SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q/A
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998 Commission file number 0-16213
---------
GBC BANCORP
(Exact name of registrant as specified in its charter)
California 95-3586596
- --------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer Identification No.)
800 West 6th Street, Los Angeles, California 90017
- ------------------------------------------------ ------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (213)972-4172
Former name address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes X No
--------- --------
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the close of the
period covered by this report.
Common stock, no par value, 7,071,849 shares issued and
outstanding as of March 31, 1998.
Part I Item 2 of the Quarterly Report filed by the Registrant for the Quarter
ended March 31, 1998 is hereby amended to read in its entirety as follows:
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
OVERVIEW
- ---------
For the quarter ended March 31, 1998, net income totaled $6,631,000,
an increase of $887,000, or 15.4% from the $5,744,000 earned during the
corresponding period of 1997. Diluted earnings per share for the quarter
ended March 31, 1998 were $0.46 per share compared to $0.41 per share for
the same period of 1997.
The increase over the corresponding period of a year ago is primarily
due to an increase of net interest income and the decrease of the provision
for credit losses.
The increase of net interest income was due to an increase of average
earning assets partially offset by a reduction in the net interest spread.
The net interest spread is defined as the yield on earning assets less the
rates paid on interest bearing liabilities. The net interest spread
declined to 3.57% for the quarter ended March 31, 1998 from 4.00% for the
corresponding period of a year ago.
There was no provision for credit losses in the first quarter of 1998.
This compares to $1,000,000 of provision recorded during the first quarter
of 1997. The decline of the provision for credit losses in 1998 is
primarily a reflection of the decrease in net charge-offs.
The annualized return on average assets ("ROA") for the Company was
1.75% and 1.73% for the quarters ended March 31, 1998 and 1997,
respectively. The annualized return on average stockholders' equity ("ROE")
for the quarters ended March 31, 1998 and 1997 was 17.8% and 19.6%,
respectively. The slight increase of the ROA reflects the increased
profitability. The decline of the ROE reflects the 26.5% growth of average
stockholders equity primarily resulting from the profitability of the Company
during the twelve-month period ended March 31, 1998.
The Board of Directors of the Company declared a two-for-one stock
split to shareholders of record on April 30, 1998. The shares will be issued
and distributed on May 15, 1998. Basic and diluted earnings per share for the
quarters ended March 31, 1998 and 1997 reflect the impact of the stock split.
RESULTS OF OPERATIONS
- ----------------------
Net Interest Income
- --------------------
For the quarters ended March 31, 1998 and 1997, net interest income
before the provision for credit losses was $15,969,000 and $14,684,000,
respectively, representing an increase of $1,285,000, or 8.8%. The components
explaining this increase are discussed below.
Interest Income
- -----------------
Total interest income for the quarter ended March 31, 1998 was
$29,686,000 compared to $25,734,000 for the corresponding period of a year
ago. The increase of $3,952,000, or 15.4%, was due to an increase of average
earning assets. For the quarter ending March 31, 1998 and 1997, average
earning assets were $1,476 million and $1,276 million, respectively,
representing a $200 million, or 15.7%, growth. For the quarters ending March
31, 1998 and 1997, the yield on earning assets was 8.16% and 8.18%,
respectively, representing a 2-basis point decrease.
The $200 million growth of average earning assets from the period ended
March 31, 1997 was the result of increases in all categories of earning
assets except for the lowest yielding asset (federal funds sold and securities
purchased under agreements to resell) which reflected a modest decline.
Average loans and leases increased $49.0 million and securities increased
$152.0 million. Excluding the average balance of $46.1 million of loans to
depository institutions during the first quarter of 1997, the average loan
growth was $95.1 million.
The slight decrease in the yield on average earning assets had a minor
impact on interest income. The 2-basis point decline was the result of a
decline in the yield on loans, excluding the loans to depository institutions.
For 1997, this yield was 10.69% compared to 10.32% for 1998. This decline was
offset by the elimination of lower-yielding loans to depository institutions
in 1998 and a 9-basis point increase in the securities portfolio from 6.39%
for the quarter ended March 31, 1997 to 6.48% for the quarter ended March 31,
1998. This increased yield in the securities portfolio was the result of an
increased average investment in higher yielding asset backed securities as a
percentage of the total average securities portfolio. For the quarters ended
March 31, 1998 and 1997, these securities represented 22.7% and 12.0%,
respectively, of the average total securities portfolio. The asset backed
securities owned by the Bank are all AAA-rated and are collateralized with
home equity mortgages.
