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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
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GBC BANCORP
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(Exact name of registrant as specified in its charter)
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California 95-3586596
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 West 6th Street, Los Angeles, CA 90017
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(Address of principal executive offices (Zip Code)
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Registrant's telephone number, including area code (213) 972-4172
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None Name of each exchange on which registered: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(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
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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:
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Part of Form 10-K
Documents Incorporated by Reference Into which Incorporated
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1996 Annual Report to Shareholders Part II Items 6, 7 and 8 and Part IV
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Definitive Proxy Statement for the
Annual Meeting of Shareholders
filed within 120 days of the fiscal
year ended December 31, 1996 Part III
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Exhibit Index on Pages 31-33
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FORM 10-K
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
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Page in Incorporation
PART I 10-K by Reference
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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
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PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................ 28 1996 Annual Report
SIGNATURES.................................................... 29
EXHIBIT INDEX................................................. 31
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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
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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
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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
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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
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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.
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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
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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
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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.
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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,
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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.
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Minimum Well
GBC General Regulatory Capitalized
Bancorp Bank Requirements Requirements
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 11.97% 11.81% 4% 6%
Total 13.69% 13.06% 8% 10%
Leverage Ratio 8.74% 8.61% 4% 5%
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
First Second Third Fourth
1996: Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
<S> <C> <C> <C> <C>
High $22.00 $23.50 $29.25 $29.88
Low $17.31 $20.50 $22.50 $27.00
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1995: Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
<S> <C> <C> <C> <C>
High $14.25 $13.63 $13.50 $17.75
Low $12.97 $11.50 $10.50 $12.50
</TABLE>
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
<PAGE> 25
Dividend
Cash dividends per share were declared during the most recent two
years as per the following table:
<TABLE>
<CAPTION>
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1996 $0.08 $0.08 $0.10 $0.10 $0.36
1995 $0.08 $0.08 $0.08 $0.08 $0.32
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Age at
Name Position and Offices presently held and business experience 12/31/96
---- ----------------------------------------------------------- ---------
<S> <C> <C>
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
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Page in Annual Report
to Shareholders
---------------------
<S> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<S> <C>
/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
------------------------- ---------------------
</TABLE>
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.
<TABLE>
<S> <C>
/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
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C>
/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
</TABLE>
30
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<S> <C> <C>
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) --
</TABLE>
E - 1
31
<PAGE> 32
<TABLE>
<S> <C> <C>
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) --
</TABLE>
E - 2
32
<PAGE> 33
<TABLE>
<S> <C> <C>
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.
</TABLE>
E - 3
33
<PAGE> 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
- --------------------------------------------------------------------------------
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
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
</TABLE>
PAGE i
<PAGE> 3
<TABLE>
<S> <C>
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
</TABLE>
PAGE ii
<PAGE> 4
<TABLE>
<S> <C>
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
</TABLE>
PAGE iii
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
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(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.
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(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.
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(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:
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(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
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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.
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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.
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(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.
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(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.
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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
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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.
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(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
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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)).
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(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.
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(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
<PAGE> 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
<PAGE> 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:
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<PAGE> 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:
<PAGE> 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:
- -------------------------------
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<PAGE> 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
<PAGE> 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."
<PAGE> 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.
<PAGE> 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:
<PAGE> 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)."
<PAGE> 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
<PAGE> 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.]
<PAGE> 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:
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<PAGE> 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
<PAGE> 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
<PAGE> 1
GBC BANCORP
Computation of Per Share Earnings
with Common Stock Options Outstanding
(Treasury Stock Method)
<TABLE>
<CAPTION>
1996 1995 1994
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
34
<PAGE> 1
GBC BANCORP
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
<TABLE>
<CAPTION>
(Dollars in Thousands) For the Years Ended December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
* Portion of rents applicable to interest is deemed immaterial
35
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE
(IN THOUSANDS) BALANCE INTEREST RATE% BALANCE INTEREST
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
<CAPTION>
1994
- -------------------------------------------------------------------------------------------------
YIELD/ AVERAGE YIELD/
(IN THOUSANDS) RATE% BALANCE INTEREST RATE%
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
</TABLE>
(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.
