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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file Number 0-16213
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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. Employer
of incorporation or organization) Identification No.)
800 West 6th Street, Los Angeles, CA 90017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 972-4172
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
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Securities pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of class)
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405, 17 CFR 230.405).
NOTE: If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
APPLICABLE ONLY TO REGISTRANT INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [_] Yes [_] No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 7,065,849 shares
outstanding as of February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Part of Form 10-K
Documents Incorporated by Reference Into which Incorporated
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1997 Annual Report to Shareholders Part II Items 6, 7 and 8 and Part IV
Definitive Proxy Statement for the
Annual Meeting of Shareholders
filed within 120 days of the fiscal
year ended December 31, 1997 Part III
Exhibit Index on Pages ____
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FORM 10-K
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TABLE OF CONTENTS AND CROSS REFERENCE SHEET
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Page in Incorporation
PART I 10-K by Reference
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Item 1. Business................................. 4
General.................................. 4
Lending Activities....................... 4
Competition.............................. 5
Subsidiaries............................. 6
Supervision and Regulation............... 7
Employees................................ 22
Item 2. Properties............................... 23
Item 3. Legal Proceedings........................ 23
Item 4. Submission of Matters to a Vote of
Security Holders......................... 23
Executive Officers of the Registrant.................... 23
PART II
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters...... 25
Item 6. Selected Financial Data.................. 26 1997 Annual Report
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 26 1997 Annual Report
Item 8. Financial Statements and Supplementary
Data..................................... 27 1997 Annual Report
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................... 27
PART III
Item 10. Directors and Executive Officers of the
Registrant............................... 27 1998 Proxy Statement
Item 11. Executive Compensation................... 27 1998 Proxy Statement
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................... 27 1998 Proxy Statement
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Item 13. Certain Relationships and Related
Transactions............................. 28 1998 Proxy Statement
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................. 28 1997 Annual Report
SIGNATURES............................................. 29
EXHIBIT INDEX.......................................... 31
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PART I
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ITEM 1 BUSINESS
GENERAL
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GBC Bancorp (the "Company"), a California corporation incorporated in 1980,
is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended, and is headquartered at 800 West 6th Street in Los Angeles,
California 90017. The Company owns all of the outstanding stock of its wholly-
owned subsidiary General Bank (the "Bank"), a California state-chartered bank
which commenced operations in March, 1980. GBC Bancorp functions primarily as a
holding company for the Bank.
The Bank has conducted the business of a commercial bank since it commenced
operations. The Bank is a community bank that serves individuals and small to
medium-sized businesses through fifteen branch offices (as of December 31, 1997)
located in the greater Los Angeles, San Diego and Silicon Valley areas. The Bank
has an operations center in Rosemead and has branches located in downtown Los
Angeles, Monterey Park, Torrance, Artesia, Alhambra, City of Industry, Irvine,
San Diego, Arcadia, Diamond Bar, Northridge, Orange, Cupertino, San Mateo,
Fremont and San Jose. The San Jose branch was opened for business in February,
1998 and represents the sixteenth branch office of the Bank.
In addition to its network of 16 branches, the Bank has also opened up two
loan production offices ("LPO") in early 1998. The LPOs are located in
Bellevue, Washington and New York, New York.
The LPOs have been established primarily to develop loans on behalf of
General Bank and to act as the liaison between customers and the Bank in
coordinating other banking services.
The Bank offers a variety of banking services to its customers, including
accepting checking, savings and time deposits; making secured and unsecured
loans; offering traveler's checks, safe deposit boxes, credit cards and other
fee-based services; and providing international trade related services. In
addition, the Bank offers escrow services through its subsidiary, Southern
Counties Escrow.
LENDING ACTIVITIES
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The Bank's primary emphasis is on commercial and real estate lending, real
estate construction lending, and, to a lesser extent, consumer lending and
residential mortgage lending.
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The Bank maintains an International Banking Division, which facilitates
international trade by providing financing, letter of credit services and
collections, as well as other international trade-related banking services. The
Bank does not make loans to foreign banks, foreign governments or their central
banks, or commercial and industrial loans to entities domiciled outside of the
United States, except for the extension of overdraft privileges to its foreign
correspondent banks on a limited, case by case, basis.
The Bank maintains an SBA lending division to provide loans for small to
medium-sized businesses under the Small Business Administration 7-A guarantee
program. Loans range from $50,000 to $1,000,000 with maturities from 7 to 25
years. As of December 31, 1997, the Bank's SBA servicing portfolio was
approximately $62 million.
The Bank also has established a Residential Mortgage Department to expand
its product lines. During 1993, the Bank became a direct lender for conforming
loans as well as jumbo loans. In October, 1997, management decided to
discontinue its operation of originating fixed rate residential mortgage loans
for sale in the secondary markets. The impact of winding down this operation
was immaterial to the Company's financial condition and results of operations as
of and for the year ended December 31, 1997. The Bank continues to service
those loans it has sold with servicing rights retained. Commensurate with the
decision to discontinue the fixed-rate residential mortgage operation, the
Company is no longer involved with derivative financial instruments as the
limited involvement heretofore was for purposes of managing the interest rate
risk from the origination of fixed rate residential mortgage loans for sale in
the secondary markets.
COMPETITION
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The Bank actively competes for deposits and loans with other banks and
financial institutions located in its service area. Interest rates, customer
service and legal lending limits are the principal competitive factors, and
increasing deregulation of financial institutions has expanded competition. In
order to compete with other financial institutions in its service area, the Bank
relies principally upon providing quality service to its customers, personal
contact by its officers, directors, employees and stockholders, and local
promotional activity. Competitors presently include banks serving the Asian
population in Southern and Northern California, as well as major banks with
extensive branch systems operating over a wide geographic area. Many of the
banks have greater financial resources and facilities than the Bank and many
offer certain services, such as trust services, not currently offered by the
Bank.
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SUBSIDIARIES
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Bank Subsidiaries
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The Bank has approval from the California State Banking Department to
engage in real estate activities pursuant to California Financial Code Section
751.3. GBC Real Estate Company, Inc., a subsidiary of the Bank, was
incorporated on July 26, 1989. The enactment of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), among other things, phased out
the ability of banks to directly or indirectly invest in real estate for non-
banking purposes. Pursuant to a resolution of dissolution, GBC Real Estate
Company, Inc. was dissolved on June 10, 1996. No financial impact resulted from
this dissolution.
GBC Insurance Services, Inc. is a wholly-owned subsidiary of the Bank and
operates exclusively as a full service insurance agent/broker to provide
additional financial services to the Bank's customers. As of and for the year
ended December 31, 1997, GBC Insurance Services, Inc. reported total assets of
$500 and a net loss of $15,000. In August, 1997, the business of GBC Insurance
Services, Inc. was transferred to a division of General Bank. Accordingly, the
insurance subsidiary is in an inactive status and will be formally dissolved in
the future.
GBC Investment & Consulting Company, Inc., a wholly-owned subsidiary of the
Bank, was incorporated to provide specific, in-depth expertise in the areas of
investment and consultation on an international and domestic basis. An office
was established in Taipei, Taiwan to coordinate and develop business between the
Bank and prospective customers in Taiwan and other Asian countries. As of and
for the year ended December 31, 1997, GBC Investment & Consulting Company, Inc.
reported total assets of $9,000 and a net loss of $45,000.
GBC Leasing Company, Inc. is the Bank's leasing subsidiary. The Bank owns
90% of the voting stock of this company which was formed to acquire various
assets, such as equipment on lease, promissory notes and leases and/or
partnership interests in partnerships owning such types of assets, in exchange
for its common stock in transfers qualifying as a tax free exchange of property,
described in Section 351 of the Internal Revenue Code of 1986, as amended. As
of and for the year ended, December 31, 1997, GBC Leasing Company, Inc. reported
total assets of $848,000 and a net loss of $66,000.
Southern Counties Escrow, a 38-year old company which provides escrow
services primarily for business and commercial and residential developers is
another wholly-owned subsidiary of the Bank. As of, and for the year ended,
December 31, 1997, Southern Counties Escrow reported total assets of $280,000
and net income of $98,000.
Holding Company Subsidiaries
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In addition to its wholly-owned bank subsidiary, the Company owns all of
the outstanding stock of GBC Venture Capital, Inc. The business purpose of GBC
Venture Capital, Inc. is to hold stock warrants received as part of business
relationships and to make equity investments in companies subject to applicable
regulatory restrictions. As of, and for the year ended, December 31, 1997, GBC
Venture Capital, Inc., reported total assets of $1,031,000 and a net loss of
$17,000.
SUPERVISION AND REGULATION
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General
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The following generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries only
and are not intended to be complete. These references are qualified in their
entirety by the referenced statutes and regulations. In addition, some statutes
and regulations which apply to and regulate the operation of the banking
industry might exist which are not referenced below. Changes in applicable
statutes and regulations may have a material effect on the business of the
Company and its subsidiaries.
GBC Bancorp
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Upon the reorganization of the Bank as a wholly-owned subsidiary, the
Company became a bank holding company within the meaning of the Bank Holding
Company ("BHC") Act and is subject to the supervision and regulation of the
Federal Reserve Bank of San Francisco. The Company functions primarily as the
sole stockholder of the Bank and establishes general policies and activities of
the operating subsidiaries.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, which include, but are not limited
to, the filing of annual, quarterly and other reports with the Securities and
Exchange Commission.
The Company, as a bank holding company, is subject to regulation under the
Bank Holding Company Act, and is registered with and subject to the supervision
and regulation of the Board of Governors of the Federal Reserve System (the
"Board"). The Company is required to obtain the prior approval of the Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of voting shares of any bank if, after giving effect to
such acquisition, the Company would own or control, directly or indirectly, more
than 5% of such bank. The BHC Act prohibits the Company from acquiring any
voting shares of, interest in, or all or substantially all of the assets of a
bank located outside the state of California unless the laws of such state
specifically authorize such acquisition.
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Under the BHC Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries. The
Company is also prohibited, with certain exceptions, from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company unless the company is engaged in such activities. The Board's approval
must be obtained before the shares of any such company can be acquired and, in
certain cases, before any approved company can open new offices. In making such
determinations, the Board considers whether the performance of such activities
by the Company would offer advantages to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices.
Further, the Board is empowered to differentiate between activities commenced de
novo and activities commenced by acquisition, in whole or in part, of a going
concern.
Although the entire scope of permitted activities is uncertain and cannot
be predicted, the major non-banking activities that have been permitted to bank
holding companies with certain limitations are: making, acquiring or servicing
loans that would be made by a mortgage, finance, credit card or factoring
company; operating an industrial loan company; leasing real and personal
property; acting as an insurance agent, broker, or principal with respect to
insurance that is directly related to the extension of credit by the bank
holding company or any of its subsidiaries and limited to repayment of the
credit in the event of death, disability or involuntary unemployment; issuing
and selling money orders, savings bonds and traveler's checks; performing
certain trust company services; performing appraisals of real estate and
personal property; providing investment and financial advice; providing data
processing services; providing courier services; providing management consulting
advice to non-affiliated depository institutions; arranging commercial real
estate equity financing; providing certain securities brokerage services;
underwriting and dealing in government obligations and money market instruments;
providing foreign exchange advisory and transactional services; acting as a
futures commission merchant; providing investment advice on financial futures
and options on futures; providing consumer financial counseling; providing tax
planning and preparation services; providing check guaranty services; engaging
in collection agency activities; and operating a credit bureau.
The Company's primary source of income is the receipt of dividends from the
Bank. The Bank's ability to make such payments to the Company is subject to
certain statutory and regulatory restrictions.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, the
Bank may not condition an extension of credit on a customer's obtaining other
services provided by it, the Company or any other subsidiary or on a promise by
the customer not to obtain other services from a competitor.
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As a bank holding company, the Company is required to file reports with the
Board and to provide such additional information as the Board may require. The
Board also has the authority to examine the Company and each of its subsidiaries
with the cost thereof to be borne by the Company.
In addition, bank subsidiaries of bank holding companies are subject to
certain restrictions imposed by federal law in dealing with their holding
companies and other affiliates. Subject to certain exceptions set forth in the
Federal Reserve Act, a bank can make a loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a loan
or extension of credit to any person or company or issue a guarantee, acceptance
or letter of credit on behalf of an affiliate only if the aggregate amount of
the above transactions of such subsidiary does not exceed 10% of such
subsidiary's capital stock and surplus on a per affiliate basis or 20% of such
subsidiary's capital stock and surplus on an aggregate affiliate basis. Such
transactions must be on terms and conditions that are consistent with safe and
sound banking practices. A bank and its subsidiaries generally may not purchase
a low-quality asset, as that term is defined in the Federal Reserve Act, from an
affiliate. Such restrictions also prevent a holding company and its other
affiliates from borrowing from a banking subsidiary of the holding company
unless the loans are secured by collateral.
The BHC Act also prohibits a bank holding company or any of its
subsidiaries from acquiring voting shares or substantially all the assets of any
bank located in a state other than the state in which the operations of the bank
holding company's banking subsidiaries are principally conducted unless such
acquisition is expressly authorized by statutes of the state in which the bank
to be acquired is located. Legislation recently adopted in California permits
out-of-state bank holding companies to acquire California banks. See "Effect of
Governmental Policies and Recent Legislation" later in this section.
The BHC Act and regulations of the Board also impose certain constraints on
the redemption or purchase by a bank holding company of its own shares of stock.
The Board has cease and desist powers to cover parent bank holding
companies and non-banking subsidiaries where action of a parent bank holding
company or its non-financial institutions represent an unsafe or unsound
practice or violation of law. The Board has the authority to regulate debt
obligations (other than commercial paper) issued by bank holding companies by
imposing interest ceilings and reserve requirements on such debt obligations.
The ability of the Company to pay dividends to its shareholders is subject
to the restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a Corporation may make a
distribution to its shareholders if the corporation's retained earnings equal at
least the amount of the
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proposed distribution. The Corporation Law further provides that, in the event
that sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets two conditions, which generally are as follows: (i) the
corporation's assets equal at least 1 1/4 times its liabilities; and (ii) the
corporation's current assets equal at least its current liabilities or, if the
average of the corporation's earnings before taxes on income and before interest
expense for the two preceding fiscal years was less than the average of the
corporation's interest expense for such fiscal years, then the corporation's
current assets equal at least 1 1/4 times its current liabilities.
General Bank (the "Bank")
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Banks are extensively regulated under both federal and state law. The Bank,
a California state-chartered bank is subject to primary supervision, periodic
examination and regulation by the Department of Financial Institutions ("DFI")
and the Federal Deposit Insurance Corporation (the "FDIC").
General Bank is insured by the FDIC, up to a maximum of $100,000 per
depositor. For this protection, the Bank, as is the case with all insured
banks, pays a quarterly statutory assessment and is subject to the rules and
regulations of the FDIC. The Bank, while not a member of the Federal Reserve
System, is subject to certain regulations of the Board.
Various requirements and restrictions under the laws of the state of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices. Further, the Bank is required to maintain
certain levels of capital.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by the Bank. California law restricts the
amount available for cash dividends by state-chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years (less
any distributions to shareholders made during such period). In the event a bank
has no retained earnings or net income for its last three fiscal years, cash
dividends may be paid in an amount not exceeding the net income for such bank's
last preceding fiscal year only after obtaining the prior approval of the
Commissioner of the DFI.
The FDIC also has authority to prohibit the Bank from engaging in what, in
the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice.
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Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of such affiliates. Such restrictions prevent affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank in any other affiliate is limited to 10 percent of such subsidiary
bank's capital and surplus (as defined by federal regulations) and such secured
loans and investments are limited, in the aggregate, to 20 percent of such
subsidiary bank's capital and surplus (as defined by federal regulations).
California law also imposes certain restrictions with respect to transactions
involving other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of the FDIC Improvement Act ("FDICIA").
Potential Actions
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Commercial banking organizations, such as the Bank, may be subject to potential
enforcement actions by the Board, the FDIC and the Superintendent for unsafe or
unsound practices in conducting their business or for violations of any law,
rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits,
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the imposition
of restrictions and sanctions under the prompt corrective action provisions of
FDICIA.
Effect of Governmental Policies and Recent Legislation
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Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by a bank on its deposits and its
borrowings and the interest rates received by a bank on loans extended to its
customers and securities held in a bank's portfolio comprise the major portion
of a bank's earnings. These rates are highly sensitive to many factors that are
beyond the control of a bank. Accordingly, the earnings and growth of a bank
are subject to the influence of local, domestic and foreign economic conditions,
including recession, unemployment and inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by monetary and fiscal policies of the federal
government and the policies of regulatory agencies, particularly the Board. The
Board implements national monetary policies (with objectives such as curbing
inflation and
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combating recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
intermediaries subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
The nature and impact of any future changes in monetary policies cannot be
predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial intermediaries are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
the Company are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
Federal Deposit Insurance Corporation Improvement Act of 1991
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Set forth below is a brief discussion of certain portions of FDICIA and
implementing regulations that have been adopted or proposed by the Board, the
Comptroller of the Currency ("Comptroller"), the Office of Thrift Supervision
("OTS") and the FDIC (collectively, the "federal banking agencies").
Standards for Safety and Soundness
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FDICIA requires the federal banking agencies to prescribe, by regulation,
standards for all insured depository institutions and depository institution
holding companies relating to internal controls, loan documentation, credit
underwriting, interest rate exposure and asset growth. Standards must also be
prescribed for classified loans, earnings and the ratio of market value to book
value for publicly traded shares. FDICIA also requires the federal banking
agencies to issue uniform regulations prescribing standards for real estate
lending that are to consider such factors as the risk to the deposit insurance
fund, the need for safe and sound operation of insured depository institutions
and the availability of credit. Further, FDICIA requires the federal banking
agencies to establish standards prohibiting compensation, fees and benefit
arrangements that are excessive or could lead to financial loss.
Prompt Corrective Regulatory Action
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FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions that fall
below one or more prescribed minimum capital ratios. The purpose of this law is
to resolve the problems of insured depository institutions at the least possible
long-term cost to the appropriate deposit insurance fund.
The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios; well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
The federal banking agencies have issued uniform final regulations
implementing the prompt corrective action provisions of FDICIA. Under the
regulations, an insured depository institution will be deemed to be:
. "well capitalized" if it (i) has total risk-based capital of 10
percent or greater, Tier 1 risk-based capital of 6 percent or greater
and a leverage capital ratio of 5 percent or greater and (ii) is not
subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specific capital
level for any capital measure.
. "adequately capitalized" if it has total risk-based capital of 8
percent or greater, Tier 1 risk-based capital of 4 percent or greater
and a leverage capital ratio of 4 percent or greater (or a leverage
capital ratio of 3 percent or greater if the institution is rated
composite 1 under the applicable regulatory rating system in its most
recent report examination);
. "undercapitalized" if it has total risk-based capital that is less
than 8 percent, Tier 1 risk-based capital that is less than 4 percent
or a leverage capital ratio that is less than 4 percent (or a leverage
capital ratio that is less than 3 percent if the institution is rated
composite 1 under the applicable regulatory rating system in its most
recent report of examination);
. "significantly undercapitalized" if it has total risk-based capital
that is less than 6 percent, Tier 1 risk-based capital that is less
than 3 percent or a leverage capital ratio that is less than 3
percent; and
. "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2 percent.
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An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized, may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is in an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to address the problems associated with such category.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions, and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers, subject to certain grandfather provisions for those elected
prior to enactment of FDICIA; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions
14
<PAGE>
on capital distributions by holding companies of such institutions; (ix)
required divestiture of subsidiaries by such institution; or (x) other
restrictions as determined by the appropriate federal banking agency. Although
the appropriate federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose, it is required to
force a sale of voting shares or merger, impose restrictions on affiliate
transactions and impose restrictions on rates paid on deposits unless it
determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in which
the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off-balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0 percent for assets with low credit risk, such as
certain U.S. Treasury securities, to 100 percent for assets with relatively high
credit risk, such as business loans.
In addition to the risk-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3 percent. For all banks not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3
percent minimum, or 4 percent to 5 percent. In addition to these uniform risk-
based capital guidelines and leverage ratios that apply across the industry,
15
<PAGE>
the FDIC has the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios.
The federal banking agencies have adopted regulations specifying that the
agencies will include, in their evaluations of a bank's capital adequacy, an
assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. The final regulations, however, do
not include a measurement framework for assessing the level of a bank's exposure
to interest rate risk, which is the subject of a proposed policy statement
issued by the federal banking agencies concurrently with the final regulations.
The proposal would measure interest rate risk in relation to the effect of a 200
basis point change in market interest rates on the economic value of a bank.
Banks with high levels of measured exposure or weak management systems generally
will be required to hold additional capital for interest rate risk. The
specific amount of capital that may be needed would be determined on a case-by-
case basis by the examiner and the appropriate federal banking agency.
The federal banking agencies issued a rule relating to capital standards
and the risks arising from the concentration of credit and nontraditional
activities. Institutions which have significant amounts of their assets
concentrated in high risk loans or nontraditional banking activities and who
fail to adequately manage these risks, will be required to set aside capital in
excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
The federal banking agencies have issued an interagency policy statement on
the allowance for loan and lease losses which, among other things, establishes
certain benchmark ratios of loan loss allowances to classified assets. The
benchmark set forth by such policy statement is the sum of (a) assets classified
loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets
classified substandard; and (d) estimated credit losses on other assets over the
upcoming 12 months.
Other Items
- -----------
FDICIA also, among other things, (i) limits the percentage of interest paid
on brokered deposits and limits the unrestricted use of such deposits to only
those institutions that are well capitalized; (ii) requires the FDIC to charge
insurance premiums based on the risk profile of each institution; (iii)
eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; (iv) prohibits insured state chartered
banks from engaging as principal in any type of activity that is not permissible
for a national bank unless the FDIC permits such activity and the bank meets all
of its regulatory capital requirements; (v) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing
16
<PAGE>
rights that may be included in calculating such institution's tangible, core and
risk-based capital; and (vi) provides that, subject to certain limitations, any
federal savings association may acquire or be acquired by any insured depository
institution.
In addition, the FDIC has issued final and proposed regulations
implementing provisions of FDICIA relating to powers of insured state banks.
Final regulations issued prohibit insured state banks from making equity
investments of a type, or in an amount, that are not permissible for national
banks. In general, equity investments include equity securities, partnership
interests and equity interests in real estate. Under the final regulations,
non-permissible investments were to be divested by no later than December 19,
1996. On June 10, 1996 GBC Real Estate Company, Inc. was dissolved. GBC Real
Estate Company, Inc. had been incorporated to engage in real estate activities
on July 26, 1989. The Bank has no non-permissible investments.
Certain regulations prohibit insured state banks from engaging as principal
in any activity not permissible for a national bank, without FDIC approval. The
proposal also provides that subsidiaries of insured state banks may not engage
as principal in any activity that is not permissible for a subsidiary of a
national bank, without FDIC approval.
Capital Adequacy Guidelines
- ---------------------------
The FDIC has issued guidelines to implement the risk-based capital
requirements. The guidelines are intended to establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, takes off-balance
sheet items into account in assessing capital adequacy and minimizes
disincentives to holding liquid, low-risk assets. Under these guidelines,
assets and credit equivalent amounts of off-balance sheet items, such as letters
of credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0 percent for risk-free assets, such as cash and
certain U.S. Government securities, to 100 percent for relatively high-risk
assets, such as loans and investments in fixed assets, premises and other real
estate owned. The aggregated dollar amount of each category is then multiplied
by the risk-weight associated with that category. The resulting weighted values
from each of the risk categories are then added together to determine the total
risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus
and retained earnings, qualifying non-cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchased credit card
relationships may be included, subjected to certain limitations. At least 50
percent of the banking organization's total regulatory capital must consist of
Tier 1 capital.
17
<PAGE>
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25 percent of risk-weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term stock and
related surplus; (iii) hybrid capital (instruments with characteristics of both
debt and equity), perpetual debt and mandatory convertible debt securities; and
(iv) eligible term subordinated debt and intermediate-term preferred stock with
an original maturity of five years or more, including related surplus, in an
amount up to 50 percent of Tier 1 capital. The inclusion of the foregoing
elements of Tier 2 capital are subject to certain requirements and limitations
of the federal banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1
capital to average total assets of 3 percent for the highest rated banks. This
leverage capital ratio is only a minimum. Institutions experiencing or
anticipating significant growth or those with other than minimum risk profiles
are expected to maintain capital well above the minimum level. Furthermore,
higher leverage capital ratios are required to be considered well capitalized or
adequately capitalized under the prompt corrective action provisions of FDICIA.
The regulatory Capital Guidelines as well as the actual regulatory
capitalization for the Company and the Bank as of December 31, 1997 follow:
<TABLE>
<CAPTION>
Minimum Well
GBC General Regulatory Capitalized
Bancorp Bank Requirements Requirements
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 13.57% 12.45% 4% 6%
Total 18.47% 13.71% 8% 10%
Leverage Ratio 9.58% 8.78% 4% 5%
</TABLE>
As of December 31, 1997 both the Company and the Bank are considered well
capitalized.
Safety and Soundness Standards
- ------------------------------
The federal banking agencies have adopted guidelines establishing standards
for safety and soundness, as required by FDICIA. The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits.
Guidelines for asset quality and earnings standards will be adopted in the
future. The guidelines establish the safety and soundness standards that the
agencies will use to identify and address problems at insured depository
institutions before capital becomes impaired. If an institution fails to comply
with a safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
18
<PAGE>
The federal banking agencies have issued regulations prescribing uniform
guidelines for real estate lending. The regulations require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state-
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the federal banking agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing of real property, and
the use of real property or interests in real property for a loan or investment,
including mortgage backed securities.
Premiums for Deposit Insurance
- ------------------------------
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90 percent of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of BIF. Any borrowings not repaid by
asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The FDIC also has authority to impose special assessments
against insured deposits.
The FDIC has implemented a final risk-based assessment system, as required
by FDICIA, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of any such loss, and the revenue needs of
the deposit insurance fund. As long as BIF's reserve ratio is less than a
specified "designated reserve ratio," or 1.25 percent, the total amount raised
from BIF's members by the risk-based assessment system may not be less than the
amount that would be raised if the assessment rate for all BIF members were .023
percent of deposits. The FDIC, effective September 15, 1995, lowered
assessments from their rates of $.23 to $.31 per $100 of insured deposits to
rates of $.04 to $.31, depending on the condition of the bank, as a result of
the recapitalization of BIF. On November 15, 1995, the FDIC voted to drop its
premiums for well capitalized banks to
19
<PAGE>
zero effective January 1, 1996. Other banks will be charged risk-based premiums
up to $.27 per $100 of deposits.
Recent Legislation
- ------------------
Governor Pete Wilson recently signed Assembly Bill 3351 (the "Banking
Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by the
California State Banking Department (the "Department"), effective July 1, 1997,
which creates the California Department of Financial Institutions ("DFI") to be
headed by a Commissioner of Financial Institutions out of the existing
Department which regulates state chartered commercial banks and trust companies
in California.
The Banking Consolidation Bill, among other provisions, also (i) transfers
regulatory jurisdiction over state chartered savings and loan associations from
the Department of Savings and Loans ("DSL") to the newly created DFI and
abolishes the DSL; (ii) transfers regulatory jurisdiction over state chartered
industrial loan companies and credit unions from the Department of Corporations
to the newly-created DFI; and (iii) establishes within the DFI separate
divisions for credit unions, commercial banks, industrial loan companies and
savings and loans. As the Banking Consolidation Bill has only recently been
enacted, it is impossible to predict with any degree of certainty what impact it
will have on the banking industry in general and the Bank in particular.
The Deposit Insurance Fund Act of 1996 included provisions to strengthen
the Savings Association Insurance Fund (the "SAIF") and to repay outstanding
bonds that were issued to recapitalize the SAIF's predecessor as a result of
payments made due to the insolvency of savings and loan associations and other
federally insured savings institutions in the late 1980's and early 1990's. The
new law required savings and loan associations to bear the cost of
recapitalizing the SAIF and, after January 1, 1997, banks must contribute
towards paying off the financing bonds, including interest. For 1997, the cost
to the Bank is 1.3 cents per $100 of deposits. In 2000, the banking industry
will assume the bulk of the payments. The new law also aims to merge BIF and
SAIF by 1999 but not until the bank and savings and loan charters are combined.
The new law requires the Treasury Department to deliver to Congress comments and
recommendations on combining the charters. Additionally, the new law provides
"regulatory relief" for the banking industry by eliminating approximately 30
laws and regulations. The costs and benefits of the new law to the Bank can not
currently be accurately predicted.
Interstate Banking and Branching
- --------------------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") mandates that, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed may
obtain regulatory approval to acquire an existing bank located in another state
without regard to state law. A bank holding company would not be permitted to
make such an acquisition if, upon consummation, it would control (a) more than
10% of the total amount of deposits of
20
<PAGE>
insured depository institutions in the United States or (b) 30% or more of the
deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not
acquire a state bank in existence for less than a minimum length of time that
may be prescribed by state law except that a state may not impose more than a
five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state was permitted to approve
such combinations earlier than June 1, 1997, and could have adopted legislation
to prohibit interstate mergers after the date in that state or in other states
by that state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction. California has adopted legislation which "opts California into"
the Interstate Act. However, the California Legislation restricts out-of-state
banks from purchasing branches or starting a de novo branch to enter the
California banking market. Such banks may proceed only by way of purchases of
whole banks.
The Interstate Act is likely to increase competition in the Bank's market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such increased competition will likely have
on the Bank's operations.
The Caldera, Weggeland, and Killea California Interstate Banking and
Branching Act of 1995 (the "1995 Act") opts in early for interstate branching,
allowing out-of-state banks to enter California by merging or purchasing a
California bank or industrial loan company which is at least five years old.
Also, the 1995 Act repeals the California Interstate (National) Banking Act of
1986, which regulated the acquisition of California banks by out-of-state bank
holding companies. In addition, the 1995 Act permits California state banks,
with the approval of the Department of Financial Institutions ("DFI"), to
establish agency relationships with FDIC-insured banks and savings associations.
Finally, the 1995 Act provides for regulatory relief, including (i)
authorization for the DFI to exempt banks from the requirement of obtaining
approval before establishing or relocating a branch office or place of business,
(ii) repeal of the requirement of directors' oaths (California Financial Code
Section 682), and (iii) repeal of the aggregate limit on real estate loans
(California Financial Code Section 1230).
Community Reinvestment Act and Fair Lending Developments
- --------------------------------------------------------
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (the "CRA") activities. The CRA generally requires the federal
banking agencies to evaluate
21
<PAGE>
the record of financial institutions in meeting the credit needs of their local
community, including low and moderate income neighborhoods. In addition to
substantial penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and the CRA into account when regulating and
supervising other activities.
