SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For Quarter Ended June 30, 1998 Commission file number 0-16213
GBC BANCORP
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(Exact name of registrant as specified in its charter)
California 95-3586596
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(State or other jurisdiction (I.R.S. incorporation or organization)
of Employer Identification No.)
800 West 6th Street, Los Angeles, California 90017
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (213) 972-4174
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
--------- ---------
Number of shares of common stock outstanding as of June 30, 1998: 14,157,698.
TABLE OF CONTENTS
-------------------
PART I - FINANCIAL INFORMATION............................................. 3
Item 1. Financial Statements.............................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 8
PART II - OTHER INFORMATION................................................. 31
Item 1. Legal Proceedings................................................. 32
Item 2. Changes In Securities............................................. 32
Item 3. Default Upon Senior Securities.................................... 32
Item 4. Submission Of Matters To A Vote Of Securities Holders............. 32
Item 5. Other Information................................................. 33
Item 6. Exhibits And Reports On Form 8-K.................................. 33
PART III - SIGNATURES........................................................ 34
PART I - FINANCIAL INFORMATION
GBC Bancorp and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars In Thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 39,290 $ 32,519
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 104,650 108,000
Securities Available for Sale at Fair Value
(Amortized Cost of $646,681 and $640,791 at
June 30, 1998 and December 31, 1997,
Respectively) 651,076 643,660
Securities Held to Maturity (Fair Value of
$77,525 and $58,169 at June 30, 1998 and
December 31, 1997, Respectively) 77,423 58,045
Loans and Leases 718,819 638,829
Less: Allowance for Credit Losses (15,538) (16,776)
Deferred Loan Fees (5,230) (4,448)
------------- -------------
Loans and Leases, Net 698,051 617,605
Bank Premises and Equipment, Net 5,517 5,709
Other Real Estate Owned, Net 6,837 7,871
Due From Customers on Acceptances 10,892 11,768
Real Estate Held for Investment 7,697 8,360
Accrued Interest Receivable and Other Assets 9,565 15,900
------------- -------------
Total Assets $ 1,610,998 $ 1,509,437
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 150,729 $ 149,616
Interest Bearing Demand 282,046 218,729
Savings 85,552 96,340
Time Certificates of Deposit of $100,000
or More 585,394 595,077
Other Time Deposits
280,389 232,070
------------- -------------
Total Deposits 1,384,110 1,291,832
Subordinated Debt 38,810 38,745
Acceptances Outstanding 10,892 11,768
Accrued Expenses and Other Liabilities 15,960 20,769
------------- -------------
Total Liabilities 1,449,772 1,363,114
Stockholders' Equity:
Common Stock, No Par or Stated Value;
40,000,000 and 20,000,000 Shares Authorized
at June 30, 1998 and December 31, 1997,
Respectively; 14,157,698 and 6,995,049
Shares Outstanding at June 30, 1998 and
December 31, 1997, Respectively 55,982 53,314
Accumulated Other Comprehensive Income 2,538 1,654
Retained Earnings 102,706 91,355
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Total Stockholders' Equity 161,226 146,323
------------- -------------
Total Liabilities and Stockholders'
Equity $ 1,610,998 $ 1,509,437
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
GBC Bancorp and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In Thousands, Except June 30, June 30,
Per Share Data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and Leases,
Including Fees $ 17,882 $ 15,677 $ 34,452 $ 30,970
Securities Available for
Sale 10,398 8,801 20,286 17,089
Securities Held to Maturity 1,430 505 2,667 764
Federal Funds Sold and
Securities Purchased under
Agreements to Resell 1,483 2,176 3,468 4,070
Other - - 6 -
---------- ---------- ---------- ----------
Total Interest Income 31,193 27,159 60,879 52,893
INTEREST EXPENSE
Interest Bearing Demand 1,795 1,319 3,168 2,477
Savings 595 799 1,243 1,563
Time Deposits of $100,000
or More 7,859 7,311 15,622 14,088
Other Time Deposits 3,377 2,121 6,436 4,071
Federal Funds Purchased and
Securities Sold under
Repurchase Agreements 12 - 16 2
Subordinated Debt 871 399 1,741 798
---------- ---------- ---------- ----------
Total Interest Expense 14,509 11,949 28,226 22,999
Net Interest Income 16,684 15,210 32,653 29,894
Provision for Credit Losses - - - 1,000
---------- ---------- ---------- ----------
Net Interest Income after
Provision for Credit
Losses 16,684 15,210 32,653 28,894
NON-INTEREST INCOME
Service Charges and
Commissions 1,661 1,424 3,098 2,766
Gain on Sale of Loans, Net 5 24 24 74
Other 146 153 463 285
---------- ---------- ---------- ----------
Total Non-Interest Income 1,812 1,601 3,585 3,125
NON-INTEREST EXPENSE
Salaries and Employee
Benefits 4,364 4,032 8,659 7,801
Occupancy Expense 758 714 1,486 1,408
Furniture and Equipment
Expense 516 453 1,001 873
Net Other Real Estate
Owned Expense 127 236 439 479
Other 1,741 1,387 3,225 3,051
---------- ---------- ---------- ----------
Total Non-Interest
Expense 7,506 6,822 14,810 13,612
Income before Income Taxes 10,990 9,989 21,428 18,407
Provision for Income Taxes 4,147 3,529 7,954 6,203
---------- ---------- ---------- ----------
Net Income $ 6,843 $ 6,460 $ 13,474 $ 12,204
========== ========== ========== ==========
Earnings Per Share
Basic $ 0.48 $ 0.48 $ 0.95 $ 0.90
Diluted 0.48 0.46 0.94 0.88
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
GBC Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
June 30, June 30,
(In Thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 6,843 $ 6,460 $ 13,474 $ 12,204
---------- ---------- ---------- ----------
Other Comprehensive Income,
Net of Tax:
Change in Unrealized Gains/
(Losses) on Securities
During Period 855 2,165 884 (532)
---------- ---------- ---------- ----------
Other Comprehensive Income 855 2,165 884 (532)
---------- ---------- ---------- ----------
Comprehensive Income $ 7,698 $ 8,625 $ 14,358 $ 11,672
========== ========== ========== ==========
</TABLE>
GBC Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
- --------------------------------------------------------------------------------
(In Thousands) 1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 13,474 $ 12,204
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 629 584
Net Amortization/(Accretion) of Premiums/
Discounts on Securities 76 (127)
Accretion of Discount on Subordinated Notes 65 -
Writedown on Real Estate Held for Investment 663 663
Amortization of Deferred Loan Fees (1,474) (1,137)
Gain on Sale of Loans (24) (74)
(Gain)/Loss on Sale of Other Real Estate Owned (23) 10
Loans Originated for Sale - (14,369)
Proceeds from Sales of Loans Originated
for Sale 24 15,596
Net Decrease in Accrued Interest
Receivable and Other Assets 5,693 1,044
Net Increase/ (Decrease) in Accrued
Expenses and Other Liabilities (3,550) 2,829
Other, Net 1 1,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 15,554 $ 18,223
------------ ------------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (189,306) (246,952)
Proceeds from Maturities of Securities
Available for Sale 183,186 203,118
Purchases of Securities Held to Maturity (50,090) (42,940)
Proceeds from Maturities of Securities
Held to Maturity 30,866 781
Net Increase in Loans and Leases (79,560) (13,895)
Proceeds from Sales of Other Real Estate
Owned 1,662 1,996
Capitalized Costs of Other Real Estate
Owned - (368)
Purchases of Premises and Equipment (456) (505)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES $ (103,698) $ (98,765)
------------ ------------
FINANCING ACTIVITIES:
Net (Decrease)/Increase in Demand,
Interest Bearing Demand and Savings
Deposits 53,642 (3,048)
Net Increase in Time Certificates of
Deposits 38,636 60,056
Cash Dividend Paid (1,900) (1,491)
Proceeds from Exercise of Stock Options 1,187 657
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 91,565 $ 56,174
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,421 (24,368)
Cash and Cash Equivalents at Beginning of
Period 140,519 187,009
------------ ------------
Cash and Cash Equivalents at End of Period $ 143,940 $ 162,641
============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During This Period
Interest $ 27,811 $ 23,075
Income Taxes (Amount net of $1,148 of
tax refunds plus interest) 1,102 920
============ ==========
Noncash Investing Activities:
Loans Transferred to Other Real Estate
Owned at Fair Value $ 588 $ 3,862
============ ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
GBC Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- -------------------------------------------------------
In the opinion of management, the consolidated financial statements of
GBC Bancorp and its subsidiaries (the "Company") as of June 30, 1998 and
December 31, 1997, and the six and three months ended June 30, 1998 and 1997,
reflect all adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation. In the opinion of management, the
aforementioned consolidated financial statements are in conformity with
generally accepted accounting principles.
