Back to GetFilings.com
FORM 10-K. - ANNUAL REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
-------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from --------------- to ---------------------
Commission file Number 0-16213
------------------------------------------------
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 Sixth Street, Los Angeles, CA 90017
- ---------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 972 - 4172
--------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
- ------------------------------- -------------------------------------
- ------------------------------- -------------------------------------
Securities pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
- ------------------------------------------------------------------------------
(Title of class)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405, 17 CFR 230.405). $222,065,226
NOTE: If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
APPLICABLE ONLY TO REGISTRANT INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
11,514,119 shares outstanding as of February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Documents Incorporated by Reference Part of Form 10-K Into Which Incorporated
- ----------------------------------- -----------------------------------------
1999 Annual Report to Shareholders Part II Items 6, 7 and 8 and Part IV
Definitive Proxy Statement for the
Annual Meeting of Shareholders
Filed within 120 days of the fiscal
Year ended December 31, 1999 Part III
Exhibit Index on Pages 32-34
1
FORM 10-K
---------
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
-------------------------------------------
Page in Incorporation
PART I 10-K by Reference
---- ------------
Item 1. Business................................. 4
General.................................. 4
Lending Activities....................... 4
Competition.............................. 5
Subsidiaries............................. 5
Supervision and Regulation............... 6
Employees................................ 23
Item 2. Properties............................... 23
Item 3. Legal Proceedings........................ 24
Item 4. Submission of Matters to a Vote of
Security Holders......................... 24
Executive Officers of the Registrant 24
PART II
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters...... 26
Item 6. Selected Financial Data.................. 27 1999 Annual Report
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 27 1999 Annual Report
Item 8. Financial Statements and Supplementary
Data..................................... 27 1999 Annual Report
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................... 28
PART III
Item 10. Directors and Executive Officers of the
Registrant............................... 28 2000 Proxy Statement
Item 11. Executive Compensation................... 28 2000 Proxy Statement
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................... 28 2000 Proxy Statement
2
Item 13. Certain Relationships and Related
Transactions............................. 28 2000 Proxy Statement
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................. 29 1999 Annual Report
SIGNATURES............................................. 30
EXHIBIT INDEX.......................................... 32
3
PART I
- ------
Item 1 Business
General
- -------
GBC Bancorp (the "Company"), a California corporation incorporated in 1980,
is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended, and is headquartered at 800 West 6th Street in Los Angeles,
California 90017. The Company owns all of the outstanding stock of its wholly-
owned subsidiary General Bank (the "Bank"), a California state-chartered bank
which commenced operations in March, 1980. GBC Bancorp functions primarily as a
holding company for the Bank.
The Bank has conducted the business of a commercial bank since it commenced
operations. The Bank is a community bank that serves individuals and small to
medium-sized businesses through seventeen branch offices located in the greater
Los Angeles, San Diego and Silicon Valley areas and two loan production offices,
one located in Bellevue, Washington and one in New York, New York. Effective in
February, 2000, the Bank converted its loan production office to a full-service
branch in the State of Washington. The Bank has an operations center in Rosemead
and has branches located in downtown Los Angeles, Monterey Park, Torrance,
Artesia, Alhambra, City of Industry, Irvine, San Diego, Arcadia, Diamond Bar,
Northridge, Orange, Cupertino, San Mateo, Fremont and San Jose.
The loan production offices have been established primarily to develop
loans on behalf of the Bank and to act as the liaison between customers and the
Bank in coordinating other banking services.
The Bank offers a variety of banking services to its customers, including
accepting checking, savings and time deposits; making secured and unsecured
loans; offering traveler's checks, safe deposit boxes, credit cards and other
fee-based services; and providing international trade-related services. Escrow
services offered through its subsidiary, Southern Counties Escrow, were
discontinued in the first quarter of 1999 commensurate with the decision to
cease doing business as an escrow agent.
Lending Activities
- ------------------
The Bank's primary emphasis is on commercial and real estate lending, real
estate construction lending, and, to a lesser extent, SBA lending.
The Bank maintains an International Banking Division, which facilitates
international trade by providing financing, letter of credit services and
collections, as well as other international trade-related banking services. The
Bank does not make loans to
4
foreign banks, foreign governments or their central banks, or commercial and
industrial loans to entities domiciled outside of the United States, except for
the extension of overdraft privileges to its foreign correspondent banks on a
limited, case by case, basis.
The Bank maintains an SBA lending division to provide loans for small to
medium-sized businesses under the Small Business Administration 7-A guarantee
program. Loans range from $50,000 to $1,000,000 with maturities from 7 to 25
years. As of December 31, 1999, the Bank's SBA servicing portfolio was
approximately $33 million.
Competition
- -----------
The Bank actively competes for deposits and loans with other banks and
financial institutions located in its service area. Interest rates, customer
service and legal lending limits are the principal competitive factors, and
increasing deregulation of financial institutions has expanded competition. In
order to compete with other financial institutions in its service area, the Bank
relies principally upon providing quality service to its customers, personal
contact by its officers, directors and employees, and local promotional
activity. Competitors presently include banks serving the Asian population in
Southern and Northern California, as well as major banks with extensive branch
systems operating over a wide geographic area. Many of the banks have greater
financial resources and facilities than the Bank and many offer certain
services, such as trust services, not currently offered by the Bank.
Subsidiaries
- ------------
Bank Subsidiaries
- -----------------
GBC Investment & Consulting Company, Inc., a wholly-owned subsidiary of the
Bank, was incorporated to provide specific, in-depth expertise in the areas of
investment and consultation on an international and domestic basis. An office
was established in Taipei, Taiwan to coordinate and develop business between the
Bank and prospective customers in Taiwan and other Asian countries. As of and
for the year ended December 31, 1999, GBC Investment & Consulting Company, Inc.
reported total assets of $29,000, and a net loss of $58,000.
GBC Leasing Company, Inc. is the Bank's leasing subsidiary. The Bank owns
90% of the voting stock of this company which was formed to acquire various
assets, such as equipment on lease, promissory notes and leases and/or
partnership interests in partnerships owning such types of assets, in exchange
for its common stock in transfers qualifying as a tax free exchange of property,
described in Section 351 of the Internal
5
Revenue Code of 1986, as amended. As of and for the year ended December 31,
1999, GBC Leasing Company, Inc. reported total assets of $645,000, and a net
loss of $66,000.
Southern Counties Escrow, a wholly owned subsidiary of the Bank,
surrendered its Escrow agent's license to the Department of Corporations which
was accepted. The effective date of the surrender was March 19, 1999. The
existing escrow files were transferred to a third party. As of and for the year
ended December 31, 1999, Southern Counties Escrow reported assets, in the form
of inter-company receivable, of $15,000 and net income of $4,000.
GBC Insurance Services, Inc. is a wholly-owned subsidiary of the Bank and
operates exclusively as a full service insurance agent/broker to provide
additional financial service to the Bank's customers. In August, 1997, the
business of GBC Insurance Services, Inc. was transferred to a division of
General Bank. Accordingly, the insurance subsidiary is in an inactive status
and will be formally dissolved in the future.
Holding Company Subsidiaries
- ----------------------------
In addition to its wholly-owned bank subsidiary, the Company owns all of
the outstanding stock of GBC Venture Capital, Inc. The business purpose of GBC
Venture Capital, Inc. is to hold stock warrants received as part of business
relationships and to make equity investments in companies and limited
partnerships subject to applicable regulatory restrictions. As of, and for the
year ended, December 31, 1999, GBC Venture Capital, Inc., reported total assets
of $5,480,000 and net income of $918,000. The net income is primarily the
result of trading revenue resulting from the receipt of securities from venture
capital funds in which the subsidiary invests and from the exercise of warrants.
The Company has received rights to acquire stock in the form of warrants as an
adjunct to its high technology banking relationships.
Supervision and Regulation
- --------------------------
General
- -------
The following generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries only
and are not intended to be complete. These references are qualified in their
entirety by the referenced statutes and regulations. In addition, some statutes
and regulations which apply to and regulate the operation of the banking
industry might exist which are not referenced below. Changes in applicable
statutes and regulations may have a material effect on the business of the
Company and its subsidiaries.
6
GBC Bancorp
- -----------
Upon the reorganization of the Bank as a wholly-owned subsidiary, the
Company became a bank holding company within the meaning of the Bank Holding
Company ("BHC") Act and is subject to the supervision and regulation of the
Federal Reserve Bank of San Francisco. The Company functions primarily as the
sole stockholder of the Bank and establishes general policies and activities of
the operating subsidiaries.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, which include, but are not limited
to, the filing of annual, quarterly and other reports with the Securities and
Exchange Commission.
In 1999, the Gramm-Leach-Bliley Financial Modernization Act (the "Act") was
signed into law. The Company has filed notice with the Federal Reserve that it
has elected to become a financial holding company under the provisions of this
law. This will become effective on April 10, 2000 unless the Company is
otherwise notified by the Board of Governors of the Federal Reserve. The Act
repeals the prohibitions among banks, securities firms and insurance companies
by rescinding provisions of the Glass-Steagall Act and the Bank Holding Company
Act. These activities will be able to be conducted by affiliates of the
financial holding company under regulations still to be published by the Federal
Reserve. Activities permitted by the Act are those that are financial in nature
or incidental to financial activities. The Act identifies the following
activities as financial in nature: lending; insurance activities, including
underwriting, agency and brokerage; providing financial investment advisory
services; underwriting in, and acting as a broker or dealer in, securities;
merchant banking; and insurance company portfolio investment. It is not yet
known in which, if any, of these financial activities the Company will engage.
The Company, as a bank holding company, is subject to regulation under the
BHC Act, and is registered with and subject to the supervision and regulation of
the Board of Governors of the Federal Reserve System (the "Board"). The Company
is required to obtain the prior approval of the Board before it may acquire all
or substantially all of the assets of any bank, or ownership or control of
voting shares of any bank if, after giving effect to such acquisition, the
Company would own or control, directly or indirectly, more than 5% of such bank.
The BHC Act prohibits the Company from acquiring any voting shares of, interest
in, or all or substantially all of the assets of a bank located outside the
state of California unless the laws of such state specifically authorize such
acquisition.
Under the BHC Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries. As
discussed above, the Gramm-Leach-Bliley Act has modified this, as will be
determined by subsequent implementing regulations. The Company is also
prohibited, with certain
7
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company unless the company is engaged in such
activities. The Board's approval must be obtained before the shares of any such
company can be acquired and, in certain cases, before any approved company can
open new offices. In making such determinations, the Board considers whether the
performance of such activities by the Company would offer advantages to the
public, such as greater convenience, increased competition, or gains in
efficiency, which outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. Further, the Board is empowered to differentiate between
activities commenced de novo and activities commenced by acquisition, in whole
or in part, of a going concern.
Although the entire scope of permitted activities is uncertain and cannot
be predicted, the major non-banking activities that have been permitted to bank
holding companies with certain limitations are: making, acquiring or servicing
loans that would be made by a mortgage, finance, credit card or factoring
company; operating an industrial loan company; leasing real and personal
property; acting as an insurance agent, broker, or principal with respect to
insurance that is directly related to the extension of credit by the bank
holding company or any of its subsidiaries and limited to repayment of the
credit in the event of death, disability or involuntary unemployment; issuing
and selling money orders, savings bonds and traveler's checks; performing
certain trust company services; performing appraisals of real estate and
personal property; providing investment and financial advice; providing data
processing services; providing courier services; providing management consulting
advice to non-affiliated depository institutions; arranging commercial real
estate equity financing; providing certain securities brokerage services;
underwriting and dealing in government obligations and money market instruments;
providing foreign exchange advisory and transactional services; acting as a
futures commission merchant; providing investment advice on financial futures
and options on futures; providing consumer financial counseling; providing tax
planning and preparation services; providing check guaranty services; engaging
in collection agency activities; and operating a credit bureau.
The Company's primary source of income is the receipt of dividends from the
Bank. The Bank's ability to make such payments to the Company is subject to
certain statutory and regulatory restrictions.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, the
Bank may not condition an extension of credit on a customer's obtaining other
services provided by it, the Company or any other subsidiary or on a promise by
the customer not to obtain other services from a competitor.
As a bank holding company, the Company is required to file reports with the
Board and to provide such additional information as the Board may require. The
Board
8
also has the authority to examine the Company and each of its subsidiaries with
the cost thereof to be borne by the Company.
In addition, bank subsidiaries of bank holding companies are subject to
certain restrictions imposed by federal law in dealing with their holding
companies and other affiliates. Subject to certain exceptions set forth in the
Federal Reserve Act, a bank can make a loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a loan
or extension of credit to any person or company or issue a guarantee, acceptance
or letter of credit on behalf of an affiliate only if the aggregate amount of
the above transactions of such subsidiary does not exceed 10% of such
subsidiary's capital stock and surplus on a per affiliate basis or 20% of such
subsidiary's capital stock and surplus on an aggregate affiliate basis. Such
transactions must be on terms and conditions that are consistent with safe and
sound banking practices. A bank and its subsidiaries generally may not purchase
a low-quality asset, as that term is defined in the Federal Reserve Act, from an
affiliate. Such restrictions also prevent a holding company and its other
affiliates from borrowing from a banking subsidiary of the holding company
unless the loans are secured by collateral.
The BHC Act also prohibits a bank holding company or any of its
subsidiaries from acquiring voting shares or substantially all the assets of any
bank located in a state other than the state in which the operations of the bank
holding company's banking subsidiaries are principally conducted unless such
acquisition is expressly authorized by statutes of the state in which the bank
to be acquired is located. Legislation adopted in California permits out-of-
state bank holding companies to acquire California banks. See "Effect of
Governmental Policies and Recent Legislation" later in this section.
The BHC Act and regulations of the Board also impose certain constraints on
the redemption or purchase by a bank holding company of its own shares of stock.
The Company's stock repurchase programs are discussed in the ensuing three
paragraphs.
On September 17, 1998, the Board of Directors authorized a stock repurchase
program of up to 1.4 million shares of its common stock at prevailing market
prices from time to time, provided: (i) such repurchases are made pursuant to
Rule 10b-18 issued by the Securities and Exchange Commission under the
Securities Exchange Act of 1934 and (ii) at the time of any such repurchase, the
Company qualifies for the exception for well-capitalized bank holding companies
in Regulation Y of the Federal Reserve Board and meets the test for distribution
under the California General Corporation Law. During the second quarter of 1999,
the program was completed at a total cost of $27.6 million for the 1.4 million
shares.
In the second quarter of 1999, the Board of Directors authorized a Dutch
Auction self-tender offer for up to 2 million shares of the Company's common
stock. The Dutch Auction was completed in the third quarter of 1999 at a total
cost of $29.6 million for the repurchase of 1.3 million shares.
9
In the fourth quarter of 1999, the Board of Directors approved the purchase
of up to $10 million of the Company's common stock from time to time in open
market transactions. As of March 8, 2000, 27,000 shares have been repurchased at
a cost of $522,000.
The Board of Governors of the Federal Reserve System has cease and desist
powers to cover parent bank holding companies and non-banking subsidiaries where
action of a parent bank holding company or its non-financial institutions
represent an unsafe or unsound practice or violation of law. The Board has the
authority to regulate debt obligations (other than commercial paper) issued by
bank holding companies by imposing interest ceilings and reserve requirements on
such debt obligations.
The ability of the Company to pay dividends to its shareholders is subject
to the restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equals
at least the amount of the proposed distribution. The Corporation Law further
provides that, in the event that sufficient retained earnings are not available
for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally are
as follows: (i) the corporation's assets equal at least 1 1/4 times its
liabilities; and (ii) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such fiscal
years, then the corporation's current assets equal at least 1 1/4 times its
current liabilities.
General Bank (the "Bank")
- -------------------------
Banks are extensively regulated under both federal and state law. The
Bank, a California state-chartered bank, is subject to primary supervision,
periodic examination and regulation by the California Department of Financial
Institutions ("DFI") and the Federal Deposit Insurance Corporation (the "FDIC").
The Bank is insured by the FDIC up to a maximum of $100,000 per depositor.
For this protection, the Bank, as is the case with all insured banks, is subject
to the rules and regulations of the FDIC. The Bank, while not a member of the
Federal Reserve System, is subject to certain regulations of the Board.
Various requirements and restrictions under the laws of the state of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions,
10
borrowings, dividends and locations of branch offices. Further, the Bank is
required to maintain certain levels of capital.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by the Bank. California law restricts the
amount available for cash dividends by state-chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years (less
any distributions to shareholders made during such period). In the event a bank
has no retained earnings or net income for its last three fiscal years, cash
dividends may be paid in an amount not exceeding the net income for such bank's
last preceding fiscal year only after obtaining the prior approval of the
Commissioner of the DFI.
The FDIC also has authority to prohibit the Bank from engaging in what, in
the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice.
Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of such affiliates. Such restrictions prevent affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank in any other affiliate is limited to 10 percent of the Bank's
capital and surplus (as defined by federal regulations) and such secured loans
and investments are limited, in the aggregate, to 20 percent of the Bank's
capital and surplus (as defined by federal regulations). California law also
imposes certain restrictions with respect to transactions involving other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of the FDIC Improvement Act ("FDICIA").
Potential Actions
- -----------------
Commercial banking organizations, such as the Bank, may be subject to potential
enforcement actions by the Board, the FDIC and the Commissioner of the DFI for
unsafe or unsound practices in conducting their business or for violations of
any law, rule, regulation or any condition imposed in writing by the agency or
any written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits,
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
11
imposition of restrictions and sanctions under the prompt corrective action
provisions of FDICIA.
Effect of Governmental Policies and Recent Legislation
- ------------------------------------------------------
Banking is a business that depends on rate differentials. In general, the
difference between the interest rates paid by a bank on its deposits and its
borrowings and the interest rates received by a bank on loans extended to its
customers and securities held in a bank's portfolio comprise the major portion
of a bank's earnings. These rates are highly sensitive to many factors that are
beyond the control of a bank. Accordingly, the earnings and growth of a bank
are subject to the influence of local, domestic and foreign economic conditions,
including recession, unemployment and inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by monetary and fiscal policies of the federal
government and the policies of regulatory agencies, particularly the Board. The
Board implements national monetary policies (with objectives such as curbing
inflation and combating recession) by its open-market operations in United
States Government securities, by adjusting the required level of reserves for
financial intermediaries subject to its reserve requirements and by varying the
discount rates applicable to borrowings by depository institutions. The actions
of the Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
The nature and impact of any future changes in monetary policies cannot be
predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial intermediaries are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
the Company are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
Gramm-Leach-Bliley Financial Modernization Act of 1999
- ------------------------------------------------------
As mentioned above on page 7, the Gramm-Leach-Bliley Financial
Modernization Act was signed into law in 1999. This Act, among other things:
. Allows bank holding companies meeting management, capital and CRA standards
to engage in a substantially broader range of non-banking activities than
was
12
permissible prior to enactment, including insurance underwriting and making
merchant banking investments in commercial and financial companies;
. Allows insurers and other financial services companies to acquire banks;
. Removes various restrictions that applied to bank holding company ownership
of securities firms and mutual fund advisory companies; and
. Establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
This Act should be considered a major piece of legislation likely to have an
impact on the Company and the competitive environment in which the Company
operates, but at this time it is impossible to predict what such impact might
be.
Federal Deposit Insurance Corporation Improvement Act of 1991
- --------------------------------------------------------------
Set forth below is a brief discussion of certain portions of FDICIA and
implementing regulations that have been adopted or proposed by the Board, the
Comptroller of the Currency ("Comptroller"), the Office of Thrift Supervision
("OTS") and the FDIC (collectively, the "federal banking agencies").
Prompt Corrective Regulatory Action
- -----------------------------------
FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions that fall
below one or more prescribed minimum capital ratios. The purpose of this law is
to resolve the problems of insured depository institutions at the least possible
long-term cost to the appropriate deposit insurance fund.
The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
The federal banking agencies have issued uniform final regulations
implementing the prompt corrective action provisions of FDICIA. Under the
regulations, an insured depository institution will be deemed to be:
13
. "well capitalized" if it (i) has total risk-based capital of 10 percent or
greater, Tier 1 risk-based capital of 6 percent or greater and a leverage
capital ratio of 5 percent or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action directive
to meet and maintain a specific capital level for any capital measure.
. "adequately capitalized" if it has total risk-based capital of 8 percent or
greater, Tier 1 risk-based capital of 4 percent or greater and a leverage
capital ratio of 4 percent or greater (or a leverage capital ratio of 3
percent or greater if the institution is rated composite 1 under the
applicable regulatory rating system in its most recent report examination);
. "undercapitalized" if it has total risk-based capital that is less than 8
percent, Tier 1 risk-based capital that is less than 4 percent or a
leverage capital ratio that is less than 4 percent (or a leverage capital
ratio that is less than 3 percent if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
. "significantly undercapitalized" if it has total risk-based capital that is
less than 6 percent, Tier 1 risk-based capital that is less than 3 percent
or a leverage capital ratio that is less than 3 percent; and
. "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2 percent.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized, may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is in an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to address the problems associated with such category.
The law prohibits insured depository institutions from paying management fees
to any controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions, and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other
14
things, it determines that the plan (i) specifies the steps the institution will
take to become adequately capitalized, (ii) is based on realistic assumptions
and (iii) is likely to succeed in restoring the depository institution's
capital. In addition, each company controlling an undercapitalized depository
institution must guarantee that the institution will comply with the capital
plan until the depository institution has been adequately capitalized on an
average basis during each of four consecutive calendar quarters and must
otherwise provide adequate assurances of performance. The aggregate liability of
such guarantee is limited to the lesser of (a) an amount equal to 5% of the
depository institution's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the institution
into compliance with all capital standards applicable to such institution as of
the time the institution fails to comply with its capital restoration plan.
Finally, the appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt corrective action provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers, subject to certain grandfather provisions for those elected
prior to enactment of FDICIA; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by
holding companies of such institutions; (ix) required divestiture of
subsidiaries by such institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most
15
importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off-balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0 percent for assets with low credit risk, such as
certain U.S. Treasury securities, to 100 percent for assets with relatively high
credit risk, such as business loans.
In addition to the risk-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3 percent. For all banks not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3
percent minimum, or 4 percent to 5 percent. In addition to these uniform risk-
based capital guidelines and leverage ratios that apply across the industry, the
FDIC has the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios.
With respect to the leverage ratio requirements for bank holding companies,
in June 1998 the Board amended its Regulation Y to provide that the minimum Tier
1 leverage ratio for the most highly-rated bank holding companies, as well as
those that have adopted the Board's market risk capital rule, is 3 percent, with
the minimum leverage ratio for all other bank holding companies being 4 percent.
The Board's adoption of this rule stemmed in large part from an interagency
effort among the various regulatory agencies responsible for regulating
financial institutions to streamline capital standards pursuant to section 303
of the Riegle Community Development and Regulatory Improvement Act of 1994.
Work is currently in progress to complete a final rule for banks.
The federal banking agencies have adopted regulations specifying that the
agencies will include, in their evaluations of a bank's capital adequacy, an
assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. The final regulations, however, do
not include a measurement framework for assessing the level of a bank's exposure
to interest rate risk, which is the subject of a proposed policy statement
issued by the federal banking agencies concurrently with the
16
final regulations. The proposal would measure interest rate risk in relation to
the effect of a 200 basis point change in market interest rates on the economic
value of a bank. Banks with high levels of measured exposure or weak management
systems generally will be required to hold additional capital for interest rate
risk. The specific amount of capital that may be needed would be determined on a
case-by-case basis by the examiner and the appropriate federal banking agency.
The federal banking agencies issued a rule relating to capital standards
and the risks arising from the concentration of credit and nontraditional
activities. Institutions which have significant amounts of their assets
concentrated in high risk loans or nontraditional banking activities and who
fail to adequately manage these risks, will be required to set aside capital in
excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
The federal banking agencies have issued an interagency policy statement on
the allowance for loan and lease losses which, among other things, establishes
certain benchmark ratios of loan loss allowances to classified assets. The
benchmark set forth by such policy statement is the sum of (a) assets classified
loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets
classified substandard; and (d) estimated credit losses on other assets over the
upcoming 12 months.
Capital Adequacy Guidelines
- ---------------------------
The FDIC has issued guidelines to implement the risk-based capital
requirements. The guidelines are intended to establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, takes off-balance
sheet items into account in assessing capital adequacy and minimizes
disincentives to holding liquid, low-risk assets. Under these guidelines,
assets and credit equivalent amounts of off-balance sheet items, such as letters
of credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0 percent for risk-free assets, such as cash and
certain U.S. Government securities, to 100 percent for relatively high-risk
assets, such as loans and investments in fixed assets, premises and other real
estate owned. The aggregated dollar amount of each category is then multiplied
by the risk-weight associated with that category. The resulting weighted values
from each of the risk categories are then added together to determine the total
risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus
and retained earnings, qualifying non-cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from
17
Tier 1 capital; however, purchased mortgage servicing rights and purchased
credit card relationships may be included, subjected to certain limitations. At
least 50 percent of the banking organization's total regulatory capital must
consist of Tier 1 capital.
