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, 1999 Commission file number 0-16213
GBC BANCORP
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(Exact name of registrant as specified in its charter)
California 95-3586596
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(State or other jurisdiction of (I.R.S.Employer Identification
incorporation or organization) 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, 11,501,819 shares issued and
outstanding as of September 30, 1999.
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 ..............................................
PART I - FINANCIAL INFORMATION
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In Thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 39,102 $ 27,514
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 8,500 101,000
Securities Available for Sale at Fair Value
(Amortized Cost of $743,079 And $721,000 at
September 30, 1999 and December 31, 1998,
Respectively) 734,508 724,172
Securities Held to Maturity (Fair Value of
$1,403 and $24,677 at September 30, 1999
and December 31, 1998, Respectively) 1,441 24,616
Loans and Leases 921,969 788,945
Less: Allowance for Credit Losses (19,545) (19,381)
Deferred Loan Fees (5,030) (5,914)
------------- -------------
Loans and Leases, Net 897,394 763,650
Bank Premises and Equipment, Net 5,462 5,656
Other Real Estate Owned, Net 9,112 6,885
Due From Customers on Acceptances 8,762 7,249
Real Estate Held for Investment 5,946 7,034
Other Investments 8,859 1,333
Accrued Interest Receivable and Other Assets 10,790 11,715
------------- -------------
Total Assets $ 1,729,876 $ 1,680,824
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 174,798 $ 149,397
Interest Bearing Demand 311,460 280,294
Savings 79,830 81,051
Time Certificates of Deposit of
$100,000 or More 688,473 599,669
Other Time Deposits 212,657 270,492
------------- -------------
Total Deposits 1,467,218 1,380,903
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 15,000 -
Borrowings from the Federal Home Loan Bank 50,000 35,000
Subordinated Debt 38,974 38,876
Acceptances Outstanding 8,762 7,249
Liability on Securities Awaiting Settlement - 30,178
Accrued Expenses and Other Liabilities 21,716 25,588
------------- -------------
Total Liabilities 1,601,670 1,517,794
Stockholders' Equity:
Common Stock, No Par or Stated Value;
40,000,000 Shares Authorized ;
11,501,819 and 13,711,998 shares
Outstanding at September 30, 1999
and December 31,1998, Respectively $ 56,990 $ 56,303
Accumulated Other Comprehensive Income (4,976) 1,829
Retained Earnings 76,192 104,898
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Total Stockholders' Equity 128,206 163,030
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Total Liabilities and Stockholders' Equity $ 1,729,876 $ 1,680,824
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
(In Thousands, Except Per Share Data) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and Leases, Including Fees $ 20,887 $ 20,237 $ 58,652 $ 54,689
Securities Available for Sale 11,745 10,132 34,027 30,418
Securities Held to Maturity 26 1,129 423 3,796
Federal Funds Sold and Securities
Purchased under Agreements to Resell 460 1,843 2,471 5,311
Other 1 1 3 7
---------- ---------- ---------- ----------
Total Interest Income 33,119 33,342 95,576 94,221
INTEREST EXPENSE
Interest Bearing Demand 2,032 2,001 5,419 5,169
Savings 481 535 1,332 1,778
Time Certificates of Deposits of $100,000 or More 7,865 7,684 22,435 23,306
Other Time Deposits 2,362 3,611 7,832 10,047
Federal Funds Purchased and Securities
Sold under Repurchase Agreements 43 2 68 18
Borrowings from the Federal Home Loan Bank 620 - 1,736 -
Subordinated Debt 870 870 2,611 2,611
---------- ---------- ---------- ----------
Total Interest Expense 14,273 14,703 41,433 42,929
Net Interest Income 18,846 18,639 54,143 51,292
Provision for Credit Losses 1,500 - 3,500 -
---------- ---------- ---------- ----------
Net Interest Income after Provision
for Credit Losses 17,346 18,639 50,643 51,292
NON-INTEREST INCOME
Service Charges and Commissions 1,987 1,633 5,434 4,731
Gain on Sale of Loans, Net 9 344 120 368
Gain on Sale of Fixed Assets - - 22 -
Other 164 258 379 721
---------- ---------- ---------- ----------
Total Non-Interest Income 2,160 2,235 5,955 5,820
NON-INTEREST EXPENSE
Salaries and Employee Benefits 5,026 5,015 14,461 13,674
Occupancy Expense 818 727 2,391 2,213
Furniture and Equipment Expense 452 523 1,522 1,524
Net Other Real Estate Owned (Income) Expense (579) 51 (805) 490
Other 1,713 1,853 5,237 5,078
---------- ---------- ---------- ----------
Total Non-Interest Expense 7,430 8,169 22,806 22,979
Income before Income Taxes 12,076 12,705 33,792 34,133
Provision for Income Taxes 4,584 4,827 12,719 12,781
---------- ---------- ---------- ----------
Net Income $ 7,492 $ 7,878 $ 21,073 $ 21,352
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.64 $ 0.56 $ 1.65 $ 1.51
Diluted $ 0.62 $ 0.55 $ 1.62 $ 1.48
__________ __________ __________ __________
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
GBC BANCORP & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Retained Comprehensive Comprehensive Stockholders'
(In Thousands, Except per Share Amounts) Shares Amount Earnings Income(Loss) Income Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 13,990 $ 53,314 $ 91,355 $ 1,654 $146,323
- ----------------------------
Comprehensive Income
Net Income for the year - - 28,142 - $ 28,142 28,142
--------
Other Comprehensive Income,Net of Tax
Net Changes in Securities Valuation
Allowance - - - 175 175 175
--------
Comprehensive Income $ 28,317
========
Stock Options Exercised 187 1,375 - - 1,375
Tax Benefit-Stock Options Exercised - 1,614 - - 1,614
Stock Repurchase (465) - (10,386) - (10,386)
Cash Dividend- $.30 per Share - - (4,213) - (4,213)
------------------------------------------- ---------
Balance at December 31, 1998 13,712 $ 56,303 $104,898 $ 1,829 $163,030
- ---------------------------- ====== ======== ======== ======== ========
Comprehensive Income
Net Income for the Nine Months - - 21,073 - $ 21,073 21,073
Other Comprehensive Income (Loss),
Net of Tax Net Changes in Securities
Valuation Allowance - - - (6,805) (6,805) (6,805)
---------
Comprehensive Income $ 14,268
========
Stock Options Exercised 52 451 - - 451
Tax Benefit-Stock Options Exercised - 236 - - 236
Stock Repurchase (2,263) - (46,782) - (46,782)
Cash Dividend- $0.24 per Share - - (2,997) - (2,997)
------------------------------------------- ---------
Balance at Sept. 30, 1999 11,502 $ 56,990 $ 76,192 $ (4,976) $128,206
- ------------------------- ====== ======== ======== ========= ========
</TABLE>
Disclosure of Reclassification Amount:
<TABLE>
<CAPTION>
For the Nine Months For the Year
Ended Sept.30, 1999 Ended Dec.31, 1998
------------------- ------------------
<S> <C> <C>
Net Change of Unrealized Holding (Losses) Gains Arising During
Period, Net of Tax (Benefit) Expense of $(4,939) and $172
in 1999 and 1998, Respectively $ (6,805) $ 237
Less: Reclassification Adjustment for Gains Included in Net
Income, Net of Tax Expense of: $0 and $45 in 1999 and
1998, Respectively - (62)
------------------- ------------------
Net Change of Unrealized (Losses) Gains on Securities Net of
Tax (Benefit) Expense of $(4,939) and $127 in 1999 and 1998,
Respectively $ (6,805) $ 175
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Month Ended September 30,
- ----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 21,073 $ 21,352
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation 942 947
Net Amortization/(Accretion) of Premiums/Discounts on
Securities 1,037 363
Accretion of Discount on Subordinated Notes 98 98
Writedown on Real Estate Held for Investment 1,087 995