The federal banking agencies have issued final regulations which change the
manner in which they measure a bank's compliance with its CRA obligations. The
final regulations adopt a performance-based evaluation system which bases CRA
ratings on an institution's actual lending service and investment performance
rather than the extent to which the institution conducts needs assessments,
documents community outreach or complies with other procedural requirements. In
March 1994, the Federal Interagency Tax Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the
three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact.
Hazardous Waste Clean-Up Costs
- ------------------------------
Management is aware of recent legislation and cases relating to hazardous
waste clean-up costs and potential liability. Based on a general survey of the
loan portfolios of the Bank, management is not aware of any potential liability
for hazardous waste contamination.
Other Regulations and Policies
- ------------------------------
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal
regulations include requirements to maintain non-interest bearing reserves
against deposits, limitations of the nature and amount of loans which may be
made, and restrictions on payment of dividends. The Superintendent approves the
number and locations of the branch offices of a bank. California law exempts
banks from the usury laws.
EMPLOYEES
- ---------
As of December 31, 1997, the Bank had approximately 316 full-time
equivalent employees. None of the employees are represented by labor unions.
Benefit programs are available to eligible employees and include, among others,
group medical-dental plan, paid sick leave, paid vacation, and a 401(k) plan.
22
<PAGE>
ITEM 2 PROPERTIES
GBC Bancorp shares common quarters with General Bank at 800 West 6th
Street, Los Angeles, California 90017. The Bank leases approximately 41,501
square feet of rentable area which includes the ground floor and the second,
fourteenth and fifteenth floors of the building. The initial lease term will
expire in the year 2009, and the Bank has two five-year options to renew the
lease following the expiration date of the initial term. As of December 31,
1997, the monthly base rent for the facility is $70,143 and is payable to the
lessor, Capital & Counties, USA, Inc.
As of December 31, 1997 the Bank operated full-service branches at fourteen
leased locations (including the 800 West 6th street, Los Angeles location which
houses the downtown branch of the Bank) and one location where it owns the
building and land. In addition, the Bank has certain operating and
administrative departments and subsidiaries located at 4128 Temple City
Boulevard, Rosemead, California, where it owns the building and land with
approximately 27,600 square feet of space. The net book value of the two owned
facilities (building and land) at December 31, 1997 was $2,358,000. Expiration
dates of the Bank's leases range from June, 1998 to February, 2009. All the
Bank's full-service branches are located in California and all but three in the
Southern California area.
ITEM 3 LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to pending and
threatened legal actions. After reviewing pending actions with counsel,
management considers that the outcome of such actions will not have a material
adverse effect on the financial condition or the operations of the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matters were submitted to a vote of
the Company's security holders.
Executive Officers of the Registrant
- ------------------------------------
There are no family relationships between any of the executive officers of
the Company. The following information indicates the position and age of the
executive officers as of December 31, 1997, and their business experience during
the prior five years:
23
<PAGE>
AGE AT
DECEMBER
NAME 31, 1997 POSITION/BACKGROUND
- ---- -------- -------------------
Li-Pei Wu.......... 63 President and Chief Executive Officer of the
Company and the Bank since May 1982, Chairman
of the Board of the Company and the Bank since
1984.
Peter Wu........... 49 Chief Operating Officer of the Bank since
1995, Executive Vice President of the Company
and Secretary of the Company and the Bank
since 1979.
Peter Lowe......... 56 Executive Vice President and Chief Financial
Officer of the Company and the Bank since
1994; prior thereto, Executive Vice President
and Chief Financial Officer of Manufacturers
Bank from 1990 to 1993.
Eddie Chang........ 42 Senior Vice President and Manager of the Real
Estate Department since January 1996. From
July 1995 to January 1996 Manager of the Real
Estate Department. From July 1994 to July
1995 self-employed. From 1992 to July 1994,
Senior Vice President and Manager of the Real
Estate Department.
Gloria Chen........ 55 Senior Vice President and Relationship Manager
in the Corporate Lending Department since May
1997; prior thereto, Senior Vice President and
Manager of the International Department at
Preferred Bank from 1992 to 1997.
Sue Lai............ 45 Senior Vice President of the Corporate Lending
Department since April 1997, Manager of the
Corporate Lending Department since 1994, in
various capacities with the Bank since 1991.
Johnny Lee......... 35 Senior Vice President and Regional Manager of
the Northern California Region since April
1997, in various positions with the Bank since
1990.
24
<PAGE>
Domenic Massei..... 53 Senior Vice President of Operations
Administration of the Bank since 1989.
Richard Voake...... 57 Senior Vice President and Credit Administrator
of the Bank since 1994, Vice President and
Manager of Corporate Credit Examination from
1992 to 1994.
Thomas Wong, Jr.... 48 Senior Vice President and Special Assistant to
the Chief Executive Officer since April 1997;
prior thereto, Senior Vice President and head
of International Banking and Cash Management
sales at Whitney National Bank from 1993 to
1996.
Carl Maier......... 57 Vice President and Controller of the Bank
since July 1993. From October 1991 to July
1993 self-employed.
PART II
-------
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
Market Information
- ------------------
The common stock of the Company has been traded in the NASDAQ National
Market under the symbol GBCB since November 24, 1987.
The market makers for GBC Bancorp are: Herzog, Heine, Geduld, Inc., Hoefer
& Arnett, GBS Financial Corp., Keefe, Bruyette & Woods, Inc., Wedbush Morgan
Securities and Oppenheimer & Co.
The high and low last sale or bid prices for each quarter of the years 1997
and 1996, as reported by the NASDAQ, are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
1997: Quarter Quarter Quarter Quarter
- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C>
High $36.13 $41.00 $49.00 $63.75
Low $27.25 $30.75 $41.00 $49.88
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
1996: Quarter Quarter Quarter Quarter
- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C>
High $22.00 $23.50 $29.25 $29.88
Low $17.31 $20.50 $22.50 $27.00
</TABLE>
Holders
- -------
As of February 28, 1998, there were 298 holders of record of the Company's
common stock as listed with the Company's transfer agent.
Dividend
- --------
Cash dividends per share were declared during the most recent two years as
per the following table:
<TABLE>
<CAPTION>
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1997 $0.12 $0.12 $0.12 $0.12 $0.48
1996 $0.08 $0.08 $0.10 $0.10 $0.36
</TABLE>
The Company's subsidiary, General Bank, is limited in the payment of
dividends by the Financial Code of the State of California which provides that
dividends in any one year may not exceed the lesser of the Bank's undivided
profits or the net income for the prior three years, less cash distributions to
stockholders during such period. As of December 31, 1997, approximately $30.8
million of undivided profits of the Bank is available for dividends to the
Company, subject to the subordinated debt covenant restrictions.
ITEM 6 SELECTED FINANCIAL DATA
The selected financial data on page 29 of the Company's 1997 Annual Report
to Shareholders is hereby incorporated by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations on pages 9 through 29 of the Company's 1997 Annual Report to
Shareholders is hereby incorporated by reference.
26
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of GBC Bancorp and its subsidiaries,
together with the report thereon of KPMG Peat Marwick LLP, on pages 30 through
56 of the Company's 1997 Annual Report to Shareholders, are hereby incorporated
by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no changes in or disagreements with accountants on matters
involving accounting and financial disclosure.
PART III
--------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
- ---------------------------
The information relating to directors of the Company under the caption
"Election of Directors" appearing on page 5 of the Company's Definitive Proxy
Statement, dated April 6, 1998, relating to the annual meeting of shareholders
to be held on May 7, 1998, is hereby incorporated by reference.
ITEM 11 EXECUTIVE COMPENSATION
The information regarding executive compensation under the caption
"Executive Compensation" appearing on pages 8 through 15 of the Company's
Definitive Proxy Statement dated April 6, 1998, for the annual meeting of
shareholders to be held on May 7, 1998, is hereby incorporated by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding the security ownership of certain beneficial
owners and management under the caption "Shareholdings of Certain Beneficial
Owners and Management" appearing on pages 2 through 4 of the Company's
Definitive Proxy Statement, dated April 6, 1998, for the annual meeting of
shareholders to be held on May 7, 1998, is hereby incorporated by reference.
27
<PAGE>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
under the caption "Certain Transactions" appearing on page 17 of the Company's
Definitive Proxy Statement dated April 6, 1998, for the annual meeting of
shareholders to be held on May 7, 1998, is hereby incorporated by reference.
PART IV
-------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(2) Financial Statements and Schedules
Page in Annual Report
to Shareholders
---------------------
GBC Bancorp and subsidiaries:
Independent Auditors' Report.............................. Page 56
Consolidated Balance Sheets as of December 31, 1997 and
1996..................................................... Page 30
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995......................... Page 31
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1997, 1996 and
1995..................................................... Page 32
Consolidated Statements of Cash Flow for the Years Ended
December 31, 1997, 1996 and 1995......................... Page 33
Notes to Consolidated Financial Statements................ Pages 34-55
All other financial statement schedules are omitted because they are not
applicable, not material or because the information is included in the financial
statements or the notes thereto.
(a)(3) Exhibit Index
(b) Reports on Form 8-K
None
28
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, GBC Bancorp has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
GBC BANCORP
/s/ Li-Pei Wu /s/ Peter Lowe
- ---------------------------------- -----------------------------------
by: Li-Pei Wu, by: Peter Lowe,
President and Chief Executive Officer Executive Vice President and Chief
Financial Officer
Date: 3-19-98 Date: 3-19-98
--------------------------- -----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Helen Chen Date: 3-19-98
- ---------------------------------- -------------------------------
Helen Chen, Director
/s/ Thomas C. T. Chiu Date: 3-19-98
- ---------------------------------- -------------------------------
Thomas C. T. Chiu, Director
/s/ Chuang-I Lin Date: 3-19-98
- ---------------------------------- -------------------------------
Chuang-I Lin, Director
/s/ Ko-Yen Lin Date: 3-19-98
- ---------------------------------- -------------------------------
Ko-Yen Lin , Director
/s/ Ting Y. Liu Date: 3-19-98
- ---------------------------------- -------------------------------
Ting Y. Liu, Director
/s/ John Wang Date: 3-19-98
- ---------------------------------- -------------------------------
John Wang, Director
/s/ Date:
- ---------------------------------- -------------------------------
Kenneth C. Wang, Director
/s/ Chien-Te Wu Date: 3-19-98
- ---------------------------------- -------------------------------
Chien-Te Wu, Director
29
<PAGE>
/s/ Julian Wu Date: 3-19-98
- ---------------------------------- -------------------------------
Julian Wu, Director
/s/ Li-Pei Wu Date: 3-19-98
- ---------------------------------- -------------------------------
Li-Pei Wu , Director
/s/ Peter Wu Date: 3-19-98
- ---------------------------------- -------------------------------
Peter Wu, Director
/s/ Ping C. Wu Date: 3-19-98
- ---------------------------------- -------------------------------
Ping C. Wu, Director
/s/ Walter Wu Date: 3-19-98
- ---------------------------------- -------------------------------
Walter Wu, Director
/s/ Chin-Liang Yen Date: 3-19-98
- ---------------------------------- -------------------------------
Chin-Liang Yen, Director
30
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<S> <C> <C>
3.1 Articles of Incorporation, as amended (incorporated herein by this
reference to Exhibit 3.1 on the Company's Form 8 to the Company's
Annual Report on Form 10-K for year ended December 31, 1987; and to
Exhibit 3.1 on the Company's Quarterly Report on form 10-Q for the
quarter ended June 30, 1988) --
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.2 on the
Company's Form 8 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1987) --
3.3 Amendment to bylaws of GBC Bancorp (incorporated herein by this
reference to Exhibit 3.3 on the Company's Form 10-K for the year
ended December 31, 1991) --
10.1 Lease for ground floor space at 23326 Hawthorne Boulevard, Suite
100, Torrance, California (incorporated herein by this reference to
Exhibit 10.2 on the Company's Form 8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987) --
10.2 Lease for ground floor space at 1420 East Valley Boulevard.,
Alhambra, California (incorporated herein by this reference to
Exhibit 10.6 on the Company's Form 8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987) --
10.3 Lease for ground floor space at 17271 Gale Ave., City of Industry,
California (incorporated herein by this reference to Exhibit 10.7
on the Company's Form 10-K for the year ended December 31, 1988) --
10.4 1988 Stock Option Plan (incorporated herein by this reference to
Exhibit 10.1 on the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1988) --
10.5 Lease for ground floor space at 4010 Barranca Parkway, Irvine,
California (incorporated herein by this reference to Exhibit 10.11
on the Company's Form 10-K for the year ended December 31, 1989) --
</TABLE>
E-1
<PAGE>
<TABLE>
<S> <C> <C>
10.6 Lease for ground floor space at 4688 Convoy Street, San Diego,
California (incorporated herein by this reference to Exhibit 10.12
on the Company's Form 10-K for the year ended December 31, 1989) --
10.7 Lease for ground floor space at 701 S. Atlantic Boulevard, Monterey
Park, California (incorporated herein by this reference to Exhibit
10.13 on the Company's Form 10-K for the year ended December 31,
1990) --
10.8 Lease for ground floor space at 2783 S. Diamond Bar Boulevard,
Suite 8-B, Diamond Bar, California (incorporated herein by this
reference to Exhibit 10.11 on the Company's Form 10-K for the year
ended December 31, 1991) --
10.9 Employment Agreement among the Company, the Bank and Li-Pei Wu,
dated as of December 19, 1991 (incorporated herein by this
reference to Exhibit 10.12 on the Company's Form 10-K for the year
ended December 31, 1991) --
10.10 Non-Qualified Stock Option Agreement between the Company and Li-Pei
Wu, dated as of December 19, 1991, relating to the grant of stock
options under the Company's 1988 stock option plan (incorporated
herein by this reference to Exhibit 10.13 on the Company's Form
10-K for the year ended December 31, 1991) --
10.11 Board of Directors resolutions adopted on February 6, 1992, with
respect to the GBC Bancorp Amended and Restated 1988 Stock Option
Plan, which, among other things, authorize the grant of incentive
stock options, eliminate certain limitations on the vesting and
exercisability, and increase the maximum number of shares that may
be issued thereunder (incorporated herein by this reference to
Exhibit 10.14 on the Company's Form 10-K for the year ended
December 31, 1991) --
10.12 GBC Bancorp Amended and Restated 1988 Stock Option Plan, as Exhibit
28.1 to Form S-8 Registration Statement filed with the Securities
and Exchange commission on April 22, 1992, Registration Number:
33-47452 (incorporated herein by this reference to Exhibit 10.15 on
the Company's Form 10-K for the year ended December 31, 1992) --
10.13 Lease for ground floor space at 1139 West Huntington Drive,
Arcadia, California (incorporated herein by this reference to
Exhibit 10.16 on the Company's Form 10-K for the year ended
December 31, 1993) --
10.14 Lease for ground floor space at 2263 N. Tustin Avenue, Orange,
California (incorporated herein by this reference to Exhibit 10.17
on the Company's Form 10-K for the year ended December 31, 1993) --
</TABLE>
E-2
<PAGE>
<TABLE>
<S> <C> <C>
10.15 Lease for office building space for ground and second floors and
14th and 15th floors located at 800 West 6th Street, Los Angeles,
California (incorporated herein by this reference to Exhibit 10.19 --
on the Company's Form 10-K for the year ended December 31, 1993)
10.16 Sublease for ground floor office building space at 1420 East Valley
Boulevard, Alhambra, California (incorporated herein by this --
reference to Exhibit 10.21 on the Company's Form 10-K for the year
ended December 31, 1994)
10.17 Addendum to standard office lease at 4010 Barranca Parkway, Irvine,
California (incorporated herein by this reference to Exhibit 10.22 --
on the Company's Form 10-K for the year ended December 31, 1994)
10.18 Lease for ground floor office building space at 9045 Corbin Avenue,
Northridge, California (incorporated herein by this reference to --
Exhibit 10.23 on the Company's Form 10-K for the year ended
December 31, 1994)
10.19 Lease for office building space on first and second floors located
at 10001 N. De Anza Boulevard, Cupertino, California (incorporated --
herein by this reference to Exhibit 10.24 on the Company's Form
10-K for the year ended December 31, 1994)
10.20 Lease agreement for office building space on ground floor located
at 520 South El Camino Real, San Mateo, California (incorporated --
herein by this reference to Exhibit 10.25 on the Company's Form
10-K for the year ended December 31, 1994)
10.21 Lease agreement for office building space on ground floor located
at 47000 Warm Springs Boulevard, Fremont, California (incorporated --
herein by this reference to Exhibit 10.26 on the Company's Form
10-K for the year ended December 31, 1994)
10.22 Purchase, Assignment and Assumption Agreement 615 dated as of December
1,1996 between Gaucho-1 Inc. and General Bank and the related
Assignment and Assumption Agreement 615 dated December 27, 1996
between the same parties (incorporated herein by this reference to
Exhibit 10.22 on the Company's Form 10-K for the year ended December
31, 1996)
10.23 Purchase Assignment and Assumption Agreement dated as of December
1, 1997 between RGL-2 Corporation and General Bank pp.
11 Computation of Per Share Earnings pp.
12 Computation of Ratios pp.
13 Annual Report to Shareholders pp.
21 Subsidiaries of GBC Bancorp pp.
27.1 Financial Data Schedule pp.
27.2 Financial Data Schedule dated 9/30/97
27.3 Financial Data Schedule dated 6/30/97
27.4 Financial Data Schedule dated 3/31/97
27.5 Financial Data Schedule dated 12/31/96
27.6 Financial Data Schedule dated 9/30/96
27.7 Financial Data Schedule dated 6/30/96
27.8 Financial Data Schedule dated 3/31/96
27.9 Financial Data Schedule dated 12/31/95
</TABLE>
E-3
<PAGE>
-------------------------------------------------
PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT
(1993 737 C)
dated
as of December 1, 1997
between
RGL-2 CORPORATION,
as Assignor,
and
GENERAL BANK
as Assignee
One Boeing Model 737-522 Aircraft
Bearing U.S. Registration No. N953UA and
Manufacturer's Serial No. 26700
-------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C> <C>
SECTION 1. Definitions.................................................................................... 2
SECTION 2. Sale and Assignment............................................................................ 2
SECTION 3. Purchase and Assumption........................................................................ 3
SECTION 4. Purchase Price................................................................................. 3
SECTION 5. Representations and Warranties of Assignor..................................................... 4
(a) Organization, Etc....................................................................... 4
(b) Corporate Authorization; Approvals; Execution and Delivery; Non-Contravention........... 4
(c) Valid and Binding Agreements............................................................ 4
(d) Approvals............................................................................... 5
(e) Litigation.............................................................................. 5
(f) No Liens................................................................................ 5
(g) Citizenship............................................................................. 5
(h) Event of Default........................................................................ 6
(i) Event of Loss........................................................................... 6
(j) Ownership and Encumbrances.............................................................. 6
(k) Brokers' Fees........................................................................... 6
(l) Operative Documents..................................................................... 6
(m) Compliance.............................................................................. 7
SECTION 6. Representations and Warranties of Assignee..................................................... 7
(a) Organization, Etc....................................................................... 7
(b) Corporate Authorization................................................................. 7
(c) Valid and Binding Agreements............................................................ 8
(d) Approvals............................................................................... 8
(e) Litigation.............................................................................. 8
(f) No Liens................................................................................ 8
(g) Citizenship............................................................................. 9
(h) Investment by Assignee; Securities Law.................................................. 9
(i) ERISA................................................................................... 9
(j) Broker's Fees........................................................................... 9
(k) Compliance; Transferee.................................................................. 9
SECTION 7. Conditions Precedent to the Obligations of Assignor............................................ 10
(a) Purchase Price.......................................................................... 10
(b) Due Authorization, Execution and Delivery............................................... 10
(c) Affidavit of Citizenship................................................................ 10
PAGE i
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(d) Representations and Warranties......................................................... 10
(e) Corporate Matters...................................................................... 10
(f) Additional Information................................................................. 11
(g) Illegality............................................................................. 11
(h) No Proceedings......................................................................... 11
(i) Compliance with Operative Documents.................................................... 11
(j) No Event of Loss....................................................................... 11
(k) Opinions............................................................................... 11
SECTION 8. Conditions Precedent to the Obligations of Assignee........................................... 12
(a) Operative Documents.................................................................... 12
(b) Due Authorization, Execution and Delivery.............................................. 12
(c) Assignor Parent Guaranty............................................................... 12
(d) Certificate of Lessee.................................................................. 12
(e) Representations and Warranties......................................................... 12
(f) Corporate Matters...................................................................... 13
(g) Additional Information................................................................. 13
(h) Illegality............................................................................. 13
(i) No Proceedings......................................................................... 13
(j) Compliance with Operative Documents.................................................... 13
(k) No Event of Loss....................................................................... 13
(l) No Defaults............................................................................ 14
(m) Opinions............................................................................... 14
(n) Insurance.............................................................................. 14
SECTION 9. Payments...................................................................................... 14
SECTION 10. Certain Notices............................................................................... 14
SECTION 11. Further Assurances............................................................................ 15
SECTION 12. Taxes and Indemnities......................................................................... 15
(a) Transfer Taxes......................................................................... 15
(b) Assignee's Tax Indemnity............................................................... 15
(c) Assignor's Tax Indemnity............................................................... 15
(d) Assignor's Indemnity................................................................... 16
(e) Assignee's Indemnity................................................................... 16
(f) Notice of Claims....................................................................... 17
SECTION 13. Miscellaneous................................................................................. 17
(a) Notices................................................................................ 17
(b) Confidentiality........................................................................ 18
(c) Headings............................................................................... 19
</TABLE>
PAGE ii
<PAGE>
<TABLE>
<C> <S> <C>
(d) References............................................................................... 19
(e) GOVERNING LAW............................................................................ 19
(f) Severability............................................................................. 19
(g) Amendments in Writing.................................................................... 19
(h) Survivales............................................................................... 20
(i) Expenses................................................................................. 20
(j) Execution in Counterparts................................................................ 20
(k) Entire Agreement......................................................................... 20
(l) Exhibits................................................................................. 20
(m) Successors and Assigns................................................................... 20
(n) Recovery of Costs and Fees............................................................... 21
(o) Third Party Benefit; Indemnification of Lessee........................................... 21
</TABLE>
ATTACHMENTS:
- ------------
Exhibit A Assignment and Assumption Agreement (FAA)
Exhibit B Affidavit of Citizenship
Exhibit C Assignor Parent Guaranty
PAGE iii
<PAGE>
PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT
(1993 737 C)
PURCHASE, ASSIGNMENT AND ASSUMPTION AGREEMENT (1993 737 C) dated as of
December 1, 1997 (this "AGREEMENT") between RGL-2 CORPORATION, a Delaware
corporation ("ASSIGNOR"), and GENERAL BANK, a California banking corporation
("ASSIGNEE"). Capitalized terms used herein without definition shall have the
meanings given them in Section 1.
WITNESSETH:
WHEREAS, Assignor desires to sell and assign to Assignee and Assignee
desires to purchase and assume from Assignor pursuant to the terms of that
certain Participation Agreement (1993 737 C) dated as of September 1, 1993 (as
amended to the date hereof, the "PARTICIPATION AGREEMENT"), by and among (i)
United Air Lines, Inc. ("LESSEE"), (ii) Assignor, (iii) Aetna Life Insurance
Company, State of Wisconsin Investment Board, American United Life Insurance
Company, Guarantee Trust Life Insurance Company, Physicians Life Insurance
Company, Physicians Mutual Insurance Company, World Insurance Company, Central
States Health & Life Company of Omaha, The Franklin Life Insurance Company and
Woodmen Accident and Life Company; (iv) General Electric Company ("GE"); (v)
Wilmington Trust Company, not in its individual capacity, except as expressly
provided therein, but solely as Owner Trustee under the Trust Agreement referred
to therein ("OWNER TRUSTEE"); and (vi) State Street Bank and Trust Company of
Connecticut, National Association, in its individual capacity and as Mortgagee
under the Trust Indenture ("MORTGAGEE"), except for Reserved Rights (as defined
in Section 2), (a) all of Assignor's right, title and interest in, to and under
(i) the Trust Estate and (ii) the Participation Agreement, the Tax Indemnity
Agreement and the Trust Agreement, and (b) excluding the Letter Agreement
Paragraph (as defined in Section 5(l)) and the Owner Participant Guaranty, all
of Assignor's right, title and interest, if any, in, to and under each other
Operative Document. The Participation Agreement, the Tax Indemnity Agreement
and the Trust Agreement are sometimes collectively referred to herein as the
"LESSOR DOCUMENTS"; and
WHEREAS, the Participation Agreement permits such sale, purchase,
assignment and assumption upon satisfaction of certain conditions heretofore or
concurrently being complied with.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements of the parties contained herein and for other good
PAGE 1
<PAGE>
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Assignor and Assignee agree as follows:
SECTION 1. DEFINITIONS
Capitalized terms used but not defined herein shall have the meanings
specified in the Participation Agreement.
SECTION 2. SALE AND ASSIGNMENT
Subject to the terms and conditions of the Agreement, Assignor does hereby
sell, assign and transfer to Assignee at the Effective Time on the Closing Date
(in each case, as defined below) (a) all of Assignor's right, title and interest
in, to and under the Trust Estate and the Lessor Documents, and (b) excluding
the Letter Agreement Paragraph and the Owner Participant Guaranty, all of
Assignor's right, title and interest, if any, in, to and under each other
Operative Document (collectively, but excluding the Letter Agreement Paragraph,
the Owner Participant Guaranty and Reserved Rights (as defined below), the
"TRANSFERRED INTERESTS"); provided, that Assignor hereby reserves, and nothing
--------
herein shall be construed as a sale, assignment or transfer, of the following
(collectively, "RESERVED RIGHTS"): any of the rights, titles and interests of
Assignor in and to each and every indemnity or other payment, and each and every
obligation to provide insurance (other than casualty insurance relating to loss
of or damage to the Aircraft), on behalf or in favor of Assignor, under the
Lessor Documents or any other operative Document to the extent that such
indemnities, payments, and obligations relate to losses accruing prior to 12:32
p.m., Las Vegas time (the "EFFECTIVE TIME"), on December 15, 1997 (the "CLOSING
DATE") (it being agreed that Assignor retains all obligations related to
Reserved Rights); provided further, that such sale, assignment and transfer
shall be effective only upon the satisfaction or waiver, on or prior to the
Effective Time on the Closing Date, of the conditions set forth in Section 7,
such satisfaction to be evidenced by Assignor's acceptance from Assignee of the
Purchase Price (as defined in Section 4) and by the filing, or the release for
filing, with the FAA pursuant to the Act of the Assignment and Assumption
Agreement (FAA) (as defined in Section 5(a)).
The closing of the transactions contemplated hereby and by the Assignment
and Assumption Agreement (FAA) shall take place at the Effective Time on the
closing Date at McCarran International Airport, Las Vegas, Nevada, with
additional activities taking place at the offices of Perkins Coie, 607
Fourteenth Street, N.W., Washington, D.C. 20005, or at such other location as
Assignor and Assignee shall agree.
<PAGE>
SECTION 3. PURCHASE AND ASSUMPTION
Subject to the terms and conditions of this Agreement, Assignee does hereby
(i) purchase and accept the Transferred Interests, (ii) assume all the duties,
liabilities and obligations of Assignor in respect of the Transferred Interests
(except as described below) and (iii) confirms that it shall be deemed a party
to each Lessor Document, and agrees to be bound by all the terms and conditions
of each thereof and to undertake all of the obligations of Assignor contained in
the Lessor Documents, the Owner Participant Documents and other Operative
Documents as though originally named therein in place of Assignor, to the extent
of the right, title or interest being conveyed hereby or by the Assignment and
Assumption Agreement (FAA); provided, that Assignor shall remain liable for the
--------
duties, liabilities and obligations of Assignor vesting or relating to events
prior to the Effective Time on the Closing Date; provided further, that such
----------------
purchase, acceptance and assumption shall be effective only upon the
satisfaction or waiver, on or prior to the Effective Time on the Closing Date,
of the conditions set forth in Section 8, such satisfaction to be evidenced by
Assignee's payment to Assignor of the Purchase Price and by filing, or the
release for filing, with the FAA pursuant to the Act of the Assignment and
Assumption Agreement (FAA). Except as otherwise expressly provided herein
(including without limitation Section 12(d)), the assumption contemplated hereby
shall release Assignor from duties, liabilities and obligations under the
Operative Documents in respect of the Transferred Interests.
SECTION 4. PURCHASE PRICE
The purchase price for the Transferred Interests shall be $5,671,120.11
(the "PURCHASE PRICE"); at or prior to the Effective Time on the Closing Date,
Assignee shall pay the Purchase Price by wire transfer of immediately available
funds to:
Citibank, N.A.
399 Park Avenue
New York, New York 10043
Account No.: 00023608
ABA No.: 021000089
Attention: Mr. Brian Todd,
tel. (302) 323-5918
in the name of RGL-2 Corporation, identified as "Sale of Equity Interest (1993
737 C)" or by such other means or to such other account at another institution
as the parties may agree.
PAGE 3
<PAGE>
SECTION 5. REPRESENTATIONS AND WARRANTIES OF ASSIGNOR
Assignor makes the following representations and warranties to Assignee,
Lessee, Mortgagee, Certificate Holders, GE and Owner Trustee, in its capacity as
such and in its individual capacity:
(a) ORGANIZATION, ETC.
Assignor is a corporation duly organized and validly existing in good
standing under the laws of its jurisdiction of organization and is in good
standing in the state in which its principal business operations are located,
and has the corporate power and authority to carry on its business as now
conducted, to own or hold under lease its properties and to enter into and
perform its obligations under this Agreement and the Assignment and Assumption
Agreement (1993 737 C) substantially in the form of Exhibit A hereto (the
"ASSIGNMENT AND ASSUMPTION AGREEMENT (FAA)"; together with this Agreement, the
"ASSIGNOR AGREEMENTS").
(b) CORPORATE AUTHORIZATION; APPROVALS; EXECUTION AND DELIVERY;
NON-CONTRAVENTION
The Assignor Agreements have been duly authorized by all necessary
corporate action on the part of Assignor, do not require any approval not
already obtained of stockholders of Assignor or any approval or consent not
already obtained of any trustee or holders of any indebtedness or obligations of
Assignor, and have been duly executed and delivered by Assignor, and neither the
execution and delivery thereof by Assignor, nor the consummation of the
transactions contemplated thereby by Assignor, nor compliance by Assignor with
any of the terms and provisions thereof will contravene any law, judgment,
government rule, regulation or order applicable to or binding on Assignor (it
being understood that no representation or warranty is made with respect to
laws, rules or regulations relating to aviation or to the nature of the
equipment owned by Owner Trustee, other than such laws, rules or regulations
relating to the citizenship requirements of Assignor under applicable aviation
law) or contravene or result in any breach of or constitute any default under,
or result in the creation of any Lien (other than the Lien of the Trust
Indenture) upon the Trust Estate under, any indenture, mortgage, chattel
mortgage, deed of trust, conditional sales contract, bank loan or credit
agreement, corporate charter, bylaw or other agreement or instrument to which
Assignor is a party or by which it or its properties may be bound or affected.
