<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission file number 0-16213
---------
GBC BANCORP
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3586596
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 West 6th Street, Los Angeles, California 90017
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 213/972-4174
--------------
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Former name address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common stock, no par value, 14,162,898 shares issued and outstanding as
of September 30, 1998.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION...........................................
Item 1. Financial Statements...........................................
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................
PART II - OTHER INFORMATION...............................................
Item 1. Legal Proceedings..............................................
Item 2. Changes In Securities..........................................
Item 3. Default Upon Senior Securities.................................
Item 4. Submission Of Matters To A Vote Of Securities Holders .........
Item 5. Other Information..............................................
Item 6. Exhibits And Reports On Form 8-K...............................
PART III - SIGNATURES.....................................................
<PAGE>
PART I - FINANCIAL INFORMATION
<PAGE>
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In Thousands) 1998 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 30,070 $ 32,519
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 137,500 108,000
Securities Available for Sale at Fair
Value (Amortized Cost of $613,407
and $640,791 at September 30, 1998
and December 31, 1997, Respectively) 621,626 643,660
Securities Held to Maturity (Fair Value
of $62,481 and $58,169 at
September 30 1998 and December 31,
1997, Respectively) 62,293 58,045
Loans and Leases 751,116 638,829
Less: Allowance for Credit Losses (17,410) (16,776)
Deferred Loan Fees (5,788) (4,448)
------------- -------------
Loans and Leases, Net 727,918 617,605
Bank Premises and Equipment, Net 5,498 5,709
Other Real Estate Owned, Net 6,803 7,871
Due From Customers on Acceptances 7,463 11,768
Real Estate Held for Investment 7,365 8,360
Accrued Interest Receivable and Other
Assets 16,251 15,900
------------- -------------
Total Assets $ 1,622,787 $ 1,509,437
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-Interest Bearing Demand $ 156,446 $ 149,616
Interest Bearing Demand 266,874 218,729
Savings 83,086 96,340
Time Certificates of Deposit of
$100,000 or More 585,672 595,077
Other Time Deposits 287,989 232,070
------------- -------------
Total Deposits 1,380,067 1,291,832
Subordinated Debt 38,843 38,745
Acceptances Outstanding 7,463 11,768
Accrued Expenses and Other Liabilities 26,071 20,769
------------- -------------
Total Liabilities 1,452,444 1,363,114
Stockholders' Equity:
Common Stock, No Par or Stated Value;
40,000,000 and 20,000,000 Shares
Authorized at September 30, 1998 and
December 31, 1997, Respectively;
14,162,898 and 6,995,049 Shares
Outstanding at September 30, 1998
and December 31, 1997, Respectively $ 56,067 $ 53,314
Accumulated Other Comprehensive Income 4,754 1,654
Retained Earnings 109,522 91,355
------------- -------------
Total Stockholders' Equity 170,343 146,323
------------- -------------
Total Liabilities and Stockholders'
Equity $ 1,622,787 $ 1,509,437
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In Thousands, Except Per Share Data) 1998 1997 1998 1997
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and Leases, Including Fees $ 20,237 $ 15,951 $ 54,689 $ 46,921
Securities Available for Sale 10,132 9,505 30,418 26,594
Securities Held to Maturity 1,129 917 3,796 1,681
Federal Funds Sold and Securities
Purchased under Agreements to
Resell 1,843 1,812 5,311 5,882
Other 1 4 7 4
---------- ---------- ---------- ----------
Total Interest Income 33,342 28,189 94,221 81,082
INTEREST EXPENSE
Interest-Bearing Demand 2,001 1,379 5,169 3,856
Savings 535 747 1,778 2,310
Time Certificates of Deposit of
$100,000 or More 7,684 7,528 23,306 21,616
Other Time Deposits 3,611 2,373 10,047 6,444
Federal Funds Purchased and
Securities Sold under Repurchase
Agreements 2 10 18 12
Subordinated Debt 870 886 2,611 1,684
---------- ---------- ---------- ----------
Total Interest Expense 14,703 12,923 42,929 35,922
Net Interest Income 18,639 15,266 51,292 45,160
Provision for Credit Losses - - - 1,000
---------- ---------- ---------- ----------
Net Interest Income after
Provision for Credit Losses 18,639 15,266 51,292 44,160
NON-INTEREST INCOME
Service Charges and Commissions 1,633 1,532 4,731 4,298
Gain on Sale of Loans, Net 344 56 368 130
Other 258 187 721 472
---------- ---------- ---------- ----------
Total Non-Interest Income 2,235 1,775 5,820 4,900
NON-INTEREST EXPENSE
Salaries and Employee Benefits 5,015 4,238 13,674 12,039
Occupancy Expense 727 701 2,213 2,109
Furniture and Equipment Expense 523 464 1,524 1,337
Other Real Estate Owned
Expense, Net 51 481 490 960
Other 1,853 1,409 5,078 4,460
---------- ---------- ---------- ----------
Total Non-Interest Expense 8,169 7,293 22,979 20,905
Income before Income Taxes and
Extraordinary Item 12,705 9,748 34,133 28,155
Provision for Income Taxes 4,827 3,402 12,781 9,605
Net Income before Extraordinary ---------- ---------- ---------- ----------
Item 7,878 6,346 21,352 18,550
Extraordinary Item:
Early Extinguishment of Debt,
Net of Taxes of $353,000 - (488) - (488)
---------- ---------- ---------- ----------
Net Income $ 7,878 $ 5,858 $ 21,352 $ 18,062
========== ========== ========== ==========
Basic Earnings Per Share:
Net Income before
Extraordinary Item $ 0.56 $ 0.46 $ 1.51 $ 1.36
Extraordinary Item - (0.03) - (0.03)
---------- ---------- ---------- ----------
Net Income $ 0.56 $ 0.43 $ 1.51 $ 1.33
========== ========== ========== ==========
Diluted Earnings Per Share:
Net Income before
Extraordinary Item $ 0.55 $ 0.44 $ 1.48 $ 1.32
Extraordinary Item - (0.03) - (0.03)
---------- ---------- ---------- ----------
Net Income $ 0.55 $ 0.41 $ 1.48 $ 1.29
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30, September 30,
(In Thousands) 1998 1997 1998 1997
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 7,878 $ 5,858 $ 21,352 $ 18,062
---------- ---------- ---------- ----------
Other Comprehensive Income,
Net of Tax:
Change in Unrealized
Gains on Securities
Available for Sale,
Net of Tax,
During the Period 2,216 1,583 3,100 978
---------- ---------- ---------- ----------
Other Comprehensive Income 2,216 1,583 3,100 978
---------- ---------- ---------- ----------
Comprehensive Income $ 10,094 $ 7,441 $ 24,452 $ 19,040
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
(In Thousands) 1998 1997
- - -------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 21,352 $ 18,062
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 947 890
Net Amortization/(Accretion) of
Premiums/Discounts on Securities 363 (196)
Accretion of Discount on Subordinated Notes 98 22
Writedown on Real Estate Held for Investment 995 995
Provision for Credit Losses - 1,000
Provision for Losses on Other Real Estate Owned - 150
Amortization of Deferred Loan Fees (2,396) (1,676)
Gain on Sale of Loans (368) (130)
Gain on Sale of Other Real Estate Owned (114) (126)
Gain on Sale of Bank Premises and Equipment - (21)
Loans Originated for Sale - (30,479)
Proceeds from Sale of Loans Originated for Sale 368 27,562
Net Decrease in Accrued Interest
Receivable and Other Assets (2,601) (18)
Net Increase in Accrued Expenses and Other
Liabilities 6,591 4,053
Other, Net 19 (3)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 25,254 $ 20,085
========== ==========
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (244,275) (404,880)
Proceeds from Maturities of Securities
Available for Sale 271,123 300,446
Purchases of Securities Held to Maturity (50,090) (48,947)
Proceeds from Maturities of Securities
Held to Maturity 46,015 11,285
Net Increase in Loans and Leases (108,818) (9,897)
Proceeds from Sale of Other Real Estate Owned 2,453 1,786
Capitalized Costs of Other Real Estate Owned (370) (368)
Purchases of Bank Premises and Equipment (756) (734)
Proceeds from Sale of Bank Premises and
Equipment - 21
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES $(84,718) $(151,288)
---------- ----------
FINANCING ACTIVITIES:
Net Increase in Noninterest Bearing
Demand, Interest-Bearing Demand and
Savings Deposits 41,721 20,555
Net Increase in Time Certificates of Deposit
and Other Time Deposits 46,514 61,218
Proceeds from Issuance of Subordinated Notes - 38,690
Redemption of Subordinated Note - (15,000)
Cash Dividend Paid (2,962) (2,306)
Proceeds from Exercise of Stock Options 1,242 3,015
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 86,515 $ 106,172
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 27,051 (25,031)
Cash and Cash Equivalents at Beginning of
Period 140,519 187,009
---------- ----------
Cash and Cash Equivalents at End of Period $ 167,570 $ 161,978
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During This Period
Interest $ 42,540 $ 35,932
Income Taxes (Amount net of $1,426 of
tax refunds plus interest) 3,538 3,780
========== ==========
Noncash Investing Activities:
Loans Transferred to Other Real Estate
Owned at Fair Value $1,036 $ 4,060
Loans to Facilitate the Sale of Other
Real Estate Owned 137 715
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
GBC Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- - -------------------------------------------------------
In the opinion of management, the unaudited consolidated financial
statements of GBC Bancorp and its subsidiaries (the "Company") as of
September 30, 1998 and the three and nine months ended September 30, 1998 and
1997, reflect all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation. Operating results for the
three and nine months ended September 30, 1998, are not necessarily indicative
the results that may be expected for the full year ending December 31, 1998.
