits discussed in the 20 21 preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirement and conditions as for a merger transaction. Effective October 2, 1995, California adopted legislation which "opts California into" the Interstate Act. However, the California Legislation restricts out of state banks from purchasing branches or starting a de novo branch to enter the California banking market. Such banks may proceed only by way of purchases of whole banks. The Interstate Act is likely to increase competition in the Bank's market areas especially from larger financial institutions and their holding companies. It is difficult to asses the impact such increased competition will likely have on the Bank's operations. On September 28, 1995, Governor Wilson signed Assembly Bill 1482, the Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of State as Chapter 480 of the California Statutes of 1995, became operative on October 2, 1995. The 1995 Acts opts in early for interstate branching, allowing out-of-state banks to enter California by merging or purchasing a California bank or industrial loan company which is at least five years old. Also, the 1995 Act repeals the California Interstate (National) Banking Act of 1986, which regulated the acquisition of California banks by out-of-state bank holding companies. In addition, the 1995 Act permits California state banks, with the approval of the Superintendent of Banks, to establish agency relationships with FDIC-insured banks and savings associations. Finally, the 1995 Act provides for regulatory relief, including (i) authorization for the Superintendent to exempt banks from the requirement of obtaining approval before establishing or relocating a branch office or place of business, (ii) repeal of the requirement of directors' oaths (California Financial Code Section 682), and (iii) repeal of the aggregate limit on real estate loans (California Financial Code Section 1230). Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (the "CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of their local community, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and the CRA into account when regulating and supervising other activities. 21 22 In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the Federal Interagency Tax Force on Fair lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. Hazardous Waste Clean-Up Costs Management is aware of recent legislation and cases relating to hazardous waste clean-up costs and potential liability. Based on a general survey of the loan portfolios of the Bank, management is not aware of any potential liability for hazardous waste contamination. Other Regulations and Policies Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal regulations include requirements to maintain non-interest bearing reserves against deposits, limitations of the nature and amount of loans which may be made, and restrictions on payment of dividends. The Superintendent approves the number and locations of the branch offices of a bank. California law exempts banks from the usury laws. EMPLOYEES As of December 31, 1996, the Bank had approximately 308 full-time equivalent employees. None of the employees are represented by labor unions. Benefit programs are available to eligible employees and include, among others, group medical-dental plan, paid sick leave, paid vacation, and a 401(k) plan. ITEM 2 PROPERTIES GBC Bancorp shares common quarters with General Bank at 800 West 6th Street, Los Angeles, California 90017. The Bank leases approximately 41,501 square feet of rentable area which includes the ground floor and the second, fourteenth and fifteenth floors of the building. The initial lease term will expire in the year 2009, and the Bank has two five-year options to renew the lease following the expiration date of the initial term. 22 23 As of December 31, 1996 the monthly base rent for the facility is $70,143 and is payable to the lessor, Capital & Counties, USA, Inc. As of December 31, 1996 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, 1996 was $2,421,000. Expiration dates of the Bank's leases range from August, 1997 to February, 2009. All the Bank's full-service branches are located in California and all but three in the southern California area. ITEM 3 LEGAL PROCEEDINGS In the normal course of business, the Company is subject to pending and threatened legal actions. After reviewing pending actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on the financial condition or the operations of the Company. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1996, no matters were submitted to a vote of the Company's security holders. 23 24 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS Market Information The common stock of the Company has been traded in the NASDAQ National Market under the symbol GBCB since November 24, 1987. The market makers for GBC Bancorp are: Herzog, Heine, Geduld, Inc., Hoefer & Arnett, GBS Financial Corp., Keefe, Bruyette & Woods, Inc., Wedbush Morgan Securities and Oppenheimer & Co. The high and low last sale or bid prices for each quarter of the years 1996 and 1995, as reported by the NASDAQ, are as follows:
First Second Third Fourth 1996: Quarter Quarter Quarter Quarter ----- ------- ------- ------- ------- High $22.00 $23.50 $29.25 $29.88 Low $17.31 $20.50 $22.50 $27.00
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
Holders As of February 28, 1997, there were 332 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. 24 25 Dividend Cash dividends per share were declared during the most recent two years as per the following table:
First Second Third Fourth Annual Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- 1996 $0.08 $0.08 $0.10 $0.10 $0.36 1995 $0.08 $0.08 $0.08 $0.08 $0.32
The Company's subsidiary, General Bank, is limited in the payment of dividends by the Financial Code of the State of California which provides that dividends in any one year may not exceed the lesser of the Bank's undivided profits or the net income for the prior three years, less cash distributions to stockholders during such period. As of December 31, 1996, approximately $21.3 million of undivided profits of the Bank are available for dividends to the Company, subject to the subordinated debt covenant restrictions. ITEM 6 SELECTED FINANCIAL DATA The selected financial data on page 26 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 8 through 25 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 27 through 50 of the Company's Annual Report to Shareholders, are hereby incorporated by reference. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on matters involving accounting and financial disclosure. 25 26 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of the Registrant The information relating to directors of the Company under the caption "Election of Directors" appearing on pages 5 and 6 of the Company's Definitive Proxy Statement, dated March 24, 1997, relating to the annual meeting of shareholders to be held on April 24, 1997, is hereby incorporated by reference. Executive Officers of the Registrant There are no family relationships between any of the executive officers of the Company. The following information indicates the position and age of the executive officers as of December 31, 1996, and their business experience during the prior five years:
Age at Name Position and Offices presently held and business experience 12/31/96 ---- ----------------------------------------------------------- --------- Li-Pei Wu Chairman, President and Chief Executive Officer of GBC Bancorp and 62 General Bank since 1984 Peter Wu Secretary and Executive Vice President of GBC Bancorp and Executive 48 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 Bancorp and 55 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 Bank since 52 1989; prior thereto, Executive Vice President and Chief Administrative Officer of Transnational Bank since 1984
26 27 Richard Voake Senior Vice President and Credit Administrator of General Bank since 56 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 Eddie Chang Senior Vice President and Manager of Real Estate Department 41 since January 1996. From July 1995 to January 1996 Manager of Real Estate Department. From July 1994 to July 1995 self employed. From 1992 to July 1994, Senior Vice President and Manager of Real Estate Department Raymond Tsung Senior Vice President and Regional Manager of General Bank since August 55 1993. From July 1993 to August 1993 Senior Vice President of Preferred Bank. From May 1992 to June 1993 Vice President of First Commercial Bank Los Angeles Branch. Since January 1989 to April 1992 Senior Vice President and Regional Manager of General Bank Carl Maier Vice President and Controller of General Bank since July 1993. From 56 October 1991 to July 1993 self employed
ITEM 11 EXECUTIVE COMPENSATION The information regarding executive compensation under the caption "Executive Compensation" appearing on pages 7 through 12 of the Company's Definitive Proxy Statement dated March 24, 1997, for the annual meeting of shareholders to be held on April 24, 1997, is hereby incorporated by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information regarding the security ownership of certain beneficial owners and management under the caption "Shareholdings of Certain Beneficial Owners and Management" appearing on pages 2 through 4 of the Company's Definitive Proxy Statement, dated March 24, 1997, for the annual meeting of shareholders to be held on April 24, 1997, is hereby incorporated by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding certain relationships and related transactions under the caption "Certain Transactions" appearing on page 13 of the Company's Definitive Proxy 27 28 Statement dated March 24, 1997, for the annual meeting of shareholders to be held on April 24, 1997, is hereby incorporated by reference. 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 50 Consolidated Balance Sheets as of December 31, 1996 and 1995 ....................... Page 27 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994.... Page 28 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994.... Page 29 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.... Page 30 Notes to Consolidated Financial Statements................ Pages 31-49
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 28 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, GBC Bancorp has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: GBC BANCORP /s/ Li-Pei Wu /s/ Peter Lowe -------------------------- --------------------------- by: Li-Pei Wu, by: Peter Lowe, President and Chief Executive Officer Executive Vice President and Chief Financial Officer Date: 3/20/97 Date: 3/20/97 ------------------------- ---------------------
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 , Director /s/ Helen Chen Date: 3/20/97 ------------------------ -------- Helen Chen, Director /s/ Thomas C.T.Chiu Date: 3/20/97 ------------------------ -------- Thomas C. T. Chiu, Director /s/ Stephen C. Huang Date: 3/20/97 ------------------------ -------- Stephen C. Huang, Director /s/ Chuang-I Lin Date: 3/20/97 ------------------------ -------- Chuang-I Lin, Director /s/ Ko-Yen Lin Date: 3/20/97 ------------------------ -------- Ko-Yen Lin , Director /s/ Ting Y. Liu Date: 3/20/97 ------------------------ -------- Ting Y. Liu, Director /s/ Alan Thian Date: 3/20/97 ------------------------ -------- Alan Thian, Director /s/ John Wang Date: 3/20/97 ------------------------ -------- John Wang, Director /s/_________________________ Date:________________ Kenneth C. Wang, Director /s/ Chien-Te Wu Date: 3/20/97 ------------------------ -------- Chien-Te Wu, Director
29 30 /s/ Julian Wu Date: 3/20/97 ------------------------ -------- Julian Wu, Director /s/ Li-Pei Wu Date: 3/20/97 ------------------------ -------- Li-Pei Wu , Director /s/ Peter Wu Date: 3/20/97 ------------------------ -------- Peter Wu, Director /s/ Ping C. Wu Date: 3/20/97 ------------------------ -------- Ping C. Wu, Director /s/ Walter Wu Date: 3/20/97 ------------------------ -------- Walter Wu, Director /s/_________________________ Date:_____________ Chin-Liang Yen, Director
30 31 EXHIBIT INDEX
Exhibit Page Number Description Number ------- ----------- ------ 3.1 Articles of Incorporation, as amended (incorporated herein by this reference to Exhibit 3.1 on the Company's Form 8 to the Company's Annual Report on Form 10-K for year ended December 31, 1987; and to Exhibit 3.1 on the Company's Quarterly Report on form 10-Q for the quarter ended June 30, 1988) -- 3.2 Bylaws (incorporated herein by this reference to Exhibit 3.2 on the Company's Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987) -- 3.3 Amendment to bylaws of GBC Bancorp (incorporated herein by this reference to Exhibit 3.3 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.1 Lease for ground floor space at 23326 Hawthorne Boulevard, Suite 100, Torrance, California (incorporated herein by this reference to Exhibit 10.2 on the Company's Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987) -- 10.2 Lease for ground floor space at 1420 East Valley Boulevard., Alhambra, California (incorporated herein by this reference to Exhibit 10.6 on the Company's Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987) -- 10.3 Lease for ground floor space at 17271 Gale Ave., City of Industry, California (incorporated herein by this reference to Exhibit 10.7 on the Company's Form 10-K for the year ended December 31, 1988) -- 10.4 1988 Stock Option Plan (incorporated herein by this reference to Exhibit 10.1 on the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988) -- 10.5 Lease for ground floor space at 4010 Barranca Parkway, Irvine, California (incorporated herein by this reference to Exhibit 10.11 on the Company's Form 10-K for the year ended December 31, 1989) --
E - 1 31 32 10.6 Lease for ground floor space at 4688 Convoy Street, San Diego, California (incorporated herein by this reference to Exhibit 10.12 on the Company's Form 10-K for the year ended December 31, 1989) -- 10.7 Lease for ground floor space at 701 S. Atlantic Boulevard, Monterey Park, California (incorporated herein by this reference to Exhibit 10.13 on the Company's Form 10-K for the year ended December 31, 1990) -- 10.8 Lease for ground floor space at 2783 S. Diamond Bar Boulevard, Suite 8-B, Diamond Bar, California (incorporated herein by this reference to Exhibit 10.11 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.9 Employment Agreement among the Company, the Bank and Li-Pei Wu, dated as of December 19, 1991 (incorporated herein by this reference to Exhibit 10.12 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.10 Non-Qualified Stock Option Agreement between the Company and Li-Pei Wu, dated as of December 19, 1991, relating to the grant of stock options under the Company's 1988 stock option plan (incorporated herein by this reference to Exhibit 10.13 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.11 Board of Directors resolutions adopted on February 6, 1992, with respect to the GBC Bancorp Amended and Restated 1988 Stock Option Plan, which, among other things, authorize the grant of incentive stock options, eliminate certain limitations on the vesting and exercisability, and increase the maximum number of shares that may be issued thereunder (incorporated herein by this reference to Exhibit 10.14 on the Company's Form 10-K for the year ended December 31, 1991) -- 10.12 GBC Bancorp Amended and Restated 1988 Stock Option Plan, as Exhibit 28.1 to Form S-8 Registration Statement filed with the Securities and Exchange commission on April 22, 1992, Registration Number: 33-47452 (incorporated herein by this reference to Exhibit 10.15 on the Company's Form 10-K for the year ended December 31, 1992) -- 10.13 Lease for ground floor space at 1139 West Huntington Drive, Arcadia, California (incorporated herein by this reference to Exhibit 10.16 on the Company's Form 10-K for the year ended December 31, 1993) -- 10.14 Lease for ground floor space at 2263 N. Tustin Avenue, Orange, California (incorporated herein by this reference to Exhibit 10.17 on the Company's Form 10-K for the year ended December 31, 1993) --
E - 2 32 33 10.15 Lease for office building space for ground and second floors and 14th and 15th floors located at 800 West 6th Street, Los Angeles, California (incorporated herein by this reference to Exhibit 10.19 on the Company's Form 10-K for the -- year ended December 31, 1993) 10.16 Sublease for ground floor office building space at 1420 East Valley Boulevard, Alhambra, California (incorporated herein by this reference to Exhibit 10.21 on -- the Company's Form 10-K for the year ended December 31, 1994) 10.17 Addendum to standard office lease at 4010 Barranca Parkway, Irvine, California (incorporated herein by this reference to Exhibit 10.22 on the Company's -- Form 10-K for the year ended December 31, 1994) 10.18 Lease for ground floor office building space at 9045 Corbin Avenue, Northridge, California (incorporated herein by this reference to Exhibit 10.23 on the -- Company's Form 10-K for the year ended December 31, 1994) 10.19 Lease for office building space on first and second floors located at 10001 N. De Anza Boulevard, Cupertino, California (incorporated herein by this reference -- to Exhibit 10.24 on the Company's Form 10-K for the year ended December 31, 1994) 10.20 Lease agreement for office building space on ground floor located at 520 South El Camino Real, San Mateo California (incorporated herein by this reference to -- Exhibit 10.25 on the Company's Form 10-K for the year ended December 31, 1994) 10.21 Lease agreement for office building space on ground floor located at 47000 Warm Springs Boulevard, Fremont, California (incorporated herein by this reference to -- Exhibit 10.26 on the Company's Form 10-K for the year ended December 31, 1994) 10.22 Purchase, Assignment and Assumption Agreement 615 dated as of December 1,1996 pp. between Gaucho-1 Inc. and General Bank and the related Assignment and Assumption Agreement 615 dated December 27, 1996 between the same parties 11 Computation of Per Share Earnings pp. 12 Computation of Ratios pp. 13 Annual Report to Shareholders pp. 21 Subsidiaries of GBC Bancorp pp. 27 Financial Data Schedule pp.
E - 3 33 EX-10.22 2 PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 1 - -------------------------------------------------------------------------------- PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 dated as of December 1, 1996 between GAUCHO-1 INC., as Assignor and GENERAL BANK, as Assignee One Boeing Model 737-524 Aircraft Bearing U.S. Registration No. N37615 and Manufacturer's Serial No. 27328 - -------------------------------------------------------------------------------- 2 CONTENTS SECTION 1. Definitions . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. Sale and Assignment . . . . . . . . . . . . . . . . . . 2 SECTION 3. Purchase and Assumption . . . . . . . . . . . . . . . . 2 SECTION 4. Purchase Price . . . . . . . . . . . . . . . . . . . . . 3 SECTION 5. Representations and Warranties of Assignor . . . . . . . 3 (a) Organization, Etc. . . . . . . . . . . . . 3 (b) Corporate Authorization . . . . . . . . . 4 (c) No Violation . . . . . . . . . . . . . . . 4 (d) Approvals . . . . . . . . . . . . . . . . 4 (e) Valid and Binding Agreements . . . . . . . 5 (f) Citizenship . . . . . . . . . . . . . . . 5 (g) No Liens . . . . . . . . . . . . . . . . . 5 (h) Litigation . . . . . . . . . . . . . . . . 5 (i) Event of Default . . . . . . . . . . . . . 5 (j) Event of Loss . . . . . . . . . . . . . . 5 (k) Ownership and Encumbrances . . . . . . . . 6 (1) Brokers' Fees . . . . . . . . . . . . . . 6 (m) Operative Agreements . . . . . . . . . . . 6 (n) Compliance . . . . . . . . . . . . . . . . 6 SECTION 6. Representations and Warranties of Assignee . . . . . . . 6 (a) Organization, Etc. . . . . . . . . . . . . 7 (b) Corporate Authorization . . . . . . . . . 7 (c) No Violation . . . . . . . . . . . . . . . 7 (d) Approvals . . . . . . . . . . . . . . . . 8 (e) Valid and Binding Agreements . . . . . . . 8 (f) Citizenship . . . . . . . . . . . . . . . 8 (g) No Liens . . . . . . . . . . . . . . . . . 8 (h) Investment by Assignee . . . . . . . . . . 8 (i) ERISA . . . . . . . . . . . . . . . . . . 9 (j) Litigation . . . . . . . . . . . . . . . . 9 (k) Securities Laws . . . . . . . . . . . . . 9 (1) Broker's Fees . . . . . . . . . . . . . . 9 (m) Compliance; Permitted Institution . . . . 9
PAGE i 3 SECTION 7. Conditions Precedent to the Obligations of Assignor 9 (a) Purchase Price . . . . . . . . . . . . . . . . 10 (b) Due Authorization, Execution and Delivery . . 10 (c) Affidavit of Citizenship . . . . . . . . . . . 10 (d) Representations and Warranties . . . . . . . . 10 (e) Corporate Matters . . . . . . . . . . . . . . 10 (f) Additional Information . . . . . . . . . . . . 10 (g) Illegality . . . . . . . . . . . . . . . . . . 11 (h) No Proceedings . . . . . . . . . . . . . . . . 11 (i) Compliance with Operative Agreements . 11 (j) No Event of Loss . . . . . . . . . . . . . . . 11 (k) Opinions . . . . . . . . . . . . . . . . . . . 11 SECTION 8. Conditions Precedent to the Obligations of Assignee . (a) Operative Agreements . . . . . . . . . . 12 (b) Due Authorization, Execution and Delivery . . 12 (c) Parent Guaranty . . . . . . . . . . . . . . . 12 (d) Letter Agreement; Closing Letter; Amendment 12 (e) Representations and Warranties . . . . . . . . 12 (f) Corporate Matters . . . . . . . . . . . . . . 13 (g) Additional Information . . . . . . . . . . . . 13 (h) Illegality . . . . . . . . . . . . . . . . . . 13 (i) No Proceedings . . . . . . . . . . . . . . . . 13 (j) Compliance with Operative Agreements . . . . . 13 (k) No Event of Loss . . . . . . . . . . . . . . . 13 (1) No Defaults . . . . . . . . . . . . . . . . . 14 (m) Opinions . . . . . . . . . . . . . . 14 SECTION 9. Payments . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 10. Certain Notices . . . . . . . . . . . . . . . . . . . 14 SECTION 11. Further Assurances . . . . . . . . . . . . . . . . . 15 SECTION 12. Taxes and Indemnities . . . . . . . . . . . . . . . . 15 (a) Transfer Taxes . . . . . . . . . . . . . . . . 15 (b) Assignee's Tax Indemnity . . . . . . . . . . 15 (c) Assignor's Tax Indemnity . . . . . . . . . . 15 (d) Assignor's Indemnity . . . . . . . . . . . . 16 (e) Assignee's Indemnity . . . . . . . . . . . . 16 (f) Notice of Claims . . . . . . . . . . . . . . 17
PAGE ii 4 SECTION 13. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 17 (a) Notices . . . . . . . . . . . . . . . . . . . . . . . 17 (b) Confidentiality . . . . . . . . . . . . . . . . . . . 18 (c) Headings . . . . . . . . . . . . . . . . . . . . . . . 19 (d) References . . . . . . . . . . . . . . . . . . . . . . 19 (e) GOVERNING LAW . . . . . . . . . . . . . . . . . . . . 19 (f) Severability . . . . . . . . . . . . . . . . . . . . . 19 (g) Amendments in Writing . . . . . . . . . . . . . . . . 19 (h) Survival . . . . . . . . . . . . . . . . . . . . . . . 20 (i) Expenses . . . . . . . . . . . . . . . . . . . . . . . 20 (j) Execution in Counterparts . . . . . . . . . . . . . . 20 (k) Entire Agreement . . . . . . . . . . . . . . . . . . . 20 (1) Exhibits . . . . . . . . . . . . . . . . . . . . . . . 20 (m) Successors and Assigns . . . . . . . . . . . . . . . . 21 (n) Recovery of Costs and Fees . . . . . . . . . . . . . . 21 (o) No Third Party Benefit . . . . . . . . . . . . . . . . 21 ATTACHMENTS: Exhibit A Assignment and Assumption Agreement (FAA) Exhibit B Affidavit of Citizenship Exhibit C Parent Guaranty Exhibit D Letter Agreement (Participation Agreement/Lease) Exhibit E Tax Indemnity Agreement Amendment