(c) VALID AND BINDING AGREEMENTS
Assuming the due authorization, execution and delivery by the other party
or parties thereto, each of the Assignor Agreements constitutes a legal, valid
and binding
PAGE 4
<PAGE>
obligation of Assignor enforceable against Assignor in accordance with the terms
thereof.
(d) APPROVALS
Neither the execution and delivery by Assignor of this Agreement or the
Assignment and Assumption Agreement (FAA), nor the consummation by Assignor of
any of the transactions contemplated hereby or thereby, requires the consent or
approval of, the giving of notice to, the registration with, the recording or
filing of any document with, or the taking of any other action in respect of,
any federal or other governmental authority or agency, expect those contemplated
by the Assignor Agreements (it being understood that no representation or
warranty is made with respect to laws, rules or regulations relating to aviation
or to the nature of the equipment owned by Owner Trustee, other than such laws,
rules or regulations relating to the citizenship requirements of Assignor under
applicable United States aviation law).
(e) LITIGATION
There are no pending or, to the knowledge of Assignor, threatened actions
or proceedings against Assignor or The Boeing Company, a Delaware corporation
("ASSIGNOR PARENT"), before any court or administrative agency which, if
determined adversely to Assignor or Assignor Parent, would materially adversely
affect the financial condition of Assignor or Assignor Parent or the ability of
Assignor to perform its obligations under the Assignor Agreements or Assignor
Parent to perform its obligations under the Assignor Parent Guaranty (as defined
in Section 8(c)).
(f) NO LIENS
On the Closing Date, there will be no Lessor Liens (including for this
purpose Liens that would be Lessor Liens but for the proviso to the definition
of Lessor Liens) attributable to Assignor or any Affiliate thereof. To the
Knowledge of Assignor, there are no other Liens (other than Permitted Liens) in
respect of all or any part of the Trust Estate.
(g) CITIZENSHIP
On the date hereof and on the Closing Date, Assignor is and will be, as the
case may be, a "citizen of the United States" as defined in Section 40102(a)(15)
of part A of subtitle VII of title 49, United States Code and the FAA
regulations thereunder (a "CITIZEN OF THE UNITED STATES").
Page 5
<PAGE>
(h) EVENT OF DEFAULT
There exists no Default or Event of Default (in each case, as defined in
the Trust Indenture) caused by or attributable to Assignor or any Affiliate
thereof. To the knowledge of Assignor there exists no Lease Default, Lease
Event of Default (in each case, as defined in the Trust Indenture), and, as to
acts or omissions of Persons other than Assignor, no Default or Event of Default
(as so defined).
(i) EVENT OF LOSS
To the knowledge of Assignor, there exists no Event of Loss or event which,
with notice or passage of time, or both, would constitute an Event of Loss.
(j) OWNERSHIP AND ENCUMBRANCES
Assignor is the sole beneficial owner of the Transferred Interests. Except
as expressly contemplated by the Operated Documents, Assignor has not previously
sold, assigned, encumbered, transferred or conveyed, and, except as contemplated
hereby, has no obligation to sell, assign, encumber, transfer or convey, any of
its right, title or interest in, to or under the Transferred Interests. At the
closing hereunder, Assignor will convey to Assignee all of the right, title and
interest of Assignor in, to and under the Transferred Interests.
(k) BROKERS' FEES
Assignee is not liable for the fees of any broker or other Person acting on
Assignor's behalf in connection with the transactions contemplated hereby.
(l) OPERATIVE DOCUMENTS
Except for (i) paragraph 3 of that certain letter agreement dated the
Delivery Date (the "LETTER AGREEMENT PARAGRAPH") between Lessee and Assignor
which is a portion of a Lessee Document that is no longer in effect with respect
to the Owner Participant after the Effective Time on the Closing Date and is not
otherwise effective with respect to the Transferred Interests, and (ii) the
Owner Participant Guaranty, each of which Assignor is not delivering to
Assignee, Assignor has provided Assignee with true and complete copies of the
Lessor Documents and each other Operative Document and other closing document
delivered to it on the Delivery Date. Except for this Agreement and any
agreement required hereunder, there are no other documents or agreements
relating to the Aircraft, the subject matter of the Operative Documents or the
transactions contemplated hereby to which Assignee is not a party that will
affect or bind Assignee after the Effective Time on the Closing Date.
<PAGE>
(m) COMPLIANCE
Assignor has complied with, or received a waiver from the appropriate
parties for, the requirements of Assignor contained in the Operative Documents,
including without limitation Section 8(1) of the Participation Agreement, to
permit Assignor to transfer the Transferred Interests to Assignee.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF ASSIGNEE
Assignee makes the following representations and warranties to Assignor,
Lessee, Mortgagee, Certificate Holders, GE and Owner Trustee, in its capacity as
such and in its individual capacity:
(a) ORGANIZATION, ETC.
Assignee is a banking corporation, duly organized and validly existing in
good standing under the laws of its jurisdiction of incorporation and is in good
standing in the state in which its principal business operations are located,
and has the corporate power and authority to carry on its business as now
conducted, to own or hold under lease its properties and to enter into and
perform its obligations under this Agreement, the Assignment and Assumption
Agreement (FAA) and the Lessor Documents.
(b) CORPORATE AUTHORIZATION
This Agreement and the Assignment and Assumption Agreement (FAA) have been
duly authorized by all necessary corporate action on the part of Assignee, do
not require any approval not already obtained of stockholders of Assignee or any
approval or consent not already obtained of any trustee or holders of any
indebtedness or obligations of Assignee, and have been duly executed and
delivered by Assignee, and neither the execution and delivery thereof by
Assignee, nor the consummation of the transactions contemplated thereby or by
the Lessor Documents by Assignee, nor compliance by Assignee with any law,
judgment, governmental rule, regulation or order applicable to or binding on
Assignee (it being understood that no representation or warranty is made with
respect to laws, rules or regulations relating to aviation or to the nature of
the equipment owned by Owner Trustee, other than such laws, rules or regulations
relating to the citizenship requirements of Assignee under applicable aviation
law) or contravene or result in any breach of or constitute any default under,
or result in the creation of any Lien (other than Liens provided for or
otherwise permitted in the Operative Documents) upon the Trust Estate under, any
indenture, mortgage, chattel mortgage, deed of trust, conditional sales
contract, bank loan or credit agreement, corporate charter, bylaw or other
agreement or instrument to which Assignee is a party or by which it or its
properties may be bound or affected.
<PAGE>
(c) VALID AND BINDING AGREEMENTS
Assuming the due authorization, execution and delivery by the other party
or parties thereto, this Agreement, the Assignment and Assumption Agreement
(FAA) and the Lessor Documents constitute the legal, valid and binding
obligations of Assignee enforceable against Assignee in accordance with the
respective terms thereof.
(d) APPROVALS
Neither the execution and delivery by Assignee of this Agreement or the
Assignment and Assumption Agreement (FAA), nor the consummation by Assignee of
any of the transactions contemplated hereby, thereby or by the Lessor Documents,
requires the consent or approval of, the giving of notice to, the registration
with, the recording or filing of any document with, or the taking of any other
action in respect of, any federal or other governmental authority or agency,
except those contemplated by this Agreement and the Assignment and Assumption
Agreement (FAA) (it being understood that no representation or warranty is made
with respect to laws, rules or regulations relating to aviation or to the nature
of the equipment owned by Owner Trustee, other than such laws, rules or
regulations relating to the citizenship requirements of Assignee under
applicable United States aviation law).
(e) LITIGATION
There are no pending or, to the knowledge of Assignee, threatened actions
or proceedings against Assignee before any court or administrative agency which,
if determined adversely to Assignee, would materially adversely affect the
financial condition of Assignee or the ability or Assignee to perform its
obligations under this Agreement, the Assignment and Assumption Agreement (FAA)
or the Lessor Documents.
(f) NO LIENS
On the Closing Date, there will be no Lessor Liens (including for this
purpose Liens that would be Lessor Liens but for the provision to the definition
of Lessor Liens) attributable to Assignee or any Affiliate thereof.
(g) CITIZENSHIP
On date hereof and on the Closing Date, Assignee is a Citizen of the United
States.
<PAGE>
(h) INVESTMENT BY ASSIGNEE; SECURITIES LAW
Assignee is acquiring the Transferred Interests, including, without
limitation, its interest in the Trust Estate, with no present intent to make any
resale or distribution thereof which would require registration under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), and Assignee will not
offer or sell its interest in a manner which would require registration under
the Securities Act (subject nonetheless to any requirement of law that the
disposition of its properties shall at all times be and remain within its
control), and neither Assignee nor anyone acting on Assignee's behalf has
directly or indirectly offered any interest in the Trust Estate or any Loan
Certificates or any similar securities for sale to, or solicited any offer to
acquire any of the same from, anyone in a manner which would result in a
violation of the Securities Act.
(i) ERISA
No part of the funds to be used by Assignee to acquire its interests in the
Trust. Estate to be acquired by it under this Agreement and the Assignment and
Assumption Agreement (FAA) constitutes "plan assets" of any "employee benefit
plan" within the meaning of ERISA or of any "plan" within the meaning of Section
4975(e)(1) of the Code, as interpreted by the Department of Labor.
(j) BROKER'S FEES
No Person's acting on behalf of Assignee other than D'Accord Financial
Services, Inc. and TransCapital Corporation (the "Brokers") are or will be
entitled to any broker's fee, commission or finder's fee in connection with the
transactions contemplated hereby, and any such fees payable to the Brokers shall
be paid by Assignee.
(k) COMPLIANCE; TRANSFEREE
Assignee has complied with all requirements of Assignee contained in the
Operative Documents, including without limitation Section 8(l) of the
Participation Agreement, to permit Assignor to transfer the Transferred
Interests to Assignee. Assignee is, and meets all the requirements of, a
"Transferee" as defined in such Section 8(l).
SECTION 7. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ASSIGNOR
The obligation of Assignor to sell and assign the Transferred Interests to
Assignee on the Closing Date is subject to the Satisfaction or waiver of the
following conditions:
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(a) PURCHASE PRICE
Assignee shall have paid the Purchase Price in the manner specified in
Section 4.
(b) DUE AUTHORIZATION, EXECUTION AND DELIVERY
This Agreement and the Assignment and Assumption Agreement (FAA) shall have
been duly authorized, executed and delivered by Assignee and, assuming due
execution and delivery by Assignor, the Assignment and Assumption Agreement
(FAA) shall have been duly filed or, if the FAA Aircraft Registry is not then
open, released for filing, with the FAA pursuant to the Act.
(c) AFFIDAVIT OF CITIZENSHIP
An affidavit of United States citizenship substantially in the form of
Exhibit B hereto (the "AFFIDAVIT OF CITIZENSHIP") shall have been duly
authorized, executed, notarized and delivered by an authorized official of
Assignee, and shall have been duly filed or, if the FAA Aircraft Registry is not
then open, released for filing, with the FAA pursuant to the Act.
(d) REPRESENTATIONS AND WARRANTIES
The representations and warranties of Assignee contained herein shall be
true and correct as of the Closing Date with the same force and effect as though
such representations and warranties had been made as of the Closing Date.
(e) CORPORATE MATTERS
Assignor shall have received copies of (i)(A) the Certificate of
Incorporation and By-Laws of Assignee, and (B) resolutions of the Board of
Directors of Assignee duly authorizing the execution, delivery and performance
by Assignee of this Agreement and the Assignment and Assumption Agreement (FAA)
and the performance of its obligations under the Lessor Documents, in each case
certified by the Secretary or an Assistant Secretary of Assignee as of the
Closing Date, together with (ii) an incumbency certificate as to the person or
persons authorized to execute and deliver this Agreement and the Assignment and
Assumption Agreement (FAA) on behalf of Assignee, duly executed by the
Secretary or an Assistant Secretary of Assignee as of the Closing Date.
(f) ADDITIONAL INFORMATION
Assignor shall have received such other documents and evidence with respect
to Assignee as Assignor may reasonably request in order to establish the
authority of
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Assignee to consummate the transactions contemplated by this Agreement, the
consummation of the transactions contemplated by this Agreement, the taking of
all appropriate corporate action in connection therewith and compliance with the
conditions set forth in this Agreement.
(g) ILLEGALITY
On the Closing Date, the performance of the transactions contemplated
hereby, upon the terms and conditions set forth herein, shall not, in the
reasonable judgement of Assignor, violate, and shall not subject Assignor to any
penalty or liability under, any law, rule or regulation binding upon Assignor.
(h) NO PROCEEDINGS
On the Closing Date, no legal or governmental action, suit or proceeding
shall have been instituted or threatened before any court, administrative
agency or tribunal, nor shall any order, judgment or decree have been issued or
proposed to be issued by any court, administrative agency or tribunal to set
aside, restrain, enjoin or prevent the consummation of this Agreement or the
transactions contemplated hereby.
(i) COMPLIANCE WITH OPERATIVE DOCUMENTS
Assignee shall have complied with all requirements of Assignee under the
Operative Documents for transfer of the Transferred Interests, such that
Assignor shall be released from all duties, liabilities and obligations under
the Participation Agreement, the Trust Agreement, the Tax Indemnity Agreement
and all other Operative Documents in respect of the Transferred Interests
accruing or arising from and after the Effective Time on the Closing Date.
(j) NO EVENT OF LOSS
On the Closing Date, there shall not exist an Event of Loss.
(k) OPINIONS
Assignor shall have received opinions reasonably satisfactory to Assignor,
dated the Closing Date, from (i) Buchalter, Nemer, Fields & Younger, special
counsel to Assignee, and (ii) Lytle Soule & Curlee, special FAA counsel in
Oklahoma City ("SPECIAL FAA COUNSEL"), in each case with respect to such matters
and to such effect as Assignor shall reasonably request, which shall include, in
the case of the opinion referred to in clause (i) above, the opinions required
by Sections 8(l)(ii) and 8(l)(R) of the Participation Agreement (other than, in
the case of any opinion required under
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such Section 8(1)(R), as such requirement relates to Section 8(1)(O) of the
Participation Agreement).
SECTION 8. Conditions Precedent to the Obligations of Assignee
The obligation of Assignee to purchase the Transferred Interests from
Assignor and assume the obligations related thereto are subject to the
satisfaction or waiver of the following conditions:
(a) Operative Documents
The Operative Documents other than the Letter Agreement Paragraph and the
Owner Participant Guaranty shall be in full force and effect.
(b) Due Authorization, Execution and Delivery
This Agreement and the Assignment and Assumption Agreement (FAA) shall have
been duly authorized, executed and delivered by Assignor, and, assuming due
execution and delivery by Assignee, the Assignment and Assumption Agreement
(FAA) shall have been duly filed, or, if the FAA Aircraft Registry is not then
open, released for filing, with the FAA pursuant to the Act.
(c) Assignor Parent Guaranty
A guaranty of certain obligations of Assignor hereunder substantially in
the form of Exhibit C hereto (the "Assignor Parent Guaranty"), shall have been
duly authorized, executed and delivered by Assignor Parent.
(d) Certificate of Lessee
Lessee shall have provided to Assignee a certificate of an officer of
Lessee as to the signer's knowledge of the existence of any condition or event
which constitutes a Default or Event of Default.
(e) Representations and Warranties
The representations and warranties of Assignor contained herein shall be
true and correct as of the Closing Date with the same force and effect as though
such representations and warranties had been made as of the Closing Date.
(f) Corporate Matters
Assignee shall have received copies of (i)(A) the Certificate of
Incorporation and By-Laws of Assignor, (B) resolutions of the Board of Directors
of Assignor duly
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authorizing the execution, delivery and performance by Assignor of the Assignor
Agreements and (C) related resolutions of the shareholder of Assignor, in each
case certified by an Assistant Secretary of Assignor as of the Closing Date,
together with (ii) an incumbency certificate as to the person or persons
authorized to execute and deliver the Assignor Agreements on behalf of Assignor,
duly executed by an Assistant Secretary of Assignor as of the Closing Date.
(g) ADDITIONAL INFORMATION
Assignee shall have received such other documents and evidence with
respect to Assignor as Assignee may reasonably request in order to establish the
authority of Assignor to consummate the transactions contemplated by this
Agreement, the consummation of the transactions contemplated by this Agreement,
the taking of all appropriate corporate action in connection therewith and
compliance with the conditions set forth in this Agreement.
(h) ILLEGALITY
On the Closing Date, the performance of the transactions contemplated
hereby, upon the terms and conditions set forth herein, shall not, in the
reasonable judgement of Assignee, violate, and shall not subject Assignee to
any penalty or liability under, any law, rule or regulation binding upon
Assignee.
(i) NO PROCEEDINGS
On the Closing Date, no legal or governmental action, suit or proceeding
shall have been instituted or threatened before any court, administrative agency
or tribunal, nor shall any order, judgment or decree have been issued or
proposed to be issued by any court, administrative agency or tribunal to set
aside, restrain, enjoin or prevent the consummation of this Agreement or the
transactions contemplated hereby.
(j) COMPLIANCE WITH OPERATIVE DOCUMENTS
Assignor shall have complied with all requirements of Assignor under the
Operative Documents for transfer of the Transferred Interests.
(k) NO EVENT OF LOSS
On the Closing Date, there shall not exist an Event of Loss.
(l) NO DEFAULTS
On the Closing Date, after giving effect to the consummation of the
transactions contemplated hereby, there shall not exist any Lease Default, Lease
Event
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<PAGE>
of Default, Default or Event of Default, as each such term is defined in the
Trust Indenture.
(m) OPINIONS
Assignee shall have received opinions reasonably satisfactory to
Assignee, dated the Closing Date, from (i) Perkins Coie, special counsel to
Assignor, (ii) Andrea J. Brantner, Esq., Counsel, Office of the General Counsel
of Boeing, and (iii) Special FAA Counsel, in each case with respect to such
matters and to such effect as Assignee shall reasonably request.
(n) INSURANCE
Assignee shall have received a broker's report and insurance certificates
from Lessee's independent aircraft insurance broker substantially in the form of
the report and certificates delivered on the Delivery Date pursuant to Section
4(a)(xxi) of the Participation Agreement, with Assignee included as an
Additional Insured thereunder.
SECTION 9. PAYMENTS
Assignor hereby covenants and agrees promptly to pay over to Assignee, if
and when received, any amounts paid to or for the benefit of Assignor that
constitute Transferred Interests, and until so paid over any such amounts
received by Assignor shall be received and held by Assignor in trust for
Assignee. Assignee hereby covenants and agrees promptly to pay over to Assignor,
if and when received, any amounts paid to or for the benefit of Assignee that
constitute Reserved Rights, and until so paid over any such amounts received by
Assignee shall be received and held by Assignee in trust for Assignor.
SECTION 10. CERTAIN NOTICES
Assignor hereby covenants and agrees promptly to forward to Assignee any
notice Assignor receives from any party to any Operative Document (other than
Assignee) pursuant to and in accordance with this Agreement, the Assignment and
Assumption Agreement (FAA), the Lessor Documents, or any other Operative
Document except to the extent solely related to Reserved Rights. Assignee hereby
covenants and agrees promptly to forward to Assignor any notice Assignee
receives from any party to any Operative Document (other than Assignor) pursuant
to and in accordance with this Agreement, the Assignment and Assumption
Agreement (FAA), the Lessor Documents, or any other Operative Document related
to the Reserved Rights.
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SECTION 11. FURTHER ASSURANCES
Each party agrees, upon the reasonable request of the other party, at any
time and from time to time, promptly to execute and deliver all such further
documents, and promptly to take and forbear from all such action, as may be
reasonably necessary or appropriate in order more effectively to confirm or
carry out the provisions of this Agreement.
SECTION 12. TAXES AND INDEMNITIES
(a) TRANSFER TAXES
Assignee hereby covenants and agrees that Assignee shall pay any and all
sales taxes, use taxes and similar transfer taxes (including, without
limitation, any charges, such as gross receipts taxes, in lieu thereof)
(collectively, "TRANSFER TAXES"), and any registration, document or filing fees,
that may be imposed in connection with the sale, assignment and transfer of the
Transferred Interests, including, without limitation, those relating to the
transfer of rights and other interests in and to, and the assumptions of
duties, liabilities and obligations in, to and under this Agreement, the
Assignment and Assumption Agreement (FAA), the Transferred Interests, the
Aircraft and the Operative Documents.
(b) ASSIGNEE'S TAX INDEMNITY
Assignee hereby covenants and agrees to indemnify, protect, defend, save
and keep harmless Assignor, on an after tax basis, against all fees, duties,
taxes, levies, charges or withholdings of any kind or nature whatever, and any
penalties, fines or interest thereon in addition thereto ("TAXES") that are
imposed with regard to the Transferred Interests with respect to any actions,
omissions, events or occurrences arising during any period after the Effective
Time on the Closing Date; provided however, that Assignee shall not be required
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to indemnify Assignor under this Section 12(b) for any net income or Washington
State business and occupation taxes imposed with respect to the sale, assignment
and transfer of the Transferred Interests.
(c) ASSIGNOR'S TAX INDEMNITY
Except as expressly provided elsewhere herein, Assignor hereby covenants
and agrees to indemnify, protect, defend, save and keep harmless, Assignee, on
an after-tax basis, from and against any and all fees, duties, taxes, levies,
charges or withholdings of any kind or nature whatsoever, and any penalties,
fines, or interest thereon or other additions thereto, which at any time or from
time to time may be imposed on or with respect to, or asserted against, the
Transferred Interests, the Aircraft or any part thereof or any interest therein,
or Assignee, by any federal, state,
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local or foreign government or taxing authority in connection with or relating
to this Agreement, the Assignment and Assumption Agreement (FAA), the
Transferred Interests, the Aircraft and the Operative Documents, and which are
attributable to the period prior to the Effective Time on the Closing Date, or
to acts, omissions, events or occurrences arising prior to the Effective Time
on the Closing Date; provided that Assignor shall not be required to pay or
--------
indemnify Assignee for taxes on or measured by the net income of Assignee.
(d) ASSIGNOR'S INDEMNITY
Assign hereby covenants and agrees upon demand of Assignee to pay and
assume liability for, and indemnify, protect, defend, save and keep harmless
Assignee, on an after-tax basis, from and against any and all liabilities,
taxes, fees, duties, charges, withholdings, obligations, losses, damages,
settlements, claims, actions, suits, penalties, costs and expenses (including,
without limitation, reasonable fees and expenses of counsel) of whatsoever kind
and nature which may at any time or from time to time be imposed upon, incurred
by or asserted against Assignee or any of its Affiliates, successors, agents,
servants, representatives, directors or officers in any way relating to,
resulting from or arising out of (i) any inaccuracy or breach of any
representation or warranty made by Assignor under this Agreement or the
Assignment and Assumption Agreement (FAA), (ii) any inaccuracy or breach of any
representation or warranty made by Assignor under the Operative Documents in
respect of or to the extent attributable to the period prior to the Effective
Time on the Closing Date or (iii) any failure by Assignor to have observed or
performed any of its obligations under or in connection with the Operative
Documents in respect of or to the extent attributable to the period prior to the
Effective Time on the Closing Date.
(e) ASSIGNEE'S INDEMNITY
(i) Assignee hereby covenants and agrees upon demand of Assignor to pay
and assume liability for, and indemnify, protect, defend, save and keep
harmless, Assignor, on an after-tax basis, from and against any and all
liabilities, taxes, fees, duties, charges, withholdings, obligations, losses,
damages, settlements,claims,actions, suits, penalties, costs and expenses
(including, without limitation, reasonable fees and expenses of counsel) of
whatsoever kind and nature which may at any time or from time to time be imposed
upon, incurred by or asserted against Assignor or any of its Affiliates, agents,
servants, representatives, directors or officers in any way relating to,
resulting from or arising out of any inaccuracy or breach of any representation
or warranty made by Assignee under this Agreement or the Assignment and
Assumption Agreement (FAA), or any failure by Assignee to have observed or
performed any of its obligations under or in connection with the Operative
Documents
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in respect of or to the extent attributable to the period from and after the
Effective Time on the Closing Date.
(ii) Assignee hereby acknowledges and agrees that in the event Assignee
shall cause any of the Operative Documents to be modified or amended as a result
of any action of Assignee in a manner that has an adverse effect upon the
Reserved Rights as of the Effective Time on the Closing Date, Assignee shall
indemnify, protect, defend, save and keep harmless, Assignor to the same extent
as if such modification or amendment had not occurred.
(f) NOTICE OF CLAIMS
Each of Assignor and Assignee agrees to provide written notification to the
other party promptly after becoming aware of any liability, obligation or claim,
whether pending or threatened, that is the subject of indemnification pursuant
to this Section 12; provided that the failure by either party to so notify the
--------
other party will not in any manner affect either party's obligations under this
Section 12.
SECTION 13. MISCELLANEOUS
(a) NOTICES
All notices, demands, declarations and other communications required by
this Agreement shall be in writing and shall be effective (i) if given by
facsimile, when transmitted, (ii) if given by registered or certified mail,
three Business Days after being deposited with the U.S. Postal Service and
(iii) if given by a nationally recognized overnight courier, when received, or,
if personally delivered, when so delivered, addressed:
If to Assignor, to:
c/o The Boeing Company
7755 East Marginal Way South
Seattle, Washington 98108
Attention: Treasurer
M/S 68-34
Facsimile: (425) 237-8746
or to such other address as Assignor shall from time to time designate
in writing to Assignee; and
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If to Assignee, to:
General Bank
800 West Sixth Street
Los Angeles, California 90017
Attention: Mr. Peter E. Lowe
Executive Vice President
and Chief Financial Officer
Facsimile: (213) 972-4294
or to such other address as Assignee may from time to time
designate in writing to Assignor.
(b) CONFIDENTIALITY
Assignor and Assignee each agree to use its best efforts, acting
reasonably and diligently, to treat this Agreement and the terms hereof as
confidential and not to disclose, without the prior written consent of the
other, the terms hereof to any other Person except (i) to such party's
directors, officers, partners, employees, legal counsel, accountants, auditors,
financial advisors and/or other professionals and consultants who agree to hold
such information confidential, but only to the extent such party deems such
disclosure necessary or appropriate to accomplish the proper business purposes
of such party, (ii) to any accountants or auditors retained by such party who
agree to hold such information confidential, if and when such disclosure is
necessary in connection with the examination and reporting on the books and
records and/or the financial condition of such party, and then only to the
extent necessary, (iii) if and when such party is required to do so pursuant to
any order, subpoena, summons, or other legal process issued by any court,
governmental body, or governmental investigator, by which it is legally bound to
produce the same, and then only to the extent so required, (iv) if and when such
party is required to do so pursuant to any order, directive, or request by any
governmental agency having supervisory authority over its operations and
administration and then only to the extent so required, or (v) to such party's
successors and assigns who agree to hold such information confidential.
Notwithstanding any provision to the contrary contained in this Section
13(b), Assignor and Assignee, and each of them, shall not be prohibited from
making any disclosure with respect to the terms hereof, which may be disclosed
in any public records of any kind or otherwise in the public domain (except as
a result of a disclosure by such party in violation of this Section 13(b)).
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(c) HEADINGS
Headings used herein are for convenience only and shall not in any way
affect the construction of, or be taken into consideration in interpreting, this
Agreement.
(d) REFERENCES
Any reference to a specific Section or Section number shall be interpreted
as a reference to that Section of this Agreement unless otherwise expressly
provided.
(e) GOVERNING LAW
THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO PRINCIPLES OF
CONFLICTS OF LAW.
(f) SEVERABILITY
If any provision hereof should be held invalid, illegal or unenforceable in
any respect in any jurisdiction, then, to the fullest extent permitted by law,
(i) all other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be construed in order to carry out the intentions of the
parties hereto as nearly as may be possible, and (ii) such invalidity,
illegality or unenforceability shall not affect the validity, legality or
enforceability of such provision in any other jurisdiction.
(g) AMENDMENTS IN WRITING
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, or any consent to any departure by Assignor or
Assignee from any provison hereof, shall in any event be effective unless the
same shall be in writing and signed by Assignor and Assignee, and each such
amendment, modification, waiver, termination or discharge shall be effective
only in the specific instance and for the specific purpose for which given;
provided, that in no event shall Assignor and Assignee amend, modify or waive
- --------
Sections 3, 6, 13(e), 13(o) or this Section 13(g) without the prior written
consents of Owner Trustee, Lessee, GE and Mortgagee, which consents shall not
be unreasonably withheld or delayed. No provision of this Agreement shall be
varied, contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by Assignor and Assignee.
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(h) Survival
Notwithstanding anything contained herein to the contrary, all agreements,
indemnities, representations and warranties contained in this Agreement shall
survive the Effective Time on the closing Date and the expiration or other
termination hereof.
(i) Expenses
Each of Assignor and Assignee shall be responsible for its own costs and
expenses incurred in connection with the negotiation, execution and delivery of
this Agreement, the Assignment and Assumption Agreement (FAA) and any other
agreements, documents, certificates and instruments relating hereto and thereto,
and shall not have any right of reimbursement or indemnity for such costs and
expenses as against the other party; provided, that, as between Assignor and
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Assignee, (i) Assignor shall be responsible for all of the fees and expenses of
Special FAA Counsel and (ii) Assignee shall be responsible for any Aircraft
appraisal prepared for Assignee.
(j) Execution in Counterparts
This Agreement and any amendments, waivers or consents hereto may be
executed by Assignor and Assignee in separate counterparts (or upon separate
signature pages bound together into one or more counterparts), each of which,
when so executed and delivered, shall be an original, but all such counterparts
shall together constitute one and the same instrument.
(k) Entire Agreement
This Agreement and the Assignment and Assumption Agreement (FAA), on and as
of the date hereof, constitute the entire agreement of Assignor and Assignee
with respect to the subject matter hereof or thereof, and all prior or
contemporaneous understandings or agreements, whether written or oral, between
Assignor and Assignee with respect to such subject matter are hereby superseded
in their entirety.
(l) Exhibits
The exhibits attached hereto are incorporated by reference herein and shall
have the same force and effect with respect to the provisions set forth therein
as though fully set forth in this Agreement.
(m) Successors and Assigns
This Agreement shall be binding upon, shall inure to the benefit of and
shall be enforceable by Assignor and Assignee, and their respective successors
and assigns.
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(n) RECOVERY OF COSTS AND FEES
If any suit or action arising out of or related to this Agreement is
brought by either party, the prevailing party shall be entitled to recover the
costs and fees (including without limitation reasonable attorneys' fees)
incurred by such party in such suit or action, including without limitation any
post-trial or appellate proceeding, or in the collection or enforcement or any
judgment or award entered or made in such suit or action.