Provision for Credit Losses 3,500 -
Provision for Losses on Other Real Estate Owned 900 -
Amortization of Deferred Loan Fees (3,454) (2,396)
Gain on Sale of Loans - (368)
Gain on Sale of Other Real Estate Owned (2,302) (114)
Gain on Sale of Fixed Assets (22) -
Proceeds from Sales of Loans Originated for Sale - 368
Net Decrease in Accrued Interest Receivable and Other
Assets (6,601) (2,601)
Net (Decrease)/ Increase in Accrued Expenses and
Other Liabilities (29,112) 6,591
Other, Net 348 19
----------- -----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES $ (12,506) $ 25,254
----------- -----------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (256,267) (244,275)
Proceeds from Maturities of Securities Available
for Sale 233,103 271,123
Purchases of Securities Held to Maturity - (50,090)
Proceeds from Maturities of Securities Held to
Maturity 23,224 46,015
Net Increase in Loans and Leases (142,249) (108,818)
Proceeds from Sales of Other Real Estate Owned 7,954 2,453
Capitalized Costs of Other Real Estate Owned (322) (370)
Purchases of Premises and Equipment (870) (756)
Proceeds from Sales of Bank Premises and
Equipment 27 -
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES $ (135,400) $ (84,718)
----------- -----------
FINANCING ACTIVITIES:
Net Increase in Demand, Interest Bearing Demand and
Savings Deposits 55,346 41,721
Net Increase in Time Certificates of Deposits 30,969 46,514
Net Increase in Federal Funds Purchased and
Securities Sold Under Agreements to Repurchase 15,000 -
Borrowings from the Federal Home Loan Bank 15,000 -
Stock Repurchase Program (46,782) -
Cash Dividend Paid (2,990) (2,962)
Proceeds from Exercise of Stock Options 451 1,242
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 66,994 $ 86,515
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (80,912) 27,051
Cash and Cash Equivalents at Beginning of Period 128,514 140,519
----------- -----------
Cash and Cash Equivalents at End of Period $ 47,602 $ 167,570
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During This Period for:
Interest $ 41,405 $ 42,540
Income Taxes $ 11,363 $ 3,538
=========== ===========
Noncash Investing Activities:
Loans Transferred to Other Real Estate Owned
at Fair Value $ 8,772 $ 1,036
Loans to Facilitate the Sale of Other Real
Estate Owned 313 137
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
GBC Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- ------------------------------------------------------
In the opinion of management, the consolidated financial
statements of GBC Bancorp and its subsidiaries (the "Company") as of
September 30, 1999 and the three and nine months ended September 30,
1999 and 1998, reflect all adjustments (which consist only of normal
recurring adjustments) necessary for a fair presentation. In the
opinion of management, the aforementioned consolidated financial
statements are in conformity with generally accepted accounting
principles.
Earnings Per Share
- ------------------
Basic earnings per share is determined by dividing net income by
the average number of shares of common stock outstanding, while
diluted earnings per share is determined by dividing net income by the
average number of shares of common stock outstanding adjusted for the
dilutive effect of common stock equivalents.
The following table discloses for the periods indicated the
average number of shares of common stock outstanding and the average
number of shares of common stock outstanding adjusted for the dilutive
effect of common stock equivalents for the basic and diluted earnings
per share computations, respectively:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In Thousands)
1999 1998 1999 1998
__________________________________________________
<S> <C> <C> <C> <C>
Basic 11,772 14,161 12,740 14,131
Diluted 12,012 14,431 12,984 14,434
</TABLE>
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 1999 was $7,492,000 or $0.62
diluted earnings per share, compared to $7,878,000, or $0.55 diluted
earnings per share, for the corresponding period of 1998. The $386,000
or 4.90%, decrease was mainly the result of a $1,500,000 provision for
credit losses, partially offset by both an increase of net interest
income and a decrease of non-interest expense. There was no provision
for credit losses for the corresponding quarter a year ago. The $0.07,
or 12.7%, increase of the diluted earnings per share was the result of
stock repurchases of 2,728,000 shares in the fourth quarter of 1998
and in 1999.
For the nine months ended September 30, 1999, net income totaled
$21,073,000, a decrease of $279,000, or 1.3%, from the $21,352,000
earned during the corresponding period of 1998. Diluted earnings per
share for the nine months ended September 30, 1999 were $1.62 compared
to $1.48 for the same period of 1998. The decrease in net income was
primarily due to an increase in the provision for credit losses offset
by higher net interest income, higher non-interest income and
decreased non-interest expense. The $0.14, or 9.5%, increase of
diluted earnings per share is for the reason explained above.
As of September 30, 1999, record high levels were achieved for
total assets, loans and leases, and for total deposits.
For the quarter ended September 30, 1999 and 1998, the annualized
return on average assets ("ROA") was 1.72% and 1.94%, respectively,
and the annualized return on average stockholders' equity ("ROE") was
22.2% and 18.9%, respectively. The ROE for 1999 was bolstered by the
stock repurchases referenced above.
For the nine months ended September 30, 1999 and 1998, the ROA
was 1.66% and 1.81%, respectively, and the ROE was 18.7% and 18.1%,
respectively.
The Company has filed applications with the relevant regulatory
authorities to establish a full service branch operation of General
Bank in the state of Washington. Management estimates the branch will
be in place by early in the year 2000.
RESULTS OF OPERATIONS
- ---------------------
Net Interest Income-Quarterly Results
- -------------------------------------
For the quarter ended September 30, 1999 and 1998, net interest
income before the provision for credit losses was $18,846,000 and
$18,639,000, respectively, representing an increase of $207,000, or
1.1%. The components explaining this increase are discussed below.
Total interest income for the quarter ended September 30, 1999
was $33,119,000, representing a $223,000, or 0.7%, decrease from the
corresponding quarter of a year ago. The decrease was due to a 60
basis points decrease in the yield on average earning assets from
8.45% during the third quarter in 1998 to 7.85% in the corresponding
quarter of 1999, partially offset by a $108.0 million increase of
average interest earning assets.
The 60 basis point decrease in the yield on earning assets from
the third quarter of 1998 to the corresponding quarter of 1999 was
primarily the result of lower yields on all categories of earning
assets. The most notable reduction was the yield on loans and leases,
which declined 160 basis points. Several factors contributed to the
decline of the loan yield, as follows:
O The third quarter, 1998 included $1,458,000 of loan interest
recoveries due to repayments in full of two loans. Excluding this
recovery, the third quarter 1998 loan yield would have been 79 basis
points lower.
O A $28.8 million increase of average non-accrual loans in the
third quarter of 1999 as compared to the third quarter, 1998.
O A lower average prime rate of interest during the third quarter
of 1999. The average prime was 8.10% and 8.50% for the third quarter
of 1999 and 1998, respectively. This factor also contributed to the
reduced yields on the Company's other categories of interest earning
assets.