Earnings Per Share
- -------------------
Basic earnings per share is determined by dividing net income by the
average number of shares of common stock outstanding, while diluted earnings
per share is determined by dividing net income by the average number of shares
of common stock outstanding adjusted for the dilutive effect of common stock
equivalents. Earnings per share for the three month and six month periods
ended June 30, 1997 have been restated to reflect a 2 for 1 stock split to
shareholders of record on April 30, 1998 and issued and distributed on May 15,
1998.
Consolidated Statements of Cash Flows
- --------------------------------------
Cash and cash equivalents consist of cash and due from banks, and federal
funds sold and securities purchased under agreements to resell.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
----------------------
OVERVIEW
- ---------
Net income for the second quarter of 1998 was $6,843,000, or $0.48 diluted
earnings per share compared to $6,460,000, or $0.46 diluted earnings per share
for the corresponding period of 1997. The increase in net income for the
second quarter of 1998 was primarily the result of an increase of net interest
income and higher non-interest income which were partially offset by an increase
of non-interest expense.
For the six months ended June 30, 1998, net income totaled $13,474,000, an
increase of $1,270,000, or 10.4%, from the $12,204,000 earned during the
corresponding period of 1997. Diluted earnings per share for the six months
ended June 30, 1998 were $0.94, up 6.8% from the $0.88 for the same period of
1997. The increase of year-to-date net income was due to the growth of net
interest income, the absence of a provision for credit losses, and higher non-
interest income, which were partially offset by higher non-interest expense.
As of June 30, 1998, record high levels were achieved for loans and leases,
total assets, total deposits, and stockholders' equity.
For the quarter ended June 30, 1998 and 1997, the annualized return on
average assets ("ROA") was 1.73% and 1.87%, respectively, and the annualized
return on average stockholders' equity ("ROE") was 17.4% and 21.2%,
respectively.
For the six months ended June 30, 1998 and 1997, the ROA was 1.74% and
1.80%, respectively. For the six months ended June 30, 1998 and 1997, the ROE
was 17.6% and 20.4%, respectively.
Subsequent to June 30, 1998, and not included in the financial results of
the second quarter, a performing, restructured loan was repaid, with a resulting
reduction of restructured loans of approximately $7 million, a recovery of
allowance for credit losses of approximately $1.7 million, and an interest
recovery of approximately $1 million.
RESULTS OF OPERATIONS
- ----------------------
Net Interest Income-Quarterly Results
- --------------------------------------
For the quarter ended June 30, 1998 and 1997, net interest income before
the provision for credit losses was $16,684,000 and $15,210,000, respectively,
representing an increase of $1,474,000, or 9.7%.
Total interest income for the quarter ended June 30, 1998 was $31,193,000,
representing a $4,034,000, or 14.9%, increase over the corresponding quarter of
a year ago. The increase was due to a growth of $225.8 million, or 17.3%, of
average interest earning assets. The impact on interest income from the growth
of average interest earning assets was partially offset by a decline in the
yield on earning assets to 8.15% from 8.33% for the quarters ending June 30,
1998 and 1997, respectively.
The $225.8 million growth of average interest earning assets was comprised
of increases of $172.5 million and $102.1 million for securities and loans and
leases, respectively, partially offset by a $48.8 million decline of federal
funds sold and securities purchased under agreements to resell. Excluding the
$27.0 million average balance of loans to depository institutions during 1997
which are included in loans, the loan growth was $129.1 million. The Bank had
no outstanding loans to depository institutions during 1998.
The 18-basis point decline of the yield was primarily the result of a
decline of the yield on loans and leases. For the quarters ended June 30, 1998
and 1997, the yield on loans and leases was 10.30% and 10.59%, respectively.
Excluding the lower yielding loans to depository institutions outstanding during
1997, the decline was from 10.82% to 10.30%. In addition to the decline of the
yield on loans and leases, there was an 11-basis point decrease of the yield on
securities to 6.47% from 6.58% for the quarters ended June 30, 1998 and 1997,
respectively (excluding the impact of the average balance of unrealized gains/
losses on securities available for sale). The effect of the decline of the
yield on loans and leases and securities was partially mitigated by an increase
in the percentage of average loans and leases, (excluding lower yielding loans
to depository institutions) to total average earning assets. For the three
months ended June 30, 1998 and 1997, average loans and leases, excluding loans
to depository institutions, comprised 45.4% and 43.3%, respectively, of total
average earning assets. Loans and leases represent the highest yielding
interest earning asset.
Total interest expense for the quarter ended June 30, 1998 was
$14,509,000, representing a $2,560,000, or 21.4%, increase over the
corresponding quarter of a year ago. The increase was due to a growth of $153.0
million of average interest bearing liabilities, and an increased cost of funds.
For the quarter ended June 30, 1998 and 1997, the cost of funds was 4.62% and
4.33%, respectively.