PAGE iii 5 PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 dated as of December 1, 1996 (this "AGREEMENT") between GAUCHO-1 INC., a Delaware corporation ("ASSIGNOR"), and GENERAL BANK, a California corporation ("Assignee"). Capitalized terms used herein without definition shall have the meanings given them in Section 1. WITNESSETH: WHEREAS, Assignor desires to sell and assign to Assignee and Assignee desires to purchase and assume from Assignor pursuant to the terms of that certain Participation Agreement 615 dated as of August 1, 1994 (as amended to the date hereof, the "PARTICIPATION AGREEMENT") among Continental Airlines, Inc. ("LESSEE"), Assignor, The Northwestern Mutual Life Insurance Company, General Electric Company ("GUARANTOR"), First Security Bank, National Association (formerly First Security Bank of Utah, National Association), not in its individual capacity except as expressly provided therein, but solely as Owner Trustee ("OWNER TRUSTEE"), and Wilmington Trust Company, not in its individual capacity, except as expressly provided therein, but solely as Mortgagee ("MORTGAGEE"), except for Reserved Rights (as defined in Section 2), (a) all of Assignor's right title and interest in, to and under (i) the Trust Estate and (ii) the Participation Agreement, the Tax Indemnity Agreement and the Trust Agreement, and (b) excluding the Letter Agreements (as defined in Section 5(m)) and the Owner Participant Guaranty, all of Assignor's right, title and interest, if any, in, to and under each other Operative Agreement. The Participation Agreement, the Tax Indemnity Agreement and the Trust Agreement are sometimes collectively referred to herein as the "LESSOR DOCUMENTS"; and WHEREAS, the Participation Agreement permits such sale, purchase, assignment and assumption upon satisfaction of certain conditions heretofore or concurrently being complied with. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements of the parties contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor and Assignee agree as follows: SECTION 1. DEFINITIONS Capitalized terms used but not defined herein shall have the meanings specified in the Participation Agreement. PAGE 1 6 SECTION 2. SALE AND ASSIGNMENT Subject to the terms and conditions of this Agreement Assignor does hereby sell, assign and transfer to Assignee at the Effective Time on the Closing Date (in each case, as defined below) (a) all of Assignor's right, title and interest in, to and under the Trust Estate and the Lessor Documents, and (b) excluding the Letter Agreements and the Owner Participant Guaranty, all of Assignor's right, title and interest, if any, in, to and under each other Operative Agreement (collectively, but excluding the Letter Agreements, the Owner Participant Guaranty and Reserved Rights (as defined below), the "TRANSFERRED INTERESTS"); provided, that Assignor hereby reserves, and nothing herein shall be construed as a sale, assignment or transfer, of the following (collectively, "RESERVED RIGHTS"): any of the rights, titles and interests of Assignor in and to each and every indemnity or other payment, and each and every obligation to provide insurance (other than casualty insurance relating to loss of or damage to the Aircraft), on behalf or in favor of Assignor, under the Lessor Documents or any other Operative Agreement to the extent that such indemnities, payments, and obligations relate to losses accruing prior to 11:38 p.m., Las Vegas time (the "EFFECTIVE TIME"), on December 27, 1996 (the "CLOSING DATE") (it being agreed that Assignor retains all obligations related to Reserved Rights); provided further, that such sale, assignment and transfer shall be effective only upon the satisfaction or waiver, on or prior to the Effective Time on the Closing Date, of the conditions set forth in Section 7, such satisfaction to be evidenced by Assignor's acceptance from Assignee of the Purchase Price (as defined in Section 4) and by the filing, or the release for filing, for recordation with the FAA pursuant to the Act of the Assignment and Assumption Agreement (FAA) (as defined in Section 5(a)). The closing of the transactions contemplated hereby and by the Assignment and Assumption Agreement (FAA) shall take place at the Effective Time on the Closing Date at McCarran International Airport, Las Vegas, Nevada, with additional activities taking place at the offices of Perkins Coie, 607 Fourteenth Street, N.W., Washington, D.C. 20005. SECTION 3. PURCHASE AND ASSUMPTION Subject to the terms and conditions of this Agreement, Assignee does hereby (i) purchase and accept the Transferred Interests, (ii) assume all the duties, liabilities and obligations of Assignor in respect of the Transferred Interests (except as described below) and (iii) confirms that it shall be deemed a party to each Lessor Document and agrees to be bound by all the terms and conditions of each thereof and to undertake all of the obligations of Assignor contained in the Lessor Documents and the other Operative Agreements as though originally named therein in place of Assignor, to the extent of the right title or interest being conveyed hereby or by the PAGE 2 7 Assignment and Assumption Agreement (FAA); provided, that Assignor shall remain liable for the duties, liabilities and obligations of Assignor relating to Reserved Rights; provided further, that such purchase, acceptance and assumption shall be effective only upon the satisfaction or waiver, on or prior to the Effective Time on the Closing Date, of the conditions set forth in Section 8, such satisfaction to be evidenced by Assignee's payment to Assignor of the Purchase Price and by the filing, or the release for filing, for recordation with the FAA pursuant to the Act of the Assignment and Assumption Agreement (FAA). Except as otherwise expressly provided in this Agreement (including, without limitation, Section 12(d)), the assumption contemplated hereby shall release Assignor from duties, liabilities and obligations under the Operative Agreements in respect of the Transferred Interests. SECTION 4. PURCHASE PRICE The purchase price for the Transferred Interests shall be $5,184,768.33 (the "PURCHASE PRICE"); at or prior to the Effective Time on the Closing Date, Assignee shall pay the Purchase Price by wire transfer of immediately available funds to: Citibank, N.A. 399 Park Avenue New York, New York 10043 Account No.: 00023608 ABA No.: 021000089 Attention: Ms. Maria Cortes, tel. (302) 323-5270 in the name of Gaucho-1 Inc., identified as "Sale of Equity Interest 615" or by such other means or to such other account at another institution as the parties may agree. SECTION 5. REPRESENTATIONS AND WARRANTIES OF ASSIGNOR Assignor makes the following representations and warranties to Assignee, Lessee, Guarantor, Owner Trustee and Mortgagee: (A) ORGANIZATION, ETC. Assignor is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware and has the corporate power and authority to conduct the business in which it is currently engaged and to own or hold under lease its properties and to enter into and perform its obligations under this Agreement, the Assignment and Assumption Agreement 615 substantially in the form of Exhibit A hereto (the "ASSIGNMENT AND ASSUMPTION AGREEMENT (FAA)") and Amendment No. 1 to Tax Indemnity Agreement 615 substantially in the form of PAGE 3 8 Exhibit E hereto (the "TAX INDEMNITY AGREEMENT AMENDMENT"; together with this Agreement and the Assignment and Assumption Agreement (FAA), the "ASSIGNOR AGREEMENTS"). (B) CORPORATE AUTHORIZATION Assignor has taken, or caused to be taken, all necessary corporate action (including, without limitation, the obtaining of any consent or approval of stockholders required by its Certificate of Incorporation or By-Laws) to authorize the execution and delivery of each of the Assignor Agreements, and the performance of its obligations thereunder. (C) NO VIOLATION The execution and delivery by Assignor of the Assignor Agreements, the performance by Assignor of its obligations thereunder and the consummation by Assignor on the Closing Date of the transactions contemplated thereby, do not and will not (a) violate or contravene any provision of the Certificate of Incorporation or By-Laws of Assignor, (b) violate or contravene any Law applicable to or binding on Assignor (it being understood that insofar as this representation relates to any Law relating to any Plan, this representation is made assuming the truth of the representations contained in Sections 7.1.13(b)(iii) and 7.4.3 of the Participation Agreement and in Section 6(i) of this Agreement and the continued validity of the position stated by the Department of Labor in paragraph (b) of Interpretive Bulletin 29 C.F.R. Section 2509.75-2 (notwithstanding anything to the contrary contained in John Hancock Mutual Life Ins. Co. v. Harris Trust & Savings Bank, 114 S. Ct. 517 (1993))) or (c) violate, contravene or constitute any default under, or result in the creation of any Lien (other than as provided for or otherwise permitted in the Operative Agreements) upon the Trust Estate under, any indenture, mortgage, chattel mortgage, deed of trust conditional sales contract, lease, loan or other material agreement, instrument or document to which Assignor is a party or by which Assignor or any of its properties is or may be bound or affected. (D) APPROVALS The execution and delivery by Assignor of the Assignor Agreements, the performance by Assignor of its obligations thereunder and the consummation by Assignor on the Closing Date of the transactions contemplated thereby do not and will not require the consent approval or authorization of, or the giving of notice to, or the registration with, or the recording or filing of any documents with, or the taking of any other action in respect of, (a) any trustee or other holder of any Debt of Assignor and (b) any Government Entity, other than the filing of the Assignment and Assumption Agreement (FAA). PAGE 4 9 (E) VALID AND BINDING AGREEMENTS The Assignor Agreements have been duly authorized, executed and delivered by Assignor and, assuming the due authorization, execution and delivery by the other party or parties thereto, constitute the legal, valid and binding obligations of Assignor and are enforceable against Assignor in accordance with the respective terms thereof, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium and other similar Laws affecting the rights of creditors generally and general principles of equity, whether considered in a proceeding at law or in equity. (F) CITIZENSHIP On the Closing Date, Assignor is a Citizen of the United States (without giving consideration to Section 47.9 of the FAA Regulations). (G) NO LIENS On the Closing Date, there are no Lessor Liens attributable to Assignor or any Affiliate thereof in respect of all or any part of the Trust Estate. To the knowledge of Assignor, there are no other Liens (other than Permitted Liens) in respect of all or any part of the Trust Estate. (H) LITIGATION There are no pending or, to the Actual Knowledge of Assignor, threatened actions or proceedings against Assignor before any court, administrative agency or tribunal which, if determined adversely to Assignor, would materially adversely affect the ability of Assignor to perform its obligations under the Assignor Agreements. (I) EVENT OF DEFAULT There exists no Default or Event of Default caused by or attributable to Assignor or any Affiliate thereof. To the knowledge of Assignor, there exists no Lease Default, Lease Event of Default, and, as to acts or omissions of Persons other than Assignor, no Default or Event of Default. (J) EVENT OF LOSS To the knowledge of Assignor, there exists no Event of Loss or event which, with notice or passage of time, or both, would constitute an Event of Loss. PAGE 5 10 (K) OWNERSHIP AND ENCUMBRANCES Assignor is the sole beneficial owner of the Transferred Interests. Except as expressly contemplated by the Operative Agreements, Assignor has not previously sold, assigned, encumbered, transferred or conveyed, and, except as contemplated hereby, has no obligation to sell, assign, encumber, transfer or convey, any of its right, title or interest in, to or under the Transferred Interests. At the closing hereunder, Assignor will convey to Assignee all of the right, title and interest of Assignor in, to and under the Transferred Interests. (L) BROKERS' FEES Assignee is not liable for the fees of any broker or other Person acting on Assignor's behalf in connection with the transactions contemplated hereby. (M) OPERATIVE AGREEMENTS Except for (i) three certain letter agreements (the "LETTER AGREEMENTS") that are Lessee Operative Agreements that are no longer in effect with respect to the Owner Participant after the Effective Time on the Closing Date and are not otherwise effective with respect to the Transferred Interests, and (ii) the Owner Participant Guaranty, each of which Assignor is not delivering to Assignee, Assignor has provided Assignee with true and complete copies of the Lessor Documents and each other Operative Agreement delivered to it. Except for this Agreement, the Assignment and Assumption Agreement (FAA) and the Tax Indemnity Agreement Amendment, there are no other documents or agreements relating to the Aircraft, the subject matter of the Operative Agreements or the transactions contemplated hereby to which Assignee is not a party that will affect or bind Assignee after the Effective Time on the Closing Date. (N) COMPLIANCE Assignor has complied with all requirements of Assignor contained in the Operative Agreements, including without limitation Section 12.1 of the Participation Agreement to permit Assignor to transfer the Transferred Interests to Assignee. SECTION 6. REPRESENTATIONS AND WARRANTIES OF ASSIGNEE Assignee makes the following representations and warranties to Assignor, Lessee, Guarantor, Owner Trustee and Mortgagee: PAGE 6 11 (A) ORGANIZATION, ETC. Assignee is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware and has the corporate power and authority to conduct the business in which it is currently engaged and to own or hold under lease its properties and to enter into and perform its obligations under this Agreement, the Assignment and Assumption Agreement (FAA) and the Lessor Documents. (B) CORPORATE AUTHORIZATION Assignee has taken, or caused to be taken, all necessary corporate action (including, without limitation, the obtaining of any consent or approval of stockholders required by its Certificate of Incorporation or By-Laws) to authorize the execution and delivery of each of this Agreement and the Assignment and Assumption Agreement (FAA), and the performance of its obligations hereunder, thereunder and under the Lessor Documents. (C) NO VIOLATION The execution and delivery by Assignee of this Agreement and the Assignment and Assumption Agreement (FAA), the performance by Assignee of its obligations hereunder, thereunder and under the Lessor Documents, and the consummation by Assignee on the Closing Date of the transactions contemplated hereby and thereby, do not and will not (a) violate or contravene any provision of the Certificate of Incorporation or By-Laws of Assignee, (b) violate or contravene any Law applicable to or binding on Assignee (it being understood that insofar as this representation relates to any Law relating to any Plan, this representation is made assuming the truth of the representations contained in Sections 7.1.13(b)(iii) and 7.4.3 of the Participation Agreement and the continued validity of the position stated by the Department of Labor in paragraph (b) of Interpretive Bulletin 29 C.F.R. Section 2509.75-2 (notwithstanding anything to the contrary contained in John Hancock Mutual Life Ins. Co. v. Harris Trust & Savings Bank, 114 S. Ct. 517 (1993))) or (c) violate, contravene or constitute any default under, or result in the creation of any Lien (other than as provided for or otherwise permitted in the Operative Agreements) upon the Trust Estate under, any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract lease, loan or other material agreement instrument or document to which Assignee is a party or by which Assignee or any of its properties is or may be bound or affected. PAGE 7 12 (D) APPROVALS The execution and delivery by Assignee of this Agreement and the Assignment and Assumption Agreement (FAA), the performance by Assignee of its obligations hereunder, thereunder and under the Lessor Documents and the consummation by Assignee on the Closing Date of the transactions contemplated hereby and thereby do not and will not require the consent, approval or authorization of, or the giving of notice to, or the registration with, or the recording or filing of any documents with, or the taking of any other action in respect of, (a) any trustee or other holder of any Debt of Assignee and (b) any Government Entity, other than the filing of the Assignment and Assumption Agreement (FAA). (E) VALID AND BINDING AGREEMENTS This Agreement and the Assignment and Assumption Agreement (FAA) have been duly authorized, executed and delivered by Assignee and, assuming the due authorization, execution and delivery by the other party or parties thereto, this Agreement, the Assignment and Assumption Agreement (FAA) and the Lessor Documents constitute the legal, valid and binding obligations of Assignee and are enforceable against Assignee in accordance with the respective terms thereof, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium and other similar Laws affecting the rights of creditors generally and general principles of equity, whether considered in a proceeding at law or in equity. (F) CITIZENSHIP On the Closing Date, Assignee is a Citizen of the United States (without giving consideration to Section 47.9 of the FAA Regulations). (G) NO LIENS On the Closing Date, there are no Lessor Liens attributable to Assignee or any Affiliate thereof in respect of all or any part of the Trust Estate. (H) INVESTMENT BY ASSIGNEE Assignee is acquiring the Transferred Interests for its own account for investment and not with a view to any resale or distribution thereof, except that, subject to the restrictions on transfer set forth in Section 12 of the Participation Agreement, the disposition by Assignee of the Transferred Interests shall at all times be within its control. PAGE 8 13 (I) ERISA No part of the funds to be used by Assignee to acquire or hold its interests in the Trust Estate to be acquired by it under this Agreement and the Assignment and Assumption Agreement (FAA) directly or indirectly constitutes assets of a Plan. (J) LITIGATION There are no pending or, to the Actual Knowledge of Assignee, threatened actions or proceedings against Assignee before any court, administrative agency or tribunal which, if determined adversely to Assignee, would materially adversely affect the ability of Assignee to perform its obligations under this Agreement, the Assignment and Assumption Agreement (FAA) or the Lessor Documents. (K) SECURITIES LAWS Neither Assignee nor any Person whom Assignee has authorized to act on its behalf has directly or indirectly offered any beneficial interest in or Security relating to the ownership of the Aircraft or any interest in the Trust Estate, or any of the Loan Certificates or any other interest in or Security under the Trust Indenture for sale to, or solicited any offer to acquire any of the same from, any Person in violation of the Securities Act or applicable state securities Laws. (L) BROKER'S FEES No Persons acting on behalf of Assignee other than D'Accord Financial Services, Inc. and TransCapital Corporation (the "BROKERS") are or will be entitled to any broker's fee, commission or finder's fee in connection with the transactions contemplated hereby, and any such fees payable to the Brokers shall be paid by Assignee. (M) COMPLIANCE; PERMITTED INSTITUTION Assignee has complied with all requirements of Assignee contained in the Operative Agreements, including without limitation Section 12.1 of the Participation Agreement, to permit Assignor to transfer the Transferred Interests to Assignee. Assignee is a Permitted Institution. SECTION 7. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ASSIGNOR The obligation of Assignor to sell and assign the Transferred Interests to Assignee on the Closing Date is subject to the satisfaction or waiver of the following conditions: PAGE 9 14 (A) PURCHASE PRICE Assignee shall have paid the Purchase Price in the manner specified in Section 4. (B) DUE AUTHORIZATION, EXECUTION AND DELIVERY This Agreement and the Assignment and Assumption Agreement (FAA) shall have been duly authorized, executed and delivered by Assignee, and, assuming due execution and delivery by Assignor, the Assignment and Assumption Agreement (FAA) shall have been duly filed, or released for filing, for recordation with the FAA pursuant to the Act. (C) AFFIDAVIT OF CITIZENSHIP An affidavit of United States citizenship substantially in the form of Exhibit B hereto (the "AFFIDAVIT OF CITIZENSHIP") shall have been duly authorized, executed, notarized and delivered by an authorized official of Assignee, and shall have been duly filed, or released for filing, with the FAA pursuant to the Act. (D) REPRESENTATIONS AND WARRANTIES The representations and warranties of Assignee contained herein shall be true and correct as of the Closing Date with the same force and effect as though such representations and warranties had been made as of the Closing Date. (E) CORPORATE MATTERS Assignor shall have received copies of (i)(A) the certificate of incorporation and by-laws of Assignee, and (B) resolutions of the Board of Directors of Assignee duly authorizing the execution, delivery and performance by Assignee of this Agreement and the Assignment and Assumption Agreement (FAA) and the performance of its obligations under the Lessor Documents, in each case certified by the Secretary or an Assistant Secretary of Assignee as of the Closing Date, together with (ii) an incumbency certificate as to the person or persons authorized to execute and deliver this Agreement and the Assignment and Assumption Agreement (FAA) on behalf of Assignee, duly executed by the Secretary or an Assistant Secretary of Assignee as of the Closing Date. (F) ADDITIONAL INFORMATION Assignor shall have received such other documents and evidence with respect to Assignee as Assignor may reasonably request in order to establish the authority of Assignee to consummate the transactions contemplated by this Agreement the PAGE 10 15 consummation of the transactions contemplated by this Agreement, the taking of all appropriate corporate action in connection therewith and compliance with the conditions set forth in this Agreement. (G) ILLEGALITY On the Closing Date, the performance of the transactions contemplated hereby, upon the terms and conditions set forth herein, shall not, in the reasonable judgment of Assignor, violate, and shall not subject Assignor to any penalty or liability under, any law, rule or regulation binding upon Assignor. (H) NO PROCEEDINGS On the Closing Date, no legal or governmental action, suit or proceeding shall have been instituted or threatened before any court, administrative agency or tribunal, nor shall any order, judgment or decree have been issued or proposed to be issued by any court, administrative agency or tribunal to set aside, restrain, enjoin or prevent the consummation of this Agreement or the transactions contemplated hereby. (I) COMPLIANCE WITH OPERATIVE AGREEMENTS Assignee shall have complied with all requirements of Assignee under the Operative Agreements for transfer of the Transferred Interests, such that Assignor shall be released from all duties, liabilities and obligations under the Participation Agreement, the Trust Agreement, the Tax Indemnity Agreement and all other Operative Agreements in respect of the Transferred Interests from and after the Effective Time on the Closing Date. (J) NO EVENT OF LOSS On the Closing Date, there shall not exist an Event of Loss. (K) OPINIONS Assignor shall have received opinions reasonably satisfactory to Assignor, dated the Closing Date, from (i) Frandzel & Share, special counsel for Assignee, (ii) Frandzel & Share, General Counsel to Assignee and (iii) Lytle Soule & Curlee, special FAA counsel in Oklahoma City ("SPECIAL FAA COUNSEL"), in each case with respect to such matters and to such effect as Assignor shall reasonably request, which shall include, in the case of the opinion referred to in clauses (i) and/or (ii) above, the opinions required by Section 12.1.l(a)(ii) of the Participation Agreement. PAGE 11 16 Promptly upon the recordation of the Assignment and Assumption Agreement (FAA) pursuant to the Act, Special FAA Counsel shall deliver to Assignor an opinion as to the due recording of such document. SECTION 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ASSIGNEE The obligation of Assignee to purchase the Transferred Interests from Assignor and assume the obligations related thereto are subject to the satisfaction or waiver of the following conditions: (A) OPERATIVE AGREEMENTS The Operative Agreements other than the Letter Agreements and the Owner Participant Guaranty shall be in full force and effect. (B) DUE AUTHORIZATION, EXECUTION AND DELIVERY This Agreement and the Assignment and Assumption Agreement (FAA) shall have been duly authorized, executed and delivered by Assignor, and, assuming due execution and delivery by Assignee, the Assignment and Assumption Agreement (FAA) shall have been duly filed, or released for filing, for recordation with the FAA pursuant to the Act. (C) PARENT GUARANTY A guaranty of certain obligations of Assignor hereunder substantially in the form of Exhibit C hereto (the "PARENT GUARANTY"), shall have been duly authorized, executed and delivered by The Boeing Company. (D) LETTER AGREEMENT; CLOSING LETTER; AMENDMENT Lessee shall have (i) entered into a letter agreement with Assignee substantially in the form of Exhibit D hereto ("LETTER AGREEMENT (PARTICIPATION AGREEMENT/LEASE"), and (ii) provided a closing letter to Assignee, in each case, with respect to such matters as Assignee shall reasonably request. The Tax Indemnity Agreement Amendment shall have been duly authorized, executed and delivered by the parties thereto. (E) REPRESENTATIONS AND WARRANTIES The representations and warranties of Assignor contained herein shall be true and correct as of the Closing Date with the same force and effect as though such representations and warranties had been made as of the Closing Date. PAGE 12 17 (F) CORPORATE MATTERS Assignee shall have received copies of (i)(A) the certificate of incorporation and by-laws of Assignor, and (B) general authorizing resolutions of the Board of Directors of Assignor and related delegations of authority contemplated thereby duly authorizing the execution, delivery and performance by Assignor of the Assignor Agreements, in each case certified by the Secretary or an Assistant Secretary of Assignor as of the Closing Date, together with (ii) an incumbency certificate as to the person or persons authorized to execute and deliver the Assignor Agreements on behalf of Assignor, duly executed by the Secretary or an Assistant Secretary of Assignor as of the Closing Date. (G) ADDITIONAL INFORMATION Assignee shall have received such other documents and evidence with respect to Assignor as Assignee may reasonably request in order to establish the authority of Assignor to consummate the transactions contemplated by this Agreement, the consummation of the transactions contemplated by this Agreement, the taking of all appropriate corporate action in connection therewith and compliance with the conditions set forth in this Agreement. (H) ILLEGALITY On the Closing Date, the performance of the transactions contemplated hereby, upon the terms and conditions set forth herein, shall not, in the reasonable judgment of Assignee, violate, and shall not subject Assignee to any penalty or liability under, any law, rule or regulation binding upon Assignee. (I) NO PROCEEDINGS On the Closing Date, no legal or governmental action, suit or proceeding shall have been instituted or threatened before any court, administrative agency or tribunal, nor shall any order, judgment or decree have been issued or proposed to be issued by any court, administrative agency or tribunal to set aside, restrain, enjoin or prevent the consummation of this Agreement or the transactions contemplated hereby. (J) COMPLIANCE WITH OPERATIVE AGREEMENTS Assignor shall have complied with all requirements of Assignor under the Operative Agreements for transfer of the Transferred Interests. (K) NO EVENT OF LOSS On the Closing Date, there shall not exist an Event of Loss. PAGE 13 18 (L) NO DEFAULTS On the Closing Date, after giving effect to the consummation of the transactions contemplated hereby, there shall not exist any Lease Default, Lease Event of Default, Default or Event of Default. (M) OPINIONS Assignee shall have received opinions reasonably satisfactory to Assignee, dated the Closing Date, from (i) Perkins Coie, special counsel to Assignor, (ii) Peter R. Day, Esq., attorney, Office of the General Counsel of Boeing, and (iii) Special FAA Counsel, in each case with respect to such matters and to such effect as Assignee shall reasonably request. Promptly upon the recordation of the Assignment and Assumption Agreement (FAA) pursuant to the Act, Special FAA Counsel shall deliver to Assignee an opinion as to the due recording of such document. SECTION 9. PAYMENTS Assignor hereby covenants and agrees to pay over to Assignee, if and when received, any amounts paid to or for the benefit of Assignor that constitute Transferred Interests, and until so paid over any such amounts received by Assignor shall be received and held by Assignor in trust for Assignee. Assignee hereby covenants and agrees to pay over to Assignor, if and when received, any amounts paid to or for the benefit of Assignee that constitute Reserved Rights, and until so paid over any such amounts received by Assignee shall be received and held by Assignee in trust for Assignor. SECTION 10. CERTAIN NOTICES Assignor hereby covenants and agrees promptly to forward to Assignee any notice Assignor receives from any party to any Operative Agreement (other than Assignee) pursuant to and in accordance with this Agreement the Assignment and Assumption Agreement (FAA), the Lessor Documents, or any other Operative Agreement except to the extent solely related to Reserved Rights. Assignee hereby covenants and agrees promptly to forward to Assignor any notice Assignee receives from any party to any Operative Agreement (other than Assignor) pursuant to and in accordance with this Agreement, the