Tier 2 capital may consist of: (i) the allowance for possible loan and
lease losses in an amount up to 1.25 percent of risk-weighted assets; (ii)
perpetual preferred stock, cumulative perpetual preferred stock and long-term
stock and related surplus; (iii) hybrid capital (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50 percent of Tier 1
capital. The inclusion of the foregoing elements of Tier 2 capital are subject
to certain requirements and limitations of the federal banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1
capital to average total assets of 3 percent for the highest rated banks. This
leverage capital ratio is only a minimum. Institutions experiencing or
anticipating significant growth or those with other than minimum risk profiles
are expected to maintain capital well above the minimum level. Furthermore,
higher leverage capital ratios are required to be considered well capitalized or
adequately capitalized under the prompt corrective action provisions of FDICIA.
The regulatory Capital Guidelines as well as the actual regulatory
capitalization for the Company and the Bank as of December 31, 1999 follow:
Minimum Well
GBC General Regulatory Capitalized
Bancorp Bank Requirements Requirements
- -----------------------------------------------------------------------------------------------------------
Tier 1 9.07% 10.82% 4% 6%
Total 12.83% 12.07% 8% 10%
Leverage Ratio 8.06% 9.58% 4% 5%
As of December 31, 1999, both the Company and the Bank are considered well
capitalized.
Safety and Soundness Standards
- ------------------------------
The federal banking agencies have adopted guidelines establishing standards
for safety and soundness, as required by FDICIA. The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits.
Guidelines for asset quality and earnings standards will be adopted in the
future. The guidelines establish the safety and soundness standards the
18
the agencies will use to identify and address problems at insured depository
institutions before capital becomes impaired. If an institution fails to comply
with a safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
The federal banking agencies have issued regulations prescribing uniform
guidelines for real estate lending. The regulations require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state-
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the federal banking agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing of real property, and
the use of real property or interests in real property for a loan or investment,
including mortgage backed securities.
Standards must also be prescribed for classified loans, earnings and the
ratio of market value to book value for publicly traded shares. Further, FDICIA
requires the federal banking agencies to establish standards prohibiting
compensation, fees and benefit arrangements that are excessive or could lead to
financial loss.
Premiums for Deposit Insurance
- ------------------------------
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90 percent of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of BIF. Any borrowings not repaid by
asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The FDIC also has authority to impose special assessments
against insured deposits.
19
The FDIC has implemented a final risk-based assessment system, as required
by FDICIA, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of any such loss, and the revenue needs of
the deposit insurance fund. As long as BIF's reserve ratio is less than a
specified "designated reserve ratio," or 1.25 percent, the total amount raised
from BIF's members by the risk-based assessment system may not be less than the
amount that would be raised if the assessment rate for all BIF members were
0.023 percent of deposits. In September 1995, the FDIC lowered assessments from
their rates of $0.23 to $0.31 per $100 of insured deposits to rates of $0.04 to
$0.31, depending on the condition of the bank, as a result of the
recapitalization of BIF. In November of the same year, the FDIC voted to reduce
its premiums for well capitalized banks to zero effective January 1, 1996.
Other banks will be charged risk-based premiums up to $0.27 per $100 of
deposits. The Bank, being considered well capitalized, made no payments as FDIC
insurance premium for the year ended December 31, 1999.
The Deposit Insurance Fund Act of 1996 included provisions to strengthen
the Savings Association Insurance Fund (the "SAIF") and to repay outstanding
bonds that were issued to recapitalize the SAIF's predecessor as a result of
payments made due to the insolvency of savings and loan associations and other
federally insured savings institutions in the late 1980's and early 1990's. The
new law required savings and loan associations to bear the cost of
recapitalizing the SAIF and, after January 1, 1997, banks must contribute
towards paying off the financing bonds, including interest. For 1999, the cost
to the Bank was 1.2 cents per $100 of deposits. In 2000, the banking industry
will assume the bulk of the payments. The new law requires the Treasury
Department to deliver to Congress comments and recommendations on combining the
charters. Additionally, the new law provides "regulatory relief" for the
banking industry by eliminating approximately 30 laws and regulations. The
costs and benefits of the new law to the Bank cannot currently be accurately
predicted.
Other Items
- -----------
FDICIA also, among other things, (i) limits the percentage of interest paid
on brokered deposits and limits the unrestricted use of such deposits to only
those institutions that are well capitalized; (ii) requires the FDIC to charge
insurance premiums based on the risk profile of each institution; (iii)
eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; (iv) prohibits insured state chartered
banks from engaging as principal in any type of activity that is not permissible
for a national bank unless the FDIC permits such activity and the bank meets all
of its regulatory capital requirements; (v) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any federal savings association may acquire or be acquired
by any insured depository institution.
20
In addition, the FDIC has issued final and proposed regulations
implementing provisions of FDICIA relating to powers of insured state banks.
Final regulations issued prohibit insured state banks from making equity
investments of a type, or in an amount, that are not permissible for national
banks. In general, equity investments include equity securities, partnership
interests and equity interests in real estate.
Certain regulations prohibit insured state banks from engaging as principal
in any activity not permissible for a national bank, without FDIC approval. The
proposal also provides that subsidiaries of insured state banks may not engage
as principal in any activity that is not permissible for a subsidiary of a
national bank, without FDIC approval.
Interstate Banking and Branching
- --------------------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") mandates that, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed may
obtain regulatory approval to acquire an existing bank located in another state
without regard to state law. A bank holding company would not be permitted to
make such an acquisition if, upon consummation, it would control (a) more than
10% of the total amount of deposits of insured depository institutions in the
United States or (b) 30% or more of the deposits in the state in which the bank
is located. A state may limit the percentage of total deposits that may be held
in that state by any one bank or bank holding company if application of such
limitation does not discriminate against out-of-state banks. An out-of-state
bank holding company may not acquire a state bank in existence for less than a
minimum length of time that may be prescribed by state law except that a state
may not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state was permitted to approve
such combinations earlier than June 1, 1997, and could have adopted legislation
to prohibit interstate mergers after the date in that state or in other states
by that state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction. California has adopted legislation which "opts California into"
the Interstate Act. However, the California Legislation restricts out-of-state
banks from purchasing branches or starting a de novo branch to enter the
California banking market. Such banks may proceed only by way of purchases of
whole banks.
The Interstate Act is likely to increase competition in the Bank's market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such increased competition will likely have
on the Bank's operations.
21
The Caldera, Weggeland, and Killea California Interstate Banking and
Branching Act of 1995 (the "1995 Act") opts in early for interstate branching,
allowing out-of-state banks to enter California by merging or purchasing a
California bank or industrial loan company which is at least five years old.
Also, the 1995 Act repeals the California Interstate (National) Banking Act of
1986, which regulated the acquisition of California banks by out-of-state bank
holding companies. In addition, the 1995 Act permits California State banks,
with the approval of the Department of Financial Institutions ("DFI"), to
establish agency relationships with FDIC-insured banks and savings associations.
Finally, the 1995 Act provides for regulatory relief, including (i)
authorization for the DFI to exempt banks from the requirement of obtaining
approval before establishing or relocating a branch office or place of business,
(ii) repeal of the requirement of directors' oaths (California Financial Code
Section 682), and (iii) repeal of the aggregate limit on real estate loans
(California Financial Code Section 1230).
Community Reinvestment Act and Fair Lending Developments
- --------------------------------------------------------
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (the "CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and the CRA into account
when regulating and supervising other activities.
The federal banking agencies have issued final regulations which change the
manner in which they measure a bank's compliance with its CRA obligations. The
final regulations adopt a performance-based evaluation system which bases CRA
ratings on an institution's actual lending service and investment performance
rather than the extent to which the institution conducts needs assessments,
documents community outreach or complies with other procedural requirements. In
March 1994, the Federal Interagency Tax Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the
three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact.
Hazardous Waste Clean-Up Costs
- ------------------------------
Management is aware of recent legislation and cases relating to hazardous
waste clean-up costs and potential liability. Based on a general survey of the
loan portfolios of the Bank, management is not aware of any potential liability
for hazardous waste contamination.
22
Other Regulations and Policies
- ------------------------------
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal
regulations include requirements to maintain non-interest bearing reserves
against deposits, limitations of the nature and amount of loans which may be
made, and restrictions on payment of dividends. The Superintendent approves the
number and locations of the branch offices of a bank. California law exempts
banks from the usury laws.
Employees
- ---------
As of December 31, 1999, the Bank had approximately 333 full-time
equivalent employees. None of the employees are represented by labor unions.
Benefit programs are available to eligible employees and include, group medical-
dental plans, paid sick leave, paid vacation, and a 401(k) plan.
Item 2 Properties
GBC Bancorp shares common quarters with General Bank at 800 West 6th
Street, Los Angeles, California 90017. The Bank leases approximately 41,501
square feet of rentable area which includes the ground floor and the second,
fourteenth and fifteenth floors of the building. The initial lease term will
expire in the year 2009, and the Bank has two five-year options to renew the
lease following the expiration date of the initial term. As of December 31,
1999, the monthly base rent for the facility is $45,593 and is payable to the
lessor, Capital & Counties, USA, Inc. The monthly base rent is subject to
change on specified dates during the 15-year initial lease term pursuant to the
lease agreement.
As of December 31, 1999, the Bank operated full-service branches at sixteen
leased locations (including the 800 West 6th street, Los Angeles location which
houses the downtown branch of the Bank) and one location where it owns the
building and land. In addition, the Bank has certain operating and
administrative departments located at 4128 Temple City Boulevard, Rosemead,
California, where it owns the building and land with approximately 27,600 square
feet of space. The net book value of the two owned facilities (building and
land) as of December 31, 1999, was $ 2,233,000. Expiration dates of the Bank's
leases range from February, 2000 to February, 2009. As of December 31, 1999, all
the Bank's full-service branches are located in California and all but four are
in the Southern California area. In February, 2000, the Bank opened a full-
service branch in the state of Washington.
23
Item 3 Legal Proceedings
In the normal course of business, the Company is subject to pending and
threatened legal actions. After reviewing pending actions with counsel,
management considers that the outcome of such actions will not have a material
adverse effect on the financial condition or the operations of the Company.
Item 4 Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1999, no matters were submitted to a vote
of the Company's security holders.
Executive Officers of the Registrant
- ------------------------------------
There are no family relationships between any of the executive officers
of the Company. The following information indicates the position and age of the
executive officers as of December 31, 1999, and their business experience during
the prior five years:
Age at
December
Name 31, 1999 Position/Background
- ---- --------- -------------------
Li-Pei Wu.......... 65 From May 1982 to present, Chief Executive
Officer and from June 1984 to present, also
Chairman of the Board of Bancorp and General
Bank. President of Bancorp and General Bank
from May 1982 to March 1998.
Peter Wu........... 51 From 1979 to March 1998, Executive Vice
President and since January 1995, also Chief
Operating Officer, of General Bank; from 1981
to March 1998, Executive Vice President of
Bancorp. President and Chief Operating Officer
of Bancorp and General Bank since March 1998.
Presently also Secretary of Bancorp and General
Bank.
Peter Lowe......... 58 Executive Vice President and Chief Financial
Officer of the Company and the Bank since 1994.
24
Domenic Massei..... 55 Executive Vice President of the Bank since
February 1999, Senior Vice President of
Operations Administration of the Bank from 1989
to February 1999.
Eddie Chang........ 44 Senior Vice President and Manager of the Real
Estate Department since January 1996. From
July 1995 to January 1996 Manager of the Real
Estate Department. From July 1994 to July 1995
self-employed. From 1992 to July 1994, Senior
Vice President and Manager of the Real Estate
Department.
Gloria Chen........ 57 Senior Vice President and Relationship Manager
in the Corporate Lending Department since May
1997; prior thereto, Senior Vice President and
Manager of the International Department at
Preferred Bank from 1992 to 1997.
Ming Lin Chen...... 39 Senior Vice President and Manager of
International Banking Department since July
1998. From February 1997 to June 1998, Manager
of SBA Loan Department and Residential Mortgage
Department. Prior thereto, Marketing Director
of the Bank since 1991.
Sue Lai............ 47 Senior Vice President of the Corporate Lending
Department since April 1997. Manager of the
Corporate Lending Department since 1994. In
various capacities with the Bank since 1991.
Johnny Lee......... 37 Senior Vice President and Regional Manager of
the Northern California Region since April
1997. In various positions with the Bank since
1990.
Gerard Lob......... 52 Senior Vice President and Manager of the New
York loan production office since December
1997. Manager of Trade Finance at Standard
Chartered Bank from 1991 to 1997.
Richard Voake...... 59 Senior Vice President and Credit Administrator
of the Bank since 1994.
25
Carl Maier......... 59 Vice President and Controller of the Bank since
1993.
PART II
-------
Item 5 Market for the Registrant's Common Equity and Related Security Holder
Matters
Market Information
- ------------------
The common stock of the Company has been traded in the NASDAQ National
Market under the symbol GBCB since November 24, 1987.
The market makers for GBC Bancorp are: Herzog, Heine, Geduld, Inc., Hoefer
& Arnett; Keefe, Bruyette & Woods, Inc.; Oppenheimer & Co.; Pacific Crest; and
Wedbush Morgan Securities.
The high and low last sale or bid prices for each quarter of the years 1999
and 1998, as reported by the NASDAQ, are as follows:
First Second Third Fourth
1999: Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
High $25.88 $20.63 $22.00 $21.25
Low $12.88 $14.94 $18.75 $17.81
First Second Third Fourth
1998: Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
High $33.50 $33.06 $26.38 $29.06
Low $26.50 $24.75 $19.00 $20.25
Where applicable the high and low last sale or bid prices have been
adjusted to reflect the two for one split of stock to shareholders of record on
April 30, 1998 and issued and distributed on May 15, 1998.
Holders
- -------
As of February 29, 2000, there were 252 holders of record of the Company's
common stock according to the records of the Company's transfer agent.
26
Dividend
- --------
Cash dividends per share were declared during the most recent two years as
per the following table:
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Total
-------------- -------------- -------------- -------------- --------------
1999 $0.075 $0.075 $ 0.09 $ 0.09 $0.33
1998 $0.075 $0.075 $0.075 $0.075 $0.30
Where applicable the cash dividends per share have been adjusted to reflect
the two for one split of stock to shareholders of record on April 30, 1998, and
issued and distributed on May 15, 1998.
The Company's subsidiary, General Bank, is limited in the payment of
dividends by the Financial Code of the State of California which provides that
dividends in any one year may not exceed the lesser of the Bank's undivided
profits or the net income for the prior three years, less cash distributions to
stockholders during such period. As of December 31, 1999, approximately $53.6
million of undivided profits of the Bank is available for dividends to the
Company, subject to the subordinated debt covenant restrictions.
Item 6 Selected Financial Data
The selected financial data on page 34 of the Company's 1999 Annual Report
to Shareholders is hereby incorporated by reference.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of financial condition and results of
operations on pages 12 through 33 of the Company's 1999 Annual Report to
Shareholders is hereby incorporated by reference.
Item 8 Financial Statements and Supplementary Data
The consolidated financial statements of GBC Bancorp and its subsidiaries,
together with the report thereon of Deloitte & Touche LLP, on pages 35 through
64 of the Company's 1999 Annual Report to Shareholders, are hereby incorporated
by reference.
27
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
There were no changes in and disagreements with accountants on matters
involving accounting and financial disclosure.
PART III
--------
Item 10 Directors and Executive Officers of the Registrant
Directors of the Registrant
- ---------------------------
The information relating to directors of the Company under the caption
"Election of Directors" appearing on page 5 of the Company's Definitive Proxy
Statement, dated March 28, 2000, relating to the annual meeting of shareholders
to be held on April 27, 2000, is hereby incorporated by reference.
Item 11 Executive Compensation
The information regarding executive compensation under the caption
"Executive Compensation" appearing on pages 7 through 14 of the Company's
Definitive Proxy Statement dated March 28, 2000, for the annual meeting of
shareholders to be held on April 27, 2000, is hereby incorporated by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information regarding the security ownership of certain beneficial
owners and management under the caption "Shareholdings of Certain Beneficial
Owners and Management" appearing on pages 2 through 4 of the Company's
Definitive Proxy Statement, dated March 28, 2000, for the annual meeting of
shareholders to be held on April 27, 2000, is hereby incorporated by reference.
Item 13 Certain Relationships and Related Transactions
The information regarding certain relationships and related transactions
under the caption "Certain Transactions" appearing on page 15 of the Company's
Definitive Proxy Statement dated March 28, 2000, for the annual meeting of
shareholders to be held on April 27, 2000, is hereby incorporated by reference.
28
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)(2) Financial Statements and Schedules
Page in Annual Report
to Shareholders
-----------------------
GBC Bancorp and subsidiaries:
Independent Auditors' Report.............................. Page 64
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... Page 35
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997.......................... Page 36
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1999, 1998 and
1997...................................................... Page 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... Page 38
Notes to Consolidated Financial Statements................ Pages 39-63
All other financial statement schedules are omitted because they are not
applicable, not material or because the information is included in the financial
statements or the notes thereto.
(a)(3) Exhibit Index
(b) Reports on Form 8-K:
There were no reports on Form 8-K issued during 1999.
29
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, GBC Bancorp has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
GBC BANCORP
/s/ Li-Pei Wu /s/ Peter Lowe
- ---------------------------- ----------------------------
by: Li-Pei Wu, by: Peter Lowe,
Chairman and Chief Executive Officer Executive Vice President and Chief
Financial Officer
Date: March 27, 2000 Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Thomas C. T. Chiu Date: March 27, 2000
- -------------------------------
Thomas C. T. Chiu, Director
/s/ Chuang-I Lin Date: March 27, 2000
- -------------------------------
Chuang-I Lin, Director
/s/ Ko-Yen Lin
- ------------------------------- Date: March 27, 2000
Ko-Yen Lin, Director
/s/ Ting Y. Liu
- ------------------------------- Date: March 27, 2000
Ting Y. Liu, Director
/s/ John Wang
- ------------------------------- Date: March 27, 2000
John Wang, Director
- ------------------------------- Date:
Kenneth C. Wang, Director
/s/ Chien-Te Wu
- ------------------------------- Date: March 27, 2000
Chien-Te Wu, Director
/s/ Julian Wu
- ------------------------------- Date: March 27, 2000
Julian Wu, Director
30
/s/ Li-Pei Wu
_____________________________ Date: March 27, 2000
Li-Pei Wu, Director
/s/ Peter Wu
______________________________ Date: March 27, 2000
Peter Wu, Director
/s/ Ping C. Wu
______________________________ Date: March 27, 2000
Ping C. Wu, Director
______________________________ Date:
Walter Wu, Director
______________________________ Date:
Chin-Liang Yen, Director
31
EXHIBIT INDEX
-------------
Exhibit Page
Number Description Number
------- ----------- ------
3.1 Articles of Incorporation, as amended (incorporated herein by this
reference to Exhibit 3.1 on the Company's Form S-8 Registration
Statement, dated January 20, 2000 previously filed with the
Commission) --
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.2 on the
Company's Form S-8 Registration Statement dated January 20, 2000
previously filed with the Commission) --
10.2 Lease for ground floor space at 23326 Hawthorne Boulevard, Suite
100, Torrance, California (incorporated herein by this reference to
Exhibit 10.2 on the Company's Form 8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987) --
10.2 Lease for ground floor space at 1420 East Valley Boulevard.,
Alhambra, California (incorporated herein by this reference to
Exhibit 10.6 on the Company's Form 8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987) --
10.3 Lease for ground floor space at 17271 Gale Ave., City of Industry,
California (incorporated herein by this reference to Exhibit 10.7
on the Company's Form 10-K for the year ended December 31, 1988) --
10.4 1988 Stock Option Plan (incorporated herein by this reference to
Exhibit 10.1 on the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1988) --
10.5 Lease for ground floor space at 4010 Barranca Parkway, Irvine,
California (incorporated herein by this reference to Exhibit 10.11
on the Company's Form 10-K for the year ended December 31, 1989) --
10.6 Lease for ground floor space at 4688 Convoy Street, San Diego,
California (incorporated herein by this reference to Exhibit 10.12
on the Company's Form 10-K for the year ended December 31, 1989) --
10.7 Lease for ground floor space at 701 S. Atlantic Boulevard, Monterey
Park, California (incorporated herein by this reference to Exhibit
10.13 on the Company's Form 10-K for the year ended December 31,
1990) --
10.8 Lease for ground floor space at 2783 S. Diamond Bar Boulevard,
Suite 8-B, Diamond Bar, California (incorporated herein by this
reference to Exhibit 10.11 on the Company's Form 10-K for the year
ended December 31, 1991) --
10.9 Employment Agreement among the Company, the Bank and Li-Pei Wu,
dated as of December 19, 1991 (incorporated herein by this
reference to Exhibit 10.12 on the Company's Form 10-K for the year
ended December 31, 1991) --
32
10.10 Non-Qualified Stock Option Agreement between the Company and Li-Pei
Wu, dated as of December 19, 1991, relating to the grant of stock
options under the Company's 1988 stock option plan (incorporated
herein by this reference to Exhibit 10.13 on the Company's Form
10-K for the year ended December 31, 1991) --
10.11 Board of Directors resolutions adopted on February 6, 1992, with
respect to the GBC Bancorp Amended and Restated 1988 Stock Option
Plan, which, among other things, authorize the grant of incentive
stock options, eliminate certain limitations on the vesting and
exercisability, and increase the maximum number of shares that may
be issued thereunder (incorporated herein by this reference to
Exhibit 10.14 on the Company's Form 10-K for the year ended
December 31, 1991) --
10.12 GBC Bancorp Amended and Restated 1988 Stock Option Plan, as Exhibit
28.1 to Form S-8 Registration Statement filed with the Securities
and Exchange Commission on April 22, 1992, Registration Number:
33-47452 (incorporated herein by this reference to Exhibit 10.15 on
the Company's Form 10-K for the year ended December 31, 1992)
10.13 Lease for ground floor space at 1139 West Huntington Drive,
Arcadia, California (incorporated herein by this reference to
Exhibit 10.16 on the Company's Form 10-K for the year ended --
December 31, 1993)
10.14 Lease for ground floor space at 2263 N. Tustin Avenue, Orange,
California (incorporated herein by this reference to Exhibit 10.17
on the Company's Form 10-K for the year ended December 31, 1993) --
10.15 Lease for office building space for ground and second floors and
14th and 15th floors located at 800 West 6th Street, Los Angeles,
California (incorporated herein by this reference to Exhibit 10.19
on the Company's Form 10-K for the year ended December 31, 1993) --
10.16 Sublease for ground floor office building space at 1420 East Valley
Boulevard, Alhambra, California (incorporated herein by this
reference to Exhibit 10.21 on the Company's Form 10-K for the year
ended December 31, 1994) --
10.17 Addendum to standard office lease at 4010 Barranca Parkway, Irvine,
California (incorporated herein by this reference to Exhibit 10.22
on the Company's Form 10-K for the year ended December 31, 1994) --
10.18 Lease for ground floor office building space at 9045 Corbin Avenue,
Northridge, California (incorporated herein by this reference to
Exhibit 10.23 on the Company's Form 10-K for the year ended
December 31, 1994) --
10.19 Lease for office building space on first and second floors located
at 10001 N. De Anza Boulevard, Cupertino, California (incorporated
herein by this reference to Exhibit 10.24 on the Company's Form
10-K for the year ended December 31, 1994) --
33
10.20 Lease agreement for office building space on ground floor located
at 520 South El Camino Real, San Mateo, California (incorporated
herein by this reference to Exhibit 10.25 on the Company's Form
10-K for the year ended December 31, 1994) --
10.21 Lease agreement for office building space on ground floor located
at 47000 Warm Springs Boulevard, Fremont, California (incorporated
herein by this reference to Exhibit 10.26 on the Company's Form
10-K for the year ended December 31, 1994) --
10.22 Purchase, Assignment and Assumption Agreement 615 dated as of
December 1,1996 between Gaucho-1 Inc. and General Bank and the
related Assignment and Assumption Agreement 615 dated December 27,
1996 between the same parties (incorporated herein by this
reference to Exhibit 10.22 on the Company's Form 10-K for the year
ended December 31, 1996) --
10.23 Purchase Assignment and Assumption Agreement dated as of December
1, 1997 between RGL-2 Corporation and General Bank (incorporated
herein by this reference to Exhibit 10.23, on the Company's Form
10-K for the year ended December 31, 1997) --
10.24 Employment Agreement among the Company, the Bank and Li-Pei Wu,
dated February 19, 1998, (incorporated herein by this reference to
Exhibit 10 on the Company's Form 8-K dated February 19, 1998
previously filed with the Commission.) --
10.25 Amendment to Employment Agreement among the Company, the Bank and
Li-Pei Wu, dated March 19, 1998, (incorporated herein by this
reference to Exhibit 10.1 on the Company's Form 8-K (Amendment)
dated March 23, 1998 previously filed with the Commission.)