The effect of the decline of the yield on loans and leases and
other earning assets was partially mitigated by an increase in the
percentage of average accruing loans and leases to total average
earning assets. For the three months ended September 30, 1999 and
1998, average accruing loans and leases comprised 51.7% and 46.4%,
respectively, of total average earning assets (excluding non-accrual
loans). Loans and leases represent the highest yielding interest
earning assets.
Total interest expense for the quarter ended September 30, 1999
was $14,273,000, representing a $430,000, or 2.9%, decrease from the
corresponding quarter of a year ago. The decrease was due to the
reduction of the cost of funds, partially offset by a $122.9 million
increase of average interest bearing liabilities.
For the quarter ended September 30, 1999, the cost of funds was
4.07% compared to 4.60% for the corresponding period of a year ago.
This decrease was the result of a decrease in the rates paid on all
interest bearing deposits, which decreased from 4.46% to 3.89% for the
quarters ended September 30, 1998 and 1999, respectively. For the
quarters ended as indicated, the average balance and the rates paid
for the deposit products of General Bank (the "Bank") were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended September 30,
1999 1998
-----------------------------------
<S> <C> <C>
Interest bearing demand -
Average balance $ 309,884 $ 276,119
Rate 2.60% 2.88%
Savings - Average balance 85,612 81,676
Rate 2.23% 2.60%
Time certificates of deposit:
of $100,000 or more - Average
balance 683,823 584,159
Rate 4.56% 5.22%
Other time deposits - Average
balance 220,502 288,046
Rate 4.25% 4.97%
</TABLE>
The most significant impact was the 65 basis point decline in the
rates paid on time certificates of deposit. Average time certificates
of deposit constituted 69.6% and 70.9% of total average interest
bearing deposits for the quarter ending September 30, 1999 and 1998,
respectively.
The 57 basis point reduction of the rates paid on interest
bearing deposits was slightly offset by an average $50 million of
borrowings from the Federal Home Loan Banks ("FHLB") with an average
rate in the quarter of 4.85%. There were no borrowings outstanding
with the FHLB during the 3 months ended September 30, 1998.
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, 1999 and 1998, the net
interest spread was 3.78% and 3.85%, respectively. The 7 basis point
decline is due to the reasons 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,
1999 and 1998, the net interest margin was 4.47% and 4.73%,
respectively. In addition to the reasons explaining the compression
of the net interest spread, the net interest margin was also
negatively impacted by the decline of average equity as a result of
the stock repurchase programs to which reference has been made above.
Net Interest Income - Year-to-Date Results
- ------------------------------------------
For the nine months ended September 30, 1999, net interest income
before the provision for credit losses was $54,143,000, representing a
$2,851,000, or 5.6%, growth over the corresponding period of a year
ago.
Total interest income for the nine months ended September 30,
1999 was $95,576,000 compared to $94,221,000 for the corresponding
period of a year ago. The $1,355,000, or 1.4%, increase is the result
of an increase in the balance of average interest earning assets.
Average interest earning assets increased to $1,650.9 million for the
nine months ended September 30, 1999 from $1,525.5 million for the
corresponding period of a year ago, representing a $125.4 million, or
8.2%, increase. The growth was represented by increases of $32.0
million and $150.5 million in the securities and loan and lease
portfolios, respectively, partially offset by $57.1 million decrease
of federal funds sold and securities purchased under agreements to
resell.
The yield on average earning assets decreased 52 basis points to
7.74% for the nine months ended September 30, 1999 from 8.26% for the
corresponding period of a year ago. The yields on all categories of
earning assets declined with the most notable reduction being the
yield on loans and leases which declined from 10.54% to 9.29%. The
following are the major reasons explaining the 125-basis point decline
of the loan yield and are similar to the explanations for the
quarterly comparison above.
O 1998 included the $1,458,000 of loan interest recoveries received
in the third quarter. Excluding the impact of this recovery the 1998
yield for loans and leases would have been 28 basis points lower.
O 1999 included a $25.6 million increase of non-accrual loans as
compared to the comparable period of 1998.
O A reduced average prime rate of interest during 1999 compared to
1998. The average prime was 7.87% and 8.50% for the nine months ended
September 30, 1999 and 1998, respectively. This factor also
contributed to the reduced yields on the Company's other categories of
interest-earning assets.
The impact of the above was partially offset by an increased
percentage of average accruing loans and leases to total average
earning assets (excluding non-accrual loans). For the nine months
ended September 30, 1999 and 1998, this ratio was 50.0% and 45.0%,
respectively.
Total interest expense for the nine months ended September 30,
1999, was $41,433,000 compared to $42,929,000 for the corresponding
period of a year ago. The decrease of $1,496,000, or 3.5%, was due
to a 51 basis point decline in the cost of funds from 4.60% to 4.09%,
partially offset by an increase in average interest bearing
liabilities. All categories of interest-bearing deposits reflected
rate decreases thereby contributing to the 55 basis point decline of
the rates paid on interest-bearing deposits. The largest decrease of
rates paid was in time deposits which declined 62 basis points. Time
deposits represent the Company's largest deposit product comprising on
an average 70.4% and 71.5% of average interest bearing deposits for
the nine months ended September 30, 1999 and 1998, respectively.
The average balance and the rates paid on deposit categories for
the nine months ended September 30, 1999 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Interest bearing demand -
Average balance $ 292,864 $ 256,495
Rate 2.47% 2.69%
Savings - Average balance 82,253 88,176
2.17% 2.70%
Time certificates of deposit
of $100,000 or more - Average
balance 651,713 593,351
Rate 4.60% 5.25%
Other time deposits - Average
balance 238,522 269,971
Rate 4.39% 4.98%
</TABLE>
Borrowings from the Federal Home Loan Bank (the "FHLB") averaged
$47.5 million during the nine months ended September 30, 1999. There
was no average balance during the nine months ended September 30,
1998. These funds represent advances under an existing line of credit
and have replaced the reduced equity base resulting from the stock
repurchases as discussed previously.
The rates paid on the FHLB borrowings of 4.82% for the nine
months ended September 30, 1999 partially offset the 55 basis point
decline of the rates paid on interest-bearing deposits.
For the nine months ended September 30, 1999 and 1998, the net
interest spread declined to 3.65% from 3.66%, respectively,
representing a 1 basis point decrease. A 52 basis point decline of the
yield on earning assets was offset by a 51 basis point decline in the
cost of funds.
For the nine months ended September 30, 1999 and 1998, the net
interest margin was 4.38% and 4.50%, respectively, representing a 12
basis point decline. The decline of the margin is primarily the result
of the decline of average equity as a result of the stock repurchases.
Provision for Credit Losses
- ---------------------------
For the quarter ended September 30, 1999, the provision for
credit losses was $1,500,000. There was no provision for credit
losses for the corresponding quarter of a year ago. For the nine
months ended September 30, 1999, there was $3,500,000 provision for
credit losses. There was no provision for credit losses for the
corresponding period of a year ago. The current year's provision
reflects the growth of the loan portfolio, the increase of non-accrual
loans and increased net charge-offs. Loans and leases were $922.0
million and $789.0 million, as of September 30, 1999, and December 31,
1998, respectively. Non-accrual loans were $45.4 million and $20.8
million as of September 30, 1999 and December 31, 1998, respectively.