Assignment and Assumption Agreement (FAA), the Lessor Documents, or any other Operative Agreement related to the Reserved Rights. PAGE 14 19 SECTION 11. FURTHER ASSURANCES Each party agrees, upon the reasonable request of the other party, at any time and from time to time, promptly to execute and deliver all such further documents, and promptly to take and forbear from all such action, as may be reasonably necessary or appropriate in order more effectively to confirm or carry out the provisions of this Agreement. SECTION 12. TAXES AND INDEMNITIES (A) TRANSFER TAXES Assignee hereby covenants and agrees that Assignee shall pay any and all sales taxes, use taxes and similar transfer taxes (including, without limitation, any charges, such as gross receipts taxes, in lieu thereof) (collectively, "TRANSFER TAXES"), and any registration, document or filing fees, that may be imposed in connection with the sale, assignment and transfer of the Transferred Interests, including, without limitation, those relating to the transfer of rights and other interests in and to, and the assumptions of duties, liabilities and obligations in, to and under this Agreement, the Assignment and Assumption Agreement (FAA), the Transferred Interests, the Aircraft and the Operative Agreements. (B) ASSIGNEE'S TAX INDEMNITY Assignee hereby covenants and agrees to indemnify, protect, defend, save and keep harmless Assignor, on an after tax basis, against all fees, duties, taxes, levies, charges or withholdings of any kind or nature whatever, and any penalties, fines or interest thereon in addition thereto ("TAXES") that are imposed with regard to the Transferred Interests with respect to any actions, omissions, events or occurrences arising during any period after the Effective Time on the Closing Date. (C) ASSIGNOR'S TAX INDEMNITY Except as expressly provided elsewhere herein, Assignor hereby covenants and agrees to indemnify, protect, defend, save and keep harmless, Assignee, on an after tax basis, from and against any and all fees, duties, taxes, levies, charges or withholdings of any kind or nature whatsoever, and any penalties, fines, or interest thereon or other additions thereto, which at any time or from time to time may be imposed on or with respect to, or asserted against, the Transferred Interests, the Aircraft or any part thereof or any interest therein, or Assignee, by any federal, state, local or foreign government or taxing authority in connection with or relating to this Agreement, the Assignment and Assumption Agreement (FAA), the Transferred Interests, the Aircraft and the Operative Agreements, and which are attributable to the PAGE 15 20 period prior to the Effective Time on the Closing Date, or to acts, omissions, events or occurrences arising prior to the Effective Time on the Closing Date; provided, that Assignor shall not be required to pay or indemnify Assignee for taxes on or measured by the net income of Assignee. (D) ASSIGNOR'S INDEMNITY Assignor hereby covenants and agrees upon demand of Assignee to pay and assume liability for, and indemnify, protect, defend, save and keep harmless Assignee, on an after-tax basis, from and against any and all liabilities, taxes, fees, duties, charges, withholdings, obligations, losses, damages, settlements, claims, actions, suits, penalties, costs and expenses (including, without limitation, reasonable fees and expenses of counsel) of whatsoever kind and nature which may at any time or from time to time be imposed upon, incurred by or asserted against Assignee or any of its Affiliates, successors, agents, servants, representatives, directors or officers in any way relating to, resulting from or arising out of (i) any inaccuracy or breach of any representation or warranty made by Assignor under this Agreement or the Assignment and Assumption Agreement (FAA), (ii) any inaccuracy or breach of any representation or warranty made by Assignor under the Operative Agreements in respect of or to the extent attributable to the period prior to the Effective Time on the Closing Date or (iii) any failure by Assignor to have observed or performed any of its obligations under or in connection with the Operative Agreements in respect of or to the extent attributable to the period prior to the Effective Time on the Closing Date. (E) ASSIGNEE'S INDEMNITY (i) Assignee hereby covenants and agrees upon demand of Assignor to pay and assume liability for, and indemnify, protect, defend, save and keep harmless, Assignor, on an after-tax basis, from and against any and all liabilities, taxes, fees, duties, charges, withholdings, obligations, losses, damages, settlements, claims, actions, suits, penalties, costs and expenses (including, without limitation, reasonable fees and expenses of counsel) of whatsoever kind and nature which may at any time or from time to time be imposed upon, incurred by or asserted against Assignor or any of its Affiliates, agents, servants, representatives, directors or officers in any way relating to, resulting from or arising out of any inaccuracy or breach of any representation or warranty made by Assignee under this Agreement or the Assignment and Assumption Agreement (FAA), or any failure by Assignee to have observed or performed any of its obligations under or in connection with the Operative Agreements in respect of or to the extent attributable to the period from and after the Effective Time on the Closing Date. PAGE 16 21 (ii) Assignee hereby acknowledges and agrees that in the event Assignee shall cause any of the Operative Agreements to be modified or amended as a result of any action of Assignee in a manner that has an adverse effect upon the Reserved Rights as of the Effective Time on the Closing Date, Assignee shall indemnify, protect, defend, save and keep harmless, Assignor to the same extent as if such modification or amendment had not occurred. (F) NOTICE OF CLAIMS Each of Assignor and Assignee agrees to provide written notification to the other party promptly after becoming aware of any liability, obligation or claim, whether pending or threatened, that is the subject of indemnification pursuant to this Section 12; provided, that the failure by either party to so notify the other party will not in any manner affect either party's obligations under this Section 12. SECTION 13. MISCELLANEOUS (A) NOTICES All notices, demands, declarations and other communications required by this Agreement shall be in writing and shall be effective (i) if given by facsimile, when transmitted, (ii) if given by registered or certified mail, three Business Days after being deposited with the U.S. Postal Service and (iii) if given by a nationally recognized overnight courier, when received, or, if personally delivered, when so delivered, addressed: If to Assignor, to: 7755 East Marginal Way South Seattle, Washington 98108 Attention: Treasurer M/S 68-34 Facsimile: (206) 237-8746 or to such other address as Assignor shall from time to time designate in writing to Assignee; and PAGE 17 22 If to Assignee, to: General Bank 800 West Sixth Street Los Angeles, California 90017 Attention: Mr. Peter Lowe Executive Vice President and Chief Financial Officer Facsimile: (213) 972-4294 or to such other address as Assignee may from time to time designate in writing to Assignor. (B) CONFIDENTIALITY Assignor and Assignee each agree to use its best efforts, acting reasonably and diligently, to treat this Agreement and the terms hereof as confidential and not to disclose, without the prior written consent of the other, the terms hereof to any other Person except (i) to such party's directors, officers, partners, employees, legal counsel, accountants, auditors, financial advisors and/or other professionals and consultants who agree to hold such information confidential, but only to the extent such party deems such disclosure necessary or appropriate to accomplish the proper business purposes of such party, (ii) to any accountants or auditors retained by such party who agree to hold such information confidential, if and when such disclosure is necessary in connection with the examination and reporting on the books and records and/or the financial condition of such party, and then only to the extent necessary, (iii) if and when such party is required to do so pursuant to any order, subpoena, summons, or other legal process issued by any court, governmental body, or governmental investigator, by which it is legally bound to produce the same, and then only to the extent so required, (iv) if and when such party is required to do so pursuant to any order, directive, or request by any governmental agency having supervisory authority over its operations and administration and then only to the extent so required, or (v) to such party's successors and assigns who agree to hold such information confidential. Notwithstanding any provision to the contrary contained in this Section 13(b), Assignor and Assignee, and each of them, shall not be prohibited from making any disclosure with respect to the terms hereof, which may be disclosed in any public records of any kind or otherwise in the public domain (except as a result of a disclosure by such party in violation of this Section 13(b)). PAGE 18 23 (C) HEADINGS Headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement. (D) REFERENCES Any reference to a specific Section or Section number shall be interpreted as a reference to that Section of this Agreement unless otherwise expressly provided. (E) GOVERNING LAW THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. (F) SEVERABILITY If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the fullest extent permitted by law, (i) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be construed in order to carry out the intentions of the parties hereto as nearly as may be possible, and (ii) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. (G) AMENDMENTS IN WRITING No amendment, modification, waiver, termination or discharge of any provision of this Agreement or any consent to any departure by Assignor or Assignee from any provision hereof, shall in any event be effective unless the same shall be in writing and signed by Assignor and Assignee, and each such amendment, modification, waiver, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given; provided, that in no event shall Assignor and Assignee amend, modify or waive Sections 3, 6, 13(e), 13(o) or this Section 13(g) without the prior written consents of Lessee, Guarantor, Owner Trustee and Mortgagee, which consents shall not be unreasonably withheld or delayed. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by Assignor and Assignee. PAGE 19 24 (H) SURVIVAL Notwithstanding anything contained herein to the contrary, all agreements, indemnities, representations and warranties contained in this Agreement shall survive the Effective Time on the Closing Date and the expiration or other termination hereof (I) EXPENSES Each of Assignor and Assignee shall be responsible for its own costs and expenses incurred in connection with the negotiation, preparation, execution and delivery of this Agreement, the Assignment and Assumption Agreement (FAA) and any other agreements, documents, certificates and instruments relating hereto and thereto, and shall not have any right of reimbursement or indemnity for such costs and expenses as against the other party; provided, that, as between Assignor and Assignee, (i) Assignor shall be responsible for all of the fees and expenses of Special FAA Counsel and (ii) Assignee shall be responsible for any Aircraft appraisal prepared for Assignee. (J) EXECUTION IN COUNTERPARTS This Agreement and any amendments, waivers or consents hereto may be executed by Assignor and Assignee in separate counterparts (or upon separate signature pages bound together into one or more counterparts), each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. (K) ENTIRE AGREEMENT This Agreement and the Assignment and Assumption Agreement (FAA), on and as of the date hereof, constitute the entire agreement of Assignor and Assignee with respect to the subject matter hereof or thereof, and all prior or contemporaneous understandings or agreements, whether written or oral, between Assignor and Assignee with respect to such subject matter are hereby superseded in their entirety. (L) EXHIBITS The exhibits attached hereto are incorporated by reference herein and shall have the same force and effect with respect to the provisions set forth therein as though fully set forth in this Agreement. (M) SUCCESSORS AND ASSIGNS This agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by Assignor and Assignee, and their respective successors and assigns. PAGE 20 25 (N) RECOVERY OF COSTS AND FEES If any suit or action arising out of or related to this Agreement is brought by either party, the prevailing party shall be entitled to recover the costs and fees (including without limitation reasonable attorneys' fees) incurred by such party in such suit or action, including without limitation any post-trial or appellate proceeding, or in the collection or enforcement or any judgment or award entered or made in such suit or action. (O) NO THIRD PARTY BENEFIT Assignor and Assignee agree that the provisions of this Agreement, including, without limitation, Section 3, are for the sole benefit of Assignor, Assignee, Lessee, Guarantor, Owner Trustee, Mortgagee and their respective successors and assigns, and are not for the benefit, directly or indirectly, of any other Person. PAGE 21 26 IN WITNESS WHEREOF, the undersigned have caused this PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 to be duly executed as of the day and year first written above. GAUCHO-1 INC. By /s/ DAVID A. EDGERTON ------------------------------- David A. Edgerton Attorney-in-fact GENERAL BANK By ------------------------------- Name: Title: 27 IN WITNESS WHEREOF, the undersigned have caused this PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 to be duly executed as of the day and year first written above. GAUCHO-1 INC. By ------------------------------- David A. Edgerton Attorney-in-fact GENERAL BANK By /s/ PETER LOWE ------------------------------- Name: Peter Lowe Title: EVP & CFO 28 EXHIBIT A TO PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 ASSIGNMENT AND ASSUMPTION AGREEMENT 615 ASSIGNMENT AND ASSUMPTION AGREEMENT 615, dated December 27, 1996 (this "AGREEMENT"), between GAUCHO-1 INC., a Delaware corporation ("ASSIGNOR"), and GENERAL BANK, a California corporation ("ASSIGNEE"). Capitalized terms used herein without definition shall have the meanings given them in Section 7. WHEREAS, pursuant to the transactions contemplated by the Trust Agreement 615, dated as of August 1, 1994 (the "TRUST AGREEMENT"), between Assignor and First Security Bank, National Association (formerly First Security Bank of Utah, National Association) ("OWNER TRUSTEE"), Continental Airlines, Inc. ("LESSEE") leased from Owner Trustee one Boeing 737-524 airframe bearing manufacturer's serial number 27328 and U.S. Registration number N37615 together with two CFM International, Inc. Model CFM56-3-B1 engines bearing, respectively, manufacturer's serial numbers 857942 and 857945 (each of which engines has 750 or more rated takeoff horsepower or the equivalent of such horsepower); and WHEREAS, Assignor desires to transfer to Assignee all its right, title and interest in, to and under the Trust Estate (excluding Reserved Rights (as defined below), the "BENEFICIAL INTEREST"), except for certain rights or indemnities described in that certain Purchase, Assignment and Assumption Agreement 615 dated as of December 1, 1996 (the "PURCHASE AGREEMENT") between Assignor and Assignee ("RESERVED RIGHTS") vested or relating to events prior to 11:38 p.m., Las Vegas time, on the date hereof (the "EFFECTIVE TIME"); NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements of the parties contained herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Assignor and Assignee agree as follows: SECTION 1. TRANSFER AND ASSUMPTION. Assignor does hereby sell, assign and transfer to Assignee the Beneficial Interest, and Assignee hereby accepts the Beneficial Interest from Assignor. Assignee agrees that, from and after the execution and delivery hereof, it shall be bound by all the terms of, and shall have assumed and undertaken to perform all the obligations PAGE 1 29 (other than obligations relating to Reserved Rights) of the Owner Participant with respect to the Beneficial Interest. SECTION 2. EFFECT OF TRANSFER. Upon the execution and delivery of this Agreement (which shall be deemed to occur at the Effective Time), Assignee shall be deemed the Owner Participant for all purposes of the Operative Agreements and shall be deemed to have paid that portion of Lessor's Cost for the Aircraft previously made by Assignor, and represented by the interest being conveyed, and each reference in any Operative Agreement, including without limitation, the Trust Agreement, to "Owner Participant" shall thereafter be deemed to be Assignee, except with respect to Reserved Rights. Assignee expressly assumes hereunder all and any liability and obligation of Assignor accruing or arising under any of the Operative Agreements, including, without limitation, the Trust Agreement, on and after the execution and delivery of this Agreement. SECTION 3. NO THIRD PARTY BENEFIT. Assignor and Assignee agree that the provisions of this Agreement are for the sole benefit of Assignor, Assignee, Lessee, Guarantor, Owner Trustee and Mortgagee, their respective successors and assigns, and are not for the benefit, directly or indirectly, of any other Person. SECTION 4. NOTICES. Any notices to the Owner Participant provided for in the Operative Agreements shall be delivered to Assignee at the following address or such other place as Assignee may designate in accordance with the Operative Agreements: General Bank 800 West Sixth Street Los Angeles, California 90017 Attn: Mr. Peter Lowe Executive Vice President and Chief Financial Officer Facsimile: (213) 972-4294 SECTION 5. HEADINGS. The headings of the Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof PAGE 2 30 SECTION 6. GOVERNING LAW. THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. SECTION 7. DEFINITIONS. Capitalized terms used herein without definition shall have the meanings given them in the Trust Agreement. SECTION 8. EXECUTION IN COUNTERPARTS. This Agreement and any amendments, waivers or consents hereto may be executed by Assignor and Assignee in separate counterparts (or upon separate signature pages bound together into one or more counterparts), each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. SECTION 9. NOTICE PURPOSES ONLY. This Agreement is being filed with the FAA for notice purposes only. The parties hereto are subject to the terms and conditions of the Purchase Agreement. PAGE 3 31 IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment and Assumption Agreement 615 to be duly executed as of the day and year first written above. GAUCHO-1 INC., as Assignor By ------------------------------- Name: Title: GENERAL BANK. as Assignee By ------------------------------- Name: Title: 32 The foregoing Assignment and Assumption Agreement 615 is hereby acknowledged, agreed and consented to as of the day and year first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, Owner Trustee By ------------------------------- Name: Title: 33 EXHIBIT B TO PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 GENERAL BANK AFFIDAVIT OF CITIZENSHIP STATE OF ss.: COUNTY OF The undersigned, being duly sworn., deposes and says on behalf of General Bank, a __________ corporation (the "Owner Participant"), that: 1. He is a duly elected and qualified officer of General Bank. 2. The Owner Participant is a corporation duly organized under the laws of the State of _________. 2. The Owner Participant is a "Citizen of the United States" as defined in Section 40102(a)(15) of Title 49 of the United States Code. By: ------------------------------- Name: Title: SWORN TO AND SUBSCRIBED before me this ____ day of December, 1996. - ------------------------------- Notary Public My Commission Expires: - ------------------------------- 34 EXHIBIT C TO PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 GUARANTY BY CORPORATE AFFILIATE OF TRANSFERRING OWNER PARTICIPANT 615 FOR VALUE RECEIVED, The Boeing Company, a Delaware corporation ("GUARANTOR"), pursuant to that certain Purchase, Assignment and Assumption Agreement 615 dated as of December 1, 1996 (the "ASSIGNMENT AND ASSUMPTION AGREEMENT") between Gaucho-1 Inc., a Delaware corporation ("OWNER PARTICIPANT") and General Bank, a California corporation (the "GUARANTEED PARTY"), does hereby unconditionally and irrevocably guaranty to the Guaranteed Party, (i) the due and punctual performance and observance by Owner Participant of each covenant, agreement, undertaking, representation, warranty and any other obligation or condition binding upon or to be performed or observed by it under and in accordance with the terms of the Assignment and Assumption Agreement, (ii) the due and punctual payment of each amount which Owner Participant is or may become obligated to pay under and in accordance with the terms of the Assignment and Assumption Agreement and (iii) in the event of any nonpayment or nonperformance, agrees to pay or perform or cause such payment or performance to be made upon notice from the Guaranteed Party of such nonpayment or nonperformance (such payment and other obligations being herein referred to as the "OBLIGATIONS"). Guarantor further agrees to pay all reasonable expenses (including, without limitation, all fees and disbursements of counsel) that may be paid or incurred by the Guaranteed Party in enforcing any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, Guarantor under this Guaranty. The obligations of Guarantor to make any payments hereunder shall be subject to the terms and conditions of the Assignment and Assumption Agreement applicable to the obligations of Owner Participant. Capitalized terms used herein which are defined in the Assignment and Assumption Agreement are used in this Guaranty as they are so defined. Guarantor hereby waives notice of acceptance of this Guaranty, and agrees that in its capacity as a guarantor, it shall not be required to consent to, or to receive any notice of, any supplement to or amendment of, or waiver or modification of the terms of, the Assignment and Assumption Agreement. 35 Owner Participant is an "Affiliate" (as that term is referred to in the Assignment and Assumption Agreement) of Guarantor, and this Guaranty is being furnished to induce the Guaranteed Party to contract with Owner Participant as set forth in the Assignment and Assumption Agreement. Guarantor represents and warrants that (i) Guarantor is duly incorporated and validly existing in good standing under the laws of the State of Delaware; (ii) the execution, delivery and performance of this Guaranty are within Guarantor's power and authority and do not contravene the charter or the by-laws of Guarantor or any indenture, mortgage, credit agreement, note, long-term lease or other material agreement to which Guarantor is a party or by which Guarantor is bound or any law, governmental rule, regulation, judgment or order binding on the Guarantor; and (iii) this Guaranty has been duly authorized, executed and delivered on behalf of Guarantor and constitutes a legal, valid, binding and enforceable obligation of Guarantor. No failure or delay or lack of demand, notice or diligence in exercising any right under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right under this Guaranty. This Guaranty is an absolute, unconditional and continuing guaranty of payment and not of collection and Guarantor waives any right to require that any right to take action against Owner Participant be exhausted or that resort be made to any security prior to action being taken against Guarantor. In the event that this Guaranty, the Assignment and Assumption Agreement or the Assignment and Assumption Agreement (FAA) shall be terminated, rejected or disaffirmed as a result of bankruptcy, insolvency, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar proceedings with respect to Owner Participant, Guarantor's obligations hereunder shall continue to the same extent as if the same had not been so terminated, rejected or disaffirmed. Guarantor shall and does hereby waive all rights and benefits which might in whole or in part, relieve Guarantor from the performance of its duties and obligations by reason of any proceeding as specified in the preceding sentence, and Guarantor agrees that it shall be liable for all sums guaranteed, in respect of and without regard to, any modification, limitation or discharge of the liability of Owner Participant that may result from any such proceedings and notwithstanding any stay, injunction or other prohibition issued in any such proceedings. Furthermore, the obligation of Guarantor hereunder will not be discharged by: (a) any extension or renewal with respect to any obligation of Owner Participant under the Assignment and Assumption Agreement; (b) any modification of, or amendment or supplement to, any such agreement; (c) any PAGE 2 36 furnishing or acceptance of additional security or any release of any security; (d) any waiver, consent or other action or inaction or any exercise or non-exercise of any right, remedy or power with respect to Owner Participant, or any change in the structure of Owner Participant; (e) any change in ownership of the shares of capital stock of Guarantor or Owner Participant or any merger or consolidation of either thereof into or with any other person; or (f) any other occurrence whatsoever, except payment in full of all amounts payable by Owner Participant under the Assignment and Assumption Agreement and performance in full of all Obligations of Owner Participant in accordance with the terms and conditions of the Assignment and Assumption Agreement. Guarantor understands and agrees that its obligations hereunder shall be continuing, absolute and unconditional without regard to, and Guarantor hereby waives any defense to, or right to seek a discharge of, its obligations hereunder with respect to, (a) the validity, legality, regularity or enforceability of the Assignment and Assumption Agreement any of the Obligations or any collateral security therefor or guaranty or right of offset with respect thereto at any time or from time to time held by the Guaranteed Party, (b) any defense, setoff or counterclaim (other than a defense of payment or performance (including payment or performance attributable to a right of setoff provided for in the Assignment and Assumption Agreement)) that may at any time be available to or be asserted by Owner Participant against the Guaranteed Party, or (c) any other circumstances whatsoever (with or without notice to or knowledge of Owner Participant or Guarantor) that constitutes, or might be construed to constitute, an equitable or legal discharge of Owner Participant or the Obligations, or of Guarantor under this Guaranty, in bankruptcy or in any other instance. Notwithstanding any payment or payments made by Guarantor hereunder or any setoff or application of funds of Guarantor by the Guaranteed Party, Guarantor shall not be entitled to be subrogated to any of the rights of the Guaranteed Party against Owner Participant or any collateral, security or guaranty or right of setoff held by the Guaranteed Party for the payment of the Obligations, nor shall Guarantor seek or be entitled to seek any reimbursement from Owner Participant in respect of payments made by Guarantor hereunder, until all amounts and performance owing to the Guaranteed Party by Owner Participant on account of the Obligations are paid and performed in full. The obligations of Guarantor hereunder shall be automatically reinstated if and to the extent that any payment by or on behalf of the Owner Participant in respect of any of the Obligations is rescinded or must be otherwise restored by the Guaranteed Party as a result of any proceedings in bankruptcy or reorganization or similar proceedings and Guarantor agrees that it will reimburse the Guaranteed Party on demand for all reasonable costs and expenses (including, without limitation, fees of PAGE 3 37 counsel) incurred by the Guaranteed Party in connection with such rescission or restoration. Any provision of this Guaranty that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Guaranty shall be binding upon the successors and assigns of Guarantor; provided, however, that no transfer, assignment or delegation by Guarantor without the consent of the Guaranteed Party shall release Guarantor from its liabilities hereunder. This Guaranty shall terminate and be of no further force and effect upon the performance and observance in full of the Obligations. All notices, requests and demands to or upon Guarantor or any beneficiary shall be made in accordance with the terms of Section 13(a) of the Assignment and Assumption Agreement and if delivered to Guarantor shall be addressed to The Boeing Company, 7755 East Marginal Way South, Seattle, Washington 98108, Attention: Treasurer, M/S 68-34, or to such other address as Guarantor shall designate to the Guaranteed Party in writing. PAGE 4 38 THIS GUARANTY SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. DATED: December ___, 1996. THE BOEING COMPANY By ------------------------------- Name: Title: 39 EXHIBIT D TO PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT 615 CONFIDENTIAL DISTRIBUTION LIMITED TO CONTINENTAL AIRLINES, INC., GENERAL BANK. THE BOEING COMPANY AND THEIR RESPECTIVE COUNSEL AND AGENTS CONTINENTAL AIRLINES, INC. 2929 ALLEN PARKWAY HOUSTON, TEXAS 77019 December ___, 1996 General Bank 800 West Sixth Street Los Angeles, California 90017 RE: LETTER AGREEMENT TO PARTICIPATION AGREEMENT 615 AND LEASE AGREEMENT 615 RELATING TO ONE BOEING MODEL 737-524 AIRCRAFT BEARING UNITED STATES REGISTRATION NO. N37615 Ladies and Gentlemen: 1. Reference is made to Participation Agreement 615, dated as of August 1, 1994 (the "PARTICIPATION AGREEMENT") among Continental Airlines, Inc. ("LESSEE"), Gaucho-2 Inc. ("OWNER PARTICIPANT"), The Northwestern Mutual Life Insurance Company, General Electric Company ("GUARANTOR"), First Security Bank, National Association (formerly First Security Bank of Utah, National Association), not in its individual capacity, except as expressly provided therein, but solely as Owner Trustee, and Wilmington Trust Company, not in its individual capacity, except as expressly provided therein, but solely as Mortgagee. 