GBC Bancorp 1999 Employee Stock Incentive Plan (incorporated herein --
10.26 by this reference to Exhibit 99.1 to Form S-8 Registration
Statement filed with the Securities and Exchange Commission on
January 26, 2000, file number: 333-95381) --
11 Computation of Per Share Earnings P.35
12 Computation of Ratios P.36
13 Annual Report to Shareholders P.37
21 Subsidiaries of GBC Bancorp P.90
23 Independent Auditors' Consent (Deloitte & Touche LLP) P.91
27 Financial Data Schedule P.92
34
Exhibit 11
GBC BANCORP
Computation of Per Share Earnings
with Common Stock Options Outstanding
(Treasury Stock Method)
1999 1998 1997
Basic Diluted Basic Diluted Basic Diluted
Average Shares Outstanding
Common Stock 12,430,000 12,430,000 14,049,000 14,049,000 13,733,000 13,733,000
Common Stock Equivalents
Stock Options - 417,000 - 510,000 - 692,000
Assumed Repurchase of
Treasury Shares - (175,000) - (214,000) - (291,000)
Average Common and Common
Equivalent Shares Outstanding 12,430,000 12,672,000 14,049,000 14,345,000 13,733,000 14,134,000
Income before
Extraordinary Item $29,988,000 $29,988,000 $28,142,000 $28,142,000 $26,434,000 $26,434,000
Extraordinary Item $ - $ - $ - $ - $ (488,000) $ (488,000)
Net Income $29,988,000 $29,988,000 $28,142,000 $28,142,000 $25,946,000 $25,946,000
Earnings Per Share:
Income before Extraordinary Item $ 2.41 $ 2.37 $ 2.00 $ 1.96 $ 1.93 $ 1.87
Extraordinary Item $ - $ - $ - $ - $ (0.03) $ (0.03)
Net Income $ 2.41 $ 2.37 $ 2.00 $ 1.96 $ 1.90 $ 1.84
35
EXHIBIT 12
GBC BANCORP
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
(Dollars in Thousands) For the Years Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
Income before income taxes & extraordinary item $48,320 $44,906 $40,739 $28,216 $ 9,076
Add:
Interest on deposits 50,377 53,279 46,848 40,897 34,574
Interest on borrowings 5,775 3,608 2,482 2,746 2,826
Portion of rents applicable to interest * -- -- -- -- --
Amortization of debt expense, discount and premium 131 131 93 18 18
---------- ---------- ---------- ---------- ----------
Earnings as adjusted (1) $104,603 $101,924 $90,162 $71,877 $46,494
========== ========== ========== ========== ==========
Less:
Interest on deposits 50,377 53,279 46,848 40,897 34,574
---------- ---------- ---------- ---------- ----------
Adjusted earnings excluding interest on deposits (2) $54,226 $48,645 $43,314 $30,980 $11,920
========== ========== ========== ========== ==========
Fixed charges
Interest on deposits $50,377 $53,279 $46,848 $40,897 $34,574
Interest on borrowings 5,775 3,608 2,482 2,746 2,826
Rents:
Total rents net of sublease rental 2,409 2,287 2,17 2,095 2,177
Portion of rents applicable to interest * -- -- -- -- --
Amortization of debt expense, discount and premium 131 131 93 18 18
Capitalized interest -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Fixed Charges (9) $58,692 $59,305 $51,593 $45,756 $39,595
========== ========== ========== ========== ==========
Fixed charges excluding interest on deposits (10) $ 8,315 $ 6,026 $ 4,745 $ 4,859 $ 5,021
---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges (1)/(9) 1.78x 1.72x 1.75x 1.57x 1.17x
---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges
excluding interest on deposits (2)/(10) 6.52x 8.07x 9.13x 6.38x 2.37x
---------- ---------- ---------- ---------- ----------
Amount of coverage surplus (deficiency) $45,911 $42,619 $38,569 $26,121 $ 6,899
========== ========== ========== ========== ==========
* Portion of rents applicable to interest is deemed immaterial
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Consolidated net income for GBC Bancorp and subsidiaries (the "Company") for
the year ended December 31, 1999 totaled $29,988,000. This compares to net
earnings of $28,142,000 in 1998 and $25,946,000 in 1997. Diluted earnings per
share were $2.37 for 1999 compared to $1.96 for 1998, and $1.84 for 1997.
Earnings per share reflect the two for one split of stock to shareholders of
record on April 30, 1998, and issued and distributed on May 15, 1998. The
$1,846,000, or 6.6%, increase in net income from 1998 to 1999 was primarily
due to the increase of net interest income and non-interest income, partially
offset by a higher provision for credit losses and higher non-interest
expense.
Net interest income increased $5,005,000, or 7.3% in 1999 compared to 1998,
due primarily to a $113.2 million increase in average earning assets and an
11-basis point increase of the net interest spread. The net interest spread is
defined as the yield on average interest earning assets less the rate paid on
average interest bearing liabilities. The provision for credit losses
increased $2,000,000 in 1999 compared to 1998 primarily as a result of an
increase in the total non-accrual loans and net charge-offs. For the year
ended December 31, 1999, there were $3.1 million of net charge-offs compared
to net recoveries of $1.1 million for the year-ended December 31, 1998.
Consolidated net income for the year ended December 31, 1998 totaled
$28,142,000 compared to net income of $25,946,000 in 1997. The increase in net
income from 1997 to 1998 was primarily due to the growth of net interest
income and higher non-interest income, which were partially offset by higher
non-interest expense and a higher provision for credit losses.
Net Interest Income
Net interest income in 1999 totaled $73,978,000 compared to net interest
income of $68,973,000 in 1998. As noted above, the increase was due to a
$113.2 million, or 7.3%, increase in the balance of average interest earning
assets and an 11-basis point increase of the net interest spread. For the year
ended December 31, 1999 and 1998, the balance of average interest earning
assets was $1,659.4 million and $1,546.3 million, respectively. For the year
ended December 31, 1999 and 1998, the net interest spread was 3.73% and 3.62%,
respectively.
Total interest income for the year ended December 31, 1999 was $130,261,000,
compared to $125,991,000 for the year ago period. The $4,270,000, or 3.4%,
increase was due to the growth of average interest earning assets. The
composition of this net growth of average interest earning assets included a
$148.2 million increase in loans and leases, an $18.9 million increase in the
securities portfolio, and a $53.9 million decrease in federal funds sold and
securities purchased under agreements to resell. Partially offsetting the
impact of this growth was a 30-basis point reduction of the yield on average
interest earning assets from 8.15% in 1998 to 7.85% in 1999. The 1999 yield
decline was the result of yield reductions on all categories of interest
earning assets as follows:
1999
Interest Earning Asset Yield Reduction
- ------------------------------------------------------------------------------
Loans and Leases 0.91%
Investment Securities 0.13%
Federal Funds Sold & Securities Purchased under Agreements to
Resell 0.50%
The 91-basis point reduction of the yield on loans and leases is due to
several factors: money market rate changes, significant interest income
recoveries recorded in 1998, and an increase of the average of loans on non-
accrual status. For 1999 the average prime rate of interest was 7.99% compared
to 8.35% during 1998, a decline of 36-basis points. For 1998, repayments in
full of two performing loans previously on non-accrual status, resulted in the
recognition of $1,458,000 of interest income. The impact of this interest
recovery was a 22-basis point increase of the yield on loans and leases in
1998. The average balance of loans on non-accrual status was $39.6 million and
$13.4 million during 1999 and 1998, respectively.
The yield on securities also declined from 6.36% in 1998 to 6.23% in 1999.
The decline was primarily due to the movement of interest rates. The 50-basis
point decline of the yield on federal funds sold and securities purchased
under agreements to resell was also attributable primarily to money market
rates.
The downward pressure on the yield on interest earning assets was partially
offset by the change in the composition of these assets. In 1999, average
loans and leases, the highest yielding asset, represented 52.1% of total
average interest earning assets, compared to 46.3% in 1998. Federal funds sold
and securities purchased under agreements to resell, the lowest yielding
asset, represented but 3.8% of total average interest earning assets in 1999
compared to 7.5% in 1998.
Total interest expense for the year ended December 31, 1999, was $56,283,000
compared to $57,018,000 for the year ago period. The $735,000, or 1.3%,
decrease is the result of a 41-basis point decline in the cost of funds from
4.53% during 1998 to 4.12% during 1999, partially offset by $106.7 million
increase of average interest bearing liabilities. The rate reduction is
primarily due to money market conditions as described above. Because of the
maturity structure of the time deposits and the timing of the prime rate
changes during 1998 and 1999, the rates paid on time deposits decreased more
than the average prime rate differential during these two years. For 1999 and
1998 the rates paid on time deposits were 4.57% and 5.10%, respectively, a
decline of 53-basis points. In addition, average time deposits, representing
the Bank's most costly deposit product, as a percentage of total average
interest bearing liabilities was 65.6% and 68.8%, for the years ended December
31, 1999 and 1998, respectively. Of the $106.7 million growth of average
interest bearing liabilities, only $29.6 million, or 27.7%, was attributable
to time deposits, with $32.9 million of the growth in less expensive deposit
products. The remainder of the average interest bearing liability growth was
in other borrowed funds which is comprised of borrowings from the Federal Home
Loan Bank. The average borrowings from the Federal Home Loan Bank increased
$43.2 million. For 1999, the average rate paid for other borrowed funds was
4.89%, partially offsetting the 44-basis point decline of rates paid on
interest bearing deposits.
As a result of the 30-basis point yield reduction on earning assets and the
41-basis point reduction of the cost of funds, the net interest spread
increased 11-basis points from 3.62% in 1998 to 3.73% in 1999.
The net interest margin, defined as the difference between interest income
and interest expense (net interest income) divided by average interest earning
assets, remained at 4.46%, unchanged from 1998. While the net interest spread
increased 11-basis points, this was offset by the decline of average
stockholders' equity. For 1999 and 1998 average stockholders' equity was
$146.4 million and $160.0 million, respectively. The decline is primarily the
result of the stock repurchase plans in effect during 1999. For 1999, stock
repurchases averaged $26.9 million compared to $2.0 million in 1998. For the
year ended December 31, 1999 and 1998, the percentage of average stockholders'
equity to average total assets was 8.6% and 10.0%, respectively.
Net interest income in 1998 totaled $68,973,000 compared to net interest
income of $61,473,000 in 1997. The increase was due to a $193.5 million, or
14.3%, increase in the balance of average interest earning assets to
$1,546.3 million during 1998 from $1,352.8 million during 1997. The favorable
impact of the growth of average interest earning assets was partially offset
by a 20-basis point decline of the net interest spread. This decline was
attributable to a downward pressure on the yield on interest earning assets
and upward pressure on the cost of funds. The yield on interest earning assets
was the result of the movement of interest rates and repricing of loans. The
cost of funds increased to 4.53% in 1998 from 4.38% in 1997. Notwithstanding
the decline of the average prime rate occurring during the fourth quarter of
1998, the average rates paid on money market and time deposits increased due
to competitive pressures. In addition, the average balance of subordinated
debt was $38.8 million in 1998 compared to $26.5 million in 1997. Subordinated
debt represents the highest costing source of funds for the Company. The
average rate paid on interest bearing deposits was 4.38% in 1998 compared to
4.26% in 1997. Upward pressure on this rate was also due to the increased
percentage of total average interest bearing deposits represented by time
certificates of deposit. As of December 31, 1998 and 1997, average time
certificates of deposit represented 71.3% and 69.2%, respectively, of total
average interest bearing deposits.
The following table represents the net interest spread, net interest margin,
average balances, interest income and expense, and the average yield/rates by
asset and liability component:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars In Thousands) Balance(5) Interest Rate Balance(5) Interest Rate Balance(5) Interest Rate
- ----------------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
Loans and Leases(1)(2) $ 863,856 $ 81,331 9.41% $ 715,695 $ 73,886 10.32% $ 607,286 $ 63,687 10.49%
Taxable Securities 733,179 45,675 6.23 714,328 45,461 6.36 603,771 39,067 6.47
Tax-Exempt
Securities(3) - - - - - - 1,438 82 5.67
Federal Funds Sold and
Securities Purchased
Under Agreement to
Resell 62,409 3,255 5.22 116,240 6,644 5.72 140,270 8,060 5.75
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total Interest-Earning
Assets 1,659,444 130,261 7.85 1,546,263 125,991 8.15 1,352,765 110,896 8.20
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
Noninterest-Earning
Assets:
Cash and Due from Banks $ 33,197 $ 31,334 $ 35,913
Trading Account
Securities 35 - -
Premises and Equipment,
net 5,528 5,633 5,692
Other Assets(4) 35,815 37,055 46,932
----------- ----------- -----------
Total Noninterest-
Earning Assets 74,575 74,022 88,537
----------- ----------- -----------
Less: Allowance for
Credit Losses (19,903) (16,954) (15,830)
Deferred Loan Fees (5,068) (5,287) (3,735)
----------- ----------- -----------
Total Assets $1,709,048 $1,598,044 $1,421,737
=========== =========== ===========
Interest-Bearing
Liabilities:
Deposits:
Interest-Bearing Demand $ 57,885 $ 533 0.92% $ 55,631 $ 661 1.19% $ 61,004 $ 805 1.32%
Money Market 241,703 7,125 2.95 206,650 6,240 3.02 167,815 4,443 2.65
Savings 82,356 1,809 2.20 86,776 2,236 2.58 110,628 3,031 2.74
Time Deposits 895,875 40,910 4.57 866,229 44,142 5.10 761,277 38,569 5.07
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreement 1,316 70 5.31 553 31 5.55 381 22 5.66
Other Borrowed Funds 48,123 2,355 4.89 4,877 227 4.66 - - -
Subordinated Debt 38,937 3,481 8.94 38,805 3,481 8.97 26,467 2,553 9.65
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total Interest-Bearing
Liabilities 1,366,195 56,283 4.12 1,259,521 57,018 4.53 1,127,572 49,423 4.38
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
Noninterest-Bearing
Liabilities:
Demand Deposits $ 164,620 $ 148,436 $ 140,761
Other Liabilities 31,805 30,115 23,899
----------- ----------- -----------
Total Noninterest
Bearing Liabilities 196,425 178,551 164,660
----------- ----------- -----------
Total Liabilities 1,562,620 1,438,072 1,292,232
Stockholders' Equity 146,428 159,972 129,505
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $1,709,048 $1,598,044 $1,421,737
=========== =========== ===========
Net Interest
Income/Spread $ 73,978 3.73% $ 68,973 3.62% $ 61,473 3.82%
======== ======== ========
Net Interest Margin 4.46% 4.46% 4.54%
(1) For the purposes of these computations, non-accrual loans are included in
the daily average loan amounts outstanding
(2) Loan interest includes loan fees for the years ended December 31, 1999,
1998 and 1997 of $6,964,000, $5,547,000 and $4,554,000, respectively
(3) Tax-exempt interest income has not been adjusted to a fully taxable
equivalent basis
(4) Other assets includes average other real estate owned, net, for the years
ended December 31, 1999, 1998 and 1997 of $7,909,000, $7,002,000 and
$13,528,000, respectively
(5) Average balances are computed based on the average of the daily ending
balances
Years Ended December 31,
- -------------------------------------------------------------------------------
1999 Compared 1998 Compared
with 1998 with 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
(In Thousands) Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------
Interest Earned on (1):
Loans and Leases $14,351 $(6,907) $ 7,444 $11,206 $(1,006) $10,200
Taxable Securities(2) 1,195 (980) 215 7,045 (652) 6,393
Tax-Exempt Securities(2) - - - (82) - (82)
Federal Funds Sold and
Securities Purchased
Under
Agreement to Resell (2,851) (538) (3,389) (1,373) (43) (1,416)
-------- -------- -------- -------- -------- --------
Total Interest-Earning
Assets 12,695 (8,425) 4,270 16,796 (1,701) 15,095
Interest Paid On (1):
Deposits:
Interest-Bearing Demand 26 (155) (129) (68) (76) (144)
Money Market 1,037 (151) 886 1,118 680 1,798
Savings (110) (316) (426) (623) (172) (795)
Time 1,472 (4,705) (3,233) 5,347 225 5,572
Federal Funds Purchased
and Securities Sold Un-
der
Repurchase Agreement 40 (1) 39 10 (1) 9
Other Borrowed Funds 2,116 12 2,128 227 - 227
Subordinated Debt - - - 1,118 (190) 928
-------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities 4,581 (5,316) (735) 7,129 466 7,595
-------- -------- -------- -------- -------- --------
Change in Net Interest
Income $ 8,114 $(3,109) $ 5,005 $ 9,667 $(2,167) $ 7,500
======== ======== ======== ======== ======== ========
(1) Changes in interest income and interest expense attributable to changes in
rate/volume have been allocated to the change due to volume and the change
due to rate in relation to the absolute dollar amount of the change in
each
(2) Interest income from municipal bonds and auction preferred stocks is not
adjusted to a fully taxable equivalent basis
Provision for Credit Losses
The provision for credit losses is an amount 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.
For 1999, the provision for credit losses was $3,500,000 compared to
$1,500,000 for 1998, representing an increase of $2,000,000. This increase of
the provision for credit losses was due in part to the increase in non-accrual
loans and net charge-offs from December 31, 1998 to December 31, 1999. As of
December 31, 1999, non-accrual loans totaled $44.5 million compared to $20.8
million as of December 31, 1998.
For the year ended December 31, 1999 there were net charge-offs of $3.1
million which compares to net recoveries of $1.1 million for the year ended
December 31, 1998.
For 1998, the provision for credit losses was $1,500,000 compared to
$1,000,000 for 1997, representing an increase of $500,000. The increase was
primarily due to the increase in non-accrual loans. As of December 31, 1998
and 1997, loans on non-accrual status totaled $20.8 million and $9.8 million,
respectively. For 1998, net recoveries were $1.1 million compared to $0.4
million of net charge-offs for 1997.
Non-Interest Income
Non-interest income consists primarily of service charges on deposit
accounts, fees and commissions resulting from the Bank's international
activities, fees from servicing Small Business Administration (SBA) loans,
trading account revenue, and income from other investments.
Non-interest income in 1999 totaled $10,544,000, representing an increase of
$2,681,000, or 34.1%, over $7,863,000 of non-interest income in 1998. The
increase was primarily attributable to the increase of service charges and
commissions and trading account revenue.
Service charges and commissions increased $1,270,000, or 19.6%, during 1999
compared to 1998. $1,102,000, or 86.8%, of this increase was due to growth of
commissions on standby and commercial letters of credit. These commissions
totaled $3,452,000 in 1999 compared to $2,350,000 in 1998.
Trading account revenue is income earned on securities classified as trading
account securities. During 1999, GBC Venture Capital ("Venture Capital")
received equity securities which it held as trading securities from two
sources: a distribution from venture capital funds in which it invests and the
exercise of warrants acquired through the lending operations of General Bank,
its affiliate. The mark to market and disposition of these securities results
in trading account revenue. In addition, outstanding short sales transactions
involving equities held in the trading account are marked to market through
the statement of income. For 1999, trading account revenue totaled $1,525,000.
For 1998, trading account revenue totaled $211,000. As of December 31, 1999,
Venture Capital had entered into two short sale transactions. There were no
short sale transactions outstanding as of December 31, 1998.
Non-interest income in 1998 totaled $7,863,000, representing an increase of
$1,224,000, or 18.4%, over $6,639,000 of non-interest income in 1997. A
$736,000, or 12.8%, increase in service charges and commissions accounts for
60.1% of the total increase of non-interest income. The increase in service
charges and commissions was due primarily to growth of commissions for both
commercial and standby letters of credit. For the years ended December 31,
1998 and 1997, commissions for commercial, standby letters of credit and
acceptances totaled $2,550,000 and $1,675,000, respectively, representing an
increase of $875,000 or 52.2%. A $254,000, or 39.9%, increase of other non-
interest income was mainly due to the interest on a tax refund received in
1998.
Non-Interest Expense
Non-interest expense increased $2,272,000, or 7.5%, from $30,430,000 in 1998
to $32,702,000 in 1999. Salaries and employee benefits increased $820,000, or
4.4%, from 1998. The increase was primarily due to increases in salaries,
incentive compensation expense and deferred compensation for the Company's
CEO, all of which totaled $715,000. The increase of salaries, totaling
$445,000, was the result of annual increases and a slight increase of the
average annual full time employee equivalent ("FTE") during 1999 compared to
1998. For 1999 the average FTE was 330 compared to 326 during 1998. The
incentive compensation and deferred compensation for the CEO combined for a
total increase of $270,000, mainly due to the growth of pre-tax earnings in
1999 compared to 1998.
During the fourth quarter 1999, the company sold available for sale
securities with a net book value of $135.6 million realizing a $751,000 loss
on sale. There were no losses incurred on sale transactions in 1998.
Net other real estate expense (income) increased $221,000, or 109%, in 1999
compared to 1998. A $1,900,000 addition to the valuation allowance in 1999 was
partially offset by a $1,860,000 increase of net gain on sale of OREO. During
the third quarter, one of the Bank's OREO properties was sold resulting in a
$1,116,000 gain on sale.
Other non-interest expense which increased $334,000, or 4.9%, included a
$260,000 accelerated write-off of the intangible asset associated with an
escrow subsidiary, the assets of which were sold to a third party. The 1998
amortization of this intangible was $52,000. For the year ended December 31,
1999 and 1998, the Company's efficiency ratio (non-interest expense divided by
the sum of net interest income plus non-interest income) was 38.7% and 39.6%,
respectively.
For 1998, non-interest expense increased $4,057,000, or 15.4%, to $30,430,000
from $26,373,000 in 1997. Of this increase, $2,203,000 was attributed in part
to the increase of salaries and employee benefits caused by a 10.0% increase
in salaries. For the year ended December 31, 1998 and 1997, the average of the
monthly full time equivalent number of employees was 326 and 315,
respectively. In addition, expense accruals associated with the employment
contract of the CEO which was effective in 1998 were recorded and are included
in salaries and employee benefits.
Net other real estate owned expense (income) increased $609,000 in 1998
primarily due to higher net OREO gains in 1997. Net gains/losses are included
as a component of net other real estate owned expense (income). For 1998, OREO
expenses of $812,000 were offset by $1,015,000 of net OREO gains and other
OREO income. For 1997, higher OREO expense of $1,893,000 were offset by higher
OREO net gains of $2,705,000.
Other non-interest expense which increased $840,000, or 14.0%, is comprised
of a number of expense classifications. The increase was spread among the
various categories and, in general, represents the growth of the Company. For
the year ended December 31, 1998 and 1997, the Company's efficiency ratio
(non-interest expense divided by the sum of net interest income plus non-
interest income) was 39.6% and 38.7%, respectively.
Provision for Income Taxes
For 1999, the Company's provision for income taxes was $18,332,000, an
increase of $1,568,000, or 9.4%, from $16,764,000 recorded in 1998. The
effective tax rate in 1999 was 37.9% as compared to 37.3% in 1998.
For 1998, the Company's provision for income taxes was $16,764,000, an
increase of $2,459,000, or 17.2%, from $14,305,000 recorded in 1997. The
effective tax rate in 1998 was 37.3% as compared to 35.1% in 1997. The
increased effective tax rate was due primarily to the reduced level of low
income housing ("LIH") tax credits as a percentage of pre-tax income which is
due to the higher level of pre-tax income. The LIH tax credit was $2,063,000
in 1998, unchanged from 1997.
Extraordinary Item
During the third quarter of 1997, the Company incurred an $841,000
prepayment premium for the early extinguishment of its $15 million
subordinated debt. The prepayment premium, net of taxes of $353,000, is
included in the consolidated statements of income as an extraordinary item
amounting to $488,000 for the year ended December 31, 1997.
Financial Condition
The Company's assets totaled $1,744.2 million as of December 31, 1999,
representing an increase of $63.4 million, or 3.8%, over the $1,680.8 million
total assets as of December 31, 1998. The asset growth was primarily funded by
an increase of total deposits of $109.9 million. The deposit increase was
partially offset by the $30.0 million decrease in the balance of stockholders'
equity. This reduction is due to stock repurchases. During 1999 a total of 2.3
million shares were repurchased at a total cost of $46.8 million. In addition,
approximately $30 million of securities awaiting settlement as of December 31,
1998, were purchased in mid-December, 1998.
The 1999 asset growth was reflected primarily in the loans and leases
portfolio which increased $137.0 million, or 17.4%. Other categories of
interest earning assets declined with the securities portfolio decreasing
$64.5 million, or 8.6%, and federal funds sold and securities purchased under
agreements to resell decreasing $21.0 million, or 20.8%. Trading account
securities and other investment which are a source of non-interest income to
the Company, are not, however, included as interest earning assets.
Loans and Leases
The growth of loans and leases to $926.0 million as of December 31, 1999,
from $788.9 million as of December 31, 1998, represents a 17.4% increase. The
largest growth component of the loan portfolio was commercial loans which
increased $89.2 million, or 28.8%. The commercial loan growth was due to trade
financing loans which increased $84.8 million, or 36.8%, from $230.5 million
as of December 31, 1998 to $315.3 million as of December 31, 1999. The
continued upward trend of trade financing loans reflects the positive
California economy and management's objective of increased participation in
the growth of international trade.
Trade financing loans are made by the Bank's International Division which,
in addition to granting loans to finance the import and export of goods
between the United States and countries in the Pacific Rim, also provides
letters of credit and other related services. The Bank does not make loans to
foreign banks, foreign governments or their central banks, or commercial and
industrial loans to entities domiciled outside of the United States, except
for the extension of overdraft privileges to its foreign correspondent banks
on a limited, case by case, basis. All loan transactions are U.S. dollar
denominated.