The increase in the cost of funds was primarily the result of an increase
in the rates paid on interest-bearing deposits. For the three months ended June
30, 1998 and 1997 rates paid on interest-bearing deposits were 4.48% and 4.24%,
respectively. With the exception of savings deposits whose average balance
declined in the second quarter 1998 compared to second quarter 1997, the rates
paid on all interest-bearing deposits increased. In addition, the increase in
the average amount of subordinated debt increased interest expense. For the
quarters ended as indicated, the average balance and the cost of funds for
subordinated debt were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended June 30
1998 1997
<S> <C> <C>
Average Balance $38,789 15,000
Cost of Funds 8.98% 10.64%
</TABLE>
The following table displays the average balance and rates paid for the
Bank's deposit products for the three months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Interest bearing demand -
Average balance $ 260,087 $ 228,191
Rate 2.77% 2.32%
Savings - Average balance 87,930 114,342
Rate 2.71% 2.80%
Time certificates of deposit of
$100,000 or more - Average balance 600,129 571,265
Rate 5.25% 5.13%
Other time deposits -
Average balance 272,026 177,965
Rate 4.98% 4.78%
</TABLE>
In addition, upward pressure on the rates paid on deposits was exerted as
a result of the increased percentage of average certificates of deposits to
average total interest-bearing deposits. This percentage was 71.5% and 68.6%
for the quarters ended June 30, 1998 and 1997, respectively. Certificates of
deposits represent the most costly deposit product for the Bank.
The net interest spread is defined as the yield on interest earning assets
less the rates paid on interest-bearing liabilities. For the three months ended
June 30, 1998 and 1997, the net interest spread declined to 3.53% from 4.00%,
respectively. The decrease is for the reasons discussed above.
The net interest margin is defined as the annualized difference between
interest income and interest expense divided by average interest earning assets.
For the three months ended June 30, 1998 and 1997, the net interest margin was
4.36% and 4.66% respectively. The decrease in the margin is primarily the
result of the reduced net interest spread and the growth of the Company.
Net Interest Income-Six-Month Results
- --------------------------------------
For the six months ended June 30, 1998, net interest income before the
provision for credit losses was $32,653,000, representing a $2,759,000, or 9.2%,
growth over the corresponding period of a year ago.
Total interest income for the six months ended June 30, 1998 was
$60,879,000 compared to $52,893,000, a $7,986,000, or 15.1%, growth over the
corresponding period of a year ago. The increase is the result of an increase
of average interest earning assets partially offset by a reduction of the yield
on interest earning assets.
The net growth of average earning assets was $213.2 million represented by
increases of $75.7 million and $162.3 million for loans and leases and
securities, respectively, and a decrease of $24.8 million for federal funds sold
and securities purchased under agreements to resell.
The yield on interest earning assets declined to 8.16% for the six months
ended June 30, 1998 from 8.25% for the corresponding period of a year ago. The
primary reason for the yield decline was a decrease of the yield on loans and
leases. For the six months ended June 30, 1998 and 1997, the yield on loans and
leases was 10.31% and 10.44%, respectively. Factoring out the average balance
of loans to depository institutions included in loans, the decline was 45 basis
points.
Total interest expense for the six months ended June 30, 1998 and 1997 was
$28,226,000 and $22,999,000, respectively, representing a $5,227,000, or
22.7%, increase. This increase is due to both the growth of interest-bearing
liabilities and the cost of funds.
Average interest-bearing liabilities increased by $147.0 million with the
majority of the increase provided by certificates of deposit. The average
balance of certificates of deposit was $858.8 million and $734.5 million for the
six-month period ending June 30, 1998 and 1997, respectively, representing a
$124.3 million, or 16.9%, increase.
The cost of funds increased by 34-basis points to 4.60% from 4.26%, for the
six-month periods ended June 30, 1998 and 1997, respectively. The increase
continues as the result primarily of both the increased percentage of total
average interest bearing deposits represented by certificates of deposits and
the increased rates paid on all categories of interest bearing deposits. For
the six month period ended June 30, 1998 and 1997, certificates of deposits as a
percentage of total average interest-bearing deposits were 71.8% and 68.4%,
respectively. Certificates of deposits represent the most costly deposit
product for the Bank. The average balance and the rates paid on the deposit
categories were as follows for the six months ended as indicated:
<TABLE>
<CAPTION>
For Six Months Ended June 30,
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Interest bearing demand -
Average balance $ 246,520 $ 223,703
Rate 2.59% 2.23%
Savings - Average balance 91,480 115,956
Rate 2.74% 2.72%
Time certificates of deposit of $100,000
or more - Average balance 598,023 560,241
Rate 5.27% 5.07%
Other time deposits - Average balance 260,785 174,211
Rate 4.98% 4.71%
</TABLE>
In addition, interest expense increased as a result of the increase in the
average amount of subordinated debt. For the six-month period ended June 30,
1998 and 1997, the average balance and the cost of funds for subordinated debt
were as shown on the table preceding for the quarter ended June 30.
For the six months ended June 30, 1998 and 1997, the net interest spread
declined to 3.56% from 3.99%, respectively. The compression of the spread is
the result of the decline of the yield on interest earning assets and the
increase of the rates paid on interest bearing liabilities, as discussed in the
above paragraphs.
For the six months ended June 30, 1998 and 1997, the net interest margin
was 4.37% and 4.67%, respectively. The decrease in the margin is primarily the
result of the reduced net interest spread and the growth of the Company.
Provision for Credit Losses
- ----------------------------
For the quarter ended June 30, 1998, there was no provision for credit
losses, unchanged from the corresponding period of a year ago. For the six
months ended June 30, 1998, there was no provision for credit losses compared
to $1,000,000 for the same period of 1997, a decrease of $1,000,000. For the
six months ended June 30, 1998 the absence of a provision for credit losses
reflects management's assessment of the adequacy of the allowance for credit
losses.
The amount of the provision for credit losses is determined by management
and is based upon the quality of the loan portfolio, management's assessment of
the economic environment, evaluations made by regulatory authorities, historical
loan loss experience, collateral values, assessment of borrowers' ability to
repay, and estimates of potential future losses. Please refer to the discussion
"Allowance for Credit Losses", following.
Non-Interest Income
- --------------------
Non-interest income for the quarter ended June 30, 1998 totaled $1,812,000,
representing a $211,000, or 13.2%, increase over the $1,601,000 for the quarter
ended June 30, 1997. The net increase was the result of a $237,000 increase in
service charges and commissions. This increase was primarily due to letter of
credit activity associated with the trade financing operation of the Bank. In
addition, effective from the last quarter of 1997, the Bank is receiving fees
for residential mortgage loan referrals. The fees received during the quarter
ended June 30, 1998 were $106,000.