In the opinion of management, the aforementioned consolidated financial
statements are in conformity with generally accepted accounting principles.
Earnings Per Share
- - -------------------
Basic earnings per share is determined by dividing net income by the
weighted average number of shares of common stock outstanding, while diluted
earnings per share is determined by dividing net income by the weighted
average number of shares of common stock outstanding adjusted for the
dilutive effect of common stock equivalents. Earnings per share for the
three-month and nine-month periods ended September 30, 1997 have been restated
to reflect a 2 for 1 stock split to shareholders of record on April 30, 1998
and issued and distributed on May 15, 1998.
Consolidated Statements of Cash Flows
- - --------------------------------------
Cash and cash equivalents consist of cash and due from banks, and federal
funds sold and securities purchased under agreements to resell.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
----------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------
OVERVIEW
- - ---------
Net income for the third quarter of 1998 was $7,878,000, or $0.55
diluted earnings per share, compared to $5,858,000 or $0.41 diluted earnings
per share, for the corresponding period of 1997. The third quarter of 1997
included an after tax extraordinary charge of $488,000 incurred upon an early
extinguishment of debt. Excluding this extraordinary charge, net income for
the third quarter of 1997 was $6,346,000, or $0.44 diluted earnings per share.
The increase in net income was due to an increase in net interest income and
non-interest income, and the absence of an extraordinary charge, partially
offset by an increase of non-interest expense. 1998 was favorably impacted
by the repayments in full of two performing loans, one of which was a
restructured debt. The repayments resulted in the recognition of $1,458,000
of pretax interest income, $1.7 million of recoveries to the allowance for
credit losses, and the reduction of $7.0 million of restructured loans.
For the nine months ended September 30, 1998, net income totaled
$21,352,000, an increase of $3,290,000, or 18.2%, from the $18,062,000 earned
during the corresponding period of 1997. Diluted earnings per share for the
nine months ended September 30, 1998 was $1.48 compared to $1.29 for the same
period of 1997. Excluding the 1997 extraordinary charge discussed above, net
income was $18,550,000, or $1.32 diluted earnings per share. The increase in
net income was primarily due to an increase in net interest income, the absence
of a provision for credit losses, higher non-interest income, and the absence
of an extraordinary charge, partially offset by higher non-interest expense.
As of September 30, 1998, record high levels were achieved for loans and
leases, for total assets and stockholders' equity.
For the quarter ended September 30, 1998 and 1997, the annualized return
on average assets ("ROA") was 1.94% and 1.60%, respectively, and the annualized
return on average stockholders' equity ("ROE") was 18.9% and 17.5%,
respectively.
For the nine months ended September 30, 1998 and 1997, the ROA was 1.81%
and 1.73%, respectively. For the nine months ended September 30, 1998 and
1997, the ROE was 18.1% and 19.4%, respectively.
On September 17, 1998,the Board of Directors authorized a stock
repurchase program of up to 1.4 million shares of the Company's stock. No
shares were purchased as of September 30, 1998 but as of November 13, 1998,
368,600 shares had been repurchased and will be reflected in the financial
results of the fourth quarter and thereafter.
Recent Developments
- - --------------------
During 1998, significant disruptions to certain financial markets in Asia
have continued. Although the Company engages in international trade financing,
the majority of the business involves imports and all of the Company's loans
are denominated in U.S. dollars. The Company has no foreign loans in its loan
portfolio as of September 30, 1998. The primary source of prepayment for
substantially all of the Company's loans is from the cash flows generated from
the borrowers' operations, which are located within the United States. There
could be adverse financial impacts on individual borrowers as they adjust their
businesses to the changes caused by the financial disruptions, but at this
time, management believes that negative impacts, if any, should not be
significant.
On November 13, 1998, GBC Bancorp announced that a borrower with an
outstanding loan balance of $12.6 million has informed its subsidiary bank,
General Bank, that it intends to file for bankruptcy proceedings.
Accordingly, General Bank has placed these loans on non-accrual. These
loans are collateralized by a first deed of trust on a commercial property
with an appraised value of $8.0 million as well as other assets of the
borrower, including equipment with a book value exceeding $10 million. An
updated estimate of the value of the collateral, together with the credit
evaluation of the rest of the loan portfolio, will be performed as usual
at year-end to determine the adequacy of the allowance for credit losses.
However, it is possible that a provision for credit losses of some amount
may have to be recorded in the fourth quarter of 1998.
RESULTS OF OPERATIONS
- - ----------------------
Net Interest Income-Quarterly Results
- - --------------------------------------
For the quarters ended September 30, 1998 and 1997, net interest income
before the provision for credit losses was $18,639,000 and $15,266,000,
respectively, representing an increase of $3,373,000, or 22.1%. The components
explaining this increase are discussed below.
Total interest income for the quarter ended September 30, 1998 was
$33,342,000, representing a $5,153,000, or 18.3%, increase over the
corresponding quarter of a year ago. The increase was due to both the growth
of $182.9 million, or 13.2%, of average interest earning assets and a 36-basis
points increase in the yield on average earning assets from 8.09% during the
third quarter in 1997 to 8.45% in the corresponding quarter of 1998.
The increase of average interest earning assets was comprised primarily
of loan growth of $120.4 million. There was also a $60.3 million and $2.1
million growth of the securities portfolio and federal funds sold and
securities purchased under agreements to resell, respectively.