Commercial loans also includes $48.2 million of unsecured commercial loans
and $34.9 million of Small Business Administration loans of which $21.5
million are government sponsor-guaranteed. As of December 31, 1999, commercial
loans represented 43.0% of the total loan portfolio compared to 39.2% as of
December 31, 1998.
Construction loans are real estate loans secured by first trust deeds. As of
December 31, 1999, construction loans totaled $195.1 million, or 21.1%, of the
total loan portfolio, representing an increase of $17.4 million, or 9.8%.
Conventional real estate loans are loans, other than construction loans,
secured by first trust deeds or junior real estate liens. As of December 31,
1999, conventional real estate loans totaled $295.6 million, or 31.9%, of the
total loan portfolio, representing a $31.7 million increase. As of December
31, 1998, conventional real estate loans totaled $263.9 million, or 33.5% of
the loan portfolio.
The Company's lending policy limits the loan to value ratio on conventional
real estate and construction loans to a maximum of 75% of the appraised value
with loans in excess of such amount being on an exception basis.
The following table sets forth the breakdown by type of collateral for
construction and conventional real estate loans as of December 31, 1999 and
1998:
(Dollars In
Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Conventional Conventional
Construction Real Estate Construction Real Estate
Project Type Loans Percentage Loans Percentage Loans Percentage Loans Percentage
- ----------------------------------------------------------------------------------------------------------------------
Residential:
Single-Family $110,101 56% $ 13,141 4% $118,251 67% $ 20,904 8%
Townhouse 6,923 4 860 1 2,505 1 885 -
Condominums 32,920 17 4,403 1 17,104 10 2,567 1
Multi-Family - - 34,714 12 1,151 1 30,965 12
Land Development - - 292 - - - - -
-------- ---- -------- ---- -------- ---- -------- ----
Total Residential $149,944 77% $ 53,410 18% $139,011 79% $ 55,321 21%
-------- ---- -------- ---- -------- ---- -------- ----
Non-Residential
Warehouse $ 3,159 2% $ 54,091 18% $ 4,150 2% $ 45,815 17%
Retail Facilities 34,646 18 54,528 19 31,254 18 59,835 23
Industrial Use 2,657 1 28,916 10 2,570 1 29,380 11
Office - - 27,334 9 - - 23,864 10
Hotel and Motel - - 56,504 19 - - 40,854 15
Other 4,727 2 20,831 7 752 - 8,800 3
-------- ---- -------- ---- -------- ---- -------- ----
Total Non-Residential $ 45,189 23% $242,204 82% $ 38,726 21% $208,548 79%
-------- ---- -------- ---- -------- ---- -------- ----
Total $195,133 100% $295,614 100% $177,737 100% $263,869 100%
======== ==== ======== ==== ======== ==== ======== ====
Substantially all of the collateral securing construction and conventional
real estate loans is located in California. However, the Bank does financing
out-of-state as well. In addition, effective in 1998, the Bank has established
loan production offices in the states of Washington and New York. Effective in
February, 2000, the Bank is operating a full service branch in the state of
Washington.
Other loans are primarily comprised of loans secured by the Bank's time
deposits. Other loans totaled $20.2 million and $22.3 million, as of December
31, 1999 and 1998, respectively.
Leveraged leases are comprised primarily of two aircraft leveraged leases.
In December 1997, the Company purchased a leveraged lease on a Boeing 737 with
a fair value of $24.0 million and a remaining estimated economic life of 28
years. The lease term ends in March, 2016, however, the lessee has an early
buy out option in the year 2011. The Company's equity investment is
$6.3 million. As of December 31, 1999, the aircraft is subject to $16.7
million of third-party financing in the form of long-term debt that provides
for no recourse against the Company and is secured by a first lien on the
aircraft. The residual value at the end of the full-term lease is estimated to
be $5.5 million, as of December 31, 1999, unchanged from prior years.
In December 1996, the Company purchased a leveraged lease on a Boeing 737
with a fair value of $24.2 million and a remaining estimated economic life of
30 years. The lease term is through the year 2012. The Company's equity
investment is $5.2 million. As of December 31, 1999, the aircraft is subject
to $16.3 million of third-party financing in the form of long-term debt that
provides for no recourse against the Company and is secured by a first lien on
the aircraft. The residual value at the end of the lease term is estimated to
be $7.6 million, as of December 31, 1999, unchanged from prior years.
For federal income tax purposes, the Company has the benefit of tax
deductions for depreciation on the entire leased asset and for interest paid
on the long-term debt. Deferred taxes are provided to reflect the temporary
differences associated with the leveraged leases.
In addition to the two aircraft leveraged leases, the Company has two other
leveraged leases included in loans and leases totaling $0.6 million, as of
December 31, 1999.
In the ordinary course of business, the Bank has granted loans to certain
directors and companies with which they are associated. In the opinion of
management, these loans were made on substantially the same terms, including
interest rates and collateral requirements, as those prevailing at the same
time for comparable transactions with other customers. Please refer to note 5
of notes to consolidated financial statements.
The following table sets forth the gross amount of loans outstanding in each
category as of the dates indicated:
December 31,
- ------------------------------------------------------------------------------
(In Thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Commercial 398,379 $309,198 $233,309 $183,268 $151,709
Real Estate-Construction 195,133 177,737 90,560 66,572 53,423
Real Estate-Conventional 295,614 263,869 276,350 273,080 239,016
Installment 11 37 54 86 231
Other Loans 20,238 22,302 23,993 22,362 22,310
Leveraged Leases 16,582 15,802 14,563 6,986 255
Loans to Depository Institutions - - - 50,000 5,000
-------- -------- -------- -------- --------
Total $925,957 $788,945 $638,829 $602,354 $471,944
======== ======== ======== ======== ========
The following table shows the maturity schedule of the Company's loans
outstanding as of December 31, 1999, which is based on the remaining scheduled
repayments of principal. Non-accrual loans of $44.5 million are included in
the "within one year" category:
After
One but More
Within Within than
One Five Five
(In Thousands) Year years Years Total
- -------------------------------------------------------------
Commercial $336,970 $ 28,468 $ 32,941 $398,379
Real Estate-Construction 156,333 38,800 - 195,133
Real Estate-Conventional 42,456 150,233 102,925 295,614
Installment - 11 - 11
Other Loans 19,949 289 - 20,238
Leveraged Leases - 587 15,995 16,582
-------- -------- -------- --------
Total $555,708 $218,388 $151,861 $925,957
======== ======== ======== ========
As of December 31, 1999, excluding non-accrual loans, loans and leases
scheduled to be repriced within one year, after one but within five years, and
in more than five years, are as follows:
After
One but More
Within Within than
One Five Five
(In Thousands) Year years Years Total
- --------------------------------------------------------
Total Fixed Rate $ 30,840 $112,714 $115,362 $258,916
Total Variable Rate 622,520 - - 622,520
-------- -------- -------- --------
Total $653,360 $112,714 $115,362 $881,436
======== ======== ======== ========
As of December 31, 1999 and 1998, there were no loans held for sale. No
loans held for sale were originated during 1999 and 1998. In 1997, management
discontinued its operation of originating fixed rate residential mortgage
loans for sale in the secondary market. In 1998, the Bank transferred its
servicing rights on loans originated with servicing rights retained to a third
party realizing a gain on the transaction of $338,000. This amount is included
in gain on sale of loans, net, in the consolidated statements of income. As of
December 31, 1999, the Bank continues to service mortgages under an FNMA
contract amounting to $2.0 million.
Non-performing Assets
A certain degree of risk is inherent in the extension of credit. Management
believes that it has credit policies in place to assure minimizing the level
of loan losses and non-performing loans. The Company performs a quarterly
assessment of the credit portfolio to determine the appropriate
level of the allowance. Included in the assessment is the identification of
loan impairment. A loan is identified as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the loan agreement. Loan impairment is measured by estimating the
expected future cash flows and discounting them at the respective effective
interest rate or by valuing the underlying collateral.
The Company has a policy of classifying loans (including impaired loans)
which are 90 days past due as to principal and/or interest as non-accrual
loans unless management determines that the fair value of the 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. The amortization of any deferred loan fees is
stopped. A loan is returned to accrual status only when the borrower has
demonstrated the ability to make future payments of principal and interest as
scheduled, and the borrower has demonstrated a sustained period of repayment
performance in accordance with the contractual terms. Interest received on
non-accrual loans generally is either applied against principal or reported as
recoveries on amounts previously charged-off, according to management's
judgment as to the collectibility of principal.
The following table provides information with respect to the Company's past
due loans, non-accrual loans, other real estate owned and restructured loans,
as of the dates indicated:
December 31,
- ----------------------------------------------------------------------------
(In Thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
Loans 90 Days or More Past Due and
Still Accruing $ - $ 780 $ 2,778 $ 6,779 $ 9
Non-accrual Loans 44,521 20,790 9,834 11,719 43,712
------- ------- ------- ------- -------
Total Past Due Loans 44,521 21,570 12,612 18,498 43,721
Restructured Loans 7,249 10,440 20,323 23,125 10,151
------- ------- ------- ------- -------
Total Non-performing Loans 51,770 32,010 32,935 41,623 53,872
Other Real Estate Owned, Net 8,170 6,885 7,871 12,988 7,686
------- ------- ------- ------- -------
Total Non-performing Assets $59,940 $38,895 $40,806 $54,611 $61,558
======= ======= ======= ======= =======
Non-performing Assets to
Period End Loans and Leases, Net,
Plus Other Real Estate Owned, Net 6.59% 5.05% 6.52% 9.17% 13.39%
======= ======= ======= ======= =======
Non-performing Assets to Period End
Total Assets 3.44% 2.31% 2.70% 4.04% 5.11%
======= ======= ======= ======= =======
Total non-performing assets increased to $59.9 million, as of December 31,
1999, from $38.9 million as of December 31, 1998, representing a $21.0
million, or 54.0% increase. The increase is primarily due to the increase of
non-accrual loans, in general, and one construction loan, in particular, as
discussed below.
Past-due loans
There were no loans 90 days or more past due and still accruing, as of
December 31, 1999, down from $0.8 million, as of December 31, 1998.
Non-accrual loans
The following table analyzes the $23.7 million increase of non-accrual loan
activity during the year:
(In Thousands)
- -------------------------------------------------
Balance at December 31, 1998 $20,790
Add: Loans Placed on Non-accrual Status 50,289
Less: Charge-offs (4,859)
Returned to Accrual Status (5,341)
Repayments (7,586)
Transferred to OREO (8,772)
--------
Balance at December 31, 1999 $44,521
========
The $23.7 million, or 114%, increase of loans placed on non-accrual status
is mainly the result 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. On January 26, 2000, the Company announced
that a portion of the Bank's collateral consisting of the hotel, casino and RV
park for the Sunrise Suites loan had been sold at a bankruptcy court auction
for a total of $42 million. The sale closed on February 25, 2000 with the Bank
receiving $28 million. Certain remaining collateral is scheduled for sale in
the future with an appraised value of $9.2 million.
The following table breaks out the Company's non-accrual loans by loan
category as of December 31, 1999 and 1998:
(In Thousands) 1999 1998
- -----------------------------------------
Commercial $ 8,567 $19,202
Real Estate-Construction 35,694 277
Real Estate-Conventional 221 1,309
Installment - 2
Other Loans 39 -
------- -------
Total $44,521 $20,790
======= =======
The effect of non-accrual loans outstanding as of year-end on interest
income for the years 1999, 1998 and 1997 is presented below:
(In Thousands) 1999 1998 1997
- ---------------------------------------------------
Contractual Interest Due $4,546 $ 2,192 $ 1,954
Interest Recognized (972) (1,540) (1,041)
------- -------- --------
Net Interest Foregone $3,574 $ 652 $ 913
======= ======== ========
Contractual interest due is based on original loan amounts. Any partial
charge-offs are not considered in the determination of contractual interest
due.
Restructured loans
The balance of restructured loans as of December 31, 1999, was $7.2 million
compared to $10.4 million as of December 31, 1998, representing a $3.2
million, or 30.6%, decrease. The decline was primarily the result of the pay-
off of two restructured loans totaling $3.0 million as of December 31, 1998,
and continuing monthly payments pursuant to the restructured terms. A loan is
categorized as restructured if the original interest rate on such loan, the
repayment terms, or both, are modified due to a deterioration in the financial
condition of the borrower. Restructured loans may also be put on a non-accrual
status in keeping with the Bank's policy of classifying loans which are 90
days past due as to principal and/or interest. Restructured loans which are
non-accrual loans are not included in the balance of restructured loans. As of
December 31, 1999, restructured loans consisted of nine credits, down from
eleven, as of December 31, 1998. The weighted average yield of the
restructured loans as of December 31, 1999, was 9.82%.
The following table breaks out the restructured loans by accrual status as
of the dates indicated:
December 31,
- --------------------------------------
(In Thousands) 1999 1998
- --------------------------------------
Restructured Loans:
On Accrual Status $7,249 $10,440
On Non-accrual Status 216 505
------ -------
Total $7,465 $10,945
====== =======
As of December 31, 1999, there are no commitments to lend additional funds
to borrowers associated with restructured loans.
The effect of restructured loans outstanding as of year-end on interest
income for the years ended December 31, 1999, 1998 and 1997 is presented
below:
(In Thousands) 1999 1998 1997
- --------------------------------------------------
Contractual Interest Due $ 993 $ 1,491 $ 2,242
Interest Recognized (764) (1,150) (1,853)
------ -------- --------
Net Interest Foregone $ 229 $ 341 $ 389
====== ======== ========
Other real estate owned
As of December 31, 1999, other real estate owned, net of valuation allowance
of $3.0 million, totaled $8.2 million, representing an increase of $1.3
million, or 18.8%, from the balance of $6.9 million, net of valuation
allowance of $2.0 million, as of December 31, 1998. As of December 31, 1999,
OREO consisted of 12 properties, down from 22 properties, as of December 31,
1998. One property with a carrying value of $6.4 million, constitutes 78.0% of
the total net OREO.
The following is an analysis of the change in gross OREO (OREO before
valuation allowance):
(In Thousands)
- ----------------------------------------------
Beginning balance, December 31, 1998 $ 8,885
Additions 9,341
Dispositions (7,041)
-------
Ending balance, December 31, 1999 $11,185
=======
The net gain realized on the sales for 1999 was $2,604,000 compared to
$744,000 for 1998.
The outstanding OREO properties are all included in the Bank's market area.
They include single family residences, condominiums, commercial buildings, and
land. Eight properties comprise the land category of OREO. The Company does
not intend to develop these properties; rather, it will sell the land
undeveloped.
The following table sets forth OREO by type of property as of the dates
indicated:
December 31,
- -------------------------------------------------
(In Thousands) 1999 1998
- -------------------------------------------------
Property Type
Single-Family Residential $ 395 $ 752
Condominium - 485
Land 1,099 3,621
Retail Facilities 1,141 4,027
Industrial Facilities/Building 8,550 -
Less: Valuation Allowance (3,015) (2,000)
------- -------
Total $ 8,170 $ 6,885
======= =======
As of December 31, 1999 and 1998, the land owned was primarily for
residential housing development.
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 $46.9 million of net recorded
investment of impaired loans as of December 31, 1999, $3.6 million is included
in the balance of restructured loans and is performing pursuant to the terms
and conditions of the restructuring.
The following table discloses pertinent information as it relates to the
Company's impaired loans as of and for the dates indicated:
As of and for the Year Ended
December 31,
- -------------------------------------------------------------------------------
(In Thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Recorded Investment with Related Allowance $ 42,881 $ 20,746 $ 16,095
Recorded Investment with no Related Allowance 4,003 1,519 1,022
--------- --------- ---------
Total Recorded Investment $ 46,884 $ 22,265 $ 17,117
Allowance on Impaired Loans $ (5,806) (3,250) (1,544)
--------- --------- ---------
Net Recorded Investment in Impaired Loans $ 41,078 $ 19,015 $ 15,573
========= ========= =========
Average Total Recorded Investment in Impaired
Loans $ 46,479 $ 13,467 $ 22,370
Interest Income Recognized $ 538 $ 478 $ 1,508
Of the amount of interest income recognized in 1999, 1998 and 1997 no
interest was recognized under the cash basis method.
Management cannot predict the extent to which the current economic
environment, including the real estate market, may 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 December 31, 1999, the balance of the allowance for credit losses was
$19.8 million, representing 2.14% 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.
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
formula allowance.
The 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.
The ratio of the allowance for credit losses to non-performing and
restructured loans decreased to 38.3% as of December 31, 1999 from 60.6% as of
December 31, 1998. As a percentage of non-accrual loans, the allowance
declined to 44.5% as of December 31, 1999 compared to 93.2% as of December 31,
1998. The erosion of this ratio is primarily due to the $31 million
construction loan that became non-accrual in 1999, as discussed above. The
provision for credit losses is the amount 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.
A detailed analysis of the Company's allowance for credit losses, the
recoveries on loans previously charged off, and the amount of loans and leases
charged off, is summarized in the following table:
(In Thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Balance at Beginning of Year $19,381 $16,776 $16,209 $16,674 $23,025
Charge-offs:
Commercial 6,330 1,949 3,848 1,492 2,219
Real Estate 7 338 803 5,810 23,293
Installment & Other - - 47 148 8
-------- -------- -------- -------- --------
Total Charge-offs 6,337 2,287 4,698 7,450 25,520
-------- -------- -------- -------- --------
Recoveries:
Commercial 417 901 491 315 43
Real Estate 2,847 2,491 3,723 2,139 553
Installment & Other - - 51 31 3
-------- -------- -------- -------- --------
Total Recoveries 3,264 3,392 4,265 2,485 599
-------- -------- -------- -------- --------
Net Charge-offs (Recoveries) 3,073 (1,105) 433 4,965 24,921
Provision Charged to Operating
Expenses 3,500 1,500 1,000 4,500 18,570
-------- -------- -------- -------- --------
Balance at End of Year $19,808 $19,381 $16,776 $16,209 $16,674
======== ======== ======== ======== ========
Ratio of Net Charge-offs to Aver-
age Loans and Leases Outstanding 0.36% N/A 0.07% 0.96% 5.10%
======== ======== ======== ======== ========
Allowance for Credit Losses to
Year-End Loans and Leases 2.14% 2.46% 2.63% 2.69% 3.53%
======== ======== ======== ======== ========
Allowance for Credit Losses to
Non-accrual Loans 44.49% 93.22% 170.59% 138.31% 38.15%
======== ======== ======== ======== ========
Allowance for Credit Losses to
Non-performing and Restructured
Loans 38.26% 60.55% 50.94% 38.94% 30.95%
======== ======== ======== ======== ========
Provision for Credit Losses Di-
vided by Net Charge-offs 113.90% N/A 230.95% 90.63% 74.52%
======== ======== ======== ======== ========
Allowance for Credit Losses to
Past Due Loans 44.49% 89.85% 133.02% 87.63% 38.14%
======== ======== ======== ======== ========
For the year 1999, there were net charge-offs of $3.1 million compared to
net recoveries of $1.1 million in 1998. For both years, loan recoveries were
approximately the same ($3.3 million and $3.4 million for 1999 and 1998,
respectively); however, charge-offs were $6.3 million in 1999 compared to $2.3
million in the year earlier period. 1999 charge-offs included a $2.3 million
charge-off related to the transfer to OREO of a $12.6 million loan for a
borrower who filed for bankruptcy.
Although the Company does not normally allocate the allowance for credit
losses to specific loan categories, an allocation to the major categories has
been made for purposes of this report as set forth in the following table.
These allocations are estimates based on historical loss experience and
management's judgment. The allocation of the allowance for credit losses is
not necessarily an indication that the charge-offs will occur, or if they do
occur, that they will be in the proportion indicated in the following table:
December 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
(Dollars In Thousands) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
- ---------------------------------------------------------------------------------------------------
Commercial $ 8,626 43.0% $ 9,834 39.2% $ 6,538 36.5% $ 4,664 30.4% $ 4,239 32.2%
Real Estate - Construc-
tion 6,636 21.1 4,307 22.5 1,852 14.2 2,796 11.1 928 11.3
Real Estate - Conven-
tional 4,078 31.9 4,669 33.5 7,478 43.2 8,337 45.3 11,167 50.6
Installment - - 1 - 1 - 1 - 3 0.1
Other Loans 257 2.2 337 2.8 372 3.8 313 3.7 280 4.7
Leveraged Leases 211 1.8 233 2.0 535 2.3 98 1.2 - -
Loan to Despository In-
stitutions - - - - - - - 8.3 - -
Unallocated - - - - - - - - 57 1.1
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $19,808 100.0% $19,381 100.0% $16,776 100.0% $16,209 100.0% $16,674 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Amount represents the allocated portion of the allowance for credit losses
to the credit categories for each respective year
(2) Percentage indicated represents the proportion of each loan category to
total loans for each respective year
Securities
The Company classifies its securities as held to maturity, trading 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 are obtained and held principally for the purpose of selling
them in the near term are classified as trading and are reported at fair
value, with unrealized gains and losses included in earnings. Equity
securities obtained from exercise of warrants and distributions from venture
capital funds are classified as trading.
Securities that could be sold in response to changes in interest rates,
increased loan demand, liquidity needs, capital requirements or other similar
factors, are classified as securities available for sale. These securities are
carried at fair value, with unrealized gains or losses reflected net of tax in
stockholders' equity.
As of December 31, 1999, the Company recorded net unrealized holding losses
of $14,283,000 on its available for sale portfolio. Included as a deduction of
other comprehensive income is $8,278,000, representing the net unrealized
holding losses, net of tax. As of December 31, 1998, the Company had recorded
net unrealized holding gains of $3,172,000 on its available for sale portfolio
and included $1,838,000 in other comprehensive income, representing the net
unrealized holding gains, net of tax.
The following table discloses proceeds received and gross gains/losses
realized from the sale of securities as indicated for the years as indicated:
Security
Classification 1999 1998
- -------------------------------------------------------------
(In Thousands) Proceeds Gain (Loss) Proceeds Gain (Loss)
- -------------------------------------------------------------
Available for Sale $134,826 $ - $(751) $ - $ - $ -
Trading Account 369 366 - 257 107 -
-------- ---- ------ ---- ---- ---
Total: $135,195 $366 $(751) $257 $107 $ -
======== ==== ====== ==== ==== ===
There were no sales of any securities during 1997.
The following table summarizes the carrying value of the Company's
securities held to maturity, securities available for sale and trading
securities for each of the past three years:
December 31,
- ------------------------------------------------------------------
(In Thousands) 1999 1998 1997
- ------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government Agencies $ 1,294 $ 24,594 $ 58,003
Collateralized Mortgage Obligations 6 22 42
-------- -------- --------
Total $ 1,300 $ 24,616 $ 58,045
======== ======== ========
Securities Available for Sale:
U. S. Treasuries $ - $ 1,862 $ 6,900
U.S. Government Agencies 21,374 59,775 220,392
Mortgage Backed Securities 170,771 73,207 57,493
Commercial Mortgage Backed Securities 30,278 - -
Corporate Notes 58,571 34,924 9,181
Collateralized Mortgage Obligations 158,911 246,647 188,552
Asset Backed Securities 237,002 259,608 136,973
Auction Preferred Stocks - - 18,500
Commercial Paper - 39,860 -
Other Securities 6,110 8,289 5,669
-------- -------- --------
Total $683,017 $724,172 $643,660
======== ======== ========
Trading Account Securities:
Equity Issues $ 1,114 $ - $ -
-------- -------- --------
Total $ 1,114 $ - $ -
======== ======== ========
The following table shows the contractual maturities of securities as of
December 31, 1999, and the weighted average yields. The actual maturities of
certain securities are expected to be shorter than the contractual maturities.
Trading account securities are excluded as the issues in portfolio are shares
of common stock. They are non-interest bearing with no stated maturity.
After One After Five
Within One but within but within After Ten
Year Five Years Ten Years Years Total
(Dollars in Millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------
Securities Held to Ma-
turity
U.S. Government Agen-
cies $ - -% $ 1.29 6.48% $ - -% $ - -% $ 1.29 6.48%
Collateralized
Mortgage Obligations - - - - 0.01 6.49 - - 0.01 6.49
----- ----- ------ ----- ------ ----- ------- ----- ------- -----
Total $ - -% $ 1.29 6.48% $ 0.01 6.49% - -% $ 1.30 6.48%
===== ===== ====== ===== ====== ===== ======= ===== ======= =====
Securities Available
for Sale
U.S. Government Agen-
cies $0.50 6.07% $19.50 6.70% $ - -% $ 1.38 6.30% $ 21.38 6.66%
Mortgage Backed Secu-
rities 0.13 - 3.30 7.12 12.99 6.73 154.35 6.50 170.77 6.52
Commercial Mortgage
Backed Securities - - - - 22.85 7.31 7.43 7.26 30.28 7.30
Corporate Notes - - 58.57 7.28 - - - - 58.57 7.28
Collateralized
Mortgage Obligations - - 0.77 6.51 - - 158.14 6.47 158.91 6.47
Asset Backed Securi-
ties - - - - 0.35 6.36 236.65 6.62 237.00 6.62
Other Securities 6.11 5.59 - - - - - - 6.11 5.59
----- ----- ------ ----- ------ ----- ------- ----- ------- -----
Total $6.74 5.57% $82.14 7.13% $36.19 7.09% $557.95 6.55% $683.02 6.64%
===== ===== ====== ===== ====== ===== ======= ===== ======= =====
The following table summarizes the aggregate fair value of securities of any
one issuer which exceeds ten percent of stockholders' equity as of December
31, 1999. The table excludes securities issued by the U.S. Government.
