<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999 Commission file number 0-16213
-------------- -------
GBC BANCORP
- --------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3586596
- --------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 West 6th Street, Los Angeles, California 90017
- --------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 213/972-4172
- --------------------------------------------------------------------
Former name address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the close of the period
covered by this report.
Common stock, no par value, 13,327,998 shares issued and
outstanding as of March 31, 1999.
<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>
March 31, December 31,
(Dollars In Thousands) 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 31,149 $ 27,514
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 40,000 101,000
Securities Available for Sale at Fair
Value (Amortized Cost of $745,406
and $721,000 at March 31, 1999 and
December 31, 1998, Respectively) 747,551 724,172
Securities Held to Maturity (Fair Value
of $6,033 and $24,677 at March 31, 1999
and December 31, 1998, Respectively) 6,014 24,616
Loans and Leases 824,450 788,945
Less: Allowance for Credit Losses (20,492) (19,381)
Deferred Loan Fees (5,553) (5,914)
----------- -----------
Loans and Leases, Net 798,405 763,650
Bank Premises and Equipment, Net 5,474 5,656
Other Real Estate Owned, Net 5,570 6,885
Due From Customers on Acceptances 7,684 7,249
Real Estate Held for Investment 6,702 7,034
Accrued Interest Receivable and Other
Assets 11,755 13,048
----------- -----------
Total Assets $ 1,660,304 $ 1,680,824
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 153,001 $ 149,397
Interest Bearing Demand 266,233 280,294
Savings 84,595 81,051
Time Certificates of Deposit of $100,000
or More 624,144 599,669
Other Time Deposits 246,251 270,492
----------- -----------
Total Deposits 1,374,224 1,380,903
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 6,000 -
Borrowings from the Federal Home Loan
Bank 50,000 35,000
Subordinated Debt 38,908 38,876
Acceptances Outstanding 7,684 7,249
Accrued Expenses and Other Liabilities 24,004 55,766
----------- -----------
Total Liabilities 1,500,820 1,517,794
Stockholders' Equity:
Common Stock, No Par or Stated Value;
40,000,000 Shares Authorized ;
13,327,998 and 13,711,998 shares
Outstanding at March 31, 1999 and
December 31,1998, Respectively $ 56,875 $ 56,303
Accumulated Other Comprehensive Income 1,234 1,829
Retained Earnings 101,375 104,898
----------- -----------
Total Stockholders' Equity 159,484 163,030
----------- -----------
Total Liabilities and Stockholders'
Equity $ 1,660,304 $ 1,680,824
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
GBC Bancorp & Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
(In Thousands, Except Per Share Data) 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans and Leases, Including Fees $ 18,826 $ 16,570
Securities Available for Sale 10,890 9,888
Securities Held to Maturity 305 1,237
Federal Funds Sold and Securities
Purchased under Agreements to Resell 1,132 1,985
Other 1 6
-------- --------
Total Interest Income 31,154 29,686
INTEREST EXPENSE
Interest Bearing Demand 1,635 1,373
Savings 418 648
Time Certificates of Deposits of
$100,000 or More 7,100 7,763
Other Time Deposits 2,883 3,059
Federal Funds Purchased and Securities
Sold under Repurchase Agreements 17 4
Borrowings from the Federal Home Loan
Bank 504 -
Subordinated Debt 870 870
-------- --------
Total Interest Expense 13,427 13,717
Net Interest Income 17,727 15,969
Provision for Credit Losses 1,500 -
-------- --------
Net Interest Income after Provision
for Credit Losses 16,227 15,969
NON-INTEREST INCOME
Service Charges and Commissions 1,640 1,437
Gain on Sale of Loans, Net 99 19
Other 113 317
-------- --------
Total Non-Interest Income 1,852 1,773
NON-INTEREST EXPENSE
Salaries and Employee Benefits 4,472 4,295
Occupancy Expense 763 728
Furniture and Equipment Expense 610 485
Net Other Real Estate Owned Expense 46 312
Other 1,704 1,484
-------- --------
Total Non-Interest Expense 7,595 7,304
Income before Income Taxes 10,484 10,438
Provision for Income Taxes 3,919 3,807
-------- --------
Net Income $ 6,565 $ 6,631
======== ========
Earnings Per Share:
Basic $ 0.48 $ 0.47
Diluted 0.47 0.46
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
GBC BANCORP & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands, Except per Share Amounts)
Accumulated
Other Total
Common Stock Retained Comprehensive Comprehensive Stockholders'
Shares Amount Earnings Income 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
Foreign Currency Translation
Adjustment - -
----------
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 Quarter - - 6,565 - $6,565 6,565
----------
Other Comprehensive Income,
Net of Tax
Net Changes in Securities
Valuation Allowance - - - (595) (595) (595)
Foreign Currency Translation
Adjustment - - -
----------
Comprehensive Income $5,970
======
Stock Options Exercised 39 376 - - 376
Tax Benefit-Stock Options - 196 - - 196
Exercised Stock Repurchase (423) (9,088) (9,088)
Cash Dividend-$.075 per Share - - (1,000) - (1,000)
------------------------------------------- -----------
Balance at March 31, 1999 13,328 $56,875 $101,375 $1,234 $159,484
====== ======= ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Disclosure of Reclassification Amount:
For the Quarter For the Year