The 36-basis point increase in the yield on earning assets from the third
quarter of 1997 to the corresponding quarter of 1998 was primarily the result
of the repayment of the two performing loans and the recognition of $1,458,000
of interest income recoveries. Excluding the $1,458,000 of the interest income
recoveries, the yield on interest earning assets for the third quarter of 1998
would be 8.08%, a 1-basis point decline from the corresponding year ago period
of 1997. The decline is due to reductions of the yield in both the securities
and the loan and lease portfolios. The impact of these yield declines was
partially offset by an increase of the percentage of average loans and leases
to total average interest earning assets. For the quarter ended September 30,
1998, average loans and leases represented 46.8% of total average interest
earning assets compared to 44.3% for the corresponding period of a year ago.
Average loans and leases for 1997 excludes $13.0 million of loans to depository
institutions. There were no loans to depository institutions outstanding
during 1998. Loans and leases represents the highest yielding interest earning
asset.
Total interest expense for the quarter ended September 30, 1998 was
$14,703,000, representing a $1,780,000, or 13.8%, increase over the
corresponding quarter of a year ago. The increase was due to both a growth of
$120.8 million of average-interest bearing liabilities, and an increased cost
of funds.
For the quarter ended September 30, 1998, the cost of funds was 4.60%
compared to 4.47% for the corresponding period of a year ago. This increase
was primarily the result of an increase in the rates paid on interest-bearing
deposits, which increased from 4.30% to 4.46% for the quarters ended September
30, 1997 and 1998, respectively. With the exception of savings deposits whose
average balance declined in the third quarter 1998 compared to third quarter
1997, the rates paid on all interest-bearing deposits increased. In addition,
the increase in the average amount of subordinated debt increased interest
expense. For the quarters ended as indicated, the average balance and the
cost of funds for subordinated debt and the Bank's deposit products were as
follows:
<TABLE>
<CAPTION>
For the Quarter Ended September 30,
1998 1997
-------------------------------------
<S> <C> <C>
Interest-bearing demand -
Average balance 276,119 235,426
Rate 2.88% 2.32%
Savings - Average balance 81,676 108,893
Rate 2.60% 2.73%
Time certificates of deposit:
of $100,000 or more -
Average balance 584,159 574,481
Rate 5.22% 5.20%
Other time deposits -
Average balance 288,046 191,886
Rate 4.97% 4.90%
Subordinated debt -
Average balance 38,821 36,770
Rate 8.96% 9.64%
</TABLE>
In addition, upward pressure on the rates paid on deposits was exerted as
a result of the increased percentage of average time certificates of deposit to
average total interest-bearing deposits. This percentage was 70.9% and 69.0%
for the quarters ended September 30, 1998 and 1997, respectively. Time
certificates of deposit represent the most costly deposit product for the
Bank.
The net interest spread is defined as the yield on interest earning
assets less the rates paid on interest-bearing liabilities. For the three
months ended September 30, 1998 and 1997, the net interest spread increased
to 3.85% from 3.62%, respectively. The increase in the spread is primarily the
result of the interest income recoveries discussed above. Excluding the
interest income recoveries of $1,458,000, the net interest spread is 3.48% for
the three months ended September 30, 1998. The 14-basis point decrease is
primarily due to the increased cost of funds as explained above.
The net interest margin is defined as the annualized difference between
interest income and interest expense divided by average interest earning
assets. For the three months ended September 30, 1998 and 1997, the net
interest margin was 4.73% and 4.38%, respectively. The increase in the spread
is primarily the result of the interest income recoveries discussed above.
Excluding these recoveries, the net margin for the three months ended
September 30, 1998 was 4.36%, down two basis-points from the corresponding
period of a year ago.
Net Interest Income - Year-to-Date Results
- - -------------------------------------------
For the nine months ended September 30, 1998, net interest income before
the provision for credit losses was $51,292,000, representing a $6,132,000, or
13.6%, growth over the corresponding period of a year ago.
Total interest income for the nine months ended September 30, 1998 was
$94,221,000 compared to $81,082,000 for the corresponding period of a year ago.
The $13,139,000, or 16.2%, increase is primarily the result of an increase in
both the balance of average interest earning assets and to a lesser extent in
the yield on average interest earning assets. Average interest earning assets
increased to $1,525.5 million for the nine months ended September 30, 1998 from
$1,322.5 million for the corresponding period of a year ago, representing a
$203.0 million, or 15.4%, increase. The growth was represented by increases of
$127.9 million and $90.8 million in the securities and loan and lease
portfolios, respectively, partially offset by $15.7 million decrease of federal
funds sold and securities purchased under agreements to resell.
The yield on average earning assets increased six basis points to 8.26%
for the nine months ended September 30, 1998 from 8.20% for the corresponding
period of a year ago. However, as was the case for the quarterly net interest
discussion above, when interest income recoveries of $1,458,000 are excluded,
the 1998 yield decreased compared to 1997. A resulting 7-basis point decline
was due to yield decreases of all categories of earning assets. This was
partially offset by an increase of the percentage of average loans and leases
to total average interest earning assets. For the nine months ended September
30, 1998 and 1997, average loans and leases as a percentage of total average
interest earning assets were 45.5% and 43.4%, respectively. The 1997 average
loans and leases included $28.6 million of loans to depository institutions
which has been factored out for the above computation. The Bank had no
outstanding loans to depository institutions during 1998.
Total interest expense for the nine months ended September 30, 1998, was
$42,929,000 compared to $35,922,000 for the corresponding period of a year ago.
The increase of $7,007,000, or 19.5%, was due to an increase in the average
balance of interest bearing deposits and an increase in the cost of funds.
For the nine months ended September 30, 1998 and 1997, the average balance of
interest bearing deposits was $1,247.2 million and $1,109.1 million,
respectively, an increase of $138.1 million, or 12.5%. The majority of this
increase was represented by the growth of the average balance of time
certificates of deposit from $745.2 million for the nine months endedg
September 30, 1997 to $863.3 million for the nine months ended September 30,
1998, representing $118.1 million, or 15.9% increase. Of this growth, average
public funds accepted from the State of California accounted for $88.3 million,
thereby representing the majority of growth in time certificates of deposit.
For the nine months ended September 30, 1998 and 1997, the cost of
funds increased by 27-basis points to 4.60% from 4.33%, respectively. The
increase continues as the result primarily of both the increased percentage of
total average interest bearing deposits represented by time certificates of
deposits and the increased rates paid on all categories of interest bearing
deposits with the exception of saving deposits. For the nine months ended
September 30, 1998 and 1997, average time certificates of deposit as a
percentage of total average interest-bearing deposits were 71.5% and 68.6%,
respectively. Time certificates of deposit represent the most costly deposit
product for the Bank. In addition, interest expense increased as a result of
the increase in the average amount of subordinated debt by 74%, albeit at a
reduced rate of interest. The average balance and the rates paid on deposit
categories and subordinated debt for the nine months ended September 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Interest-bearing demand -
Average balance 256,495 227,653
Rate 2.69% 2.26%
Savings - Average balance 88,176 113,576
Rate 2.70% 2.72%
Time certificates of deposit:
of $100,000 or more -
Average balance 593,351 565,040
Rate 5.25% 5.11%
Other time deposits -
Average balance 269,971 180,168
Rate 4.98% 4.78%
Subordinated debt -
Average balance 38,789 22,336
Rate 8.98% 10.05%
</TABLE>
For the nine months ended September 30, 1998 and 1997, the net interest
spread declined to 3.66% from 3.87%, respectively, representing a 21-basis
point decrease. The compression of the spread is primarily the result of the
interest-bearing liabilities as discussed in the above paragraphs, partially
offset by the $1,458,000 of interest income recoveries. Excluding these
recoveries, the net interest spread for 1998 was 3.53%.
For the nine months ended September 30, 1998 and 1997, the net interest
margin was 4.50% and 4.57%, respectively, representing a 7-basis point decline.
Excluding the interest income recoveries, the net interest margin was 4.37%,
representing a 20-basis point decline from the corresponding nine month period
of a year ago.