Interest Expense
- ------------------
Total interest expense for the quarter ended March 31, 1998 was
$13,717,000 compared to $11,050,000 for the corresponding period of a year
ago. The increase of $2,667,000, or 24.1%, was due to both the increase of
average interest-bearing liabilities and an increase in the cost of funds.
Average interest-bearing deposits were $1,173 million and $1,056 million for
the quarter ended March 31, 1998 and 1997, respectively, representing a
$116.9 million, or 11.1%, increase. Higher yielding certificates of deposit
represented the greatest increase of $125.8 million. Interest bearing demand
also increased by $13.6 million. These increases were partially offset by a
decline of $22.5 million in savings deposits.
The rates paid on interest bearing deposits increased by 35-basis points
from 4.09% in 1997 to 4.44% in 1998. There were two reasons for the increase.
First, there was an increased percentage of average time deposits to total
average interest-bearing deposits. For the quarters ended March 31, 1998 and
1997, average time deposits were 72.1% and 68.1% of average interest-bearing
deposits, respectively. Time deposits represent the most costly deposit
product for the Bank.
Second, the rates paid on the different categories of interest-bearing
deposits increased. For the quarters ended as indicated, average balance and
rates paid for the deposit categories were as follows:
<TABLE>
For the Quarter Ended March 31,
(Dollars in Thousands) 1998 1997
<S> <C> <C>
-------------- ------------
Interest bearing demand - Average
balance 232,803 219,166
Rate 2.39% 2.14%
Savings - Average balance 95,070 117,588
Rate 2.76% 2.64%
Time certificates of deposit of
$100,000 or more - Average balance 595,894 549,095
Rate 5.28% 5.01%
Other time deposits - Average balance 249,417 170,416
Rate 4.97% 4.64%
</TABLE>
The cost of funds for the quarters ended March 31, 1998 and 1997 was
4.59% and 4.18%, respectively, an increase of 41-basis points. In addition to
the increased rates paid on deposits and the composition of the deposit
products, as discussed above, the increase in the average amount of
subordinated debt further increased interest expense. For the quarters ended
as indicated, the average balance and cost of funds for subordinated debt were
as follows:
For the Quarter Ended March 31,
1998 1997
-------------- ------------
Average Balance $38,756 $15,000
Cost of Funds 8.98% 10.64%
The net interest spread, defined as the yield on earning assets less the
rates paid on interest-bearing liabilities, declined to 3.57% for the quarter
ended March 31, 1998 from 4.00% for the corresponding period of a year ago.
The reduction is primarily due to the increased cost of funds, as explained
above.
The net interest margin defined as the annualized difference between
interest income and interest expense divided by average interest earning
assets, decreased to 4.39% for the quarter ended March 31, 1998, from 4.67%
for the corresponding period of a year ago. The compression of the margin is
primarily due to the 43-basis point reduction of the net interest spread.
Provision for Credit Losses
- ----------------------------
For the quarter ended March 31, 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.
The decline of the provision for credit losses in 1998 was primarily
caused by the improved credit quality of the loan portfolio and a decrease of
net charge-offs. For the quarters ending March 31, 1998 and 1997, net
charge-offs were $0.9 million and $2.0 million, respectively. As of March 31,
1998, non-performing loans totaled $34.3 million compared to $36.4 million,
as of March 31, 1997.
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 March 31, 1998 totaled
$1,773,000 compared to $1,524,000 for the same period ended March 31, 1997.
The net increase of $249,000, or 16.3%, was primarily attributable to an
increase in escrow fees and the receipt of $125,000 of interest on a 1992 tax
refund.
Non-Interest Expense
- ----------------------
Non-interest expense for the quarter ended March 31, 1998 totaled
$7,304,000, a $514,000, or 7.6%, increase over the $6,790,000 recorded in the
same period of 1997. The increase was due to a $526,000, or 14.0%, increase
in salaries and employee benefits. The increase was due to increased salaries
and a higher profit sharing accrual caused by a higher level of pre-tax
earnings. Other expense decreased $180,000 primarily as a result of a
$139,000 decrease in legal fees.