Net charge-offs were $1.0 million and $3.3 million for the three and
nine month periods ended Sept. 30, 1999. This compares to net
recoveries of $1.9 million and $0.6 million for the corresponding
periods of 1998.
The amount of the provision for credit losses is determined by
management and is based upon the quality of the loan portfolio,
management's assessment of the economic environment, evaluations made
by regulatory authorities, historical loan loss experience, collateral
values, assessment of borrowers' ability to repay, and estimates of
potential future losses. Please refer to the discussion "Allowance
for Credit Losses", following.
Non-Interest Income
- -------------------
Non-interest income for the quarter ended September 30, 1999
totaled $2,160,000, representing a $75,000, or 3.4%, decrease compared
to $2,235,000 for the quarter ended September 30, 1998. While service
charges and commissions increased $354,000 due to increased
commissions on standby and commercial letters of credit reflecting the
increased activity of the Bank's International department, this
increase was more than offset by reduced gain on sale of loans, net
(during the third quarter of 1998 the Company sold its mortgage loan
servicing portfolio for a pre-tax amount of $338,000) and the
cessation of an escrow business. The Bank's escrow subsidiary was
closed in the first quarter of 1999.
For the nine months ended September 30, 1999, non-interest income
totaled $5,955,000 representing a $135,000, or 2.3%, increase compared
to $5,820,000 for the nine months ended September 30, 1998. Non-
interest income increased primarily due to the commission income from
letter of credit related transactions as discussed above. Partially
offsetting the increase was the cessation of the escrow business and
the reduced gain on sale of loans, net, as discussed above.
Non-Interest Expense
- --------------------
For the three months ended September 30, 1999, non-interest
expense was $7,430,000, representing a $739,000, or 9.0%, decrease
from $8,169,000 for the corresponding period of a year ago. The
decline was primarily due to the net gains on sale of other real
estate owned ("OREO") that are included as a reduction of OREO
incurred expenses. For the three months ended September 30, 1999, net
gains on the sale of OREO were $1,582,000, representing a $1,491,000
increase from $91,000 for the corresponding period of a year ago. The
effect of this increase was partially offset by a $900,000 addition to
the valuation allowance for the Company's OREO properties.
For the quarter ended September 30, 1999, and 1998, the Company's
efficiency ratio, defined as non-interest expense divided by the sum
of net interest income plus non-interest income, was 35.4% and 39.1%,
respectively.
For the nine months ended September 30, 1999, non-interest
expense was $22,806,000 representing a $173,000, or 0.8% decrease from
the $22,979,000 reported for the corresponding period of a year ago.
The decline was primarily due to the net other real estate owned
(income) expense decline of $1,295,000 which included net gains on
sale of OREO of $2,302,000 compared to $114,000 for the corresponding
period of the prior year. This was partially offset by the $900,000
increase to the OREO valuation allowance discussed above. Partially
offsetting the $1,295,000 decrease of net other real estate owned
expense was a $787,000, or 5.8% increase of salaries and employee
benefits. The increase is primarily the result of the accrual for
deferred compensation for the Company's chairman and chief executive
officer.
For the nine months ended September 30, 1999, the Company's
efficiency ratio declined to 38.0%, comparing favorably to 40.2% for
the corresponding period of 1998.
Provision for Income Taxes
- --------------------------
For the quarter ended September 30, 1999 and 1998, the provision
for income taxes was $4,584,000 and $4,827,000, respectively,
representing effective tax rates of 38.0%.
For the nine months ended September 30, 1999 and 1998, the
provision for income taxes was $12,719,000 and $12,781,000,
representing effective tax rates of 37.6% and 37.4%, respectively.
The effective tax rates compare favorably to a combined statutory
rate of 42.0% primarily due to a low income housing tax credit to
which the Company is entitled. Through September 30, 1999 and 1998,
this tax credit was $1,485,000 and $1,547,000, respectively.
FINANCIAL CONDITION
- -------------------
As of September 30, 1999, the Company achieved balance sheet
records as follows:
** Total assets of $1,729.9 million, up $23.0 million, or 1.3%,
from $1,706.9 million, as of June 30, 1999.
** Total loans and leases of $922.0 million, up $73.1 million, or
8.6%, from $848.9 million, as of June 30, 1999.
** Total deposits of $1,467.2 million, up $29.9 million, or 2.1%,
from $1,437.3 million, as of June 30, 1999.
Stockholders' equity was $128.2 million, down $24.3 million from
$152.5 million as of June 30, 1999 and $34.8 million, from $163.0
million as of December 31, 1998. The decline is the result of the
Company's stock repurchase programs which reduced retained earnings by
$46.8 million in 1999.
Loans
- -----
The $133.0 million loan growth from year-end 1998, was mainly due
to increases of $87.6 million and $46.5 million in the commercial and
real estate loans portfolios, respectively. The commercial loan
growth was primarily in the trade financing area which increased $82.8
million reflecting a continued growth in international trade and new
customer relationships.
During the third quarter of 1999, loans and leases increased
$73.1 million, or 8.6%. The loan production offices in New York and
Seattle contributed a significant portion of the growth.
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 as of the dates indicated:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(In Thousands) Amount Percentage Amount Percentage
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 396,813 43.04% $ 309,198 39.19%
Real Estate-Construction 192,089 20.83% 177,737 22.53%
Real Estate-Conventional 296,040 32.11% 263,869 33.45%
Installment 15 N/A 37 N/A
Other Loans 20,591 2.24% 22,302 2.83%
Leveraged Leases 16,421 1.78% 15,802 2.00%
----------------------------------------------
Total $ 921,969 100.00% $ 788,945 100.00%
==============================================
N/A = Percentage less than 0.01
</TABLE>
Non-Performing Assets
- ---------------------
A certain degree of risk is inherent in the extension of credit.
Management has credit policies in place to minimize the level of loan
losses and non-performing loans. The Company performs a quarterly
assessment of the credit portfolio to determine the appropriate level
of the allowance. Included in the assessment is the identification of
loan impairment. A loan is identified as impaired when it is probable
that interest and principal will not be collected according to the
contractual terms of the loan agreement. Loan impairment is measured
by estimating the expected future cash flows and discounting them at
the respective effective interest rate or by valuing the underlying
collateral.
The Company has a policy of classifying loans (including an
impaired loan) which are 90 days past due as to principal and/or
interest as non-accrual loans unless management determines that the
fair value of underlying collateral is substantially in excess of the
loan amount or other circumstances justify treating the loan as fully
collectible. After a loan is placed on non-accrual status, any
interest previously accrued, but not yet collected, is reversed
against current income. A loan is returned to accrual status only
when the borrower has demonstrated the ability to make future payments
of principal and interest as scheduled, and the borrower has
demonstrated a sustained period of repayment performance in accordance
with the contractual terms. Interest received on non-accrual loans
generally is either applied as principal reduction or reported as
recoveries on amounts previously charged-off, according to
management's judgment as to the collectability of principal.
The following table provides information with respect to the
Company's past due loans, non-accrual loans, restructured loans and
other real estate owned, net, as of the dates indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(IN THOUSANDS) September 30,1999 December 31,1998
- ----------------------------------------------------------------------
<S> <C> <C>
Loans 90 Days or More
Past Due and Still Accruing $3,400 $780
Non-Accrual Loans 45,398 20,790
Total Past Due Loans 48,798 21,570
Restructured Loans 8,809 10,440
Total Non-Performing Loans 57,607 32,010
Other Real Estate Owned, Net 9,112 6,885
Total Non-Performing Assets $66,719 $38,895
- ----------------------------------------------------------------------
</TABLE>
Total non-performing assets increased to $66.7 million, as of
September 30, 1999, from $38.9 million, as of December 31, 1998,
representing a $27.8 million, or 71.5%, increase. The increase is
primarily due to the increase of non-accrual loans, in general, and
one construction loan, in particular, as discussed below.