Ended Mar.31,99 Ended Dec.31,98
<S> <C> <C>
Net Change of Unrealized Holding Gains (Losses) Arising During Period
Net of Tax Expense(Benefit) of $(433,000) and $172,000 in 1999 and
1998, Respectively $ (596) $ 237
Less: Reclassification Adjustment for Gains Included in Net Income Net
of Tax Expense of $0 and $45,000 in 1999 and 1998, Respectively - (62)
Net Change of Unrealized Gains on Securities Net of Tax Expense (Benefit) ----------- ------------
of $(433,000) and $127,000 in 1999 and 1998, Respectively. $ (596) $ 175
=========== ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
- -----------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 6,565 $ 6,631
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation 360 313
Net Amortization/(Accretion) of
Premiums/Discounts on Securities 159 (83)
Accretion of Discount on Subordinated Notes 32 32
Writedown on Real Estate Held for Investment 332 331
Write-off of Goodwill 256 -
Provision for Credit Losses 1,500 -
Amortization of Deferred Loan Fees (1,130) (710)
Gain on Sale of Loans (99) (19)
Gain on Sale of Other Real Estate Owned (151) (14)
Proceeds from Sales of Loans Originated for Sale - 19
Net Increase in Accrued Interest
Receivable and Other Assets 1,293 1,744
Net Decrease in Accrued Expenses and Other Liabilities (31,231) (2,937)
Other, Net - 1
---------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (22,114) $ 5,308
---------- -----------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (155,697) (70,947)
Proceeds from Maturities of Securities
Available for Sale 131,087 95,339
Purchases of Securities Held to Maturity - (50,090)
Proceeds from Maturities of Securities
Held to Maturity 18,648 13,933
Net Increase in Loans and Leases (35,189) (34,077)
Proceeds from Sales of Other Real Estate Owned 1,812 832
Capitalized Costs of Other Real Estate Owned (283) -
Purchases of Premises and Equipment (211) (257)
---------- -----------
NET CASH USED BY INVESTING ACTIVITIES $ (39,833) $ (45,267)
---------- -----------
FINANCING ACTIVITIES:
Net Increase/(Decrease) in Demand, Interest
Bearing Demand and Savings Deposits (6,913) 16,853
Net Increase in Time Certificates of Deposits 234 43,487
Net Increase in Federal Funds Purchased
and Securities Sold Under Agreements
to Repurchase 6,000 -
Borrowings from the Federal Home Loan Bank 15,000 -
Stock Repurchase Program (9,087) -
Cash Dividends Paid (1,028) (839)
Proceeds from Exercise of Stock Options 376 1,076
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 4,582 $ 60,577
--------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (57,365) 20,618
Cash and Cash Equivalents at Beginning of Period 128,514 140,519
-------- -------
Cash and Cash Equivalents at End of Period $ 71,149 $ 161,137
======== =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During This Period for:
Interest $ 13,205 $ 13,453
Income Taxes 1,155 350
======== =========
Noncash Investing Activities:
Loans Transferred to Other Real
Estate Owned at Fair Value $ 64 $ 151
======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
GBC Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
In the opinion of management, the unaudited consolidated
financial statements of GBC Bancorp and its subsidiaries (the
"Company") as of March 31, 1999 and December 31, 1998 and the
quarter ended March 31, 1999 and 1998, reflect all adjustments
(which consist only of normal recurring adjustments) necessary
for a fair presentation. Operating results for the three months
ended March 31, 1999, are not necessarily indicative of the
results that may be expected for the full year ending December
31, 1999. In the opinion of management, the aforementioned
consolidated financial statements are in conformity with general
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
months ended March 31, 1998 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
- --------
For the quarter ended March 31, 1999, net income totaled
$6,565,000, or $0.47 diluted earnings per share, compared to
$6,631,000, or $0.46 diluted earnings per share for the first
quarter of 1998. The 1998 earnings per share reflect the 2 for 1
split of the stock to shareholders of record on April 30, 1998
and issued and distributed on May 15, 1998.
During the first quarter, the Company announced that a
borrower with an outstanding loan balance of $31 million informed
its subsidiary bank, General Bank (the "Bank"), that it has filed
a bankruptcy proceeding. Accordingly, the Bank placed the loan on
non-accrual. The loan was for the construction of a casino in Las
Vegas, Nevada, and is collateralized by a first trust deed on the
building. In addition, the loan is collateralized by second
trust deeds on an associated hotel and on an RV park and by a
first trust deed on undeveloped land, all of which are also
located in Las Vegas, Nevada. There was also a take-out
commitment from another financial institution to pay off the loan
at the end of construction. A review of the collateral indicates
sufficient value to repay the loan's principal balance, together
with interest and expenses.
The $66,000, or 1.0%, decrease in net income from the same
period of 1998 was primarily caused by a $1,500,000 provision for
credit losses recorded in 1999. For the quarter ended March 31,
1998, there was no provision for credit losses recorded. At
quarter-end, an allocation of the allowance for credit losses for
the $31 million non-accrual loan was made.