For the quarter ended March 31, 1998, the Company's efficiency ratio,
defined as non-interest expense divided by the sum of net interest income plus
non-interest income, declined to 41.2%, comparing favorably to 41.9% for the
corresponding period of 1997.
Provision for Income Taxes
- ---------------------------
For the quarter ended March 31, 1998 the provision for income taxes was
$3,807,000, representing 36.5% of pre-tax income. The provision for the
quarter ended March 31, 1997 was $2,674,000, representing 31.8% of pre-tax
income. The higher effective tax rate of the current quarter was mainly due
to the increase in taxable earnings compared to the corresponding period of
a year ago while the low income housing tax credit remained constant.
FINANCIAL CONDITION
- ----------------------
Total assets as of March 31, 1998, were $1,572 million representing a
$62.1 million, or 4.1%, increase from total assets of $1,509 million as of
December 31, 1997. As of March 31, 1998, total deposits were $1,352 million
representing a $60.3 million, or 4.7%, increase from total deposits of $1,292
million as of December 31, 1997.
Loans
- ------
As of March 31, 1998, total loans and leases were $673.1 million,
representing a $34.3 million, or 5.4%, increase from total loans and leases of
$638.8 million as of December 31, 1997. The net increase was primarily from
the growth of trade-financing loans of $15.0 million which are included in
commercial loans, and the growth of $12.8 million of conventional real estate
loans. The growth of trade-financing loans reflects the growth in
international trade resulting primarily from new customer relationships.
The $12.8 million increase in conventional real estate loans is the result
of the take-out financing on three construction loans totaling $13.0 million
and an additional loan of $8.0 million, net of pay-downs and pay-offs, in the
first quarter.
Also contributing to the loan growth was a net increase of $3.4 million of
construction lending. Despite the decline of $13.0 million as discussed above,
there was net growth due to a $9 million disbursement under a new $35 million
construction loan commitment as well as disbursements under commitments booked
prior to 1998.
The following table sets forth the amount of loans and leases outstanding
by category and the percentage of each category to the total loans and leases
outstanding:
<TABLE>
March 31, 1998 December 31, 1997
(In Thousands) Amount Percentage Amount Percentage
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 253,441 37.6% $ 233,309 36.5%
Real Estate -
Construction 93,980 14.0% 90,560 14.2%
Real Estate -
Conventional 289,124 43.0% 276,350 43.2%
Installment 38 - 54 -
Other Loans 21,572 3.2% 23,993 3.8%
Leveraged Leases 14,929 2.2% 14,563 2.3%
----------------------------------------------------
Total $ 673,084 100.0% $ 638,829 100.0%
====================================================
</TABLE>
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 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 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 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 and the amortization of any deferred loan fees is stopped. A
loan is returned to accrual status only when the borrower has demonstrated the
ability to make future payments of principal and interest as scheduled, and the
borrower has demonstrated a sustained period of repayment performance in
accordance with the contractual terms. Interest received on non-accrual loans
generally is either applied against principal or reported as recoveries on
amounts previously charged-off, according to management's judgment as to the
collectibility of principal.
The following table provides information with respect to the Company's
past due loans, non-accrual loans, restructured loans and other real estate
owned, net, as of the dates indicated:
(IN THOUSANDS) March 31, 1998 December 31, 1997
Loans 90 Days or More
Past Due and Still Accruing $ 1,745 $ 2,778
Non-accrual Loans 13,309 9,834
Total Past Due Loans 15,054 12,612
Restructured Loans (on
Accrual Status) 19,281 20,323
Total Non-performing
and Restructured Loans 34,335 32,935
Other Real Estate Owned, Net 7,204 7,871
------------ -------------
Total Non-performing Assets $ 41,539 $ 40,806
Total non-performing assets increased $0.7 million to $41.5 million, as
of March 31, 1998, from $40.8 million, as of December 31, 1997. The reason for
the 1.8% increase was a $3.5 million rise in non-accrual loans from $9.8
million as of December 31, 1997 to $13.3 million as of March 31, 1998,
representing a 35.3% increase, offset by reductions in the other categories of
non-performing assets.