Loans 90 days or More Past Due and Still Accruing
- -------------------------------------------------
As of September 30, 1999, there is one credit in this category of
loans for the amount of $3.4 million. This loan is well collateralized
and in the process of collection.
Non-Accrual Loans
- -----------------
As of September 30, 1999 non-accrual loans totaled $45.4 million,
an increase of $24.6 million from year-end 1998 and an increase of
$4.4 million from June 30, 1999. The increase from December 31, 1998
is primarily due to a $30.9 million construction loan for a casino in
Las Vegas. The loan is collateralized by a first trust deed on the
building, second trust deeds on an associated hotel and on a RV park,
and by a first trust deed on undeveloped land. There also was a take-
out commitment from another financial institution to pay off the loan
at the end of construction. As of September 30, 1999, this particular
loan remains in bankruptcy proceedings. Excluding this credit, non-
accrual loans would be less than year-end, 1998 levels.
The increase of non-accrual loans from June 30, 1999 to September
30, 1999 was primarily the result of a $4.8 million construction loan
for a tract of single family homes in Southern California. The loan to
collateral value ratio is low and there is considered sufficient value
for the full recapture of principal, interest and expenses.
The following table breaks out the Company's non-accrual loans by
category as of the dates indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(IN THOUSANDS) September 30, 1999 December 31, 1998
- ------------------------------------------------------------------
<S> <C> <C>
Commercial $ 8,981 $ 19,202
Real Estate- Construction 35,694 277
Real Estate- Conventional 723 1,309
Other Loans - 2
Total $ 45,398 $ 20,790
- ------------------------------------------------------------------
</TABLE>
Of the $45.4 million of non-accrual loans, $36.4 million are
collateralized by real property with appraisal value considerably in
excess of the carrying value of the loans, providing substantial
protection against the loss of principal. This amount includes the
casino construction loan discussed above.
The following table analyzes the change in non-accrual loans
during the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------
<S> <C>
Balance, December 31, 1998 $ 20,790
Add: Loans placed on non-accrual 47,756
Less: Charge-offs (4,225)
Returned to accrual status (4,644)
Repayments (5,492)
Transfer to OREO (8,787)
Balance, September 30, 1999 $ 45,398
- -------------------------------------------------
</TABLE>
Restructured Loans
- ------------------
The balance of restructured loans as of September 30, 1999 was
$8.8 million compared to $10.4 million as of December 31, 1998,
representing a $1.6 million, or 15.4% decrease. As indicated
previously, the decline was primarily due to the pay-off in full of
$1.4 million of restructured loans during the second quarter of 1999.
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 September 30, 1999, three restructured loans totaling $581,000
were on non-accrual status. As of September 30, 1999, restructured
loans excluding the three non-accrual loans consisted of ten loans
compared to eleven loans as of December 31, 1998. The weighted
average yield of the restructured loans was 9.86% as of September 30,
1999.
There are no commitments to lend additional funds on any of the
restructured loans.
Other Real Estate Owned
- -----------------------
As of September 30, 1999, other real estate owned ("OREO"), net
of valuation allowance of $2.0 million, totaled $9.1 million,
representing an increase of $2.2 million, or 31.9%, from the net
balance of $6.9 million, net of valuation allowance of $2.0 million,
as of December 31, 1998. As of September 30, 1999 and December 31,
1998, OREO consisted of 12 properties and 22 properties, respectively.
One of the 12 properties comprising the September 30, 1999 balance is
a manufacturing facility representing the primary collateral on a
$12.6 million loan which became non-accrual in the fourth quarter,
1998. Net of valuation allowance this property has a carrying value of
$7.7 million as of September 30, 1999 which is considered fair value
based on appraisals and other criteria of property valuation.
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>
- ----------------------------------------------------------------------
September 30, December 31,
- ----------------------------------------------------------------------
(In Thousands) 1999 1998
- ----------------------------------------------------------------------
Property Type
- -------------
<S> <C> <C>
Single-Family Residential $ 96 $ 752
Condominium - 485
Land 1,194 3,621
Retail Facilities 1,287 4,027
Industrial Facilities 8,550 -
Less: Valuation Allowance (2,015) (2,000)
---------------------------------
Total $ 9,112 $ 6,885
========= =========
</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 $49.8 million of outstanding impaired loans as of
September 30, 1999, $3.6 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) Sept. 30,1999 Dec. 31,1998
- --------------------------------------------------------------------
<S> <C> <C>
Recorded Investment with Related
Allowance $ 43,528 $ 20,746
Recorded Investment with no Related
Allowance 6,257 1,519
Total Recorded Investment 49,785 22,265
Allowance on Impaired Loans 4,713 3,250
- --------------------------------------------------------------------
</TABLE>
The increase from year-end in the recorded investment of impaired
loans is due primarily to the $30.9 million casino construction loan
and the $4.8 million tract home construction loan as discussed above.
The average balance of impaired loans before the allowance was
$45.9 million for the nine months ended September 30, 1999 and $13.5
million for the twelve months ended December 31, 1998.
For the nine months ended September 30, 1999 and 1998, interest
income recognized on impaired loans was $499,000 and $233,000,
respectively. Of the amount of interest income recognized during the
nine months ended September 30, 1999 and 1998, no interest was
recognized under the cash basis method.
Management cannot predict the extent to which the current
economic environment, including the real estate market, may continue
to improve or worsen, or the full impact such environment may have on
the Bank's loan portfolio. Furthermore, as the Bank's primary
regulators review the loan portfolio as part of their routine,
periodic examinations of the Bank, their assessment of specific
credits may affect the level of the Bank's non-performing loans.
Accordingly, there can be no assurance that other loans will not be
placed on non-accrual, become 90 days or more past due, have terms
modified in the future, or become OREO.
Allowance for Credit Losses
- ---------------------------
As of September 30, 1999, the balance of the allowance for credit
losses was $19.5 million, representing 2.12% of outstanding loans and
leases. This compares to an allowance for credit losses of $19.4
million as of December 31, 1998, representing 2.46% 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 month periods ended as indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(IN THOUSANDS) September 30, 1999 September 30, 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Balance, Beginning of Period $ 19,381 $ 16,776
Provision for Credit Losses 3,500 -
Charge-offs (5,684) (1,829)
Recoveries 2,348 2,463
Net Recoveries (Charge-offs) (3,336) 634
Balance, End of Period $ 19,545 $ 17,410
- --------------------------------------------------------------------------
</TABLE>
As of September 30, 1999, the allowance represents 33.9% and
43.1% of non-performing loans and of non-accrual loans, respectively.
As of December 31, 1998, the allowance represented 60.6% and 93.2% of
non-performing loans and of non-accrual loans, respectively. The
decline of these ratios is due to the increase of non-accrual loans as
discussed above.
The amount of the provision for credit losses is that required to
maintain an allowance for credit losses that is adequate to cover
probable credit losses related to specifically identified loans as
well as probable credit losses inherent in the remainder of the loan
and lease portfolio. Management evaluates the loan portfolio, the
economic environment, historical loan loss experience, collateral
values and assessments of borrowers' ability to repay in determining
the amount of the allowance for credit losses.