2. This Letter Agreement, when accepted by you, will evidence our agreement with respect to the matters set forth below. Capitalized terms used but not defined herein shall have the respective meanings set forth or incorporated by reference, and shall be construed and interpreted in the manner described, in the Participation Agreement. 3. Lessee agrees with General Bank ("TRANSFEREE") that, notwithstanding the text of the definition of "Net Economic Return" in Annex A to the Participation Agreement and Annex A to the Lease, as of the Effective Time (as defined in the 40 General Bank Page 2 Assignment and Assumption Agreement 615, dated the date hereof, between Owner Participant and Transferee, as in effect on the date hereof), for the purposes of the obligations of each of Lessee, Lessor and Transferee (and any direct or indirect transferees thereof) only, such definition shall read in its entirety as follows: "Net Economic Return" means Owner Participant's net after-tax yield and aggregate after-tax cash flow computed on the basis of the same methodology and assumptions as were utilized by General Bank ("GENERAL BANK") in analyzing Basic Rent Stipulated Loss Value percentages and Termination Value percentages as of the date on which General Bank became Owner Participant, as such assumptions may be adjusted after December ____, 1996 for events that have been the basis for adjustments to Basic Rent pursuant to Section 3.2.l(b) of the Lease or events giving rise to indemnity payments to General Bank pursuant to Section 5.1 of the Tax Indemnity Agreement; provided, that, if General Bank shall have transferred its interest, Net Economic Return shall be calculated as if General Bank had retained its interest; provided further, that, notwithstanding the preceding proviso, solely for purposes of Section 13 of the Participation Agreement and calculating any adjustments to Basic Rent, Stipulated Loss Values and Termination Values in connection with a refunding pursuant to such Section 13 at a time when Owner Participant is a direct or indirect transferee of General Bank, (other than an Affiliate of General Bank), the after-tax yield (but not the after-tax cash flow) component of Net Economic Return shall be calculated on the basis of the methodology and assumptions utilized by the transferee Owner Participant as of the date on which it acquired its interest. 4. Lessee agrees with Transferee that notwithstanding anything to the contrary set forth in Section 7.2.7(k) of the Lease, as of the Effective Time (as so defined), for the purposes of the obligations of each of Lessee and Transferee owed to the other only, Section 7.2.7(k) of the Lease shall read in its entirety as follows: "(k) No such sublease shall be made to Permitted Air Carriers, other than U.S. Air Carriers, prior to January 1, 2004, or if a Lessee Act (as defined in the Tax Indemnity Agreement) as a result of which indemnification has been required under the Tax Indemnity Agreement has created a longer Tax Attribute Period (as defined in the Tax Indemnity Agreement), prior to the close of the Tax Attribute Period, unless in either case Lessee prepays any liability Owner Participant determines would be due under the Tax Indemnity Agreement as a result of such sublease based upon the assumption that such sublease were to continue for the remainder of the term of such sublease." 41 General Bank Page 3 5. This Letter Agreement is provided solely for the benefit of the parties hereto and their respective successors and is not and is not intended to be an amendment of the Participation Agreement the Lease or any other Operative Agreement. 6. This Letter Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. 7. THIS LETTER AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. 42 General Bank Page 4 By signing and returning an original counterpart hereof, each of the undersigned accepts and agrees to the foregoing terms and provisions of this Letter Agreement. Very truly yours, CONTINENTAL AIRLINES, INC. By ------------------------------- Name: Title: ACCEPTED AND AGREED TO this day of December, 1996. GENERAL BANK By ------------------------------- Name: Title: 43 EXHIBIT E TO PURCHASE ASSIGNMENT AND ASSUMPTION AGREEMENT 615 AMENDMENT NO. 1 TO TAX INDEMNITY AGREEMENT 615 AMENDMENT NO. 1 TO TAX INDEMNITY AGREEMENT 615, dated as of December 1, 1996 (this "Amendment"), between CONTINENTAL AIRLINES INC., a Delaware corporation (the "Lessee"), and GAUCHO-1 INC., a Delaware corporation ("Gaucho-1" or the "Owner Participant"), and amending that certain Tax Indemnity Agreement 615 dated as of August 1, 1994 (the "Tax Indemnity Agreement") between Lessee and Owner Participant. Except as otherwise defined in this Amendment, the terms used herein in capitalized form shall have the meanings attributed thereto in the Tax Indemnity Agreement. WITNESSETH WHEREAS, in contemplation of the transfer by Owner Participant to General Bank, a California corporation ("General Bank") of all of its right, title and interest (other than Reserved Rights (as such term is defined in the Purchase, Assignment and Assumption Agreement 615 between Owner Participant and General Bank, dated as of December 1, 1996) (the "Purchase, Assignment and Assumption Agreement")) in and to the Trust and the Operative Agreements, among other things, Owner Participant and the Lessee desire to amend the Tax Indemnity Agreement as herein set forth. WHEREAS, it is not intended that this Agreement affect any of the rights, obligations, or liabilities of Owner Participant for any acts, events or occurrences before the Effective Time (as defined in Section 3 hereof). NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. AMENDMENTS The Tax Indemnity Agreement shall be amended as follows: (a) Section 2.2 is hereby amended to read as follows: "For U.S. federal income tax purposes, the Aircraft will be considered to have been placed in service by Owner Participant on the Closing Date (as defined in Section 3.4)." 44 2 (b) Section 2.3 is hereby amended by (i) deleting the phrase "in which the Delivery Date occurs" and replacing it with the words "ending December 31, 1996", and (ii) deleting the phrase "Lessor's Cost for the Aircraft" and replacing it with the words "an amount equal to $24,412,204.86 (which amount, for purposes of this Agreement (but not for purposes of any other Operative Agreement), shall be referred to as "Lessor's Cost")". (c) Section 3.4 is hereby amended by (i) replacing the phrase "the Delivery Date" the first time it occurs with the phrase "the date on which the Effective Time, as defined in the Purchase, Assignment and Assumption Agreement between Gaucho-1 Inc. and General Bank, a California corporation ("General Bank") occurs (the "Closing Date")" and replacing the term "Delivery Date" in clause (a) of such Section with the term "Closing Date", and (ii) inserting after the phrase "original Owner Participant" in the first place such phrase occurs the following parenthetical phrase "(it being understood that, for purposes of this Agreement, General Bank shall be treated as the original Owner Participant, other than with respect to Section 3.3, for purposes of which Gaucho-1 Inc. shall be treated as the original Owner Participant)". (d) Section 3.9 is hereby amended by (i) deleting the phrase "Tax Attribute Period" and replacing it with the phrase "Sourcing Period", and (ii) adding a new sentence at the end of such Section to read as follows: "For purposes of this Agreement, the term "Sourcing Period" shall mean the period commencing on the Closing Date and ending two years prior to the end of the Tax Attribute Period." (e) Sections 6.1 and 6.2 are hereby amended by deleting the phrase "Tax Attribute Period" each place such phrase occurs and replacing it with the term "Sourcing Period". SECTION 2. QUALIFIED ASSIGNMENT. The parties hereto agree that (i) the Purchase, Assignment and Assumption Agreement satisfies the requirements of clause (a) of Section 19, and 45 3 (ii) clause (b) of Section 19 of the Tax Indemnity Agreement shall not apply to the transfer and assignment to General Bank, provided that such clause (b) shall apply to any transferee or assignee of General Bank or any subsequent transferee or assignee as if General Bank were the original Owner Participant. SECTION 3. EFFECTIVENESS. This Amendment shall take effect at the Effective Time (as defined in the Purchase, Assignment and Assumption Agreement) and, for the avoidance of doubt, shall not affect any rights or obligations of Lessee or Gaucho-1 to one another under the Tax Indemnity Agreement with respect to periods prior to the Effective Time during which Gaucho-1 is, or was, the owner participant under the Operative Agreements. Except as amended hereby, the Tax Indemnity Agreement continues and shall remain in full force and effect in all respects. SECTION 4. MISCELLANEOUS. This Amendment may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute by one and the same instrument. Neither this Amendment nor any of the terms hereof may be terminated, amended, supplemented, waived or modified, except by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification is sought; and no such termination, amendment, supplement, waiver or modification shall be effective unless a signed copy thereof shall have been delivered to the Lessee and the Owner Participant. The terms of this Amendment shall be binding upon, and inure to the benefit of and shall be enforceable by, Lessee and the Owner Participant and their respective successors or assigns permitted under the Operative Agreements. This Amendment shall in all respects be governed by, and construed in accordance with, the laws of the State of New York. [This space intentionally left blank.] 46 4 IN WITNESS WHEREOF, the Lessee and the Owner Participant have caused this Amendment No. 1 to Tax Indemnity Agreement 615 to be duly executed as of the date and year first written above. CONTINENTAL AIRLINES, INC. By ------------------------------- Name: Title: GAUCHO-1 INC. By ------------------------------- Name: Title: 47 ASSIGNMENT AND ASSUMPTION AGREEMENT 615 ASSIGNMENT AND ASSUMPTION AGREEMENT 615, dated December 27, 1996 (this "AGREEMENT"), between GAUCHO-1 INC., a Delaware corporation ("ASSIGNOR"), and GENERAL BANK, a California corporation ("ASSIGNEE"). Capitalized terms used herein without definition shall have the meanings given them in Section 7. WHEREAS, pursuant to the transactions contemplated by the Trust Agreement 615, dated as of August 1, 1994 (the "TRUST AGREEMENT"), between Assignor and First Security Bank, National Association (formerly First Security Bank of Utah, National Association) ("OWNER TRUSTEE"), Continental Airlines, Inc. ("LESSEE") leased from Owner Trustee one Boeing 737-524 airframe bearing manufacturer's serial number 27328 and U.S. Registration number N37615 together with two CFM International, Inc. Model CFM56-3-B1 engines bearing, respectively, manufacturer's serial numbers 857942 and 857945 (each of which engines has 750 or more rated takeoff horsepower or the equivalent of such horsepower); and WHEREAS, Assignor desires to transfer to Assignee all its right, title and interest in, to and under the Trust Estate (excluding Reserved Rights (as defined below), the "BENEFICIAL INTEREST"), except for certain rights or indemnities described in that certain Purchase, Assignment and Assumption Agreement 615 dated as of December 1, 1996 (the "PURCHASE AGREEMENT") between Assignor and Assignee ("RESERVED RIGHTS") vested or relating to events prior to 11:38 p.m., Las Vegas time, on the date hereof (the "EFFECTIVE TIME"); NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements of the parties contained herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Assignor and Assignee agree as follows: SECTION 1. TRANSFER AND ASSUMPTION. Assignor does hereby sell, assign and transfer to Assignee the Beneficial Interest and Assignee hereby accepts the Beneficial Interest from Assignor. Assignee agrees that from and after the execution and delivery hereof, it shall be bound by all the terms of, and shall have assumed and undertaken to perform all the obligations PAGE 1 48 (other than obligations relating to Reserved Rights) of the Owner Participant with respect to the Beneficial Interest. SECTION 2. EFFECT OF TRANSFER. Upon the execution and delivery of this Agreement (which shall be deemed to occur at the Effective Time), Assignee shall be deemed the Owner Participant for all purposes of the Operative Agreements and shall be deemed to have paid that portion of Lessor's Cost for the Aircraft previously made by Assignor, and represented by the interest being conveyed, and each reference in any Operative Agreement, including without limitation, the Trust Agreement to "Owner Participant" shall thereafter be deemed to be Assignee, except with respect to Reserved Rights. Assignee expressly assumes hereunder all and any liability and obligation of Assignor accruing or arising under any of the Operative Agreements, including, without limitation, the Trust Agreement, on and after the execution and delivery of this Agreement. SECTION 3. NO THIRD PARTY BENEFIT. Assignor and Assignee agree that the provisions of this Agreement are for the sole benefit of Assignor, Assignee, Lessee, Guarantor, Owner Trustee and Mortgagee, their respective successors and assigns, and are not for the benefit directly or indirectly, of any other Person. SECTION 4. NOTICES. Any notices to the Owner Participant provided for in the Operative Agreements shall be delivered to Assignee at the following address or such other place as Assignee may designate in accordance with the Operative Agreements: General Bank 800 West Sixth Street Los Angeles, California 90017 Attn: Mr. Peter Lowe Executive Vice President and Chief Financial Officer Facsimile: (213) 972-4294 SECTION 5. HEADINGS. The headings of the Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. PAGE 2 49 SECTION 6. GOVERNING LAW. THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. SECTION 7. DEFINITIONS. Capitalized terms used herein without definition shall have the meanings given them in the Trust Agreement. SECTION 8. EXECUTION IN COUNTERPARTS. This Agreement and any amendments, waivers or consents hereto may be executed by Assignor and Assignee in separate counterparts (or upon separate signature pages bound together into one or more counterparts), each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. SECTION 9. NOTICE PURPOSES ONLY. This Agreement is being filed with the FAA for notice purposes only. The parties hereto are subject to the terms and conditions of the Purchase Agreement. PAGE 3 50 IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment and Assumption Agreement 615 to be duly executed as of the day and year first written above. GAUCHO-1 INC, as Assignor By /s/ DAVID A. EDGERTON ------------------------------- Name: David A. Edgerton Title: Attorney-in-fact GENERAL BANK, as Assignee By ------------------------------- Name: Title: 51 IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment and Assumption Agreement 615 to be duly executed as of the day and year first written above. GAUCHO-1 INC. as Assignor By ------------------------------- Name: Title: GENERAL BANK By /s/ PETER LOWE ------------------------------- Name: Peter Lowe Title: EVP & CFO 52 The foregoing Assignment and Assumption Agreement 615 is hereby acknowledged, agreed and consented to as of the day and year first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, Owner Trustee By /s/ GREG A. HAWLEY ------------------------------- Name: GREG A. HAWLEY Title: VICE PRESIDENT EX-11 3 COMPUTATION OF PER SHARE EARNINGS 1 GBC BANCORP Computation of Per Share Earnings with Common Stock Options Outstanding (Treasury Stock Method)
1996 1995 1994 Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted Average Shares Outstanding Common Stock 6,722,229 6,722,229 6,663,892 6,663,892 6,654,960 6,654,960 Common Stock Equivalents Stock Options 806,475 806,475 766,275 766,275 684,389 684,389 Assumed Repurchase of Treasury Shares (393,569) (333,646) (701,362) (543,552) (646,510) (619,056) Average Common and Common Equivalent Shares Outstanding 7,135,135 7,195,058 6,728,805 6,886,615 6,692,839 6,720,293 Net Income in $1,000 $19,037 $19,037 $7,649 $7,649 $7,529 $7,529 Earnings Per Common and Common Equivalent Share $2.67 $2.65 $1.14 $1.11 $1.12 $1.12
34 EX-12 4 COMPUTATION OF RATIOS 1 GBC BANCORP COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
(Dollars in Thousands) For the Years Ended December 31, 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Income before income tax expense $28,216 $9,076 $9,325 $17,136 $19,597 Add: Interest on deposits 40,897 34,575 25,505 20,796 25,153 Interest on borrowings 2,746 2,825 3,366 4,183 3,270 Portion of rents applicable to interest * -- -- -- -- -- Amortization of debt expense, discount and premium 18 18 18 18 18 ------- ------- ------- ------- ------- Earnings as adjusted(1) $71,877 $46,494 $38,214 $42,133 $48,038 ======= ======= ======= ======= ======= Less: Interest on deposits 40,897 34,575 25,505 20,796 25,153 ------- ------- ------- ------- ------- Adjusted earnings excluding interest on deposits(2) $30,980 $11,919 $12,709 $21,337 $22,885 ======= ======= ======= ======= ======= Fixed charges Interest on deposits $40,897 $34,575 $25,505 $20,796 $25,153 Interest on borrowings 2,746 2,825 3,366 4,183 3,270 Rents: Total rents net of sublease rental 2,095 2,177 1,831 2,544 1,376 Portion of rents applicable to interest * -- -- -- -- -- Amortization of debt expense, discount and premium 18 18 18 18 18 Capitalized interest -- -- -- -- -- ------- ------- ------- ------- ------- Total Fixed Charges(9) $45,756 $39,595 $30,720 $27,542 $29,818 ======= ======= ======= ======= ======= Fixed charges excluding interest on deposits(10) $ 4,859 $ 5,020 $ 5,215 $ 6,746 $ 4,664 Ratio of earnings to fixed charges(1)/(9) 157% 117% 124% 153% 161% ------- ------- ------- ------- ------- Ratio of earnings to fixed charges excluding interest on deposits(2)/(10) 638% 237% 244% 316% 491% ------- ------- ------- ------- ------- Amount of coverage surplus (deficiency) $26,121 $6,899 $7,494 $14,591 $18,220 ======= ======= ======= ======= =======
* Portion of rents applicable to interest is deemed immaterial 35 EX-13 5 ANNUAL REPORT TO SHAREHOLDERS 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATION Consolidated net income for GBC Bancorp and subsidiaries (together, the "Company") for the year ended December 31, 1996 totaled $19,037,000. This compares to net earnings of $7,649,000 in 1995 and $7,529,000 in 1994. Earnings per share were $2.67 for 1996 compared to $1.14 for 1995, and $1.12 for 1994. The $11,388,000, or 149%, increase in net income from 1995 to 1996 was primarily due to a lower provision for credit losses and an increase in net interest income. The decline of the provision for credit losses in 1996 was caused primarily by the reduction of non-accrual loans and net charge-offs reflecting the successful efforts of management to resolve problem credits, as well as by the recovery of the southern California economy and the commercial real estate market. As of December 31, 1996, non-accrual loans were $11.7 million, compared to $43.7 million as of December 31, 1995. Net charge-offs were $5.0 million for the year ended December 31, 1996 as compared to $24.9 million for the year ended December 31, 1995. Net interest income increased $6,272,000 in 1996 compared to 1995, primarily as a result of an increase in average interest earning assets partially offset by a reduced net interest spread of 14 basis points. Consolidated net income for the year ended December 31, 1995 totaled $7,649,000 compared to net income of $7,529,000 in 1994. The slight increase in net income from 1994 to 1995 resulted from a $3,815,000 increase of net interest income and a lower effective income tax rate, which were partially offset by a $2,376,000 million increase in the provision for credit losses and a $1,794,000 increase in non-interest expense. NET INTEREST INCOME Net interest income in 1996 totaled $53,980,000 compared to net interest income of $47,708,000 in 1995. The increase was due mainly to a $198.0 million, or 19.0%, increase in average interest earning assets to $1,238.1 million during 1996 from $1,040.1 million during 1995. The composition of the net increase in average interest earning assets includes a $30.3 million increase in loans and leases, a $151.1 million increase in the securities portfolio, and a $16.6 million increase in federal funds sold and securities purchased under agreements to resell. The growth of average interest earning assets was primarily funded by an increase of $196.0 million of average deposits. Of this increase $184.9 million represented interest-bearing deposits and $11.1 million represented non-interest bearing demand deposits. The net interest income increase attributed to the volume growth was partially offset by a reduced net interest spread, defined as the yield on earning assets less the rate paid on interest bearing deposits. For 1996, the net interest spread was 3.73% compared to 3.87% for 1995. The yield on earning assets declined 29 basis points to 7.89% in 1996 from 8.18% in 1995. The decline was due primarily to the increase of lower yielding securities as a percent of average interest earning assets. While there was also a decline of short-term interest rates during 1996, the yield on loans increased to 10.33% in 1996 from 10.14% in 1995. The increase in the yield was primarily due to both the reduction of the non-accrual loans and the net effect of interest charge-offs and interest recoveries on non-accrual loans. For 1996, average non-accrual loans were $30.4 million, or 5.9% of the average of total loans and leases. For 1995, average non-accrual loans were $50.5 million, or 10.3% of the average total loans and leases. For 1996, net interest recoveries on non-accrual loans totaled $457,000. For 1995, net interest charge-offs on non-accrual loans totaled $1,128,000. The rates paid on interest-bearing liabilities decreased 15 basis points to 4.16% in 1996 from 4.31% in 1995. The rates paid on interest-bearing deposits did not decline as much as short-term rates. Also, there was a change in the average composition of the deposit base in 1996 compared to 1995. For 1996, the ratio of average time certificates of deposits of $100,000 or more, the most costly deposit product, comprised 58.3% of total average deposits compared to 52.0% for 1995. The net interest margin, defined as the difference between interest income and interest expense divided by average interest earning assets, declined to 4.36% in 1996 from 4.59% in 1995. The decline is primarily the result of the $180.3 million growth of average interest-bearing liabilities funding lower yielding earning assets. 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 interest earning assets to $1,040.1 million during 1995 from $925.4 million during 1994. The growth in average interest 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 2 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 was in part due to the maturity in the fourth quarter of a $30 million advance from the Federal Home Loan Bank. Both the yield 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 increases in both the yield and rate were 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%. 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:
1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE YIELD/ AVERAGE (IN THOUSANDS) BALANCE INTEREST RATE% BALANCE INTEREST - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans and Leases(1)(2) $ 518,603 $ 53,551 10.33% $ 488,274 $ 49,533 Taxable Securities 582,006 36,430 6.26 427,878 28,193 Tax-Exempt Securities(3) 4,111 261 6.34 7,081 459 Interest-Bearing Deposits -- -- -- 49 1 Federal Funds Sold and Securities Purchased Under Agreement to Resell 133,334 7,399 5.55 116,820 6,940 ----------- ----------- ----- ----------- ----------- TOTAL INTEREST-EARNING ASSETS 1,238,054 97,641 7.89 1,040,102 85,126 ----------- ----------- ----- ----------- ----------- NON-INTEREST-EARNING ASSETS: Cash and Due from Banks $ 37,509 $ 36,319 Premises and Equipment, Net 6,131 6,017 Other Assets(4) 44,912 42,285 ----------- ----------- TOTAL NON-INTEREST-EARNING ASSETS 88,552 84,621 ----------- ----------- Less: Allowance for Credit Losses (17,154) (21,671) Deferred Loan Fees (3,308) (3,553) Less: Securities Valuation Allowance for Securities Available for Sale (673) (2,035) ----------- ----------- TOTAL ASSETS $ 1,305,471 $ 1,097,464 =========== =========== INTEREST-BEARING LIABILITIES: Deposits: Interest-Bearing Demand $ 64,247 $ 862 1.34% $ 59,625 $ 975 Money Market 149,663 3,629 2.42 132,409 3,229 Savings 131,849 3,563 2.70 140,903 4,484 Time Deposits 667,047 32,843 4.92 494,973 25,886 Federal Funds Purchased and Securities Sold Under Repurchase Agreement 20,918 1,168 5.59 2,959 172 Other Borrowed Funds -- -- -- 22,521 1,076 Subordinated Debt 15,000 1,596 10.64 15,000 1,596 ----------- ----------- ---- ----------- ----------- TOTAL INTEREST-BEARING LIABILITIES 1,048,724 43,661 4.16 868,390 37,418 ----------- ----------- ---- ----------- ----------- NON-INTEREST-BEARING LIABILITIES: Demand Deposits $ 132,088 $ 120,902 Other Liabilities 18,501 14,120 ----------- ----------- Total Non-Interest Bearing Liabilities 150,589 135,022 ----------- ----------- Total Liabilities 1,199,313 1,003,412 Stockholders' Equity 106,158 94,052 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,305,471 $ 1,097,464 =========== =========== NET INTEREST INCOME/SPREAD $ 53,980 3.73% $ 47,708 =========== ========== NET INTEREST MARGIN 4.36% 1994 - ------------------------------------------------------------------------------------------------- YIELD/ AVERAGE YIELD/ (IN THOUSANDS) RATE% BALANCE INTEREST RATE% - ------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans and Leases(1)(2) 10.14% $ 507,161 $ 48,478 9.56% Taxable Securities 6.59 321,464 20,030 6.23 Tax-Exempt Securities(3) 6.48 8,018 520 6.49 Interest-Bearing Deposits 2.05 717 26 3.63 Federal Funds Sold and Securities Purchased Under Agreement to Resell 5.94 88,060 3,728 4.23 ----- ----------- ----------- ---- TOTAL INTEREST-EARNING ASSETS 8.18 925,420 72,782 7.86 ----- ----------- ----------- ---- NON-INTEREST-EARNING ASSETS: Cash and Due from Banks $ 35,711 Premises and Equipment, Net 5,994 Other Assets(4) 45,455 ----------- TOTAL NON-INTEREST-EARNING ASSETS 87,160 ----------- Less: Allowance for Credit Losses (15,514) Deferred Loan Fees (3,851) Less: Securities Valuation Allowance for Securities Available for Sale (1,732) ----------- TOTAL ASSETS $ 991,483 =========== INTEREST-BEARING LIABILITIES: Deposits: Interest-Bearing Demand 1.64% $ 59,623 $ 1,043 1.75% Money Market 2.44 134,992 3,167 2.35 Savings 3.18 107,650 2,619 2.43 Time Deposits 5.23 432,031 18,676 4.32 Federal Funds Purchased and Securities Sold Under Repurchase Agreement 5.81 10,299 360 3.50 Other Borrowed Funds 4.78 30,000 1,428 4.76 Subordinated Debt 10.64 15,000 1,596 10.64 ---- ----------- ----------- ---- TOTAL INTEREST-BEARING LIABILITIES 4.31 789,595 28,889 3.66 ---- ----------- ----------- ---- NON-INTEREST-BEARING LIABILITIES: Demand Deposits $ 102,734 Other Liabilities 8,911 ----------- TOTAL NON-INTEREST BEARING LIABILITIES 111,645 ----------- Total Liabilities 901,240 Stockholders' Equity 90,243 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 991,483 =========== NET INTEREST INCOME/SPREAD 3.87% $ 43,893 4.20% =========== NET INTEREST MARGIN 4.59% 4.74%
(1) FOR THE PURPOSES OF THESE COMPUTATIONS, NON-ACCRUAL LOANS ARE INCLUDED IN THE DAILY AVERAGE LOAN AMOUNTS OUTSTANDING. (2) LOAN INTEREST INCLUDES NET LOAN FEES FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 OF $4,150,000, $4,112,000 AND $4,096,000, RESPECTIVELY. (3) TAX-EXEMPT INTEREST INCOME HAS NOT BEEN ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS. (4) OTHER ASSETS INCLUDES AVERAGE OTHER REAL ESTATE OWNED, NET, FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 OF $11,885,000, $5,710,000 AND $12,675,000, RESPECTIVELY. 3 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, - ------------------------------------------------------------------------------------------------------------------------ 1996 COMPARED 1995 COMPARED WITH 1995 WITH 1994 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 $ 3,119 $ 899 $ 4,018 $ (1,847) $ 2,902 $ 1,055 Taxable Securities(2) 9,709 (1,472) 8,237 6,956 1,207 8,163 Tax-Exempt Securities(2) (188) (10) (198) (61) -- (61) Interest-Bearing Deposits (1) -- (1) (17) (8) (25) Federal Funds Sold and Securities Purchased Under Agreement to Resell 937 (478) 459 1,437 1,775 3,212 -------- -------- -------- -------- -------- -------- TOTAL INTEREST-EARNING ASSETS 13,576 (1,061) 12,515 6,468 5,876 12,344 INTEREST PAID ON(1): Deposits: Interest-Bearing Demand 72 (185) (113) -- (66) (66) Money Market 418 (18) 400 (61) 123 62 Savings (275) (646) (921) 934 931 1,865 Time 8,548 (1,591) 6,957 2,954 4,255 7,209 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,002 (6) 996 (345) 156 (189) Other Borrowed Funds (1,076) -- (1,076) (357) 5 (352) Subordinated Debt -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- TOTAL INTEREST-BEARING LIABILITIES 8,689 (2,446) 6,243 3,125 5,404 8,529 -------- -------- -------- -------- -------- -------- CHANGE IN NET INTEREST INCOME $ 4,887 $ 1,385 $ 6,272 $ 3,343 $ 472 $ 3,815 ======== ======== ======== ======== ======== ========
(1) CHANGES IN INTEREST INCOME AND INTEREST EXPENSE ATTRIBUTABLE TO CHANGES IN RATE/VOLUME HAVE BEEN ALLOCATED TO THE CHANGE DUE TO VOLUME AND THE CHANGE DUE TO RATE IN RELATION TO THE ABSOLUTE DOLLAR AMOUNT OF THE CHANGE IN EACH. (2) INTEREST INCOME FROM MUNICIPAL BONDS AND AUCTION PREFERRED STOCKS IS NOT ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS. PROVISION FOR CREDIT LOSSES For 1996, the provision for credit losses was $4,500,000 compared to $18,570,000 for 1995, representing a decrease of $14,070,000, or 75.8%. The decline of the provision for credit losses was primarily due to the reduction of non-accrual loans and a decrease in net charge-offs. As of December 31, 1996, non-accrual loans totaled $11.7 million compared with $43.7 million as of December 31, 1995. Despite the addition of loans to non-accrual status totaling $26 million, the combination of loans returned to accrual status, repayments and transfers to other real estate owned (OREO), caused the substantial reduction of non-accrual loans. Please refer to the discussion "Non-performing Assets" following. Net charge-offs for 1996 were $5.0 million compared to $24.9 million for 1995, a reduction of $20.0 million, or 80.1%. The decline of net charge-offs is the result of successful collection efforts and the recovery of the southern California economy and the improvement of the commercial real estate market. 4 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 reflected 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 would no longer be criticized by the regulators. It is believed that the accounting resulted 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 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/loss on sale of securities, fees and commissions collected from the Bank's international activities, fees from servicing Small Business Administration (SBA) loans, and income from escrow services. Non-interest income in 1996 totaled $6,073,000, representing a modest increase of $31,000, over $6,042,000 of non-interest income in 1995. There were no significant changes in any of the categories of non-interest income. 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. There were no significant changes in any of the categories of non-interest income. NON-INTEREST EXPENSE Non-interest expense increased $1,233,000, or 4.7%, from $26,104,000 in 1995 to $27,337,000 in 1996. Salaries and employee benefits increased $2,400,000 in 1996, representing a 21.4% increase. Of this increase, $1,989,000 was due to higher incentive compensation, directly related to the higher level of pre-tax income earned. The increase of salaries and employee benefits was partially offset by a $734,000 decrease of net other real estate owned expense, and a $394,000 reduction of other expense. The reduced net other real estate owned expense was due to decreases in all expense categories of OREO and the inclusion of a net gain from the sales of properties amounting to $441,000 compared to a net gain of $163,000 for 1995. The decrease of other expense was $394,000 comparing 1996 to 1995. Other expense is comprised of a number of expense classifications such as office supplies and communication expense, professional services expense, FDIC assessment expense and real estate investment expense. The net reduction of other expense is primarily due to the decreased cost of the Bank's FDIC insurance in 1996 from $1,299,000 to $150,000, partially offset by an increase in legal fees. The reduced FDIC insurance expense was the result of the upgrading of the Bank's rating for deposit insurance purposes. In addition, effective July, 1996, the rate structure for all insured depository institutions was decreased. The increase of legal fee expense was related to the resolution of problem credits. Non-interest expense increased $1,794,000, or 7.4%, to $26,104,000 in 1995 from $24,310,000 in 1994. The increase was primarily from the growth of salaries and employee benefits, which increased to $11,201,000 in 1995 from $9,883,000 in 1994, 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 growth of personnel. As of December 31, 1995 and 1994, the full time equivalent number of employees was 317 and 289, respectively. 5 Contributing also to the increase of non-interest expense was a $303,000, or 11.7%, increase in occupancy expense to $2,886,000 in 1995 from $2,583,000 in 1994. This increase primarily related 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. Other expenses increased $280,000, or 3.8% to $7,654,000 in 1995 from $7,374,000 in 1994. There was an increase of $306,000 in legal fees 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. PROVISION FOR INCOME TAXES For 1996, the Company's provision for income taxes was $9,179,000, an increase of $7,752,000, or 543%, from $1,427,000 recorded in 1995. The effective tax rate in 1996 was 32.5% as compared to 15.7% in 1995. The increased effective tax rate was due to an increased level of pre-tax income and the fact that in both years, the tax liability based on pre-tax income was reduced by approximately the same level of low income housing ("LIH") tax credits. For 1996, the LIH tax credit was $1,878,000 compared to $2,093,000 in 1995. 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 LIH tax credits in 1995 compared to 1994. FINANCIAL CONDITION The Company's assets totaled $1,352.1 million as of December 31, 1996, representing an increase of $147.6 million, or 12.3%, over the $1,204.5 of million total assets as of December 31, 1995. The asset growth was primarily funded by an increase of total deposits of $155.3 million, representing a 14.8% increase. The asset growth was reflected in all categories of interest-earning assets with the exception of securities held to maturity. Loans and leases reflected the largest growth, increasing by $130.4 million. Federal funds sold and securities purchased under agreements to resell increased $15.2 million and securities available for sale increased by $12.7 million. Securities held to maturity decreased $21.3 million. LOANS AND LEASES The growth of loans and leases to $602.4 million as of December 31, 1996, from $471.9 million as of December 31, 1995 represents a 27.6% increase. With the exception of installment loans, which represents the smallest component of the Bank's loan portfolio, all categories reflected growth compared to levels as of December 31, 1995. The loan growth is in line with management's intentions for increasing the loan to deposit ratio of the Company and reflects the improvement of the California economy. The largest growth component of the portfolio was loans to depository institutions. As of December 31, 1996, these loans totaled $50 million compared to $5 million as of December 31, 1995. Pursuant to Bank policy, loans to depository institutions may range for periods of time ranging from 2 to 31 days. As of December 31, 1996, there were four loans outstanding to depository institutions, with 30-day terms, maturing in January, 1997. Conventional real estate loans are loans, other than construction loans, secured by first trust deeds or junior real estate liens. As of December 31, 1996, conventional real estate loans totaled $273.1 million, or 45.3%, of the total loan portfolio. As of December 31, 1995 conventional real estate loans outstanding were $239.0 million, or 50.6%, of the total loan portfolio. Construction loans are real estate loans secured by first trust deeds. As of December 31, 1996, construction loans totaled $66.6 million, or 11.1%, of the total loan portfolio. As of December 31, 1995, construction loans totaled $53.4 million, or 11.3%, of the total loan portfolio. 6 The Company limits the loan to value ratio on conventional real estate and construction loans to a maximum of 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. The following table sets forth the breakdown by type of collateral for construction and conventional real estate loans as of December 31, 1996 and 1995:
1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) CONVENTIONAL CONVENTIONAL CONSTRUCTION REAL ESTATE CONSTRUCTION REAL ESTATE PROJECT TYPE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE - --------------------------------------------------------------------------------------------------------------------------- RESIDENTIAL: Single-Family $ 18,913 28% $ 38,688 14% $ 14,007 26% $ 33,470 14% Townhouse 745 1 3,970 2 1,094 2 4,049 2 Condominiums 28,855 44 6,587 2 26,320 49 5,406 2 Multi-Family 6,784 10 39,204 14 10,607 20 36,108 15 Land Development -- -- 158 -- -- -- 600 -- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL RESIDENTIAL $ 55,297 83% $ 88,607 32% $ 52,028 97% $ 79,633 33% -------- -------- -------- -------- -------- -------- -------- -------- NON-RESIDENTIAL: Warehouse $ 2,617 4% $ 38,582 14% $ -- --% $ 28,794 12% Retail Facilities 8,658 13 70,073 26 1,395 3 55,790 24 Office -- -- 34,634 13 -- -- 29,268 12 Hotel and Motel -- -- 38,178 14 -- -- 42,681 18 Other -- -- 3,006 1 -- -- 2,850 1 -------- -------- -------- -------- -------- -------- -------- -------- TOTAL NON-RESIDENTIAL $ 11,275 17% $184,473 68% $ 1,395 3% $159,383 67% -------- -------- -------- -------- -------- -------- -------- -------- TOTAL $ 66,572 100% $273,080 100% $ 53,423 100% $239,016 100% ======== ======== ======== ======== ======== ======== ======== ========
Substantially all of the collateral securing construction and conventional real estate loans is located in California. Commercial loans include $21.7 million of unsecured commercial loans, $45.5 million of SBA loans of which $22.3 million are government sponsor-guaranteed, and $116.1 million of trade financing loans. As of December 31, 1996, commercial loans represented 30.4% of the total loans outstanding compared to 32.2% at December 31, 1995. The growth of commercial loans totaling $31.6 million was primarily from trade-financing loans which increased $32.8 million. The improvement of the California economy and the growth in international trade was primarily responsible for this growth. 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. Other loans totaled $22.4 million and $22.3 million, as of December 31, 1996 and 1995, respectively. 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. 7 The following table sets forth the amount of loans outstanding in each category as of the dates indicated:
DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Commercial $183,268 $151,709 $132,806 $126,098 $ 88,186 Real Estate-Construction 66,572 53,423 60,610 79,513 78,020 Real Estate-Conventional 273,080 239,016 281,225 270,566 250,680 Installment 86 231 377 434 627 Other Loans 22,362 22,310 25,699 28,455 29,192 Leveraged Leases 6,986 255 273 290 - Loans to Depository Institutions 50,000 5,000 - - - -------- -------- -------- -------- -------- TOTAL $602,354 $471,944 $500,990 $505,356 $446,705 ======== ======== ======== ======== ========
The following table shows the maturity schedule of the Company's loans outstanding as of December 31, 1996, which are based on the remaining scheduled repayments of principal. Non-accrual loans of $11.7 million 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 $131,583 $ 8,078 $ 43,607 $183,268 Real Estate-Construction 62,624 3,629 319 66,572 Real Estate-Conventional 65,788 144,951 62,341 273,080 Installment 19 67 -- 86 Other Loans 22,299 63 -- 22,362 Leveraged Leases -- 69 6,917 6,986 Loans to Depository Institutions 50,000 -- -- 50,000 -------- -------- -------- -------- TOTAL $332,313 $156,857 $113,184 $602,354 ======== ======== ======== ========
As of December 31, 1996, 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 $ 77,765 $ 75,974 $ 48,397 $202,136 Total Variable Rate 388,499 -- -- 388,499 -------- -------- -------- -------- TOTAL $466,264 $ 75,974 $ 48,397 $590,635 ======== ======== ======== ========
8 The balance of loans and leases includes loans held for sale totaling $1.9 million as of December 31, 1996. During 1996, approximately $29 million of loans held for sale were originated and approximately $33 million were sold. As of December 31, 1996, approximately $59 million of loans were serviced by the Bank on behalf of 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, other real estate owned and restructured loans as of the dates indicated:
DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------- Loan 90 Days or More Past Due and Still Accruing $ 6,779 $ 9 $ 999 $ 4,059 $ 87 Non-accrual Loans 11,719 43,712 46,672 22,033 15,965 ------- ------- ------- ------- ------- Total Past Due Loans 18,498 43,721 47,671 26,092 16,052 Restructured Loans 23,125 10,151 20,865 11,898 -- ------- ------- ------- ------- ------- Total Non-performing Loans 41,623 53,872 68,536 37,990 16,052 Other Real Estate Owned, Net 12,988 7,686 5,051 15,541 14,713 ------- ------- ------- ------- ------- TOTAL NON-PERFORMING ASSETS $54,611 $61,558 $73,587 $53,531 $30,765 ======= ======= ======= ======= ======= NON-PERFORMING ASSETS TO PERIOD END LOANS AND LEASES, NET, PLUS OTHER REAL ESTATE OWNED, NET 9.17% 13.39% 15.35% 10.60% 6.83% ======= ======= ======= ======= =======
Total non-performing assets decreased to $54.6 million as of December 31, 1996, from $61.6 million as of December 31, 1995, representing a $7.0 million, or 11.4% reduction. The net decrease was primarily due to a $32.0 million, or 73.2%, decline of non-accrual loans. As of December 31, 1996 non-accrual loans were $11.7 million compared to $43.7 million as of December 31, 1995. 9 The following table analyzes the decline of non-accrual loans during the year ended December 31, 1996:
(IN THOUSANDS) - -------------------------------------------------------------------------------- Balance at December 31, 1995 $ 43,712 Add: Loans Placed on Non-accrual Status 26,045 Less: Charge-offs (5,110) Returned to Accrual Status (20,049) Repayments (14,594) Transferred to OREO (18,285) -------- BALANCE AT DECEMBER 31, 1996 $ 11,719 ========
The following table breaks out the Company's non-accrual loans by loan category as of December 31, 1996 and 1995:
(IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Commercial $ 3,219 $ 3,802 Real Estate-Construction 477 3,630 Real Estate-Conventional 8,023 36,241 Other Loans -- 39 ------- ------- TOTAL $11,719 $43,712 ======= =======
Loans 90 days or more past due and still accruing totaled $6.8 million, as of December 31, 1996, up from $9,000, as of December 31, 1995. The balance of $6.8 million is comprised of two real estate credits of $5.1 million and $1.7 million. The $5.1 million credit is collateralized by a mobile home park with an appraised value substantially in excess of the loan balance. Interest payments continue to be made on a monthly basis approximately 45 days late. It is expected that either the property will be sold by the borrower with the Bank providing financing or it will be paid in full within 90 days. The $1.7 million is currently going through renewal negotiations at which time it will be removed from the 90 days or more past due and still accruing classification. The interest on the loan is current. The terms of the renewal are expected to be similar to those of the existing credit. The balance of restructured loans as of December 31, 1996, was $23.1 million compared to $10.2 million as of December 31, 1995, representing a $12.9 million, or 126%, increase. A loan is categorized as restructured if the original interest rate on such loan, the repayment terms, or both, are modified due to a deterioration in the financial condition of the borrower. Restructured loans may also be put on a non-accrual status in keeping with the Bank's policy of classifying loans which are 90 days past due as to principal and/or interest. Restructured loans which are non-accrual loans are not included in the balance of restructured loans. As of December 31, 1996, restructured loans consisted of sixteen real estate credits with a balance of $23.1 million. This compares to nine real estate credits with a balance of $10.2 million as of December 31, 1995. The increase of the balance of restructured loans was primarily due to the return to accrual status of six restructured credits totaling $10.6 million, as of December 31, 1996. 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 weighted average yield of the restructured loans (on accrual status) as of December 31, 1996, was 10.19%. With the exception of one loan which is currently 30 days but less than 90 days past due, all restructured loans are performing pursuant to the terms and conditions of the restructuring. The following table breaks out the restructured loans by accrual status as of the dates indicated:
DECEMBER 31, - -------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Restructured Loans: On Accrual Status $23,125 $10,151 On Non-accrual Status 2,820 16,727 ------- ------- TOTAL $25,945 $26,878 ======= =======
There are no commitments to lend additional funds on any of the restructured loans including those both on accrual status and on non-accrual status. Other real estate owned ("OREO"), net of valuation allowance of $1.8 million, totaled $13.0 million, representing an increase of $5.3 million, or 69.0%, from the balance of $7.7 million, net of valuation allowance of $0.6 million, as of December 31, 1995. As of December 31, 1996 and December 31, 1995, OREO consisted of 26 properties and 14 properties, respectively. With the exception of 7 properties, all currently outstanding properties became OREO in 1996. The net increase in OREO is the result of management emphasis on resolving non-accrual loans. During 1996, properties with a fair value of $17.9 million were transferred to OREO. During 1996, OREO with a carrying value of $11.4 million was sold. The net gain realized on the sales for 1996 was $441,000. 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. Nine properties comprise the land category of OREO. The Company does not intend to develop these properties; rather, it will sell the land undeveloped. 10 The following table sets forth OREO by type of property as of the dates indicated:
DECEMBER 31, - -------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- PROPERTY TYPE Single-Family Residential $ 901 $ 11 Condominium 6,284 509 Multi-Family Residential -- 978 Warehouse -- 188 Land for Residential 1,413 1,054 Land for Commercial 735 -- Retail Facilities 5,228 5,289 Office 250 268 Less: Valuation Allowance (1,823) (611) -------- -------- TOTAL $ 12,988 $ 7,686 ======== ========
In accordance with SFAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118, 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 following table discloses pertinent information as it relates to the Company's impaired loans as of and for the dates indicated:
AS OF AND FOR THE YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Recorded Investment with Related Allowance $21,210 $45,862 Recorded Investment with no Related Allowance $ 2,303 $ -- ------- ------- TOTAL RECORDED INVESTMENT $23,513 $45,862 ======= ======= Allowance for Impaired Loans $ 2,011 $ 5,803 Average Balance of Impaired Loans before Allowance for the Year Indicated $35,725 $44,206 Interest Income Recognized $ 2,067 $ 808
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 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. Of the amount of interest income recognized in 1996 and 1995, no interest was recognized under the cash basis method. Management cannot predict the extent to which the current economic environment, including the real estate market, may improve or worsen, or the full impact such environment may have on the Bank's loan portfolio. Furthermore, as the Bank's primary regulators review the loan portfolio as part of their routine, periodic examinations of the Bank, their assessment of specific credits may affect the level of the Bank's non-performing loans. Accordingly, there can be no assurance that other loans will not be placed on non-accrual, become 90 days or more past due, have terms modified in the future, or become OREO. The effect of non-accrual loans outstanding as of year-end on interest income for the years 1996, 1995 and 1994 is presented below:
(IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------- Contractual Interest Due $ 2,526 $ 6,969 $ 5,844 Interest Recognized (1,470) (1,098) (2,768) ------- ------- ------- NET INTEREST FOREGONE $ 1,056 $ 5,871 $ 3,076 ======= ======= =======
Contractual interest due is based on original loan amounts. Any partial charge-offs are not considered in the determination of contractual interest due. The effect of restructured loans outstanding as of year-end on interest income for the years ended December 31, 1996, 1995 and 1994 is presented below:
(IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------- Contractual Interest Due $ 3,709 $ 1,713 $ 1,888 Interest Recognized (3,113) (1,150) (1,559) ------- ------- ------- NET INTEREST FOREGONE $ 596 $ 563 $ 329 ======= ======= =======
11 ALLOWANCE FOR CREDIT LOSSES As of December 31, 1996, the balance of the allowance for credit losses was $16.2 million, representing 2.69% of outstanding loans and leases. This compares to an allowance for credit losses of $16.7 million as of December 31, 1995, representing 3.53% of outstanding loans and leases. The decline of this ratio is primarily due to the reduction of the non-accrual loans to $11.7 million as of December 31, 1996 from $43.7 million as of December 31, 1995. In addition, net charge-offs declined substantially, to $5.0 million in 1996 from $24.9 million in 1995. 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.