For the six months ended June 30, 1998, non-interest income totaled
$3,585,000 representing a $460,000, or 14.7%, increase compared to $3,125,000
for the six months ended June 30, 1997. The net increase was due to a
$332,000 increase in service charges and commissions and a $178,000 increase of
other non-interest income partially offset by a reduction of $50,000 of net gain
on sale of loans. The increase in service charges and commissions is explained
above. The increase of other non-interest income is primarily the result of
interest received on a tax refund in the first quarter of 1998.
Non-Interest Expense
- ---------------------
For the three months ended June 30, 1998, non-interest expense was
$7,506,000, representing a $684,000, or 10.0%, increase over $6,822,000 for the
corresponding period of a year ago. The increase of $332,000 in salaries and
employee benefits, which accounted for almost one half of this net increase,
was primarily due to the growth of salaries reflecting both an increase of
employees and salary increases. In addition, other non-interest expense
increased $354,000 primarily the result of an increase in legal expense. During
the three months ended June 30, 1997, the Bank recorded recoveries of $198,000
of previously incurred legal fees. For the three-months ended June 30, 1998,
the Company's efficiency ratio, defined as non-interest expense divided by the
sum of net interest income plus non-interest income, remained at 40.6%,
unchanged from the corresponding period of a year ago.
For the six months ended June 30, 1998, non-interest expense was
$14,810,000, representing a $1,198,000, or 8.8%, increase over $13,612,000
reported for the corresponding period of a year ago. The increase in salaries
and employee benefits was $858,000, primarily the result of growth of salaries.
The reason for the increase is as explained above.
For the six months ended June 30, 1998, the Company's efficiency ratio
declined to 40.9%, comparing favorably to 41.2% for the corresponding period of
1997.
Provision for Income Taxes
- ---------------------------
For the quarter ended June 30, 1998 and 1997, the provision for income
taxes was $4,147,000 and $3,529,000, respectively, representing effective tax
rates of 37.7% and 35.3%.
For the six months ended June 30, 1998, the provision for income taxes
was $7,954,000, representing 37.1% of pre-tax income. The provision for the
six months ended June 30, 1997, was $6,203,000, representing 33.7% of pre-tax
income.
The increase in the effective tax rates for the 3-month and 6-month periods
ended June 30, 1998 compared to the corresponding periods of a year ago is due
to legislated discontinuance of the Los Angeles Revitalization Zone California
tax incentive and the reduced holdings of tax preference securities in 1998.
In addition, for the three and six month periods ending June 30, 1998,
pre-tax income increased 10.0% and 16.4%, respectively, over the year ago
periods while the low income housing tax credit remained constant.
FINANCIAL CONDITION
- --------------------
Total assets as of June 30, 1998 were $1,611 million, an increase of
$102 million from total assets of $1,509 million as of December 31, 1997. The
increase was the result of a growth of deposits that was invested primarily in
loans and leases and securities. As of June 30, 1998 and December 31, 1997,
total deposits were $1,384 million and $1,292 million, respectively.
Loans
- ------
As of June 30, 1998, loans and leases totaled $718.8 million, representing
an $80.0 million, or 12.5%, increase from the balance of $638.8 million as of
December 31, 1997. Growth in the commercial loan portfolio representing $57.5
million was primarily in the trade-financing area which increased $46.5
million. The growth of this category of loan reflects the growth in
international trade and new customer relationships. In addition, there was an
increase of $18.7 million of real estate-construction.
The following table sets forth the amount of loans and leases outstanding
by category and the percentage of each category to total loans and leases
outstanding:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(DOLLARS IN THOUSANDS) Amount Percentage Amount Percentage
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 290,847 40.46% $ 233,309 36.52%
Real Estate-Construction 109,244 15.20% 90,560 14.18%
Real Estate-Conventional 281,976 39.23% 276,350 43.26%
Installment 55 0.01% 54 0.01%
Other Loans 21,425 2.98% 23,993 3.75%
Leveraged Leases 15,272 2.12% 14,563 2.28%
----------- --------- ----------- ---------
Total $ 718,819 100.00% $ 638,829 100.00%
</TABLE>
Non-Performing Assets
- ----------------------
A certain degree of risk is inherent in the extension of credit.
Management has credit policies in place to minimize the level of loan losses
and non-performing loans. The Company performs a quarterly assessment of the
credit portfolio to determine the appropriate level of the allowance. Included
in the assessment is the identification of loan impairment. A loan is
identified as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreement. Loan
impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral.
The Company has a policy of classifying loans (including an impaired
loan) which are 90 days past due as to principal and/or interest as non-accrual
loans unless management determines that the fair value of underlying collateral
is substantially in excess of the loan amount or other circumstances justify
treating the loan as fully collectible. After a loan is placed on non-accrual
status, any interest previously accrued, but not yet collected, is reversed
against current income. A loan is returned to accrual status only when the
borrower has demonstrated the ability to make future payments of principal and
interest as scheduled, and the borrower has demonstrated a sustained period of
repayment performance in accordance with the contractual terms. Interest
received on non-accrual loans generally is either applied as principal reduction
or reported as recoveries on amounts previously charged off, according to
management's judgment as to the collectability of principal.
The following table provides information with respect to the Company's
past due loans, non-accrual loans, restructured loans and other real estate
owned, net, as of the dates indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) June 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans 90 Days or More Past Due and
Still Accruing $ 1,745 $ 2,778
Non-accrual Loans 12,531 9,834
Total Past Due Loans 14,276 12,612
Restructured Loans 18,232 20,323
Total Non-performing Loans 32,508 32,935
Other Real Estate Owned, Net 6,837 7,871
Total Non-Performing Assets $ 39,345 $ 40,806
</TABLE>
Total non-performing assets decreased to $39.3 million, as of June 30,
1998, from $40.8 million, as of December 31, 1997, representing a $1.5 million,
or 3.6%, reduction. All categories of non-performing assets declined with the
exception of non-accrual loans.
Loans 90 Days or More Past Due and Still Accruing
- --------------------------------------------------
This category of loans is comprised of two credits of approximately equal
balances. One of the two is in process of collection and demand for pay-off is
in escrow.
Non-accrual Loans
- ------------------
As of June 30, 1998 non-accrual loans were $12.5 million, an increase of
$2.7 million from year-end 1997, but a decline from the end of the first
quarter 1998.
The following table breaks out the Company's non-accrual loans by category
as of June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS) June 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 9,248 $ 5,957
Real Estate-Construction 455 455
Real Estate-Conventional 2,822 3,414
Other Loans 6 8
---------- ----------
Total $ 12,531 $ 9,834
========== ==========
</TABLE>
Of the $12.5 million of non-accrual loans, $3.3 million are collateralized
by real property with appraisal value considerably in excess of the carrying
value of the loans, providing substantial protection against the loss of
principal.
The increase in the non-accrual loans classified as commercial is
primarily in the trade financing portfolio. These loans are collateralized by
a variety of business assets and the Bank does not anticipate any significant
losses.