Past-due loans
- ---------------
Of the two loans comprising the past-due and still accruing
classification one is expected to be paid off in the near future and the other
is anticipated to be renewed with no concessions granted.
Non-accrual loans
- -------------------
Of the $13.3 million of non-accruals, $4.5 million, or 33.5%, are
collateralized by real property. In the event the Bank initiates foreclosure
proceedings, management believes the collateral underlying these loans provides
substantial protection against the loss of principal. Commercial loans
totaling $8.8 million are on non-accrual status as of March 31, 1998. These
loans are collateralized by a variety of business assets and the Bank does not
anticipate any significant losses.
The increase of non-accrual loans from levels during 1997 is the result
of a few specific problem credits. Management does not anticipate an upward
trend developing in the levels of non-accrual loans during 1998.
The following table analyzes the increase in non-accrual loans during the
three months ended March 31, 1998:
Non-Accrual Loans (In Thousands)
---------------------------------------------------
Balance, December 31, 1997 $ 9,834
Add: Loans placed on non-accrual 7,733
Less: Charge-offs (1,099)
Returned to accrual status (1,076)
Repayments (1,958)
Transfer to OREO (125)
Balance, March 31, 1998 13,309
The following table breaks out the Company's non-accrual loans by
category as of March 31, 1998 and December 31, 1997:
<TABLE>
(IN THOUSANDS) March 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 8,837 $ 5,957
Real Estate-Construction 455 455
Real Estate-Conventional 4,010 3,414
Installment 7 8
Total $ 13,309 $ 9,834
</TABLE>
Restructured Loans
- -------------------
As of March 31, 1998, the balance of restructured loans was $19.3 million
compared to $20.3 million as of December 31, 1997, representing a $1.0 million
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 March 31, 1998, one loan totaling $685,000 was on non-accrual
status. As of March 31, 1998, restructured loans consisted of fourteen real
estate credits compared to fifteen as of year end 1997. The weighted average
yield of the restructured loans as of March 31, 1998 was 10.19%.
There are no commitments to lend additional funds on any of the
restructured loans.
Other Real Estate Owned
- --------------------------
As of March 31, 1998, other real estate owned ("OREO"), net of valuation
allowance of $2.0 million, totaled $7.2 million, representing a decrease of
$0.7 million, or 8.5%, from the net balance of $7.9 million, net of valuation
allowance of $2.1 million, as of December 31, 1997. As of March 31, 1998 and
December 31, 1997, OREO consisted of 16 properties and 17 properties,
respectively.
The 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 the Bank's OREO by property type as of the
dates indicated:
March 31, December 31,
(In Thousands) 1998 1997
- -----------------------------------------------------------------------------
Property Type
- --------------
Single-Family Residential $ 217 $ 380
Condominium 2,198 2,598
Multi-Family Residential - 220
Land for Residential 3,715 3,715
Land for Agriculture 15 15
Retail Facilities 3,058 3,003
Less: Valuation Allowance (1,999) (2,060)
----------- -----------
Total $ 7,204 $ 7,871
=========== ===========
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 $15.4 million of outstanding
impaired loans as of March 31, 1998, $10.1 million are included in the balance
of restructured loans and are performing pursuant to the terms and conditions
of the restructuring. The following table discloses pertinent information as
it relates to the Company's impaired loans as of and for the dates indicated:
(IN THOUSANDS) March 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------
Recorded Investment with Related
Allowance $15,378 $16,095
Recorded Investment with no Related
Allowance 6 1,022
Total Recorded Investment 15,384 17,117
Specific Allowance on Impaired
Loans 1,380 1,544
The average balance of total recorded investment in impaired loans was
$16.3 million for the three months ended March 31, 1998 and $22.4 million for
the twelve months ended December 31, 1997.