1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------ End of Period Allowance to Non-performing Loans 38.94% 30.95% 33.60% 31.53% 46.74% Provision for Credit Losses Divided by Net Charge-offs 0.91 0.75 3.15 1.93 1.71
The ratio of the allowance to non-performing and restructured loans improved to 38.9% as of December 31, 1996 from 31.0% as of December 31, 1995. In addition, the allowance as a percentage of non-accrual loans increased to 138% as of December 31, 1996 from 38.6% as of December 31, 1995. 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, 1996. 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) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------- Balance at Beginning of Year $16,674 $23,025 $11,977 $ 7,503 $ 5,910 CHARGE-OFFS: Commercial 1,492 2,219 1,917 937 528 Real Estate 5,810 23,293 3,848 3,695 1,403 Installment 148 8 37 493 342 Leverage Leases -- -- -- -- 59 ------- ------- ------- ------- ------- TOTAL CHARGE-OFFS 7,450 25,520 5,802 5,125 2,332 ------- ------- ------- ------- ------- RECOVERIES: Commercial 315 43 423 83 88 Real Estate 2,139 553 218 201 -- Installment & Other 31 3 15 15 7 ------- ------- ------- ------- ------- TOTAL RECOVERIES 2,485 599 656 299 95 ------- ------- ------- ------- ------- Net Charge-Offs 4,965 24,921 5,146 4,826 2,237 Provision Charged to Operating Expenses 4,500 18,570 16,194 9,300 3,830 ------- ------- ------- ------- ------- BALANCE AT END OF YEAR $16,209 $16,674 $23,025 $11,977 $ 7,503 ======= ======= ======= ======= ======= Ratio of Net Charge-Offs to Average Loans and Leases Outstanding 0.96% 5.10% 1.01% 1.00% 0.48% ======= ======= ======= ======= ======= Allowance for Credit Losses to Year-End Loans and Leases 2.69% 3.53% 4.60% 2.37% 1.72% ======= ======= ======= ======= ======= Allowance for Credit Losses to Past Due Loans 87.63% 38.14% 48.30% 45.90% 46.74% ======= ======= ======= ======= =======
12 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, - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 (DOLLARS IN THOUSANDS) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) - ------------------------------------------------------------------------------------------------------------------------------------ Commercial $ 4,664 30.4% $ 4,239 32.2% $ 3,651 26.5% $ 2,405 25.0% $1,638 19.7% Real Estate - Construction 2,796 11.1 928 11.3 2,232 12.1 1,206 15.7 1,515 17.5 Real Estate - Conventional 8,337 45.3 11,167 50.6 16,809 56.2 7,217 53.5 3,393 56.1 Installment 1 -- 3 0.1 4 0.1 9 0.1 20 0.1 Other Loans 313 3.7 280 4.7 327 5.1 384 5.6 442 6.6 Leveraged Leases 98 1.2 -- -- -- -- -- 0.1 -- -- Term Federal Funds Sold -- 8.3 -- -- -- -- -- -- -- -- Unallocated -- -- 57 1.1 2 -- 756 -- 495 -- ------- ----- ------- ----- ------- ----- ------- ----- ------ ----- TOTAL $16,209 100.0% $16,674 100.0% $23,025 100.0% $11,977 100.0% $7,503 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ====== =====
(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, 1996, the Company recorded net unrealized holding gains of $1,120,000 on its available for sale portfolio which is included as a separate component of stockholders' equity amounting to $646,000, representing the unrealized holding gain, net of tax. Proceeds from the sales of securities available for sale were $41,367,000 for the year ended December 31, 1996. There were no sales of securities available for sale for the year ended December 31, 1995. Proceeds from the sale of securities available for sale were $1,140,000 for the year ended December 31, 1994. There were no sale of securities held to maturity in 1996 or in 1995. Gross realized gains on sales of securities were $28,000, $0, and $124,000 for 1996, 1995, and 1994, respectively. Gross realized losses on sales of securities were $252,000, $0, and $150,000 in 1996, 1995, and 1994, respectively. The 1996 gross realized losses includes the write-off of a $250,000 convertible note deemed worthless. The Company has increased its holding of auction preferred stock, asset-backed securities and collateralized mortgage obligations, while reducing its holdings of U.S. Government Agency securities. These changes are a result of ongoing management of the investment portfolio with regard to relative value and sector diversification for securities that meet eligibility requirements. 13 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) 1996 1995 1994 - -------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY U. S. Treasuries $ -- $ -- $ 1,978 U. S. Government Agencies -- -- 10,726 Mortgage Backed Securities -- -- 19,048 State and Municipal Securities 2,222 6,460 7,322 Commercial Paper -- -- 2,999 Collateralized Mortgage Obligations 56 82 14,162 Asset Backed Securities 9,996 27,011 27,041 -------- -------- -------- TOTAL $ 12,274 $ 33,553 $ 83,276 ======== ======== ======== SECURITIES AVAILABLE FOR SALE U. S. Treasuries $ 1,891 $ 16,944 $ 37,489 U. S. Government Agencies 160,666 223,528 193,458 Mortgage Backed Securities 51,256 62,199 31,303 Corporate Notes 19,594 28,315 42,154 Collateralized Mortgage Obligations 165,798 133,957 44,408 Asset Backed Securities 37,934 -- -- Auction Preferred Stocks 72,450 32,200 -- Other Securities 10,232 9,998 8,423 -------- -------- -------- TOTAL $519,821 $507,141 $357,235 ======== ======== ========
The following table shows the contractual maturities of securities at December 31, 1996, 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 $ 2.22 6.42% $ -- --% $ -- --% $ -- --% $ 2.22 6.42% Collateralized Mortgage Obligations -- -- -- -- 0.06 9.79 -- -- 0.06 9.79 Asset Backed Securities 5.98 9.37 -- -- -- -- 4.01 8.50 9.99 9.01 ------- ---- ------- ---- ------ ---- ------- ---- ------- ---- TOTAL $ 8.20 8.57% $ -- --% $ 0.06 9.79% $ 4.01 8.50% $ 12.27 8.55% ======= ==== ======= ==== ====== ==== ======= ==== ======= ==== SECURITIES AVAILABLE FOR SALE U. S. Treasuries $ -- --% $ 1.89 5.30% $ -- --% $ -- --% $ 1.89 5.30% U.S. Government Agencies 14.87 6.57 145.58 6.24 -- -- 0.22 6.97 160.67 6.27 Mortgage Backed Securities 0.33 0.70 2.57 7.53 -- -- 48.36 6.16 51.26 6.20 Corporate Notes 10.17 8.06 9.42 8.57 -- -- -- -- 19.59 8.30 Collateralized Mortgage Obligations -- -- 1.51 6.02 18.90 6.38 145.39 6.54 165.80 6.52 Asset Backed Securities -- -- -- -- -- -- 37.93 7.06 37.93 7.06 Auction Preferred Stocks 72.45 5.65 -- -- -- -- -- -- 72.45 5.65 Other Securities 10.23 6.91 -- -- -- -- -- -- 10.23 6.91 ------- ---- ------- ---- ------ ---- ------- ---- ------- ---- TOTAL $108.05 6.11% $160.97 6.38% $18.90 6.38% $231.90 6.55% $519.82 6.40% ======= ==== ======= ==== ====== ==== ======= ==== ======= ====
14 The following table summarizes the aggregate fair value of securities of any one issuer which exceeds ten percent of stockholders' equity as of December 31, 1996:
(IN THOUSANDS) - -------------------------------------------------------------------------------- ISSUER BOOK VALUE FAIR VALUE - -------------------------------------------------------------------------------- GE Capital $11,791 $11,955 Industry Mortgage Company 12,282 12,384 International Lease Finance 17,000 17,000 JP Morgan 15,800 15,800 Sara Lee 13,400 13,400 Transamerica 20,010 20,052 ------- ------- $90,283 $90,591 ======= =======
The issues are primarily auction preferred stock and asset backed securities. DEPOSITS The Company's deposits totaled $1,201.5 million as of December 31, 1996, representing a $155.3 million, or 14.8%, increase over the $1,046.2 million total deposits as of December 31, 1995. The largest deposit growth was in the time certificates of deposit of $100,000 or more which increased $137.3 million, or 33.6%. During 1996, average deposits increased to $1,144.9 million from $948.8 million during 1995, representing an increase of $196.1 million, or 20.7%. The following table sets forth the average amount of and the average rate paid on each of the following deposit categories which are in excess of 10 percent of average total deposits for the years ending December 31, 1996 and 1995:
1996 1995 - ----------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AMOUNT RATIO RATE AMOUNT RATIO RATE - ----------------------------------------------------------------------------------------------------------- Deposits: Noninterest-Bearing Demand Deposits $ 132,088 11.54% --% $ 120,902 12.74% --% Interest-Bearing Demand Deposits 213,910 18.68 2.10 192,033 20.24 2.19 Saving Deposits 131,849 11.52 2.70 140,904 14.85 3.18 Time Deposits 667,047 58.26 4.92 494,973 52.17 5.23 ------------------------------- ------------------------------ TOTAL DEPOSITS $1,144,894 100.00% 4.04% $ 948,812 100.00% 4.18% =============================== ==============================
The growth of deposits from the Company's customers reflects the continuing tradition of personalized services. There are no brokered deposits outstanding. The Company believes that the majority of its deposit customers have strong ties to the Bank. Although the Company has a significant amount of time certificates of deposit of $100,000 or more having maturities of one year or less, the depositors have generally renewed their deposits in the past at their maturity. Accordingly, the Company believes its deposit source to be stable. The following table is indicative of the length of the relationship of depositors of time certificates of deposit of $100,000 or more with the Bank, as of December 31, 1996:
(DOLLARS IN THOUSANDS) AMOUNT NO. OF ACCOUNTS - -------------------------------------------------------------------------------- 3 years or more $273,062 1,684 2 - 3 years 56,969 400 1 - 2 years 102,787 596 Less than 1 year 112,760 587 -------- ----- TOTAL $545,578 3,267 ======== =====
The maturity schedule of time certificates of deposit of $100,000 or more as of December 31, 1996, is as follows:
(IN THOUSANDS) AMOUNT - -------------------------------------------------------------------------------- 3 Months or Less $264,776 Over 3 Months Through 6 Months 103,075 Over 6 Months Through 12 Months 176,694 Over 12 Months 1,033 -------- TOTAL $545,578 ========
15 OTHER BORROWINGS In September 1992, the Company obtained an advance from the Federal Home Loan Bank of San Francisco ("FHLB") of $30.0 million at a 4.76% fixed rate of interest. The advance matured on October 2, 1995 and was repaid. In 1990, the Company issued $15.0 million of subordinated debentures with a contractual annual interest rate of 10.52% and a stated maturity of September 1, 2000. REGULATORY MATTERS On April 23, 1996, the Bank was notified by its primary regulator, the Federal Deposit Insurance Corporation ("FDIC"), that the Memorandum of Understanding ("MOU") dated August 17, 1995, had been terminated based upon the results of a safety and soundness examination dated January 8, 1996. The Company's Board of Directors received a letter, dated July 19, 1996, from the Federal Reserve Bank of San Francisco (the "Federal Reserve") indicating that the existing board resolution which required the Company to inform the Federal Reserve prior to: (a) declaring cash or in-kind dividends; (b) incurring debt; (c) repurchasing stock; or (d) entering into any agreements to acquire any entities or portfolios, was no longer required. The Company's Board rescinded the resolution at its August Board meeting. CAPITAL RESOURCES Stockholders' equity totaled $116.6 million as of December 31, 1996, an increase of $17.2 million, or 17.2%, from $99.5 million as of December 31, 1995. The increase from year-end 1995 to year-end 1996 was primarily due to net income of $19,037,000, less cash dividends paid to shareholders of $2,424,000. For the year ended December 31, 1996, the ratio of the Company's average stockholders' equity to average assets was 8.13%. For the year ended December 31, 1995 the ratio of the Company's average stockholders' equity to average assets was 8.57%. 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%. 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, 1996, the Company's and the Bank's Tier 1 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 11.97% 11.81% 4% 6% Total 13.69% 13.06% 8% 10% Leverage Ratio 8.74% 8.61% 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 $717 million, or 53.0%, of total assets as of December 31, 1996 compared with $614.0 million, or 51.1%, of total assets as of December 31, 1995. To further supplement its liquidity, the Company has established federal funds lines with correspondent banks and three master repurchase agreements with major brokerage companies. In August, 1992, the FHLB granted the Bank a line of credit equal to 25 percent of assets with terms up to 240 months. Management believes its liquidity sources to be stable and adequate. 16 As of December 31, 1996, total loans and leases represented 50.1% of total deposits. This compares to 45.1% as of December 31, 1995, and reflects the Company's intentions of increasing this ratio. As of December 31, 1996, management is not aware of any information that would result in or that was reasonably likely to have a material effect on the Company's liquidity and capital resources. The liquidity of the parent company, GBC Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, General Bank, subject to the limitations imposed by the Financial Code of the State of California. For 1996, General Bank paid/declared $13.0 million of cash dividends to GBC Bancorp. 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. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. As of December 31, 1996, a contract with a notional value of $500,000 was outstanding. These instruments 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 its 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 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. As of December 31, 1996 and 1995 there were outstanding fixed rate mortgages held for sale of $1.9 million and $6.3 million and a notional value of derivative instruments of $0.5 million and $0, respectively. For the years ended December 31, 1996 and 1995, the Company had realized net losses of $6,000 and $114,000 with unrealized losses of $625 and $0, 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. 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. "Gap" reports originated as a means to provide management with a tool to monitor repricing differences, or "gaps", between assets and liabilities repricing in a specified period, based upon their underlying contractual rights. The use of "gap" reports is thus limited to a quantification of the "mismatch" between assets and liabilities repricing within a unique specified timeframe. "Gap" reports cannot be used to quantify exposure to interest rate changes because they do not take into account timing differences between repricing assets and liabilities, and changes in the amount of prepayments. 17 As of December 31, 1996 there is a cumulative one year negative "gap" of $311.4 million, up from $241.1 million at December 31, 1995. The negative gaps would appear to be predictive of an increase in the net interest margin during 1996, as the average fed funds rate declined 52 basis points in 1996 as compared to 1995. However, due to the lag in repricing downward the rates paid on liabilities versus the immediate repricing downward of its assets, the Company did not realize a corresponding increase in the net interest margin. The Company uses a simulation analysis to attempt to predict changes in the yields earned on different asset categories and the rates paid on liabilities in relation to changes in market interest rates. The analysis has concluded that the Bank's liabilities reprice more slowly than it's assets, and that the Company's balance sheet has a positive gap when the timing of repricing is taken into account. This results in an interest rate sensitivity profile for the Company where it has exposure to a downward shift in interest rates. The Company has established an internal policy to manage its net interest income volatility to a change of 10% when the simulation is using an assumed instant change of money market rates of 100 basis points. As of year-end, the Company was well within that policy limit. The following table indicates the Company's interest rate sensitivity position as of December 31, 1996, 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 $ 97,065 $ 21,361 $ 160,791 $240,604 $ -- $ 519,821 Securities Held to Maturity 245 7,960 -- 4,069 -- 12,274 Federal Funds Sold and Securities Purchased Under Agreements to Resell 140,200 -- -- -- -- 140,200 Loans and Leases (1) (2) 360,227 56,037 75,974 48,397 -- 540,635 Loans to Depository Institutions 50,000 -- -- -- -- 50,000 Non-Earning Assets (2) -- -- -- -- 89,185 89,185 --------- --------- --------- -------- --------- ---------- TOTAL ASSETS $ 647,737 $ 85,358 $ 236,765 $293,070 $ 89,185 $1,352,115 ========= ========= ========= ======== ========= ========== SOURCE OF FUNDS FOR ASSETS: Deposits: Demand $ -- $ -- $ -- $ -- $ 158,728 $ 158,728 Interest Bearing Demand 213,697 -- -- -- -- 213,697 Savings 119,315 -- -- -- -- 119,315 TCD'S Under $100,000 104,586 58,590 1,019 -- -- 164,195 TCD'S $100,000 and Over 325,571 218,974 1,033 -- -- 545,578 --------- --------- --------- -------- --------- ---------- TOTAL DEPOSITS $ 763,169 $ 277,564 $ 2,052 $ -- $ 158,728 $1,201,513 ========= ========= ========= ======== ========= ========== Subordinated Debt $ -- $ 3,750 $ 11,250 $ -- $ -- $ 15,000 Other Liabilities -- -- -- -- 18,966 18,966 Stockholders' Equity -- -- -- -- 116,636 116,636 TOTAL LIABILITIES AND --------- --------- --------- -------- --------- ---------- STOCKHOLDERS' EQUITY $ 763,169 $ 281,314 $ 13,302 $ -- $ 294,330 $1,352,115 ========= ========= ========= ======== ========= ========== Interest Sensitivity Gap $(115,432) $(195,956) $ 223,463 $293,070 $(205,145) Cumulative Interest Sensitivity Gap $(115,432) $(311,388) $ (87,925) $205,145 $ -- Gap Ratio (% of Total Assets) -8.5% -14.5% 16.5% 21.7% -15.2% Cumulative Gap Ratio -8.5% -23.0% -6.5% 15.2% 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. 18 RECENT ACCOUNTING DEVELOPMENTS ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, AN AMENDMENT OF FASB STATEMENT NO. 65 The Company adopted statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement No. 65" ("SFAS 122") on January 1, 1996. SFAS 122 amends SFAS 65 to remove the distinction in accounting for mortgage servicing rights resulting from originated loans and those resulting from purchased loans. 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. Additionally, SFAS 122 requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. Mortgage servicing rights are amortized in proportion to and over the period of estimated net securities income. The implementation of SFAS 122 did not have a material impact on 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, or at least disclosed, in the case of stock options, 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 Company has elected to reflect the impact of SFAS 123 in the notes to consolidated financial statements. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 establishes new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. SFAS 125 also establishes new accounting requirements for pledged collateral. As issued, SFAS 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and earlier or retroactive application is not permitted. During 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127"). SFAS 127 defers for one year the effective date (a) of paragraph 15 of SFAS 125 and (b) for repurchase agreement, dollar-roll, securities lending, and similar transactions, of paragraphs 9 - 12 and 237 (b) of Statements 125. SFAS 127 provides additional guidance on the types of transactions for which the effective date of Statement 125 has been deferred. It is required that if it is not possible to determine whether a transfer occurring during calendar-year 1997 is part of a repurchase agreement, dollar-roll, securities lending, or similar transaction, then paragraphs 9 - 12 of Statement 125 should be applied to that transfer. It is not anticipated the adoption of SFAS 125 will have a material impact on the financial condition or results of operations of the Company. 19 SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Interest Income $ 97,641 $ 85,126 $ 72,782 $ 65,159 $ 65,731 Interest Expense 43,661 37,418 28,889 24,997 28,441 ---------- ---------- ---------- -------- -------- Net Interest Income Before Provision for Credit Losses 53,980 47,708 43,893 40,162 37,290 Provision for Credit Losses 4,500 18,570 16,194 9,300 3,830 ---------- ---------- ---------- -------- -------- Net Interest Income After Provision for Credit Losses 49,480 29,138 27,699 30,862 33,460 Non-Interest Income 6,073 6,042 5,936 8,286 4,420 Non-Interest Expense 27,337 26,104 24,310 22,012 18,283 ---------- ---------- ---------- -------- -------- Income Before Income Taxes 28,216 9,076 9,325 17,136 19,597 Provision for Income Taxes 9,179 1,427 1,796 5,196 6,585 ---------- ---------- ---------- -------- -------- Net Income $ 19,037 $ 7,649 $ 7,529 $ 11,940 $ 13,012 ========== ========== ========== ======== ======== BALANCE SHEET DATA AS OF DECEMBER 31 Assets $1,352,115 $1,204,506 $1,081,602 $957,260 $861,252 Loans and Leases, Net 582,507 451,891 474,276 489,394 435,880 Securities Available for Sale 519,821 507,141 357,235 199,109 189,408 Investment Securities 12,274 33,553 83,276 111,870 146,731 Deposits 1,201,513 1,046,200 934,020 790,575 697,020 Stockholders' Equity 116,636 99,477 87,683 86,438 76,209 PER SHARE DATA Earnings (2) $ 2.67 $ 1.14 $ 1.12 $ 1.76 $ 1.94 Cash Dividends Declared 0.36 0.32 0.32 0.32 0.32 Year End Book Value 17.24 14.89 13.17 13.00 11.51 Average Shares Outstanding (In 000's)(2 ) 7,135 6,729 6,720 6,774 6,707 FINANCIAL RATIOS Return on Average Assets 1.46% 0.70% 0.76% 1.32% 1.59% Return on Average Stockholders' Equity 17.93 8.13 8.34 14.47 18.25 Average Stockholders' Equity to Average Assets 8.13 8.57 9.10 9.10 8.72 Net Interest Margin (1)(3) 4.36 4.59 4.74 4.74 4.86 Net Charge-Offs to Average Loans and Leases 0.96 5.10 1.01 1.00 0.48 Non-performing Assets to Year End Loans and Leases, Net, Plus Other Real Estate Owned, Net (4) 9.17 13.39 15.35 10.60 6.83 Allowance for Credit Losses to Year End Loans and Leases 2.69 3.53 4.60 2.37 1.72 Cash Dividend Payout 13.49 28.07 28.57 18.18 16.49