Provision for Credit Losses
- - ----------------------------
For the quarters ended September 30, 1998 and 1997, there was no
provision for credit losses. Net recoveries were $1.9 million for the quarter
ended September 30, 1998 and was primarily due to the repayment of the loans
mentioned previously.
For the nine months ended September 30, 1998, there was no provision for
credit losses compared to $1,000,000 for the same period of 1997, a decrease of
$1,000,000. Year-to-date net recoveries were $0.6 million compared to $2.2
million of net charge-offs for the corresponding period of a year ago.
The absence of a provision for credit losses reflects management's
assessment of the adequacy of the allowance for credit losses. The amount of
the provision for credit losses is determined by management and is based upon
the quality of the loan portfolio, management's assessment of the economic
environment, evaluations made by regulatory authorities, historical loan loss
experience, collateral values, assessment of borrower's ability to repay, and
estimates of potential future losses. Please refer to further discussion
under "Allowance for Credit Losses," in the following sections.
Non-Interest Income
- - --------------------
Non-interest income for the quarter ended September 30, 1998 totaled
$2,235,000, representing a $460,000, or 25.9%, increase compared to $1,775,000
for the quarter ended September 30, 1997. The increase was primarily the
result of the transfer and sale of the Bank's mortgage loan servicing portfolio
for a pretax amount of $338,000. Such amount is included as gain on sale of
loans, net. In addition, service charges and commissions increased $101,000
for the quarter ended September 30, 1998 as compared to the quarter ended
September 30, 1997 which resulted from the increased commissions on commercial
and standby letters of credit issuance.
For the nine months ended September 30, 1998, non-interest income totaled
$5,820,000 representing a $920,000, or 18.8%, increase compared to $4,900,000
for the nine months ended September 30, 1997. Other income increased $249,000
primarily due to the interest received on a tax refund in the first quarter of
1998. Increases in service charges and commissions and on gain on sale of
loans were for the reasons explained above.
Non-Interest Expense
- - ---------------------
For the quarter ended September 30, 1998, non-interest expense was
$8,169,000, representing an $876,000, or 12.0%, increase over 7,293,000 for
the corresponding period of a year ago. Salaries and employee benefits
accounted for $777,000 of the increase due to an increase of salaries, an
increase of the incentive compensation which is based on pretax earnings, and
the accrual of compensation based on a 1998 employment agreement. Other
expense increased $444,000, or 31.5%, due to increased legal fees, professional
services expense and various other expense categories. The increase to other
expense was partially offset by a $430,000 decrease in other real estate
owned ("OREO") expense, net. The decline was due to the absence of a provision
for OREO losses and a reduction of OREO holding expenses.
For the nine months ended September 30, 1998, non-interest expense was
$22,979,000 representing a $2,074,000, or 9.9% increase over the $20,905,000
reported for the corresponding period of a year ago. The reason for the
increase is explained above.
For the nine months ended September 30, 1998, the Company's efficiency
ratio, defined as non-interest expense divided by the sum of net interest
income plus non-interest income, declined to 40.2%, comparing favorably to
41.8% for the corresponding period of 1997.
Provision for Income Taxes
- - ---------------------------
For the quarter ended September 30, 1998 and 1997, the provision for
income taxes was $4,827,000 and $3,402,000, respectively, representing
effective tax rates of 38.0% and 34.9%.
For the nine months ended September 30, 1998 and 1997, the provision for
income taxes was $12,781,000 and $9,605,000, representing effective tax rates
of 37.4% and 34.1%, respectively. The increase in the effective tax rates for
the three month and nine month periods ended September 30, 1998 compared to the
corresponding periods of a year ago is primarily due to the growth of pre-tax
income while the low income housing tax credit remained constant.
Extraordinary Item
- - -------------------
During the quarter ended September 30, 1997, the Company incurred an
$841,000 prepayment for the early extinguishment of debt. This amount, net of
taxes of $353,000, is included in the consolidated statements of income as an
extraordinary item for the three and nine months ended September 30, 1997.
There have been no extraordinary items during the nine months ended September
30, 1998.
FINANCIAL CONDITION
- - --------------------
Total assets as of September 30, 1998 were $1,622.8 million, an increase
of $113.4 million from total assets of $1,509.4 million as of December 31,
1997. The increase was the result of an $88.2 million growth of deposits that
was invested primarily in loans and leases. As of September 30, 1998, loans
and leases totaled $751.1 million compared to $638.8 million as of December 31,
1997, a growth of $112.3 million, or 17.6%.
Loans
- - ------
The $112.3 million loan growth was mainly due to increases of $65.2
million and $53.3 million in the commercial and construction loan portfolios,
respectively. The commercial loan growth was primarily in the trade financing
area which increased $54.5 million reflecting the growth in international trade
and new customer relationships.
The following table sets forth the amount of loans and leases outstanding
by category and the percentage of each category to the total loans and leases
outstanding:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------------------------------------------
(DOLLARS IN THOUSANDS) Amount Percentage Amount Percentage
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 298,474 39.74% $ 233,309 36.52%
Real Estate - Construction 143,846 19.15% 90,560 14.18%
Real Estate - Conventional 271,743 36.18% 276,350 43.26%
Installment 48 0.01% 54 0.01%
Other Loans 21,439 2.85% 23,993 3.75%
Leveraged Leases 15,566 2.07% 14,563 2.28%
--------------------------------------------------
Total $ 751,116 100.00% $ 638,829 100.00%
==================================================
</TABLE>
Non-Performing Assets
- - ----------------------
A certain degree of risk is inherent in the extension of credit.
Management has credit policies in place to minimize the level of loan losses
and non-performing loans. The Company performs a quarterly assessment of the
credit portfolio to determine the appropriate level of the allowance; included
in the assessment is the identification of loan impairment. A loan is
identified as impaired when it is probable that interest and principal will not
becollected according to the contractual terms of the loan agreement. Loan
impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral.
The Company has a policy of classifying loans (including impaired
loans) which are 90 days past due as to principal and/or interest as non-
accrual loans unless management determines that the fair value of underlying
collateral is substantially in excess of the loan amount or other
circumstances justify treating the loan as fully collectible. After a loan
is placed on non-accrual status, any interest previously accrued, but not yet
collected, is reversed against current income. A loan is returned to accrual
status only when the borrower has demonstrated the ability to make future
payments of principal and interest as scheduled, and the borrower has
demonstrated a sustained period of repayment performance in accordance with
the contractual terms. Interest received on non-accrual loans generally is
either applied as principal reduction or reported as recoveries on amounts
previously charged-off, in accordance with management's judgment as to the
collectability of principal.
The following table provides information on the Company's past due
loans, non-accrual loans, restructured loans and other real estate owned,
net, as of the dates indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------------------
<S> <C> <C>
Loans 90 Days or More
Past Due and Still Accruing $ 1,088 $ 2,778
Non-accrual Loans 12,359 9,834
---------- ----------
Total Past Due Loans 13,447 12,612
Restructured Loans 11,188 20,323
---------- ----------
Total Non-performing Loans 24,635 32,935
Other Real Estate Owned, Net 6,803 7,871
---------- ----------
Total Non-Performing Assets $ 31,438 $ 40,806
========== ==========
</TABLE>
Total non-performing assets decreased to $31.4 million, as of September
30, 1998, from $40.8 million, as of December 31, 1997, representing a $9.4
million, or 23.0%, reduction. The net decrease was primarily due to the
pay-off of $7.0 million of restructured loans in the third quarter of 1998.
Loans 90 days or More Past Due and Still Accruing
- - --------------------------------------------------
As of September 30, 1998, this category of loans is comprised of two
credits. It is anticipated that both loans will be paid off in full in
the near future.