For the quarters ended March 31, 1998 and 1997, interest income
recognized on impaired loans was $355,000 and $564,000, respectively. Of the
amount of interest income recognized during the quarters ended March 31, 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 March 31, 1998, the balance of the allowance for credit losses was
$15.8 million, representing 2.35% 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 allowance for credit
losses (which amount includes the allowance on impaired loans), for the
three-month periods ended as indicated:
(IN THOUSANDS) March 31, 1998 March 31, 1997
- ------------------------------------------------------------------------------
Balance, Beginning of Period $ 16,776 $ 16,209
Provision for Credit Losses - 1,000
Charge-offs (1,099) (2,458)
Recoveries 171 455
Net Charge-offs (928) (2,003)
------------ ------------
Balance, End of Period $ 15,848 $ 15,206
============ ============
As of March 31, 1998, the allowance represents 119% of non-accrual loans
and 46.2% of non-performing and restructured loans combined. As of December
31, 1997, the allowance represented 171% of non-accrual loans and 50.9% of
non-performing and restructured loans combined.
Management believes that the allowance for credit losses is adequate to
cover known and inherent losses related to loans and leases outstanding as of
March 31, 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 March 31, 1998, the Company recorded net unrealized gains of
$2,919,000 on its available for sale portfolio. Stockholders' equity includes
$1,692,000, representing the net unrealized gains, net of tax.
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of securities at March 31, 1998 and December 31, 1997 were as
follows:
<TABLE>
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
Securities Held to Maturity
- ----------------------------
<S> <C> <C> <C> <C> <S> <C>
U.S. Government Agencies $ 94,306 $ 48 $ - $ 94,354
Collateralized Mortgage
Obligations 36 - - 36
------------ ----------- --------- -----------
Total Securities Held to
Maturity $ 94,342 $ 48 $ - $ 94,390
============ =========== ========= ===========
Securities Available for Sale
- ------------------------------
U.S. Treasuries $ 6,882 $ 4 $ - $ 6,886
U.S. Government Agencies 169,504 183 - 169,687
Mortgage Backed Securities 53,956 399 - 54,355
Corporate Notes 9,004 115 - 9,119
Collateralized Mortgage
Obligations 178,681 471 - 179,152
Asset Backed Securities 186,568 1,747 - 188,315
Auction Preferred Stock 5,999 - - 5,999
Other Securities 5,749 - - 5,749
------------ ----------- --------- -----------
Total Securities Available
for Sale $ 616,343 $ 2,919 $ - $ 619,262
============ =========== ========= ===========
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
Auction Preferred Stock 18,500 - - 18,500
Other Securities 5,669 - - 5,699
------------ ----------- --------- -----------
Total Securities Available
for Sale $ 640,791 $ 2,869 $ - $ 643,660
============ =========== ========= ===========
</TABLE>
There were no sales of securities available for sale or securities held to
maturity during the quarters ended March 31, 1998 and 1997.
Deposits
- ----------
The Company's deposits totaled $1,352 million as of March 31, 1998, an
increase of $60.3 million from $1,292 million as of December 31, 1997. The
largest growth was in the category of other time deposits which increased $31.5
million, or 13.6%, from year-end 1997. Interest-bearing demand also increased
$21.4 million, or 9.8%. Time certificates of deposit of $100,000 or more
increased $12.0 million, or 2.0%. Included in this deposit category is $15
million growth of deposits from the State of California. These deposits, which
totaled $93 million as of March 31, 1998, are collateralized at 110%, as is
required for all public time deposits. The collateral provided is U.S.
government agency issues.
There were no brokered deposits outstanding as of March 31, 1998 and
December 31, 1997. 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. The State of California deposit is not considered to
constitute a relationship and is invested in securities. 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 March 31, 1998 is as follows:
(IN THOUSANDS)
- ------------------------------------------------------
3 Months or Less $ 290,763
Over 3 Months Through One Year 313,806
Over One Year through 5 Years 2,499
-----------
Total $ 607,068
===========
Other Borrowings
- ------------------
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. On September 2, 1997 the Company prepaid the $15 million of
10.52% subordinated debentures.