The allowance is based on ongoing, quarterly assessments of the
probable estimated losses inherent in the loan and lease portfolio,
and to a lesser extent, unused commitments to provide financing. The
Company's methodology for assessing the appropriateness of the
allowance consists primarily of the use of a formula allowance.
This formula allowance is calculated by applying loss factors to
outstanding loans and leases and certain unused commitments, in each
case based on the internal risk rating of such loans, pools of loans,
leases or commitments. Changes in risk rating of both performing and
nonperforming loans affect the amount of the formula allowance. Loss
factors are based on the Company's historical loss experience and may
be adjusted for significant factors that, in management's judgement,
affect the collectibility of the portfolio as of the evaluation date.
Loss factors are described as follows:
- Problem graded loan loss factors represent percentages which have
proven accurate over time. Such factors are checked against and
supported by migration analysis which tracks loss experience over
a five-year period.
- Pass graded loan loss factors are based on the approximate
average annual net charge-off rate over an eight-year period.
- Pooled loan loss factors (not individually graded loans) are
based on probable net charge-offs. Pooled loans are loans and
leases that are homogeneous in nature, such as residential
mortgage loans and small business loans.
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, 1999.
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, 1999, the Company recorded net unrealized
holding losses of $8,571,000 on its available-for-sale portfolio.
Accumulated other comprehensive income has been reduced by $4,967,000
representing the net unrealized holding loss, net of tax.
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of securities at September 30, 1999 and December
31, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
September 30, 1999 Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity
- ---------------------------
U.S. Government Agencies $ 1,432 $ - $ (38) $ 1,394
Collateralized Mortgage
Obligations 9 - - 9
-------------------------------------------------
Total Securities Held to
Maturity $ 1,441 $ - $ (38) $ 1,403
=================================================
Securities Available for Sale
- -----------------------------
U.S. Government Agencies $ 39,032 $ 30 $ - $ 39,062
Mortgage Backed Securities 147,200 - (3,829) 143,371
Corporate Notes 49,984 - (342) 49,642
Collateralized Mortgage
Obligations 227,789 - (2,900) 224,889
Asset Backed Securities 272,921 - (2,302) 270,619
Other Securities 6,153 772 - 6,925
-------------------------------------------------
Total Securities Available
for Sale $ 743,079 $ 802 $ (9,373) $ 734,508
=================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity
- ---------------------------
U.S. Government Agencies $ 24,594 $ 61 $ - $ 24,655
Collateralized Mortgage
Obligations 22 - - 22
-------------------------------------------------
Total Securities Held to
Maturity $ 24,616 $ 61 $ - $ 24,677
=================================================
Securities Available for Sale
- -----------------------------
U.S. Treasuries $ 1,859 $ 3 $ - $ 1,862
U.S. Government Agencies 59,604 171 - 59,775
Mortgage Backed Securities 72,799 408 - 73,207
Corporate Notes 34,925 - (1) 34,924
Collateralized Mortgage
Obligations 246,026 621 - 246,647
Asset Backed Securities 257,638 1,970 - 259,608
Commercial Papaer 39,860 - - 39,860
Other Securities 8,289 - - 8,289
-------------------------------------------------
Total Securities Available
for Sale $ 721,000 $3,173 $ (1) $ 724,172
=================================================
</TABLE>
There were no sales of securities available for sale or held to
maturity during the nine months ended September 30, 1999 and 1998.
Other Investments
- -----------------
The balance of other investments as of September 30, 1999 of $8.8
million is primarily comprised of the purchase of a 10% interest in a
limited partnership. The partnership is involved with the leasing of
aircraft.
Deposits
- --------
The Company's deposits totaled $1,467.2 million as of September
30, 1999, representing an $86.3 million, or 6.3%, increase from total
deposits of $1,380.9 million as of December 31, 1998. The growth for
the nine months ended September 30, 1999, was primarily due to
increases in time certificates of deposit of $100,000 or more, which
grew $88.8 million, or 14.8%. Also, interest bearing demand reflected
an increase of $31.2 million, or 11.1%. The growth of these deposit
categories was partially offset by a $57.8 million, or 21.4% decline
of other time deposits.
As of September 30, 1999 and December 31, 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 deposits of $100,000 or more
having maturities of one year or less, historically, the depositors
have generally renewed their deposits upon maturity. Accordingly, the
Company believes its deposit source to be stable.
The maturity schedule of time certificates of deposit of $100,000
or more, as of September 30, 1999, is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
(IN THOUSANDS)
- ----------------------------------------------------
<S> <C>
3 Months or Less $ 365,819
Over 3 Months Through 6 Months 202,002
Over 6 Months Through 12 Months 119,851
Over 12 Months 801
- ----------------------------------------------------
Total $ 688,473
- ----------------------------------------------------
</TABLE>
Other Borrowings
- ----------------
As of September 30, 1999, the Company has three sources of
outstanding borrowings.
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 at date of issuance. The discount is
amortized as a yield adjustment over the 10-year life of the notes.
The Bank has obtained advances from the Federal Home Loan Bank of
San Francisco (the "FHLB") totaling $50.0 million. The advances are
under an existing line of credit whereby the FHLB has granted the Bank
a line of credit equal to 25 percent of its assets. The following
relates to the four outstanding advances as of September 30, 1999:
<TABLE>
<CAPTION>
Maturity Amount Fixed Rate of Interest
-------- ------ ----------------------
<S> <C> <C>
Nov. 1, 2000 $25,000,000 4.53%
Jan. 31, 2001 10,000,000 5.19%
Apr. 30, 2001 10,000,000 4.92%
July 15, 2002 5,000,000 5.61%
</TABLE>
The total outstanding of $50 million of advances as of September 30,
1999 has a composite fixed rate of interest of 4.85%.
As of September 30, 1999, the Bank had $15.0 million outstanding
of federal funds purchased. The rate of interest paid on the federal
funds purchased was 5.75% .
Capital Resources
- -----------------
As of September 30, 1999, stockholders' equity totaled $128.2
million, a decrease of $34.8 million, or 21.3%, from $163.0 million as
of December 31, 1998. During 1999, a total of $46.8 million was spent
on the repurchase of shares of the Company stock. These repurchases
represented the completion of a 1.4 million share repurchase as
authorized by the Board of Directors on September 17, 1998, and the
repurchase of 1.3 million shares pursuant to the Dutch Auction self-
tender program announced in the second quarter of 1999 and completed
in the current quarter.
Capital ratios for the Company and for the Bank were as follows
as of the dates indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Well-Capitalized Sept. 30, Dec. 31
Standards 1999 1998
- --------------------------------------------------------------------
<S> <C> <C> <C>
GBC Bancorp
Tier 1 Leverage Ratio 5% 7.69% 9.75%
Tier 1 Risk-Based Capital
Ratio 6% 8.82% 11.06%
Total Risk-Based Capital
Ratio 10% 12.65% 14.98%
General Bank
Tier 1 Leverage Ratio 5% 9.24% 9.49%
Tier 1 Risk-Based Capital
Ratio 6% 10.62% 10.77%
Total Risk-Based Capital
Ratio 10% 11.87% 12.02%
- --------------------------------------------------------------------
</TABLE>
For the nine months ended September 30, 1999, the ratio of the
Company's average stockholders' equity to average assets was 8.9%. For
the year ended December 31, 1998, this ratio was 10.0%. The decrease
of the ratio is mainly the result of the stock repurchases.