Substantially all of the remaining construction loans are
for the construction of residential properties, and the loans are
disbursed in phases as the developers complete and sell portions
of the projects. Excluding the casino loan, there are nine real
estate lending commitments exceeding $10 million, of which five
have loans outstanding in excess of $10 million and the largest
such loan is $17 million. There also is a $20 million real
estate term loan commitment. In addition, there also are twelve
commercial loan lending commitments exceeding $10 million, of
which five have loans outstanding exceeding $10 million and the
largest such loan is $21 million. The risk potential of loans is
a function of many factors, including the type and amount of
collateral associated with the loan, in addition to the amount of
the loan outstanding.
The annualized return on average assets ("ROA") for the
Company was 1.59% and 1.75% for the quarter ended March 31, 1999
and 1998, respectively. The annualized return on average
stockholders' equity ("ROE") for the quarter ended March 31, 1999
and 1998 was 16.3% and 17.8%, respectively.
RESULTS OF OPERATIONS
- ---------------------
Net Interest Income
- -------------------
For the quarter ended March 31, 1999 and 1998, net interest
income before the provision for credit losses was $17,727,000 and
$15,969,000, respectively, representing an increase of
$1,758,000, or 11.0%. The components explaining this increase
are discussed below.
Interest Income
- ---------------
Total interest income for the quarter ended March 31, 1999
was $31,154,000 compared to $29,686,000 for the corresponding
period of a year ago. The increase of $1,468,000, or 4.9%, was
due to an increase of average earning assets. For the quarter
ended March 31, 1999 and 1998, average earning assets were $1,627
million and $1,476 million, respectively, representing a $151
million, or 10.2%, growth. The impact of the growth of average
earning assets was partially offset by a decrease of the yield on
earning assets from 8.16% to 7.77%, for the quarter ended March
31, 1998 and 1999, respectively.
The reduction of the yield is due to decreases of the yield
on all interest-earning categories, primary among which was an 88-
basis decline of the yield on loans and leases. The average
prime rate of interest during the quarter ended March 31, 1999
and 1998 was 7.75% and 8.50%, respectively. The reduced yields
on all categories of earning assets was partially offset by the
increase of average loans and leases, the highest yielding
earning assets, as a percent of total average earning assets.
For the quarter ended March 31, 1999 and 1998, average loans and
leases represented 49.7% and 44.1%, respectively, of total
average earning assets.
Interest Expense
- ----------------
Total interest expense for the quarter ended March 31, 1999
was $13,427,000 compared to $13,717,000 for the corresponding
period of a year ago. The decrease of $290,000, or 2.1%, was due
to the decline of the cost of funds from 4.59% for the quarter
ended March 31, 1998 to 4.13% for the quarter ended March 31,
1999. The rates paid on all categories of deposit products
decreased with the largest impact in time certificates of deposit
of $100,000 or more which declined 61-basis points from 5.28% to
4.67%. The result of the above was a 49-basis point decrease in
the rates paid on interest-bearing deposits. For the quarter
ended as indicated, average balance and rates paid for the
deposit categories were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
(Dollars in Thousands) 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Interest-bearing demand
- Average balance $ 281,950 $ 232,803
Rate 2.35% 2.39%
Savings - Average balance 79,379 95,070
Rate 2.14% 2.76%
Time certificates of deposit
of $100,000 or more -
Average balance 616,412 595,894
Rate 4.67% 5.28%
Other time deposits -
Average balance 257,443 249,417
Rate 4.54% 4.97%
</TABLE>
The impact on interest expense of the rate reduction of the
cost of funds was partially offset by an increase of the average
interest-bearing liabilities. For the quarter ended March 31,
1999 and 1998 average interest-bearing liabilities were $1,317.8
million and $1,212.3 million, respectively, an increase of $105.5
million, or 8.7%. Included in this increase was $42.4 million of
advances with the Federal Home Loan Bank of San Francisco.
The net interest spread, defined as the yield on earning
assets less the rates paid on interest-bearing liabilities,
increased to 3.64% for the quarter ended March 31, 1999 from
3.57% for the corresponding period of a year ago. The increase
is primarily due to the reduced cost of funds as explained above.
The net interest margin, defined as the annualized
difference between interest income and interest expense divided
by average interest earning assets, increased to 4.42% for the
quarter ended March 31, 1999, from 4.39% for the corresponding
period of a year ago.
Provision for Credit Losses
- ---------------------------
For the quarter ended March 31, 1999, the provision for
credit losses was $1,500,000. For the quarter ended March 31,
1998, there was no provision for credit losses.
At quarter end, the Company made an allocation of the
allowance for credit losses for the $31 million construction loan
placed on non-accrual in the first quarter and discussed above.
Although the Company anticipates the full recapture of principal,
interest and estimated expenses, it cannot determine the timing
of the liquidation of the assets nor the actual values at that
time.
For the quarter ended March 31,1999 and 1998, net charge-
offs were $389,000 and $928,000, respectively.
The amount of the provision for credit losses is determined
by management and is based upon the quality of the loan
portfolio, management's assessment of the economic environment,
evaluations made by regulatory authorities, historical loan loss
experience, collateral values, assessment of borrowers' ability
to repay, and estimates of potential future losses. Please refer
to the discussion "Allowance for Credit Losses", following.