Non-Accrual Loans
- - ------------------
As of September 30, 1998, non-accrual loans totaled $12.4 million, an
increase of $2.6 million from December 31, 1997, but a reduction from first
and second quarter levels in 1998.
The following table breaks out the Company's non-accrual loans by
category as of the dates indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) September 30, 1998 December 31, 1997
- - ----------------------------------------------------------------------
<S> <C> <C>
Commercial $ 9,330 $ 5,957
Real Estate- Construction 335 455
Real Estate- Conventional 2,689 3,414
Other Loans 5 8
---------- ---------
Total $ 12,359 $ 9,834
========== =========
</TABLE>
Of the $12.4 million of non-accrual loans, $3.0 million are collateralized
by real property with appraisal value considerably in excess of the carrying
value of the loans, thus providing substantial protection against the loss of
principal.
The increase in those non-accrual loans classified as commercial is
primarily in the trade financing portfolio. These loans are collateralized by
a variety of business assets and the Bank does not anticipate any significant
losses.
The following table analyzes the change in non-accrual loans during the
nine months ended September 30, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- - -------------------------------------------------------
<S> <C>
Balance, December 31, 1997 $ 9,834
Add: Loans placed on non-accrual 12,281
Less: Charge-offs (1,851)
Returned to accrual status (1,690)
Repayments (5,179)
Transfer to OREO (1,036)
----------
Balance, September 30, 1998 $ 12,359
==========
</TABLE>
Restructured Loans
- - -------------------
The balance of restructured loans as of September 30, 1998 was $11.2
million compared to $20.3 million as of December 31, 1997, representing a $9.1
million, or 44.8% decrease. As indicated previously, the decline was primarily
due to the pay-off of $7.0 million of restructured loans during the third
quarter. 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 non-accrual status in accordance with the Bank's policy of classifying loans
which are 90 days past due as to principal and/or interest. Restructured loans
which are on non-accrual status are not included in the balance of restructured
loans. As of September 30, 1998, one restructured loan totaling $685,000 was
on non-accrual status. As of September 30, 1998, restructured loans excluding
the one non-accrual loan consisted of 11 loans compared to 15 loans as of
December 31, 1997. The weighted average yield of the restructured loans was
10.00% as of September 30, 1998.
There are no commitments to lend additional funds on any of the
restructured loans.
Other Real Estate Owned
- - ------------------------
As of September 30, 1998, other real estate owned, net of
valuation allowance of $2.0 million, totaled $6.8 million, representing a
decrease of $1.1 million, or 13.9%, from the net balance of $7.9 million, net
of valuation allowance of $2.1 million, as of December 31, 1997. As of
September 30, 1998 and December 31, 1997, OREO consisted of 20 properties and
17 properties, respectively.
The outstanding OREO properties are all physically located in the Bank's
market area. They include single family residences, condominiums, commercial
buildings, and land. Seven properties comprise the land category of OREO. The
Company does not intend to develop these properties; rather, it will sell the
land undeveloped.
The following table sets forth OREO by property type as of the dates
indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------------------
<S> <C> <C>
PROPERTY TYPE
Single-Family Residential $ 474 $ 380
Condominium 1,090 2,598
Multi-Family Residential - 220
Land for Residential 3,715 3,715
Land for Commercial 15 -
Land for Agriculture - 15
Retail Facilities 3,509 3,003
Less: Valuation Allowance (2,000) (2,060)
--------- ---------
Total $ 6,803 $ 7,871
========= =========
</TABLE>
Impaired Loans
- - ---------------
A loan is identified as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. Loan impairment is measured by estimating the expected future cash
flows and discounting them at the respective effective interest rate or by
valuing the underlying collateral. Of the $5.5 million of outstanding impaired
loans as of September 30, 1998, $1.6 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 the dates indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) September 30, 1998 December 31, 1997
- - ------------------------------------------------------------------------------
<S> <C> <C>
Recorded Investment with
Related Allowance $ 5,476 $ 16,095
Recorded Investment with no
Related Allowance - 1,022
--------- ----------
Total Recorded Investment 5,476 17,117
Specific Allowance on
Impaired Loans 665 1,544
</TABLE>
The average balance of impaired loans before the allowance was $13.3
million for the nine months ended September 30, 1998 and $22.4 million for
the year ended December 31, 1997.
For the nine months ended September 30, 1998 and 1997, interest income
recognized on impaired loans was $233,000 and $1,304,000, respectively. Of the
amount of interest income recognized during the nine months ended September 30,
1998 and 1997, no interest was recognized under the cash basis method.
Management cannot predict the extent to which the current economic
environment, including the real estate market, may continue to improve or
worsen, or the full impact such environment may have on the Bank's loan
portfolio. Futhermore, as the Bank's primary regulators review the loan
portfolio as part of their routine, periodic examinations of the Bank, their
assessment of specific credits may affect the level of the Bank's non-
performing loans. Accordingly, there can be no assurance that other loans will
not be placed on non-accrual, become 90 days or more past due, have terms
modified in the future, or become OREO.
Allowance for Credit Losses
- - ----------------------------
As of September 30, 1998, the balance of the allowance for credit losses
was $17.4 million, representing 2.32% of outstanding loans and leases. This
compares to an allowance for credit losses of $16.8 million as of December 31,
1997, representing 2.63% of outstanding loans and leases, respectively.
The table below summarizes the activity in the total allowance for credit
losses (which amount includes the specific allowance on impaired loans) for the
nine months ended as indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS) September 30, 1998 September 30, 1997
- - -----------------------------------------------------------------------------
<S> <C> <C>
Balance, Beginning of Period $ 16,776 $ 16,209
Provision for Credit Losses - 1,000
Charge-offs (1,829) (4,207)
Recoveries 2,463 1,960
Net Recoveries (Charge-offs) 634 (2,247)
Balance, End of Period $ 17,410 $ 14,962
</TABLE>
As of September 30, 1998, the allowance represents 70.7% and 141% of non-
performing loans and of non-accrual loans, respectively. As of December 31,
1997, the allowance represented 50.9% and 171% of non-performing loans and of
non-accrual loans, respectively.
On a quarterly basis, management reviews all criticized credits as
identified both internally and by outside sources, including the Bank's
regulators. Specific allocations of a required allowance are made based on
these reviews, as well as on the historical loss experience of criticized
credits. In addition, a percentage of non-criticized credits is also computed
for purposes of the allowance requirement. The sum of these two allocations is
compared with the actual recorded allowance for adequacy. Based on management's
quarterly review as of September 30, 1998, management believes no provision
for credit losses was necessary. Management believes that the allowance for
credit losses is adequate to cover known and inherent losses related to loans
and leases outstanding as of September 30, 1998.
Securities
- - -----------
The Company classifies its securities as held to maturity or available
for sale. Securities classified as held to maturity are those that the Company
has the positive intent and ability to hold until maturity. These securities
are carried at amortized cost.
Securities that could be sold in response to changes in interest rates,
increased loan demand, liquidity needs, capital requirements or other similar
factors, are classified as securities available for sale. These securities
are carried at fair value, with unrealized gains or losses reflected net of
tax in stockholders' equity.
As of September 30, 1998, the Company recorded net unrealized holding
gains of $8,219,000 on its available for sale portfolio and the inclusion as a
separate component of stockholders' equity of $4,763,000, representing the net
unrealized holding gains, net of tax.