The following table analyzes the increase in non-accrual loans during the
six months ended June 30, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ----------------------------------------------------------------
<S> <C>
Balance, December 31, 1997 $ 9,834
Add: Loans placed on non-accrual 10,545
Less: Charge-offs (1,639)
Returned to accrual status (1,448)
Repayments (4,174)
Transfer to OREO (587)
Balance, June 30, 1998 $ 12,531
</TABLE>
Restructured Loans
- -------------------
The balance of restructured loans as of June 30, 1998 was $18.2 million
compared to $20.3 million as of December 31, 1997, representing a $2.1 million,
or 10.3%, decrease. 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 June 30, 1998, one restructured loan totaling
$685,000 was on non-accrual status. As of June 30, 1998, restructured loans
excluding the $685,000, totaled $18.2 million and consisted of 15 loans compared
to $20.3 million and 15 loans as of December 31, 1997. The weighted average
yield of the restructured loans was 10.32% as of June 30, 1998.
There are no commitments to lend additional funds on any of the
restructured loans.
Subsequent to June 30, 1998, and not included in the financial results of
the second quarter, a performing, restructured loan was repaid, with a resulting
reduction of restructured loans of approximately $7 million, a recovery of
allowance from credit losses of approximately $1.7 million, and an interest
recovery of approximately $1 million.
Other Real Estate Owned
- ------------------------
As of June 30, 1998, other real estate owned ("OREO"), net of valuation
allowance of $2.0 million, totaled $6.8 million, representing a decrease of $1.0
million, or 13.1%, from the net balance of $7.9 million, net of valuation
allowance of $2.1 million, as of December 31, 1997. As of June 30, 1998 and
December 31, 1997, OREO consisted of 16 properties and 17 properties,
respectively.
The outstanding OREO properties are all physically located in the Bank's
market area. They include single family residences, condominiums, commercial
buildings, and land. Seven properties comprise the land category of OREO. The
Company does not intend to develop these properties; rather, it will sell the
land undeveloped.
The following table sets forth OREO by property type as of the dates
indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) June 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
PROPERTY TYPE
Single-Family Residential $ 217 $ 380
Condominium 1,540 2,598
Multi-Family Residential - 220
Land for Residential 3,715 3,715
Land for Agriculture 15 15
Retail Facilities 3,350 3,003
Less: Valuation Allowance (2,000) (2,060)
--------- ---------
Total $ 6,837 $ 7,871
========= =========
</TABLE>
Impaired Loans
- ---------------
A loan is identified as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. Loan impairment is measured by estimating the expected future cash
flows and discounting them at the respective effective interest rate or by
valuing the underlying collateral. Of the $13 million of outstanding impaired
loans as of June 30, 1998, $9 million are included in the balance of
restructured loans and are performing pursuant to the terms and conditions of
the restructuring. Included in the $9 million is $7 million which amount was
repaid subsequent to June 30, 1998, and accordingly was not included in the
financial results of the second quarter. The following table discloses
pertinent information as it relates to the Company's impaired loans as of the
dates indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) June 30, 1998 Dec. 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Recorded Investment with Related Allowance $ 13,315 $ 16,095
Recorded Investment with no Related Allowance - 1,022
Total Recorded Investment 13,315 17,117
Allowance for Impaired Loans 1,073 1,544
</TABLE>
The average balance of impaired loans before the allowance was $15 million
for the six months ended June 30, 1998 and $22.4 million for the twelve months
ended December 31, 1997.
For the six months ended June 30, 1998 and 1997, interest income
recognized on impaired loans was $583,000 and $832,000, respectively. Of the
amount of interest income recognized during the six months ended June 30, 1998
and 1997, no interest was recognized under the cash basis method.
Management cannot predict the extent to which the current economic
environment, including the real estate market, may continue to improve or
worsen, or the full impact such environment may have on the Bank's loan
portfolio. Furthermore, as the Bank's primary regulators review the loan
portfolio as part of their routine, periodic examinations of the Bank, their
assessment of specific credits may affect the level of the Bank's
non-performing loans. Accordingly, there can be no assurance that other loans
will not be placed on non-accrual, become 90 days or more past due, have terms
modified in the future, or become OREO.
Allowance for Credit Losses
- ----------------------------
As of June 30, 1998, the balance of the allowance for credit losses was
$15.5 million, representing 2.16% of outstanding loans and leases. This
compares to an allowance for credit losses of $16.8 million as of December 31,
1997, representing 2.63% of outstanding loans and leases.
The table below summarizes the activity in the total allowance for credit
losses (which amount includes the allowance on impaired loans) for the six
months ended as indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) June 30, 1998 June 30, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, Beginning of Period $ 16,776 $ 16,209
Provision for Credit Losses - 1,000
Charge-offs (1,639) (3,622)
Recoveries 401 1,349
Net Charge-offs (1,238) (2,273)
Balance, End of Period $ 15,538 $ 14,936
</TABLE>
As of June 30, 1998, the allowance represents 47.8% and 124% of
non-performing loans and of non-accrual loans, respectively. As of December 31,
1997, the allowance represented 50.9% and 171% of non-performing loans and of
non-accrual loans, respectively.
On a quarterly basis, management reviews all criticized credits as
identified both internally and by outside sources, including the Bank's
regulators. Specific allocations of a required allowance are made based on
these reviews, as well as on the historical loss experience of criticized
credits. In addition, a percentage of non-criticized credits is also computed
for purposes of the allowance requirement. The sum of these two allocations is
compared with the actual allowance for sufficiency. Based on its quarterly
review as of June 30, 1998, management believes no provision for credit losses
was necessary.
Management believes that the allowance for credit losses is adequate to
cover known and inherent losses related to loans and leases outstanding as of
June 30, 1998.
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 June 30, 1998, the Company recorded net unrealized gains of
$4,395,000 on its available-for-sale portfolio. Stockholders' equity includes
$2,547,000, representing the net unrealized gain, net of tax.