Non-Interest Income
- -------------------
Non-interest income for the quarter ended March 31, 1999
totaled $1,852,000 compared to $1,773,000 for the same period
ended March 31, 1998. The net increase of $79,000, or 4.5%, was
primarily attributable to an increase in service charges and
commissions due mainly to increases of commissions on both
standby and commercial letters of credit. There was a reduction
in other income in the current quarter, as compared to the first
quarter of 1998, due primarily to the closure of the Bank's
escrow subsidiary.
Non-Interest Expense
- --------------------
Non-interest expense for the quarter ended March 31, 1999,
totaled $7,595,000, a $291,000, or 4.0%, increase over the
$7,304,000 recorded in the same period of 1998. Included in other
expense, which increased $220,000 for the first quarter, was a
$256,000 write-off of the intangible asset associated with the
Bank's escrow subsidiary. The assets of this subsidiary were sold
to a third party.
For the quarter ended March 31,1999, the Company's
efficiency ratio, defined as non-interest expense divided by the
sum of net interest income plus non-interest income, declined to
38.8%, comparing favorably to 41.2% for the corresponding period
of 1998.
Provision for Income Taxes
- --------------------------
For the quarter ended March 31, 1999, the provision for
income taxes was $3,919,000, representing 37.4% of pre-tax
income. The provision for the quarter ended March 31, 1998 was
$3,807,000, representing 36.5% of pre-tax income. The increase
of the effective tax rate was primarily responsible for the
$112,000 increase of the tax provision. The increase of the
effective tax rate was mainly the result of the expiration on
November 30, 1998 of the Los Angeles Revitalization Zone
California tax incentive.
FINANCIAL CONDITION
- -------------------
Total assets as of March 31, 1999, were $1,660.3 million
representing a $20.5 million, or 1.2%, decrease from total assets
of $1,680.8 million as of December 31, 1998. The decline of
total assets from December 31, 1998 to March 31, 1999 is
primarily due to the settlement in January of $30 million of
securities that were traded in December and the continued
repurchase of Company stock pursuant to the stock repurchase
program. For the quarter ended March 31, 1998, $9.1 million was
paid for 423,100 shares. In addition, deposits declined $6.7
million from December 31, 1998 to March 31, 1999 primarily due to
$14.1 million decline of interest-bearing demand deposits.
Offsetting the above was a $15.0 million increase in borrowings
from the FHLB.
Loans
- -----
As of March 31, 1999, total loans and leases were $824.5
million compared to $788.9 million as of December 31, 1998,
representing a $35.6 million, or 4.5% increase. All major
categories of loans experienced growth during the first quarter
of 1999, led by increases of $17.9 million, or 6.8%, in the real
estate- conventional portfolio. This increase was primarily the
result of five loans totaling $20 million. Each loan is secured
by real property collateral with loan to value ratios from 50% to
75%.
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>
March 31, 1999 December 31, 1998
(In Thousands) Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 315,448 38.27% $ 309,198 39.19%
Real Estate -Construction 188,742 22.89% 177,737 22.53%
Real Estate -Conventional 281,809 34.18% 263,869 33.45%
Installment 29 0.00% 37 0.00%
Other Loans 22,395 2.72% 22,302 2.83%
Leveraged Leases 16,027 1.94% 15,802 2.00%
------------------------------------------------
Total $ 824,450 100.00% $ 788,945 100.00%
================================================
</TABLE>
Trade financing loans which are included in commercial
loans, declined $8.1 million from December 31, 1998, to $222.4
million as of March 31, 1999. Trade financing loans are made by
the Bank's International Division which, in addition to granting
loans to finance the import and export of goods between the
United Sates and countries in the Pacific Rim, also provides
letters of credit and other related services. The Bank does not
make loans to foreign banks, foreign government or their central
banks, or commercial and industrial loans to entities domiciled
outside of the United States, except for the extension of
overdraft privileges to its foreign correspondent banks on a
limited, case by case, basis.
During 1998 and continuing into 1999, 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 primary
source of payment for substantially all of the Company's loans
is from the cash flow generated from the borrowers' operations,
which are located within the United States. There could be
adverse financial impacts on individual borrowers as they adjust
their businesses to the changes caused by the financial
disruption, but at this time, management believes that negative
impacts, if any, should not be significant.
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
impaired loans) which are 90 days past due as to principal and/or
interest as non-accrual loans unless management determines that
the fair value of underlying collateral is substantially in
excess of the loan amount or circumstances justify treating the
loan as fully collectible. After a loan is placed on non-accrual
status, any interest previously accrued but not yet collected, is
reversed against current income. 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) March 31, 1999 December 31, 1998
- ---------------------------------------------------------------
<S> <C> <C>
Loans 90 Days or More Past
Due and Still Accruing $ 569 $ 780
Non-accrual Loans 50,623 20,790
Total Past Due Loans 51,192 21,570
Restructured Loans (on
Accrual Status) 10,373 10,440
Total Non-performing and
Restructured Loans 61,565 32,010
Other Real Estate Owned, Net 5,570 6,885
-----------------------------
Total Non-performing Assets $ 67,135 $ 38,895
=========== =========
</TABLE>
Total non-performing assets increased from $38.9 million to
$67.1 million from December 31, 1998 to March 31, 1999,
respectively. The $28.2 million or 72.6%, increase was due to
the increase of non-accrual loans, discussed below.