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of securities at September 30, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
September 30, 1998 Cost Gains Losses Value
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity
U.S. Government Agencies $ 62,267 $ 188 $ - $ 62,455
Collateralized Mortgage
Obligations 26 - - 26
-----------------------------------------------------
Total Securities
Held to Maturity $ 62,293 $ 188 $ - $ 62,481
=====================================================
Securities Available for Sale
U. S. Treasuries $ 1,866 $ 7 $ - $ 1,873
U.S. Government Agencies 87,713 399 - 88,112
Mortgage Backed Securities 45,682 576 - 46,258
Corporate Notes 3,000 - - 3,000
Collateralized Mortgage
Obligations 250,854 2,519 - 253,373
Asset Backed Securities 209,732 4,648 - 214,380
Auction Preferred Stock 8,499 - - 8,499
Other Securities 6,061 70 - 6,131
-----------------------------------------------------
Total Securities
Available for Sale $ 613,407 $ 8,219 $ - $ 621,626
=====================================================
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- - --------------------------------------------------------------------------------------
Securities Held to Maturity
U.S. Government Agencies $ 58,003 $ 124 $ - $ 58,127
Collateralized Mortgage
Obligations 42 - - 42
-----------------------------------------------------
Total Securities
Held to Maturity $ 58,045 $ 124 $ - $ 58,169
=====================================================
Securities Available for Sale
U. S. Treasuries $ 6,889 $ 11 $ - $ 6,900
U.S. Government Agencies 220,205 187 - 220,392
Mortgage Backed Securities 57,167 326 - 57,493
Corporate Notes 9,006 175 - 9,181
Collateralized Mortgage
Obligations 188,092 460 - 188,552
Asset Backed Securities 135,263 1,710 - 136,973
Auction Preferred Stock 18,500 - - 18,500
Other Securities 5,669 - - 5,669
-----------------------------------------------------
Total Securities
Available for Sale $ 640,791 $ 2,869 - $ 643,660
=====================================================
</TABLE>
There were no sales of securities available for sale or held to maturity
during the nine months ended September 30, 1998 and 1997.
Deposits
- - ---------
The Company's deposits totaled $1,380.1 million as of September 30, 1998,
representing an $88.3 million, or 6.8%, increase from total deposits of
$1,291.8 million as of December 31, 1997. The growth for the nine months ended
September 30, 1998, was primarily due to increases in other time deposits,
which grew $55.9 million, or 24.1%. Also, interest-bearing demand deposits
reflected an increase of $48.1 million, or 22.0%. During this same period
savings deposits decreased $13.3 million, or 13.8%. The balance of time
certificates of deposit of $100,000 or more decreased $9.4 million from
December 31, 1997. Included in the September 30, 1998 balance of this deposit
category is $93 million of deposits from the State of California, up $15
million from December 31, 1997. Eliminating this $15 million increase, time
certificates of deposit of $100,000 or more declined $24.4 million as of
September 30, 1998 compared to December 31, 1997.
As of September 30, 1998, there were 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, historically, the depositors have generally renewed their deposits upon
maturity.
The maturity schedule of time certificates of deposit of $100,000 or
more, as of September 30, 1998, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- - -------------------------------------------------
<S> <C>
3 Months or Less $ 324,985
Over 3 Months Through One Year 258,027
Over One Year through 5 Years 2,660
Total $ 585,672
</TABLE>
Subordinated Debt
- - ------------------
Subordinated debt is comprised of a $40 million public offering issuance
of 8.375% subordinated notes due August 1, 2007. Proceeds of $38.7 million,
net of underwriting discount of $1.3 million, were received by the Company.
The discount is amortized as a yield adjustment over the 10-year life of the
notes.
Capital Resources
- - ------------------
As of September 30, 1998, stockholders' equity totaled $170.3 million, an
increase of $24.0 million, or 16.4%, from $146.3 million as of December 31,
1997. The increase was due to net income of $21.4 million, less cash dividends
declared to stockholders of $3.2 million, plus the net change in the securities
valuation allowance, net of tax, of $3.1 million, plus the exercise of stock
options and related tax benefits of $2.7 million, for the nine months ended
September 30, 1998.
On September 17, 1998, the Board of Directors authorized a stock
repurchase program of up to 1.4 million shares of the Company's stock. No
shares were purchased as of September 30, 1998, but as of November 13, 1998,
368,600 shares had been repurchased and will be reflected in the financial
results of the fourth quarter and thereafter.
Capital ratios for the Company and for the Bank were as follows as of the
dates indicated:
<TABLE>
<CAPTION>
Well-Capitalized September 30, December 31,
Standards 1998 1997
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
GBC Bancorp
- - ------------
Tier 1 Leverage Ratio 5% 10.26% 9.58%
Tier 1 Risk-Based Capital Ratio 6% 12.51% 13.57%
Total Risk-Based Capital Ratio 10% 16.71% 18.47%
General Bank
- - -------------
Tier 1 Leverage Ratio 5% 9.34% 8.78%
Tier 1 Risk-Based Capital Ratio 6% 11.40% 12.45%
Total Risk-Based Capital Ratio 10% 12.65% 13.71%
</TABLE>
Liquidity and Interest Rate Sensitivity
- - ----------------------------------------
Liquidity measures the ability of the Company to meet fluctuations in
deposit levels, to fund its operations and to provide for customers' credit
needs. Asset liquidity is provided by cash and short-term financial
instruments which include federal funds sold and securities purchased under
agreements to resell, unpledged securities held to maturity maturing within
one year and unpledged securities available for sale. These sources of
liquidity amounted to $672.8 million, or 41.5% of total assets, as of September
30, 1998, compared to $696.3 million, or 46.1% of total assets, as of December
31, 1997.
To further supplement its liquidity, the Company has established federal
funds lines with correspondent banks and three master repurchase agreements
with major brokerage companies. In August, 1992, the Federal Home Loan Bank of
San Francisco ("FHLB") granted the Bank a line of credit currently equal to 25
percent of assets with terms up to 360 months. As of September 30, 1998, the
Company has no borrowing outstanding under this financing facility with the
FHLB. Management believes its liquidity sources to be stable and adequate.
As of September 30, 1998, total loans and leases represented 54.4% of
total deposits. This compares to 49.5% as of December 31, 1997.
The liquidity of the parent company, GBC Bancorp, is primarily dependent
on the payment of cash dividends by its subsidiary, General Bank, subject to
the limitations imposed by the Financial Code of the State of California. For
the nine months ended September 30, 1998, General Bank declared $3.2
million of cash dividends to GBC Bancorp.
Derivatives
- - ------------
As of September 30, 1998 and December 31, 1997, there were no derivative
financial instruments outstanding. As of September 30, 1997, the amount of
derivative financial instruments outstanding was $1 million.
"Gap" Measurement
- - ------------------
While no single measure can completely identify the impact of changes in
interest rates on net interest income, one gauge of interest rate sensitivity
is to measure, over a variety of time periods, contractual differences in the
amounts of the Company's rate sensitive assets and rate sensitive liabilities.
These differences, or "gaps," provide an indication of the extent that net
interest income may be affected by future changes in interest rates. However,
these contractual "gaps" do not take into account timing differences between
the repricing of assets and the repricing of liabilities.
A positive gap exists when rate sensitive assets exceed rate sensitive
liabilities and indicates that a greater volume of assets than liabilities will
reprice during a given period. This mismatch may enhance earnings in a rising
rate environment and may inhibit earnings when rates decline. Conversely, when
rate sensitive liabilities exceed rate sensitive assets, referred to as a
negative gap, it indicates that a greater volume of liabilities than assets
will reprice during the period. In this case, a rising interest rate
environment may inhibit earnings and declining rates may enhance earnings.
"Gap" reports originated as a means to provide management with a tool to
monitor repricing differences, or "gaps," between assets and liabilities
repricing in a specified period, based upon their underlying contractual
rights. The use of "gap" reports is thus limited to a quantification of the
"mismatch" between assets and liabilities repricing within a unique specified
timeframe. Contractual "Gap" reports cannot be used to quantify exposure to
interest rate changes because they do not take into account timing differences
between repricing assets and liabilities, and changes in the amount of
prepayments.