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of securities at June 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
June 30, 1998 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity
U.S. Government Agencies $ 77,392 $ 102 $ - $ 77,494
Collateralized Mortgage
Obligations 31 - - 31
----------- --------- ------ -----------
Total Securities Held
to Maturity $ 77,423 $ 102 $ - $ 77,525
=========== ========= ====== ===========
Securities Available for Sale
U. S. Treasuries $ 1,874 $ - $ (3) $ 1,871
U.S. Government Agencies 132,850 103 - 132,953
Mortgage Backed Securities 49,511 372 - 49,883
Corporate Notes 9,002 55 - 9,057
Collateralized Mortgage
Obligations 245,659 1,095 - 246,754
Asset Backed Securities 201,956 2,773 - 204,729
Other Securities 5,829 - - 5,829
----------- --------- ------ -----------
Total Securities
Available for Sale $ 646,681 $ 4,398 $ (3) $ 651,076
=========== ========= ====== ===========
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
December 31,1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
Securities Held to Maturity
U.S. Government Agencies $ 58,003 $ 124 $ - $ 58,127
Collateralized Mortgage
Obligations 42 - - 42
----------- --------- ------ -----------
Total Securities Held
to Maturity $ 58,045 $ 124 $ - $ 58,169
=========== ========= ====== ===========
Securities Available for Sale
U. S. Treasuries $ 6,889 $ 11 $ - $ 6,900
U.S. Government Agencies 220,205 187 - 220,392
Mortgage Backed Securities 57,167 326 - 57,493
Corporate Notes 9,006 175 - 9,181
Collateralized Mortgage
Obligations 188,092 460 - 188,552
Asset Backed Securities 135,263 1,710 - 136,973
Auctioned Preferred Stock 18,500 - - 18,500
Other Securities 5,669 - - 5,669
----------- --------- ------ -----------
Total Securities
Available for Sale $ 640,791 $ 2,869 $ - $ 643,660
=========== ========= ====== ===========
</TABLE>
There were no sales of securities during the six months ended June 30,
1998 and 1997.
Deposits
- ---------
The Company's deposits totaled $1,384.1 million as of June 30, 1998,
representing a $92.3 million, or 7.1%, increase from total deposits of $1,291.8
million as of December 31, 1997. The net growth was primarily due to increases
in interest-bearing demand deposits and other time deposits which grew $63.3
million and $48.3 million, respectively. Included in the balance of time
certificates of deposit of $100,000 or more is $93 million of deposits from the
state of California, up $15 million from December 31, 1997, and unchanged from
March 31, 1998. Factoring out the $15 million growth of these deposits during
the first quarter ended March 31, 1998, time certificates of deposits of
$100,000 or more declined $24.7 million as of June 30, 1998 compared to
December 31, 1997.
There were no brokered deposits outstanding as of June 30, 1998. The
Company believes that the majority of its deposit customers have strong ties
to the Bank. Although the Company has a significant amount of time deposits of
$100,000 or more having maturities of one year or less, in the past the
depositors have generally renewed their deposits 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 June 30, 1998, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------
<S> <C>
3 Months or Less $ 287,422
Over 3 Months Through One Year 295,203
Over One Year through 5 Years 2,769
-----------
Total $ 585,394
===========
</TABLE>
Subordinated Debt
- ------------------
Subordinated debt is comprised of a $40 million public offering issuance
of 8.375% subordinated notes due August 1, 2007. Proceeds of $38.7 million,
net of underwriting discount of $1.3 million, were received by the Company.
The discount is amortized as a yield adjustment over the 10-year life of the
notes.
Capital Resources
- ------------------
As of June 30, 1998, stockholders' equity totaled $161.2 million, an
increase of $14.9 million, or 10.2%, from $146.3 million as of December 31,
1997. The increase was due to net income of $13.5 million, less cash dividends
declared to stockholders of $2.1 million, plus the net change in other
comprehensive income, net of tax, of $0.9 million, plus the exercise of stock
options and related tax benefit totaling $2.6 million.
Capital ratios for the Company and for the Bank were as follows as of the
dates indicated:
<TABLE>
<CAPTION>
Well-Capitalized June 30, December 31,
Requirements 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GBC Bancorp
Tier 1 Leverage Ratio 5% 9.98% 9.58%
Tier 1 Risk-Based Capital Ratio 6% 12.85% 13.57%
Total Risk-Based Capital Ratio 10% 17.25% 18.47%
General Bank
Tier 1 Leverage Ratio 5% 9.05% 8.78%
Tier 1 Risk-Based Capital Ratio 6% 11.66% 12.45%
Total Risk-Based Capital Ratio 10% 12.91% 13.71%
</TABLE>
For the six months ended June 30, 1998, the ratio of the Company's
average stockholders' equity to average assets was 9.88%. For the year ended
December 31, 1997, this ratio was 9.11%. The increase of the ratio is due to
average capital increasing more rapidly than the growth of average assets.
Liquidity and Market Risk
- --------------------------
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 federal funds sold and securities purchased under agreements to resell,
unpledged securities held to maturity maturing within one year and unpledged
securities available for sale. These sources of liquidity amounted to $678.9
million, or 42.1% of total assets, as of June 30, 1998, compared to $696.3
million, or 46.1% of total assets, as of December 31, 1997.
To further supplement its liquidity, the Company has established federal
funds lines with correspondent banks and three master repurchase agreements
with major brokerage companies. In August, 1992, the Federal Home Loan Bank of
San Francisco ("FHLB") granted the Bank a line of credit equal to 25 percent of
assets with terms up to 360 months. Management believes its liquidity sources
to be stable and adequate.
As of June 30, 1998, total loans and leases represented 51.9% of total
deposits. This compares to 49.8 and 49.5% as of March 31, 1998 and December
31, 1997, respectively.
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 the
six months ended June 30, 1998, General Bank declared cash dividends of $2.2
million to GBC Bancorp.
Derivatives
- ------------
As of June 30, 1998 and December 31, 1997, there were no derivative
financial instruments. As of June 30, 1997, the amount of derivative financial
instruments outstanding was $2 million.
"GAP" measurement
- ------------------
While no single measure can completely identify the impact of changes in
interest rates on net interest income, one gauge of interest rate sensitivity is
to measure, over a variety of time periods, contractual differences in the
amounts of the Company's rate sensitive assets and rate sensitive liabilities.
These differences, or "gaps", provide an indication of the extent that net
interest income may be affected by future changes in interest rates. However,
these contractual "gaps" do not take into account timing differences between the
repricing of assets and the repricing of liabilities.
A positive gap exists when rate sensitive assets exceed rate sensitive
liabilities and indicates that a greater volume of assets than liabilities will
reprice during a given period. This mismatch may enhance earnings in a rising
rate environment and may inhibit earnings when rates decline. Conversely, when
rate sensitive liabilities exceed rate sensitive assets, referred to as a
negative gap, it indicates that a greater volume of liabilities than assets will
reprice during the period. In this case, a rising interest rate environment may
inhibit earnings and declining rates may enhance earnings.
"Gap" reports originated as a means to provide management with a tool to
monitor repricing differences, or "gaps", between assets and liabilities
repricing in a specified period, based upon their underlying contractual rights.
The use of "gap" reports is thus limited to a quantification of the "mismatch"
between assets and liabilities repricing within a unique specified timeframe.
Contractual "Gap" reports cannot be used to quantify exposure to interest rate
changes because they do not take into account timing differences between
repricing assets and liabilities, and changes in the amount of prepayments.
As of June 30, 1998, there was a cumulative one-year negative "gap" of
$514.8 million, up from $462.7 million as of December 31, 1997. The negative
gaps would appear to be predictive of an increase in the net interest margin
had the average prime rate of interest declined. There was, however, no change
in the prime rate of interest between the fourth quarter of 1997 and the first
and second quarters of 1998.