<PAGE> 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:
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
(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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) CONVENTIONAL CONVENTIONAL
CONSTRUCTION REAL ESTATE CONSTRUCTION REAL ESTATE
PROJECT TYPE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE
- ---------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
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.
<PAGE> 7
The following table sets forth the amount of loans outstanding in each
category as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
AFTER MORE
WITHIN ONE BUT THAN
ONE WITHIN FIVE
(IN THOUSANDS) YEAR FIVE YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
AFTER MORE
WITHIN ONE BUT THAN
ONE WITHIN FIVE
(IN THOUSANDS) YEAR FIVE YEARS YEARS TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
======= ======= ======= ======= =======
</TABLE>
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.
<PAGE> 9
The following table analyzes the decline of non-accrual loans during the
year ended December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
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
========
</TABLE>
The following table breaks out the Company's non-accrual loans by loan
category as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Restructured Loans:
On Accrual Status $23,125 $10,151
On Non-accrual Status 2,820 16,727
------- -------
TOTAL $25,945 $26,878
======= =======
</TABLE>
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.
<PAGE> 10
The following table sets forth OREO by type of property as of the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Contractual Interest Due $ 3,709 $ 1,713 $ 1,888
Interest Recognized (3,113) (1,150) (1,559)
------- ------- -------
NET INTEREST FOREGONE $ 596 $ 563 $ 329
======= ======= =======
</TABLE>
<PAGE> 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.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
======= ======= ======= ======= =======
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
(DOLLARS IN THOUSANDS) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
(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.
<PAGE> 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:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ==== ======= ==== ====== ==== ======= ==== ======= ====
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------
ISSUER BOOK VALUE FAIR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AMOUNT RATIO RATE AMOUNT RATIO RATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
=============================== ==============================
</TABLE>
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:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) AMOUNT NO. OF ACCOUNTS
- --------------------------------------------------------------------------------
<S> <C> <C>
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
======== =====
</TABLE>
The maturity schedule of time certificates of deposit of $100,000 or more
as of December 31, 1996, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
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
========
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
MINIMUM WELL
GBC GENERAL REGULATORY CAPITALIZED
BANCORP BANK REQUIREMENTS REQUIREMENTS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 11.97% 11.81% 4% 6%
Total 13.69% 13.06% 8% 10%
Leverage Ratio 8.74% 8.61% 4% 5%
</TABLE>
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.
<PAGE> 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.
<PAGE> 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:
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
(1) LOANS ARE BEFORE UNAMORTIZED DEFERRED LOAN FEES AND ALLOWANCE FOR CREDIT
LOSSES.
(2) NON-ACCRUAL LOANS ARE INCLUDED IN NON-EARNING ASSETS.
<PAGE> 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.
<PAGE> 19
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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.
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 21
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
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
======== ======= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 22
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SECURITIES FOREIGN
VALUATION CURRENCY TOTAL
COMMON STOCK RETAINED ALLOWANCE, TRANSLATION STOCKHOLDERS'
(IN THOUSANDS) SHARES AMOUNT EARNINGS NET OF TAX ADJUSTMENT EQUITY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======= ======== ======= === =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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:
<TABLE>
<CAPTION>
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ====== ==== ========
</TABLE>
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.
<PAGE> 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
(IN THOUSANDS) AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= ======= ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 30
provides information regarding the aggregate indebtedness of related parties:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
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
======= ======= ========
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996
- ----------------------------------------------------------------------
<S> <C>
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
=======
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
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
======= ======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
The effect of non-accrual loans outstanding as of year-end on interest
income for the years 1996, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Contractual Interest Due $ 3,709 $ 1,713 $ 1,888
Interest Recognized (3,113) (1,150) (1,559)
------- ------- -------
NET INTEREST FOREGONE $ 596 $ 563 $ 329
======= ======= =======
</TABLE>
There were no commitments to lend additional funds to borrowers associated
with restructured loans, as of December 31, 1996.