Loans 90 Days or More Past Due
- ------------------------------
One credit comprises this category which is anticipated
to be current in the second quarter.
Non-accrual loans
- -----------------
The $29.8 million or 143.5%, increase of non-accrual loans,
is due to the inclusion of a $31 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. A
review of the collateral indicates sufficient value for the full
recapture of principal, interest and estimated expenses.
However, the Company cannot determine the timing of the
liquidation of the assets nor the actual values at that time.
The following table analyzes the increase in non-accrual
loans during the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Non-Accrual Loans (In Thousands)
--------------------------------------------
<S> <C>
Balance, December 31, 1998 $20,790
Add: Loans placed on non-accrual 33,474
Less: Charge-offs (1,075)
Returned to accrual status (476)
Repayments (2,026)
Transfer to OREO (64)
Balance, March 31, 1999 50,623
--------------------------------------------
</TABLE>
The following table breaks out the Company's non-accrual
loans by category as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(IN THOUSANDS) March 31, 1999 December 31, 1998
- -------------------------------------------------------------
<S> <C> <C>
Commercial $17,885 $19,202
Real Estate-Construction 31,102 277
Real Estate-Conventional 1,635 1,309
Installment 1 2
---------------------------
Total $50,623 $20,790
======= =======
</TABLE>
Restructured Loans
- ------------------
As of March 31, 1999, the balance of restructured loans was
$10.4 million, unchanged from the balance as of December 31, 1998.
A loan is categorized as restructured if the original interest
rate on such loan, the repayment terms, or both, are modified due
to a deterioration in the financial condition of the borrower.
Restructured loans may also be put on a non-accrual status in
keeping with the Bank's policy of classifying loans which are 90
days past due as to principal and/or interest. Restructured
loans which are non-accrual loans are not included in the balance
of restructured loans. As of March 31, 1999, there were three
loans on non-accrual status totaling $667,000. As of March 31,
1999, restructured loans, excluding the three non-accrual loans,
consisted of eleven real estate credits, unchanged from year-end
1998. The weighted average yield of the restructured loans as of
March 31, 1999 was 9.95%.
There are no commitments to lend additional funds on any of
the restructured loans.
Other Real Estate Owned
- -----------------------
As of March 31, 1999, other real estate owned ("OREO"), net
of valuation allowance of $2.0 million, totaled $5.6 million,
representing a decrease of $1.3 million, or 18.8%, from the net
balance of $6.9 million, net of valuation allowance of $2.0
million, as of December 31, 1998. As of March 31, 1999, OREO
consisted of 16 properties of which one is a multi-family
condominium project. As of March 31, 1999, the sales of this
project have resulted in the repayment of its carrying value. As
of December 31, 1998, OREO consisted of 22 properties.
The OREO properties are all physically located in the Bank's
market area. They include single family residences,
condominiums, commercial buildings, and land. Nine properties
comprise the land category of OREO. The Company does not intend
to develop these properties; rather, it will sell the land
undeveloped.
The following table sets forth the Bank's OREO by property
type as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
- ------------------------------------------------------------
(In Thousands) 1999 1998
- ------------------------------------------------------------
Property Type
<S> <C> <C>
Single-Family Residential $ 550 $ 752
Condominium - 485
Land 3,626 3,621
Retail Facilities 3,394 4,027
Less : Valuation Allowance (2,000) (2,000)
--------------------------
Total $ 5,570 $ 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. The following table discloses
pertinent information as it relates to the Company's impaired
loans as of and for the dates indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(IN THOUSANDS) March 31, Dec. 31,
1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Recorded Investment with Related Allowance $53,009 $20,746
Recorded Investment with no Related Allowance 1,517 1,519
Total Recorded Investment 54,526 22,265
Specific Allowance on Impaired Loans 6,816 3,250
- ----------------------------------------------------------------------
</TABLE>
The increase of the recorded investment of impaired loans is
due to the $31 million casino construction loan discussed above.
The average balance of total recorded investment in impaired
loans was $38.4 million for the three months ended March 31, 1999
and $13.5 million for the twelve months ended December 31, 1998.
For the quarter ended March 31, 1999 and 1998, interest
income recognized on impaired loans was $180,000 and $355,000,
respectively. Of the amount of interest income recognized during
the quarters ended March 31, 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 March 31, 1999, the balance of the allowance for
credit losses was $20.5 million, representing 2.49% 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. At quarter
end, an allocation of the allowance for credit losses for the $31
million non-accrual loan as discussed above was made. Although
the Company anticipates the full recapture of principal, interest
and estimated expenses, it cannot determine the timing of the
liquidation of the assets nor the actual values at that time.
The table below summarizes the activity in the allowance
for credit losses (which amount includes the allowance on
impaired loans), for the three-month period ended as indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(IN THOUSANDS) March 31, 1999 March 31, 1998
- ---------------------------------------------------------------
<S> <C> <C>
Balance,Beginning of Period $19,381 $16,776
Provision for Credit Losses 1,500 -
Charge-offs (1,056) (1,099)
Recoveries 667 171
Net Charge-offs (389) (928)
Balance,End of Period $20,492 $15,848
- ---------------------------------------------------------------
</TABLE>
As of March 31, 1999, the allowance represents 40.5% of non-
accrual loans and 33.3% of non-performing and restructured loans
combined. As of December 31, 1998, the allowance represented
93.2% of non-accrual loans and 60.6% of non-performing and
restructured loans combined. 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 March 31, 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 accumulated other comprehensive income.