(In Thousands)
------------------------------------------
Fair
Issuer Book Value Value
------------------------------------------
American Business Financial
Services $ 25,040 $ 24,660
Capco America
Securitization Corp. 13,528 13,303
Champion Mortgage 14,756 14,611
Conti Mortgage Corp. 19,068 18,722
Finova Capital Corp. 14,869 14,682
Industry Mortgage Co. 16,542 16,300
Lehman Brothers Inc. 15,095 14,909
Norwest Capital 15,055 14,650
Provident Bank 32,296 31,686
United Companies Financial 24,164 23,899
-------- --------
Total $190,413 $187,422
======== ========
The above includes corporate notes, asset backed securities, mortgage backed
securities and collateralized mortgage obligations. The rating criteria for
corporate notes is single A; all other issuers are triple A rated.
Other Investments
As of December 31, 1999, other investments totaled $9.8 million. The balance
is comprised of various venture capital funds that invest in technology
companies. In addition to seeking an appropriate return from such investments,
the Company seeks to use the investments to increase its high technology
banking business. Also included in other investments is a 10% equity interest
in an aircraft finance trust ("AFT") totaling $7.1 million as of December 31,
1999. AFT owns a number of aircraft which it leases to different lessees in
various countries. All these partnership interests are accounted for by the
equity method.
Funding Sources
Deposits
The Company's deposits totaled $1,490.8 million as of December 31, 1999,
representing a $109.9 million, or 8.0%, increase over the $1,380.9 million
total deposits as of December 31, 1998. The largest deposit growth was in time
certificates of deposit of $100,000 or more which increased $112.7 million, or
18.8%. Interest bearing demand reflected growth of $43.2 million, or 15.4%.
Other time deposits totaled $202.2 million, as of December 31, 1999,
representing a $68.3 million, or 25.3% decrease over the $270.5 million
balance as of December 31, 1998. Time certificates of deposit of $100,000 or
more includes $100 million of deposits from the state of California, up $7.0
million from December 31, 1998. These deposits are collateralized at 110%, as
is required for all public time deposits. The collateral provided is U.S.
government agency issues.
During 1999, average deposits increased to $1,442.4 million from $1,363.7
million during 1998, representing an increase of $78.7 million, or 5.8%.
The following table sets forth the average amount of and the average rate
paid on each of the following deposit categories for the years ended December
31, 1999 and 1998:
1999 1998
- -------------------------------------------------------------------------------
Weighted Weighted
Average Average Average Average
(Dollars In Thousands) Amount Ratio Rate Amount Ratio Rate
- -------------------------------------------------------------------------------
Deposits:
Noninterest-Bearing
Demand Deposits $ 164,620 11.41% -% $ 148,436 10.89% -%
Interest-Bearing De-
mand Deposits 299,588 20.77% 2.56 262,281 19.23 2.63
Saving Deposits 82,356 5.71% 2.20 86,776 6.36 2.58
Time Deposits 895,875 62.11% 4.57 866,229 63.52 5.10
---------- ------- ----- ---------- ------- -----
Total $1,442,439 100.00% 3.94% $1,363,722 100.00% 4.38%
========== ======= ===== ========== ======= =====
The growth of deposits from the Company's customers reflects the continuing
tradition of personalized services. There are no brokered deposits
outstanding. The Company believes that the majority of its deposit customers
have strong ties to the Bank. Although the Company has a significant amount of
time certificates of deposit of $100,000 or more having maturities of one year
or less, the depositors have generally renewed their deposits in the past at
their maturity. Accordingly, the Company believes its deposit source to be
stable. The following table is indicative of the length of the relationship of
depositors of time certificates of deposit of $100,000 or more with the Bank
as of December 31, 1999 and 1998:
1999
- -----------------------------------
(Dollars in No. of
Thousands) Amount Accounts
- -----------------------------------
3 years or more $439,394 2,353
2-3 years 158,276 320
1-2 years 56,980 264
Less than 1 year 57,748 345
-------- -----
Total $712,398 3,282
======== =====
1998
- -----------------------------------
(Dollars in No. of
Thousands) Amount Accounts
- -----------------------------------
3 years or more $335,913 1,799
2-3 years 75,301 339
1-2 years 147,927 259
Less than 1 year 40,528 176
-------- -----
Total $599,669 2,573
======== =====
The maturity schedule of time certificates of deposit of $100,000 or more as
of December 31, 1999 is as follows:
(In Thousands) Amount
- -----------------------------------------
3 Months or Less $426,006
Over 3 Months Through 6 Months 137,323
Over 6 Months Through 12 Months 148,638
Over 12 Months 431
--------
Total $712,398
========
Other Borrowings
As of December 31, 1999, the Bank had 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 December 31, 1999:
Fixed Rate
Maturity Amount of Interest
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------
Nov. 1, 2000 $25,000 4.53%
Jan. 31, 2001 10,000 5.19%
Apr. 30, 2001 10,000 4.92%
July 15, 2002 5,000 5.61%
The total outstanding of $50.0 million of advances as of December 31, 1999
has a composite fixed rate of interest of 4.85%.
On July 30, 1997, the Company issued, through a public offering, $40 million
of 8.375% subordinated notes due August 1, 2007. Proceeds of $38.7 million,
net of underwriting discount of $1.3 million, was received by the Company. The
discount is amortized as a yield adjustment over the 10 year life of the
subordinated notes. The notes are not redeemable prior to August 1, 2002.
Thereafter, the notes are redeemable, in whole or in part, at the option of
the Company at decreasing redemption prices plus accrued interest to the date
of redemption. The notes have no sinking fund. The indenture (the "Indenture")
under which the notes are issued does not limit the ability of the Company or
its subsidiaries to incur additional indebtedness. The Indenture provides that
the Company cannot pay cash dividends or make any other distribution on, or
purchase, redeem or acquire its capital stock, except that the Company may (1)
declare and pay a dividend in capital stock of the Company and (2) declare and
pay dividends, purchase, redeem or otherwise acquire for value its capital
stock or make other distributions in cash or property other than capital stock
of the Company if the amount of such dividend, purchase or distribution,
together with the amount of all previous such dividends, purchases,
redemptions and distributions of capital stock after December 31, 1996, would
not exceed in the aggregate the sum of (a) $38 million, plus (b) 100% of the
Company's consolidated net income (or minus 100% of the Company's consolidated
net loss, as the case may be), based upon audited consolidated financial
statements, plus (c) 100% of the net proceeds received by the Company on
account of any capital stock issued by the Company (other than to a subsidiary
of the Company) after December 31, 1996. The subordinated notes are included
as part of the Company's total risk-based capital and further contribute to
the capital strength of the Company.
Capital Resources
Stockholders' equity totaled $133.0 million as of December 31, 1999, a
decrease of $30.0 million, or 18.4%, from $163.0 million as of December 31,
1998. The net decrease from year-end 1998 to year-end 1999 was due to the
following:
Stockholders' Equity Amount
- -------------------------------------------------------------
(In Thousands)
- -------------------------------------------------------------
Beginning Balance, December 31, 1998 $163,030
Repurchase of Stock (46,817)
Net Income 29,988
Cash Dividends Declared (4,034)
Change in Securities Valuation (10,115)
Exercise of Stock Options and Related Tax Benefits 986
--------
Ending Balance, December 31, 1999 $133,038
========
On December 20, 1999, the Board of Directors authorized a stock repurchase
program approving the buy-back of up to $10 million of GBC Bancorp stock. The
purchases will be done from time to time in open market transactions. As of
February 4, 2000, 19,900 shares had been repurchased at an average cost of
$19.16 per share.
For the year ended December 31, 1999 and 1998, the ratio of the Company's
average stockholders' equity to average assets was 8.57% and 10.01%,
respectively. The decline of the ratio is due primarily to the stock
repurchases.
Management is committed to maintaining capital at a sufficient level to
assure shareholders, customers and regulators that the Company is financially
sound. Risk-based capital guidelines issued by regulatory authorities in 1989
assign risk weightings to assets and off-balance sheet items. The guidelines
require a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio
of 8%. Tier 1 capital consists of common stockholders' equity and non-
cumulative perpetual preferred stock, less goodwill and nonqualifying
intangible assets, while total capital includes other elements, primarily
cumulative perpetual, long-term and convertible preferred stock, subordinated
and mandatory convertible debt, plus the allowance for loan losses, within
limitations. The unrealized gain/loss on debt securities available for sale,
net of tax, is not included in either Tier 1 or the total capital computation.
In addition, a minimum Tier 1 leverage ratio of 3% is required for the
highest rated banks. All other state nonmember banks must meet a minimum
leverage ratio of not less than 4%. This ratio is defined as Tier 1 capital to
average total assets, net of nonqualifying intangible assets, for the most
recent quarter.
During 1992, pursuant to the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA"), the federal banking regulators set forth the
definitions for "adequately capitalized" and "well capitalized" institutions.
An "adequately capitalized" institution is one that meets the minimum
regulatory capital requirements. A "well capitalized" institution is one with
capital ratios as shown in the following table. As of December 31, 1999, the
Company's and the Bank's Tier 1 risk based capital, total risk based capital
and leverage ratios exceeded the "well capitalized" ratio requirements as
follows:
Minimum Well
GBC Bancorp General Bank Regulatory Capitalized
(In Thousands) Amount Ratio Amount Ratio Requirements Requirements
-----------------------------------------------------------------------
Tier 1 $141,257 9.07% $167,554 10.82% 4% 6%
Total $199,726 12.83% $186,925 12.07% 8% 10%
Leverage Ratio $141,257 8.06% $167,554 9.58% 4% 5%
Asset Liability and Market Risk Management
Liquidity
Liquidity measures the ability of the Company to meet fluctuations in
deposit levels, to fund its operations and to provide for customers' credit
needs. Liquidity is monitored by management on an on-going basis. Asset
liquidity is provided by cash and short-term financial instruments, which
include auction preferred stocks, federal funds sold and securities purchased
under agreements to resell, unpledged securities held to maturity and maturing
within one year and unpledged securities available for sale. These sources of
liquidity amounted to $504.5 million, or 28.9%, of total assets as of December
31, 1999 compared with $666.7 million, or 39.7%, of total assets as of
December 31, 1998. The decline in the liquidity ratio as of December 31, 1999
was the direct result of increased pledgings to the Federal Reserve Bank for
purposes of potential short-term borrowings. This measure was part of the Year
2000 preparedness of the Company.
To further supplement its liquidity, the Company has established federal
funds lines with correspondent banks and three master repurchase agreements
with major brokerage companies. In August, 1992, the FHLB granted the Bank a
line of credit equal to 25 percent of assets with terms up to 360 months.
Management believes its liquidity sources to be stable and adequate.
As of December 31, 1999, total loans and leases represented 62.1% of total
deposits. This compares to 57.1% as of December 31, 1998.
As of December 31, 1999, management is not aware of any information, that
would result in or that was reasonably likely to have a material effect on the
Company's liquidity and capital resources.
The liquidity of the parent company, GBC Bancorp, is primarily dependent on
the payment of cash dividends by its subsidiary, General Bank, subject to the
limitations imposed by the Financial Code of the State of California. For
1999, General Bank declared $20.0 million of cash dividends to GBC Bancorp. As
of December 31, 1999, approximately $53.6 million of undivided profits of the
Bank is available for dividends to the Company, subject to the subordinated
debt covenant restrictions.
"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 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 December 31, 1999 there is a cumulative one year negative "gap" of
$591.4 million, up from $448.2 million as of December 31, 1998.
The following table indicates the Company's interest rate sensitivity
position as of December 31, 1999, and is based on contractual maturities. It
may not be reflective of positions in subsequent periods.
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:
Securities Available for
Sale $ 13,849 $ - $ 115,648 $553,520 $ - $ 683,017
Securities Held to Matu-
rity - - 1,294 6 - 1,300
Trading Account Securi-
ties 1,114 - - - - 1,114
Federal Funds Sold & Se-
curities
Purchased Under Agree-
ment to Resell 80,000 - - - - 80,000
Loans and Leases(1)(2) 631,559 21,801 112,714 115,362 - 881,436
Non-earning Assets(2) - - - - 97,333 97,333
----------- ----------- ----------- ---------- ----------- ----------
Total Earning Assets $ 726,522 $ 21,801 $ 229,656 $668,888 $ 97,333 $1,744,200
=========== =========== =========== ========== =========== ==========
Source of Funds for Earn-
ing Assets:
Deposits:
Demand--Non-Interest
Bearing $ - $ - $ - $ - $ 174,753 $ 174,753
Interest Bearing Demand 323,451 - - - - 323,451
Savings 78,050 - - - - 78,050
TCDs Under $100,000 111,594 89,685 880 - - 202,159
TCDs $100,000 and Over 426,005 285,962 431 - - 712,398
----------- ----------- ----------- ---------- ----------- ----------
Total Deposits $ 939,100 $ 375,647 $ 1,311 $ - $ 174,753 $1,490,811
=========== =========== =========== ========== =========== ==========
Borrowings from the Fed-
eral Home Loan Bank $ - $ 25,000 $ 25,000 $ - $ - $ 50,000
Subordinated Debt - - - 39,007 39,007
Other Liabilities - - - - 31,344 31,344
Stockholders' Equity - - - - 133,038 133,038
----------- ----------- ----------- ---------- ----------- ----------
Total Liabilities and
Stockholders' Equity $ 939,100 $ 400,647 $ 26,311 $ 39,007 $ 339,135 $1,744,200
=========== =========== =========== ========== =========== ==========
Interest Sensitivity Gap $(212,578) $(378,846) $ 203,345 $629,881 $(241,802)
Cumulative Interest Sen-
sitivity Gap $(212,578) $(591,424) $(388,079) $241,802 -
Gap Ratio (% of Total As-
sets) -12.2% -21.7% 11.7% 36.1% -13.9%
Cumulative Gap Ratio -12.2% -33.9% -22.2% 13.9% 0.0%
(1) Loans and leases are before unamortized deferred loan fees and allowance
for credit losses
(2) Non-accrual loans are included in non-earning assets
Effective asset/liability management includes maintaining adequate liquidity
and minimizing the impact of future interest rate changes on net interest
income. The Company attempts to manage its interest rate sensitivity on an on-
going basis through the analysis of the repricing characteristics of its
loans, securities, and deposits, and managing the estimated net interest
income volatility by adjusting the terms of its interest-earning assets and
liabilities, and through the use of derivatives, as needed.
Market risk
Market risk is the risk of financial loss arising from adverse changes in
market prices and interest rates. The Company's market risk is inherent in its
lending and deposit taking activities to the extent of differences in the
amounts maturing or degree of repricing sensitivity. Adverse changes in market
prices and interest rates may therefore result in diminished earnings and
ultimately an erosion of capital.
Since the Company's profitability is affected by changes in interest rates,
management actively monitors how changes in interest rates may affect earnings
and ultimately the underlying market value of equity. Management monitors
interest rate exposure through the use of three basic measurement tools in
conjunction with established risk limits. These tools are the expected
maturity gap report, net interest income volatility and market value of equity
volatility reports. The gap report details the expected maturity mismatch or
gap between interest earning assets and interest bearing liabilities over a
specified timeframe. The expected gap differs from the contractual gap report
shown earlier in this section by adjusting contractual maturities for expected
prepayments of principal on loans and amortizing securities as well as the
projected timing of repricing non-maturity deposits. The following table shows
the Company's financial instruments that are sensitive to changes in interest
rates, categorized by their expected maturity, and the fair value of these
instruments as of December 31, 1999:
Interest Sensitivity Period
- -----------------------------------------------------------------------------------------------
Over 1 Weighted
0 to 90 91 to Year to Over Average
(Dollars In Thousands) Days 365 Days 5 Years 5 Years Total Int Rate(2) Fair Value
- -----------------------------------------------------------------------------------------------
Interest-sensitive As-
sets:
Securities Available for
Sale $ 18,533 $ 61,472 $488,388 $114,624 $ 683,017 6.64% $ 683,017
Securities Held to Matu-
rity 1,300 - - - 1,300 6.48% 1,241
Trading Account Securi-
ties 1,114 - - - 1,114 N/A 1,114
Federal Funds Sold & Se-
curities
Purchased Under Agree-
ments to Resell 80,000 - - - 80,000 5.17% 80,000
Loans and Leases(1) 631,559 21,801 112,714 115,362 881,436 9.25% 881,398
-------- -------- -------- -------- ---------- ----------
Total Interest-sensitive
Assets $732,506 $ 83,273 $601,102 $229,986 $1,646,867 $1,646,770
======== ======== ======== ======== ========== ==========
Interest-sensitive Lia-
bilities:
Deposits:
Interest Bearing Demand $ 11,286 $ 33,860 $214,480 $ 63,825 $ 323,451 2.93% $ 323,451
Savings 2,602 7,805 52,033 15,610 78,050 2.37% 78,050
Time Deposit of Certifi-
cates 537,600 375,646 1,311 - 914,557 4.70% 914,189
-------- -------- -------- -------- ---------- ----------
Total Deposits $551,488 $417,311 $267,824 $ 79,435 $1,316,058 $1,315,690
======== ======== ======== ======== ========== ==========
Borrowing from FHLB $ - $ 25,000 $ 25,000 $ - $ 50,000 4.83% $ 49,173
Subordinated Debt - - - 39,007 39,007 8.38% 37,007
-------- -------- -------- -------- ---------- ----------
Total Interest-sensitive
Liabilities $551,488 $442,311 $292,824 $118,442 $1,405,065 $1,401,870
======== ======== ======== ======== ========== ==========
(1) Loans and leases are net of non-accrual loans and before unamortized
deferred loan fees and allowance for credit losses
(2) The average interest rate relates to the year for the category of
asset/liability indicated as of December 31, 1999. The rate for the
subordinated debt is the stated rate of the debt outstanding as of
December 31, 1999
Expected maturities of assets are contractual maturities adjusted for
projected payment based on contractual amortization and unscheduled
prepayments of principal as well as repricing frequency. Expected maturities
for deposits are based on contractual maturities adjusted for projected
rollover rates and changes in pricing for non-maturity deposits. The Company
utilizes assumptions supported by documented analysis for the expected
maturities of its loans and repricing of its deposits and relies on third
party data providers for prepayment projections for amortizing securities. The
actual maturities of these instruments could vary significantly if future
prepayments and repricing differ from the Company's expectations based on
historical experience.
The Company uses a computer simulation analysis to attempt to predict
changes in the yields earned on assets and the rates paid on liabilities in
relation to changes in market interest rates. The net interest income
volatility and market value of equity volatility reports measure the exposure
of earnings and capital respectively, to immediate incremental changes in
market interest rates as represented by the prime rate change of 100 to 200
basis points. Market value of equity is defined as the present value of
assets, minus the present value of liabilities and off balance sheet
contracts. The table below shows the estimated impact of changes in interest
rates on net interest income and market value of equity as of December 31,
1999:
Change in
Interest Net Interest Market Value Of
Rates (Basis Income Volatility Equity Volatility
Points) December 31, 1999(1) December 31, 1999(2)
----------------------------------------------
+200 -1.6% -12.0%
+100 -1.2% -6.5%
-100 -1.0% 6.5%
-200 -3.4% 10.7%
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate enviornment 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
During 1999, the Company successfully completed all aspects of its Year 2000
preparedness program. All of the systems that were identified as critical to
the Company's operations were tested and certified.
On January 1, 2000, Bank personnel from various departments performed Year
2000 related procedures and certifications. No deficiencies were noted in any
of the critical applications and systems.
To date, no unusual system problems have been noted and there has been no
negative impact on the Bank's customers resulting from the year 2000 date
rollover.
The Company has budgeted $100,000 of expenses related to Year 2000
compliance. The actual cost from inception to date has been $73,000.
Forward-Looking Statements
Certain statements contained herein, including, without limitation,
statements containing the words "believes," "intends," "expects" and words of
similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economics and business
conditions in those areas in which the Company operates; demographic changes;
competition; fluctuations in interest rates; changes in business strategy or
development plans; changes in governmental regulation; credit quality; and
other factors referenced herein, including, without limitation, under the
captions Provision for Credit Losses, Non-Performing Assets, Allowance for
Credit Losses, Market Risk, Liquidity and Interest Rate Sensitivity, and Year
2000. Given these uncertainties, the reader is cautioned not to place undue
reliance on such foward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments (i.e., interest rate swaps), including some derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognizes
all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. In July 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement
No.133." This statement has delayed the effective date of Statement No. 133 for
one year. This new standard is effective for the first quarter in 2001 and is
not to be applied retroactively to financial statements of prior periods.
Management does not believe there will be a material adverse impact on the
financial position or results of operations of the Company upon adoption of
FASB Statement No. 133.