(o) THIRD PARTY BENEFIT; INDEMNIFICATION OF LESSEE
Assignor and Assignee agree that the provisions of this Agreement,
including, without limitation, Section 3, are for the sole benefit of Assignor,
Assignee, Owner Trustee, Lessee, GE, Mortgagee (and with respect to Section 6,
Certificate Holders) and their respective successors and assigns, and are not
for the benefit, directly or indirectly, of any other Person. Assignor further
agrees, for the sole benefit of Lessee, that, in accordance with Section 8(l) of
the Participation Agreement (i) Assignor hereby assumes the risk of any loss of
Interest Deductions and MACRS Deductions or any Inclusion Event (each as defined
in the Tax Indemnity Agreement) resulting directly from the transfer of the
Transferred Interest to Assignee and (ii) Assignor hereby indemnifies Lessee for
any loss of tax benefits to or increase in the tax liability of Lessee as a
result of the transfer of the Transferred Interests to Assignee (it being
understood that this is not intended to require that Assignor indemnify Lessee
against an indemnity obligation of Lessee to Assignee under either: (A) the Tax
Indemnity Agreement, or (B) Section 7(b) of the Participation Agreement, in each
case that is greater than the indemnity obligation that would have been owing to
Assignor because of a difference in the circumstances of Assignor and Assignee).
PAGE 21
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Purchase, Assignment
and Assumption Agreement (1993 737 C) to be duly executed as of the day and year
first written above.
RGL-2 CORPORATION
By /s/ Anthony V. Simpson
-------------------------
Name: Athony V. Simpson
Title: Assistant Treasurer
GENERAL BANK
By /s/ Peter Lowe
-------------------------
Name: Peter Lowe
Title: EVP & CFO
<PAGE>
-------------------------
EXHIBIT A TO PURCHASE,
ASSIGNMENT AND ASSUMPTION
AGREEMENT (1993 737 C)
-------------------------
ASSIGNMENT AND ASSUMPTION AGREEMENT
(1993 737 C)
ASSIGNMENT AND ASSUMPTION AGREEMENT (1993 737 C), dated December __, 1997
(this "Agreement"), between RGL-2 Corporation, a Delaware corporation
("Assignor"), and General Bank, a California banking corporation ("Assignee").
Capitalized terms used herein without definition shall have the meanings given
them in Section 7.
WHEREAS, pursuant to the transactions contemplated by the Trust Agreement
(1993 737 C), dated as of September 1, 1993 (the "Trust Agreement"), between
Assignor and Wilmington Trust Company ("Owner Trustee"), United Air Lines, Inc.
("Lessee") leased from Owner Trustee one Boeing 737-522 airframe bearing
manufacturer's serial number 26700 and U.S. Registration number N953UA together
with two CFM International, Inc. Model CFM56-3C-1 engines bearing, respectively,
manufacturer's serial numbers 857611 and 856625 (each of which engines has 750
or more rated takeoff horsepower or the equivalent of such horsepower); and
WHEREAS, Assignor desires to transfer to Assignee all its right, title and
interest in, to and under the Trust Estate (excluding Reserved Rights (as
defined below), the "Beneficial Interest"), except for certain rights or
indemnities described in that certain Purchase, Assignment and Assumption
Agreement (1993 737 C) dated as of December 1, 1997 (the "Purchase Agreement")
between Assignor and Assignee ("Reserved Rights") vesting or relating to events
prior to ___:___ _.m., Las Vegas time, on the date hereof (the "Effective
Time");
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements of the parties contained herein, and for other good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, Assignor and Assignee agree as follows:
SECTION 1. Transfer and Assumption.
Assignor does hereby sell, assign and transfer to Assignee the Beneficial
Interest, and Assignee hereby accepts the Beneficial Interest from Assignor.
Assignee agrees that, from and after the execution and delivery hereof, it shall
be bound by all the terms of, and shall have assumed and undertaken to perform
all the obligations
PAGE 1
<PAGE>
(other than obligations relating to Reserved Rights) of the Owner Participant
with respect to the Beneficial Interest.
SECTION 2. EFFECT OF TRANSFER.
Upon the execution and delivery of this Agreement (which shall be deemed to
occur at the Effective Time), Assignee shall be deemed the Owner Participant for
all purposes of the Operative Documents and shall be deemed to have paid that
portion of Lessor's Cost for the Aircraft previously made by Assignor, and
represented by the interest being conveyed, and each reference in any Operative
Document, including without limitation, the Trust Agreement, to "Owner
Participant" shall thereafter be deemed to be Assignee, except with respect to
Reserved Rights. Assignee expressly assumes hereunder all and any liability and
obligation of Assignor accruing or arising under any of the Operative Documents,
including, without limitation, the Trust Agreement, on and after the execution
and delivery of this Agreement.
SECTION 3. NO THIRD PARTY BENEFIT.
Assignor and Assignee agree that the provisions of this Agreement are for
the sole benefit of Assignor, Assignee, Owner Trustee, Lessee, GE, Mortgagee and
their respective successors and assigns, and are not for the benefit, directly
or indirectly, of any other Person.
SECTION 4. NOTICES.
Any notices to the Owner Participant provided for in the Operative Documents
shall be delivered to Assignee at the following address or such other place as
Assignee may designate in accordance with the Operative Documents:
General Bank
800 West Sixth Street
Los Angeles, California 90017
Attention: Mr. Peter E. Lowe
Executive Vice President and
Chief Financial Officer
Facsimile: (213) 972-4294
SECTION 5. HEADINGS.
The headings of the Sections herein are for convenience of reference only
and shall not define or limit any of the terms or provisions hereof.
PAGE 2
<PAGE>
SECTION 6. GOVERNING LAW.
THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT GIVING EFFECT TO PRINCIPLES OF
CONFLICTS OF LAWS.
SECTION 7. DEFINITIONS.
Capitalized terms used herein without definition shall have the meanings
given them in the Trust Agreement.
SECTION 8. EXECUTION IN COUNTERPARTS.
This Agreement and any amendments, waivers or consents hereto may be
executed by Assignor and Assignee in separate counterparts (or upon separate
signature pages bound together into one or more counterparts), each of which,
when so executed and delivered, shall be an original, but all such counterparts
shall together constitute one and the same instrument.
SECTION 9. NOTICE PURPOSES ONLY.
This Agreement is being filed with the FAA for notice purposes only. The
parties hereto are subject to the terms and conditions of the Purchase
Agreement.
PAGE 3
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment and
Assumption Agreement (1993 737 C) to be duly executed as of the day and year
first written above.
RGL-2 CORPORATION
as Assignor
By
--------------------------------
Name:
Title:
GENERAL BANK,
as Assignee
By
--------------------------------
Name:
Title:
<PAGE>
The foregoing Assignment and Assumption
Agreement (1993 737 C) is hereby
acknowledged, agreed and consented to as of the
day and year first above written.
WILMINGTON TRUST COMPANY,
not in its individual capacity,
but solely as Owner Trustee,
Owner Trustee
By
---------------------------------
Name:
Title:
<PAGE>
EXHIBIT B TO PURCHASE
ASSIGNMENT AND ASSUMPTION
AGREEMENT (1993 737 C)
GENERAL BANK
AFFIDAVIT OF CITIZENSHIP
------------------------
STATE OF CALIFORNIA )
) ss.:
COUNTY OF LOS ANGELES )
The undersigned being duly sworn, deposes and says on behalf of General
Bank, a California banking corporation (the "Owner Participant"), that:
1. He is duly elected and qualified officer of General Bank.
2. The Owner Participant is a banking corporation duly organized
under the laws of the State of California.
2. The Owner Participant is a "Citizen of the United States" as
defined in Section 40102(a)(15) of Title 49 of the United States Code.
By:
--------------------------------------------
Name:
Title:
SWORN TO AND SUBSCRIBED before
me this ___ day of December, 1997.
- ------------------------------
Notary Public
My Commission Expires:
- ------------------------------
<PAGE>
-------------------------
EXHIBIT C TO PURCHASE,
ASSIGNMENT AND ASSUMPTION
AGREEMENT (1993 737 C)
-------------------------
GUARANTEE BY
CORPORATE AFFILIATE OF ASSIGNOR
(1993 737 C)
FOR VALUE RECEIVED, The Boeing Company, a Delaware corporation
("GUARANTOR"), pursuant to that certain Purchase, Assignment and Assumption
Agreement (1993 737 C) dated as of December 1, 1997 (the "ASSIGNMENT AND
ASSUMPTION AGREEMENT") between RGL-2 Corporation, a Delaware corporation
("ASSIGNOR"), and General Bank, a California banking corporation (the
"GUARANTEED PARTY"), does hereby unconditionally and irrevocably guarantee to
the Guaranteed Party, (i) the due and punctual performance and observance by
Assignor of each covenant, agreement, undertaking, representation, warranty and
any other obligation or condition binding upon or to be performed or observed by
it under and in accordance with the terms of the Assignment and Assumption
Agreement, (ii) the due and punctual payment of each which Assignor is or may
become obligated to pay under and in accordance with the terms of the
Assignment and Assumption Agreement, and (iii) in the event of any nonpayment or
nonperformance, agrees to pay or perform or cause such payment or performance to
be made upon notice from the Guaranteed Party of such nonpayment or
nonperformance (such payment and other obligations being herein referred to as
the ("OBLIGATIONS"). Guarantor further agrees to pay all reasonable expenses
(including, without limitation, all fees and disbursements of counsel) that may
be paid or incurred by the Guaranteed Party in enforcing any rights with respect
to, or collecting, any or all of the Obligations and/or enforcing any rights
with respect to, or collecting against, Guarantor under this Guarantee. The
obligations of Guarantor to make any payments hereunder shall be subject to the
terms and conditions of the Assignment and Assumption Agreement applicable to
the obligations of Assignor.
Capitalized terms used herein which are defined in the Assignment and
Assumption Agreement are used in this Guarantee as they are so defined.
Guarantor hereby waives notice of acceptance of this Guarantee, and agrees
that, in its capacity as a guarantor, it shall not be required to consent to, or
to receive any notice of, any supplement to or amendment of, or waiver or
modification of the terms of, the Assignment and Assumption Agreement.
Assignor is an "Affiliate" (as that term is defined in the Participation
Agreement) of Guarantor, and this Guarantee is being furnished to induce the
<PAGE>
Guaranteed Party to contract with Assignor as set forth in the Assignment and
Assumption Agreement.
Guarantor represents and warrants that (i) Guarantor is duly incorporated
and validly existing in good standing under the laws of the State of Delaware;
(ii) the execution, delivery and performance of this Guarantee are within
Guarantor's power and authority, do not contravene the charter or the by-laws of
Guarantor or any indenture, mortgage, credit agreement, note, long-term lease or
other material agreement to which Guarantor is a party or by which Guarantor is
bound or any law, governmental rule, regulation, judgment or order binding on
Guarantor; and (iii) this Guarantee has been duly authorized, executed and
delivered on behalf of Guarantor and constitutes a legal, valid, binding and
enforceable obligation of Guarantor.
No failure or delay or lack of demand, notice or diligence in exercising
any right under this Guarantee shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right under this Guarantee.
This Guarantee is an absolute, unconditional and continuing guarantee of
payment and not of collection and Guarantor waives any right to require that any
right to take action against Assignor be exhausted or that resort be made to
any security prior to action being taken against Guarantor.
In the event that this Guarantee, the Assignment and Assumption Agreement
or the Assignment and Assumption Agreement (FAA) shall be terminated, rejected
or disaffirmed as a result of bankruptcy, insolvency, reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
proceedings with respect to Assignor, Guarantor's obligations hereunder shall
continue to the same extent as if the same had not been so terminated, rejected
or disaffirmed. Guarantor shall and does hereby waive all rights and benefits
which might, in whole or in part, relieve Guarantor from the performance of its
duties and obligations by reason of any proceeding as specified in the
preceding sentence, and Guarantor agrees that it shall be liable for all sums
guaranteed, in respect of and without regard to, any modification, limitation or
discharge of the liability of Assignor that may result from any such proceedings
and notwithstanding any stay, injunction or other prohibitions issued in any
such proceedings. Furthermore, the obligation of Guarantor hereunder will not be
discharged by: (a) any extension or renewal with respect to any obligation of
Assignor under the Assignment and Assumption Agreement; (b) any modification of,
or amendment or supplement to, any such agreement; (c) any furnishing or
acceptance of additional security or any release of any security; (d) any
waiver, consent or other action or inaction or any exercise of non-exercise of
any right, remedy or power with respect to Assignor, or any change in the
structure of Assignor;
PAGE 2
<PAGE>
(e) any change in ownership of the shares of capital stock of Guarantor or
Assignor or any other merger or consolidation of either thereof into or with any
other person; or (f) any other occurrence whatsoever, except payment in full of
all amounts payable by Assignor under the Assignment and Assumption Agreement
and performance in full of all Obligations of Assignor in accordance with the
terms and conditions of the Assignment and Assumption Agreement.
Guarantor understands and agrees that its obligations hereunder shall be
continuing, absolute and unconditional without regard to, and Guarantor hereby
waives any defense to, or right to seek a discharge of its obligations hereunder
with respect to (a) the validity, legality, regularity or enforceability of the
Assignment and Assumption Agreement, any of the Obligations or any collateral
security therefor or guarantee or right of offset with respect thereto at any
time or from time to time held by the Guaranteed Party, (b) any defense, setoff
or counterclaim (other than a defense of payment or performance (including
payment or performance attributable to a right of set off provided for in the
Assignment and Assumption Agreement)) that may at any time be available to or be
asserted by Assignor against the Guaranteed Party, or (c) any other
circumstances whatsoever (with or without notice to or knowledge of Assignor or
Guarantor) that constitutes, or might be construed to constitute, an equitable
or legal discharge of Assignor or the Obligations, or of Guarantor under this
Guarantee, in bankruptcy or in any other instance.
Notwithstanding any payment or payments made by Guarantor hereunder or
any setoff or application of funds of Guarantor by the Guaranteed Party,
Guarantor shall not be entitled to be subrogated to any of the rights of the
Guaranteed Party against Assignor or any collateral, security or guarantee or
right of setoff held by the Guaranteed Party for the payment of the Obligations,
nor shall Guarantor seek or be entitled to seek any reimbursement from Assignor
in respect of payments made by Guarantor hereunder, until all amounts and
performance owing to the Guaranteed Party by Assignor on account of the
Obligations are paid and performed in full.
The obligations of Guarantor hereunder shall be automatically reinstated
if and to the extent that any payment by or on behalf of Owner Participant in
respect of any of the Obligations is rescinded or must be otherwise restored by
the Guaranteed Party as a result of any proceedings in bankruptcy or
reorganization or similar proceedings and Guarantor agrees that it will
reimburse the Guaranteed Party on demand for all reasonable costs and expenses
(including, without limitation, fees or counsel) incurred by the Guaranteed
Party in connection with such rescission or restoration. Any provision of this
Guarantee that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such
Page 3
<PAGE>
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
This Guarantee shall be binding upon the successors and assigns of
Guarantor, provided, however, that no transfer, assignment or delegation by
Guarantor without the consent of the Guaranteed Party shall release Guarantor
from its liabilities hereunder. This Guaranty shall terminate and be of no
further force and effect upon the performance and observance in full of the
Obligations.
All notices, requests and demands to or upon Guarantor or any beneficiary
shall be made in accordance with the terms of Section 13(a) of the Assignment
and Assumption Agreement and if delivered to Guarantor shall be addressed to
P.O. Box 3707, Seattle, Washington 98124, Attn: Treasurer, M/S 68-34, Telecopy:
(425) 237-8746, or to such other address as Guarantor shall designate to
Guaranteed Party in writing.
THIS GUARANTEE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
---------------------------------------------------------------------
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF
- ----------------------------------------------------------------------------
CONSTRUCTION,VALIDITY AND PERFORMANCE WITHOUT GIVING EFFECT TO PRINCIPLES OF
- ----------------------------------------------------------------------------
CONFLICTS OF LAW.
- ----------------
PAGE 4
<PAGE>
Dated: December __, 1997
THE BOEING COMPANY
By:
-------------------------
Name:
Title:
<PAGE>
EXHIBIT 11
GBC BANCORP
Computation of Per Share Earnings
with Common Stock Options Outstanding
(Treasury Stock Method)
<TABLE>
<CAPTION>
1997 1996 1995
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Average Shares Outstanding
Common Stock 6,866,000 6,866,000 6,722,000 6,722,000 6,663,000 6,663,000
Common Stock Equivalents
Stock Options - 357,000 - 279,000 - 1,000
Assumed Repurchase of
Treasury Shares - (150,000) - (118,000) - -
Average Common and Common
Equivalent Shares Outstanding 6,866,000 7,073,000 6,722,000 6,883,000 6,663,000 6,664,000
Income before
Extraordinary Item $26,434,000 $26,434,000 $19,037,000 $19,037,000 $7,649,000 $7,649,000
Extraordinary Item $ (488,000) $ (488,000) $ - $ - $ - $ -
Net Income $25,946,000 $25,946,000 $19,037,000 $19,037,000 $7,649,000 $7,649,000
Earnings Per Share:
Income before Extraordinary Item $ 3.85 $ 3.74 $ 2.83 $ 2.77 $ 1.15 $ 1.15
Extraordinary Item $ (0.07) $ (0.07) $ - $ - $ - $ -
Net Income $ 3.78 $ 3.67 $ 2.83 $ 2.77 $ 1.15 $ 1.15
</TABLE>
34
<PAGE>
EXHIBIT 12
GBC BANCORP
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
<TABLE>
<CAPTION>
(Dollars in Thousands)
For the Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income taxes & extraordinary item $40,739 $28,216 $ 9,076 $ 9,325 $17,136
Add:
Interest on deposits 46,848 40,897 34,574 25,505 20,796
Interest on borrowings 2,482 2,746 2,826 3,366 4,183
Portion of rents applicable to interest * - - - - -
Amortization of debt expense, discount and premium 93 18 18 18 18
-------------------------------------------------------------------
Earnings as adjusted (1) $90,161 $71,877 $46,494 $38,214 $42,133
===================================================================
Less:
Interest on deposits 46,848 40,897 34,574 25,505 20,796
-------------------------------------------------------------------
Adjusted earnings excluding interest on deposits (2) $43,314 $30,980 $11,920 $12,709 $21,337
===================================================================
Fixed charges
Interest on deposits $46,848 $40,897 $34,574 $25,505 $20,796
Interest on borrowings 2,482 2,746 2,826 3,366 4,183
Rents:
Total rents net of sublease rental 2,170 2,095 2,177 1,831 2,544
Portion of rents applicable to interest * - - - - -
Amortization of debt expense, discount and premium 93 18 18 18 18
Capitalized interest - - - - -
-------------------------------------------------------------------
Total Fixed Charges (9) $51,592 $45,756 $39,595 $30,720 $27,542
===================================================================
Fixed charges excluding interest on deposits (10) $ 4,745 $ 4,859 $ 5,021 $ 5,215 $ 6,746
-------------------------------------------------------------------
Ratio of earnings to fixed charges (1)/(9) 1.75x 1.57x 1.17x 1.24x 1.53x
-------------------------------------------------------------------
Ratio of earnings to fixed charges
excluding interest on deposits (2)/(10) 9.13x 6.38x 2.37x 2.44x 3.16x
-------------------------------------------------------------------
Amount of coverage surplus (deficiency) $38,569 $26,121 $ 6,899 $ 7,494 $14,591
===================================================================
</TABLE>
* Portion of rents applicable to interest is deemed immaterial
35
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Consolidated net income for GBC Bancorp and subsidiaries (the "Company") for
the year ended December 31, 1997 totaled $25,946,000. This compares to net
earnings of $19,037,000 in 1996 and $7,649,000 in 1995. Diluted earnings per
share were $3.67 for 1997 compared to $2.77 for 1996, and $1.15 for 1995. The
$6,909,000, or 36%, increase in net income from 1996 to 1997 was primarily due
to an increase in net interest income, a lower provision for credit losses and
higher gains on the sale of other real estate owned ("OREO") properties.
Net interest income increased $7,493,000 in 1997 compared to 1996, due
primarily to a $115.4 million increase in average interest earning assets and
a nine basis point increase of the net interest spread. The net interest
spread is defined as the yield on interest earning assets less the rate paid
on interest bearing liabilities.
The provision for credit losses declined $3,500,000 in 1997 compared to 1996
due primarily to the reduction of non-accrual loans and a decrease in net
charge-offs.
Consolidated net income for the year ended December 31, 1996 totaled
$19,037,000 compared to net income of $7,649,000 in 1995. The increase in net
income from 1995 to 1996 resulted primarily from a lower provision for credit
losses of $14,070,000 and an increase in net interest income of $6,272,000.
NET INTEREST INCOME
Net interest income in 1997 totaled $61,473,000 compared to net interest
income of $53,980,000 in 1996. The increase was due to a $115.4 million, or
9.3%, increase in the balance of average interest earning assets to
$1,352.8 million during 1997 from $1,237.4 million and a nine basis point
increase of the net interest spread.
Total interest income for the year ended December 31, 1997, was $110,896,000
compared to $97,641,000 for the year ago period. The $13,255,000, or 13.6%,
increase was due to the growth of average interest earning assets and an
increase of the yield earned thereon.
The composition of the net growth of $115.4 million in the balance of
average interest earning assets included an $88.7 million increase in loans
and leases, a $19.8 million increase in the securities portfolio, and a $6.9
million increase in federal funds sold and securities purchased under
agreements to resell. The growth of average interest earning assets was
primarily funded by an increase of $96.6 million of average deposits. Of this
increase, $87.9 million represented interest-bearing deposits and $8.7 million
represented non-interest bearing demand deposits.
The yield on interest earning assets increased to 8.20% in 1997 from 7.89%
in 1996. The 31-basis point increase is due to the increased percentage of
accruing loans and leases in interest earning assets, a decline in average
non-accrual loans, and an increase in the yield on securities. Average
accruing loans and leases were 44% and 39% of average interest earning assets
for 1997 and 1996, respectively. Average non-accrual loans were $10.0 million
and $30.4 for 1997 and 1996, respectively. The yield on securities was 6.47%
and 6.26% for 1997 and 1996, respectively. Partially offsetting the above was
the reduced yield on accruing loans and leases which was 10.44% and 10.87% for
1997 and 1996, respectively. The reduced yield is primarily due to the
downward pricing of loans in response to market conditions.
Total interest expense for the year ended December 31, 1997, was $49,423,000
compared to $43,661,000 for the year ago period. The $5,762,000, or 13.2%,
increase was due to an $87.9 million increase of average interest bearing
deposits and a 22 basis point increase in the cost of funds. For the year
ended December 31, 1997 and 1996, average interest bearing deposits were
$1,100.7 million and $1,012.8 million, respectively. The cost of funds
increased to 4.38% during 1997 from 4.16% for 1996. This increase was due
primarily to increases in the rates paid on virtually all deposit categories
and the deposit product composition. For the year ended December 31, 1997 and
1996, average time deposits represented 69.2% and 65.9% of average total
interest bearing deposits. Further, the highest costing deposit product, time
certificates of deposit of $100,000 or more, represented 51.9% of average
total interest bearing deposits for 1997 compared to 48.8% of average total
interest bearing deposits for 1996.
Because of the 31 basis point increase of the yield on interest earning
assets and the 22 basis point increase of the cost of funds the net interest
spread increased nine basis points to 3.82% in 1997 from 3.73% in 1996.
The net interest margin, defined as the difference between interest income
and interest expense divided by average interest earning assets, increased to
4.54% in 1997 from 4.36% in 1996. The increase is due to the increased spread
and the funding from non-interest bearing sources.
<PAGE>
Net interest income in 1996 totaled $53,980,000 compared to net interest
income of $47,708,000 in 1995. The increase was due mainly to a $199.3
million, or 19.0%, increase in average interest earning assets to
$1,237.4 million during 1996 from $1,038.1 million during 1995. The
composition of the net increase in average interest earning assets includes a
$30.3 million increase in loans and leases, a $151.1 million increase in the
securities portfolio and a $16.5 million increase in federal funds sold and
securities purchased under agreements to resell.
The growth of average interest earning assets was primarily funded by an
increase of $196.0 million of average deposits. Of this increase, $184.9
million represented interest-bearing deposits and $11.2 million represented
non-interest bearing demand deposits. The net interest income increase
attributed to the volume growth was partially offset by a reduced net interest
spread. For 1996, the net interest spread was 3.73% compared to 3.87% for
1995.
The following table presents the net interest spread, net interest margin,
average balances, interest income and expense, and the average yield/rates by
asset and liability component:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(IN THOUSANDS) BALANCE(5) INTEREST RATE% BALANCE(5) INTEREST RATE% BALANCE(5) INTEREST RATE%
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans and Leases(1)(2) $ 607,286 63,687 10.49% $ 518,603 $53,551 10.33% $ 488,274 $49,533 10.14%
Taxable Securities 603,677 39,067 6.47 582,006 36,434 6.26 427,878 28,193 6.59
Tax-Exempt
Securities(3) 1,438 82 5.67 4,111 261 6.34 7,081 459 6.48
Interest-Bearing
Deposits - - - - - - 49 1 2.05
Federal Funds Sold and
Security Purchased Under
Agreement to Resell 140,270 8,060 5.75 133,334 7,395 5.55 116,820 6,940 5.94
----------- ------- ------ ----------- ------- ------ ----------- ------- ------
TOTAL INTEREST-EARNING
ASSETS $1,352,671 110,896 8.20 1,238,054 97,641 7.89 1,040,102 85,126 8.18
----------- ------- ------ ----------- ------- ------ ----------- ------- ------
NON-INTEREST-EARNING
ASSETS:
Cash and Due from Banks $ 35,913 $ 37,509 $ 36,319
Premises and Equipment,
Net 5,692 6,131 6,017
Other Assets(4) 46,932 44,912 42,285
----------- ----------- -----------
TOTAL NON-INTEREST-
EARNING ASSETS 88,537 88,552 84,621
----------- ----------- -----------
Less: Allowance for
Credit Losses (15,830) (17,154) (21,671)
Deferred Loan Fees (3,735) (3,308) (3,553)
----------- ----------- -----------
Less: Unrealized
Gain/(Loss) on
Securities Available
for Sale 94 (673) (2,035)
----------- ----------- -----------
TOTAL ASSETS $1,421,737 $1,305,471 $1,097,464
=========== =========== ===========
INTEREST-BEARING
LIABILITIES:
Deposits:
Interest-Bearing Demand $ 61,004 $ 805 1.32% $ 64,247 $ 862 1.34% $ 59,625 $ 975 1.64%
Money Market 167,815 4,443 2.65 149,663 3,628 2.42 132,409 3,229 2.44
Savings 110,628 3,031 2.74 131,849 3,563 2.70 140,903 4,484 3.18
Time Deposits 761,277 38,569 5.07 667,047 32,844 4.92 494,973 25,886 5.23
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreement 381 22 5.66 20,918 1,168 5.59 2,959 172 5.81
Other Borrowed Funds - - - - - - 22,521 1,076 4.78
Subordinated Debt 26,467 2,553 9.65 15,000 1,596 10.64 15,000 1,596 10.64
----------- ------- ------ ----------- ------- ------ ----------- ------- ------
TOTAL INTEREST-BEARING
LIABILITIES 1,127,572 49,423 4.38 1,048,724 43,661 4.16 868,390 37,418 4.31
----------- ------- ------ ----------- ------- ------ ----------- ------- ------
NON-INTEREST-BEARING
LIABILITIES:
Demand Deposits $ 140,761 $ 132,088 $ 120,902
Other Liabilities 23,899 18,501 14,120
----------- ----------- -----------
TOTAL NON-INTEREST
BEARING LIABILITIES 164,660 150,589 135,022
----------- ----------- -----------
Total Liabilities 1,292,232 1,199,313 1,003,412
Stockholders' Equity 129,505 106,158 94,052
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,421,737 $1,305,471 $1,097,464
=========== =========== ===========
NET INTEREST
INCOME/SPREAD $61,473 3.82% $53,980 3.73% $47,708 3.87%
======= ======= =======
NET INTEREST MARGIN 4.54% 4.36% 4.59%
</TABLE>
(1) FOR THE PURPOSES OF THESE COMPUTATIONS, NON-ACCRUAL LOANS ARE INCLUDED IN
THE DAILY AVERAGE LOAN AMOUNTS OUTSTANDING. FOR NON-ACCRUAL LOANS,
INTEREST INCOME IS RECORDED ON A CASH BASIS.
(2) LOAN INTEREST INCLUDES LOAN FEES FOR THE YEARS ENDED DECEMBER 31, 1997,
1996 AND 1995 OF $4,554,000, $4,150,000 AND $4,112,000, RESPECTIVELY.
(3) TAX-EXEMPT INTEREST INCOME HAS NOT BEEN ADJUSTED TO A FULLY TAXABLE
EQUIVALENT BASIS.
(4) OTHER ASSETS INCLUDES AVERAGE OTHER REAL ESTATE OWNED, NET, FOR THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995 OF $13,528,000, $11,885,000 AND
$5,710,000, RESPECTIVELY.
(5) AVERAGE BALANCES WERE CALCULATED BASED ON THE AVERAGE OF THE DAILY ENDING
BALANCES.
<PAGE>
The following table sets forth a summary of the changes in interest earned
and paid resulting from changes in volume and changes in rates for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1997 COMPARED 1996 COMPARED
WITH 1996 WITH 1995
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
(IN THOUSANDS) VOLUME RATE NET VOLUME RATE NET
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON(1):
Loans and Leases $ 9,289 $ 847 $10,136 $ 3,119 $ 899 $ 4,018
Taxable Securities(2) 1,381 1,252 2,633 9,709 (1,468) 8,241
Tax-Exempt Securities(2) (154) (25) (179) (188) (10) (198)
Interest-Bearing Deposits - - - (1) - (1)
Federal Funds Sold and
Securities Purchased
Under Agreement to Re-
sell 393 272 665 937 (482) 455
-------- ------- -------- -------- -------- --------
TOTAL INTEREST-EARNING
ASSETS 10,909 2,346 13,255 13,576 (1,061) 12,515
INTEREST PAID ON(1):
Deposits:
Interest-Bearing Demand (43) (14) (57) 72 (185) (113)
Money Market 459 356 815 418 (18) 400
Savings (581) 49 (532) (275) (646) (921)
Time 4,751 974 5,725 8,548 (1,591) 6,957
Federal Funds Purchased
and Securities Sold Un-
der
Repurchase Agreement (1,162) 16 (1,146) 1,002 (6) 996
Other Borrowed Funds - - - (1,076) - (1,076)
Subordinated Debt 1,118 (161) 957 - - -
-------- ------- -------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES 4,542 1,220 5,762 8,689 (2,446) 6,243
-------- ------- -------- -------- -------- --------
CHANGE IN NET INTEREST IN-
COME $ 6,367 $1,126 $ 7,493 $ 4,887 $ 1,385 $ 6,272
======== ======= ======== ======== ======== ========
</TABLE>
(1) CHANGES IN INTEREST INCOME AND INTEREST EXPENSE ATTRIBUTABLE TO CHANGES IN
RATE/VOLUME HAVE BEEN ALLOCATED TO THE CHANGE DUE TO VOLUME AND THE CHANGE
DUE TO RATE IN RELATION TO THE ABSOLUTE DOLLAR AMOUNT OF THE CHANGE IN
EACH.