The following table indicates the Company's interest rate sensitivity
position as of June 30, 1998, and is based on contractual maturities. It 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 $ 47,883 $ 34,925 $ 92,912 $ 475,356 $ - $ 651,076
Securities Held to
Maturity - - 56,454 20,969 - 77,423
Federal Funds Sold &
Securities Purchased Under
Agreement to Resell 104,650 - - - - 104,650
Loans and Leases (1) (2) 510,383 16,060 85,068 94,777 - 706,288
Non-interest
Earning Assets (2) - - - - 71,561 71,561
----------- ----------- ----------- ----------- ----------- -------------
Total Assets $ 662,916 $ 50,985 $ 234,434 $ 591,102 $ 71,561 $ 1,610,998
=========== =========== =========== =========== =========== =============
Source of Funds for Assets:
Deposits:
Demand - N/B $ - $ - $ - $ - $ 150,729 $ 150,729
Interest Bearing Demand 282,046 - - - - 282,046
Savings 85,552 - - - - 85,552
TCD'S Under $100,000 123,391 155,047 1,951 - - 280,389
TCD'S $100,000 and Over 288,239 294,386 2,769 - - 585,394
----------- ----------- ----------- ----------- ----------- -------------
Total Deposits $ 779,228 $ 449,433 $ 4,720 $ - $ 150,729 $ 1,384,110
----------- ----------- ----------- ----------- ----------- -------------
Subordinated Debt $ - $ - $ - $ 38,810 $ - $ 38,810
Other Liabilities - - - - 26,852 26,852
Stockholders' Equity - - - - 161,226 161,226
----------- ----------- ----------- ----------- ----------- -------------
Total Liabilities
and Stockholders' Equity $ 779,228 $ 449,433 $ 4,720 $ 38,810 $ 338,807 $ 1,610,998
=========== =========== =========== =========== =========== =============
Interest Sensitivity Gap $(116,312) $(398,448) $ 229,714 $ 552,292 $(267,246)
Cumulative Interest
Sensitivity Gap $(116,312) $(514,760) $(285,046) $ 267,246 -
Gap Ratio (% of Total
Assets) -7.2% -24.7% 14.3% 34.3% -16.6%
Cumulative Gap Ratio -7.2% -32.0% -17.7% 16.6% 0.0%
</TABLE>
(1) Loans and leases are before unamortized deferred loan fees and allowance for
credit losses.
(2) Non-accrual loans are included in non-interest earning assets.
Effective asset/liability management includes maintaining adequate
liquidity and minimizing the impact of future interest rate changes on net
interest income. The Company attempts to manage its interest rate sensitivity
on an on-going basis through the analysis of the repricing characteristics of
its loans, securities, and deposits, and managing the estimated net interest
income volatility by adjusting the terms of its interest-earning assets and
liabilities, and through the use of derivatives as needed.
Market risk
- ------------
Market risk is the risk of financial loss arising from adverse changes in
market prices and interest rates. The Company's market risk is inherent in its
lending and deposit taking activities to the extent of differences in the
amounts maturing or degree of repricing sensitivity. Adverse changes in market
prices and interest rates may therefore result in diminished earnings and
ultimately an erosion of capital.
Since the Company's profitability is affected by changes in interest
rates, management actively monitors how changes in interest rates may affect
earnings and ultimately the underlying market value of equity. Management
monitors interest rate exposure through the use of three basic measurement tools
in conjunction with established risk limits. These tools are the expected
maturity gap report, net interest income volatility and market value of equity
volatility reports. The gap report details the expected maturity mismatch or
gap between interest earning assets and interest bearing liabilities over a
specified timeframe. The expected gap differs from the contractual gap report
shown earlier in this section by adjusting contractual maturities for expected
prepayments of principal on loans and amortizing securities as well as the
projected timing of repricing non-maturity deposits. The following table
shows the Company's financial instruments that are sensitive to changes in
interest rates categorized by their expected maturity, as of June 30, 1998:
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
--------------------------------------------------------------------------
0 to 90 91 to 365 Over 1 Year Over
(In Thousands) Days Days to 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-sensitive Assets:
Securities Available for Sale $ 65,498 $ 170,440 $ 367,446 $ 47,692 $ 651,076
Securities Held to Maturity 14,729 33,633 29,061 - 77,423
Federal Funds Sold & Securities
Purchased Under Agreement to
Resell 104,650 - - - 104,650
Loans and Leases (1)
510,383 16,060 85,068 94,777 706,288
----------- ----------- ----------- ----------- -------------
Total Interest-sensitive Assets $ 695,260 $ 220,133 $ 481,575 $ 142,469 $ 1,539,437
=========== =========== =========== =========== =============
Interest-sensitive Liabilities:
Deposits:
Interest Bearing Demand $ 14,562 $ 43,688 $ 223,796 $ - $ 282,046
Savings 4,277 12,833 68,442 - 85,552
Time Deposits 409,097 451,902 4,784 - 865,783
----------- ----------- ----------- ----------- -------------
Total Deposits $ 427,936 $ 508,423 $ 297,022 $ - $ 1,233,381
----------- ----------- ----------- ----------- -------------
Subordinated Debt $ - $ - $ - $ 38,810 $ 38,810
----------- ----------- ----------- ----------- -------------
Total Interest-sensitive
Liabilities $ 427,936 $ 508,423 $ 297,022 $ 38,810 $ 1,272,191
=========== =========== =========== =========== =============
</TABLE>
(1) Loans and leases are net of non-accrual loans and before unamortized
deferred loan fees and allowance for credit losses.
Expected maturities of assets are contractual maturities adjusted for
projected payment based on contractual amortization and unscheduled prepayments
of principal as well as repricing frequency. Expected maturities for deposits
are based on contractual maturities adjusted for projected rollover rates and
changes in pricing for non-maturity deposits. The Company utilizes assumptions
supported by documented analysis for the expected maturities of its loans and
repricing of its deposits and relies on third party data providers for
prepayment projections for amortizing securities. The actual maturities of
these instruments could vary significantly if future prepayments and repricing
differ from the Company's expectations based on historical experience.
The Company uses a computer simulation analysis to attempt to predict
changes in the yields earned on assets and the rates paid on liabilities in
relation to changes in market interest rates. The net interest income
volatility and market value of equity volatility reports measure the exposure
of earnings and capital respectively, to immediate incremental changes in market
interest rates as represented by the prime rate change of 100 to 200 basis
points. Market value of portfolio equity is defined as the present value of
assets minus the present value of liabilities and off balance sheet contracts.
The table below shows the estimated impact of changes in interest rates on net
interest income and market value of equity as of June 30, 1998:
<TABLE>
<CAPTION>
NET INTEREST MARKET VALUE OF
CHANGE IN INTEREST INCOME VOLATILITY PORTFOLIO EQUITY VOLATILITY
RATES (BASIS POINTS) JUNE 30, 1998 (1) JUNE 30, 1998 (2)
- --------------------------------------------------------------------------------
<C> <C> <C>
+200 2.85% -11.98%
+100 1.66% -5.48%
-100 -5.76% 1.81%
-200 -12.06% 3.32%
</TABLE>
(1) The percentage change in this column represents the change in net interest
income for 12 months under various rate scenarios.