As of September 30, 1998, there was a cumulative one-year negative "gap"
of $467.7 million, compared to a one-year negative gap of $462.7 million as of
December 31, 1997.
The following table indicates the Company's interest rate sensitivity
position as of September 30, 1998, and is based on contractual maturities. It
may not be reflective of positions in subsequent periods:
<TABLE>
<CAPTION>
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 $ 38,255 $ 11,876 $ 72,301 $ 499,194 $ - $ 621,626
Securities Held to Maturity - - 41,323 20,970 - 62,293
Federal Funds Sold &
Securities Purchased Under
Agreement to Resell 137,500 - - - - 137,500
Loans and Leases (1) (2) 545,088 18,623 90,026 85,020 - 738,757
Non-Earning Assets (2) - - - - 62,611 62,611
----------- ----------- ----------- ----------- ------------- -------------
Total Assets $ 720,843 $ 30,499 $ 203,650 $ 605,184 $ 62,611 $ 1,622,787
Source of Funds for Assets:
Deposits:
Noninterest Bearing Demand $ - $ - $ - $ - $ 156,446 $ 156,446
Interest-Bearing Demand 266,874 - - - - 266,874
Savings 83,086 - - - - 83,086
TCD'S Under $100,000 118,336 167,736 1,917 - - 287,989
TCD'S $100,000 and Over 326,812 256,200 2,660 - - 585,672
----------- ----------- ----------- ----------- ------------- -------------
Total Deposits $ 795,108 $ 423,936 $ 4,577 $ - $ 156,446 $ 1,380,067
----------- ----------- ----------- ----------- ------------- -------------
Subordinated Debt $ - $ - $ - $ 38,843 $ - $ 38,843
Other Liabilities - - - - 33,534 33,534
Stockholders' Equity - - - - 170,343 170,343
----------- ----------- ----------- ----------- ------------- -------------
Total Liabilities and
Stockholders' Equity $ 795,108 $ 423,936 $ 4,577 $ 38,843 $ 360,323 $ 1,622,787
=========== =========== =========== =========== ============= =============
Interest Sensitivity Gap $ (74,265) $(393,437) $ 199,073 $ 566,341 $ (297,712)
Cumulative Interest
Sensitivity Gap $ (74,265) $(467,702) $(268,629) $ 297,712 $ -
Gap Ratio (% of Total Assets) -4.6% -24.2% 12.3% 34.9% -18.3%
Cumulative Gap Ratio -4.6% -28.8% -16.6% 18.3% 0.0%
(1) Loans and leases are before unamortized deferred loan fees and allowance
for credit losses.
(2) Nonaccrual loans are included in non-earning assets.
</TABLE>
Effective asset/liability management includes maintaining adequate
liquidity and minimizing the impact of future interest rate changes on net
interest income. The Company attempts to manage its interest rate sensitivity
on an on-going basis through the analysis of the repricing characteristics of
its loans, securities, and deposits, and managing the estimated net interest
income volatility by adjusting the terms of its interest-earning assets and
liabilities, and through the use of derivatives as needed.
Market risk
- - ------------
Market risk is the risk of financial loss arising from adverse changes
in market prices and interest rates. The Company's market risk is inherent in
its lending and deposit taking activities to the extent of differences in the
amounts maturing or degree of repricing sensitivity. Adverse changes in market
prices and interest rates may therefore result in diminished earnings and
ultimately an erosion of capital.
Since the Company's profitability is affected by changes in interest
rates, management actively monitors how changes in interest rates may affect
earnings and ultimately the underlying market value of equity. Management
monitors interest rate exposure through the use of three basic measurement
tools in conjunction with established risk limits. These tools are the
expected maturity gap report, net interest income volatility and market value
of equity volatility reports. The gap report details the expected maturity
mismatch or gap between interest earning assets and interest bearing
liabilities over a specified timeframe. The expected gap differs from the
contractual gap report shown earlier in this section by adjusting contractual
maturities for expected prepayments of principal on loans and amortizing
securities as well as the projected timing of repricing non-maturity deposits.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates categorized by their expected maturity,
as of September 30, 1998:
<TABLE>
<CAPTION>
0 to 90 91 to 365 Over 1 Year Over
(In Thousands) Days Days to 5 Years 5 Years Total
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-sensitive Assets:
Securities Available for Sale $ 120,220 $ 118,560 $ 346,183 $ 36,663 $ 621,626
Securities Held to Maturity 12,153 50,140 - - 62,293
Federal Funds Sold &
Securities Purchased Under
Agreement to Resell 137,500 - - - 137,500
Loans and Leases (1) 545,088 18,623 90,026 85,020 738,757
----------- ----------- ----------- ----------- -------------
Total Interest-earning Assets $ 814,961 $ 187,323 $ 436,209 $ 121,683 $ 1,560,176
=========== =========== =========== =========== =============
Interest-sensitive Liabilities:
Deposits:
Interest-Bearing Demand $ 13,903 $ 41,714 $ 211,257 $ - $ 266,874
Savings 4,155 12,463 66,468 - 83,086
Time Certificates of Deposit 441,727 427,357 4,577 - 873,661
----------- ----------- ----------- ----------- -------------
Total Deposits $ 459,785 $ 481,534 $ 282,302 $ - $ 1,223,621
----------- ----------- ----------- ----------- -------------
Subordinated Debt $ - $ - $ - $ 38,843 $ 38,843
----------- ----------- ----------- ----------- -------------
Total Interest-sensitive
Liabilities $ 459,785 $ 481,534 $ 282,302 $ 38,843 $ 1,262,464
=========== =========== =========== =========== =============
(1) Loans and leases are net of non-accrual loans and before unamortized
deferred loan fees and allowance for credit losses.
</TABLE>
Expected maturities of assets are contractual maturities adjusted for
projected payment based on contractual amortization and unscheduled prepayments
of principal as well as repricing frequency. Expected maturities for deposits
are based on contractual maturities adjusted for projected rollover rates and
changes in pricing for non-maturity deposits. The Company utilizes assumptions
supported by documented analysis for the expected maturities of its loans and
repricing of its deposits and relies on third party data providers for
prepayment projections for amortizing securities. The actual maturities of
these instruments could vary significantly if future prepayments and repricing
differ from the Company's expectations based on historical experience.
The Company uses a computer simulation analysis to attempt to predict
changes in the yields earned on assets and the rates paid on liabilities in
relation to changes in market interest rates. The net interest income
volatility and market value of equity volatility reports measure the exposure
of earnings and capital respectively, to immediate incremental changes in
market interest rates as represented by the prime rate change of 100 to 200
basis points. Market value of portfolio equity is defined as the present
value of assets minus the present value of liabilities and off balance sheet
contracts. The table below shows the estimated impact of changes in interest
rates on net interest income and market value of equity as of September 30,
1998:
<TABLE>
<CAPTION>
Net Interest Market Value of
Change in Interest Income Volatility Portfolio Equity Volatility
Rates (Basis Points) September 30, 1998 (1) September 30, 1998 (2)
- - --------------------------------------------------------------------------------------
<C> <C> <C>
+200 5.13% -10.64%
+100 3.19% -4.48%
-100 -7.99% 1.22%
-200 -15.62% 2.55%
(1) The percentage change in this column represents the change in net interest
income for 12 months under various rate scenarios.
(2) The percentage change in this column represents the change in net
portfolio equity value of the Bank under various rate scenarios.