<PAGE> 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:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------
<S> <C> <C>
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
======= =======
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- -----------------------------------------------------------
<S> <C>
1997 $ 1,994
1998 1,682
1999 1,761
2000 1,439
2001 1,280
Thereafter 9,403
-------
TOTAL $17,559
=======
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- -----------------------------------------------------------
PROPERTY TYPE
<S> <C> <C>
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
======= ======
</TABLE>
A summary of activity in the valuation allowance is as follows for the
years indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ======= =======
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, net other real estate
owned expense was comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
NOTE 9 - REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment ("REI") at December 31, 1996 and 1995
included the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
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
====== =======
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
PROJECT NAME % OWNERSHIP DATE ACQUIRED AMOUNT AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
========== ===========
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AMOUNT RATIO RATE AMOUNT RATIO RATE
- ----------------------------------------------------------------------------------------------------------------------------
Deposits:
<S> <C> <C> <C> <C> <C> <C>
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%
==================================== =================================
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
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").
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------
<S> <C>
September 1, 1997 $ 3,750
September 1, 1998 3,750
September 1, 1999 3,750
September 1, 2000 3,750
-------
TOTAL $15,000
=======
</TABLE>
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.
<PAGE> 34
NOTE 12 - INCOME TAXES
Income taxes (benefit) expense in the accompanying consolidated statements
of income is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
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)
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
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)
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
PERCENT OF PRE-TAX EARNINGS
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
===== ====== ======
</TABLE>
The Company had a current income tax receivable of $241,000 and $142,000 as
of December 31, 1996 and 1995, respectively.
<PAGE> 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:
<TABLE>
<CAPTION>
Number of Weighted-Average Option Price
Shares Exercise Price Per Share
-------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 643,496 $13.71 $6.61 - $20.05
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====================================== =============== ================= ======================
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
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 -
</TABLE>
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.
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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) - -
</TABLE>
<PAGE> 39
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF GBC BANCORP (PARENT COMPANY)
Condensed balance sheets as of December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
Condensed statements of income for the years ended December 31, 1996, 1995
and 1994 follow:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
<PAGE> 40
Condensed statements of cash flows for the years ended December 31, 1996,
1995, and 1994 follow:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
MINIMUM WELL
GBC GENERAL REGULATORY CAPITALIZED
BANCORP BANK REQUIREMENTS REQUIREMENTS
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 11.97% 11.81% 4% 6%
Total 13.69% 13.06% 8% 10%
Leverage Ratio 8.74% 8.61% 4% 5%
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
<PAGE> 42
NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended in 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> 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
<PAGE> 1
Exhibit 21
<TABLE>
<CAPTION>
Subsidiaries of GBC Bancorp State of Incorporation
- ---------------------------------- ----------------------
<S> <C>
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
</TABLE>
36
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 46,809
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 140,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 519,821
<INVESTMENTS-CARRYING> 12,274
<INVESTMENTS-MARKET> 12,463
<LOANS> 602,354
<ALLOWANCE> 16,209
<TOTAL-ASSETS> 1,352,115
<DEPOSITS> 1,201,513
<SHORT-TERM> 3,750
<LIABILITIES-OTHER> 18,966
<LONG-TERM> 11,250
0
0
<COMMON> 47,281
<OTHER-SE> 69,355
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<INTEREST-LOAN> 53,551
<INTEREST-INVEST> 44,090
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 97,641
<INTEREST-DEPOSIT> 40,897
<INTEREST-EXPENSE> 43,661
<INTEREST-INCOME-NET> 53,980
<LOAN-LOSSES> 4,500
<SECURITIES-GAINS> (224)
<EXPENSE-OTHER> 27,337
<INCOME-PRETAX> 28,216
<INCOME-PRE-EXTRAORDINARY> 28,216
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,037
<EPS-PRIMARY> 2.67
<EPS-DILUTED> 2.65
<YIELD-ACTUAL> 4.36
<LOANS-NON> 11,719
<LOANS-PAST> 6,779
<LOANS-TROUBLED> 23,125
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,674
<CHARGE-OFFS> 7,450
<RECOVERIES> 2,485
<ALLOWANCE-CLOSE> 16,208
<ALLOWANCE-DOMESTIC> 16,209
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