SELECTED FINANCIAL DATA
Year Ended December 31,
- -------------------------------------------------------------------------------------
(Dollars In Thousands,
Except Per Share Data) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
Results of Operations
Interest Income $ 130,261 $ 125,991 $ 110,896 $ 97,641 $ 85,126
Interest Expense 56,283 57,018 49,423 43,661 37,418
----------- ----------- ----------- ----------- -----------
Net Interest Income
before Provision for
Credit Losses 73,978 68,973 61,473 53,980 47,708
Provision for Credit
Losses 3,500 1,500 1,000 4,500 18,570
----------- ----------- ----------- ----------- -----------
Net Interest Income
After Provision for
Credit Losses 70,478 67,473 60,473 49,480 29,138
Non-interest Income 10,544 7,863 6,639 6,073 6,042
Non-interest Expense 32,702 30,430 26,373 27,337 26,104
----------- ----------- ----------- ----------- -----------
Income before Income
Taxes 48,320 44,906 40,739 28,216 9,076
Provision for Income
Taxes 18,332 16,764 14,305 9,179 1,427
----------- ----------- ----------- ----------- -----------
Income before
Extraordinary Item 29,988 28,142 26,434 19,037 7,649
Extraordinary Item - - (488) - -
----------- ----------- ----------- ----------- -----------
Net Income $ 29,988 $ 28,142 $ 25,946 $ 19,037 $ 7,649
=========== =========== =========== =========== ===========
Balance Sheet Data as of
December 31
Assets $1,744,200 $1,680,824 $1,509,437 $1,352,115 $1,204,506
Loans and Leases, net 902,000 763,650 617,605 582,507 451,891
Securities Available for
Sale 683,017 724,172 643,660 519,821 507,141
Securities Held to
Maturity 1,300 24,616 58,045 12,274 33,553
Deposits 1,490,811 1,380,903 1,291,832 1,201,513 1,046,200
Stockholders' Equity 133,038 163,030 146,323 116,636 99,477
Per Share Data(1)
Earnings - Basic $ 2.41 $ 2.00 $ 1.90 $ 1.42 $ 0.58
Earnings - Diluted 2.37 1.96 1.84 1.39 0.58
Cash Dividends Declared 0.33 0.30 0.24 0.18 0.16
Year End Book Value 11.55 11.89 10.46 8.62 7.45
Average Shares
Outstanding - Basic (In
000's) 12,430 14,049 13,733 13,444 13,328
Average Shares
Outstanding - Diluted
(In 000's) 12,672 14,345 14,134 13,755 13,365
Financial Ratios
Return on Average Assets 1.75% 1.76% 1.82% 1.46% 0.70%
Return on Average
Stockholders' Equity 20.48 17.59 20.03 17.93 8.13
Average Stockholders'
Equity to Average
Assets 8.57 10.01 9.11 8.13 8.57
Net Interest
Margin(2)(3) 4.46 4.46 4.54 4.36 4.59
Net Charge-offs (Net
Recoveries) to Average
Loans and Leases 0.36 (0.15) 0.07 0.96 5.10
Non-performing Assets to
Year End Loans and
Leases, net, Plus Other
Real Estate Owned,
net(4) 6.59 5.05 6.52 9.17 13.39
Allowance for Credit
Losses to Year End
Loans and Leases 2.14 2.46 2.63 2.69 3.53
Cash Dividend Payout(5) 13.45 14.97 12.75 12.73 27.90
(1) Per share data has been restated where applicable for the two for one stock
split to shareholders of record on April 30, 1998, and issued and
distributed on May 15, 1998
(2) Tax-exempt interest income is not adjusted to a fully taxable equivalent
basis
(3) Net interest income before provision for credit losses divided by average
earning assets
(4) Non-performing assets include loans 90 days past due still accruing, non-
accrual loans, restructured loans and other real estate owned, net
(5) Cash dividend payout is computed based on the dividends declared divided by
net income for the applicable year
CONSOLIDATED BALANCE SHEETS
December 31,
- ------------------------------------------------------------------------------
(In Thousands) 1999 1998
- ------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 26,120 $ 27,514
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 80,000 101,000
----------- -----------
Cash and Cash Equivalents 106,120 128,514
Securities Available for Sale at Fair Value
(Amortized Cost of $697,300 and $721,000 at
December 31, 1999 and 1998, respectively) 683,017 724,172
Securities Held to Maturity (Fair Value of $1,241 and
$24,677 at December 31, 1999 and 1998, respectively) 1,300 24,616
Trading Securities 1,114 -
Loans and Leases 925,957 788,945
Less: Allowance for Credit Losses (19,808) (19,381)
Deferred Loan Fees (4,149) (5,914)
----------- -----------
Loans and Leases, net 902,000 763,650
Bank Premises and Equipment, net 5,435 5,656
Other Real Estate Owned, net 8,170 6,885
Due From Customers on Acceptances 7,197 7,249
Real Estate Held for Investment 5,522 7,034
Other Investments 9,801 1,279
Accrued Interest Receivable and Other Assets 14,524 11,769
----------- -----------
Total Assets $1,744,200 $1,680,824
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 174,753 $ 149,397
Interest Bearing Demand 323,451 280,294
Savings 78,050 81,051
Time Certificates of Deposit of $100,000 or More 712,398 599,669
Other Time Deposits 202,159 270,492
----------- -----------
Total Deposits 1,490,811 1,380,903
Borrowings from the Federal Home Loan Bank 50,000 35,000
Subordinated Debt 39,007 38,876
Acceptances Outstanding 7,197 7,249
Liability on Securities Awaiting Settlement - 30,178
Accrued Expenses and Other Liabilities 24,147 25,588
----------- -----------
Total Liabilities 1,611,162 1,517,794
Stockholders' Equity:
Common Stock, No Par or Stated Value; 40,000,000
Shares
Authorized; 11,523,019 and 13,711,998 Shares
Outstanding at December 31, 1999 and 1998, respec-
tively $ 57,289 $ 56,303
Retained Earnings 84,035 104,898
Accumulated Other Comprehensive (Loss) Income (8,286) 1,829
----------- -----------
Total Stockholders' Equity 133,038 163,030
----------- -----------
Total Liabilities and Stockholders' Equity $1,744,200 $1,680,824
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December
31,
- ------------------------------------------------------------------------------
(In Thousands, Except Per Share Data) 1999 1998 1997
- ------------------------------------------------------------------------------
INTEREST INCOME
Loans and Leases, Including Fees $ 81,331 $ 73,886 $ 63,687
Securities Available for Sale 45,227 40,769 36,546
Securities Held to Maturity 444 4,685 2,598
Federal Funds Sold and Securities Purchased un-
der Agreements to Resell 3,255 6,644 8,060
Other 4 7 5
--------- --------- ---------
Total Interest Income 130,261 125,991 110,896
--------- --------- ---------
INTEREST EXPENSE
Interest Bearing Demand 7,658 6,901 5,248
Savings 1,809 2,236 3,031
Time Deposits of $100,000 or More 30,816 30,709 29,372
Other Time Deposits 10,094 13,433 9,197
Federal Funds Purchased and Securities Sold un-
der Repurchase Agreements 70 31 22
Borrowings from the Federal Home Loan Bank 2,355 227 -
Subordinated Debt 3,481 3,481 2,553
--------- --------- ---------
Total Interest Expense 56,283 57,018 49,423
Net Interest Income 73,978 68,973 61,473
Provision for Credit Losses 3,500 1,500 1,000
--------- --------- ---------
Net Interest Income after Provision for Credit
Losses 70,478 67,473 60,473
--------- --------- ---------
NON-INTEREST INCOME
Service Charges and Commissions 7,762 6,492 5,756
Gain on Sale of Loans, Net 149 373 224
Gain on Sale of Fixed Assets 22 - 22
Trading Account Revenue 1,525 211 -
Income from Other Investments 670 - -
Other 416 787 637
--------- --------- ---------
Total Non-Interest Income 10,544 7,863 6,639
--------- --------- ---------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 19,577 18,757 16,554
Occupancy Expense 3,204 2,960 2,810
Furniture and Equipment Expense 1,980 2,078 1,823
Loss on Sale of Securities Available for Sale 751 - -
Net Other Real Estate Owned Expense (Income) 18 (203) (812)
Other 7,172 6,838 5,998
--------- --------- ---------
Total Non-Interest Expense 32,702 30,430 26,373
--------- --------- ---------
Income before Income Taxes and Extraordinary
Item 48,320 44,906 40,739
Provision for Income Taxes 18,332 16,764 14,305
--------- --------- ---------
Net Income before Extraordinary Item 29,988 28,142 26,434
Extraordinary Item:
Early Extinguishment of Debt, Net of Taxes of
$353 - - (488)
--------- --------- ---------
Net Income $ 29,988 $ 28,142 $ 25,946
========= ========= =========
Earnings Per Share:
Net Income before extraordinary Item
Basic $ 2.41 $ 2.00 $ 1.93
Diluted 2.37 1.96 1.87
--------- --------- ---------
Extraordinary Item:
Basic $ - $ - $ (0.03)
Diluted - - (0.03)
--------- --------- ---------
Earnings Per Share:
Basic $ 2.41 $ 2.00 $ 1.90
Diluted 2.37 1.96 1.84
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
Accumulated
Other Total
(In Thousands, Except per Retained Comprehensive Comprehensive Stockholders'
Share Amounts) Shares Amount Earnings Income (Loss) Income (Loss) Equity
- ----------------------------------------------------------------------------------------------
Balance at December 31,
1996 13,532 $47,281 $ 68,716 $ 639 $116,636
Comprehensive Income 25,946
Net Income for the Year 25,946 $ 25,946
---------
Other Comprehensive
Income, Net of Tax
Net Changes in Securi-
ties Valuation Allow-
ance 1,017 1,017 1,017
Foreign Currency Trans-
lation Adjustment (2) (2) (2)
---------
Comprehensive Income $ 26,961
=========
Stock Options Exercised 458 3,192 3,192
Tax Benefit-Stock
Options Exercised 2,841 2,841
Comprehensive Income
Cash Dividend - $.24
per Share (3,307) (3,307)
------- ------- --------- --------- ---------
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 In-
come, Net of Tax
Net Changes in Securi-
ties Valuation Allow-
ance 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 Year 29,988 $ 29,988 29,988
---------
Other Comprehensive In-
come, Net of Tax
Net Changes in Securi-
ties Valuation Allow-
ance (10,115) (10,115) (10,115)
---------
Comprehensive Income $ 19,873
=========
Stock Options Exercised 73 664 664
Tax Benefit-Stock
Options Exercised 322 322
Stock Repurchase (2,262) (46,817) (46,817)
Cash Dividend - $.33 per
Share (4,034) (4,034)
------- ------- --------- --------- ---------
Balance at December 31,
1999 11,523 $57,289 $ 84,035 $ (8,286) $133,038
======= ======= ========= ========= =========
Disclosure of Reclassifi-
cation Amount:
1999 1998 1997
- -------------------------------------------------------------------------------
Net Change of Unrealized Gains (Losses) Arising
During Period, Net of Tax
Expense (Benefit) of ($7,655), $127, and $732 in
1999, 1998 and 1997, respectively $(10,550) $175 $1,017
Less: Reclassification Adjustment for Losses In-
cluded in Net Income, Net of Tax
Benefit of $316 in 1999. There were no
gains/losses in 1998 and 1997 435 - -
--------- ---- ------
Net Unrealized (Losses) Gains on Securities Net
of Tax (Benefit ) Expense of ($7,339),
$127 and $732 in 1999, 1998 and 1997, respec-
tively $(10,115) $175 $1,017
========= ==== ======
See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
- --------------------------------------------------------------------------------
(In Thousands, Except Per Share Data) 1999 1998 1997
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 29,988 $ 28,142 $ 25,946
Adjustments to Reconcile Net Income to Net
Cash Provided
by Operating Activities:
Depreciation 1,388 1,269 1,195
Net Amortization/(Accretion) of Discounts on
Securities 1,333 316 (209)
Net Unrealized Holding Gains on Trading Secu-
rities and Liabilities (1,159) - -
Accretion of Discount on Subordinated Notes 131 131 55
Writedown on Real Estate Held for Investment 1,512 1,328 1,326
Provision for Credit Losses 3,500 1,500 1,000
Provision for Losses on Other Real Estate
Owned 1,900 - 650
Amortization of Deferred Loan Fees (4,936) (3,477) (2,353)
Deferred Income Taxes (435) 4,558 3,490
Gain on Sale of Loans - (373) (224)
Loss on Sale of Securities Available for Sale 751 - -
Write-off of Securities 125 - -
Gain on Sale of Other Real Estate Owned (2,604) (744) (2,705)
Gain on Sale of Fixed Assets (22) - (22)
Loans Originated for Sale - - (40,381)
Proceeds from Sales of Loans Originated for
Sale - 373 39,968
Net Decrease/(Increase) in Accrued Interest
Receivable and Other Assets (10,859) 4,058 2,162
Net Increase/(Decrease) in Accrued Expenses
and Other Liabilities (23,904) (978) 4,686
Other, Net 1 141 -
---------- ---------- ----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVI-
TIES (3,290) 36,244 34,584
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (376,076) (457,175) (520,740)
Proceeds from Maturities of Securities Avail-
able for Sale 262,693 406,322 398,744
Purchase of Securities Held to Maturity - (50,090) (58,970)
Proceeds from Maturities of Securities Held
to Maturity 23,365 83,779 13,313
Proceeds from Sales of Securities Available
for Sale 134,826 - -
Net Increase in Loans and Leases (145,373) (144,526) (33,234)
Proceeds from Sales of Other Real Estate
Owned 8,497 4,494 7,201
Capitalized Cost of Other Real Estate Owned (621) (831) (368)
Purchases of Premises and Equipment (1,172) (1,258) (1,098)
Proceeds from Sales of Bank Premises and
Equipment 27 - 21
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (93,834) (159,285) (195,131)
---------- ---------- ----------
FINANCING ACTIVITIES:
Net (Decrease)/Increase in Demand, Interest
Bearing Demand and Savings Deposits 65,512 46,057 (27,055)
Net Increase in Time Certificates of Deposit 44,396 43,014 117,374
Borrowings from the Federal Home Loan Bank 15,000 35,000 -
Proceeds from Issuance of Subordinated Notes - - 38,690
Redemption of Subordinated Note - - (15,000)
Stock Repurchase Program (46,817) (10,386) -
Cash Dividend Paid (4,025) (4,024) (3,144)
Proceeds from Exercise of Stock Options 664 1,375 3,192
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 74,730 111,036 114,057
---------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (22,394) (12,005) (46,490)
Cash and Cash Equivalents at Beginning of
Year 128,514 140,519 187,009
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 106,120 $ 128,514 $ 140,519
========== ========== ==========
Supplemental Disclosures of Cash Flow Infor-
mation:
Cash Paid During the Year For:
Interest $ 55,716 $ 56,575 $ 48,734
Income Taxes 15,810 7,638 6,210
========== ========== ==========
Noncash Investing Activities:
Loans Transferred to Other Real Estate Owned $ 8,772 $ 2,149 $ 4,194
Loans to Facilitate the Sale of Other Real
Estate Owned 313 216 4,068
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements of GBC Bancorp (the
"Company") are prepared in conformity with generally accepted accounting
principles and general practice within the banking industry. It is the
Company's policy to consolidate all majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to 1998 in order to
conform to the current year presentation. The preparation of the consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported operations of the Company for the periods presented. Actual results
may differ from those estimates calculated by the Company. Significant balance
sheet items which could be materially affected by such estimates include loans
and leases, which are presented net of the allowance for credit losses, the
valuation for other real estate owned ("OREO") and the estimated residual
value of leased assets.
The consolidated financial statements include the accounts of GBC Bancorp
(the "Bancorp") and its wholly owned subsidiaries, GBC Venture Capital, Inc.,
General Bank, (the "Bank"), a California state chartered bank, and the Bank's
wholly owned subsidiaries, GBC Insurance Services, Inc., GBC Investment &
Consulting Company, Inc., and Southern Counties Escrow. The assets of Southern
Counties Escrow were sold to a third party and the business dissolved in 1999.
The Bank also holds 90% of the voting stock of GBC Leasing Company, Inc.,
which amount is not material.
The Bank, the Company's 100% owned bank subsidiary, conducts the business of
a commercial bank serving individuals and small to medium-sized businesses
through seventeen branch offices located in the greater Los Angeles, San Diego
and Silicon Valley area, and two loan production offices located in the States
of Washington and New York. The Bank's deposit gathering and loan production
operations are concentrated in California, particularly in Southern
California.
Securities Purchased Under Agreements to Resell: The Company invests in
securities purchased under agreements to resell ("repurchase agreement") to
maximize the yield on liquid assets. The Company obtains collateral for these
agreements, which normally consists of single family residential mortgage
loans with an agreement to sell back the same collateral. The collateral is
normally held in custody of a trustee who is not a party to the transaction.
The purchase is overcollateralized to ensure against unfavorable market price
movements. The duration of these agreements is one business day with a roll-
over under continuing contract. The counterparties to these agreements are
nationally recognized investment banking firms that meet credit eligibility
criteria and with whom a master repurchase agreement has been duly executed.
Securities: The Company classifies its investment in debt and equity
securities as held to maturity securities, trading securities and available
for sale securities, as applicable. Securities held to maturity are designated
as such when the Company has the positive intent and ability to hold the
securities until maturity. Securities held to maturity are carried at cost,
adjusted for amortization of premiums and accretion of discounts into interest
income using a methodology which approximates a level yield. When a decline in
value has occurred and is deemed to be other than temporary, such decline is
charged to income. Securities available for sale are carried at fair value.
Premiums and discounts on securities available for sale are amortized/accreted
into interest income using a methodology which approximates a level yield. The
resulting unrealized gains or losses are recorded net of tax as part of other
comprehensive income. Equity securities received by GBC Venture Capital Inc.,
from venture capital funds in which it invests and from the exercise of
warrants are classified as trading securities. They are held principally for
the purpose of selling them in the near term and are reported at fair value,
with unrealized gains /losses included in earnings. The specific
identification method is used to compute realized gains or losses on
securities' transactions.
Loans and Related Allowance for Credit Losses: Loans are recorded in the
consolidated balance sheets at principal amounts outstanding. Interest on
loans is accrued daily as earned. It is generally the Company's policy to
place a loan on non-accrual status in the event that the borrower is 90 days
or more delinquent or earlier if the timely collection of interest and/or
principal appears doubtful. When loans are placed on non-accrual status, the
accrual of income is discontinued and previously accrued but unpaid interest
is generally reversed against income. The amortization of any deferred loan
fees is stopped. Subsequent payments are generally applied to principal or
reported as recoveries on amounts previously charged-off. A loan is returned
to accrual
status only when the borrower has demonstrated the ability to make future
payments of principal and interest as scheduled, and the borrower has
demonstrated a sustained period of repayment performance in accordance with
the contractual terms.
The Company provides for credit losses by a charge to operations based upon
the composition of the loan and lease portfolio, past loss experience, current
economic conditions, evaluations made by regulatory authorities, and such
other factors that, in management's judgment, deserve recognition in
estimating probable credit losses. The allowance for credit losses is based on
estimates, and ultimate losses may vary from current estimates. These
estimates are reviewed periodically and, as adjustments become necessary, they
are reported in earnings in the period in which they become known.
Additionally, regulatory examiners may require the institution to recognize
additions to the allowance for credit losses based upon their judgments
regarding information available to them at the time of their examination.
Charge-offs of loans are debited to the allowance for credit losses.
Recoveries on loans previously charged off are credited to the allowance for
credit losses.
A loan is considered impaired when it is probable that the Company will be
unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The Company reviews
all non-homogenous loans for impairment. Homogenous pools that the Company
does not review for impairment include SBA loans and mortgage loans secured by
single-family real estate. The measurement of impairment may be based on
(i) the present value of the expected future cash flows of the impaired loan
discounted at the loan's original effective interest rate, (ii) the observable
market price of the impaired loan, or (iii) the fair value of the collateral
of a collateral-dependent loan. The amount by which the recorded investment of
the loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to the provision for credit
losses. Income recognition on impaired loans is similar to that for non-
accrual loans but can include the accrual of interest. The accrual of interest
is normally followed for those impaired loans which have been restructured
with the borrower servicing the debt pursuant to the contractual terms of the
restructuring. While a loan is on non-accrual status, some or all of the cash
interest payments received may be treated as interest income on a cash basis
as long as the remaining book balance of the loan (i.e., after charge-off of
identified losses, if any) is deemed to be fully collectible. The Bank's
determination as to the ultimate collectibility of the loan's remaining book
balance is supported by a current, well documented credit evaluation of the
borrower's financial condition and prospects for repayment, including
consideration of the borrower's historical repayment performance and other
relevant factors.
Loan Origination Fees: Loan origination fees and commitment fees, offset by
certain direct loan origination costs, are deferred and recognized in income
over the contractual life of the loan as an adjustment of yield.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation or amortization. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives or lease
terms of assets, whichever is shorter. The lease term is defined as the
original lease term plus option periods with a maximum of 15 years unless
there is a reason to believe that the premises will be vacated prior to the
end of the lease term.
Other Real Estate Owned: Other real estate owned ("OREO") is comprised of
real estate acquired primarily through foreclosure proceedings. These assets
are carried at fair value minus selling costs of the related real estate. The
fair value of the real estate is based upon an appraisal adjusted for
estimated carrying and selling costs. The excess carrying value, if any, over
the fair value of the asset upon foreclosure is charged to the allowance for
credit losses at the time of acquisition. Any subsequent decline in the fair
value of OREO is recognized as a charge to operations and a corresponding
increase to the valuation allowance on OREO. Gains and losses from sales and
net operating expenses of OREO are included in net other real estate owned
expense (income) in the accompanying consolidated statements of income.
Real Estate Held for Investment: The Bank is a limited partner in three
different partnerships that invest in low income housing projects that qualify
for federal income tax credits. As further discussed in note 8 of the notes to
consolidated financial statements, the partnership interests are accounted for
based on the percentage ownership and control exerted by the Company on the
partnerships. The three partnership investments are accounted for as follows:
the cost method, a method which approximates the equity method, and a method
resulting in approximately the same treatment as if the investment had been
consolidated.
Other Investments: This asset category includes the partnership interests
owned by GBC Venture Capital and a partnership interest in an aircraft finance
trust owned by the Bank. The partnership interests are carried under the
equity method.
Foreign Currency Translation: Assets and liabilities of the foreign office
are translated to U. S. dollars at current exchange rates. Income and expense
amounts are translated based on the average current exchange rates in effect
during the month in which the transactions are recorded. These translation
adjustments are included in accumulated other comprehensive income of the
accompanying consolidated balance sheets.
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. In addition, earnings per share for 1997 have
been restated to reflect the two for one stock split to shareholders of record
on April 30, 1998 and issued and distributed on May 15, 1998.
Income Taxes: The Company files a consolidated federal income tax return
with its subsidiaries, a combined California franchise tax return and New York
State and City tax returns.
The Company records income taxes under the asset and liability method.
Income tax expense is derived by establishing deferred tax assets and
liabilities as of the reporting date for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company's evaluation of the realizability of deferred tax assets includes
consideration of the amount and timing of future reversals of existing
temporary differences, as well as available taxable income in carryback years
and projections of future income. Tax benefits associated with the exercise of
non-qualified stock options are credited to stockholders' equity.
Stock Option Plans: On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion No.
25, Accounting for Stock Issued to Employees, and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Statement of Cash Flows: Cash and cash equivalents consist of cash and due
from banks, federal funds sold and securities purchased under agreements to
resell.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments (i.e., interest rate swaps), including some derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. In July 1999, the FASB issued
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 an
amendment of FASB Statement No.133." This statement has delayed the effective
date of Statement No. 133 - for one year. This new standard is effective for
the first quarter in 2001 and is not to be applied retroactively to financial
statements of prior periods. Management does not believe there will be a
material impact on the financial position or results of operations of the
Company upon adoption of FASB Statement No. 133.
NOTE 2 - CASH AND DUE FROM BANKS
The Company is required to maintain cash on hand and on deposit to meet
reserve requirements established by the Federal Reserve Bank. Average reserve
requirements were $0.4 million during 1999 and 1998.
NOTE 3 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by single
family residential loans as of December 31, 1999 and 1998. The following table
indicates relevant information:
(Dollars in Thousands) 1999 1998
- ----------------------------------------------------------------------
Amount Outstanding as of December 31 $ 80,000 $ 90,000
Maximum Month End Amount Outstanding $110,000 $140,000
Average Outstanding $ 47,773 $101,200
Weighted Average Rate of Interest 5.17% 5.67%
Weighted Average Rate of Interest as of December 31 4.84% 5.60%
NOTE 4 - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value of securities as of December 31, 1999 and 1998 were as follows:
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- -------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government Agencies $ 1,294 $ - $ (59) $ 1,235
Collateralized Mortgage Obligations 6 - - 6
-------- ------ --------- --------
Total $ 1,300 $ - $ (59) $ 1,241
======== ====== ========= ========
Securities Available for Sale:
U.S. Government Agencies $ 21,591 $ - $ (217) $ 21,374
Mortgage Backed Securities 176,217 - (5,446) 170,771
Commercial Mortgage Backed Securities 30,585 - (307) 30,278
Corporate Notes 59,319 - (748) 58,571
Collateralized Mortgage Obligations 163,323 - (4,412) 158,911
Asset Backed Securities 240,155 - (3,153) 237,002
Other Securities 6,110 - - 6,110
-------- ------ --------- --------
Total $697,300 $ - $(14,283) $683,017
======== ====== ========= ========
Trading Account Securities
Equity Issues $ - $ - $ - $ 1,114
-------- ------ --------- --------
Total $ - $ - $ - $ 1,114
======== ====== ========= ========
Gross Gross
(In Thousands) Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- -------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government Agencies $ 24,594 $ 61 $ - $ 24,655
Collateralized Mortgage Obligations 22 - - 22
-------- ------ --------- --------
Total $ 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 Paper 39,860 - - 39,860
Other Securities 8,289 - - 8,289
-------- ------ --------- --------
Total $721,000 $3,173 $ (1) $724,172
======== ====== ========= ========
The majority of the securities are actively traded in the secondary markets.
All of the securities are rated A or better by at least one major rating
service at the time of purchase.
As of December 31, 1999, the yield on the collateralized mortgage
obligations held to maturity and available for sale was 6.49% and 6.47%,
respectively. As of December 31, 1998, the yield on collateralized mortgage
obligations held to maturity and available for sale was 6.75% and 6.38%,
respectively.
As of December 31, 1999, trading account securities consisted of marketable
equity securities with a fair value of $1.1 million. As of December 31, 1999,
trading liabilities consisted of forward sale transactions of marketable
equity securities with a fair value of $0.8 million. There were no trading
account securities or liabilities as of December 31, 1998.
The net gains on trading securities and liabilities included in trading
account revenue are as follows:
Year Ended
December 31,
-------------------------------------------------------
(In Thousands) 1999 1998 1997
-------------------------------------------------------
Marketable Equity Securities $366 $107 $ -
Forward Sales-Marketable Equity Securities 62 - -
---- ---- ---
Total $428 $107 $ -
==== ==== ===
The amortized cost and fair value of securities as of December 31, 1999, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities Held Securities Available
to Maturity for Sale
---------------------------------------------------------------------------
Fair
(In Thousands) Amortized Cost Fair Value Amortized Cost Value
---------------------------------------------------------------------------
Due in One Year or Less $ - $ - $ 6,740 $ 6,738
Due After One Year
Through Five Years 1,294 1,235 83,135 82,136
Due After Five Years
Through Ten Years 6 6 36,737 36,189
Due After Ten Years - - 570,688 557,954
------ ------ -------- --------
Total $1,300 $1,241 $697,300 $683,017
====== ====== ======== ========
The following table summarizes the aggregate fair value of securities of any
one issuer which exceeds ten percent of stockholders' equity as of December
31, 1999. Securities issued by the U.S. government are not included:
(In Thousands)
- ---------------------------------------------------------
Fair
Issuer Book Value Value
- ---------------------------------------------------------
American Business Financial Services $ 25,040 $ 24,660
Capco America Securitization Corp. 13,528 13,303
Champion Mortgage 14,756 14,611
Conti Mortgage Corp. 19,068 18,722
Finova Capital Corp. 14,869 14,682
Industry Mortgage Co. 16,542 16,300
Lehman Brothers Inc. 15,095 14,909
Norwest Capital 15,055 14,650
Provident Bank 32,296 31,686
United Companies Financial 24,164 23,899
-------- --------
Total $190,413 $187,422
======== ========
The above include corporate notes, asset backed securities, mortgage backed
securities and collateralized mortgage obligations. The rating criteria for
corporate notes is single A; all other issuers are triple A rated.
As of December 31, 1999 and 1998, securities from the available for sale
portfolio were pledged for the purposes indicated as follows:
December 31,
- ---------------------------------------------------------
(In Millions) 1999 1998
- ---------------------------------------------------------
Borrowings from Federal Reserve Bank $ 82.1 $ 18.8
Public Time Deposits 112.5 117.0
Borrowings from the Federal Home Loan Bank 101.3 58.6
Other Purposes 10.2 11.6
------ ------
Total $306.1 $206.0
====== ======
NOTE 5 - LOANS AND LEASES AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Company's loan portfolio and leveraged leases as of
December 31, 1999 and 1998, was as follows:
(In Thousands) 1999 1998
- ------------------------------------------------------
Commercial $398,379 $309,198
Real Estate-Construction 195,133 177,737
Real Estate-Conventional 295,614 263,869
Installment 11 37
Other Loans 20,238 22,302
Leveraged Leases 16,582 15,802
--------- ---------
Total $925,957 $788,945
Less: Allowance for Credit Losses (19,808) (19,381)
Deferred Loan Fees (4,149) (5,914)
--------- ---------
Loan and Leases, Net $902,000 $763,650
========= =========
Construction loans are collateralized primarily by single family residences,
condominiums, townhouses and multi-family buildings. Real estate loans are
collateralized primarily by single family residences, condominiums, apartment
complexes, industrial buildings, motels and hotels.