</TABLE>
The Company's primary objective in managing interest rate risk is to
minimize the adverse effects of changes in interest rates on earnings and
capital. In this regard the Company has established internal risk limits for
net interest income volatility given a 100 and 200 basis point decline in rates
of 10% and 15% respectively, over a twelve-month horizon. Similarly, risk
limits have been established for market value of portfolio equity volatility in
response to a 100 and 200 basis point increase in rates of 10% and 15%,
respectively. Although the Company's net interest income volatility as of
September 30, 1998, given a hypothetical 200-basis point decline of interest
rates, was in excess of the Company's policy, management has decided to not
enter into any hedging contracts because of the current volatility in money
market rates and the uncertainty of the actual repricing of the Company's
assets and liabilities.
On September 30, 1998, the Federal Reserve Bank (the "FRB") announced a
reduction of 25-basis points in the federal funds rate. Again, on October 15,
1998, the FRB reduced the federal funds rate by 25-basis points and dropped
the discount rate from 5.00% to 4.75%. The decline of short-term rates affects
immediately the yield of approximately $680 million of the Company's earning
assets as of September 30, 1998. In addition, there is an increasing rate of
prepayments of the Company's securities that will be reinvested in lower yields
based on current money market conditions. Partially offsetting these
reductions in interest income will be a reduction of interest expense due to
lower rates paid on the Company's time certificates of deposit, which totaled
$874 million as of September 30, 1998, and on other interest-bearing deposits.
Although the net interest income of the Company in the future will be affected
by many variables, including the amount of loan growth in the future, loan
pricing, future changes in money market conditions, and asset/liability
sensitivity, management expects that the immediate effect of the above changes
will be a decline in the net interest spread.
Year 2000
- - ----------
The Company's main software systems have been licensed from large vendors
who have provided certifications of year 2000 compliance. Tests have confirmed
such compliance for these main software systems. Certain ancillary systems
that operate on personal computers are also licensed and the vendors have
informed the Company that releases conforming to year 2000 requirements will be
received this year. The Bank has budgeted $100,000 of expenses related to Year
2000 compliance. Expenses to date have been approximately $18,000. Personal
computers including hardware and software that are not in compliance will be
replaced or modified by June, 1999. Total expenses are expected to be under the
budgeted amount. Management believes that there are no material risks to the
Company from its computer systems related to the Year 2000.
Certain operations, such as payroll and the administration of the
Company's 401(k) plan, are outsourced to outside companies. The Company has
obtained certification of their Year 2000 compliance. Management believes
that there are no material risks to the Company from its outsourced operations
related to the Year 2000.
The Company has sent questionnaires to selected borrowers representing
more than 70% of the outstanding credit commitments by dollar volume at the
time of the mailing. Approximately 89% of the answers to the questionnaires
had been received as of September 30, 1998. The answers were reviewed, and it
has been determined that approximately 33% of the responses represent varying
degrees of concern. In that group, twenty credits with loan commitments of
$157 million at September 30, 1998, have been identified as having potentially
adverse impact on credit quality if Year 2000 issues are not addressed. Those
credits will be placed on the "Watch" list to ensure high visibility and
ongoing monitoring by Bank management if the concerns are not addressed in a
timely manner. Year 2000 compliance will be a factor in all credit decisions
and in the specific allocations of a required allowance for credit losses.
Management believes the Year 2000 does represent an area of potential risk for
credit losses, but also believes the risk is manageable. However, credit
losses could be realized by the Company due to Year 2000 problems affecting the
businesses of borrowers. The amount of such losses would be a function of the
value of the collateral associated with the individual credits. Whether such
potential losses would require an additional provision for credit losses would
be determined in conjunction with the normal quarterly analysis of the adequacy
of the allowance for credit losses.
Forward-Looking Statements
- - ---------------------------
Certain statements contained herein, including, without limitation,
statements containing the words "believes," "intends," "expects" and words of
similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economics and business conditions in
those areas in which the Company operates; demographic changes; competition;
fluctuations in interest rates; changes in business strategy or development
plans; changes in governmental regulation; credit quality; and other factors
referenced herein, including, without limitation, under the captions Provision
for Credit Losses, Non-Performing Assets, Allowance for Credit Losses, Market
Risk Liquidity and Interest Rate Sensitivity, and Recent Developments. Given
these uncertainties, the reader is cautioned not to place undue reliance on
such foward-looking statements. The Company disclaims any obligation to update
any such factors or to publicly announce the results of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.
Recent Accounting Developments
- - -------------------------------
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency denominated forecasted
transaction. The accounting for changes in fair value of a derivative, that is
gains and losses depends on the intended use of the derivative and the resulting
designation.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS 133 must be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of SFAS 133.
SFAS 133 is not to be applied retroactively to financial statements of prior
periods. Management does not believe that there will be a material adverse
impact on the financial position or results of operations of the Company upon
adoption of SFAS 133.
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134") amends SFAS
No. 65, "Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are
substantially similar. SFAS No. 134 requires that after the securitization of
mortgage loans held for sale, the resulting mortgage-backed securities and
other retained interests should be classified in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," based on
the company's intent to sell or hold the investment. SFAS No. 134 is effective
for the first fiscal quarter beginning after December 15, 1998. Implementation
of SFAS 134 will not have a material adverse effect on the Company's financial
condition or results of operations.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
- - --------------------------
The Bank is a defendant in various lawsuits arising from the normal
course of business. No material legal proceedings to which the Registrant or
its subsidiaries is a party have been initiated or terminated during the
quarter ended September 30, 1998. There have been no significant developments
in any material pending legal proceedings involving the Registrant or its
subsidiaries during this same quarter.
Item 2. CHANGES IN SECURITIES
- - -------------------------------
There have been no changes in the securities of the Registrant during the
quarter ended September 30, 1998.
Item 3. DEFAULT UPON SENIOR SECURITIES
- - ----------------------------------------
This item is not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
- - ---------------------------------------------------------------
No matters were submitted to a vote of security holders during the quarter
ended September 30, 1998.
Item 5. OTHER INFORMATION
- - ---------------------------
There are no events to be reported under this item.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- - ------------------------------------------
a) Exhibits: None.
b) Reports on Form 8-K: A form 8-K was filed on October 29, 1998 under
items 4 and 7 for the change in the registrant's certifying accountant.
PART III - SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
GBC Bancorp
(Registrant)
Dated: November 16, 1998 s/ Li-Pei Wu
------------------------ -------------------------
Li-Pei Wu, Chairman and
Chief Executive Officer
Dated: November 16, 1998 s/ Peter Lowe
------------------------ --------------------------
Peter Lowe, Executive
Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 30,070
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 137,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 621,626
<INVESTMENTS-CARRYING> 62,293
<INVESTMENTS-MARKET> 62,481
<LOANS> 751,116
<ALLOWANCE> 17,410
<TOTAL-ASSETS> 1,622,787
<DEPOSITS> 1,380,067
<SHORT-TERM> 0
<LIABILITIES-OTHER> 33,534
<LONG-TERM> 38,843
0
0
<COMMON> 56,067
<OTHER-SE> 114,276
<TOTAL-LIABILITIES-AND-EQUITY> 1,622,787
<INTEREST-LOAN> 54,689
<INTEREST-INVEST> 39,525
<INTEREST-OTHER> 7
<INTEREST-TOTAL> 94,221
<INTEREST-DEPOSIT> 40,300
<INTEREST-EXPENSE> 2,629
<INTEREST-INCOME-NET> 51,292
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,979
<INCOME-PRETAX> 34,133
<INCOME-PRE-EXTRAORDINARY> 21,352
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,352
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.48
<YIELD-ACTUAL> 4.50
<LOANS-NON> 12,359
<LOANS-PAST> 1,088
<LOANS-TROUBLED> 11,188
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,776
<CHARGE-OFFS> 1,829
<RECOVERIES> 2,463
<ALLOWANCE-CLOSE> 17,410
<ALLOWANCE-DOMESTIC> 17,410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