(1) TAX-EXEMPT INTEREST INCOME IS NOT ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS. (2) PER SHARE DATA AND AVERAGE SHARES OUTSTANDING ARE ADJUSTED TO REFLECT THE 10% STOCK DIVIDEND TO SHAREHOLDERS 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. 20 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, - -------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------------------------------- ASSETS Cash and Due From Banks $ 46,809 $ 38,837 Federal Funds Sold and Securities Purchased Under Agreements to Resell 140,200 125,000 Securities Available for Sale at Fair Value (Amortized Cost of $518,701 and $504,163 at December 31, 1996 and 1995, Respectively) 519,821 507,141 Securities Held to Maturity (Fair Value of $12,463 and $34,370 at December 31, 1996 and 1995, Respectively) 12,274 33,553 Loans and Leases 602,354 471,944 Less: Allowance for Credit Losses (16,209) (16,674) Deferred Loan Fees (3,638) (3,379) ----------- ----------- Loans and Leases, Net 582,507 451,891 Bank Premises and Equipment, Net 5,806 6,101 Other Real Estate Owned, Net 12,988 7,686 Due From Customers on Acceptances 6,535 4,703 Real Estate Held for Investment 9,686 12,142 Accrued Interest Receivable and Other Assets 15,489 17,452 ----------- ----------- TOTAL ASSETS $ 1,352,115 $ 1,204,506 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Demand $ 158,728 $ 137,048 Interest Bearing Demand 213,697 200,614 Savings 119,315 129,202 Time Certificates of Deposit of $100,000 or More 545,578 408,289 Other Time Deposits 164,195 171,047 ----------- ----------- TOTAL DEPOSITS 1,201,513 1,046,200 Federal Funds Purchased and Securities Sold Under Repurchase Agreements $ -- $ 24,000 Subordinated Debt 15,000 15,000 Acceptances Outstanding 6,535 4,703 Accrued Expenses and Other Liabilities 12,431 15,126 ----------- ----------- Total Liabilities 1,235,479 1,105,029 STOCKHOLDERS' EQUITY: Common Stock, No Par or Stated Value; 20,000,000 Shares Authorized; 6,766,469 and 6,679,661 Shares Outstanding at December 31, 1996 and 1995, Respectively $ 47,281 $ 45,658 Securities Valuation Allowance, Net of Tax 646 1,723 Retained Earnings 68,716 52,103 Foreign Currency Translation Adjustments (7) (7) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 116,636 99,477 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,352,115 $ 1,204,506 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and Leases, Including Fees $ 53,551 $49,533 $ 48,478 Securities Available for Sale 34,823 22,161 14,018 Securities Held to Maturity 1,868 6,474 6,528 Due From Financial Institutions-Time -- 1 26 Federal Funds Sold and Securities Purchased under Agreements to Resell 7,395 6,940 3,728 Other 4 17 4 -------- ------- -------- TOTAL INTEREST INCOME 97,641 85,126 72,782 -------- ------- -------- INTEREST EXPENSE Interest Bearing Demand 4,490 4,204 4,211 Savings 3,563 4,484 2,618 Time Deposits of $100,000 or More 24,686 17,950 14,328 Other Time Deposits 8,158 7,936 4,348 Federal Funds Purchased and Securities Sold under Repurchase Agreements 1,168 172 360 Borrowings from the Federal Home Loan Bank -- 1,076 1,428 Subordinated Debt 1,596 1,596 1,596 -------- ------- -------- TOTAL INTEREST EXPENSE 43,661 37,418 28,889 Net Interest Income 53,980 47,708 43,893 Provision for Credit Losses 4,500 18,570 16,194 -------- ------- -------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 49,480 29,138 27,699 -------- ------- -------- NON-INTEREST INCOME Service Charges and Commissions 5,517 5,205 5,388 Gain on Sale of Loans, Net 157 217 42 Gain on Sale of Securities Available for Sale 26 -- 124 Write-off of Securities (250) -- (150) Gain on Sale of Fixed Assets 14 9 -- Gain on Sale of Real Estate Investment 101 -- -- Other 508 611 532 -------- ------- -------- TOTAL NON-INTEREST INCOME 6,073 6,042 5,936 -------- ------- -------- NON-INTEREST EXPENSE Salaries and Employee Benefits 13,601 11,201 9,883 Occupancy Expense 2,769 2,886 2,583 Furniture and Equipment Expense 1,696 1,618 1,737 Net Other Real Estate Owned Expense 2,011 2,745 2,733 Other 7,260 7,654 7,374 -------- ------- -------- TOTAL NON-INTEREST EXPENSE 27,337 26,104 24,310 -------- ------- -------- Income before Income Taxes 28,216 9,076 9,325 Provision for Income Taxes 9,179 1,427 1,796 -------- ------- -------- NET INCOME $ 19,037 $ 7,649 $ 7,529 ======== ======= ======== EARNINGS PER SHARE $ 2.67 $ 1.14 $ 1.12 ======== ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22 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, 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 Changes 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 Stock Options Exercised 80 1,163 -- -- -- 1,163 Common Stock Issued to Employee 401k Plan 6 150 -- -- -- 150 Tax Benefit-Stock Options Exercised -- 310 -- -- -- 310 Net Income for the year -- -- 19,037 -- -- 19,037 Cash Dividend-$.36 per Share -- -- (2,424) -- -- (2,424) Net Changes in Securities Valuation Allowance, Net of Tax -- -- -- (1,077) -- (1,077+ -------- ------- -------- ------- --- --------- BALANCE AT DECEMBER 31, 1996 6,766 $47,281 $ 68,716 $ 646 $(7) $ 116,636 ======== ======= ======== ======= === =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 19,037 $ 7,649 $ 7,529 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 1,122 1,061 1,087 Net (Accretion)/Amortization of Premiums/Discounts on Securities (1,078) (3,193) 1,064 Writedown on Real Estate Held for Investment 1,423 1,130 1,257 Provision for Credit Losses 4,500 18,570 16,194 Provision for Losses on Other Real Estate Owned 1,335 1,504 1,111 Amortization of Deferred Loan Fees (3,042) (2,589) (3,088) Deferred Income Taxes 81 315 (3,202) (Gain)/Loss on Sale of Loans (157) (217) (42) Gain on Sale of Securities Available for Sale (26) -- (124) Write-off of Securities 250 -- 150 Gain on Sale of Real Estate Investment (101) -- -- Gain on Sale of Other Real Estate Owned (441) (163) (235) Gain on Sale of Fixed Assets (14) (9) -- Loans Originated for Sale (28,833) (54,998) (28,938) Proceeds from Sales of Loans Originated for Sale 33,082 48,001 29,009 Net Decrease/(Increase) in Accrued Interest Receivable and Other Assets 1,408 (327) (2,554) Net (Decrease)/Increase in Accrued Expenses and Other Liabilities (1,440) 3,236 1,352 Other, Net 2 547 (2,079) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 27,108 20,517 18,491 --------- --------- --------- INVESTING ACTIVITIES: Purchases of Securities Available for Sale (716,415) (567,830) (251,285) Proceeds from Maturities of Securities Available for Sale 661,329 471,426 95,268 Proceeds from Maturities of Securities Held to Maturity 21,314 70,733 31,461 Proceeds from Sales of Securities Available for Sale 41,367 -- 1,140 Purchase of Securities Held to Maturity -- (60,958) (12,462) Net (Increase)/Decrease in Loans and Leases (148,266) (699) 3,249 Capitalized Cost of Other Real Estate Owned (867) -- (328) Proceeds from Sales of Other Real Estate Owned 6,771 10,371 9,625 Additions to Real Estate Investment -- (355) (3,342) Proceeds from Sales of Real Estate Investment 1,134 4,980 696 Proceeds from Sale of Premises and Equipment 23 18 -- Purchases of Premises and Equipment (838) (1,056) (2,168) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (134,448) (73,370) (128,146) --------- --------- --------- FINANCING ACTIVITIES: Net Increase in Demand, Interest Bearing Demand and Savings Deposits 24,876 93,201 102,761 Net Increase in Time Certificates of Deposits 130,437 18,979 40,684 Net Increase/(Decrease) in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (24,000) 24,000 (24,844) Repayment of Federal Home Loan Bank -- (30,000) -- Cash Dividend Paid (2,424) (2,134) (2,130) Proceeds from Exercise of Stock Options/Sale of Stock 1,623 285 117 --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 130,512 $ 104,331 $ 116,588 --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS 23,172 51,478 6,933 Cash and Cash Equivalents at Beginning of Year 163,837 112,359 105,426 --------- --------- --------- Cash and Cash Equivalents at End of Period $ 187,009 $ 163,837 $ 112,359 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Year For: Interest $ 43,814 $ 37,016 $ 28,673 Income Taxes 10,197 450 5,136 ========= ========= ========= NONCASH INVESTING ACTIVITIES: Loans Transferred to Other Real Estate Owned, Net $ 17,025 $ 15,105 $ 5,926 Loans to Facilitate the Sale of Other Real Estate Owned 4,925 822 6,373 Investment Securities Transferred to Securities Available for Sale -- 39,818 8,389 ========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 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 1995 and 1994 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. Material estimates that are particularly susceptible to significant changes in the near term relate to the allowance for loan losses and other real estate owned. While management believes that these allowances are adequate, as of December 31, 1996, future additions may be necessary due to changes in economic conditions. Additionally, regulatory examinations may require the Company to recognize additions to these allowances based upon their judgements regarding information made available to them at the time of their examination. 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 subsidiaries, GBC Venture Capital, Inc., incorporated July 12, 1996, General Bank, (the "Bank"), a California state chartered bank, and the Bank's wholly owned subsidiaries, GBC Insurance Services, Inc., GBC Investment & Consulting Company, Inc., GBC Real Estate Company, Inc. and Southern Counties Escrow. Pursuant to the resolution of dissolution, GBC Real Estate Company, Inc. was dissolved on June 10, 1996. The Bank also holds 90% of the voting stock of GBC Leasing Company, Inc., the investment in which is not material. All significant intercompany accounts and transactions have been eliminated in consolidation. 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, 1996. The Company invests in securities purchased under agreements to resell ("repurchase agreement") to maximize the yield on liquid assets. The Company obtains collateral for these agreements, which normally consists of single or multi-family residential mortgage loans with an agreement to sell back the same collateral. The collateral is normally held in custody of a trustee who is not a party to the transaction. The purchase is overcollateralized to ensure against unfavorable market price movements. The duration of these agreements is one business day with a rollover under continuing contracts. The counterparties to these agreements are nationally recognized investment banking firms that meet credit eligibility criteria and with whom a master repurchase agreement has been duly executed. SECURITIES: In accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company classifies its investment in debt and equity securities as held to maturity securities, trading securities and available for sale securities, as applicable. Securities available for sale are carried at fair value. 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. 25 LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES: Loans are recorded in the consolidated balance sheets at principal amounts outstanding. Interest on loans is accrued daily as earned. It is generally the Company's policy to place a loan on non-accrual status in the event that the borrower is 90 days or more delinquent or earlier if the timely collection of interest and/or principal appears doubtful. When loans are placed on non-accrual status, the accrual of income is discontinued and previously accrued but unpaid interest is generally reversed against income. 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 regarding information available to them at the time of their examination. Charge-offs of loans are debited to the allowance for credit losses. Recoveries on loans previously charged off are credited to the allowance. Under SFAS 114, "Accounting by Creditors for Impairment of a Loan," 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. Impaired loans exclude groups of smaller balance homogeneous loans that are collectively evaluated for impairment on a quarterly basis. All loans of $500,000 or more are evaluated separately on a quarterly basis for impairment. 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. The accrual of interest is normally followed for those impaired loans which have been restructured with the borrower servicing the debt pursuant to the contractual terms of the restructuring. While a loan is 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. LOANS HELD FOR SALE: Loans held for sale are included in loans and leases on the consolidated balance sheets. They are recorded at the lower of cost or fair value in the aggregate at the reporting date. Realized gains and losses and unrealized losses are reported in gain/loss on sale of loans, net. Changes in the 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 which are recorded at the lower of cost or fair value. Please refer to note 6 of the notes to consolidated financial statements 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 on a straight-line basis as an adjustment of yield. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation or amortization. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives or lease terms of assets, whichever is shorter. The lease term is defined as the original lease term plus option periods with a maximum of 15 years unless there is a reason to believe that the premises will be vacated prior to the end of the lease term. 26 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 less selling costs 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 decline in the fair value of OREO is recognized as a charge to operations and a corresponding increase to the valuation allowance. Gains and losses from sales and net operating expenses of OREO are also charged to operations and are included in Net Other Real Estate Owned Expense in the accompanying consolidated statements of income. REAL ESTATE HELD FOR INVESTMENT: The Bank is a limited partner in three different partnerships that invest in low income housing projects that qualify for federal income tax credits. As further discussed in note 9 of the notes to consolidated financial statements, the partnership interests may be carried at cost, at a method which approximates the equity method and a method resulting in approximately the same treatment as if the investment had been consolidated. 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 7,135,135, 6,728,805 and 6,692,839, for the years ended December 31, 1996, 1995 and 1994, 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 reliability 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 The Company adopted statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement No. 65" ("SFAS 122") on January 1, 1996. SFAS 122 amends SFAS 65 to remove the distinction in accounting for mortgage servicing rights resulting from originated loans and those resulting from purchased loans. 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 at fair value. Where a definitive plan is not in place, capitalization of the mortgage servicing rights will occur at the date of sale or securitization. Additionally, SFAS 122 requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. Mortgage servicing rights are amortized in proportion to and over the period of estimated net securities income. The implementation of SFAS 122 did not have a material impact on the financial condition or results of operations of the Company. 27 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. 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. See note 14 of notes to consolidated financial statements. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SAFS 125"). SFAS 125 establishes new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sales or as a pledge of collateral in a secured borrowing. SFAS 125 also establishes new accounting requirements for pledged collateral. As issued, SFAS 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and earlier or retroactive application is not permitted. During 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127"). SFAS 127 defers for one year the effective date (a) of paragraph 15 of SFAS 125 and (b) for repurchase agreement, dollar-roll, securities lending, and similar transactions, of paragraphs 9 - 12 and 237 (b) of Statements 125. SFAS 127 provides additional guidance on the types of transactions for which the effective date of Statement 125 has been deferred. It is required that if it is not possible to determine whether a transfer occurring during calendar-year 1997 is part of a repurchase agreement, dollar-roll, securities lending, or similar transaction, then paragraphs 9 - 12 of Statement 125 should be applied to that transfer. It is not anticipated the adoption of SFAS 125 will have a material impact on the financial condition or results of operation of the Company. 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 $11.1 and $9.5 million, during 1996 and 1995, 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, 1996. For the year ended December 31, 1996, the maximum amounts of outstanding securities purchased under agreements to resell was $120.0 million compared to $90.0 million for the year ended December 31, 1995. For the years ended December 31, 1996 and 1995 the average amount of outstanding securities purchased under agreements to resell was $97.7 million and $20.6 million, respectively. The average rate of interest of securities purchased under agreements to resell was 7.06% and 5.48% as of December 31, 1996 and for the year ended December 31, 1996, respectively. The average rate of interest of securities purchased under agreements to resell was 6.13% and 5.95% as of December 31, 1995 and for the year ended December 31, 1995, respectively. The collateral is normally held in custody of a trustee who is not a party to the transaction and is overcollateralized to ensure against unfavorable market price movements. The duration of these agreements is one business day with a rollover under continuing contracts. The counterparties to these agreements are nationally recognized investment banking firms that meet credit eligibility criteria and with whom a master repurchase agreement has been duly executed. 28 NOTE 4 - SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and market value of securities as of December 31, 1996 and 1995 were as follows:
GROSS GROSS (IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR 1996 COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY State and Municipal Securities $ 2,222 $ 28 $ -- $ 2,250 Collateralized Mortgage Obligations 56 6 -- 62 Asset Backed Securities 9,996 155 -- 10,151 -------- ------ ----- -------- TOTAL $ 12,274 $ 189 $ -- $ 12,463 ======== ====== ===== ======== SECURITIES AVAILABLE FOR SALE U.S. Treasuries $ 1,918 $ -- $ (27) $ 1,891 U.S. Government Agencies 160,718 -- (52) 160,666 Mortgage Backed Securities 51,503 -- (247) 51,256 Corporate Notes 19,014 580 -- 19,594 Collateralized Mortgage Obligations 165,517 281 -- 165,798 Asset Backed Securities 37,474 460 -- 37,934 Auction Preferred Stock 72,450 -- -- 72,450 Other Securities 10,107 125 -- 10,232 -------- ------ ----- -------- TOTAL $518,701 $1,446 $(326) $519,821 ======== ====== ===== ========
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 $ 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 $504,163 $2,982 $(4) $507,141 ======== ====== ==== ========
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, 1996, the yield on the collateralized mortgage obligations held to maturity and available for sale were 9.79% and 6.52%, respectively. 29 The amortized cost and fair value of securities at December 31, 1996, 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.
DECEMBER 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE (IN THOUSANDS) AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE - --------------------------------------------------------------------------------------------------------------------------- Due in One Year or Less $ 8,205 $ 8,361 $107,735 $108,064 Due After One Year Through Five Years - - 160,684 160,961 Due After Five Years Through Ten Years 56 62 18,912 18,893 Due After Ten Years 4,013 4,040 231,370 231,903 ------- ------- -------- -------- TOTAL $12,274 $12,463 $518,701 $519,821 ======= ======= ======== ========
Proceeds from the sales of securities available for sale were $41.4 million for the year ended December 31, 1996. There were no sales of securities available for sale for the year ended December 31, 1995. Proceeds from the sale of securities available for sale were $1.1 million for the year ended December 31, 1994. There were no sales of securities held to maturity in 1996 nor in 1995. Gross realized gains on sales of securities were $28,000, $0, and $124,000 for 1996, 1995 and 1994, respectively. Gross realized losses on sales of securities were $252,000, $0, and $150,000 in 1996, 1995 and 1994, respectively. The 1996 and 1994 gross unrealized losses include the write-offs of a $250,000 and a $150,000 note, respectively, deemed worthless. Securities from the available for sale portfolio having a fair value of $19.1 million as of December 31, 1996 were pledged to secure treasury, tax and loan deposits and to secure borrowings from the Federal Reserve Bank. In addition, one U.S. Treasury security and a Government-sponsored agency security in the available for sale portfolio having a fair value of $2.3 million were pledged for other purposes. 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 $9.1 million and $3.1 million, respectively, were pledged to secure borrowings from the Federal Reserve Bank, as of December 31, 1995. 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, 1996 and 1995 was as follows:
(IN THOUSANDS) 1996 1995 - ----------------------------------------------------------- Commercial $183,268 $151,709 Real Estate-Construction 66,572 53,423 Real Estate-Conventional 273,080 239,016 Installment 86 231 Other Loans 22,362 22,310 Leveraged Leases 6,986 255 Loans to Depository Institutions 50,000 5,000 -------- -------- TOTAL $602,354 $471,944 Less: Allowance for Credit Losses (16,209) (16,674) Deferred Loan Fees (3,638) (3,379) -------- -------- LOAN AND LEASES, NET $582,507 $451,891 ======== ========
Most of the Company's business is with customers in the state of California. Construction loans are collateralized primarily by single family residences, townhouses and multi-family buildings. Real estate loans are collateralized primarily by single family residences, condominiums, apartment complexes, industrial buildings, motels and hotels. In the ordinary course of business, the Bank has granted loans to certain directors and the companies with which they are associated. In the opinion of management, the loans were made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time of origination for comparable transactions with other customers and did not involve more than the normal risk of collectibility or present other unfavorable features. The following 30 provides information regarding the aggregate indebtedness of related parties:
DECEMBER 31, - --------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 - --------------------------------------------------------------------- Balance at Beginning of Year $ 4,787 $ 4,526 $ 11,800 New Loans and Advances 3,967 5,490 4,607 Repayments (3,279) (5,229) (11,881) ------- ------- -------- BALANCE AT END OF YEAR $ 5,475 $ 4,787 $ 4,526 ======= ======= ========
In December 1996, the Company purchased a leveraged lease consisting of a Boeing 737 with a fair value of $24.2 million and a remaining estimated economic life of 30 years. The lease term is through the year 2012. The Company's equity investment is $5.2 million. The aircraft is subject to $19.0 million of third-party financing in the form of long-term debt that provides for no recourse against the Company and is secured by a first lien on the aircraft. The residual value at the end of the lease term is estimated to be $7.6 million. For federal income tax purposes, the Company has the benefit of tax deductions for depreciation on the entire leased asset and for interest paid on the long-term debt. Deferred taxes are provided to reflect the temporary differences between the book tax provisions and the taxes that are payable. The Company has two other leveraged leases included in loans and leases, the amounts of which are immaterial. They comprise $0.8 million of the balance of leveraged leases outstanding as of December 31, 1996. The Company's net investment in the aircraft leveraged lease is composed of the following elements:
(IN THOUSANDS) DECEMBER 31, 1996 - ---------------------------------------------------------------------- Rentals Receivable (Net of Principal and Interest on the Nonrecourse Debt) $ 5,840 Direct Cost 620 Estimated Residual Value of Leased Asset 7,600 Less: Unearned and Deferred Income (7,898) ------- Investment in Leveraged Lease 6,162 Less: Deferred Taxes Arising from Leveraged Lease (357) ------- NET INVESTMENT IN LEVERAGED LEASE $ 5,805 =======
There was no pre-tax income recognized on the leveraged leases during 1996, 1995 and 1994. A summary of activity in the allowance for credit losses is as follows:
(IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------- Balance at Beginning of Year $16,674 $ 23,025 $11,977 Provision Charged to Operating Expenses 4,500 18,570 16,194 Loans and Leases Charged Off (7,450) (25,520) (5,802) Recoveries 2,485 599 656 ------- -------- ------- Net Charge Offs (4,965) (24,921) (5,146) ------- -------- ------- BALANCE AT END OF YEAR $16,209 $ 16,674 $23,025 ======= ======== =======
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) 1996 1995 1994 - ----------------------------------------------------------- Loan 90 Days or More Past Due and Still Accruing $ 6,779 $ 9 $ 999 Non-accrual Loans 11,719 43,712 46,672 Restructured Loans 23,125 10,151 20,865 ------- ------- ------- TOTAL PAST DUE, NON-ACCRUAL AND RESTRUCTURED LOANS $41,623 $53,872 $68,536 ======= ======= =======
The effect of non-accrual loans outstanding as of year-end on interest income for the years 1996, 1995 and 1994 is presented below:
(IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------- Contractual Interest Due $ 2,526 $ 6,969 $ 5,844 Interest Recognized (1,470) (1,098) (2,768) ------- ------- ------- NET INTEREST FOREGONE $ 1,056 $ 5,871 $ 3,076 ======= ======= =======
Contractual interest due is based on original loan amounts. Any partial charge-offs are not considered in the determination of contractual interest due. The effect of restructured loans outstanding as of year-end on interest income for the years ended December 31, 1996, 1995 and 1994 is presented below:
(IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------- Contractual Interest Due $ 3,709 $ 1,713 $ 1,888 Interest Recognized (3,113) (1,150) (1,559) ------- ------- ------- NET INTEREST FOREGONE $ 596 $ 563 $ 329 ======= ======= =======
There were no commitments to lend additional funds to borrowers associated with restructured loans, as of December 31, 1996. 31 As of December 31, 1996 and 1995 there were outstanding fixed rate mortgages held for sale of $1.9 million and $6.3 million, respectively. As of December 31, 1996 the Bank was servicing approximately $59.1 million of loans on behalf of third parties. The following table discloses pertinent information as it relates to the Company' impaired loans as of and for the dates indicated:
AS OF AND FOR THE YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - --------------------------------------------------------------------------- Recorded Investment with Related Allowance $21,210 $45,862 Recorded Investment with no Related Allowance 2,303 - ------- ------- TOTAL RECORDED INVESTMENT $23,513 $45,862 ======= ======= Allowance for Impaired Loans $ 2,011 $ 5,803 Average Balance of Impaired Loans before Allowance for the Year Indicated $35,725 $44,206 Interest Income Recognized $ 2,067 $ 808
Income recognition on impaired loans uses methods existing for non-accrual loans but can include the accrual of interest. While a loan is on non-accrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining book balance of the loan (i.e., after charge-off of identified losses, if any) is deemed to be fully collectible. The Bank's determination as to the ultimate collectibility of the loan's remaining book balance must be supported by a current, well documented credit evaluation of the borrower's financial condition and prospects for repayment, including consideration of the borrower's historical repayment performance and other relevant factors. Of the amount of interest income recognized in 1996 and 1995, no interest was recognized under the cash basis method. 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. 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 assets that the forward sale contracts commit to sell, rather it purchases offsetting contracts to eliminate the obligation. 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 forward sale contracts are Merrill Lynch 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, 1996 and 1995, there were outstanding fixed rate mortgages held for sale of $1.9 million and $6.3 million, and a notional value of derivative instruments of $500,000 and $0, respectively. For the years ended December 31, 1996 and 1995, the Company had realized net losses of $6,000 and $114,000, with unrealized losses of $625 and $0, 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. NOTE 7 - PREMISES AND EQUIPMENT A summary of premises and equipment is as follows:
DECEMBER 31, - --------------------------------------------------------- (IN THOUSANDS) 1996 1995 - --------------------------------------------------------- Land $ 1,246 $ 1,246 Bank Premises 1,504 1,504 Leasehold Improvements 2,052 2,017 Furniture, Fixtures and Equipment 7,902 7,160 ------- ------- 12,704 11,927 Less: Accumulated Depreciation and Amortization (6,898) (5,826) ------- ------- TOTAL $ 5,806 $ 6,101 ======= =======
32 The Company conducts a portion of its operations in leased facilities under non-cancelable operating leases expiring at various dates through 2009. The following summarizes the Company's future minimum lease commitments as of December 31, 1996:
YEAR (IN THOUSANDS) - ----------------------------------------------------------- 1997 $ 1,994 1998 1,682 1999 1,761 2000 1,439 2001 1,280 Thereafter 9,403 ------- TOTAL $17,559 =======
Net rental expense included in occupancy expense was approximately $2,095,000, $2,177,000, and $1,831,000 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 8 - OTHER REAL ESTATE OWNED As of December 31, 1996, other real estate owned ("OREO") consisted of twenty-six properties with a net carrying value of $13.0 million. As of December 31, 1995 real estate owned consisted of fourteen properties with a net carrying value of $7.7 million. The following table sets forth OREO by type of property as of December 31, 1996 and 1995:
(IN THOUSANDS) 1996 1995 - ----------------------------------------------------------- PROPERTY TYPE Single-Family Residential $ 901 $ 11 Condominium 6,284 509 Multi-Family Residential - 978 Warehouse - 188 Land for Residential 1,413 1,054 Land for Commercial 735 - Retail Facilities 5,228 5,289 Office 250 268 Less: Valuation Allowance (1,823) (611) ------- ------ TOTAL $12,988 $7,686 ======= ======
A summary of activity in the valuation allowance is as follows for the years indicated:
(IN THOUSANDS) 1996 1995 1994 - --------------------------------------------------------------------- Balance at Beginning of Year $ 611 $ 429 $ 1,458 Provision Charged to Operations 1,335 1,504 1,111 Other Real Estate Owned Charged Off (123) (1,322) (2,140) ------ ------- ------- BALANCE AT END OF YEAR $1,823 $ 611 $ 429 ====== ======= =======
For the years ended December 31, 1996, 1995 and 1994, net other real estate owned expense was comprised of the following:
(IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------ Net Gain on Sale of Other Real Estate Owned $ (441) $ (163) $ (235) Provision for Losses on Other Real Estate Owned 1,335 1,504 1,111 Net Operating Expenses 1,117 1,404 1,857 ------ ------ ------ NET OTHER REAL ESTATE OWNED EXPENSE $2,011 $2,745 $2,733 ====== ====== ======
NOTE 9 - REAL ESTATE HELD FOR INVESTMENT Real estate held for investment ("REI") at December 31, 1996 and 1995 included the following:
(IN THOUSANDS) 1996 1995 - ----------------------------------------------------------- Investments in Low Income Housing Projects $9,686 $11,013 Real Estate Development Projects - 1,209 Less: Valuation Allowance - (80) ------ ------- TOTAL $9,686 $12,142 ====== =======
As of December 31, 1996 and 1995, the Company had three investments totaling $9.7 million and $11.0 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 five years. Please refer to note 12 of the notes to consolidated financial statements for income tax effects. The following table identifies the pertinent details of the three projects as of December 31, 1996 and 1995:
(IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------------------------------------ 1996 1995 PROJECT NAME % OWNERSHIP DATE ACQUIRED AMOUNT AMOUNT - ------------------------------------------------------------------------------------------------------------ Liberty 7.20% Mar-90 $6,086,000 $ 7,118,000 Greenview 98.40% Sep-92 3,011,000 3,222,000 Las Brisas 49.50% Dec-93 589,000 673,000 ---------- ----------- TOTAL $9,686,000 $11,013,000 ========== ===========
33 The method of accounting for the Greenview investment approximates the results if the investment were consolidated. A $1.4 million first deed of trust on the Greenview property is included in accrued expenses and other liabilities on the Company's consolidated balance sheets. The cost method is used for the investment in Liberty with the investment being amortized over the remaining period that tax credits will be received. A method approximating the equity method is used for the Las Brisas investment. As of December 31, 1996 and 1995, the Company had $0 and $1.1 million, respectively, in projects formed for the purpose of developing residential real estate. Expenses incurred for REI were $1,443,000, $1,388,000, and $1,300,000 for the years ended 1996, 1995 and 1994, respectively. REI expense includes the amortization of the investments in the real estate projects which qualify for low income housing tax credits, which totaled $1,326,000, $1,050,000 and $1,257,000 in 1996, 1995 and 1994, respectively. NOTE 10 - DEPOSITS The Bank obtains deposits primarily through a network of fifteen full service branches located in the State of California, primarily, southern California. Deposits obtained by the Bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, up to a maximum of $100,000 for each depositor. The Company's deposits totaled $1,201.5 million as of December 31, 1996, representing a $155.3 million, or 14.8%, increase over the $1,046.2 million total deposits as of December 31, 1995. The largest deposit growth was in the time certificates of deposit of $100,000 or more which increased $137.3 million, or 33.6%. During 1996, average deposits increased to $1,144.9 million from $948.8 million during 1995, representing an increase of $196.1 million, or 20.7%. The following table sets forth the average amount of and the average rate paid on each of the following deposit categories for the years ending December 31, 1996 and 1995:
1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) AMOUNT RATIO RATE AMOUNT RATIO RATE - ---------------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-Bearing Demand Deposits $ 132,088 11.54% -% $120,902 12.74% -% Interest-Bearing Demand Deposits 213,910 18.68 2.10 192,033 20.24 2.19 Saving Deposits 131,849 11.52 2.70 140,904 14.85 3.18 Time Deposits 667,047 58.26 4.92 494,973 52.17 5.23 ------------------------------------ --------------------------------- TOTAL DEPOSITS $1,144,894 100.00% 4.04% $948,812 100.00% 4.18% ==================================== =================================
The growth of deposits from the Company's customers reflects the continuing tradition of personalized services. There are no brokered deposits outstanding. The Company believes that the majority of its deposit customers have strong ties to the Bank. Although the Company has a significant amount of time certificates of deposit of $100,000 or more having maturities of one year or less, the depositors have generally renewed their deposits in the past at their maturity. Accordingly, the Company believes its deposit source to be stable. The maturity schedule of time certificates of deposit of $100,000 or more as of December 31, 1996, and 1995, is as follows:
(IN THOUSANDS) 1996 1995 - ----------------------------------------------------------- 3 Months or Less $264,776 $166,136 Over 3 Months Through 6 Months 103,075 86,273 Over 6 Months Through 12 Months 176,694 154,960 Over 12 Months 1,033 920 -------- -------- TOTAL $545,578 $408,289 ======== ========
NOTE 11 - SUBORDINATED DEBT On August 31, 1990, the Company issued $15.0 million 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").
(IN THOUSANDS) - --------------------------------------------------------- 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, 1996. 34 NOTE 12 - INCOME TAXES Income taxes (benefit) expense in the accompanying consolidated statements of income is comprised of the following:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------- Current Tax Expense: Federal $ 6,721 $ 79 $ 3,047 State 2,377 1,033 1,951 ------- ------- ------- Total 9,098 1,112 4,998 Deferred Tax (Benefit) Expense: Federal (511) 397 (2,293) State 592 (82) (909) ------- ------- ------- Total 81 315 (3,202) Total Income Tax Expense $ 9,179 $ 1,427 $ 1,796 ======= ======= ======= Deferred Taxes Charged/(Credited) to Stockholders' Equity Related to Available for Sale Securities $ (781) $ 4,367 $(3,112) ======= ======= =======
Tabulated below are the significant components of the net deferred tax asset at December 31, 1996 and December 31, 1995 (as restated for the 1995 tax return as filed and adjusted):
YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 - ----------------------------------------------------------------------------- Components of the Deferred Tax Asset: Provision for Credit Losses $ (8,276) $ (9,059) California Franchise Taxes (803) - Loan Fee Income (174) (175) Allowance for Other Real Estate Owned (836) (283) Other (837) (787) -------- -------- (10,926) (10,304) Valuation Allowance 250 250 -------- -------- Deferred Tax Asset, Net of Valuation Allowance $(10,676) $(10,054) ======== ======== Components of the Deferred Tax Liability: Leveraged Leases 479 25 Low Income Housing 3,495 3,245 Unrealized Gain on Securities 474 1,255 Discount Accretion 1,453 1,325 California Franchise Taxes - 122 Other 789 796 -------- -------- Deferred Tax Liability 6,690 6,768 -------- -------- Net Deferred Tax Liability (Asset) $ (3,986) $ (3,286) ======== ========
The valuation allowance at December 31, 1996 and 1995, 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 the statutory federal corporate income tax rate to the effective income tax rate on consolidated income before income tax expense follows:
PERCENT OF PRE-TAX EARNINGS YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Statutory Federal Corporate Income Tax Rate 35.0% 35.0% 35.0% State Tax, Net of Federal Income Tax Effect 6.8 6.8 7.3 Increase (Decrease) Resulting from: Non-taxable interest income on Municipal Securities and Dividend Exclusion on Auction Preferred Stocks (2.3) (3.6) (3.2) Low Income Housing Tax Credit (6.7) (23.1) (20.0) Other, Net (0.3) 0.6 0.2 ----- ------ ------ 32.5% 15.7% 19.3% ===== ====== ======
The Company had a current income tax receivable of $241,000 and $142,000 as of December 31, 1996 and 1995, respectively. 35 NOTE 13 - PENDING LITIGATION LEGAL ACTION In the normal course of business, the Company is subject to pending and threatened legal actions. After reviewing pending actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on the financial condition or the operations 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 become vested in installments of 20 percent per year over a four-year period. If an option expires without having been exercised, usually two years from date of vesting, the unpurchased shares are again available for future grants. The Company's Chief Executive Officer ("CEO") has been granted options exercisable in even yearly installments over a six-year period and are exerciseable over eight cumulative years. As of December 31, 1996, 368,780 shares are exercisable at a weighted average exercise price of $13.38. A summary of stock option activity and related option prices for 1996, 1995 and 1994 follows:
Number of Weighted-Average Option Price Shares Exercise Price Per Share ------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 643,496 $13.71 $6.61 - $20.05 ------------------------------------------------------------------------------------------------------- Granted 89,500 $15.32 $13.25 - 15.75 Exercised (3,465) $13.12 $12.00 - 13.23 Forfeited (43,467) $15.60 $13.18 - 16.95 Expired (42,895) $15.10 $ 6.61 - 20.05 BALANCE AT DECEMBER 31, 1994 643,169 $13.71 $6.61 - $20.05 -------------------------------------- --------------- ----------------- ---------------------- Granted 101,000 $13.50 $13.50 Exercised (12,779) $13.52 $13.18 - 16.95 Forfeited (22,042) $14.35 $13.18 - 17.05 Expired (34,160) $15.36 $13.02 - 20.05 BALANCE AT DECEMBER 31, 1995 675,188 $13.55 $6.61 - $20.05 -------------------------------------- --------------- ----------------- ---------------------- Granted 70,500 $17.38 $17.38 Exercised (80,066) $14.53 $13.18 - 17.38 Forfeited (21,800) $15.11 $13.25 - 17.38 Expired (17,942) $15.15 $13.18 - 16.95 BALANCE AT DECEMBER 31, 1996 625,880 $13.76 $6.61 - $20.05 ====================================== =============== ================= ======================
On December 19, 1991, the Board of Directors of the Company amended the employment agreement of the Company's 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 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. The Company applies APB Opinion No. 25 in accounting for its stock option plan and, accordingly, no compensation cost has been recognized for the fair value of the options 36 granted in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and earnings per share would have been changed to the pro forma amounts indicated below:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - ------------------------------------------------------------ Net Income as Reported $19,037 $7,649 Pro Forma Net Income $18,914 $7,585 EPS as Reported $ 2.67 $ 1.14 Pro Forma EPS $ 2.65 $ 1.13
The Black-Scholes model was utilized for purposes of the option pricing. The volatility of 30.17% and 28.96% for the options granted in 1996 and 1995, respectively, was based on the historical weekly closing prices and the historical annual dividend rate of $0.32 per share. The expected life of the options ranged from 15 months to 63 months. The weighted average fair value at date of grant for options granted during 1996 and 1995 was $4.18 and $3.15, respectively. Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. 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 298,500 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, up to 5 percent of that employee's base salary. In 1996, 1995, and 1994, the Bank's contribution amounted to $274,000, $203,000, and $155,000 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, and the Bank will contribute additional funds for each participant to pay the federal income tax for the portion of the bonus or award so set aside. This arrangement is tied to a paid-up life insurance program having investment features and the participant has the right to choose different investment vehicles for the investment of the portion of the bonus or award set aside as described above. The Bank has contributed approximately $271,000, $86,000, and $98,000 to this plan in 1996, 1995 and 1994, respectively. NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The consolidated balance sheets do not reflect various commitments relating to financial instruments which are used in the normal course of business. These instruments include commitments to extend credit, letters of credit and futures contracts. Management does not anticipate that the settlement of these financial instruments will have a material adverse effect on the 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 37 based on management's evaluation. Collateral held varies but may include accounts receivable, inventory, property, equipment and real estate. As of December 31, 1996, the Company's undisbursed loan commitments amounted to approximately $164.1 million, of which $59.8 million related to construction loans. 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, 1996, $79.9 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, 1996 and 1995:
DECEMBER 31, - ------------------------------------------------------------ (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------ Commitments to Extend Credit $164,073 $128,747 Standby Letters of Credit 10,929 11,867 Bills of Lading Guarantee 171 328 Commercial Letters of Credits 30,593 35,948 Forward Sales Contracts 500 -
As of December 31, 1996, commitments to fund fixed-rate loans and adjustable-rate loans were $8.0 million and $156.1 million, respectively. As of 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: CASH AND DUE FROM BANKS The carrying amount of cash and due from banks is considered fair value. FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL Outstanding amounts under these categories were overnight transactions as of December 31, 1996 and are considered to be carried at fair value. SECURITIES For securities including securities held to maturity and securities available for sale, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS AND LEASES 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 leases included in the loan category are considered to be carried at fair value. Of the $7.0 million of net leases, $6.2 million is represented by the leveraged lease involving an aircraft which was acquired at the end of December, 1996 and is therefore considered to approximate fair value. 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. 38 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, 1996 and 1995 for deposits of similar remaining maturities. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND SUBORDINATED DEBT 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. The estimated fair values of the Company's financial instruments as of December 31 are as follows:
1996 1995 - --------------------------------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and Due from Banks $ 46,809 $ 46,809 $ 38,837 $ 38,837 Fed Funds Sold & Securities Purchased Under Agreements to Resell 140,200 140,200 125,000 125,000 Securities Available for Sale 519,821 519,821 507,141 507,141 Securities Held to Maturity 12,274 12,463 33,553 34,370 Loans, Net 582,507 573,964 451,891 452,543 FINANCIAL LIABILITIES: Deposits 1,201,513 1,201,426 1,046,200 1,047,084 Securities Sold Under Repurchase Agreements - - 24,000 24,000 Subordinated Debt 15,000 15,825 15,000 15,915 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- CONTRACT FAIR CONTRACT FAIR (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commercial Letters of Credit $ 30,593 $ 76 $ 35,948 $ 90 Standby Letters of Credit 10,929 124 11,867 143 Bill of Lading Guarantees 171 - 328 1 Undisbursed Loans 164,073 1,804 128,747 1,694 Forward Sale Contract 500 (1) - -
39 NOTE 17 - CONDENSED FINANCIAL INFORMATION OF GBC BANCORP (PARENT COMPANY) Condensed balance sheets as of December 31, 1996 and 1995 follow:
(DOLLARS IN THOUSANDS) 1996 1995 - --------------------------------------------------------------------------------------------------------- ASSETS Due From Bank $ 512 $ 566 Securities Available for Sale 5,125 5,175 Investment in Subsidiaries 114,407 108,578 Advance to Bank 6,000 - Other Assets 6,844 717 -------- -------- TOTAL ASSETS $132,888 $115,036 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Dividends Payable $ 677 $ 534 Other Liabilities 575 25 Subordinated Debt 15,000 15,000 -------- -------- TOTAL LIABILITIES 16,252 15,559 STOCKHOLDERS' EQUITY Common stock, no par value or stated value; 20,000,000 shares authorized; 6,766,469 and 6,679,661 shares outstanding at December 31, 1996 and 1995, respectively 47,281 45,658 Retained Earnings 68,716 52,103 Securities Valuation Allowance, Net of Tax 646 1,723 Foreign Currency Translation Adjustment (7) (7) -------- -------- TOTAL STOCKHOLDERS' EQUITY 116,636 99,477 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $132,888 $115,036 ======== ========
Condensed statements of income for the years ended December 31, 1996, 1995 and 1994 follow:
(IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Interest Income, Including Fees $ 501 $1,208 $1,296 Dividends Received from Bank 13,021 2,134 2,130 ------- ------ ------ TOTAL INCOME 13,522 3,342 3,426 Interest Expense 1,596 1,596 1,596 Non-Interest Expense 130 48 165 ------- ------ ------ TOTAL EXPENSE 1,726 1,644 1,761 Income Before Income Taxes 11,796 1,698 1,665 Benefit for Income Taxes (615) (281) (293) ------- ------ ------ Income Before Equity in Undistributed Earnings of Subsidiary 12,411 1,979 1,958 Equity in Undistributed Earnings of Subsidiary 6,626 5,670 5,571 ------- ------ ------ NET INCOME $19,037 $7,649 $7,529 ======= ====== ======
40 Condensed statements of cash flows for the years ended December 31, 1996, 1995, and 1994 follow:
(IN THOUSANDS) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: NET INCOME $ 19,037 $ 7,649 $ 7,529 Adjustments to reconcile net income to net cash provided by operating activities: Net decrease/(increase) in other assets (6,127) (97) 152 Equity in undistributed earnings of subsidiaries (6,626) (5,670) (5,571) Net increase/(decrease) in other liabilities 571 (281) 65 -------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,855 1,601 2,175 -------- ------- ------- INVESTING ACTIVITIES: Net (increase)/decrease in cash invested in subsidiaries (6,251) -- 500 -------- ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (6,251) -- 500 -------- ------- ------- FINANCING ACTIVITIES: Cash dividends paid (2,424) (2,134) (2,130) Proceeds from issuance of common stock 1,623 285 117 Other, net 143 -- 2 -------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES (658) (1,849) (2,011) -------- ------- ------- NET CHANGE IN DUE FROM BANK (54) (248) 664 Due from bank at beginning of year 566 814 150 -------- ------- ------- Due from bank at end of year $ 512 $ 566 $ 814 ======== ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the year for: Interest $ 1,578 $ 1,578 $ 1,578 Income tax refunds (281) (293) (358)
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, 1996 approximately $21.3 million of undivided profits of the Bank are available for dividends to the Company, subject to the subordinated debt covenant restrictions. NOTE 18 - REGULATORY MATTERS On April 23, 1996, the Bank was notified by its primary regulator, the Federal Deposit Insurance Corporation ("FDIC"), that the Memorandum of Understanding ("MOU") dated August 17, 1995, had been terminated based upon the results of a safety and soundness examination dated January 8, 1996. The Company's Board of Directors received a letter, dated July 19, 1996, from the Federal Reserve Bank of San Francisco (the "Federal Reserve") indicating that the existing board resolution which required the Company to inform the Federal Reserve prior to: (a) declaring cash or in-kind dividends; (b) incurring debt; (c) repurchasing stock; or (d) entering into any agreements to acquire any entities or portfolios, was no longer required. The Company's Board rescinded the resolution at its August Board Meeting. 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 41 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 assessment rate for BIF members is the greater of 0.15 percent or such rate as the Board of Directors of the FDIC, at its discretion, determines to be appropriate to maintain the reserve ratio at the designated reserve ratio or to increase the ratio to the designated reserve ratio within a reasonable period of time. 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 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). 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. Both the Company and the Bank are considered to be well capitalized. As of December 31, 1996, the Company's and the Bank's Tier 1 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 11.97% 11.81% 4% 6% Total 13.69% 13.06% 8% 10% Leverage Ratio 8.74% 8.61% 4% 5%
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 year as indicated:
(IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Office Supplies and Communication Expense $1,395 $1,347 $1,273 Professional Services Expense 2,428 1,756 1,432 FDIC Assessment Expense 150 1,299 1,771 Real Estate Investment Expense 1,443 1,388 1,300 Other 1,844 1,864 1,598 ------ ------ ------ TOTAL $7,260 $7,654 $7,374 ====== ====== ======
42 NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended in 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - --------------------------------------------------------------------------------------------------------------------- Interest Income $23,284 $24,495 $24,189 $25,673 Interest Expense 10,666 11,192 10,893 10,910 Net Interest Income 12,618 13,303 13,296 14,763 Provision for Credit Losses 1,500 1,000 1,000 1,000 Income Before Income Taxes 6,363 6,963 7,564 7,328 Net Income 4,309 4,662 4,980 5,086 Earnings Per Share 0.62 0.66 0.70 0.71 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
43 INDEPENDENT AUDITORS' REPORT The Board of Directors of GBC Bancorp: We have audited the accompanying consolidated balance sheets of GBC Bancorp (a California corporation) and subsidiaries as of December 31, 1996 and 1995, 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, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California February 12, 1997 EX-21 6 SUBSIDIARIES OF GBC BANCORP 1 Exhibit 21
Subsidiaries of GBC Bancorp State of Incorporation - ---------------------------------- ---------------------- General Bank California GBC Venture Capital, Inc. California Subsidiaries of General Bank - ---------------------------- GBC Investment & Consulting Company, Inc. California GBC Insurance Services, Inc. California Southern Counties Escrow California GBC Leasing Company, Inc. California
36 EX-27 7 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 46,809 0 140,200 0 519,821 12,274 12,463 602,354 16,209 1,352,115 1,201,513 3,750 18,966 11,250 0 0 47,281 69,355 1,352,115 53,551 44,090 0 97,641 40,897 43,661 53,980 4,500 (224) 27,337 28,216 28,216 0 0 19,037 2.67 2.65 4.36 11,719 6,779 23,125 0 16,674 7,450 2,485 16,208 16,209 0 0
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