As of March 31, 1999, the Company recorded net unrealized
gains of $2,145,000 on its available for sale portfolio. Other
comprehensive income includes $1,243,000, representing the net
unrealized gains, net of tax.
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of securities at March 31, 1999 and
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
(In Thousands) Gross Gross
March 31, 1999 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <S> <C> <C>
Securities Held to Maturity
U.S.Government Agencies $ 5,996 $ 19 $ - $ 6,015
Collateralized Mortgage
Obligations 18 - - 18
-------------------------------------------------
Total Securities Held to Maturity $ 6,014 $ 19 $ - $ 6,033
=================================================
Securities Available for Sale
U.S.Treasuries 1,851 1 - 1,852
U.S.Government Agencies 19,388 99 - 19,487
Mortgage Backed Securities 127,560 - (211) 127,349
Corporate Notes 50,054 - (75) 49,979
Collateralized Mortgage Obligations 258,305 460 - 258,765
Asset Backed Securities 279,858 1,871 - 281,729
Other Securities 8,390 - - 8,390
-------------------------------------------------
Total Securities Available for Sale $ 745,406 $ 2,431 $ (286) $ 747,551
=================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands) Gross Gross
December 31, 1998 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity
U.S. Government Aencies $ 24,594 $ 61 $ - $ 24,655
Collateralized Mortgage Obligation 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
securities held to maturity during the quarter ended March 31,
1999 and 1998.
Deposits
The Company's deposits totaled $1,374.2 million as of March
31, 1999, a decrease of $6.7 million from $1,380.9 million as of
December 31, 1998. Other time deposits and interest-bearing
demand deposits declined $24.2 million and $14.1 million,
respectively. This decrease was partially offset by a $24.5
million increase of time certificates of deposit of $100,000 or
more.
There were no brokered deposits outstanding as of March 31,
1999 and December 31, 1998. The Company believes that the
majority of its deposit customers have strong ties to the Bank.
Although the Company has a significant amount of time
certificates of deposit of $100,000 or more having maturities of
one year or less, and has experienced growth in this area, the
depositors have generally renewed their deposits in the past at
their maturity.
The maturity schedule of time certificates of deposit of
$100,000 or more as of March 31, 1999 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ----------------------------------------------------
<S> <C>
3 Months or Less $359,182
Over 3 Months Through 6 Months 137,548
Over 6 Months through 12 Months 127,129
Over 12 Months 285
--------
Total $624,144
========
</TABLE>
Other Borrowings
As of March 31, 1999, the Company has three sources of other
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. 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 March 31, 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 March 31,
1999 has a composite fixed rate of interest of 4.85%.
As of March 31, 1999, the Bank had $6 million outstanding of
federal funds purchased, an overnight borrowing from one of its
major correspondents. The rate of interest paid on the federal
funds purchased was 5.50%. (Reference also discussion of
liquidity following.)
Regulatory Matters
During the first quarter of 1999, the annual safety and
soundness examination was conducted concurrently by the Federal
Deposit Insurance Corporation ("FDIC") and the California
Department of Financial Institutions. No reports have yet been
issued, but no significant findings are anticipated.
Capital Resources
Stockholders' equity totaled $159.5 million as of March 31,
1999, a decrease of $3.5 million, or 2.2%, from $163.0 million as
of December 31, 1998. The net decrease from year-end 1998 was
primarily due to the repurchase of $9.1 million of the Company's
stock, which was partially offset by net income of $6.6 million,
less cash dividends declared to shareholders of $1.0 million less
the net change in securities' valuation of $0.6 million, plus the
exercise of stock options and related tax benefits of $0.6
million.
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. As of March 31, 1999, 888,400 shares had been
repurchased at an average cost of $21.92 per share. As of April
30, 1999, 1,302,000 shares had been repurchased for $25.9
million, for an average cost of $19.85 per share.
Capital ratios for the Company and for the Bank were as
follows as of the dates indicated:
<TABLE>
<CAPTION>
Well-Capitalized March 31, December 31,
Requirements 1999 1998
---------------- ----------- --------------
GBC Bancorp
<S> <C> <C> <C>
Tier 1 Leverage Ratio 5% 9.48% 9.75%
Tier 1 Risk-Based Capital Ratio 6% 11.11% 11.06%
Total Risk-Based Capital Ratio 10% 15.09% 14.98%
General Bank
Tier 1 Leverage Ratio 5% 9.75% 9.49%
Tier 1 Risk-Based Capital Ratio 6% 11.43% 10.77%
Total Risk-Based Capital Ratio 10% 12.68% 12.02%
</TABLE>
For the quarter ended March 31, 1999, the ratio of the
Company's average stockholders' equity to average assets was
9.77%. For the year ended December 31, 1998, this ratio was
10.01%. The decrease of the ratio is mainly the result of the
stock repurchase program.