(2) INTEREST INCOME FROM MUNICIPAL BONDS AND AUCTION PREFERRED STOCKS IS NOT
ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS.
PROVISION FOR CREDIT LOSSES
For 1997, the provision for credit losses was $1,000,000 compared to
$4,500,000 for 1996, representing a decrease of $3,500,000, or 77.8%.
The decline of the provision for credit losses was primarily due to a
decrease in net charge-offs and the continued reduction of non-accrual loans.
As of December 31, 1997, non-accrual loans totaled $9.8 million compared with
$11.7 million and $43.7 million, as of December 31, 1996 and 1995,
respectively.
Net charge-offs for 1997 were $0.4 million compared to $5.0 million for
1996. The $4.6 million, or 92.0%, decline of net charge-offs is the result of
a $2.8 million, or 36.9%, reduction of charge-offs and a $1.8 million, or
71.6%, increase of recoveries from previous charge-offs. The decline of net
charge-offs is a reflection of continuing successful collection efforts, the
recovery of the Southern California economy and the improvement of the
commercial real estate market.
For 1996, the provision for credit losses was $4,500,000 compared to
$18,570,000 for 1995, representing a decrease of $14,070,000, or 75.8%. The
decline of the provision for credit losses was primarily due to the reduction
of non-accrual loans and a decrease in net charge-offs. As of December 31,
1996, non-accrual loans totaled $11.7 million compared with $43.7 million as
of December 31, 1995. Despite the addition of loans to non-accrual status
totaling $26 million, the combination of loans returned to accrual status,
repayments and transfers to other real estate owned , caused the substantial
reduction of non-accrual loans. Net charge-offs for 1996 were $5.0 million
compared to $24.9 million for 1995, a reduction of $19.9 million, or 79.9%.
The decline of net charge-offs was the result of successful collection
efforts, the recovery of the Southern California economy and the improvement
of the commercial real estate market.
<PAGE>
The amount of the provision for credit losses is determined by management
and is based upon the quality of the loan portfolio, management's assessment
of the economic environment, evaluations made by regulatory authorities,
historical loan loss experience, collateral values, assessment of borrowers'
ability to repay, and estimates of potential future losses. Please refer to
the discussion "Allowance for Credit Losses", following.
NON-INTEREST INCOME
Non-interest income consists primarily of service charges on deposit
accounts, gain/loss on sale of securities, fees and commissions collected from
the Bank's international activities, fees from servicing Small Business
Administration (SBA) loans, and fees received from escrow services.
Non-interest income in 1997 totaled $6,639,000, representing an increase of
$566,000, or 9.3%, over $6,073,000 of non-interest income in 1996. The
increase was due to the $239,000 growth of service charges and commissions and
the absence of net loss on the sale and write-down of securities available for
sale. In 1996, there was a write-off from securities available for sale of a
$250,000 note deemed worthless.
Non-interest income in 1996 totaled $6,073,000, representing an increase of
$31,000, or 0.5%, over $6,042,000 of non-interest income in 1995. There were
no significant changes in any of the categories of non-interest income.
NON-INTEREST EXPENSE
Non-interest expense decreased $964,000, or 3.5%, from $27,337,000 in 1996
to $26,373,000 in 1997. The decrease was primarily due to net income from OREO
sales after OREO expenses partially offset by increased salaries and employee
benefits. For, 1997 OREO expenses of $1,893,000 were more than offset by net
gains on the sale of OREO totaling $2,705,000. The $2,953,000 increase in
salaries and employee benefits was primarily due to a $1,704,000 increase of
incentive compensation, which is based on income before income taxes and
extraordinary items, and a $902,000 increase in salary expense. The increase
in salary expense is due to both salary increases in 1997 and an increased
number of employees. For the year ending December 31, 1997 and 1996, the
average of the monthly full time equivalent number of employees was 315 and
306, respectively.
Also contributing to the decrease in non-interest expense was a $1,262,000,
or 17.4%, decline of other expense from $7,260,000 for the year ended December
31, 1996 to $5,998,000 for the year ended December 31, 1997. This decrease was
primarily due to reduced legal fees. For the year ended December 31, 1997 and
1996, legal fees were $510,000 and $1,372,000, respectively. The reduction of
legal fees was primarily due to the decrease of non-performing assets.
Non-interest expense increased $1,233,000, or 4.7%, from $26,104,000 in 1995
to $27,337,000 in 1996. Salaries and employee benefits increased $2,400,000 in
1996, representing a 21.4% increase. Of this increase, $1,989,000 was due to
the increase of bonus accrual directly related to the higher level of pre-tax
income earned.
The increase of salaries and employee benefits was partially offset by a
$734,000 decrease of net other real estate owned expense, and a $394,000
reduction of other expense.
The reduced net other real estate owned expense was due to decreases in all
expense categories of OREO and the inclusion of a net gain from the sales of
properties amounting to $441,000 compared to a net gain of $163,000 for 1995.
The decrease of other expense was $394,000 comparing 1996 to 1995. Other
expense is comprised of a number of expense classifications such as office
supplies and communication expense, professional services expense, FDIC
assessment expense and real estate investment expense. The net reduction of
other expense was primarily due to the decreased cost of the Bank's FDIC
insurance in 1996 from $1,299,000 to $150,000, partially offset by an increase
in legal fees. The reduced FDIC insurance expense was the result of the
upgrading of the Bank's rating for deposit insurance purposes and a decrease
in the rate structure for all insured depository institutions. The increase of
legal fee expense was related to the resolution of problem credits.
PROVISION FOR INCOME TAXES
For 1997, the Company's provision for income taxes was $14,305,000, an
increase of $5,126,000, or 55.8%, from $9,179,000 recorded in 1996. The
effective tax rate in 1997 was 35.1% as compared to 32.5% in 1996. The
increased effective tax rate was due primarily to the reduced level of low
income housing ("LIH") tax credits as a percentage of pre-tax income. For
1997, the LIH tax credit was $2,254,000, compared to $1,878,000 in 1996.
For 1996, the Company's provision for income taxes was $9,179,000, an
increase of $7,752,000, or 543%, from
<PAGE>
$1,427,000 recorded in 1995. The effective tax rate in 1996 was 32.5% as
compared to 15.7% in 1995. The increased effective tax rate was due to the
reduced level of low income housing ("LIH") tax credits as a percentage of
pre-tax income. For 1996, the LIH tax credit was $1,878,000 compared to
$2,093,000 in 1995.
EXTRAORDINARY ITEM
During the third quarter, 1997, the Company incurred an $841,000 prepayment
premium for the early extinguishment of its $15 million subordinated debt. The
prepayment premium, net of taxes of $353,000, is included in the consolidated
statements of income as an extraordinary item amounting to $488,000 for the
year ended December 31, 1997.
FINANCIAL CONDITION
The Company's assets totaled $1,509.4 million as of December 31, 1997,
representing an increase of $157.3 million, or 11.6%, over the $1,352.1
million total assets as of December 31, 1996. The asset growth was primarily
funded by an increase of total deposits of $90.3 million, an increase of $23.7
million of subordinated debt, and an increase in stockholders' equity of
$29.7 million.
The asset growth was reflected in all categories of interest-earning assets
with the exception of the lower yielding federal funds sold and securities
purchased under agreements to resell. Investment securities reflected the
largest growth, increasing by $169.6 million. Loans and leases increased $36.5
million and non-earning assets decreased by $15.2 million.
LOANS AND LEASES
The growth of loans and leases to $638.8 million as of December 31, 1997,
from $602.4 million as of December 31, 1996 represents a 6.1% increase.
Excluding loans to depository institutions, which decreased from $50 million
as of December 31, 1996, to zero as of December 31, 1997, loans and leases
increased $86.5 million, or 15.7%. This growth was primarily reflected in the
Bank's commercial and real estate loans portfolios. The loan growth is in line
with management's intentions for increasing the percentage of loans in earning
assets of the Company and reflects the improvement of the California economy.
The largest growth component of the portfolio was commercial loans. As of
December 31, 1997, these loans totaled $233.3 million compared to $183.3
million as of December 31, 1996, representing a $50.0 million, or 27.3%
growth. As of December 31, 1997, commercial loans represented 36.5% of the
total loan portfolio compared to 30.4% as of December 31, 1996.
Conventional real estate loans are loans, other than construction loans,
secured by first trust deeds or junior real estate liens. As of December 31,
1997, conventional real estate loans totaled $276.4 million, or 43.3%, of the
total loan portfolio. As of December 31, 1996 conventional real estate loans
outstanding were $273.1 million, or 45.3%, of the total loan portfolio.
Construction loans are real estate loans secured by first trust deeds. As of
December 31, 1997, construction loans totaled $90.6 million, or 14.2%, of the
total loan portfolio. As of December 31, 1996, construction loans totaled
$66.6 million, or 11.1%, of the total loan portfolio.
The Company limits the loan to value ratio on conventional real estate and
construction loans to a maximum of 75% of the appraised value. Management
believes that the Company's underwriting guidelines, including collateral
requirements, and the underlying values of real estate collateral, provide the
Company with protection against future losses on non-performing conventional
real estate and construction loans.
<PAGE>
The following table sets forth the breakdown by type of collateral for
construction and conventional real estate loans as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
CONVENTIONAL CONVENTIONAL
CONSTRUCTION REAL ESTATE CONSTRUCTION REAL ESTATE
PROJECT TYPE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE LOANS PERCENTAGE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL:
Single-Family $57,551 64% $ 33,064 12% $18,913 28% $ 38,688 14%
Townhouse 3,751 4 1,154 1 745 1 3,970 2
Condominiums 9,648 11 4,564 2 28,855 44 6,587 2
Multi-Family 857 1 44,584 16 6,784 10 39,204 14
Land Development - - 2,001 - - - 158 -
------- ---- -------- ---- ------- ---- -------- ----
TOTAL RESIDENTIAL $71,807 80% $ 85,367 31% $55,297 83% $ 88,607 32%
------- ---- -------- ---- ------- ---- -------- ----
NON-RESIDENTIAL:
Warehouse $ 2,130 2% $ 33,485 12% $ 2,617 4% $ 30,254 11%
Retail Facilities 16,246 18 69,529 25 8,658 13 58,304 22
Industrial Use - - 23,334 8 - - 20,398 7
Office - - 24,407 9 - - 34,333 13
Hotel and Motel - - 35,788 13 - - 38,178 14
Other 377 - 4,440 2 - - 3,006 1
------- ---- -------- ---- ------- ---- -------- ----
TOTAL NON-RESIDENTIAL $18,753 20% $190,983 69% $11,275 17% $184,473 68%
------- ---- -------- ---- ------- ---- -------- ----
TOTAL $90,560 100% $276,350 100% $66,572 100% $273,080 100%
======= ==== ======== ==== ======= ==== ======== ====
</TABLE>
Substantially all of the collateral securing construction and conventional
real estate loans is located in California.
Commercial loans include $21.7 million of unsecured commercial loans, $39.8
million of SBA loans of which $19.7 million are government sponsor-guaranteed,
and $171.8 million of trade financing loans. The growth of commercial loans
totaling $50.0 million was due to trade-financing loans which increased $55.8
million. The improvement of the California economy and the growth in
international trade was primarily responsible for this growth.
Trade financing loans are made by the Bank's International Division which,
in addition to granting loans to finance the import and export of goods
between the United States and countries in the Pacific Rim, also provides
letters of credit and other related services. The Bank does not make loans to
foreign banks, foreign governments or their central banks, or commercial and
industrial loans to entities domiciled outside of the United States, except
for the extension of overdraft privileges to its foreign correspondent banks
on a limited, case by case, basis. All transactions are U.S. dollar
denominated. Please refer to the section Recent Developments, following.
Other loans are primarily comprised of loans secured by the Bank's time
deposits. Other loans totaled $24.0 million and $22.4 million, as of December
31, 1997 and 1996, respectively.
Leveraged leases are comprised primarily of two aircraft leveraged leases.
In December 1997, the Company purchased a leveraged lease on a Boeing 737 with
a fair value of $24 million and a remaining estimated economic life of 28
years. The lease term ends in March, 2016, however, the lessee has an early
buy out option in the year 2011. The Company's equity investment is $6.3
million. The aircraft is subject to $17.8 million of third-party financing in
the form of long-term debt that provides for no recourse against the Company
and is secured by a first lien on the aircraft. The residual value at the end
of the full-term lease is estimated to be $5.5 million.
In December 1996, the Company purchased a leveraged lease on a Boeing 737
with a fair value of $24.2 million and a remaining estimated economic life of
30 years. The lease term is through the year 2012. As of December 31, 1997,
the aircraft is subject to $18.3 million of third-party financing in the form
of long-term debt that provides for no recourse against the Company and is
secured by a first lien on the aircraft. The residual value at the end of the
lease term is estimated to be $7.6 million.
For federal income tax purposes, the Company has the benefit of tax
deductions for depreciation on the entire leased asset and for interest paid
on the long-term debt. Deferred taxes are provided to reflect the temporary
differences associated with the leveraged leases.
<PAGE>
In addition to the two aircraft leveraged leases, the Company has two other
leveraged leases included in loans and leases totaling $0.7 million as of
December 31, 1997.
In the ordinary course of business, the Bank has granted loans to certain
directors and companies with which they are associated. In the opinion of
management, these loans were made on substantially the same terms, including
interest rates and collateral requirements, as those prevailing at the same
time for comparable transactions with other customers. Please refer to note 5
of notes to consolidated financial statements.
The following table sets forth the gross amount of loans outstanding in each
category as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $233,309 $183,268 $151,709 $132,806 $126,098
Real Estate-Construction 90,560 66,572 53,423 60,610 79,513
Real Estate-Conventional 276,350 273,080 239,016 281,225 270,566
Installment 54 86 231 377 434
Other Loans 23,993 22,362 22,310 25,699 28,455
Leveraged Leases 14,563 6,986 255 273 290
Loans to Depository Institutions - 50,000 5,000 - -
-------- -------- -------- -------- --------
TOTAL $638,829 $602,354 $471,944 $500,990 $505,356
======== ======== ======== ======== ========
</TABLE>
The following table shows the maturity schedule of the Company's loans
outstanding as of December 31, 1997, which are based on the remaining
scheduled repayments of principal. Non-accrual loans of $9.8 million are
included in the within one year category:
<TABLE>
<CAPTION>
AFTER
ONE BUT MORE
WITHIN WITHIN THAN
ONE FIVE FIVE
(IN THOUSANDS) YEAR YEARS YEARS TOTAL
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $187,043 $ 8,597 $ 37,669 $233,309
Real Estate-Construction 53,126 37,434 - 90,560
Real Estate-Conventional 43,773 136,168 96,409 276,350
Installment 12 42 - 54
Other Loans 23,943 50 - 23,993
Leveraged Leases - 735 13,828 14,563
-------- -------- -------- --------
TOTAL $307,897 $183,026 $147,906 $638,829
======== ======== ======== ========
</TABLE>
As of December 31, 1997, excluding non-accrual loans, loans and leases
scheduled to be repriced within one year, after one but within five years, and
in more than five years, are as follows:
<TABLE>
<CAPTION>
AFTER MORE
WITHIN ONE BUT THAN
ONE WITHIN FIVE
(IN THOUSANDS) YEAR FIVE YEARS YEARS TOTAL
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Total Fixed Rate $ 44,256 $82,150 $92,348 $218,754
Total Variable Rate 410,241 - - 410,241
-------- ------- ------- --------
TOTAL $454,497 $82,150 $92,348 $628,995
======== ======= ======= ========
</TABLE>
<PAGE>
The balance of loans and leases includes loans held for sale totaling $2.7
million as of December 31, 1997. During 1997, approximately $40 million of
loans held for sale were originated and sold. As of December 31, 1997,
approximately $53 million of loans were serviced by the Bank on behalf of
third parties. In October, 1997 management decided to discontinue its
operation of originating fixed rate residential mortgage loans for sale in the
secondary markets. The impact of winding down this operation was immaterial to
the Company's financial condition and results of operations as of and for the
year ended December 31, 1997. Accordingly, no residential loans are currently
being originated or purchased for sale. The Bank continues to service those
loans it has sold with servicing rights retained.
NON-PERFORMING ASSETS
A certain degree of risk is inherent in the extension of credit. Management
believes that it has credit policies in place to assure minimizing the level
of loan losses and non-performing loans. The Company performs a quarterly
assessment of the credit portfolio to determine the appropriate level of the
allowance. Included in the assessment is the identification of loan
impairment. A loan is identified as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
loan agreement. Loan impairment is measured by estimating the expected future
cash flows and discounting them at the respective effective interest rate or
by valuing the underlying collateral.
The Company has a policy of classifying loans (including impaired loans)
which are 90 days past due as to principal and/or interest as non-accrual
loans unless management determines that the fair value of underlying
collateral value is substantially in excess of the loan amount or
circumstances justify treating the loan as fully collectible. After a loan is
placed on non-accrual status, any interest previously accrued, but not yet
collected, is reversed against current income. 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, other real estate owned and restructured loans
as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan 90 Days or More Past Due and
Still Accruing $ 2,778 $ 6,779 $ 9 $ 999 $ 4,059
Non-accrual Loans 9,834 11,719 43,712 46,672 22,033
------- ------- ------- ------- -------
Total Past Due Loans 12,612 18,498 43,721 47,671 26,092
Restructured Loans 20,323 23,125 10,151 20,865 11,898
------- ------- ------- ------- -------
Total Non-performing and Restructured
Loans 32,935 41,623 53,872 68,536 37,990
Other Real Estate Owned, Net 7,871 12,988 7,686 5,051 15,541
------- ------- ------- ------- -------
TOTAL NON-PERFORMING ASSETS $40,806 $54,611 $61,558 $73,587 $53,531
======= ======= ======= ======= =======
NON-PERFORMING ASSETS TO
PERIOD END LOANS AND LEASES, NET,
PLUS OTHER REAL ESTATE OWNED, NET 6.52% 9.17% 13.39% 15.35% 10.60%
======= ======= ======= ======= =======
NON-PERFORMING ASSETS TO TOTAL ASSETS 2.70% 4.04% 5.11% 6.80% 5.59%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Total non-performing assets decreased to $40.8 million as of December 31,
1997, from $54.6 million as of December 31, 1996, representing a $13.8
million, or 25.3% reduction. The decline is the result of decreases in all
categories of non-performing assets.
PAST-DUE LOANS
Loans 90 days or more past due and still accruing totaled $2.8 million, as
of December 31, 1997, down from $6.8 million, as of December 31, 1996. The
balance of $2.8 million is comprised of three borrowers. One borrower with
$500,000 outstanding has paid off in full subsequent to December 31, 1997. The
second borrower with a $900,000 loan has had the loan renewed with no
concessions. The Bank has committed to renew the notes totaling $1.4 million
of the third borrower.
NON-ACCRUAL LOANS
The following table analyzes the $1.9 million, or 16.1%, decline of non-
accrual loans during the year ended December 31, 1997:
<TABLE>
(IN THOUSANDS) 1997
- ------------------------------------------------
<S> <C>
Balance at December 31, 1996 $11,719
Add:Loans Placed on Non-accrual Status 17,476
Less:Charge-offs (3,056)
Returned to Accrual Status (3,134)
Repayments (8,197)
Transferred to OREO (4,974)
--------
BALANCE AT DECEMBER 31, 1997 $ 9,834
========
</TABLE>
The following table breaks out the Company's non-accrual loans by loan
category as of December 31, 1997 and 1996:
<TABLE>
(IN THOUSANDS) 1997 1996
- ----------------------------------------
<S> <C> <C>
Commercial $5,957 $ 3,219
Real Estate-Construction 455 477
Real Estate-Conventional 3,414 8,023
Installment 8 -
------ -------
TOTAL $9,834 $11,719
====== =======
</TABLE>
The effect of non-accrual loans outstanding as of year-end on interest
income for the years 1997, 1996 and 1995 is presented below:
<TABLE>
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------
<S> <C> <C> <C>
Contractual Interest Due $ 1,954 $ 2,526 $ 6,969
Interest Recognized (1,041) (1,470) (1,098)
-------- -------- --------
NET INTEREST FOREGONE $ 913 $ 1,056 $ 5,871
======== ======== ========
</TABLE>
Contractual interest due is based on original loan amounts. Any partial
charge-offs are not considered in the determination of contractual interest
due.
RESTRUCTURED LOANS
The balance of restructured loans as of December 31, 1997, was $20.3 million
compared to $23.1 million as of December 31, 1996, representing a $2.8
million, or 12.1%, 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 December 31, 1997,
restructured loans consisted of fifteen real estate credits. This compares to
sixteen real estate credits as of December 31, 1996. As of December 31, 1997,
all restructured loans were on accrual status. The weighted average yield of
the restructured loans as of December 31, 1997, was 10.18%.
The following table breaks out the restructured loans by accrual status as
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------
<S> <C> <C>
(IN THOUSANDS) 1997 1996
- ---------------------------------------
Restructured Loans:
On Accrual Status $20,323 $23,125
On Non-accrual Status - 2,820
------- -------
TOTAL $20,323 $25,945
======= =======
</TABLE>
As of December 31, 1997, there are no commitments to lend additional funds
to borrowers associated with restructured loans.
The effect of restructured loans outstanding as of year-end on interest
income for the years ended December 31, 1997, 1996 and 1995 is presented
below:
<TABLE>
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------
<S> <C> <C> <C>
Contractual Interest Due $ 2,242 $ 3,709 $ 1,713
Interest Recognized (1,853) (3,113) (1,150)
-------- -------- --------
NET INTEREST FOREGONE $ 389 $ 596 $ 563
======== ======== ========
</TABLE>
<PAGE>
OTHER REAL ESTATE OWNED
Other real estate owned, net of valuation allowance of $2.1 million, totaled
$7.9 million, representing a decrease of $5.1 million, or 39.4%, from the
balance of $13.0 million, net of valuation allowance of $1.8 million, as of
December 31, 1996. As of December 31, 1997, OREO consisted of 17 properties,
down from 26 properties as of December 31, 1996.
The following is an analysis of the change in gross OREO (OREO before
valuation allowance):
<TABLE>
<S> <C>
Beginning balance, December 31, 1996 $14,811,000
Additions 4,562,000
Dispositions (9,442,000)
------------
ENDING BALANCE, DECEMBER 31, 1997 $ 9,931,000
============
</TABLE>
The net gain realized on the sales for 1997 was $2,705,000 compared to
$441,000 for 1996.
The outstanding OREO properties are all included in the Bank's market area.
They include single family residences, condominiums, multi-family residences,
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 type of property as of the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------
(IN THOUSANDS) 1997 1996
- --------------------------------------------
<S> <C> <C>
PROPERTY TYPE
Single-Family Residential $ 380 $ 901
Condominium 2,598 6,284
Multi-Family Residential 220 -
Land for Residential 3,715 1,413
Land for Commercial - 735
Land for Agriculture 15 -
Retail Facilities 3,003 5,228
Office - 250
Less: Valuation Allowance (2,060) (1,823)
-------- --------
TOTAL $ 7,871 $12,988
======== ========
</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 $17.1 million of outstanding
impaired loans as of December 31, 1997, $12.5 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:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
- ----------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Recorded Investment with
Related Allowance $16,095 $21,210 $45,862
Recorded Investment with no Related Allowance 1,022 2,303 -
------- ------- -------
Total Recorded Investment $17,117 $23,513 $45,862
Allowance on Impaired Loans 1,544 2,011 5,803
------- ------- -------
NET RECORDED INVESTMENT IN IMPAIRED LOANS $15,573 $21,502 $40,059
======= ======= =======
Average Total Recorded Investment in Impaired Loans $22,370 $35,725 $44,206
Interest Income Recognized $ 1,508 $ 2,067 $ 808
</TABLE>
Of the amount of interest income recognized in 1997, 1996 and 1995 no
interest was recognized under the cash basis method.
Management cannot predict the extent to which the current economic
environment, including the real estate market, may improve or worsen, or the
full impact such environment may have on the Bank's loan portfolio.
Furthermore, as the Bank's primary regulators review the loan portfolio as
part of their routine, periodic examinations of the Bank, their assessment of
specific credits may affect the level of the Bank's non-performing loans.
Accordingly, there can be no assurance that other loans will not be placed on
non-accrual, become 90 days or more past due, have terms modified in the
future, or become OREO.
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
As of December 31, 1997, the balance of the allowance for credit losses was
$16.8 million, representing 2.63% of outstanding loans and leases. This
compares to an allowance for credit losses of $16.2 million as of December 31,
1996, representing 2.69% of outstanding loans and leases.
The ratio of the allowance to non-performing and restructured loans improved
to 50.9% as of December 31, 1997 from 38.9% as of December 31, 1996. In
addition, the allowance as a percentage of non-accrual loans increased to 171%
as of December 31, 1997 from 138% as of December 31, 1996. Management believes
that the allowance for credit losses is adequate to cover known and inherent
losses related to loans and leases outstanding as of December 31, 1997.
A detailed analysis of the Company's allowance for credit losses, the
recoveries on loans previously charged off, and the amount of loans and leases
charged off is summarized in the following table:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $16,209 $16,674 $23,025 $11,977 $ 7,503
CHARGE-OFFS:
Commercial 3,848 1,492 2,219 1,917 937
Real Estate 803 5,810 23,293 3,848 3,695
Installment and Other 47 148 8 37 493
------- ------- ------- ------- -------
TOTAL CHARGE-OFFS 4,698 7,450 25,520 5,802 5,125
------- ------- ------- ------- -------
RECOVERIES:
Commercial 491 315 43 423 83
Real Estate 3,723 2,139 553 218 201
Installment and Other 51 31 3 15 15
------- ------- ------- ------- -------
TOTAL RECOVERIES 4,265 2,485 599 656 299
------- ------- ------- ------- -------
Net Charge-offs 433 4,965 24,921 5,146 4,826
Provision Charged to Operating Ex-
penses 1,000 4,500 18,570 16,194 9,300
------- ------- ------- ------- -------
BALANCE AT END OF YEAR $16,776 $16,209 $16,674 $23,025 $11,977
======= ======= ======= ======= =======
Ratio of Net Charge-offs to Average
Loans and Leases Outstanding 0.07% 0.96% 5.10% 1.01% 1.00%
======= ======= ======= ======= =======
Allowance for Credit Losses to
Year-End Loans and Leases 2.63% 2.69% 3.53% 4.60% 2.37%
======= ======= ======= ======= =======
Allowance for Credit Losses to
Non-accrual Loans 170.59% 138.31% 38.15% 49.33% 54.36%
======= ======= ======= ======= =======
Allowance for Credit Losses to
Non-performing and Restructured Loans 50.94% 38.94% 30.95% 33.60% 31.53%
======= ======= ======= ======= =======
Provision for Credit Losses Divided by
Net Charge-offs 230.95% 90.63% 74.52% 314.69% 192.71%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Although the Company does not normally allocate the allowance for credit
losses to specific loan categories, an allocation to the major categories has
been made for purposes of this report as set forth in the following table.
These allocations are estimates based on historical loss experience and
management's judgment. The allocation of the allowance for credit losses is
not necessarily an indication that the charge-offs will occur, or if they do
occur, that they will be in the proportion indicated in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
(DOLLARS IN
THOUSANDS) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 6,538 36.5% $ 4,664 30.4% $ 4,239 32.2% $ 3,651 26.5% $ 2,405 25.0%
Real Estate -
Construction 1,852 14.2 2,796 11.1 928 11.3 2,232 12.1 1,206 15.7
Real Estate -
Conventional 7,478 43.2 8,337 45.3 11,167 50.6 16,809 56.2 7,217 53.5
Installment 1 - 1 - 3 0.1 4 0.1 9 0.1
Other Loans 372 3.8 313 3.7 280 4.7 327 5.1 384 5.6
Leveraged Leases 535 2.3 98 1.2 - - - - - 0.1
Loans to Depository
Institutions - - - 8.3 - - - - - -
Unallocated - - - - 57 1.1 2 - 756 -
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
TOTAL $16,776 100.0% $16,209 100.0% $16,674 100.0% $23,025 100.0% $11,977 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
(1) AMOUNT REPRESENTS THE ALLOCATED PORTION OF THE ALLOWANCE FOR CREDIT LOSSES
TO THE CREDIT CATEGORIES FOR EACH RESPECTIVE YEAR.
(2) PERCENTAGE INDICATED REPRESENTS THE PROPORTION OF EACH LOAN CATEGORY TO
TOTAL LOANS FOR EACH RESPECTIVE YEAR.
SECURITIES
The Company classifies its securities as held to maturity or available for
sale. Securities classified as held to maturity are those that the Company has
the positive intent and ability to hold until maturity. These securities are
carried at amortized cost.
Securities that could be sold in response to changes in interest rates,
increased loan demand, liquidity needs, capital requirements or other similar
factors, are classified as securities available for sale. These securities are
carried at fair value, with unrealized gains or losses reflected net of tax in
stockholders' equity.
As of December 31, 1997, the Company recorded net unrealized holding gains
of $2,869,000 on its available for sale portfolio. Included as a separate
component of stockholders' equity is $1,663,000, representing the net
unrealized holding gains, net of tax. As of December 31, 1996, the Company
recorded net unrealized holding gains of $1,120,000 on its available for sale
portfolio. Included as a separate component of stockholders' equity is
$646,000, representing the net unrealized holding gains, net of tax.
There were no sales of securities available for sale for the year ended
December 31, 1997. Proceeds from the sales of securities available for sale
were $41,367,000 for the year ended December 31, 1996. There were no sales of
securities available for sale for the year ended December 31, 1995. There were
no sale of securities held to maturity in 1997, 1996 or 1995.
Gross realized gains on sales of securities were $0, $28,000, and $0, for
1997, 1996, and 1995, respectively. Gross realized losses on sales of
securities were $0, $252,000, and $0, in 1997, 1996, and 1995, respectively.
The 1996 gross realized losses includes the write-off of a $250,000
convertible note deemed worthless.
The Company has increased its holding of U.S. Government agency and asset-
backed securities, while reducing its holdings of auction preferred stocks.
These changes are a result of ongoing management of the investment portfolio
with regard to relative value and sector diversification for securities that
meet eligibility requirements.