On July 30, 1997, the Company issued, through a public offering, $40
million of 8.375% subordinated notes due August 1, 2007. Proceeds of $38.7
million, net of underwriting discount of $1.3 million, were received by the
Company. The discount is amortized as a yield adjustment over the 10 year life
of the subordinated notes. The notes are not redeemable prior to August 1,
2002. Thereafter, the notes are redeemable, in whole or in part, at the option
of the Company at decreasing redemption prices plus accrued interest to the
date of redemption. The notes have no sinking fund. The indenture (the
"Indenture") under which the notes are issued does not limit the ability of the
Company or its subsidiaries to incur additional indebtedness. The Indenture
provides that the Company cannot pay cash dividends or make any other
distribution on, or purchase, redeem or acquire its capital stock, except that
the Company may (1) declare and pay a dividend in capital stock of the Company
and (2) declare and pay dividends, purchase, redeem or otherwise acquire for
value its capital stock or make other distributions in cash or property other
than capital stock of the Company if the amount of such dividend, purchase or
distribution, together with the amount of all previous such dividends,
purchases, redemptions and distributions of capital stock after December 31,
1996, would not exceed in the aggregate the sum of (a) $38 million, plus (b)
100% of the Company's consolidated net income (or minus 100% of the Company's
consolidated net loss, as the case may be), based upon audited consolidated
financial statements, plus (c) 100% of the net proceeds received by the Company
on account of any capital stock issued by the Company (other than to a
subsidiary of the Company) after December 31, 1996. The subordinated notes are
included as part of the Company's total risk-based capital and further
contribute to the capital strength of the Company.
Regulatory Matters
- ---------------------
During the first quarter of 1998, the annual safety and soundness
examination was conducted jointly by the Federal Deposit Insurance Corporation
("FDIC") and the California Department of Financial Institutions. Although the
report has not been received, no material adverse findings are expected.
Capital Resources
- -------------------
Stockholders' equity totaled $154.4 million as of March 31, 1998, an
increase of $8.1 million, or 5.5% from $146.3 million as of December 31, 1997.
The increase from year-end 1997 was primarily due to net income of $6.6
million, less cash dividends declared to shareholders of $1.1 million plus the
exercise of stock options and related tax benefit totaling approximately $2.5
million.
Capital ratios for the Company and for the Bank were as follows as of the
dates indicated:
Well- Capitalized March 31, December 31,
Requirements 1998 1997
-------------------------------------------------------
GBC Bancorp
- ------------
Tier 1 Leverage Ratio 5% 9.94% 9.58%
Tier 1 Risk-Based
Capital Ratio 6% 12.92% 13.57%
Total Risk-Based
Capital Ratio 10% 17.47% 18.47%
General Bank
- -------------
Tier 1 Leverage Ratio 5% 9.01% 8.78%
Tier 1 Risk-Based
Capital Ratio 6% 11.70% 12.45%
Total Risk-Based
Capital Ratio 10% 12.96% 13.71%
For the quarter ended March 31, 1998, the ratio of the Company's average
stockholders' equity to average assets was 9.83%. For the year ended December
31, 1997, this ratio was 9.11%. The increase of the ratio is due to capital
increasing more rapidly than the growth of average assets.
Liquidity
- ------------
Liquidity measures the ability of the Company to meet fluctuations in
deposit levels, to fund its operations and to provide for customers' credit
needs. Liquidity is monitored by management on an on-going basis. Asset
liquidity is provided by cash and short-term financial instruments which
include 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 $664.6
million, or 42.3% of total assets, as of March 31, 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 March 31, 1998, total loans and leases represented 49.8% of total
deposits. This compares to 49.5% as of December 31, 1997.
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 three months ending March 31, 1998, General Bank declared cash dividends of
$1.1 million to GBC Bancorp.
Derivatives
- -------------
As of March 31, 1998 and December 31, 1997, there were no derivative
financial instruments. As of March 31, 1997, the amount of derivative
financial instruments outstanding was immaterial.
"GAP" measurement
- -------------------
While no single measure can completely identify the impact of changes in
interest rates on net interest income, one gauge of interest rate sensitivity
is to measure, over a variety of time periods, contractual differences in the
amounts of the Company's rate sensitive assets and rate sensitive liabilities.
These differences, or "gaps", provide an indication of the extent that net
interest income may be affected by future changes in interest rates. However,
these contractual "gaps" do not take into account timing differences between
the repricing of assets and the repricing of liabilities.
A positive gap exists when rate sensitive assets exceed rate sensitive
liabilities and indicates that a greater volume of assets than liabilities will
reprice during a given period. This mismatch may enhance earnings in a rising
rate environment and may inhibit earnings when rates decline. Conversely, when
rate sensitive liabilities exceed rate sensitive assets, referred to as a
negative gap, it indicates that a greater volume of liabilities than assets
will reprice during the period. In this case, a rising interest rate
environment may inhibit earnings and declining rates may enhance earnings.