Liquidity and Market Risk
Liquidity measures the ability of the Company to meet
fluctuations in deposit levels, to fund its operations and to
provide for customers' credit needs. Liquidity is monitored by
management on an on-going basis. Asset liquidity is provided by
cash and short-term financial instruments which include federal
funds sold and securities purchased under agreements to resell,
unpledged securities held to maturity maturing within one year
and unpledged securities available for sale. These sources of
liquidity amounted to $643.6 million, or 38.8%, of total assets,
as of March 31, 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 equal to 25
percent of assets with terms up to 360 months. As of March 31,
1999, there were four draws under this financing facility with
the FHLB for a total $50 million, and a blended fixed rate of
interest of 4.85%. Management believes its liquidity sources to
be stable and adequate.
As of March 31, 1999, total loans and leases represented
60.0% of total deposits. This compares to 57.1% as of December
31, 1998.
The liquidity of the parent company, GBC Bancorp, is
primarily dependent on the payment of cash dividends by its
subsidiary, General Bank, subject to the limitations imposed by
the Financial Code of the State of California. For the three
months ending March 31, 1999, General Bank declared cash
dividends of $1.0 million to GBC Bancorp.
"GAP" Measurement
While no single measure can completely identify the impact
of changes in interest rates on net interest income, one gauge of
interest rate sensitivity is to measure, over a variety of time
periods, contractual differences in the amounts of the Company's
rate sensitive assets and rate sensitive liabilities. These
differences, or "gaps", provide an indication of the extent that
net interest income may be affected by future changes in interest
rates. However, these contractual "gaps" do not take into
account timing differences between the repricing of assets and
the repricing of liabilities.
A positive gap exists when rate sensitive assets exceed rate
sensitive liabilities and indicates that a greater volume of
assets than liabilities will reprice during a given period. This
mismatch may enhance earnings in a rising rate environment and
may inhibit earnings when rates decline. Conversely, when rate
sensitive liabilities exceed rate sensitive assets, referred to
as a negative gap, it indicates that a greater volume of
liabilities than assets will reprice during the period. In this
case, a rising interest rate environment may inhibit earnings and
declining rates may enhance earnings.
"Gap" reports are utilized as a means to provide management
with a tool to monitor repricing differences, or "gaps", between
assets and liabilities repricing in a specified period, based
upon their underlying contractual rights. The use of "gap"
reports is thus limited to a quantification of the "mismatch"
between assets and liabilities repricing within a unique
specified timeframe. Contractual "gap" reports cannot be used to
quantify exposure to interest rate changes because they do not
take into account timing differences between repricing assets and
liabilities, and changes in the amount of prepayments.
As of March 31, 1999 there is a cumulative one year negative
"gap" of $594.0 million, up from $448.2 million of December 31,
1998.
The following table indicates the Company's interest rate
sensitivity position as of March 31, 1999, 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 $ 19,331 $ 678 $ 71,760 $ 655,782 $ - $ 747,551
Securities Held to Maturity - - - 6,014 - 6,014
Federal Funds Sold &
Securities Purchased Under
Agreement to Resell 40,000 - - - - 40,000
Loans and Leases (1)(2) 548,706 23,511 92,304 109,306 - 773,827
Non-Earning Assets (2) - - - - 92,912 92,912
-------- ---------- ----------- --------- ----------- -----------
Total Assets $608,037 $ 24,189 $164,064 $ 771,102 92,912 $1,660,304
======== ========== =========== ========= =========== ===========
Source of Funds for Assets:
Deposits:
Demand - N/B $ - $ - $ - $ - $ 153,001 $ 153,001
Interest Bearing Demand 266,233 - - - - 266,233
Savings 84,595 - - - - 84,595
TCD'S Under $100,000 125,877 119,661 713 - - 246,251
TCD'S $100,000 and Over 360,228 263,631 285 - - 624,144
--------- ---------- ----------- --------- ----------- ------------
Total Deposits $ 836,933 $383,292 $ 998 $ - $ 153,001 $1,374,224
========= ======== ======== ======== ========= ==========
Federal Funds Purchased &
Securities Sold Under
Agreement to Resell $ 6,000 $ - $ - $ - $ - $ 6,000
Borrowings from the
Federal Home Loan Bank - - 50,000 - - 50,000
Subordinated Debt - - - 38,908 - 38,908
Other Liabilities - - - - 31,688 31,688
Stockholders' Equity - - - - 159,484 159,484
--------- --------- -------- -------- --------- ---------
Total Liabilities and
Stockholders'Equity $ 842,933 $ 383,292 $ 50,998 $ 38,908 $ 344,173 $1,660,304
========= ========= ======== ======== ========= ==========
Interest Sensitivity Gap $(234,896) $(359,103) $113,066 $732,194 $(251,261)
Cumulative Interest
Sensitivity Gap $(234,896) $(593,999) $(480,933) $251,261 -
Gap Ratio (% of Total
Assets) -14.1% -21.6% 6.8% 44.1% -15.1%
Cumulative Gap Ratio -14.1% -35.8% -29.0% 15.1% 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 indicates
the Company's financial instruments that are sensitive to changes
in interest rates categorized by their expected maturity, as of
March 31, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------
0 to 90 91-365 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 $ 42,833 $ 106,549 $ 515,241 $ 82,928 $ 747,551
Securities Held to Maturity 6,014 - - - 6,014
Federal Funds Sold & Securities
Purchased Under Agreement
to Resell 40,000 - - - 40,000
Loans and Leases (1) 548,706 23,511 92,304 109,306 773,827
---------- ---------- --------- --------- ----------
Total Interest-earning Assets $ 637,553 $ 130,060 $ 607,545 $ 192,234 $1,567,392
========== ========== ========== ========= ==========
Interest-sensitive Liabilities:
Deposits:
Interest Bearing Demand $ 9,573 $ 28,721 $ 175,891 $ 52,048 $ 266,233
Savings 2,820 8,459 56,397 16,919 84,595
Time Deposit of Certificates 484,565 384,832 998 - 870,395
---------- ---------- ---------- --------- ----------
Total Deposits $ 496,958 $ 422,012 $ 233,286 $ 68,967 $1,221,223
---------- ---------- ---------- --------- ----------
Federal Funds Purchased
& Securities Sold Under
Repurchased Agreements $ 6,000 $ - $ - $ - $ 6,000
Borrowing from FHLB - - 50,000 - 50,000
Subordinated Debt - - - 38,908 38,908
---------- ---------- ---------- --------- ----------
Total Interest-sensitive
Liabilities $ 496,958 $ 422,012 $ 233,286 $ 107,875 $1,316,131
========== ========== ========== ========= ==========
</TABLE>
(1) Loans and leases are net of non-accrual loans and before unamortized
deferred loan fees and allowance for credit losses.