<PAGE>
The following table summarizes the carrying value of the Company's securities
held to maturity and securities available for sale for each of the past three
years:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Government Agencies $ 58,003 $ - $ -
State and Municipal Securities - 2,222 6,460
Collateralized Mortgage Obligations 42 56 82
Asset Backed Securities - 9,996 27,011
-------- -------- --------
TOTAL $ 58,045 $ 12,274 $ 33,553
======== ======== ========
SECURITIES AVAILABLE FOR SALE
U. S. Treasuries $ 6,900 $ 1,891 $ 16,944
U.S. Government Agencies 220,392 160,666 223,528
Mortgage Backed Securities 57,493 51,256 62,199
Corporate Notes 9,181 19,594 28,315
Collateralized Mortgage Obligations 188,552 165,798 133,957
Asset Backed Securities 136,973 37,934 -
Auction Preferred Stocks 18,500 72,450 32,200
Other Securities 5,669 10,232 9,998
-------- -------- --------
TOTAL $643,660 $519,821 $507,141
======== ======== ========
</TABLE>
The following table shows the contractual maturities of securities as of
December 31, 1997, and the weighted average yields. The actual maturities of
certain securities are expected to be shorter than the contractual maturities.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN ONE BUT WITHIN BUT WITHIN AFTER TEN
YEAR FIVE YEARS TEN YEARS YEARS TOTAL
(DOLLARS IN MILLIONS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MA-
TURITY
U.S. Government Agen-
cies $ - -% $ 58.01 6.60% $ - -% $ - -% $ 58.01 6.60%
Collateralized Mort-
gage Obligations - - - - 0.04 6.83 - - 0.04 6.83
------- ----- ------- ----- ------ ----- ------- ----- ------- -----
TOTAL SECURITIES HELD
TO MATURITY $ - - $ 58.01 6.60% $ 0.04 6.83% $ - -% $ 58.05 6.61%
======= ===== ======= ===== ====== ===== ======= ===== ======= =====
SECURITIES AVAILABLE
FOR SALE
U. S. Treasuries $ 5.02 6.14% $ 1.88 5.32% $ - -% $ - -% $ 6.90 5.91%
U.S. Government Agen-
cies 63.62 6.15 153.92 6.24 - - 2.86 6.51 220.40 6.22
Mortgage Backed Secu-
rities - - 9.35 6.85 - - 48.14 6.10 57.49 6.22
Corporate Notes 9.18 8.77 - - - - - - 9.18 8.77
Collateralized Mort-
gage Obligations - - - - 27.27 6.21 161.28 6.47 188.55 6.43
Asset Backed Securi-
ties - - - - - - 136.97 6.78 136.97 6.78
Auction Preferred
Stocks 18.50 6.11 - - - - - - 18.50 6.11
Other Securities 5.67 6.18 - - - - - - 5.67 6.18
------- ----- ------- ----- ------ ----- ------- ----- ------- -----
TOTAL SECURITIES AVAIL-
ABLE FOR SALE $101.99 6.38% $165.15 6.27% $27.27 6.21% $349.25 6.54% $643.66 6.43%
======= ===== ======= ===== ====== ===== ======= ===== ======= =====
</TABLE>
The issues are all triple A rated asset backed securities collateralized with
home equity mortgages.
<PAGE>
The following table summarizes the aggregate fair value of securities of any
one issuer which exceeds ten percent of stockholders' equity as of December
31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------------
ISSUER BOOK VALUE FAIR VALUE
---------------------------------------------
<S> <C> <C>
Access Financial Corp. $14,841 $15,008
Advanta Corp 16,135 16,402
Conti Mortgage Corp. 16,059 16,257
Equicredit Corp. 16,489 16,718
Industry Mortgage Co. 16,320 16,508
The Money Store Inc. 15,550 15,736
------- -------
$95,394 $96,629
======= =======
</TABLE>
DEPOSITS
The Company's deposits totaled $1,291.8 million as of December 31, 1997,
representing a $90.3 million, or 7.5%, increase over the $1,201.5 million
total deposits as of December 31, 1996. The largest deposit growth was in
other time deposits which increased $67.9 million, or 41.4%. Time certificates
of deposit of $100,000 or more increased $49.5 million to $595.1 million as of
December 31, 1997, from $545.6 million as of December 31, 1996. Included in
the year end 1997 balance is $78.0 million of deposits from the State of
California. These deposits are collateralized at 110%, as is required for all
public time deposits. The collateral provided is U.S. government agency
issues.
During 1997, average deposits increased to $1,241.5 million from $1,144.9
million during 1996, representing an increase of $96.6 million, or 8.4%.
The following table sets forth the average amount of and the average rate
paid on each of the following deposit categories which are in excess of 10
percent of average total deposits for the years ending December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
% OF % OF
(IN THOUSANDS) AMOUNT TOTAL RATE AMOUNT TOTAL RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Noninterest-Bearing Demand
Deposits $ 140,761 11.34% -% $ 132,088 11.54% -%
Interest-Bearing Demand De-
posits 228,819 18.43 2.29 213,910 18.68 2.10
Saving Deposits 110,628 8.91 2.74 131,849 11.52 2.70
Time Deposits 761,277 61.32 5.07 667,047 58.26 4.92
---------- ------- ----- ---------- ------- -----
TOTAL DEPOSITS $1,241,485 100.00% 4.26% $1,144,894 100.00% 4.04%
========== ======= ===== ========== ======= =====
</TABLE>
The growth of deposits from the Company's customers reflects the continuing
tradition of personalized services. There are no brokered deposits
outstanding. The Company believes that the majority of its deposit customers
have strong ties to the Bank. Although the Company has a significant amount of
time certificates of deposit of $100,000 or more having maturities of one year
or less, the depositors have generally renewed their deposits in the past at
their maturity. Accordingly, the Company believes its deposit source to be
stable. The following table is indicative of the length of the relationship of
depositors of time certificates of deposit of $100,000 or more with the Bank
as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS) 1997 1996
- -----------------------------------------------------
LENGTH OF NO. OF NO. OF
RELATIONSHIP AMOUNT ACCOUNTS AMOUNT ACCOUNTS
- -----------------------------------------------------
<S> <C> <C> <C> <C>
3 years or more $283,489 1,689 $273,062 1,684
2-3 years 77,498 426 56,969 400
1-2 years 89,738 448 102,787 596
Less than 1 year 144,352 277 112,760 587
-------- ----- -------- -----
TOTAL $595,077 2,840 $545,578 3,267
======== ===== ======== =====
</TABLE>
<PAGE>
The maturity schedule of time certificates of deposit of $100,000 or more as
of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997
- -----------------------------------------
<S> <C>
3 Months or Less $292,608
Over 3 Months Through 6 Months 116,360
Over 6 Months Through 12 Months 185,007
Over 12 Months 1,102
--------
TOTAL $595,077
========
</TABLE>
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. The prepayment premium for the early extinguishment
of the debt was $841,000 pre-tax. Net of taxes of $353,000, the premium is
included as an extraordinary item amounting to $488,000.
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, was 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.
CAPITAL RESOURCES
Stockholders' equity totaled $146.3 million as of December 31, 1997, an
increase of $29.7 million, or 25.5%, from $116.6 million as of December 31,
1996. The increase from year-end 1996 to year-end 1997 was due to net income
of $25,946,000, less cash dividends declare to shareholders of $3,307,000 plus
the net change in securities valuation of $1,017,000, and the exercise of
stock options and related tax benefits of $6,033,000.
For the year ended December 31, 1997, the ratio of the Company's average
stockholders' equity to average assets was 9.11%. For the year ended December
31, 1996 the ratio of the Company's average stockholders' equity to average
assets was 8.13%. The increase of this ratio was due to capital increasing
more rapidly than the growth of average assets.
Management is committed to maintaining capital at a sufficient level to
assure shareholders, customers and regulators that the Company is financially
sound. Risk-based capital guidelines issued by regulatory authorities in 1989
assign risk weightings to assets and off-balance sheet items. The guidelines
require a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio
of 8%. Tier 1 capital consists of common stockholders' equity and non-
cumulative perpetual preferred stock, less goodwill and nonqualifying
intangible assets, while total capital includes other elements, primarily
cumulative perpetual, long-term and convertible preferred stock, subordinated
and mandatory convertible debt, plus the allowance for loan losses, within
limitations. The unrealized gain/loss on debt securities available for sale,
net of tax, is not included in either Tier 1 or the total capital computation.
In addition, a minimum Tier 1 leverage ratio of 3% is required for the
highest rated banks. All other state nonmember banks, must meet a minimum
leverage ratio of not less than 4%. This ratio is defined as Tier 1 capital to
average total assets, net of nonqualifying intangible assets, for the most
recent quarter.
During 1992, pursuant to the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA"), the federal banking regulators set forth the
definitions for "adequately capitalized" and "well capitalized" institutions.
An "adequately capitalized" institution is one that meets the minimum
regulatory capital requirements. A "well capitalized" institution is one with
capital ratios as shown in the following table. As of December 31, 1997, the
<PAGE>
Company's and the Bank's Tier 1 capital, total capital and leverage ratios
exceeded the "well capitalized" ratio requirements as follows:
<TABLE>
<CAPTION>
MINIMUM WELL
GBC GENERAL REGULATORY CAPITALIZED
BANCORP BANK REQUIREMENTS REQUIREMENTS
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 13.57% 12.45% 4% 6%
Total 18.47% 13.71% 8% 10%
Leverage Ratio 9.58% 8.78% 4% 5%
</TABLE>
LIQUIDITY AND MARKET RISK
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 auction preferred stocks, federal funds sold and securities purchased
under agreements to resell, unpledged securities held to maturity and maturing
within one year and unpledged securities available for sale. These sources of
liquidity amounted to $696.3 million, or 46.1%, of total assets as of December
31, 1997 compared with $717.2 million, or 53.0%, of total assets as of
December 31, 1996.
To further supplement its liquidity, the Company has established federal
funds lines with correspondent banks and three master repurchase agreements
with major brokerage companies. In August, 1992, the FHLB granted the Bank a
line of credit equal to 25 percent of assets with terms up to 360 months. As
of December 31, 1997, the Company had no borrowings outstanding under this
financing facility with the FHLB. Management believes its liquidity sources to
be stable and adequate.
As of December 31, 1997, total loans and leases represented 49.5% of total
deposits. This compares to 50.1% as of December 31, 1996.
As of December 31, 1997, management is not aware of any information that
would result in or that was reasonably likely to have a material effect on the
Company's liquidity and capital resources.
The liquidity of the parent company, GBC Bancorp, is primarily dependent on
the payment of cash dividends by its subsidiary, General Bank, subject to the
limitations imposed by the Financial Code of the State of California. For
1997, General Bank declared and paid $8.3 million of cash dividends to GBC
Bancorp. As of December 31, 1997, approximately $30.8 million of undivided
profits of the Bank is available for dividends to the Company, subject to the
subordinated debt covenant restrictions.
DERIVATIVES
The Company has had historically only limited involvement with derivative
financial instruments and has not used them for trading purposes. Such
instruments were used to manage the interest rate risk from origination of
fixed rate residential mortgage loans for sale in the secondary markets. In
October, 1997, management decided to discontinue its operation of originating
fixed rate residential mortgage loans for sale in the secondary markets. The
impact of winding down this operation was immaterial to the Company's
financial condition and results of operations as of and for the year ended
December 31, 1997. Commensurate with this decision, the Company is no longer
involved with derivative financial instruments as the limited involvement
heretofore was for purposes of managing the interest rate risk from the
origination of fixed rate residential mortgage loans for sale in the secondary
markets. As of December 31, 1997, there were no contracts outstanding. Prior
to October, 1997 the Company utilized Treasury note futures and forward sales
of mortgage-backed securities to hedge interest rate risk associated with its
residential mortgage banking activities. Futures and forward sale contracts
provided for sale of the underlying securities, including mortgage-backed
securities, at a specified future date, at a specified price or yield. The
amount of the futures and forward sale contracts was determined by the
aggregate amount of fixed rate commitments for mortgage loans that were
expected to be funded plus the amount of fixed rate residential mortgages
categorized as being held for sale that were not sold. The fair value of the
underlying futures and forward sale contracts was expected to move inversely
to the change in fair value of the mortgage loans.
The Company never intended to deliver the underlying securities that the
futures and forward sale contracts committed to sell. Rather, it purchased
offsetting contracts to eliminate the obligation. The Company was exposed to
the risk that the fair value of futures contracts, being based on the value of
the Treasury note would not move proportionately with the change in value of
the mortgage loans being hedged. This basis risk is unpredictable and can
result in economic loss. There is no basis risk related to the use of forward
sale contracts on mortgage-backed securities since their fair value is based
on similar mortgage loans. However, a gain or loss could arise from the
difference between the fair value and the forward sale price of the mortgage-
backed security.
As of December 31, 1997 and 1996 there were outstanding fixed rate mortgages
held for sale of
<PAGE>
$2.7 million and $1.9 million and a notional value of derivative instruments
of $0.0 million and $0.5 million, respectively. The outstanding fixed rate
mortgages as of December 31, 1997 represent loans that had been sold pending
delivery. For the years ended December 31, 1997 and 1996, the Company had
realized net losses of $53,300 and $6,500 with unrealized losses of $0 and
$625, respectively, related to its hedging activities.
Initial margin requirements and daily calls on futures contracts were met in
cash. There are no margin requirements nor daily calls on forward sale
contracts since whole loans are expected to be delivered to fulfill the
commitment.
"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 December 31, 1997 there is a cumulative one year negative "gap" of
$462.7 million, up from $311.4 million as of December 31, 1996. The negative
gaps would appear to be predictive of a decrease in the net interest margin
during 1997, as the average market interest rate represented by the prime rate
increased 18 basis points in 1997 as compared to 1996. However, due to the lag
in repricing upward the rates paid on liabilities versus the immediate
repricing upward of its assets, the Company did not realize a corresponding
decrease in the net interest margin.
<PAGE>
The following table indicates the Company's interest rate sensitivity
position as of December 31, 1997, 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 $ 41,192 $ 72,769 $ 165,107 $364,592 $ - $ 643,660
Securities Held to
Maturity - - 58,003 42 - 58,045
Federal Funds Sold 108,000 - - - - 108,000
Loans and Leases(1)(2) 422,812 31,685 82,150 92,348 - 628,995
Non-Earning Assets(2) - - - - 70,737 70,737
----------- ----------- ----------- ---------- ----------- ----------
TOTAL ASSETS $ 572,004 $ 104,454 $ 305,260 $456,982 $ 70,737 $1,509,437
=========== =========== =========== ========== =========== ==========
SOURCE OF FUNDS FOR AS-
SETS:
Deposits:
Demand $ - $ - $ - $ - $ 149,616 $ 149,616
Interest Bearing Demand 218,729 - - - - 218,729
Savings 96,340 - - - - 96,340
TCD'S Under $100,000 103,162 126,964 1,944 - - 232,070
TCD'S $100,000 and Over 294,208 299,767 1,102 - - 595,077
----------- ----------- ----------- ---------- ----------- ----------
TOTAL DEPOSITS $ 712,439 $ 426,731 $ 3,046 $ - $ 149,616 $1,291,832
----------- ----------- ----------- ---------- ----------- ----------
Subordinated Debt $ - $ - $ - $ 38,745 $ - $ 38,745
Other Liabilities - - - - 32,537 32,537
Stockholders' Equity - - - - 146,323 146,323
----------- ----------- ----------- ---------- ----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 712,439 $ 426,731 $ 3,046 $ 38,745 $ 328,476 $1,509,437
=========== =========== =========== ========== =========== ==========
Interest Sensitivity Gap $(140,435) $(322,277) $ 302,214 $418,237 $(257,739)
Cumulative Interest
Sensitivity Gap $(140,435) $(462,712) $(160,498) $257,739 -
Gap Ratio (% of Total
Assets) -9.3% -21.4% 20.0% 27.7% -17.0%
Cumulative Gap Ratio -9.3% -30.7% -10.7% 17.0% 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-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.
<PAGE>
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, and the fair values of these
instruments as of December 31, 1997:
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
- ---------------------------------------------------------------------------------------------
OVER 1 AVERAGE
0 TO 90 91 TO 365 YEAR TO OVER INTEREST
(IN THOUSANDS) DAYS DAYS 5 YEARS 5 YEARS TOTAL RATE (2) FAIR VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE
ASSETS:
Securities Available for
Sale $ 45,081 $208,347 $362,129 $ 28,103 $ 643,660 6.43% $ 643,660
Securities Held to
Maturity 5,914 39,051 13,080 - 58,045 6.61% 58,169
Federal Funds Sold and
Securities Purchased
Under Agreement to
Resell 108,000 - - - 108,000 5.72% 108,000
Loans and Leases(1) 422,812 31,685 82,150 92,348 628,995 9.79% 608,910
-------- -------- -------- -------- ---------- ----------
TOTAL INTEREST-EARNING
ASSETS $581,807 $279,083 $457,359 $120,451 $1,438,700 $1,418,739
======== ======== ======== ======== ========== ==========
INTEREST-SENSITIVE
LIABILITIES:
Deposits:
Interest Bearing Demand $ 11,495 $ 34,486 $172,748 $ - $ 218,729 2.29% $ 218,729
Savings 4,817 14,451 77,072 - 96,340 2.74% 96,340
Time Deposit of Certifi-
cates 397,370 426,731 3,046 - 827,147 5.07% 827,622
-------- -------- -------- -------- ---------- ----------
TOTAL DEPOSITS $413,682 $475,668 $252,866 $ - $1,142,216 $1,142,691
-------- -------- -------- -------- ---------- ----------
Subordinated Debt $ - $ - $ - $ 38,745 $ 38,745 8.38% $ 42,977
-------- -------- -------- -------- ---------- ----------
TOTAL INTEREST-SENSITIVE
LIABILITIES $413,682 $475,668 $252,866 $ 38,745 $1,180,961 $1,185,668
======== ======== ======== ======== ========== ==========
</TABLE>
(1) LOANS AND LEASES ARE BEFORE UNAMORTIZED DEFERRED LOAN FEES AND ALLOWANCE
FOR CREDIT LOSSES.
(2) THE AVERAGE INTEREST RATE RELATES TO THE YEAR FOR THE CATEGORY OF
ASSET/LIABILITY INDICATED. THE RATE FOR THE SUBORDINATED DEBT IS THE
STATED RATE OF THE DEBT OUTSTANDING AS OF DECEMBER 31, 1997.
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 December 31,
1997:
<TABLE>
<CAPTION>
CHANGE
IN
INTEREST
RATES NET INTEREST INCOME MARKET VALUE OF
(BASIS VOLATILITY EQUITY VOLATILITY
POINTS) DECEMBER 31, 1997(1) DECEMBER 31, 1997(2)
- ---------------------------------------------------
<S> <C> <C>
+200 1.2 % (10.4)%
+100 0.8 % (5.3)%
-100 (5.4)% 1.8 %
-200 (10.7)% 4.0 %
</TABLE>
(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
<PAGE>
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
In the fourth quarter of 1997, there have been significant disruptions to
certain financial markets in Asia. 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 December 31, 1997. 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 1998. Certain
ancillary systems that operate on personal computers are also licensed and the
vendors have informed the Company that releases that conform to year 2000
requirements will be received in 1998. 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 forward-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
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income". Comprehensive income represents the change in equity of
the Company during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions
to owners. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. It does not, however, specify when to recognize or how
to measure items that make up comprehensive income. This statement requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed in equal prominence with the other financial statements. It does
not require a specific format for that financial statement, but will require
the Company to display an amount representing total comprehensive income for
the period in that financial statement. SFAS 130 is effective for both interim
and annual periods beginning after December 15, 1997. Implementation of SFAS
130 will not have a material adverse effect on the Company's financial
condition or results of operations.
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
<PAGE>
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
shareholders. 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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest Income $ 110,896 $ 97,641 $ 85,126 $ 72,782 $ 65,159
Interest Expense 49,423 43,661 37,418 28,889 24,997
----------- ----------- ----------- ----------- ---------
Net Interest Income
Before Provision for
Credit Losses 61,473 53,980 47,708 43,893 40,162
Provision for Credit
Losses 1,000 4,500 18,570 16,194 9,300
----------- ----------- ----------- ----------- ---------
Net Interest Income
After Provision for
Credit Losses 60,473 49,480 29,138 27,699 30,862
Non-Interest Income 6,639 6,073 6,042 5,936 8,286
Non-Interest Expense 26,373 27,337 26,104 24,310 22,012
----------- ----------- ----------- ----------- ---------
Income Before Income
Taxes 40,739 28,216 9,076 9,325 17,136
Provision for Income
Taxes 14,305 9,179 1,427 1,796 5,196
----------- ----------- ----------- ----------- ---------
Income before
Extraordinary Item 26,434 19,037 7,649 7,529 11,940
Extraordinary Charge (488) - - - -
----------- ----------- ----------- ----------- ---------
Net Income $ 25,946 $ 19,037 $ 7,649 $ 7,529 $ 11,940
=========== =========== =========== =========== =========
BALANCE SHEET DATA AS OF
DECEMBER 31
Assets $1,509,437 $1,352,115 $1,204,506 $1,081,602 $957,260
Loans and Leases, Net 617,605 582,507 451,891 474,276 489,394
Securities Available for
Sale 643,660 519,821 507,141 357,235 199,109
Securities Held to
Maturity 58,045 12,274 33,553 83,276 111,870
Deposits 1,291,832 1,201,513 1,046,200 934,020 790,575
Stockholders' Equity 146,323 116,636 99,477 87,683 86,438
PER SHARE DATA
Earnings - Basic $ 3.78 $ 2.83 $ 1.15 $ 1.13 $ 1.80
Earnings - Diluted 3.67 2.77 1.15 1.13 1.78
Cash Dividends Declared 0.48 0.36 0.32 0.32 0.32
Year End Book Value 20.92 17.24 14.89 13.17 13.00
Average Shares
Outstanding - Basic (In
000's) 6,866 6,722 6,663 6,655 6,635
Average Shares
Outstanding - Diluted
(In 000's) 7,073 6,883 6,664 6,668 6,696
FINANCIAL RATIOS
Return on Average Assets 1.82% 1.46% 0.70% 0.76% 1.32%
Return on Average
Stockholders' Equity 20.03 17.93 8.13 8.34 14.47
Average Stockholders'
Equity to Average
Assets 9.11 8.13 8.57 9.10 9.10
Net Interest
Margin(1)(2) 4.54 4.36 4.59 4.74 4.74
Net Charge-Offs to
Average Loans and
Leases 0.07 0.96 5.10 1.01 1.00
Nonperforming Assets to
Year End Loans and
Leases,
Net, Plus Other Real
Estate Owned, Net(3) 6.52 9.17 13.39 15.35 10.60
Allowance for Credit
Losses to Year End
Loans and Leases 2.63 2.69 3.53 4.60 2.37
Cash Dividend Payout(4) 12.75 12.73 27.90 28.29 17.80
</TABLE>
(1) TAX-EXEMPT INTEREST INCOME IS NOT ADJUSTED TO A FULLY TAXABLE EQUIVALENT
BASIS.
(2) NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES DIVIDED BY AVERAGE
EARNING ASSETS.
(3) NON-PERFORMING ASSETS INCLUDE LOANS 90 DAYS PAST DUE STILL ACCRUING, NON-
ACCRUAL LOANS AND OTHER REAL ESTATE OWNED, NET.
(4) CASH DIVIDEND PAYOUT IS COMPUTED BASED ON THE DIVIDENDS DECLARED DIVIDED
BY NET INCOME FOR THE APPLICABLE YEAR.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 32,519 $ 46,809
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 108,000 140,200
Securities Available for Sale at Fair Value
(Amortized Cost of $640,791
and $518,701 at December 31, 1997 and 1996,
Respectively) 643,660 519,821
Securities Held to Maturity (Fair Value of $58,169
and
$12,463 at December 31, 1997 and 1996, Respectively) 58,045 12,274
Loans and Leases 638,829 602,354
Less: Allowance for Credit Losses (16,776) (16,209)
Deferred Loan Fees (4,448) (3,638)
----------- -----------
Loans and Leases, Net 617,605 582,507
Bank Premises and Equipment, Net 5,709 5,806
Other Real Estate Owned, Net 7,871 12,988
Due From Customers on Acceptances 11,768 6,535
Real Estate Held for Investment 8,360 9,686
Accrued Interest Receivable and Other Assets 15,900 15,489
----------- -----------
TOTAL ASSETS $1,509,437 $1,352,115
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 149,616 $ 158,728
Interest Bearing Demand 218,729 213,697
Savings 96,340 119,315
Time Certificates of Deposit of $100,000 or More 595,077 545,578
Other Time Deposits 232,070 164,195
----------- -----------
Total Deposits 1,291,832 1,201,513
Subordinated Debt $ 38,745 $ 15,000
Acceptances Outstanding 11,768 6,535
Accrued Expenses and Other Liabilities 20,769 12,431
----------- -----------
Total Liabilities 1,363,114 1,235,479
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, No Par or Stated Value; 20,000,000
Shares Authorized; 6,995,049 and 6,766,469 Shares
Outstanding at December 31, 1997 and 1996, Respec-
tively $ 53,314 $ 47,281
Unrealized Gain on Securities Available for Sale, Net
of Tax 1,663 646
Retained Earnings 91,355 68,716
Foreign Currency Translation Adjustment (9) (7)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 146,323 116,636
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,509,437 $1,352,115
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and Leases, Including Fees $ 63,687 $ 53,551 $ 49,533
Securities Available for Sale 36,546 34,823 22,161
Securities Held to Maturity 2,598 1,868 6,474
Federal Funds Sold and Securities Purchased
under Agreements to Resell 8,060 7,395 6,940
Other 5 4 18
----------- ---------- ---------
TOTAL INTEREST INCOME 110,896 97,641 85,126
----------- ---------- ---------
INTEREST EXPENSE
Interest Bearing Demand 5,248 4,490 4,204
Savings 3,031 3,563 4,484
Time Deposits of $100,000 or More 29,372 24,686 17,950
Other Time Deposits 9,197 8,158 7,936
Federal Funds Purchased and Securities Sold
under Repurchase Agreements 22 1,168 172
Borrowings from the Federal Home Loan Bank - - 1,076
Subordinated Debt 2,553 1,596 1,596
----------- ---------- ---------
TOTAL INTEREST EXPENSE 49,423 43,661 37,418
----------- ---------- ---------
Net Interest Income 61,473 53,980 47,708
Provision for Credit Losses 1,000 4,500 18,570
----------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES 60,473 49,480 29,138
----------- ---------- ---------
NON-INTEREST INCOME
Service Charges and Commissions 5,756 5,517 5,205
Gain on Sale of Loans, Net 224 157 217
Gain on Sale of Securities Available for Sale,
Net - 26 -
Write-off of Securities - (250) -
Gain on Sale of Fixed Assets 22 14 9
Gain on Sale of Real Estate Investment - 101 -
Other 637 508 611
----------- ---------- ---------
TOTAL NON-INTEREST INCOME 6,639 6,073 6,042
----------- ---------- ---------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 16,554 13,601 11,201
Occupancy Expense 2,810 2,769 2,886
Furniture and Equipment Expense 1,823 1,696 1,618
Net Other Real Estate Owned Expense (Income) (812) 2,011 2,745
Other 5,998 7,260 7,654
----------- ---------- ---------
TOTAL NON-INTEREST EXPENSE 26,373 27,337 26,104
----------- ---------- ---------
Income before Income Taxes and Extraordinary
Item 40,739 28,216 9,076
Provision for Income Taxes 14,305 9,179 1,427
----------- ---------- ---------
NET INCOME BEFORE EXTRAORDINARY ITEM 26,434 19,037 7,649
Extraordinary Item:
Early Extinguishment of Debt, Net of Taxes of
$353,000 (488) - -
----------- ---------- ---------
NET INCOME $ 25,946 $ 19,037 $ 7,649
=========== ========== =========
Basic Earnings Per Share:
Net Income before extraordinary Item $ 3.85 $ 2.83 $ 1.15
Extraordinary Item (0.07) - -
----------- ---------- ---------
NET INCOME $ 3.78 $ 2.83 $ 1.15
=========== ========== =========
Diluted Earnings Per Share
Net Income before Extraordinary Item $ 3.74 $ 2.77 $ 1.15
Extraordinary Item (0.07) - -
----------- ---------- ---------
NET INCOME $ 3.67 $ 2.77 $ 1.15
=========== ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN/(LOSS)
ON SECURITIES FOREIGN
AVAILABLE FOR CURRENCY TOTAL
(IN THOUSANDS, EXCEPT PER COMMON STOCK RETAINED SALE, TRANSLATION STOCKHOLDERS'
SHARE AMOUNTS) SHARES AMOUNT EARNINGS NET OF TAX ADJUSTMENT EQUITY
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994 6,660 $45,373 $46,588 $(4,271) $(7) $ 87,683
Stock Options Exercised 13 173 - - - 173
Common Stock Issued to
Employee 401k Plan 7 80 - - - 80
Director's Contribution - 13 - - - 13
Tax Benefit-Stock
Options Exercised - 19 - - - 19
Net Income for the year - - 7,649 - - 7,649
Cash Dividend-$.32 per
Share - - (2,134) - - (2,134)
Net Change in Unrealized
Gain/(Loss) on
Securities Available
for Sale, Net of Tax - - - 5,994 - 5,994
----- ------- -------- -------- ---- ---------
BALANCE AT DECEMBER 31,
1995 6,680 $45,658 $52,103 $ 1,723 $(7) $ 99,477
Stock Options Exercised 80 1,163 - - - 1,163
Common Stock Issued to
Employee 401k Plan 6 150 - - - 150
Tax Benefit-Stock
Options Exercised - 310 - - - 310
Net Income - - 19,037 - - 19,037
Cash Dividend-$.36 per
Share - - (2,424) - - (2,424)
Net Change in Unrealized
Gain/(Loss) on
Securities Available
for Sale, Net of Tax - - - (1,077) - (1,077)
----- ------- -------- -------- ---- ---------
BALANCE AT DECEMBER 31,
1996 6,766 $47,281 $68,716 $ 646 $(7) $116,636
Stock Options Exercised 229 3,192 - - - 3,192
Tax Benefit-Stock
Options Exercised - 2,841 - - - 2,841
Net Income for the year - - 25,946 - - 25,946
Cash Dividend-$.48 per
Share - - (3,307) - - (3,307)
Net Change in Unrealized
Gain/(Loss) on
Securities Available
for Sale, Net of Tax - - - 1,017 - 1,017
Foreign Currency
Translation Adjustment (2) (2)
----- ------- -------- -------- ---- ---------
BALANCE AT DECEMBER 31,
1997 6,995 $53,314 $91,355 $ 1,663 $(9) $146,323
===== ======= ======== ======== ==== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
- -------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 25,946 $ 19,037 $ 7,649
Adjustments to Reconcile Net Income to Net
Cash Provided by
Operating Activities:
Depreciation 1,195 1,122 1,061
Net Accretion of Discounts on Securities (209) (1,078) (3,193)
Accretion of Discount on Subordinated Notes 55 - -
Amortization/Writedown on Real Estate Held for
Investment 1,326 1,423 1,130
Provision for Credit Losses 1,000 4,500 18,570
Provision for Losses on Other Real Estate
Owned 650 1,335 1,504
Amortization of Deferred Loan Fees (2,353) (3,042) (2,589)
Deferred Income Taxes 3,490 81 315
Gain on Sale of Loans (224) (157) (217)
Gain on Sale of Securities Available for Sale - (26) -
Write-off of Securities - 250 -
Gain on Sale of Real Estate Investment - (101) -
Gain on Sale of Other Real Estate Owned (2,705) (441) (163)
Gain on Sale of Fixed Assets (22) (14) (9)
Loans Originated for Sale (40,381) (28,833) (54,998)
Proceeds from Sales of Loans Originated for
Sale 39,968 33,082 48,001
Net Decrease/(Increase) in Accrued Interest
Receivable and Other Assets 2,162 1,718 (308)
Net Increase/(Decrease) in Accrued Expenses
and Other Liabilities 4,686 (1,440) 3,236
Other, Net - 2 547
---------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 34,584 $ 27,418 $ 20,536
---------- ---------- ---------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (520,740) (716,415) (567,830)
Proceeds from Maturities of Securities Avail-
able for Sale 398,744 661,329 471,426
Purchase of Securities Held to Maturity (58,970) - (60,958)
Proceeds from Maturities of Securities Held to
Maturity 13,313 21,314 70,733
Proceeds from Sales of Securities Available
for Sale - 41,367 -
Net Increase in Loans and Leases (33,234) (148,266) (699)
Proceeds from Sales of Other Real Estate Owned 7,201 6,771 10,371
Capitalized Cost of Other Real Estate Owned (368) (867) -
Additions to Real Estate Investments - - (355)
Proceeds from Sales of Real Estate Investments - 1,134 4,980
Purchases of Premises and Equipment (1,098) (838) (1,056)
Proceeds from Sale of Bank Premises and Equip-
ment 21 23 18
---------- ---------- ---------
NET CASH USED BY INVESTING ACTIVITIES $(195,131) $(134,448) $(73,370)
---------- ---------- ---------
FINANCING ACTIVITIES:
Net (Decrease)/Increase in Demand, Interest
Bearing Demand and
Savings Deposits (27,055) 24,876 93,201
Net Increase in Time Certificates of Deposits 117,374 130,437 18,979
Net Increase/(Decrease) in Federal Funds Pur-
chased and Securities Sold Under Agreements
to Repurchase - (24,000) 24,000
Repayment of Federal Home Loan Bank Borrowings - - (30,000)
Proceeds from Issuance of Subordinated Notes,
Net 38,690 - -
Redemption of Subordinated Notes (15,000) - -
Cash Dividend Paid (3,144) (2,424) (2,134)
Proceeds from Exercise of Stock Options/Sale
of Stock 3,192 1,313 266
---------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 114,057 $ 130,202 $104,312
---------- ---------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (46,490) 23,172 51,478
Cash and Cash Equivalents at Beginning of Year 187,009 163,837 112,359
---------- ---------- ---------
Cash and Cash Equivalents at End of Period $ 140,519 $ 187,009 $163,837
========== ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMA-
TION:
Cash Paid During the Year For:
Interest $ 48,734 $ 43,814 $ 37,016
Income Taxes 6,210 10,197 450
========== ========== =========
NONCASH INVESTING ACTIVITIES:
Loans Transferred to Other Real Estate Owned $ 4,194 $ 17,025 $ 15,105
Loans to Facilitate the Sale of Other Real
Estate Owned 4,068 4,925 822
Investment Securities Transferred to Securi-
ties Available for Sale - - 39,818
========== ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements of GBC Bancorp (the
"Company") are prepared in conformity with generally accepted accounting
principles and general practice within the banking industry. It is the
Company's policy to consolidate all majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to 1996 and 1995 data
in order to conform to the current year presentation. The preparation of the
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported operations of the Company for the periods presented. Actual
results may differ from those estimates calculated by the Company. Significant
balance sheet items which could be materially effected by such estimates
include loans held for investment, which are presented net of the allowance
for credit losses and the estimated residual value of leased assets.