(2) The percentage change in this column represents the change in net portfolio
equity value of the Bank under various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse effects of changes in interest rates on earnings and
capital. In this regard the Company has established internal risk limits for
net interest income volatility given a 100 and 200 basis point decline in rates
of 10% and 15% respectively, over a twelve month horizon. Similarly, risk
limits have been established for market value of portfolio equity volatility in
response to a 100 and 200 basis point increase in rates of 10% and 15%,
respectively.
Recent Developments
- --------------------
During 1998, significant disruptions to certain financial markets in Asia
have continued. Although the Company engages in significant international trade
financing, the majority of the business involves imports and is U.S. dollar
denominated. The Company has no outstanding foreign loans in its loan portfolio
as of June 30, 1998. The primary source of repayment for substantially all of
the Company's loans is from the cash flow generated from the borrowers'
operations, which are located within the United States. There could be adverse
financial impacts on individual borrowers as they adjust their businesses to the
changes caused by the financial disruptions, but at this time, management
believes that negative impacts, if any, could be outweighed by increased
business for the Company's customers.
Year 2000
- ----------
The Company's main software systems have been licensed from large vendors
who have provided certifications of year 2000 compliance. Tests have confirmed
such compliance for these main software systems. Certain ancillary systems
that operate on personal computers are also licensed and the vendors have
informed the Company that releases conforming to year 2000 requirements will be
received this year. Management formed a task force in 1997 to oversee year 2000
compliance and does not expect that there will be material impact nor expense
for its systems. The Company has sent questionnaires regarding the impact of
Year 2000 to its major loan customers, and is awaiting the completion of these
questionnaires. It then will prepare an assessment of year 2000 risk of its
customers.
Forward-Looking Statements
- ---------------------------
Certain statements contained herein, including, without limitation,
statements containing the words "believes," "intends," "expects" and words of
similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economics and business conditions in those
areas in which the Company operates; demographic changes; competition;
fluctuations in interest rates; changes in business strategy or development
plans; changes in governmental regulation; credit quality; and other factors
referenced herein, including, without limitation, under the captions Provision
for Credit Losses, Non-Performing Assets, Allowance for Credit Losses, Market
Risk Liquidity and Interest Rate Sensitivity, and Recent Developments. Given
these uncertainties, the reader is cautioned not to place undue reliance on such
foward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
Recent Accounting Developments
- -------------------------------
Accounting for Derivative Instruments and Hedging Activities
- -------------------------------------------------------------
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities", ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency denominated forecasted
transaction. The accounting for changes in fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and the
resulting designation.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS 133 must be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of SFAS 133.
SFAS 133 is not to be applied retroactively to financial statements of prior
periods. Management does not believe that there will be a material adverse
impact on the financial position or results of operations of the Company upon
adoption of SFAS 133.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
- --------------------------
The Bank is a defendant in various lawsuits arising from the normal course
of business. No material legal proceedings to which the Registrant or its
subsidiaries is a party have been initiated or terminated during the quarter
ended June 30, 1998. There have been no significant developments in any
material pending legal proceedings involving the Registrant or its subsidiaries
during this same quarter.
Item 2. CHANGES IN SECURITIES
- -------------------------------
There have been no changes in the securities of the Registrant during the
quarter ended June 30, 1998.
Item 3. DEFAULT UPON SENIOR SECURITIES
- ----------------------------------------
This item is not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
- ---------------------------------------------------------------
At the Annual Meeting of Shareholders held on May 7, 1998, a proposal to
elect fourteen directors to the Board of Directors of the Registrant to hold
office until the next meeting and until their successors are elected and
qualified was approved by shareholders. This proposal received the following
votes:
<TABLE>
<CAPTION>
For Withheld
------------- -------------
<S> <C> <C>
Helen Y. Chen 5,753,688 7,765
Thomas C. T. Chiu 5,758,788 2,665
Chuang-I Lin 5,758,788 2,665
Ko-Yen Lin 5,758,788 2,665
Ting Yung Liu 5,758,788 2,665
John Wang 5,758,788 2,665
Kenneth Wang 5,633,489 127,964
Chien-Te Wu 5,758,788 2,665
Julian Wu 5,758,788 2,665
Li-Pei Wu 5,758,788 2,665
Peter Wu 5,758,788 2,665
Ping C. Wu 5,758,788 2,665
Walter Wu 5,758,788 2,665
Chin-Liang Yen 5,633,489 127,964
</TABLE>
There was also a proposal to approve the incentive compensation award
program included in the employment agreement between GBC Bancorp and Mr. Li-Pei
Wu. The proposal received the following votes:
<TABLE>
<CAPTION>
For Against Withheld
----------- --------- ----------
<C> <C> <C>
5,440,971 292,516 27,966
Item 5. OTHER INFORMATION
- ---------------------------
There are no events to be reported under this item.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a) Exhibits: None.
b) Reports on Form 8-K: None.
PART III - SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GBC Bancorp
(Registrant)
Dated: 08/12/98 s/ Li-Pei Wu
------------------ --------------------------
Li-Pei Wu, Chairman and
Chief Executive Officer
Dated: 08/12-98 s/ Peter Lowe
------------------ --------------------------
Peter Lowe, Executive
Vice President and
Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,290
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 104,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 651,076
<INVESTMENTS-CARRYING> 77,423
<INVESTMENTS-MARKET> 77,525
<LOANS> 718,819
<ALLOWANCE> 15,538
<TOTAL-ASSETS> 1,610,998
<DEPOSITS> 1,384,110
<SHORT-TERM> 0
<LIABILITIES-OTHER> 26,852
<LONG-TERM> 38,810
<COMMON> 55982
0
0
<OTHER-SE> 105,244
<TOTAL-LIABILITIES-AND-EQUITY> 1,610,998
<INTEREST-LOAN> 34,452
<INTEREST-INVEST> 26,421
<INTEREST-OTHER> 6
<INTEREST-TOTAL> 60,879
<INTEREST-DEPOSIT> 26,469
<INTEREST-EXPENSE> 1,757
<INTEREST-INCOME-NET> 32,653
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,810
<INCOME-PRETAX> 21,428
<INCOME-PRE-EXTRAORDINARY> 13,474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,474
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 4.37
<LOANS-NON> 12,531
<LOANS-PAST> 1,745
<LOANS-TROUBLED> 18,232
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,776
<CHARGE-OFFS> 1,639
<RECOVERIES> 401
<ALLOWANCE-CLOSE> 15,538
<ALLOWANCE-DOMESTIC> 15,538
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