In the ordinary course of business, the Bank has granted loans to certain
directors and the companies with which they are associated. In the opinion of
management, the loans were made on substantially the same terms, including
interest rates and collateral requirements, as those prevailing at the time of
origination for comparable transactions with other customers and did not
involve more than the normal risk of collectibility or present other
unfavorable features. The following provides information regarding the
aggregate indebtedness of related parties:
December 31,
- --------------------------------------------------------
(In Thousands) 1999 1998 1997
- --------------------------------------------------------
Balance at Beginning of Year $ 1,888 $ 4,159 $ 5,475
New Loans and Advances 3,562 2,420 4,114
Repayments (2,737) (4,691) (5,430)
-------- -------- --------
Balance at End of Year $ 2,713 $ 1,888 $ 4,159
======== ======== ========
In December 1997, the Company purchased a leveraged lease on a Boeing 737
with a fair value of $24.0 million and a remaining estimated economic life of
28 years. The lease term ends in March, 2016, however, the lessee has an early
buy out option in the year 2011. The Company's equity investment is $6.3
million. As of December 31, 1999, the aircraft is subject to $16.7 million of
third-party financing in the form of long-term debt that provides for no
recourse against the Company and is secured by a first lien on the aircraft.
The residual value at the end of the full-term lease is estimated to be $5.5
million.
In December 1996, the Company purchased a leveraged lease on a Boeing 737
with a fair value of $24.2 million and a remaining estimated economic life of
30 years. The lease term is through the year 2012. The Company's equity
investment is $5.2 million. As of December 31, 1999, the aircraft is subject
to $16.3 million of third-party financing in the form of long-term debt that
provides for no recourse against the Company and is secured by a first lien on
the aircraft. The residual value at the end of the lease term is estimated to
be $7.6 million.
For federal income tax purposes, the Company has the benefit of tax
deductions for depreciation on the entire leased asset and for interest paid
on the long-term debt. Deferred taxes are provided to reflect the temporary
differences associated with the leveraged leases.
The Company's net investment in leveraged leases is composed of the
following elements:
December 31,
- -----------------------------------------------------------------------------
(In Thousands) 1999 1998
- -----------------------------------------------------------------------------
Rentals Receivable (Net of Principal and Interest on the
Nonrecourse Debt) $ 10,964 $ 10,964
Direct Cost 1,090 1,166
Estimated Residual Value of Leased Assets 13,868 13,869
Less: Unearned and Deferred Income (9,340) (10,197)
--------- ---------
Investment in Leveraged Leases 16,582 15,802
Less: Deferred Taxes Arising from Leveraged Leases (13,037) (9,892)
--------- ---------
Net Investment in Leveraged Leases $ 3,545 $ 5,910
========= =========
During 1999, pre-tax interest income recognized for leveraged leases was
$930,000, all of which related to the two aircraft leases. Pre-tax income
recognized for leveraged leases during 1998 and 1997 was $1,411,000, and
$1,010,000, respectively.
A summary of activity in the allowance for credit losses is as follows:
(In Thousands) 1999 1998 1997
- --------------------------------------------------------
Balance at Beginning of Year $19,381 $16,776 $16,209
Provision for Credit Losses 3,500 1,500 1,000
Charge-offs (6,337) (2,287) (4,698)
Recoveries 3,264 3,392 4,265
-------- -------- --------
Balance at End of Year $19,808 $19,381 $16,776
======== ======== ========
The following table provides information with respect to the Company's past
due loans, non-accrual loans and restructured loans as of the dates indicated:
December 31,
- ---------------------------------------------------------------------------
(In Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
Loans 90 Days or More Past Due and Still Accruing $ - $ 780 $ 2,778
Non-accrual Loans 44,521 20,790 9,834
Restructured Loans 7,249 10,440 20,323
------- ------- -------
Total Past Due, Non-accrual and Restructured Loans $51,770 $32,010 $32,935
======= ======= =======
The effect of non-accrual loans outstanding as of year-end on interest
income for the years 1999, 1998 and 1997 is presented below:
1999 1998 1997
- ---------------------------------------------------
Contractual Interest Due $4,546 $ 2,192 $ 1,954
Interest Recognized (972) (1,540) (1,041)
------- -------- --------
Net interest Foregone $3,574 $ 652 $ 913
======= ======== ========
Contractual interest due is based on original loan amounts. Any partial
charge-offs are not considered in the determination of contractual interest
due.
The effect of restructured loans outstanding as of year-end on interest
income for the years ended December 31, 1999, 1998 and 1997 is presented
below:
(In Thousands) 1999 1998 1997
- --------------------------------------------------
Contractual Interest Due $ 993 $ 1,491 $ 2,242
Interest Recognized (764) (1,150) (1,853)
------ -------- --------
Net interest Foregone $ 229 $ 341 $ 389
====== ======== ========
There were no commitments to lend additional funds to borrowers associated
with restructured loans, as of December 31, 1999.
The following table discloses pertinent information as it relates to the
Company's impaired loans as of and for the years indicated:
As of and for the Year
Ended December 31,
- -------------------------------------------------------------------------------
(In Thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Recorded Investment with Related Allowance $42,881 $20,746 $16,095
Recorded Investment with no Related Allowance 4,003 1,519 1,022
-------- -------- --------
Total Recorded Investment $46,884 $22,265 $17,117
Allowance on Impaired Loans $(5,806) (3,250) (1,544)
-------- -------- --------
Net Recorded Investment in Impaired Loans $41,078 $19,015 $15,573
======== ======== ========
Average Total Recorded Investment in Impaired Loans $46,479 $13,467 $22,370
Interest Income Recognized $ 538 $ 478 $ 1,508
Of the amount of interest income recognized in 1999, 1998 and 1997, no
interest was recognized under the cash basis method.
As of December 31, 1999 and 1998, there were no loans held for sale.
As of December 31, 1999 and 1998, the Bank was servicing approximately $2.0
million and $2.2 million, respectively, on behalf of third party investors.
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
December 31,
- ------------------------------------------------------------------
(In Thousands) 1999 1998
- ------------------------------------------------------------------
Land $ 1,246 $ 1,246
Bank Premises 1,504 1,504
Leasehold Improvements 2,498 2,502
Furniture, Fixtures and Equipment 8,916 8,165
-------- --------
14,164 13,417
Less: Accumulated Depreciation and Amortization (8,729) (7,761)
-------- --------
Total $ 5,435 $ 5,656
======== ========
The range of estimated depreciable lives is twenty-five years for bank
premises, five to fifteen years for leasehold improvements and three to five
years for furniture, fixtures and equipment.
The Company conducts a portion of its operations in leased facilities under
non-cancelable operating leases expiring at various dates through 2009. The
following summarizes the Company's future minimum lease commitments as of
December 31, 1999:
Year (In Thousands)
- --------------------------
2000 $ 2,246
2001 2,096
2002 1,940
2003 2,137
2004 2,005
Thereafter 6,028
-------
Total $16,452
=======
Net rental expense included in occupancy expense was approximately
$2,409,000, $2,287,000 and $2,170,000, for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 7 - OTHER REAL ESTATE OWNED
As of December 31, 1999, other real estate owned ("OREO") consisted of 12
properties with a net carrying value of $8.2 million. As of December 31, 1998
OREO consisted of 22 properties with a net carrying value of $6.9 million. One
property, a manufacturing (retail) facility in northern California, has a net
carrying value of $6.4 million, constituting 78.0% of the Company's net OREO
balance, as of December 31, 1999. The following table sets forth OREO by type
of property as of December 31, 1999 and 1998:
December 31,
- --------------------------------------------------
(In Thousands) 1999 1998
- --------------------------------------------------
Property Type
Single-Family Residential $ 395 $ 752
Condominium - 485
Land 1,099 3,621
Retail Facilities 1,141 4,027
Industrial Facilities/ Building 8,550 -
Less: Valuation Allowance (3,015) (2,000)
-------- --------
Total $ 8,170 $ 6,885
======== ========
A summary of activity in the valuation allowance is as follows for the years
indicated:
(In Thousands) 1999 1998 1997
- ------------------------------------------------------------
Balance at Beginning of Year $2,000 $2,060 $1,823
Provision Charged to Operations 1,900 - 650
Other Real Estate Owned Charged Off (885) (60) (413)
------- ------- -------
Balance at End of Year $3,015 $2,000 $2,060
======= ======= =======
For the years ended December 31, 1999, 1998 and 1997, net other real estate
owned expense (income) was comprised of the following:
(In Thousands) 1999 1998 1997
- -------------------------------------------------------------------------
Net Gain on Sale of Other Real Estate Owned $(2,604) $(744) $(2,705)
Provision for Losses on Other Real Estate Owned 1,900 - 650
Net Operating Expenses 722 541 1,243
-------- ------ --------
Net Other Real Estate Owned Expense (Income) $ 18 $(203) $ (812)
======== ====== ========
NOTE 8 - REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment ("REI") at December 31, 1999 and 1998 was
comprised of investments in low income housing projects.
As of December 31, 1999 and 1998, the Company had three investments with a
net investment of $5.5 million and $7.0 million, respectively, in limited
partnerships formed for the purpose of investing in real estate projects. Such
projects qualify for low income housing tax credits. The limited partnerships
will generate tax credits over a weighted average remaining period of
approximately 2 1/2 years. Please refer to note 11 of the notes to
consolidated financial statements for income tax effects. The following table
identifies the pertinent details of the three projects as of December 31, 1999
and 1998:
(Dollars In Thousands) December 31,
------------------------------------------------
Project 1999 1998
Name % Ownership Date Acquired Amount Amount
------------------------------------------------
Liberty 7.1% Mar-90 $2,805 $4,022
Greenview 99.0% Sep-92 2,381 2,591
Las Brisas 49.5% Dec-93 336 421
------ ------
Total $5,522 $7,034
====== ======
The method of accounting for the Greenview investment approximates the
results if the investment were consolidated. A $1.4 million first deed of
trust on the Greenview property is included in accrued expenses and other
liabilities on the Company's consolidated balance sheet. The cost method is
used for the investment in Liberty with the investment being amortized over
the remaining period that tax credits will be received. A method approximating
the equity method is used for the Las Brisas investment.
Expenses incurred for REI, consisting primarily of the amortization of the
investment balances, and included in other expense, were $1,512,000,
$1,329,000, and $1,329,000, for the years ended 1999, 1998 and 1997,
respectively.
NOTE 9 - DEPOSITS
The Bank obtains deposits primarily through a network of seventeen full
service branches located in the state of California, primarily, southern
California. Deposits obtained by the Bank are insured by the Bank Insurance
Fund of the Federal Deposit Insurance Corporation up to a maximum of $100,000
for each depositor.
The following table sets forth the average amount of and the average rate
paid on each of the following deposit categories for the years ending December
31, 1999 and 1998:
1999 1998
- --------------------------------------------------------------------------------
Weighted
Average Average Average Weighted
(Dollars In Thousands) Amount Ratio Rate Amount Ratio Average
- --------------------------------------------------------------------------------
Deposits:
Noninterest-Bearing De-
mand Deposits $ 164,620 11.41% -% $ 148,436 10.89% -%
Interest-Bearing Demand
Deposits 299,588 20.77 2.56 262,281 19.23 2.63
Saving Deposits 82,356 5.71 2.20 86,776 6.36 2.58
Time Deposits 895,875 62.11 4.57 866,229 63.52 5.10
---------- ------- ------ ---------- ------- ------
Total Deposits $1,442,439 100.00% 3.94% $1,363,722 100.00% 4.38%
========== ======= ====== ========== ======= ======
As of December 31 1999, and 1998, there were no brokered deposits
outstanding. During 1999 and 1998, the Bank accepted deposits from the State
of California. As of December 31, 1999, these deposits totaled $100.0 million.
The Company has pledged securities in excess of the required amount of 110
percent of this deposit amounting to $112.5 million, as of December 31, 1999.
The securities pledged are collateralized mortgage obligations. The Company
believes that the majority of its deposit customers have strong ties to the
Bank. Although the Company has a significant amount of time certificates of
deposit of $100,000 or more having maturities of one year or less, the
depositors have generally renewed their deposits in the past at their
maturity. Accordingly, the Company believes its deposit source to be stable.
Deposits outstanding as of December 31, 1999, mature as follows:
(In Thousands) Amount
- ------------------------------------
Immediately Withdrawable $ 576,254
Year Ending December 31:
2000 913,246
2001 1,196
2002 15
2003 0
2004 100
----------
Total $1,490,811
==========
NOTE 10 - OTHER BORROWINGS
As of December 31, 1999, the Bank had obtained four advances from the
Federal Home Loan Bank of San Francisco (the "FHLB") totaling $50.0 million.
The following relates to these advances:
Fixed Rate
of
Maturity Amount Interest
- ------------------------------------------
(Dollars in Thousands)
- ------------------------------------------
Nov.1, 2000 $25,000 4.53%
Jan.31, 2001 10,000 5.19%
Apr.30, 2001 10,000 4.92%
July 15, 2002 5,000 5.61%
On July 30, 1997, the Company issued, through a public offering, $40 million
of 8.375% subordinated notes due August 1, 2007. Proceeds of $38.7 million,
net of underwriting discount of $1.3 million, was received by the Company. The
discount is amortized over the 10 year life of the subordinated notes. The
notes are not redeemable prior to August 1, 2002. Thereafter, the notes are
redeemable, in whole or in part, at the option of the Company at decreasing
redemption prices plus accrued interest to the date of redemption. The notes
have no sinking fund. The indenture (the "Indenture") under which the notes
are issued does not limit the ability of the Company or its subsidiaries to
incur additional indebtedness. The Indenture provides that the Company cannot
pay cash dividends or make any other
distribution on, or purchase, redeem or acquire its capital stock, except that
the Company may (1) declare and pay a dividend in capital stock of the Company
and (2) declare and pay dividends, purchase, redeem or otherwise acquire for
value its capital stock or make other distributions in cash or property other
than capital stock of the Company if the amount of such dividend, purchase or
distribution, together with the amount of all previous such dividends,
purchases, redemptions and distributions of capital stock after December 31,
1996, would not exceed in the aggregate the sum of (a) $38 million, plus (b)
100% of the Company's consolidated net income (or minus 100% of the Company's
consolidated net loss, as the case may be), based upon audited consolidated
financial statements, plus (c) 100% of the net proceeds received by the
Company on account of any capital stock issued by the Company (other than to a
subsidiary of the Company) after December 31, 1996. As of December 31, 1999,
in the opinion of management, the Company was in compliance with all the
terms, conditions and provisions of the Indenture.
NOTE 11 - INCOME TAXES
Income taxes (benefit) expense in the accompanying consolidated statements
of income is comprised of the following:
Year Ended December 31,
- ------------------------------------------------------------------------------
(In Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Current Taxes:
Federal $13,681 $ 7,609 $ 5,316
State 4,764 2,983 2,658
-------- ------- --------
Total 18,445 10,592 7,974
Deferred Taxes:
Federal 143 3,422 2,895
State (578) 1,136 595
-------- ------- --------
Total (435) 4,558 3,490
Taxes Credited to Stockholders' Equity for Exercise
of Stock Options 322 1,614 2,841
-------- ------- --------
Total Provision for Income Taxes per Consolidated
Statements of Income 18,332 16,764 14,305
Tax Benefit on Extraordinary Item - - (353)
-------- ------- --------
Total $18,332 $16,764 $13,952
======== ======= ========
Deferred Taxes (Credited)/Charged to Shareholders'
Equity Related to Available for Sale Securities $(7,339) $ 127 $ 732
======== ======= ========
Tabulated below are the significant components of the net deferred tax asset
(liability) as of December 31, 1999 and December 31, 1998:
Year Ended
December 31,
- --------------------------------------------------------------
(In Thousands) 1999 1998
- --------------------------------------------------------------
Components of the Deferred Tax Asset:
Provision for Credit Losses $ 8,584 $ 8,709
California Franchise Taxes 2,110 1,661
Loan Fee Income - 174
Allowance for Other Real Estate Owned 1,382 917
Unrealized Net Loss on Securities 6,005 -
Other 1,530 464
--------- ---------
Deferred Tax Asset 19,611 11,925
========= =========
Components of the Deferred Tax Liability:
Leveraged Leases (13,037) (9,892)
Low Income Housing (3,957) (4,414)
Unrealized Net Gain on Securities - (1,334)
Discount Accretion (356) (1,798)
--------- ---------
Deferred Tax Liability (17,350) (17,438)
========= =========
Net Deferred Tax Asset (Liability) $ 2,261 $ (5,513)
========= =========
The Company believes that all deferred tax assets will ultimately be
realized. In evaluating the reliability of its deferred tax assets, management
has considered income from future operations, the turnaround of deferred tax
liabilities and current and prior years' taxes paid.
A reconciliation of the statutory federal corporate income tax rate to the
effective income tax rate on consolidated income before income tax expense
follows:
Percent of Pre-tax Earnings
Year Ended December 31,
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Statutory Federal Corporate Income Tax Rate 35.0% 35.0% 35.0%
State Tax, Net of Federal Income Tax Effect 7.0% 6.6% 6.3%
Increase (Decrease) Resulting from:
Non-taxable Interest Income on Municipal Securi-
ties and Dividend Exclusion on Auction Preferred
Stocks 0.0% -0.1% -1.0%
Low Income Housing Tax Credit -4.1% -4.6% -4.7%
Other, Net 0.0% 0.4% -0.5%
-------- -------- ---------
37.9% 37.3% 35.1%
======== ======== =========
The Company had a current income tax payable of $5,465,000 and $2,830,000 as
of December 31, 1999 and 1998.
NOTE 12 - EARNINGS PER SHARE
The following is the reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the years as
indicated:
For the Year Ended 1999 For the Year Ended 1998 For the Year Ended 1997
- -----------------------------------------------------------------------------------------------------------------
Per- Per- Per-
Income Share Income Share Income Share
(Dollars in Thousands) (Numerator) Shares Amount (Numerator) Shares Amount (Numerator) Shares Amount
- -----------------------------------------------------------------------------------------------------------------
Income before
Extraordinary Item $29,988 $28,142 $26,434
------- ------- -------
Basic EPS
Income Available to
Common Stockholders $29,988 12,430,000 $2.41 $28,142 14,049,000 $2.00 $26,434 13,733,000 $1.93
------- ---------- ------ ------- ---------- ------ ------- ---------- ------
Effect of Dilutive
Securities
Options - Common Stock
Equivalent 242,000 (0.04) 296,000 (0.04) 401,000 (0.06)
---------- ------ ---------- ------ ---------- ------
Diluted EPS
Income Available to
Common Stockholders
plus Assumed
Conversions $29,988 12,672,000 $2.37 $28,142 14,345,000 $1.96 $26,434 14,134,000 $1.87
======= ========== ====== ======= ========== ====== ======= ========== ======
NOTE 13 - PENDING LITIGATION
Legal Action
In the normal course of business, the Company is subject to pending and
threatened legal actions. After reviewing pending actions with counsel,
management considers that the outcome of such actions will not have a material
adverse effect on the financial condition or the results of operations of the
Company.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company adopted the 1999 Employee Stock Incentive Plan (the "Plan") as
of April 22, 1999.
The purpose of this plan is to enable the Company and its subsidiaries to
attract, retain and motivate their employees, non-employee directors and
consultants by providing for or increasing the proprietary interests of such
employees, non-employee directors and consultants in the Company and, thereby,
further align their interests with those of the shareholders of the Company.
On January 26, 2000, the Company filed a Registration Statement on Form S-8
with the Securities and Exchange Commission (the "Commission") to register
2,484,120 shares (the "Shares") of the Registrant's Common Stock for issuance
pursuant to the Registrant's 1999 Employee Stock Incentive Plan (the "Plan"),
and such indeterminate number of shares as may become available under the Plan
as a result of the adjustment provisions thereof. The Shares include
(i) 1,000,000 shares, including any shares issuable pursuant to that certain
Employment Agreement dated as of January 1, 1998, between the Registrant and
Li-Pei Wu, as amended, (ii) 343,020 shares currently available for future
awards under the Registrant's Amended and Restated 1988 Stock Option Plan (the
"Prior Plan") and (iii) up to 1,141,100 shares subject to awards currently
outstanding under the Prior Plan and which subsequently may be forfeited,
canceled, or expire without delivery of shares.
As of December 31, 1999, there were options outstanding that included three
different vestings as described below:
a) Options become vested over a four year period and include five vestings.
If an option expires without having been exercised, usually two years from
date of vesting, the unexercised shares are again available for future
grants.
b) Options become vested on the one year anniversary date of the grant and
are exerciseable over a ten year period from date of grant. Options with
this vesting schedule are granted to non-employee directors.
c) Options become vested over a four year period and include five vestings.
All options expire on the sixth anniversary from date of grant.
As of December 31, 1999, authorized stock option shares were 3,640,000. The
balance of authorized stock options includes 1,000,000 shares under the 1999
Employee Stock Incentive Plan for which the above referenced registration
statement was filed. As of December 31, 1999, options available for future
grant were 1,299,620.
A summary of stock option activity and related option prices for 1999, 1998
and 1997 follows:
Range of or
Number Weighted Average Option Price
of Shares Option Price Per Share
---------- ---------------- ---------------
Balance at December 31, 1996 1,251,760 $ 6.88 $6.59 - $10.03
- -------------------------------------------------------------------------
Granted 100,500 $14.55 $14.25 - $15.75
Exercised (457,160) $ 6.99 $ 6.59 - $14.25
Forfeited (28,700) $ 9.79 $ 6.75 - $14.25
Expired (2,000) $ 7.39 $ 6.75 - $ 7.88
Balance at December 31, 1997 864,400 $ 7.62 $ 6.59 - $15.75
- ---------------------------- ---------- ------ ---------------
Granted 478,000 $29.49 $27.13 - $31.75
Exercised (187,200) $ 7.31 $ 6.59 - $15.75
Forfeited (16,400) $21.39 $ 6.75 - $29.25
Expired (400) $27.13 $27.13
Balance at December 31, 1998 1,138,400 $16.65 $ 6.59 - $31.75
- ---------------------------- ---------- ------ ---------------
Granted 164,500 $23.63 $23.00 - $25.88
Exercised (73,300) $ 9.06 $ 6.75 - $15.75
Forfeited (23,800) $24.66 $ 8.69 - $29.25
Expired (7,200) $28.54 $27.13 - $29.25
Balance at December 31, 1999 1,198,600 $17.85 $ 6.59 - $31.75
============================ ========== ====== ===============
The following table indicates relevant information for all stock options
outstanding, as of December 31, 1999:
Weighted Average
Exercise Remaining Contractual
Shares Price Life (in Years)
--------- -------- ---------------------
476,000 $ 6.59 2.0
2,400 7.88 0.1
21,400 6.75 0.8
41,800 8.69 1.5
44,300 14.25 1.9
8,000 15.75 1.8
204,400 27.13 2.0
4,000 29.25 2.1
240,000 31.75 8.4
36,000 25.88 9.0
120,300 23.00 5.1
--------- ----------
Total 1,198,600 3.73 Years
========= ==========
For purposes of the above table, contractual life is defined as the time
from balance sheet date to the expiration date of the option contract and may
include a period of time during which the option is not vested.
The following table indicates relevant information for all exercisable stock
options, as of December 31, 1999:
Exercise
Shares Price
------- --------
476,000 $ 6.59
2,400 7.88
21,400 6.75
21,400 8.69
16,700 14.25
4,000 15.75
83,200 27.13
1,600 29.25
240,000 31.75
24,700 23.00
-------
Total 891,400
======= ===
As of December 31, 1999, 1998 and 1997, exercisable options were 891,400,
597,400, and 519,400 shares, respectively. The weighted average exercise price
for all exercisable stock options as of December 31, 1999 and 1998 was $16.02
and $8.56, respectively.
Employment Agreement
On February 19, 1998 Mr. Wu, Bancorp and the Bank entered into an employment
agreement having an effective date of January 1, 1998, (the "Agreement").
The Agreement provides for an employment term of five (5) years, commencing
January 1, 1998, and ending December 31, 2002. Pursuant to the Agreement, Mr.
Wu will serve as Chairman of the Board of Bancorp and the Bank throughout the
entire term of the Agreement, but he will serve as Chief Executive Officer of
Bancorp and the Bank only through December 31, 2000.
The Agreement provides for a base annual salary of $402,336, which amount
shall be adjusted on January 1 of each anniversary thereof, for a percentage
increase equal to three percent (3%) over the increase in the Consumer Price
Index.