The consolidated financial statements include the accounts of GBC Bancorp
and its wholly owned subsidiaries, GBC Venture Capital, Inc., General Bank,
(the "Bank"), a California state chartered bank, and the Bank's wholly owned
subsidiaries, GBC Insurance Services, Inc., GBC Investment & Consulting
Company, Inc., and Southern Counties Escrow. The Bank also holds 90% of the
voting stock of GBC Leasing Company, Inc., which amount is not material.
The Bank, the Company's 100% owned bank subsidiary, conducts the business of
a commercial bank serving individuals and small to medium-sized businesses
through fifteen branch offices located in the greater Los Angeles, San Diego
and Silicon Valley area. The Bank's deposit gathering and loan production
operations are concentrated in California, particularly in Southern
California.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL: Securities purchased under
agreements to resell are collateralized by a combination of single family
residential loans and commercial paper. The Company invests in securities
purchased under agreements to resell ("repurchase agreement") to maximize the
yield on liquid assets. The Company obtains collateral for these agreements,
which normally consists of single or multi-family residential mortgage loans
with an agreement to sell back the same collateral. The collateral is normally
held in custody of a trustee who is not a party to the transaction. The
purchase is overcollateralized to ensure against unfavorable market price
movements. The duration of these agreements is one business day with a roll-
over under continuing contract. The counterparties to these agreements are
nationally recognized investment banking firms that meet credit eligibility
criteria and with whom a master repurchase agreement has been duly executed.
SECURITIES: The Company classifies its investment in debt and equity
securities as held to maturity securities, trading securities and available
for sale securities, as applicable. Securities available for sale are carried
at fair value. Premiums and discounts on securities available for sale are
amortized/accreted into interest income using a methodology which approximates
a level yield. The resulting unrealized gains or losses are recorded net of
tax in stockholders' equity. Securities held to maturity are designated as
such when the Company has the positive intent and ability to hold the
securities until maturity. Securities held to maturity are carried at cost,
adjusted for amortization of premiums and accretion of discounts into interest
income using a methodology which approximates a level yield. When a decline in
value has occurred and is deemed to be other than temporary, such decline is
charged to income. The discount or premium on the Company's mortgage
derivative investments is reviewed periodically to ensure that it does not
exceed the estimated discount or premium, using current estimates of market
prepayments and defaults. In the event that actual prepayments exceed the
assumptions used in determining the rate of amortization or accretion, the
amortization or accretion is adjusted to reflect current prepayment
projections. The specific identification method is used to compute gains or
losses on securities' transactions.
LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES: Loans are recorded in the
consolidated balance sheets at principal amounts outstanding. Interest on
loans is accrued daily as earned. It is generally the Company's policy to
place a loan on non-accrual status in the event that the borrower is 90 days
or more delinquent or earlier if the timely collection of interest and/or
principal appears doubtful. When loans are placed on non-accrual status, the
accrual of income is discontinued and previously accrued but unpaid interest
is generally reversed against income. Subsequent payments are generally
applied to principal or reported as recoveries on amounts previously charged-
off. A loan is returned to accrual status only when the borrower has
demonstrated the ability to make future payments of
<PAGE>
principal and interest as scheduled, and the borrower has demonstrated a
sustained period of repayment performance in accordance with the contractual
terms.
The Company provides for credit losses by a charge to operations based upon
the composition of the loan and lease portfolio, past loss experience, current
economic conditions, evaluations made by regulatory authorities, and such
other factors that, in management's judgment, deserve recognition in
estimating credit losses. The allowance for credit losses is based on
estimates, and ultimate losses may vary from current estimates. These
estimates are reviewed periodically and, as adjustments become necessary, they
are reported in earnings in the period in which they become known.
Additionally, regulatory examiners may require the institution to recognize
additions to the allowance for credit losses based upon their judgments
regarding information available to them at the time of their examination.
Charge-offs of loans are debited to the allowance for credit losses.
Recoveries on loans previously charged off are credited to the allowance.
A loan is considered impaired when it is "probable" that the Company will be
unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The Company reviews
all non-homogenous loans for impairment. Homogenous pools that the Company
does not review for impairment include SBA loans and mortgage loans secured by
single-family real estate. The measurement of impairment may be based on
(i) the present value of the expected future cash flows of the impaired loan
discounted at the loan's original effective interest rate, (ii) the observable
market price of the impaired loan, or (iii) the fair value of the collateral
of a collateral-dependent loan. The amount by which the recorded investment of
the loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to the provision for credit
losses. Income recognition on impaired loans is similar to that for non-
accrual loans but can include the accrual of interest. The accrual of interest
is normally followed for those impaired loans which have been restructured
with the borrower servicing the debt pursuant to the contractual terms of the
restructuring. While a loan is on non-accrual status, some or all of the cash
interest payments received may be treated as interest income on a cash basis
as long as the remaining book balance of the loan (i.e., after charge-off of
identified losses, if any) is deemed to be fully collectible. The Bank's
determination as to the ultimate collectibility of the loan's remaining book
balance must be supported by a current, well documented credit evaluation of
the borrower's financial condition and prospects for repayment, including
consideration of the borrower's historical repayment performance and other
relevant factors.
LOANS HELD FOR SALE: Loans held for sale are included in loans and leases on
the balance sheet. They are recorded at the lower of aggregate cost or fair
value. Realized gains and losses and unrealized losses are reported in
gain/loss on sale of loans, net. In October, 1997, management decided to
discontinue its operation of originating fixed rate residential mortgage loans
for sale in the secondary markets. The impact of winding down this operation
was immaterial to the Company's financial condition and results of operations
as of and for the year ended December 31, 1997. The Bank continues to service
those loans it has sold with servicing rights retained. Commensurate with this
decision, the Company is no longer involved with derivative financial
instruments as the limited involvement heretofore was for purposes of managing
the interest rate risk from the origination of fixed rate residential mortgage
loans for sale in the secondary markets.
Changes in the fair value of futures contracts that hedged the loans held
for sale were reported as part of the gain/loss on sale of loans and included
in the carrying amount of the loans held for sale. Please refer to note 6 of
the notes to consolidated financial statements for further discussion of
derivative financial instruments.
LOAN ORIGINATION FEES: Loan origination fees and commitment fees, offset by
certain direct loan origination costs, are deferred and recognized in income
over the contractual life of the loan as an adjustment of yield.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation or amortization. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives or lease
terms of assets, whichever is shorter. The lease term is defined as the
original lease term plus option periods with a maximum of 15 years unless
there is a reason to believe that the premises will be vacated prior to the
end of the lease term.
OTHER REAL ESTATE OWNED: Other real estate owned ("OREO") is comprised of
real estate acquired through foreclosure. These assets are carried at the fair
value minus selling costs of the related real estate. The fair value of the
real estate is based upon an appraisal adjusted for estimated carrying and
selling costs. The excess carrying value, if any, over the fair value of the
asset upon foreclosure is charged to the allowance for credit losses at the
time of acquisition. Any subsequent decline in the fair value of OREO is
recognized as a charge to operations and a corresponding increase to the
valuation allowance on OREO. Gains and losses from sales and net operating
expenses of OREO are included in Net Other Real Estate Owned Expense (Income)
in the accompanying consolidated statements of income.
<PAGE>
REAL ESTATE HELD FOR INVESTMENT: The Bank is a limited partner in three
different partnerships that invest in low income housing projects that qualify
for federal income tax credits. As further discussed in note 9 of the notes to
consolidated financial statements, the partnership interests are carried at
cost, at a method which approximates the equity method and at a method
resulting in approximately the same treatment as if the investment had been
consolidated, depending on the percentage ownership and control by the
Company.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of the foreign office
are translated to U. S. dollars at current exchange rates. Income and expense
amounts are translated based on the average current exchange rates in effect
during the month in which the transactions are recorded. These translation
adjustments are included in Stockholders' Equity in the accompanying
consolidated balance sheets.
EARNINGS PER SHARE: Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. Under SFAS 128, the Company is required to report both basic and
diluted 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 1996 and 1995 have been
restated to conform with the provisions of SFAS 128.
INCOME TAXES: The Company files a consolidated federal income tax return
with its subsidiaries and a combined California franchise tax return.
The Company records income taxes under the asset and liability method.
Income tax expense is derived by establishing deferred tax assets and
liabilities as of the reporting date for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company's evaluation of the realizability of deferred tax assets includes
consideration of the amount and timing of future reversals of existing
temporary differences, as well as available taxable income in carryback years
and projections of future income. Tax benefits associated with the exercise of
non-qualified stock options are credited to stockholders' equity.
STOCK OPTION PLANS: The Company accounts for its stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
STATEMENT OF CASH FLOWS: Cash and cash equivalents consist of cash and due
from banks, due from financial institutions - time and federal funds sold and
securities purchased under agreements to resell.
RECENT ACCOUNTING DEVELOPMENTS
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income". Comprehensive income represents the change in equity of
the Company during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions
to owners. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. It does not, however, specify when to recognize or how
to measure items that make up comprehensive income. This statement requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed in equal prominence with the other financial statements. It does
not require a specific format for that financial statement, but will require
the Company to display an amount representing total comprehensive income for
the period in that financial statement. SFAS 130 is effective for both interim
and annual periods beginning after December 15, 1997. Management believes that
implementation of SFAS 130
<PAGE>
will not have a material adverse effect on the Company's financial condition
or results of operations.
Disclosure About Segments Of An Enterprise And Related Information
In June 1997, the FASB issued SFAS 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 shareholders. 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. Management believes that implementation of
SFAS 131 will not have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 2 - CASH AND DUE FROM BANKS
The Company is required to maintain cash on hand and on deposit to meet
reserve requirements established by the Federal Reserve Bank. Average reserve
requirements were $6.6 million and $11.1 million, during 1997 and 1996,
respectively.
NOTE 3 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by a
combination of single family residential loans and commercial paper at
December 31, 1997 and 1996. The following table indicates relevant
information:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Amount Outstanding as of December 31 $100,000 $120,000
Maximum Month End Amount Outstanding 120,000 120,000
Average Amount Outstanding 112,500 97,700
Average Rate of Interest for the Year 5.72% 5.48%
Average Rate of Interest as of December 31 7.03% 7.06%
</TABLE>
The collateral is normally held in custody of a trustee who is not a party
to the transaction and is overcollateralized to ensure against unfavorable
market price movements. The duration of these agreements is one business day
with a roll over under a continuing contract. The counterparties to these
agreements are nationally recognized investment banking firms that meet credit
eligibility criteria and with whom a master repurchase agreement has been duly
executed.
<PAGE>
NOTE 4 - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value of securities as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 - - 5,669
-------- ------ ------ --------
TOTAL SECURITIES AVAILABLE FOR SALE $640,791 $2,869 $ - $643,660
======== ====== ====== ========
<CAPTION>
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
State and Municipal Securities $ 2,222 $ 28 $ - $ 2,250
Collateralized Mortgage Obligations 56 6 - 62
Asset Backed Securities 9,996 155 - 10,151
-------- ------ ------ --------
TOTAL SECURITIES HELD TO MATURITY $ 12,274 $ 189 $ - $ 12,463
======== ====== ====== ========
SECURITIES AVAILABLE FOR SALE
U. S. Treasuries $ 1,918 $ - $ (27) $ 1,891
U.S. Government Agencies 160,718 - (52) 160,666
Mortgage Backed Securities 51,503 - (247) 51,256
Corporate Notes 19,014 580 - 19,594
Collateralized Mortgage Obligations 165,517 281 - 165,798
Asset Backed Securities 37,474 460 - 37,934
Auction Preferred Stock 72,450 - - 72,450
Other Securities 10,107 125 - 10,232
-------- ------ ------ --------
TOTAL SECURITIES AVAILABLE FOR SALE $518,701 $1,446 $(326) $519,821
======== ====== ====== ========
</TABLE>
The majority of the securities are actively traded in the secondary markets.
All of the securities are rated A or better by at least one major rating
service at the time of purchase.
As of December 31, 1997, the yield on the collateralized mortgage
obligations held to maturity and available for sale was 6.83% and 6.43%. As of
December 31, 1996, the yield on collateralized mortgage obligations held to
maturity and available for sale was 9.79% and 6.52%, respectively.
<PAGE>
The amortized cost and fair value of securities as of December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES HELD TO SECURITIES AVAILABLE FOR
MATURITY SALE
(IN THOUSANDS) AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ - $ - $101,690 $101,993
Due After One Year Through
Five Years 58,003 58,127 165,037 165,147
Due After Five Years
Through Ten Years 42 42 27,246 27,269
Due After Ten Years - - 346,818 349,251
------- ------- -------- --------
TOTAL $58,045 $58,169 $640,791 $643,660
======= ======= ======== ========
</TABLE>
The following table summarizes the aggregate fair value of securities of any
one issuer which exceeds ten percent of stockholders' equity as of December
31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------
BOOK FAIR
ISSUER VALUE VALUE
- ---------------------------------------
<S> <C> <C>
Access Financial Corp. $14,841 $15,008
Advanta Corp 16,135 16,402
Conti Mortgage Corp. 16,059 16,257
Equicredit Corp. 16,489 16,718
Industry Mortgage Co. 16,320 16,508
The Money Store Inc. 15,550 15,736
------- -------
$95,394 $96,629
======= =======
</TABLE>
Proceeds from the sales of securities available for sale were $0, $41.4
million, and $0 for the years ended December 31, 1997, 1996, and 1995. There
were no sales of securities held to maturity during 1997, 1996 or 1995.
Gross realized gains on sales of securities were $0, $28,000, and $0, for
1997, 1996 and 1995, respectively. Gross realized losses on sales of
securities were $0, $252,000, and $0 in 1997, 1996 and 1995, respectively. The
1996 gross realized losses included the write-off of a $250,000 convertible
note deemed worthless.
Securities from the available for sale portfolio with a fair value of $19.3
million, as of December 31, 1997, were pledged to secure treasury, tax and
loan deposits and to secure borrowings from the Federal Reserve Bank. As of
December 31, 1997, there were no outstanding borrowings from the Federal
Reserve Bank. Securities from the available for sale portfolio with a fair
value of $85.8 million, as of December 31, 1997, were pledged to secure public
time deposits. One U.S. Treasury security and a Government-sponsored agency
security in the available for sale portfolio having a combined fair value of
$2.4 million, as of December 31, 1997, were pledged for other purposes.
Securities from the available for sale portfolio having a fair value of
$19.1 million as of December 31, 1996 were pledged to secure treasury, tax and
loan deposits and to secure borrowings from the Federal Reserve Bank. As of
December 31, 1996, there were no outstanding borrowings from the Federal
Reserve Bank. In addition, one U.S. Treasury security and a Government-
sponsored agency security in the available for sale portfolio having a
combined fair value of $2.3 million were pledged for other purposes.
NOTE 5 - LOANS AND LEASES AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Company's loan portfolio and leveraged leases as of
December 31, 1997 and 1996, was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------
<S> <C> <C>
Commercial $233,309 $183,268
Real Estate-Construction 90,560 66,572
Real Estate-Conventional 276,350 273,080
Installment 54 86
Other Loans 23,993 22,362
Leveraged Leases 14,563 6,986
Loans to Depository Institutions - 50,000
--------- ---------
TOTAL $638,829 $602,354
Less: Allowance for Credit Losses (16,776) (16,209)
Deferred Loan Fees (4,448) (3,638)
--------- ---------
LOAN AND LEASES, NET $617,605 $582,507
========= =========
</TABLE>
Most of the Company's business is with customers in the State of California.
Construction loans are collateralized primarily by single family residences,
condominiums, townhouses and multi-family buildings. Real estate loans are
collateralized primarily by single family residences, condominiums, apartment
complexes, industrial buildings, motels and hotels.
In the ordinary course of business, the Bank has granted loans to certain
directors and the companies with which they are associated. In the opinion of
management, the loans were made on substantially the same terms,
<PAGE>
including interest rates and collateral requirements, as those prevailing at
the time of origination for comparable transactions with other customers and
did not involve more than the normal risk of collectibility or present other
unfavorable features. The following provides information regarding the
aggregate indebtedness of related parties:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 5,475 $ 4,787 $ 4,526
New Loans and Advances 4,114 3,967 5,490
Repayments (5,430) (3,279) (5,229)
-------- -------- --------
BALANCE AT END OF YEAR $ 4,159 $ 5,475 $ 4,787
======== ======== ========
</TABLE>
In December 1997, the Company purchased a leveraged lease on a Boeing 737
with a fair value of $24 million and a remaining estimated economic life of 28
years. The lease term ends in March, 2016, however, the lessee has an early
buy out option in the year 2011. The Company's equity investment is $6.3
million. The aircraft is subject to $17.8 million of third-party financing in
the form of long-term debt that provides for no recourse against the Company
and is secured by a first lien on the aircraft. The residual value at the end
of the full-term lease is estimated to be $5.5 million.
In December 1996, the Company purchased a leveraged lease on a Boeing 737
with a fair value of $24.2 million and a remaining estimated economic life of
30 years. The lease term is through the year 2012. As of December 31, 1997,
the aircraft is subject to $18.3 million of third-party financing in the form
of long-term debt that provides for no recourse against the Company and is
secured by a first lien on the aircraft. The residual value at the end of the
lease term is estimated to be $7.6 million.
For federal income tax purposes, the Company has the benefit of tax
deductions for depreciation on the entire leased asset and for interest paid
on the long-term debt. Deferred taxes are provided to reflect the temporary
differences associated with the leveraged leases.
The Company's net investment in leveraged leases is composed of the
following elements:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Rentals Receivable (Net of Principal
and Interest on the Nonrecourse Debt) $ 10,964 $ 5,840
Direct Cost 1,263 620
Estimated Residual Value
of Leased Assets 13,869 8,369
Less: Unearned and Deferred Income (11,533) (7,843)
--------- --------
Investment in Leveraged Leases 14,563 6,986
Less: Deferred Taxes Arising from Leveraged Leases (3,530) (357)
--------- --------
NET INVESTMENT IN LEVERAGED LEASES $ 11,033 $ 6,629
========= ========
</TABLE>
During 1997, pre-tax interest income recognized for leveraged leases was
$1,010,000, all of which related to the aircraft lease purchased in 1996.
There was no pre-tax income recognized for leveraged leases during 1996 or
1995.
A summary of activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $16,209 $16,674 $ 23,025
Provision for Credit Losses 1,000 4,500 18,570
Loans and Leases Charged Off (4,698) (7,450) (25,520)
Recoveries 4,265 2,485 599
-------- -------- ---------
BALANCE AT END OF YEAR $16,776 $16,209 $ 16,674
======== ======== =========
</TABLE>
The following table provides information with respect to the Company's past
due loans, non-accrual loans and restructured loans as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Loan 90 Days or More Past Due and Still Accruing $ 2,778 $ 6,779 $ 9
Non-accrual Loans 9,834 11,719 43,712
Restructured Loans 20,323 23,125 10,151
------- ------- -------
TOTAL PAST DUE, NON-ACCRUAL AND RESTRUCTURED LOANS $32,935 $41,623 $53,872
======= ======= =======
</TABLE>
<PAGE>
The effect of non-accrual loans outstanding as of year-end on interest
income for the years 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------
<S> <C> <C> <C>
Contractual Interest Due $ 1,954 $ 2,526 $ 6,969
Interest Recognized (1,041) (1,470) (1,098)
-------- -------- --------
NET INTEREST FOREGONE $ 913 $ 1,056 $ 5,871
======== ======== ========
</TABLE>
Contractual interest due is based on original loan amounts. Any partial
charge-offs are not considered in the determination of contractual interest
due.
The effect of restructured loans outstanding as of year-end on interest
income for the years ended December 31, 1997, 1996 and 1995 is presented
below:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------
<S> <C> <C> <C>
Contractual Interest Due $ 2,242 $ 3,709 $ 1,713
Interest Recognized (1,853) (3,113) (1,150)
-------- -------- --------
NET INTEREST FOREGONE $ 389 $ 596 $ 563
======== ======== ========
</TABLE>
There were no commitments to lend additional funds to borrowers associated
with restructured loans, as of December 31, 1997.
The following table discloses pertinent information as it relates to the
Company's impaired loans as of and for the years indicated:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
- ----------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Recorded Investment with Related Allowance $16,095 $21,210 $45,862
Recorded Investment with no Related Allowance 1,022 2,303 -
------- ------- -------
Total Recorded Investment $17,117 $23,513 $45,862
Allowance on Impaired Loans 1,544 2,011 5,803
------- ------- -------
NET RECORDED INVESTMENT IN IMPAIRED LOANS $15,573 $21,502 $40,059
======= ======= =======
Average Total Recorded Investment in Impaired Loans $22,370 $35,725 $44,206
Interest Income Recognized $ 1,508 $ 2,067 $ 808
</TABLE>
Of the amount of interest income recognized in 1997, 1996 and 1995 no
interest was recognized under the cash basis method.
As of December 31, 1997 and 1996, there were outstanding fixed rate
mortgages held for sale of $2.7 million and $1.9 million, respectively.
As of December 31, 1997 and 1996, there were commitments to sell $2.7
million and $1.9 million of residential mortgage loans. As of December 31,
1997, there were no commitments to purchase loans.
As of December 31, 1997 and 1996, the Bank was servicing approximately $53.2
million and $59.1 million of loans on behalf of third party investors.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company has had historically only limited involvement with derivative
financial instruments and has not used them for trading purposes. These
instruments have been used to manage the interest rate risk from origination
of fixed rate residential mortgage loans for sale in the secondary markets. In
October, 1997, management decided to discontinue its operation of originating
fixed rate residential mortgage loans for sale in the secondary markets. The
impact of winding down this operation was immaterial to the Company's
financial condition and results of operations as of and for the year ended
December 31, 1997. Commensurate with this decision, the Company is no longer
involved with derivative financial instruments as the limited involvement
heretofore was for purposes of managing the interest rate risk from the
origination of fixed rate residential mortgage loans for sale in the secondary
markets. Prior to October, 1997 the Company utilized Treasury note futures and
forward sales of mortgage-backed securities to hedge interest rate risk
associated with its residential mortgage banking activities. Futures and
forward sale contracts provided for the sale of underlying securities
including mortgage-backed securities at a specified future date, at a
specified price or yield. The amount of the futures and forward sale contracts
was determined by the aggregate amount of fixed rate commitments for mortgage
loans that are expected to be funded plus the amount of fixed rate residential
mortgages categorized as being held for sale that have not been sold. The fair
value of the underlying futures and forward sale contracts was expected to
move inversely to the change in fair value of the mortgage loans.
The Company never intended to deliver the underlying assets that the forward
sale contracts commit to sell; rather, it purchased offsetting contracts to
eliminate the obligation. There is no basis risk related to the use of forward
sale contracts on mortgage-backed securities since their fair value is based
on similar mortgage loans. However, a gain or loss would arise from the
difference between the fair value and the forward sale price of the mortgage-
backed security. The counterparties to the forward sale contracts were Merrill
Lynch, the Chicago Board of Trade ("CBOT") and the Federal Home Loan Mortgage
Corporation ("FHLMC") respectively; therefore, there was little or no risk of
default.
<PAGE>
As of December 31, 1997 and 1996, there were outstanding fixed rate
mortgages held for sale of $2.7 million and $1.9 million, and a notional value
of derivative instruments of $0, and $500,000, respectively. For the years
ended December 31, 1997, 1996 and 1995, the Company had realized net losses of
$53,300, $6,500 and $114,000. As of December 31, 1997 and 1996, unrealized
losses related to its hedging activities were $0 and $625, respectively.
NOTE 7 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Land $ 1,246 $ 1,246
Bank Premises 1,504 1,504
Leasehold Improvements 2,060 2,052
Furniture, Fixtures and Equipment 8,536 7,902
-------- --------
13,346 12,704
Less: Accumulated Depreciation and Amortization (7,637) (6,898)
-------- --------
TOTAL $ 5,709 $ 5,806
======== ========
</TABLE>
The range of estimated depreciable lives is 25 years for bank premises, five
to fifteen years for leasehold improvements and three to five years for
furniture, fixtures and equipment.
The Company conducts a portion of its operations in leased facilities under
non-cancelable operating leases expiring at various dates through 2009. The
following summarizes the Company's future minimum lease commitments as of
December 31, 1997:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- --------------------------
<S> <C>
1998 $ 1,932
1999 2,028
2000 1,677
2001 1,490
2002 1,320
Thereafter 8,518
-------
TOTAL $16,965
=======
</TABLE>
Net rental expense included in occupancy expense was approximately
$2,170,000, $2,095,000, and $2,177,000, for the years ended December 31, 1997,
1996 and 1995, respectively.
NOTE 8 - OTHER REAL ESTATE OWNED
As of December 31, 1997, other real estate owned ("OREO") consisted of
seventeen properties with a net carrying value of $7.9 million. As of December
31, 1996 OREO consisted of twenty-six properties with a net carrying value of
$13.0 million. The following table sets forth OREO by type of property as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------
(IN THOUSANDS) 1997 1996
- --------------------------------------------
<S> <C> <C>
PROPERTY TYPE
Single-Family Residential $ 380 $ 901
Condominium 2,598 6,284
Multi-Family Residential 220 -
Land for Residential 3,715 1,413
Land for Commercial - 735
Land for Agriculture 15 -
Retail Facilities 3,003 5,228
Office - 250
Less: Valuation Allowance (2,060) (1,823)
-------- --------
TOTAL $ 7,871 $12,988
======== ========
</TABLE>
A summary of activity in the valuation allowance is as follows for the years
indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $1,823 $ 611 $ 429
Provision Charged to Operations 650 1,335 1,504
Charge-Offs (413) (123) (1,322)
------- ------- --------
BALANCE AT END OF YEAR $2,060 $1,823 $ 611
======= ======= ========
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, net other real estate
owned expense (income) was comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net Gain on Sale of Other Real Estate Owned $(2,705) $ (441) $ (163)
Provision for Losses on Other Real Estate Owned 650 1,335 1,504
Net Operating Expenses 1,243 1,117 1,404
-------- ------- -------
NET OTHER REAL ESTATE OWNED EXPENSE (INCOME) $ (812) $2,011 $2,745
======== ======= =======
</TABLE>
NOTE 9 - REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment ("REI") at December 31, 1997 and 1996 was
comprised of investments in low income housing projects.