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 $604.8
million, or 35.0% of total assets, as of September 30, 1999, compared
to $666.7 million, or 39.7% of total assets, as of December 31, 1998.
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, 1999, the Company has $50
million outstanding under this financing facility representing 2.9% of
total assets. Management believes its liquidity sources to be stable
and adequate.
As of September 30, 1999, total loans and leases represented
62.8% of total deposits. This compares to 59.1% and 57.1% as of June
30, 1999 and December 31, 1998, respectively. During the third quarter
of 1999, loans and leases increased $73.1 million, or 8.6%.
The liquidity of the parent company, GBC Bancorp ("GBC"), is
primarily dependent on the payment of cash dividends by its
subsidiary, General Bank, (the "Bank") subject to the limitations
imposed by the Financial Code of the State of California. For the
nine months ended September 30, 1999, the Bank declared cash dividends
of $19.0 million to GBC Bancorp. A $16 million cash dividend in the
3rd quarter was used to partially fund GBC's stock repurchase.
"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, 1999, there was a cumulative one-year
negative "gap" of $618.2 million, compared to a one-year negative gap
of $448.2 million as of December 31, 1998.
The following table indicates the Company's interest rate
sensitivity position as of September 30, 1999, and is based on
contractual maturities. It may not be reflective of positions in
subsequent periods:
<TABLE>
<CAPTION>
September 30,1999
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
- -----------------------------------------------------------------------------------------------------------------
Earning Assets
<S> <C> <C> <C> <C> <C> <C>
Securities Available for Sale $ 14,896 $ 10,420 $ 70,251 $ 638,941 $ - $ 734,508
Securities Held to Maturity - - 1,432 9 - 1,441
Federal Funds Sold & Securities
Purchased Under Agreement to Resell 8,500 - - - - 8,500
Loans and Leases (1) (2) 633,817 20,271 98,642 123,841 - 876,571
Non-Earning Assets (2) 108,856 108,856
--------- -------- -------- ---------- -------------- -----------
Total Assets $657,213 $30,691 $170,325 $ 762,791 $ 108,856 $1,729,876
--------- -------- -------- ---------- -------------- -----------
Source of Funds for Assets:
Deposits:
Demand - N/B $ - $ - $ - $ - $ 174,798 $ 174,798
Interest Bearing Demand 311,460 - - - - 311,460
Savings 79,830 - - - - 79,830
TCD'S Under $100,000 112,807 99,379 471 - - 212,657
TCD'S $100,000 and Over 365,819 321,853 801 - - 688,473
--------- --------- -------- ---------- -------------- -----------
Total Deposits $869,916 $421,232 $ 1,272 $ - $ 174,798 $1,467,218
--------- --------- -------- ---------- -------------- -----------
Federal Funds Purchased & Securities
Sold Under Agreement to Resell $ 15,000 $ - $ - $ - $ - $ 15,000
Borrowings from the Federal Home Loan
Bank - - 50,000 - - 50,000
Subordinated Debt - - - 38,974 - 38,974
Other Liabilities - - - - 30,478 30,478
Stockholders' Equity - - - - 128,206 128,206
--------- --------- -------- ---------- -------------- ----------
Total Liabilities and
Stockholders' Equity $884,916 $421,232 $51,272 $ 38,974 $ 333,482 $1,729,876
--------- --------- --------- ---------- -------------- ----------
Interest Sensitivity Gap ($227,703) ($390,541) $119,053 $ 723,817 ($224,626)
Cumulative Interest Sensitivity Gap ($227,703) ($618,244) ($499,191) $ 224,626 -
Gap Ratio (% of Total Assets) -13.2% -22.6% 6.9% 41.8% -12.9%
Cumulative Gap Ratio -13.2% -35.8% -28.9% 12.9% 0.0%
</TABLE>
(1) Loans and leases are before unamortized deferred loan fees
and allowance for credit losses.
(2) Nonaccrual loans are included in non-earning assets.
Effective asset/liability management includes maintaining
adequate liquidity and minimizing the impact of future interest rate
changes on net interest income. The Company attempts to manage its
interest rate sensitivity on an on-going basis through the analysis of
the repricing characteristics of its loans, securities, and deposits,
and managing the estimated net interest income volatility by adjusting
the terms of its interest-earning assets and liabilities, and through
the use of derivatives as needed.
Market risk
- -----------
Market risk is the risk of financial loss arising from adverse
changes in market prices and interest rates. The Company's market
risk is inherent in its lending and deposit taking activities to the
extent of differences in the amounts maturing or degree of repricing
sensitivity. Adverse changes in market prices and interest rates may
therefore result in diminished earnings and ultimately an erosion of
capital.
Since the Company's profitability is affected by changes in
interest rates, management actively monitors how changes in interest
rates may affect earnings and ultimately the underlying market value
of equity. Management monitors interest rate exposure through the use
of three basic measurement tools in conjunction with established risk
limits. These tools are the expected maturity gap report, net
interest income volatility and market value of equity volatility
reports. The gap report details the expected maturity mismatch or gap
between interest earning assets and interest bearing liabilities over
a specified timeframe. The expected gap differs from the contractual
gap report shown earlier in this section by adjusting contractual
maturities for expected prepayments of principal on loans and
amortizing securities as well as the projected timing of repricing non-
maturity deposits. The following table shows the Company's financial
instruments that are sensitive to changes in interest rates
categorized by their expected maturity, as of September 30, 1999:
<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 $ 29,982 $ 88,112 $ 490,182 $ 126,232 $ 734,508
Securities Held to Maturity 1,441 - - - 1,441
Federal Funds Sold & Securities
Purchased Under Agreements to Resell 8,500 - - - 8,500
Loans and Leases (1) 633,817 20,271 98,642 123,841 876,571
----------- ------------ ------------ ------------ -----------
Total Interest-earning Assets $ 673,740 $ 108,383 $ 588,824 $ 250,073 $1,621,020
----------- ------------ ------------ ------------ -----------
Interest-sensitive Liabilities:
Deposits:
Interest Bearing Demand $ 10,902 $ 32,705 $ 206,452 $ 61,401 $ 311,460
Savings 2,661 7,983 53,220 15,966 79,830
Time Certificates of Deposit 478,626 421,232 1,272 - 901,130
----------- ------------ ------------ ------------ -----------
Total Deposits $ 492,189 $ 461,920 $ 260,944 $ 77,367 $1,292,420
----------- ------------ ------------ ------------ -----------
Federal Funds Purchased & Securities
Sold Under Repurchased Agreements $ 15,000 $ - $ - $ - $ 15,000
Borrowing from FHLB - - 50,000 - 50,000
Subordinated Debt - - - 38,974 38,974
----------- ------------ ------------ ------------ -----------
Total Interest-sensitive Liabilities $ 507,189 $ 461,920 $ 310,944 $ 116,341 $1,396,394
----------- ------------ ------------ ------------ -----------
</TABLE>
(1) Loans and leases are net of non-accrual loans and before
unamortized deferred loan fees and allowance for credit
losses.
Expected maturities of assets are contractual maturities adjusted
for projected payment based on contractual amortization and
unscheduled prepayments of principal as well as repricing frequency.