The Agreement also provides for an annual incentive compensation award
payable to Mr. Wu, which is based upon a formula to be computed as follows:
(i) three percent (3%) of any amount by which the Bank's tax equivalent income
before taxes exceeds ten percent (10%) of the net equity of the Bank at the
beginning of that fiscal year but does not exceed fifteen percent (15%) of
such net equity; and (ii) four percent (4%) of any amount by which such income
exceeds fifteen percent (15%) of such net equity. In addition, Mr. Wu will be
entitled to receive from each Bancorp subsidiary (other than the Bank), if any
exists, an incentive compensation cash award computed in accordance with a
formula identical to the one described in the preceding sentence. The
aggregate incentive compensation cash award payable to Mr. Wu shall be subject
to the following maximum dollar limitations commencing with the fiscal year
ending December 31, 2000: (i) $1,500,000 for the fiscal year 2000; (ii)
$400,000 for the fiscal year 2001; and (iii) $400,000 for the fiscal year
2002.
Mr. Wu was granted non-qualified options under the 1988 Stock Option Plan to
purchase an aggregate of 924,000 shares of Common Stock of Bancorp at a price
of $6.59 per share. All such options have become exercisable and have been
exercised in part, with Mr. Wu now holding unexercised options to acquire
476,000 shares of Common Stock.
Under the Agreement, provided that Mr. Wu continues to be employed by the
Company through December 19, 2001, on such date Mr. Wu will be granted a non-
qualified stock option to purchase shares of GBC Common Stock equal to the
aggregate of the number of shares of GBC Common Stock that are covered by the
unexercised portion of Mr. Wu's December 19, 1991 non-qualified stock option
as of December 31, 2000 and/or the number of shares that had been previously
acquired by Mr. Wu by reason of exercising such non-qualified stock option and
which shares are held by him as of December 31, 2000. The number of shares of
GBC Common Stock subject to the new non-qualified stock option will be
equitably adjusted in the event of any change to GBC Common Stock occurring as
a result of any stock split, stock dividend, reorganization or similar
transaction. The exercise price under such new option will be the fair market
value of GBC Common Stock on the date of grant and such option will vest
immediately. The new option will be exercisable until December 31, 2007;
provided, that if Mr. Wu's employment with the Company terminates prior to
December 31, 2002, the exercise period will only be three (3) months from such
termination date, or, if Mr. Wu dies or becomes disabled, the exercise period
will be the earlier of one (1) year from his death or disability or December
31, 2007.
The Agreement provides that commencing with the year ended December 31,
1999, Mr. Wu may elect in his discretion to receive up to one-half ( 1/2) of
his incentive compensation cash award for any fiscal year in shares of Bancorp
Common Stock. If Mr. Wu makes such an election he will receive as of the date
of such election GBC Common Stock equal in value (determined as of such
election date) to the portion of the cash award for which he elected to
receive GBC Common Stock. In addition, he will be awarded as of such election
date a vested, deferred contractual right to receive two (2) years later GBC
Common Stock equal in value to the sum of fifty percent (50%) in value of the
portion of the cash award for which he elected to receive GBC Common Stock
plus the value of dividends that would have been paid during the two (2) year
deferral period had such GBC Common Stock actually been granted to him on the
date of his election. The number of shares of GBC Common Stock subject to the
vested, deferred contractual right will be equitably adjusted in the event of
any change to GBC Common Stock occurring as a result of any stock split, stock
dividend, reorganization or similar transaction.
The Agreement further provides that during the first three (3) years of Mr.
Wu's employment thereunder, Bancorp shall grant to him a vested, deferred
contractual right to receive one share of Bancorp Common Stock for every
twenty (20) shares of Bancorp Common Stock acquired by him through exercise of
his non-qualified stock option, or acquired by reason of his election to
receive up to one-half ( 1/2) of his incentive compensation cash award for any
fiscal year in Bancorp Common Stock, excluding shares for which Mr. Wu has a
vested, deferred contractual right to receive, and/or of vested option shares
(even though not exercised) under his non-qualified stock option that are held
during the
full term of the relevant fiscal year. The total number of shares to be
received by Mr. Wu shall not in the aggregate exceed 100,000, which number is
subject to equitable adjustment in the event of any change to GBC Common Stock
occurring as a result of any stock split, stock dividend, reorganization or
similar transaction. Such additional shares shall be granted on the fifth
(5th) anniversary of the first (1st) day of January following the year with
respect to which the contractual right to receive the additional shares was
awarded (together with a further number of shares equal in value to the
dividends that would have been paid on the additional shares during such five
(5) year deferral period).
Under the Agreement, at the expiration of its stated term on December 31,
2002 (other than for cause), Mr. Wu will be entitled to an annual retirement
benefit equal to fifty percent (50%) of the annual base salary he earned
during his final year of employment. This retirement benefit will be payable
in equal monthly installments over the five (5) years following the expiration
of the term of the Agreement.
The Agreement contains a noncompetition provision whereby Mr. Wu agrees not
to compete with the Company for a period of five (5) years following the date
of his termination of employment under the Agreement. In the event that Mr. Wu
fails to comply with such noncompetition provision, as of the date of such
failure to comply, (i) the new stock option granted to Mr. Wu on December 19,
2001, to the extent not yet exercised, or Mr. Wu's right to receive such
option if not yet granted, will expire or terminate, (ii) Mr. Wu will no
longer be entitled to the retirement benefit provided for under the Agreement,
to the extent not yet paid, and (iii) Mr. Wu will no longer be allowed
continued use of an office and automobile.
In the event of any merger or consolidation or acquisition of Bancorp or the
Bank, whereby Bancorp or the Bank is not the surviving entity, or another
entity or person acquires more than fifty (50%) of the outstanding Common
Stock of the Bank or Bancorp in one or more transactions, or the Bank or
Bancorp ceases to exist pursuant to any of such transactions (any of which
herein referred to as a "Triggering Event"), under the contingency stock
option granted pursuant to a prior agreement, provided Mr. Wu is then in the
employ of the Company, Mr. Wu shall have the right to purchase 242,000 shares
of Bancorp Common Stock at $1.86 per share, exercisable upon the execution of
an agreement or the application to any regulatory authority for approval of or
consent to any Triggering Event, such right to remain exercisable in whole or
in part until 45 days after the consummation of the Triggering Event. If any
Triggering Event is not consummated, such contingent option shall then not be
exercisable, but shall continue in full force and effect and be exercisable
upon the occurrence of any future Triggering Event.
Contingent Stock Option Plan
A contingent stock option plan issued at market is in effect which allows
certain key officers of the Bank to purchase up to an aggregate of 574,900
shares (as of December 31, 1999) of the Company's authorized but unissued
common stock at a price of $1.86 - $14.25 per share. The stock options may be
exercised by the optionee only in the event of certain triggering events, such
as a merger, sale or disposition of all of the assets by the Company, or the
Bank, or any similar event in which neither the Company nor the Bank is a
survivor. Each of the contingent stock options is for a term of indefinite
duration, provided, however, said options shall terminate upon the death of
the optionee or in the event the optionee ceases to be employed by the
Company. A summary of contingent stock option activity and related option
prices for 1999, 1998 and 1997 follows:
Range of or
Number Weighted Average Option Price
of Shares Option Price Per Share
--------- ---------------- --------------
Balance at December 31,
1996 554,900 $ 4.05 $1.86 - $10.02
---------------------------------------------------------------
Granted 20,000 $14.25 $14.25
Balance at December 31,
1997 574,900 $ 4.40 $1.86 - $14.25
----------------------- ------- ------ --------------
Balance at December 31,
1998 574,900 $ 4.40 $1.86 - $14.25
----------------------- ------- ------ --------------
Balance at December 31,
1999 574,900 $ 4.40 $1.86 - $14.25
----------------------- ------- ------ --------------
The following table indicates relevant information for all contingent stock
options outstanding, as of December 31, 1999:
Shares Exercise Price
------- --------------
242,000 $ 1.86
96,800 2.17
31,460 6.51
48,400 6.59
16,940 6.61
10,000 6.75
50,000 6.94
12,000 8.13
11,000 8.30
12,100 8.47
24,200 10.02
20,000 14.25
-------
Total 574,900
=======
The weighted average exercise price of all the contingent stock options
outstanding was $4.40.
There were no contingent stock options that were exercisable as of December
31, 1999.
Pro Forma Net Income and Earnings Per Share
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for the fair
value of the options granted in the consolidated financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income and
earnings per share ("EPS") would have been changed to the pro forma amounts
indicated below:
(Dollars In Thousands,
Except Per Share Data) 1999 1998 1997
- --------------------------------------------------
Net Income as Reported $29,988 $28,142 $25,946
Pro Forma Net Income $29,555 $27,643 $25,752
EPS as Reported - Basic $ 2.41 $ 2.00 $ 1.90
EPS as Reported - Diluted $ 2.37 $ 1.96 $ 1.84
Pro Forma EPS - Basic $ 2.38 $ 1.97 $ 1.88
Pro Forma EPS - Diluted $ 2.33 $ 1.93 $ 1.82
The Black-Scholes model was utilized for purposes of the option pricing. The
volatility of 30.60%, 28.00%, and 28.38% for the options granted in 1999, 1998
and 1997, respectively, was based on historical weekly closing prices and
historical annual dividend rates. The expected life of the
options ranged from 1 month to 10 years. The weighted average fair value at
date of grant for options granted during 1999, 1998 and 1997 was $4.71, $5.50
and $3.58, respectively. The risk-free interest rate which is based on the
treasury bill/note rate, was 6.2%, 5.0% and 5.0% for options granted during
1999, 1998 and 1997, respectively.
Pro forma net income only reflects the cost of options granted in 1995 and
thereafter. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above for the years 1997 and 1998. Pro forma net income does
not reflect options granted under the contingent stock option plan as the
options will become exercisable only upon the occurrence of certain triggering
events the dates of which cannot be determined.
General Bank 401(k) Plan
In 1988, the Bank established a 401(k) Plan in which all employees of the
Bank may elect to enroll each January 1 or July 1 of every year provided that
they have been employed for at least one year prior to the semi-annual
enrollment date. Employees may contribute up to 15 percent of their annual
base salary up to limits established by the Internal Revenue Services with the
Company matching 100 percent of the employee's contribution up to 5 percent of
that employee's base salary. In 1999, 1998, and 1997, the Bank's contribution
amounted to $342,000, $240,000, and $267,000, respectively.
Executive Incentive Savings Plan
In 1992, the Board of Directors of the Bank authorized an Incentive Savings
Plan which replaced the Executive Deferred Compensation Plan established in
1988. Under the plan, if any bonus or profit sharing award is received during
the year by any vice president or any officer of the Bank ranking above such
position (including officers who are also directors), he or she is allowed to
set aside up to 30% of such bonus or profit sharing award received in the
payment year, and the Bank will contribute additional funds for each
participant to pay the federal income tax for the portion of the bonus or
award so set aside. This arrangement is tied to a paid-up life insurance
program having investment features and the participant has the right to choose
different investment vehicles for the investment of the portion of the bonus
or award set aside as described above. The Bank has contributed approximately
$473,000, $592,000, and $572,000, to this plan in 1999, 1998 and 1997,
respectively.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The consolidated balance sheets do not reflect various commitments relating
to financial instruments which are used in the normal course of business.
These instruments include commitments to extend credit, letters of credit and
futures contracts. Management does not anticipate that the settlement of these
financial instruments will have a material adverse effect on the financial
condition or the operations of the Company.
These financial instruments carry various degrees of credit and market risk.
Credit risk is defined as the possibility that a loss may occur from the
failure of another party to perform according to the terms of the contract.
Market risk is the possibility that future changes in the market price may
render less valuable a financial instrument.
The contractual amounts of commitments to extend credit and letters of
credit represent the amount of credit risk. Since many of the commitments and
letters of credit are expected to expire without being drawn upon, the
contractual amounts do not necessarily represent future cash requirements.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank receives a fee for
providing a commitment. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary,
by the Bank upon the extension of credit is based on management's evaluation.
Collateral held varies but may include accounts receivable, inventory,
property, equipment and real estate. As of December 31, 1999, the Company's
undisbursed loan commitments amounted to approximately $458.5 million, of
which $126.1 million related to construction loans. As of December 31, 1998,
the Company's undisbursed loan commitments amounted to approximately $474.4
million, of which $161.1 million related to construction loans. As of December
31, 1999 and 1998, $134.8 million and $134.7 million, respectively, of loan
commitments were related to a program to which the Bank and various other
minority-owned banks participate in the granting of credit to large U.S.
corporations, all of which are rated A or better by one or both of the major
rating services at the time of entering into the agreement. All of the
commitments are for one year or less. The Company does not anticipate funding
in the majority of instances.
In addition to loan commitments, the Company is also committed to meet
capital calls to the various partnership interests of GBC Venture Capital,
Inc. As of December 31, 1999 and 1998, these undisbursed commitments totaled
$3.8 million and $1.1 million, respectively. These amounts are included as
part of total undisbursed commitments.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. Commercial letters of credit
are issued to customers to facilitate foreign or domestic trade transactions.
They represent a substitution of the Bank's credit for the customer's credit.
The following is a summary of various financial instruments with off-balance
sheet risk as of December 31, 1999 and 1998:
December 31,
- -----------------------------------------------
(In Thousands) 1999 1998
- -----------------------------------------------
Undisbursed Commitments $462,333 $474,366
Standby Letters of Credit 95,236 89,735
Bills of Lading Guarantee 632 531
Commercial Letters of Credit 84,002 64,578
As of December 31, 1999, commitments to fund fixed-rate loans and
adjustable-rate loans were $8.4 million and $450.1 million, respectively. As
of December 31, 1998, commitments to fund fixed-rate loans and adjustable-rate
loans were $10.3 million and $462.9 million, respectively.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and due from banks
The carrying amount of cash and due from banks is considered fair value.
Federal funds sold and securities purchased under agreements to resell
Outstanding amounts under these categories represented overnight
transactions as of December 31, 1999 and 1998 and are considered to be carried
at fair value.
Securities
For securities including securities held to maturity, for trading and
securities available for sale, fair values are based
on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. These portfolios were then segmented into fixed and
adjustable interest rate classifications.
Adjustable rate loans are considered to be carried at fair value.
The fair value of fixed rate loans was calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan.
The entire allowance for credit losses was applied to classified loans
including non-accruals. Accordingly, they are considered to be carried at fair
value as the allowance for credit losses represents the estimated discount for
credit risk for the applicable loans.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
Deposit liabilities
The fair value of demand deposits, interest bearing demand, savings
accounts, and certain money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposits
is estimated using the rates the Bank was offering as of December 31, 1999 and
1998 for deposits of similar remaining maturities.
Borrowings from Federal Home Loan Bank
The fair value of borrowings from Federal Home Loan Bank is estimated using
a discounted cash flow model.
Subordinated debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of subordinated debt.
Accrued interest receivable/payable
Accrued interest receivable and accrued interest payable are considered to
be carried at fair value.
Off Balance Sheet Financial Instruments
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
The fair value disclosed hereinafter does not reflect any premium or
discount that could result from offering the instruments for sale. Potential
taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in the amounts disclosed. The fair value
estimates are dependent upon subjective estimates of market conditions and
perceived risks of financial instruments at a point in time and involve
significant uncertainties resulting in variation in estimates with changes in
assumptions.
The estimated fair values of the Company's financial instruments are as
follows:
1999 1998
- -----------------------------------------------------------------------------
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------
Financial Assets:
Cash and Due from Banks $ 26,120 $ 26,120 $ 27,514 $ 27,514
Fed Funds Sold & Securities
Purchased Under Agreement to
Resell 80,000 80,000 101,000 101,000
Securities Available for Sale 683,017 683,017 724,172 724,172
Securities Held to Maturity 1,300 1,241 24,616 24,677
Trading Securities 1,114 1,114 - -
Loans, net 902,000 881,398 763,650 759,528
Accrued Interest Receivable 9,853 9,853 8,069 8,069
Financial Liabilities:
Deposits 1,490,811 1,490,443 1,380,903 1,382,458
Borrowing from Federal Home Loan
Bank 50,000 49,173 35,000 34,694
Subordinated Debt 39,007 37,007 38,876 39,402
Accrued Interest Payable 4,076 4,076 3,509 3,509
1999 1998
- -----------------------------------------------------------------------------
Contract Fair Contract Fair
(In Thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------
Off-balance Sheet
Financial Instruments:
Commercial Letters of Credit $ 84,002 $ 210 $ 64,578 $ 161
Standby Letters of Credit 95,236 1,251 89,735 1,160
Bill of Lading Guarantees 632 2 531 1
Undisbursed Commitments 462,333 3,566 474,366 4,155
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF GBC BANCORP (PARENT COMPANY)
Condensed balance sheets as of December 31, 1999 and 1998 follow:
(Dollars in Thousands) 1999 1998
- ------------------------------------------------------------------------------
Assets
Due From Bank Subsidiary $ 848 $ 211
Investment in Subsidiaries 163,264 160,000
Advance to Bank Subsidiary 7,000 40,000
Other Assets 2,677 3,452
--------- ---------
Total Assets $173,789 $203,663
========= =========
Liabilities and Stockholders' Equity
Dividends Payable $ 1,037 $ 1,028
Other Liabilities 707 729
Subordinated Debt 39,007 38,876
--------- ---------
Total Liabilities 40,751 40,633
Stockholders' Equity
Common stock, no par value or stated value;
40,000,000 shares
authorized; 11,523,019 and 13,711,998 shares
outstanding at
December 31, 1999 and 1998, respectively $ 57,289 $ 56,303
Retained Earnings 84,035 104,898
Accumulated Other Comprehensive (Loss) Income (8,286) 1,829
--------- ---------
Total Stockholders' Equity 133,038 163,030
--------- ---------
Total Liabilities and Stockholders' Equity $173,789 $203,663
========= =========
Condensed statements of income for the years ended December 31, 1999, 1998,
and 1997 follow:
(Dollars in Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Interest Income $ - $ - $ 199
Interest Income from Bank Subsidiary 1,058 2,583 1,639
Dividends Received from Bank Subsidiary 20,034 4,213 8,307
-------- --------- ---------
Total Income 21,092 6,796 10,145
Interest Expense 3,481 3,481 2,553
Non-Interest Expense 135 139 105
-------- --------- ---------
Total Expense 3,616 3,620 2,658
Income before Income Taxes & Extraordinary Item 17,476 3,176 7,487
Benefit for Income Taxes (1,075) (436) (394)
-------- --------- ---------
Income before Extraordinary Item 18,551 3,612 7,881
Extraordinary Item - - (488)
-------- --------- ---------
Income before Equity in Undistributed Earnings
of Subsidiaries 18,551 3,612 7,393
Equity in Undistributed Earnings of Subsidiaries 11,437 24,530 18,553
-------- --------- ---------
Net Income $29,988 $ 28,142 $ 25,946
======== ========= =========
Condensed statements of cash flows for the years ended December 31, 1999,
1998, and 1997 follow:
(In Thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Operating Activities:
Net Income $ 29,988 $ 28,142 $ 25,946
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Accretion of Discount on Subordinated Debt 131 131 55
Net Decrease in Other Assets 1,088 2,883 5,016
Equity in Undistributed Earnings of Subsidiar-
ies (11,437) (24,530) (18,553)
Net Increase/(Decrease) in Other Liabilities (13) (1) 101
--------- --------- ---------
Net Cash Provided by Operating Activities 19,757 6,625 12,565
--------- --------- ---------
Investing Activities:
Net Decrease/(Increase) in Cash Invested in Sub-
sidiaries 31,058 5,400 (40,647)
Proceeds from Sale of Investment Securities - - 5,000
--------- --------- ---------
Net Cash Provided (Used) in Investing Activi-
ties 31,058 5,400 (35,647)
--------- --------- ---------
Financing Activities:
Cash Dividends Paid (4,025) (4,024) (3,144)
Proceeds from Issuance of Subordinated Notes - - 38,690
Redemption of Subordinated Debt - - (15,000)
Proceeds from Exercise of Stock Options 664 1,375 3,192
Stock Repurchase Program (46,817) (10,386) -
Other, Net - - 53
--------- --------- ---------
Net Cash Provided by (Used in) Financing Ac-
tivities (50,178) (13,035) 23,791
--------- --------- ---------
Net Change in Due from Bank 637 (1,010) 709
Due from Bank at Beginning of Year 211 1,221 512
--------- --------- ---------
Due from Bank at End of Year $ 848 $ 211 $ 1,221
========= ========= =========
Supplemental Disclosures of Cash Flow Informa-
tion:
Cash Paid (Received) During the Year for:
Interest $ 3,350 $ 3,350 $ 2,279
Income Tax Refunds (436) (394) (615)
NOTE 18 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory- and possibly additional discretionary-actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets, and of Tier
1 capital to average assets. Management believes, as of December 31, 1999,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table below. There
are no conditions or events since the most recent notification that management
believes would change the institution's category.
A "well capitalized" institution is one with capital ratios as shown in the
following table. As of December 31, 1999, Tier 1 risk based capital, total
risk based and leverage ratios for both the Company and the Bank exceeded the
"well capitalized" ratio requirements as follows:
Minimum Well
GBC Bancorp General Bank Regulatory Capitalized
(In Thousands) Amount Ratio Amount Ratio Requirements Requirements
- ------------------------------------------------------------------------------
Tier 1 $141,257 9.07% $167,554 10.82% 4% 6%
Total $199,726 12.83% $186,925 12.07% 8% 10%
Leverage Ratio $141,257 8.06% $167,554 9.58% 4% 5%
As of December 31, 1998, Tier 1 risk based capital, total risk based capital
and leverage ratios for both the Company and the Bank exceeded the "well
capitalized" ratio requirements as follows:
Minimum Well
GBC Bancorp General Bank Regulatory Capitalized
(In Thousands) Amount Ratio Amount Ratio Requirements Requirements
- ------------------------------------------------------------------------------
Tier 1 $160,805 11.06% $156,333 10.77% 4% 6%
Total $217,871 14.98% $174,494 12.02% 8% 10%
Leverage Ratio $160,805 9.75% $156,333 9.49% 4% 5%
The Financial Code of the State of California provides that dividends paid
by the Bank in any one year may not exceed the lesser of the Bank's undivided
profits or the net income for the prior three years, less cash distributions
to stockholders during such period. As of December 31, 1999, approximately
$53.6 million of undivided profits of the Bank is available for dividends to
the Company, subject to the subordinated debt covenant restrictions.
NOTE 19 - OTHER NON-INTEREST EXPENSE
Components of other non-interest expense in excess of 1% of the sum of total
interest income and non-interest income for each period were as follows:
(In Thousands) 1999 1998 1997
- ---------------------------------------------------------------
Office Supplies and Communication Expense $1,644 $1,522 $1,346
Professional Services Expense 1,592 1,606 1,380
FDIC Assessment Expense 163 159 148
Real Estate Investment Expense 1,512 1,329 1,329
Other 2,261 2,222 1,795
------ ------ ------
Total $7,172 $6,838 $5,998
====== ====== ======
NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended in 1999
(In Thousands, except Per Share Data) March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------
Interest Income $31,154 $31,303 $33,119 $34,685
Interest Expense 13,427 13,733 14,273 14,850
Net Interest Income 17,727 17,570 18,846 19,835
Provision for Credit Losses 1,500 500 1,500 -
Income before Income Taxes and Extraordinary
Item 10,484 11,232 12,076 14,528
Net Income 6,565 7,016 7,492 8,915
Earnings Per Share - Basic 0.48 0.54 0.64 0.77
Earnings Per Share - Diluted 0.47 0.53 0.62 0.76
Three Months Ended in 1998
(In Thousands, except Per Share Data) March 31 June 30 Sept.30 Dec. 31
- ------------------------------------------------------------------------------
Interest Income $29,686 $31,193 $33,342 $31,770
Interest Expense 13,717 14,509 14,703 14,089
Net Interest Income 15,969 16,684 18,639 17,681
Provision for Credit Losses - - - 1,500
Income before Income Taxes and Extraordinary
Item 10,438 10,990 12,705 10,773
Net Income 6,631 6,843 7,878 6,790
Earnings Per Share - Basic 0.47 0.48 0.56 0.49
Earnings Per Share - Diluted 0.46 0.48 0.55 0.48
NOTE 21 - SUBSEQUENT EVENTS
On January 26, 2000, the Company announced that a portion of the Bank's
collateral consisting of the hotel, casino and RV park for the Sunrise Suites
construction loan, currently on non-accrual status, has been sold at a
bankruptcy court auction for a total of $42 million. The sale closed on
February 25, 2000 with the Bank receiving $28 million. Certain remaining
collateral is scheduled for sale in the future with an appraised value of $9.2
million.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of GBC Bancorp and Subsidiaries:
We have audited the accompanying consolidated balance sheets of GBC Bancorp
and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of the
Company for the year ended December 31, 1997 were audited by other auditors
whose report, dated January 30, 1998, expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 26, 2000
EXHIBIT 21
Subsidiaries of GBC Bancorp State of Incorporation
- --------------------------- ----------------------
General Bank California
GBC Venture Capital, Inc. California
Subsidiaries of General Bank
- ----------------------------
GBC Investment & Consulting Company, Inc. California
GBC Insurance Services, Inc. California
Southern Counties Escrow California
GBC Leasing Company, Inc. California
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement No.
333-95381 of GBC Bancorp on Form S-8 of our report dated January 26, 2000, on
the consolidated balance sheets of GBC Bancorp and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended, incorporated by
reference in the Annual Report on Form 10-K of GBC Bancorp for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 27, 2000