Expected maturities of assets are contractual maturities
adjusted for projected payment based on contractual amortization
and unscheduled prepayments of principal as well as repricing
frequency. Expected maturities for deposits are based on
contractual maturities adjusted for projected rollover rates and
changes in pricing for non-maturity deposits. The Company
utilizes assumptions supported by documented analysis for the
expected maturities of its loans and repricing of its deposits
and relies on third party data providers for prepayment
projections for amortizing securities. The actual maturities of
these instruments could vary significantly if future prepayments
and repricing differ from the Company's expectations based on
historical experience.
The Company uses a computer simulation analysis to attempt
to predict changes in the yields earned on assets and the rates
paid on liabilities in relation to changes in market interest
rates. The net interest income volatility and market value of
equity volatility reports measure the exposure of earnings and
capital respectively, to immediate incremental changes in market
interest rates as represented by the prime rate change of 100 to
200 basis points. Market value of equity is defined as the
present value of assets minus the present value of liabilities
and off balance sheet contracts. The table below shows the
estimated impact of changes in interest rates on net interest
income and market value of equity as of March 31, 1999:
<TABLE>
<CAPTION>
NET INTEREST
CHANGE IN INCOME MARKET VALUE OF
INTEREST VOLATILITY EQUITY VOLATILITY
RATES (BASIS MARCH 31, 1999 MARCH 31, 1999
POINTS) (1) (2)
- ----------------------------------------------------
<C> <C> <C>
+200 -3.60% -12.30%
+100 -1.80% -6.10%
-100 -1.90% 3.40%
-200 -5.90% 4.30%
</TABLE>
(1) The percentage change in this column represents net interest income
for 12 months in a stable interest rate environment versus the net
interest income in the various rate scenarios.
(2) The percentage change in this column represents net portfolio value
of the Bank in a stable interest rate environment versus the net
portfolio value in the various rate scenarios.
The Company's primary objective in managing interest rate
risk is to minimize the adverse effects of changes in interest
rates on earnings and capital. In this regard the Company has
established internal risk limits for net interest income
volatility given a 100 and 200 basis point decline in rates of
10% and 15% respectively, over a twelve month horizon.
Similarly, risk limits have been established for market value of
equity volatility in response to a 100 and 200 basis point
increase in rates of 10% and 15%, respectively.
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 in 1999. The Bank has budgeted
$100,000 of expenses related to Year 2000 compliance. Expenses
to date have been approximately $35,000. 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.
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 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 the outstanding credit commitments
by dollar volume at the time of the mailing. As of March 31,
1999, 98% of the questionnaires have been received and reviewed.
The review process identified two credits with commitments of $6
million that continue to represent potential adverse impact on
credit quality if Year 2000 issues are not addressed. Ongoing
oversight has identified an additional six credits where Y2K
issues are not resolved, bringing the total to $30.5 million
represented by eight credits, as of April 30, 1999. 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 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 "indicates,"
"anticipates," "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,
Market Risk, Liquidity and Interest Rate Sensitivity, and Year
2000. 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 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Initial application of SFAS
133 must be as of the beginning of an entity's fiscal quarter; on
that date, hedging relationships must be designated anew and
documented pursuant to the provisions of SFAS 133. SFAS 133 is
not to be applied retroactively to financial statements of prior
periods. Management does not believe that there will be a
material adverse impact on the financial position or results of
operations of the Company upon adoption of SFAS 133.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
- -------------------------
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 March 31, 1999.
Item 3. DEFAULT UPON SENIOR SECURITIES
- ---------------------------------------
This item is not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the Company security
holders during the quarter ended March 31, 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: May 13, 1999 s/ Li-Pei Wu
------------------ ------------------------
Li-Pei Wu, Chairman and
Chief Executive Officer
Dated: May 13, 1999 s/ Peter Lowe
------------------ ------------------------
Peter Lowe, Executive
Vice President and
Chief Financial Officer
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