"Gap" reports are utilized 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 March 31, 1998 there is a cumulative one year negative "gap" of
$494.0 million, up from $462.7 million 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. However, there was no change in the
prime rate of interest between the fourth quarter of 1997 and the first quarter
of 1998.
The following table indicates the Company's interest rate sensitivity
position as of March 31, 1998, and is based on contractual maturities. It may
not be reflective of positions in subsequent periods.
<TABLE>
MARCH 31, 1998
INTEREST SENSIVITY PERIOD
----------------------------------------------------------------------------------------
91 to Over 1 Non-Interest
0 to 90 365 Year to Over 5 Earning/
(In Thousands) Days Days 5 Years Years Bearing Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Securities Available for
Sale $ 31,902 $ 64,143 $ 118,914 $ 404,303 $ - $ 619,262
Securities Held to
Maturity - - 73,372 20,970 - 94,342
Federal Funds Sold &
Securities Purchased Under
Agreement to Resell 127,500 - - - - 127,500
Loans and Leases (1)(2) 463,670 19,219 83,340 93,546 - 659,775
Non-Earning Assets (2) - - - - 70,658 70,658
---------- ---------- ---------- ---------- ---------- ------------
Total Assets $ 623,072 $ 83,362 $ 275,626 $ 518,819 $ 70,658 $ 1,571,537
========== ========== ========== ========== ========== ============
Source of Funds for Assets:
Deposits:
Demand-non-interest bearing $ - $ - $ - $ - $ 147,422 $ 147,422
Interest Bearing Demand 240,159 - - - - 240,159
Savings 93,957 - - - - 93,957
TCD'S Under $100,000 108,655 153,048 1,863 - - 263,566
TCD'S $100,000 and Over 290,763 313,806 2,499 - - 607,068
---------- ---------- ---------- ---------- ---------- ------------
Total Deposits $ 733,534 $ 466,854 $ 4,362 $ - $ 147,422 $ 1,352,172
---------- ---------- ---------- ---------- ---------- ------------
Subordinated Debt $ - $ - $ - $ 38,777 $ - $ 38,777
Other Liabilities - - - - 26,233 26,233
Stockholders' Equity - - - - 154,355 154,355
---------- ---------- ---------- ---------- ---------- ------------
Total Liabilities and
Stockholders' Equity $ 733,534 $ 466,854 $ 4,362 $ 38,777 $ 328,010 $ 1,571,537
========== ========== ========== ========== ========== ============
Interest Sensitivity Gap $ (110,462) $ (383,492) $ 271,264 $ 480,042 $ (257,352)
Cumulative Interest
Sensitivity Gap $ (110,462) $ (493,954) $ (222,690) $ 257,352 -
Gap Ratio (% of
Total Assets) -7.0% -24.4% 17.3% 30.5% -16.4%
Cumulative Gap Ratio -7.0% -31.4% -14.2% 16.4% 0.0%
</TABLE>
(1) Loans and leases are before unamortized deferred loan fees and allowance
for credit losses.
(2) Nonaccrual loans are included in non-earning assets.
Effective asset/liability management includes maintaining adequate
liquidity and minimizing the impact of future interest rate changes on net
interest income. The Company attempts to manage its interest rate sensitivity
on an on-going basis through the analysis of the repricing characteristics of
its loans, securities, and deposits, and managing the estimated net interest
income volatility by adjusting the terms of its interest-earning assets and
liabilities, and through the use of derivatives as needed.
Market risk
- -------------
Market risk is the risk of financial loss arising from adverse changes in
market prices and interest rates. The Company's market risk is inherent in its
lending and deposit taking activities to the extent of differences in the
amounts maturing or degree of repricing sensitivity. Adverse changes in market
prices and interest rates may therefore result in diminished earnings and
ultimately an erosion of capital.