Expected maturities for deposits are based on contractual maturities
adjusted for projected rollover rates and changes in pricing for non-
maturity deposits. The Company utilizes assumptions supported by
documented analysis for the expected maturities of its loans and
repricing of its deposits and relies on third party data providers for
prepayment projections for amortizing securities. The actual
maturities of these instruments could vary significantly if future
prepayments and repricing differ from the Company's expectations based
on historical experience.
The Company uses a computer simulation analysis to attempt to
predict changes in the yields earned on assets and the rates paid on
liabilities in relation to changes in market interest rates. The net
interest income volatility and market value of equity volatility
reports measure the exposure of earnings and capital respectively, to
immediate incremental changes in market interest rates as represented
by the prime rate change of 100 to 200 basis points. Market value of
portfolio equity is defined as the present value of assets minus the
present value of liabilities and off balance sheet contracts. The
table below shows the estimated impact of changes in interest rates on
net interest income and market value of equity as of September 30,
1999:
<TABLE>
<CAPTION>
Net Interest Market Value of
Change in Income Portfolio Equity
Interest Volatility Volatility
Rates (Basis September 30, September 30, 1999
Points) 1999 (1) (2)
<S> <C> <C>
+200 -3.60% -12.70%
+100 -2.10% -6.70%
-100 -0.90% +6.00%
-200 -3.70% +8.60%
</TABLE>
(1) The percentage change in this column represents the change in net
interest income for 12 months under various rate scenarios.
(2) The percentage change in this colume represents the change in net
portfolio equity value of the Bank under variouse rate scenarios.
The Company's primary objective in managing interest rate risk is
to minimize the adverse effects of changes in interest rates on
earnings and capital. In this regard the Company has established
internal risk limits for net interest income volatility given a 100
and 200 basis point decline in rates of 10% and 15% respectively, over
a twelve month horizon. Similarly, risk limits have been established
for market value of portfolio equity volatility in response to a 100
and 200 basis point increase in rates of 10% and 15%, respectively.
On June 30, 1999 the Federal Reserve Bank (the "FRB") announced
an increase of 25 basis points in short-term rates. Again, on August
24, the FRB increased short-term rates by 25 basis points and also
raised the discount rate from 4.50% to 4.75%. The increase of short-
term rates affects immediately the yield of approximately $627 million
of loans and $8.5 million in overnight fed funds sold as of September
30, 1999. In addition, securities expected to mature or re-price
during the current quarter totaling $31.5 million are expected to be
re-invested at higher yields. Offsetting these increase in interest
income, however, are increases in interest expense due primarily to
higher rates paid on the Company's time certificates of deposit which
comprise 69.7% of total interest bearing deposits as of September 30,
1999. There is a delay in the increased rates paid on time
certificates of deposit due to a four-month average maturity of these
deposits.
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
conform to Year 2000 requirements. The Bank has budgeted $100,000 of
expenses related to Year 2000 compliance. Expenses to date have been
approximately $66,000. 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.
Non-information technology systems are expected to function well
in Year 2000 and beyond. The Company has requested written
certification for Year 2000 compliance from the utilities companies
and the telecommunications companies and has received acknowledgement
from each company that they are on target with Year 2000 compliance.
A Business Resumption Plan (the "Plan") is in place including a
back-up site for data processing in the event of failure of the Bank's
mainframe computer. In the unlikely event that the testing and
certification procedures of the Bank utilized software did not
discover a problem, the Bank has in place manual processing procedures
that have been tested which would be followed until correction of the
software problem by the Bank's vendors.
The Company has sent questionnaires to selected borrowers
representing more than 70% of outstanding credit commitments by
dollar volume at the time of the mailing. All questionnaires have now
been received and reviewed. The questionnaire review process, along
with ongoing oversight, has resolved all issues where potential
adverse impact on credit quality would have been a factor had Year
2000 issues not been addressed.
One credit with a commitment of $3 million has been judged "not
sure" in its ability to ensure Year 2000 compliance, and one credit of
$0.5 million has a Year 2000 analysis still pending. These credits
have been placed on the "Watch" list to ensure high visibility and
ongoing monitoring.
Any borrowers unable to confirm Year 2000 compliance in a timely
manner will be evaluated to ensure an adequate specific allocation to
the allowance for credit losses. Year 2000 compliance is 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 a
borrower's businesses. 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,"
"should", "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,
Liquidity and Interest Rate Sensitivity, Market Risk, and Recent
Accounting Developments. 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
- ------------------------------
Disclosure about Segments of an Enterprise and Related Information
- ------------------------------------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information". This statement establishes standards for the
way public business enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to 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 and the Board of Directors do not
utilize profit center reporting to manage the organization.
Therefore, segment reporting will not be disclosed.
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 was originally scheduled to be effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. However, the
FASB recently issued SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No.133 " which amended the effective date of the application
of SFAS 133 to be effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Initial application of SFAS 133 must be
as of the beginning of an entity's fiscal quarter; on that date,
hedging relationships must be designated anew and documented pursuant
to the provisions of SFAS 133. SFAS 133 is not to be applied
retroactively to financial statements of prior periods. Management
does not believe that there will be a material adverse impact on the
financial position or results of operations of the Company upon
adoption of SFAS 133.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
- -------------------------
In the normal course of business, the Company is subject to
pending and threatened legal actions. Management believes that the
outcome of such actions will not have a material adverse effect on the
Company's financial condition or results of operations.
Item 2. CHANGES IN SECURITIES
- ------------------------------
There have been no changes in the securities of the Registrant
during the quarter ended September 30, 1999.
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, 1999.
Item 5. OTHER INFORMATION
- --------------------------
There are no events to be reported under this item.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibits: None.
b) Reports on Form 8-K: None.
PART III - SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GBC Bancorp
(Registrant)
Dated: November 12, 1999 s/Li-Pei Wu
-------------------- -----------------------
Chairman and
Chief Executive Officer
Dated: November 12,1999 s/Peter Lowe
-------------------- -----------------------
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 39,102
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 734,508
<INVESTMENTS-CARRYING> 1,441
<INVESTMENTS-MARKET> 1,403
<LOANS> 921,969
<ALLOWANCE> 19,545
<TOTAL-ASSETS> 1,729,876
<DEPOSITS> 1,467,218
<SHORT-TERM> 15,000
<LIABILITIES-OTHER> 30,478
<LONG-TERM> 88,974
0
0
<COMMON> 56,990
<OTHER-SE> 71,216
<TOTAL-LIABILITIES-AND-EQUITY> 1,729,876
<INTEREST-LOAN> 58,652
<INTEREST-INVEST> 36,921
<INTEREST-OTHER> 3
<INTEREST-TOTAL> 95,576
<INTEREST-DEPOSIT> 37,018
<INTEREST-EXPENSE> 41,433
<INTEREST-INCOME-NET> 54,143
<LOAN-LOSSES> 3,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,806
<INCOME-PRETAX> 33,792
<INCOME-PRE-EXTRAORDINARY> 21,073
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,073
<EPS-BASIC> 1.65
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 4.38
<LOANS-NON> 45,398
<LOANS-PAST> 3,400
<LOANS-TROUBLED> 8,809
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,381
<CHARGE-OFFS> 5,684
<RECOVERIES> 2,348
<ALLOWANCE-CLOSE> 19,545
<ALLOWANCE-DOMESTIC> 19,545
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