<PAGE>
As of December 31, 1997 and 1996, the Company had three investments totaling
$8.4 million and $9.7 million, respectively, in limited partnerships formed
for the purpose of investing in real estate projects which qualify for low
income housing tax credits. The limited partnerships will generate tax credits
over a weighted average remaining period of approximately 4 1/2 years. Please
refer to note 12 of the notes to consolidated financial statements for income
tax effects. The following table identifies the pertinent details of the three
projects as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31,
- -----------------------------------------------------------
PROJECT 1997 1996
NAME % OWNERSHIP DATE ACQUIRED AMOUNT AMOUNT
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Liberty 7.2% Mar-90 $5,054,000 $6,086,000
Greenview 98.4% Sep-92 2,802,000 3,011,000
Las Brisas 49.5% Dec-93 504,000 589,000
---------- ----------
TOTAL $8,360,000 $9,686,000
========== ==========
</TABLE>
The method of accounting for the Greenview investment approximates the
results if the investment were consolidated. A $1.4 million first deed of
trust on the Greenview property is included in accrued expenses and other
liabilities on the Company's consolidated balance sheet. The cost method is
used for the investment in Liberty with the investment being amortized over
the remaining period that tax credits will be received. A method approximating
the equity method is used for the Las Brisas investment.
Expenses incurred for REI and included in other expense were $1,329,000,
$1,443,000, and $1,388,000 for the years ended 1997, 1996 and 1995,
respectively. REI expense includes the amortization of the investments in the
real estate projects which qualify for low income housing tax credits, and
totaled $1,326,000 in 1997 and 1996 and $1,050,000 in 1995.
NOTE 10 - DEPOSITS
The Bank obtains deposits primarily through a network of fifteen full
service branches located in the state of California, primarily, Southern
California. Deposits obtained by the Bank are insured by the Bank Insurance
Fund of the Federal Deposit Insurance Corporation, up to a maximum of $100,000
for each depositor.
The following table sets forth the average amount of and the average rate
paid on each of the following deposit categories for the years ending December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS) AMOUNT % OF TOTAL RATE AMOUNT % OF TOTAL RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Noninterest-Bearing
Demand Deposits $ 140,761 11.34% -% $ 132,088 11.54% -%
Interest-Bearing Demand
Deposits 228,819 18.43 2.29 213,910 18.68 2.10
Saving Deposits 110,628 8.91 2.74 131,849 11.52 2.70
Time Deposits 761,277 61.32 5.07 667,047 58.26 4.92
---------------------------------------------------------
TOTAL DEPOSITS $1,241,485 100.00% 4.26% $1,144,894 100.00% 4.04%
=========================================================
</TABLE>
<PAGE>
As of December 31, 1997, and 1996, there were no brokered deposits
outstanding. During 1997, the Bank accepted deposits from the State of
California. As of December 31, 1997, these deposits totaled $78 million. The
Company has pledged securities in the amount of 110 percent of this deposit
amounting to $85.8 million, as of December 31, 1997. The securities pledged are
various U.S. government agency issues. The Company believes that the majority of
its deposit customers have strong ties to the Bank. Although the Company has a
significant amount of time certificates of deposit of $100,000 or more having
maturities of one year or less, the depositors have generally renewed their
deposits in the past at their maturity. Accordingly, the Company believes its
deposit source to be stable.
Deposits outstanding as of December 31, 1997, mature as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) AMOUNT
- -------------------------------------
<S> <C>
Immediately Withdrawable: $ 464,685
Year Ending December 31:
1998 824,039
1999 3,039
2000 59
2001 -
2002 10
----------
TOTAL $1,291,832
==========
</TABLE>
NOTE 11 - SUBORDINATED DEBT
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. The prepayment premium for the early extinguishment
of the debt was $841,000 pre-tax. Net of taxes of $353,000, the prepayment
premium is included as an extraordinary item amounting to $488,000.
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, was received by the Company. The
discount is amortized 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. As of December 31, 1997, in the opinion of
management, the Company was in compliance with all the terms, conditions and
provisions of the Indenture.
NOTE 12 - INCOME TAXES
Income taxes (benefit) expense in the accompanying consolidated statements
of income is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current Taxes:
Federal $ 5,316 $6,411 $ 60
State 2,658 2,377 1,033
-------- ------- -------
Total 7,974 8,788 1,093
Deferred Taxes:
Federal 2,895 (511) 397
State 595 592 (82)
-------- ------- -------
Total 3,490 81 315
Taxes credited to
stockholders' equity for exercise of stock options 2,841 310 19
-------- ------- -------
Total provision for income taxes per consolidated
statements of income 14,305 9,179 1,427
Tax Benefit on Extraordinary Item (353) - -
-------- ------- -------
Total $13,952 $9,179 $1,427
======== ======= =======
Deferred Taxes Charged/(Credited) to Stockholders'
Equity Related to Available for Sale Securities $ 732 $ (781) $4,367
======== ======= =======
</TABLE>
<PAGE>
Tabulated below are the significant components of the net deferred tax asset
at December 31, 1997 and December 31, 1996 (as restated for the 1996 tax
return as filed and adjusted):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Components of the Deferred Tax Asset:
Provision for Credit Losses $ (8,400) $(8,166)
California Franchise Taxes (1,116) (666)
Loan Fee Income (174) (174)
Allowance for Other Real Estate Owned (756) (836)
Other (226) (85)
--------- --------
(10,672) (9,927)
Valuation Allowance 250 250
--------- --------
Deferred Tax Asset, Net of Valuation Allowance $(10,422) $(9,677)
--------- --------
Components of the Deferred Tax Liability:
Leveraged Leases 4,736 850
Low Income Housing 3,795 3,506
Unrealized Gain on Securities 1,206 474
Discount Accretion 1,513 1,453
--------- --------
Deferred Tax Liability $ 11,250 $ 6,283
--------- --------
Net Deferred Tax Liability (Asset) $ 828 $(3,394)
========= ========
</TABLE>
The valuation allowance at December 31, 1997 and 1996, relates to the net
deductible temporary differences that cannot be realized through carrybacks to
prior periods or projection of future income. In evaluating the reliability of
its deferred tax assets, management has considered income from future
operations, the turnaround of deferred tax liabilities and current and prior
years' taxes paid.
A reconciliation of the statutory federal corporate income tax rate to the
effective income tax rate on consolidated income before income tax expense
follows:
<TABLE>
<CAPTION>
PERCENT OF PRE-TAX
EARNINGS YEAR ENDED
DECEMBER 31,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal Corporate Income Tax Rate 35.0% 35.0% 35.0%
State Tax, Net of Federal Income Tax Effect 6.3 6.8 6.8
Increase (Decrease) Resulting from:
Non-taxable Interest Income on Municipal Securities and
Dividend Exclusion on Auction Preferred Stocks (1.0) (2.3) (3.6)
Low Income Housing Tax Credits (4.7) (6.7) (23.1)
Other, Net (0.6) (0.3) 0.6
------ ------ -------
35.0% 32.5% 15.7%
====== ====== =======
</TABLE>
The Company had a current income tax (payable) receivable of $(1,420,000)
and $241,000 as of December 31, 1997 and 1996.
<PAGE>
NOTE 13 - EARNINGS PER SHARE
The following is the reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the years as
indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1997 FOR THE YEAR ENDED 1996 FOR THE YEAR ENDED 1995
- ------------------------------------------------------------------------------------------------------------------------
PER- PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) ACCOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income before
extraordinary item $26,434,000 $19,037,000 $7,649,000
----------- ----------- ----------
BASIC EPS
Income available to
common
stockholders $26,434,000 6,866,000 $3.85 $19,037,000 6,722,000 $2.83 $7,649,000 6,663,000 $1.15
----------- --------- ----- ----------- --------- ----- ---------- --------- -----
EFFECT OF DILUTIVE
SECURITIES
Options - common
stock equivalent 207,000 161,000 1,000
--------- --------- ---------
DILUTED EPS
Income available to
common
stockholder's plus
assumed
conversions $26,434,000 7,073,000 $3.74 $19,037,000 6,883,000 $2.77 $7,649,000 6,664,000 $1.15
=========== ========= ===== =========== ========= ===== ========== ========= =====
</TABLE>
NOTE 14 - PENDING LITIGATION
LEGAL ACTION
In the normal course of business,
the Company is subject to pending and
threatened legal actions. After
reviewing pending actions with
counsel, management considers that
the outcome of such actions will not
have a material adverse effect on the
financial condition or the results of
operations of the Company.
NOTE 15 - EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The Company has an employee stock
option plan for certain key
employees. Option prices under the
plan must be at least equal to the
fair market value per share of the
stock at the date of grant. Options
become vested over a four year period
and include five vestings. If an
option expires without having been
exercised, usually two years from
date of vesting, the unpurchased
shares are again available for future
grants. As of December 31, 1997,
authorized stock option shares were
1,320,000 and 447,160 options were
available for future grant. The
maximum term of options granted was
10 years as of December 31, 1997 and
1996.
<PAGE>
A summary of stock option activity and related option prices for 1997, 1996
and 1995 follows:
<TABLE>
<CAPTION>
Range of or
Number Weighted-Average Option Price
of Shares Option Price Per Share
--------- ---------------- ---------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 643,169 $13.71 $13.02 - $20.05
- ------------------------------------------------------------------------
Granted 101,000 $13.50 $13.50
Exercised (12,779) $13.52 $13.18 - $16.95
Forfeited (22,042) $14.35 $13.18 - $17.05
Expired (34,160) $15.36 $13.02 - $20.05
BALANCE AT DECEMBER 31, 1995 675,188 $13.55 $13.18 - $20.05
- ---------------------------- --------- ------ ---------------
Granted 70,500 $17.38 $17.38
Exercised (80,066) $14.53 $13.18 - $17.38
Forfeited (21,800) $15.11 $13.25 - $17.38
Expired (17,942) $15.15 $13.18 - $16.95
BALANCE AT DECEMBER 31, 1996 625,880 $13.76 $13.18 - $20.05
- ---------------------------- --------- ------ ---------------
Granted 50,250 $29.10 $28.50 & $31.50
Exercised (228,580) $13.97 $13.18 - $28.50
Forfeited (14,350) $19.57 $13.50 - $28.50
Expired (1,000) $14.78 $13.50 - $15.75
BALANCE AT DECEMBER 31, 1997 432,200 $15.24 $13.18 - $31.50
============================ ========= ====== ===============
</TABLE>
The following table indicates relevant information for all stock options
outstanding, as of December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
Remaining Contractual
Shares Exercise Price Life (in Years)
------- -------------- ---------------------
<S> <C> <C> <C>
303,000 $13.18 4.0
32,700 13.50 2.3
3,000 13.88 2.1
3,100 15.50 0.9
9,600 15.75 1.6
38,000 17.38 2.8
32,800 28.50 3.2
10,000 31.50 3.3
------- ---------
TOTAL 432,200 3.6 YEARS
======= =========
</TABLE>
The following table indicates relevant information for all exercisable stock
options, as of December 31, 1997:
<TABLE>
<CAPTION>
Shares Exercise Price
------- --------------
<S> <C> <C>
237,000 $13.18
4,900 13.50
3,100 15.50
3,100 15.75
5,600 17.38
4,000 28.50
2,000 31.50
-------
TOTAL 259,700
=======
</TABLE>
<PAGE>
As of December 31, 1997, 1996 and
1995, exercisable options were
259,700, 368,780 and 348,180 shares,
respectively. The weighted average
exercise price for all exercisable
stock options as of December 31, 1997
and 1996 was $13.71 and $13.38,
respectively.
On December 19, 1991, the Board of
Directors of the Company amended the
employment agreement of the Company's
CEO. The agreement was approved by
the shareholders on March 19, 1992
and provided for an employment term
of seven years, commencing January 1,
1992, ending September 9, 1998 and
renewable for a successive 12-month
period. The CEO was granted 462,000
stock options at $13.18 per share
adjusted for the 10% stock dividend
paid on July 15, 1992. The shares are
exercisable in seven cumulative
annual installments of 66,000 shares.
These shares are included in the
above summary tables.
CONTINGENT STOCK OPTION PLAN
A contingent stock option plan issued at market is in effect which allows
certain key officers of the Bank to purchase up to an aggregate of 287,450
shares (as of December 31, 1997) of the Company's authorized but unissued
common stock at a price of $3.72 - $28.50 per share. The stock options may be
exercised by the optionee only in the event of certain triggering events, such
as a merger, sale or disposition of all of the assets by the Company, or the
Bank, or any similar event in which neither the Company nor the Bank is a
survivor. Each of the contingent stock options is for a term of indefinite
duration, provided, however, said options shall terminate upon the death of
the optionee or in the event the optionee ceases to be employed by the
Company. A summary of contingent stock option activity and related option
prices for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Range of or
Number Weighted Average Option Price
of Shares Option Price Per Share
--------- ---------------- --------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 272,450 $ 7.99 $3.72 - $20.04
- -----------------------------------------------------------------------
Granted 10,500 $13.50 $13.50
Forfeited (5,500) $13.50 $13.50
BALANCE AT DECEMBER 31, 1995 277,450 $ 8.09 $3.72 - $20.04
- ---------------------------- -------- ------ --------------
BALANCE AT DECEMBER 31, 1996 277,450 $ 8.09 $3.72 - $20.04
- ---------------------------- -------- ------ --------------
Granted 10,000 $28.50 $28.50
BALANCE AT DECEMBER 31, 1997 287,450 $ 8.80 $3.72 - $28.50
============================ ======== ====== ==============
</TABLE>
The following table indicates relevant information for all contingent stock
options outstanding, as of December 31, 1997:
<TABLE>
<CAPTION>
Shares Exercise Price
------- --------------
<S> <C> <C>
121,000 $ 3.72
48,400 4.34
15,730 13.02
24,200 13.18
8,470 13.22
5,000 13.50
25,000 13.88
6,000 16.25
5,500 16.59
6,050 16.94
12,100 20.04
10,000 28.50
-------
TOTAL 287,450
=======
</TABLE>
The weighted average exercise price of all the contingent stock options
outstanding was $8.80.
There were no contingent stock options that were exercisable as of December
31, 1997.
PRO FORMA NET INCOME AND EARNINGS PER SHARE
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for the fair
value of the options granted in the consolidated financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income and
earnings
<PAGE>
per share ("EPS") would have been changed to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT
PER SHARE DATA) 1997 1996 1995
- -------------------------------------------------
<S> <C> <C> <C>
Net Income as Reported $25,946 $19,037 $7,649
Pro Forma Net Income $25,745 $18,906 $7,581
EPS as Reported - Basic $ 3.78 $ 2.83 $ 1.15
EPS as Reported - Diluted $ 3.67 $ 2.77 $ 1.15
Pro Forma EPS - Basic $ 3.75 $ 2.81 $ 1.14
Pro Forma EPS - Diluted $ 3.64 $ 2.75 $ 1.14
</TABLE>
The Black-Scholes model was utilized for purposes of the option pricing. The
volatility of 28.38%, 30.17% and 28.96% for the options granted in 1997, 1996
and 1995, respectively, was based on historical weekly closing prices and
historical annual dividend rates. The expected life of the options ranged from
1 month to 51 months. The weighted average fair value at date of grant for
options granted during 1997, 1996 and 1995 was $7.01, $4.46 and $3.37,
respectively. The risk free interest rate was assumed at 5% for all periods.
Pro forma net income reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of four years and compensation cost for options granted prior
to January 1, 1995 is not considered. Pro forma net income does not reflect
options granted under the contingent stock option plan as the options will
become exercisable only upon the occurrence of certain triggering events the
dates of which cannot be determined.
GENERAL BANK 401(K) PLAN
In 1988, the Bank established a 401(k) Plan in which all employees of the
Bank may elect to enroll each January 1 or July 1 of every year provided that
they have been employed for at least one year prior to the semi-annual
enrollment date. Employees may contribute up to 10 percent of their annual
base salary (15% effective for 1998 and thereafter) with the Company matching
100 percent of the employee's contribution, up to 5 percent of that employee's
base salary. In 1997, 1996, and 1995, the Bank's contribution amounted to
$267,000, $274,000, and $203,000, respectively.
In 1995, there was an amendment to the General Bank 401(k) plan, whereby a
participant loan feature was added to allow participants to borrow against
their own fund in case of family emergency.
EXECUTIVE INCENTIVE SAVINGS PLAN
In 1992, the Board of Directors of the Bank authorized an Incentive Savings
Plan which replaced the Executive Deferred Compensation Plan established in
1988. Under the plan, if any bonus or profit sharing award is received during
the year by any vice president or any officer of the Bank ranking above such
position (including officers who are also directors), he or she is allowed to
set aside up to 30% of such bonus or profit sharing award received in the
payment year, and the Bank will contribute additional funds for each
participant to pay the federal income tax for the portion of the bonus or
award so set aside. This arrangement is tied to a paid-up life insurance
program having investment features and the participant has the right to choose
different investment vehicles for the investment of the portion of the bonus
or award set aside as described above. The Bank has contributed approximately
$572,000, $271,000, and $86,000 to this plan in 1997, 1996 and 1995,
respectively.
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The consolidated balance sheets do not reflect various commitments relating
to financial instruments which are used in the normal course of business.
These instruments include commitments to extend credit, letters of credit and
futures contracts. Management does not anticipate that the settlement of these
financial instruments will have a material adverse effect on the financial
condition or the operations of the Company.
These financial instruments carry various degrees of credit and market risk.
Credit risk is defined as the possibility that a loss may occur from the
failure of another party to perform according to the terms of the contract.
Market risk is the possibility that future changes in the market price may
render less valuable a financial instrument.
The contractual amounts of commitments to extend credit and letters of
credit represent the amount of credit risk. Since many of the commitments and
letters of credit are expected to expire without being drawn, the contractual
amounts do not necessarily represent future cash requirements.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank receives a fee for
providing a commitment. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary,
by the Bank upon
<PAGE>
the extension of credit is based on management's evaluation. Collateral held
varies but may include accounts receivable, inventory, property, equipment and
real estate. As of December 31, 1997, the Company's undisbursed loan
commitments amounted to approximately $362.5 million, of which $77.5 million
related to construction loans. As of December 31, 1996, the Company's
undisbursed loan commitments amounted to approximately $164.1 million, of
which $59.8 million related to construction loans. As of December 31, 1997 and
1996, $111.7 million and $79.9 million of loan commitments were related to a
program to which the Bank and various other minority-owned banks participate
in the granting of credit to large U.S. corporations, all of which are rated A
or better by one or both of the major rating services at the time of entering
into the agreement. All of the commitments are for one year or less. The
Company does not anticipate funding in the majority of instances.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. Commercial letters of credit
are issued to customers to facilitate foreign or domestic trade transactions.
They represent a substitution of the Bank's credit for the customer's credit.
The Company also has off-balance sheet risk associated with its involvement
with its financial futures contracts. Please refer to the discussion of
derivative financial instruments in note 6 of the notes to consolidated
financial statements.
The following is a summary of various financial instruments with off-balance
sheet risk as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------
<S> <C> <C>
Commitments to Extend Credit $365,358 $164,073
Standby Letters of Credit 11,938 10,929
Bills of Lading Guarantee 531 171
Commercial Letters of Credits 51,074 30,593
Forward Sale Contracts - 500
</TABLE>
As of December 31, 1997, commitments to fund fixed-rate loans and
adjustable-rate loans were $12.3 million and $353.1 million, respectively. As
of December 31, 1996, commitments to fund fixed-rate loans and adjustable-rate
loans were $8.0 million and $156.1 million, respectively.
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND DUE FROM BANKS
The carrying amount of cash and due from banks is considered fair value.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Outstanding amounts under these categories were overnight transactions as of
December 31, 1997 and 1996 and are considered to be carried at fair value.
SECURITIES
For securities including securities held to maturity and securities
available for sale, fair values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS AND LEASES
Fair values are estimated for portfolios of loans with similar financial
characteristics. These portfolios were then segmented into fixed and
adjustable interest rate classifications.
Adjustable rate loans are considered to be carried at fair value.
The fair value of fixed rate loans was calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan.
The leases included in the loan category are considered to be carried at
fair value. Of the $14.6 million of net leases, $13.8 million is represented
by two leveraged leases involving aircraft which were separately acquired in
December, 1997 and 1996.
The entire allowance for credit losses was applied to classified loans
including non-accruals. Accordingly, they are considered to be carried at fair
value as the allowance
<PAGE>
for credit losses represents the estimated discount for credit risk for the
applicable loans.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
DEPOSIT LIABILITIES
The fair value of demand deposits, interest bearing demand, savings
accounts, and certain money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposits
is estimated using the rates the Bank was offering as of December 31, 1997 and
1996 for deposits of similar remaining maturities.
SUBORDINATED DEBT
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
The fair value of financial futures contracts is based on quoted market
prices or dealer quotes.
The fair value disclosed hereinafter does not reflect any premium or
discount that could result from offering the instruments for sale. Potential
taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in the amounts disclosed. The fair value
estimates are dependent upon subjective estimates of market conditions and
perceived risks of financial instruments at a point in time and involve
significant uncertainties resulting in variation in estimates with changes in
assumptions.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Due from Banks $ 32,519 $ 32,519 $ 46,809 $ 46,809
Fed Funds Sold and Securities
Purchased Under
Agreement to Resell 108,000 108,000 140,200 140,200
Securities Available for Sale 643,660 643,660 519,821 519,821
Securities Held to Maturity 58,045 58,169 12,274 12,463
Loans, Net 617,605 608,910 582,507 573,964
FINANCIAL LIABILITIES:
Deposits 1,291,832 1,292,307 1,201,513 1,201,426
Subordinated Debt 38,745 42,977 15,000 15,825
1997 1996
- ---------------------------------------------------------------------------
<CAPTION>
CONTRACT FAIR CONTRACT FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS:
Commercial Letters of Credit $ 51,074 $ 128 $ 30,593 $ 76
Standby Letters of Credit 11,938 180 10,929 124
Bill of Lading Guarantees 531 1 171 -
Undisbursed Loans 365,358 3,633 164,073 1,804
Forward Sale Contract - - 500 (1)
</TABLE>
<PAGE>
NOTE 18 - CONDENSED FINANCIAL INFORMATION OF GBC BANCORP (PARENT COMPANY)
Condensed balance sheets as of December 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Due From Bank Subsidiary $ 1,221 $ 512
Securities Available for Sale - 5,125
Investment in Subsidiaries 134,995 114,407
Advance to Bank Subsidiary 45,700 6,000
Other Assets 4,722 6,844
--------- ---------
TOTAL ASSETS $186,638 $132,888
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends Payable $ 839 $ 677
Other Liabilities 731 575
Subordinated Debt 38,745 15,000
--------- ---------
TOTAL LIABILITIES 40,315 16,252
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, no par value or stated value;
20,000,000 shares
authorized; 6,995,049 and 6,766,469 shares
outstanding at
December 31, 1997 and 1996, respectively 53,314 47,281
Retained Earnings 91,355 68,716
Unrealized Gain on Securities Available for
Sale, Net of Tax 1,663 646
Foreign Currency Translation Adjustment (9) (7)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 146,323 116,636
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $186,638 $132,888
========= =========
Condensed statements of income for the years ended December 31, 1997, 1996,
and 1995 follow:
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income from Bank Subsidiary $ 1,639 $ 106 $ 813
Interest Income-Other 199 395 395
Dividends Received from Bank Subsidiary 8,307 13,021 2,134
-------- --------- ---------
TOTAL INCOME 10,145 13,522 3,342
Interest Expense 2,553 1,596 1,596
Non-Interest Expense 105 130 48
-------- --------- ---------
TOTAL EXPENSE 2,658 1,726 1,644
Income Before Income Taxes and Extraordinary
Item 7,487 11,796 1,698
Income Tax Benefit (394) (615) (281)
-------- --------- ---------
Income Before Extraordinary Item 7,881 12,411 1,979
Extraordinary Charge (488) - -
-------- --------- ---------
Income Before Equity in Undistributed
Earnings of Subsidiaries 7,393 12,411 1,979
Equity in Undistributed Earnings of Subsidiar-
ies 18,553 6,626 5,670
-------- --------- ---------
NET INCOME $25,946 $ 19,037 $ 7,649
======== ========= =========
</TABLE>
<PAGE>
Condensed statements of cash flows for the years ended December 31, 1997,
1996, and 1995 follow:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
NET INCOME $ 25,946 $19,037 $ 7,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Net decrease/(increase) in other assets 5,016 (5,817) (78)
Equity in undistributed earnings of subsidiaries (18,553) (6,626) (5,670)
Net increase/(decrease) in other liabilities 156 571 (281)
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,565 7,165 1,620
--------- -------- --------
INVESTING ACTIVITIES:
Net increase in cash invested in subsidiaries (40,647) (6,251) -
Proceeds from sale of available for sale
securities 5,000 - -
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (35,647) (6,251) -
--------- -------- --------
FINANCING ACTIVITIES:
Cash dividends paid (3,144) (2,424) (2,134)
Proceeds from issuance of subordinated notes 38,690 - -
Redemption of subordinated debt (15,000) - -
Proceeds from exercise of stock options/sales of
stock 3,192 1,313 266
Other, net 53 143 -
--------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 23,791 (968) (1,868)
--------- -------- --------
NET CHANGE IN DUE FROM BANK 709 (54) (248)
Due from bank at beginning of year 512 566 814
--------- -------- --------
Due from bank at end of year $ 1,221 $ 512 $ 566
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ 2,279 $ 1,578 $ 1,578
Income tax refunds (615) (281) (293)
</TABLE>
NOTE 19 - REGULATORY MATTERS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") was adopted in order to reform the regulation and supervision of
financial institutions and the insured deposits of financial institutions.
This law requires the FDIC to assume responsibility for insuring the deposits
of financial institutions formerly insured by the Federal Savings and Loan
Insurance Corporation. FIRREA establishes two separate insurance funds to be
administered by the FDIC. Insurance premiums on deposit insurance will be
assessed by the FDIC independently for the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund. The Omnibus Budget Reconciliation Act of
1990 revised the assessment rates. The assessment rate for BIF members is the
greater of 0.15 percent or such rate as the Board of Directors of the FDIC, at
its discretion, determines to be appropriate to maintain the reserve ratio at
the designated reserve ratio or to increase the ratio to the designated
reserve ratio within a reasonable period of time.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
provided for increased funding for FDIC deposit insurance and for expanded
regulation of the banking industry. Among other things, FDICIA requires the
federal banking regulators to take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements. FDICIA
establishes five capital ratio categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and "crit-
ically undercapitalized."
A depository institution is "well capitalized" if it significantly exceeds
the minimum level required by regulation for each relevant capital measure,
"adequately
45
<PAGE>
capitalized" if it meets each such measure, "undercapitalized" if it fails to
meet any such measure, "significantly undercapitalized" if it is significantly
below any such measure, and "critically undercapitalized" if it fails to meet
any critical capital level set forth in the regulation. The critical capital
level must be a level of tangible equity equal to at least 2% of total assets,
but may be fixed at a higher level by regulation. A depository institution may
be deemed to be in a capitalization category that is lower than is indicated
by its actual capital position if it receives an unsatisfactory examination
rating and may be reclassified to a lower category by action based on other
supervisory criteria. For an institution to be "well capitalized" it must have
a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6%, and a leverage ratio of at least 5% and not be subject
to any specific capital order or directive. For an institution to be
adequately capitalized it must have a total risk-based capital ratio of at
least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage
ratio of at least 4% (3% in some cases).
During 1992, pursuant to the provisions of FDICIA, the federal banking
regulators set forth the definitions for "adequately capitalized" and "well
capitalized" institutions. An "adequately capitalized" institution is one that
meets the minimum regulatory capital requirements. A "well capitalized"
institution is one with capital ratios as shown in the following table. Both
the Company and the Bank are considered to be well capitalized. As of
December 31, 1997, Tier 1 capital, total capital and leverage ratios for both
the Company and the Bank exceeded the "well capitalized" ratio requirements as
follows:
<TABLE>
<CAPTION>
MINIMUM WELL
GBC GENERAL REGULATORY CAPITALIZED
BANCORP BANK REQUIREMENTS REQUIREMENTS
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 13.57% 12.45% 4% 6%
Total 18.47% 13.71% 8% 10%
Leverage Ratio 9.58% 8.78% 4% 5%
</TABLE>
As of December 31, 1996, Tier 1 capital, total capital and leverage ratios
for both the Company and the Bank exceeded the "well capitalized" ratio
requirements as follows:
<TABLE>
<CAPTION>
MINIMUM WELL
GBC GENERAL REGULATORY CAPITALIZED
BANCORP BANK REQUIREMENTS REQUIREMENTS
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 11.97% 11.81% 4% 6%
Total 13.69% 13.06% 8% 10%
Leverage Ratio 8.74% 8.61% 4% 5%
</TABLE>
The Financial Code of the State of California provides that dividends paid
by the Bank in any one year may not exceed the lesser of the Bank's undivided
profits or the net income for the prior three years, less cash distributions
to stockholders during such period. As of December 31, 1997, approximately
$30.8 million of undivided profits of the Bank is available for dividends to
the Company, subject to the subordinated debt covenant restrictions.
NOTE 20 - OTHER NON-INTEREST EXPENSE
Components of other non-interest expense in excess of 1% of the sum of total
interest income and non-interest income for each period were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Office Supplies and Communication Expense $1,346 $1,395 $1,347
Professional Services Expense 1,380 2,428 1,756
FDIC Assessment Expense 148 150 1,299
Real Estate Investment Expense 1,329 1,443 1,388
Other 1,795 1,844 1,864
------ ------ ------
TOTAL $5,998 $7,260 $7,654
====== ====== ======
</TABLE>
<PAGE>
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended in 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $25,734 $27,159 $28,189 $29,814
Interest Expense 11,050 11,949 12,923 13,501
Net Interest Income 14,684 15,210 15,266 16,313
Provision for Credit Losses 1,000 - - -
Income Before Income Taxes and Extraordinary
Item 8,418 9,989 9,748 12,584
Extraordinary Charge - - 488 -
Net Income 5,744 6,460 5,858 7,884
Earnings Per Share - Basic 0.85 0.95 0.85 1.13
Earnings Per Share - Diluted 0.82 0.92 0.82 1.10
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended in 1996
(IN THOUSANDS, EXCEPT PER
SHARE DATA) MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $23,284 $24,495 $24,189 $25,673
Interest Expense 10,666 11,192 10,893 10,910
Net Interest Income 12,618 13,303 13,296 14,763
Provision for Credit Losses 1,500 1,000 1,000 1,000
Income Before Income Taxes 6,362 6,962 7,564 7,328
Net Income 4,309 4,662 4,980 5,086
Earnings Per Share - Basic 0.64 0.69 0.74 0.75
Earnings Per Share - Diluted 0.63 0.68 0.72 0.73
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of GBC Bancorp:
We have audited the accompanying consolidated balance sheets of GBC Bancorp
(a California corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GBC
Bancorp and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 30, 1998
<PAGE>
Exhibit 21
Subsidiaries of GBC Bancorp State of Incorporation
- --------------------------- ----------------------
General Bank California
GBC Venture Capital, Inc. California
Subsidiaries of General Bank
- ----------------------------
GBC Investment & Consulting Company, Inc. California
GBC Insurance Services, Inc. California
Southern Counties Escrow California
GBC Leasing Company, Inc. California
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000351710
<NAME> GBC BANCORP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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