Since the Company's profitability is affected by changes in interest
rates, management actively monitors how changes in interest rates may affect
earnings and ultimately the underlying market value of equity. Management
monitors interest rate exposure through the use of three basic measurement
tools in conjunction with established risk limits. These tools are the
expected maturity gap report, net interest income volatility and market value
of equity volatility reports. The gap report details the expected maturity
mismatch or gap between interest earning assets and interest bearing
liabilities over a specified timeframe. The expected gap differs from the
contractual gap report shown earlier in this section by adjusting contractual
maturities for expected prepayments of principal on loans and amortizing
securities as well as the projected timing of repricing non-maturity deposits.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates categorized by their expected maturity,
as of March 31, 1998:
<TABLE>
Expected Maturity Date March 31, 1997
(Dollars in Thousands)
-----------------------------------------------------------------
91 to Over 1
0 to 90 365 Year to Over
(In Thousands) Days Days 5 Years 5 Years Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-sensitive Assets:
Securities Available for
Sale $ 73,132 $ 175,428 $ 348,140 $ 22,562 $ 619,262
Securities Held to
Maturity 12,760 32,510 49,072 - 94,342
Federal Funds Sold &
Securities Purchased Under
Agreement to Resell 127,500 - - - 127,500
Loans and Leases (1) 463,670 19,219 83,340 93,546 659,775
----------- ---------- ---------- ---------- ------------
Total Interest-earning
Assets $ 677,062 $ 227,157 $ 480,552 $ 116,108 $ 1,500,879
=========== ========== ========== ========== ============
Interest-sensitive Liabilities:
Deposits:
Interest Bearing $ 12,577 $ 37,731 $ 189,851 $ - $ 240,159
Savings 4,698 14,094 75,165 - 93,957
Time Deposit of
Certificates 396,870 469,339 4,425 - 870,634
----------- ---------- ---------- ---------- ------------
Total Deposits $ 414,145 $ 521,164 $ 269,441 $ - $ 1,204,750
----------- ---------- ---------- ---------- ------------
Subordinated Debt $ - $ - $ - $ 38,777 $ 38,777
----------- ---------- ---------- ---------- ------------
Total Interest-sensitive
Liabilities $ 414,145 $ 521,164 $ 269,441 $ 38,777 $ 1,243,527
=========== ========== ========== ========== ============
</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 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 March 31, 1998:
NET INTEREST MARKET VALUE OF
CHANGE IN INTEREST INCOME VOLATILITY EQUITY VOLATILITY
RATES (BASIS POINTS) MARCH 31, 1998 (1) MARCH 31, 1998 (2)
- ----------------------------------------------------------------------------
+200 2.0% -12.6%
+100 1.2% -6.4%
-100 -5.9% 2.4%
-200 -11.4% 5.0%
(1) The percentage change in this column represents net interest income for
12 months in a stable interest rate environment versus the net interest
income in the various rate scenarios.
(2) The percentage change in this column represents net portfolio value of the
Bank in a stable interest rate environment versus the net portfolio value
in the various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse effects of changes in interest rates on earnings and
capital. In this regard the Company has established internal risk limits for
net interest income volatility given a 100 and 200 basis point decline in rates
of 10% and 15% respectively, over a twelve month horizon. Similarly, risk
limits have been established for market value of equity volatility in response
to a 100 and 200 basis point increase in rates of 10% and 15%, respectively.
Recent Developments
- ---------------------
During the first quarter of 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 March 31, 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. 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 already provided certifications of year 2000 compliance. The Company
intends to complete testing to confirm such compliance in the current year.
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
significant impact nor expense for its systems. The Company is in the process
of assessing the impact of Year 2000 on its major loan 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 and Liquidity and Interest Rate Sensitivity. Given these uncertainties,
the reader is cautioned not to place undue reliance on such foward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
Recent Accounting Developments
- --------------------------------
Disclosure about Segments of an Enterprise and Related Information
- --------------------------------------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information".
This statement establishes standards for the way public business enterprises
are to report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholdrers. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS 131 supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997.
Implementation of SFAS 131 will not have a material adverse effect on the
Company's financial condition or results of operations.
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: 05-15-1998 s/ Peter Wu
-------------------- ------------------------
Peter Wu, President and
Chief Operating Officer
Dated: 05-15-1998 s/ Peter Lowe
-------------------- ------------------------
Peter Lowe, Executive
Vice President and
Chief Financial Officer
