<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
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 0-18630
----------------------------------------------------------
CATHAY BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4274680
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 North Broadway, Los Angeles, California 90012
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 625-4700
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, $.01 par value, 8,975,129 shares outstanding as of September
30, 1998.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION ...................................... 3
Item 1. Condensed Consolidated Financial Statements ........ 4-6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ... 9-22
PART II - OTHER INFORMATION ......................................... 23
Item 1. Legal Proceedings .................................. 23
Item 2. Changes in Securities .............................. 23
Item 3. Defaults upon Senior Securities .................... 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information .................................. 23
Item 6. Exhibits and Reports on Form 8-K ................... 23
SIGNATURES .......................................................... 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE> 4
CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 69,694 $ 57,728
Federal funds sold and securities purchased under
agreements to resell 80,000 67,000
---------- ----------
Cash and cash equivalents 149,694 124,728
Securities available-for-sale (with amortized costs of
$182,169 in 1998 and $215,466 in 1997) 184,698 216,158
Securities held-to-maturity (with estimated fair
values of $353,487 in 1998 and $356,187 in 1997) 342,744 350,336
Loans (net of allowance for loan losses of
$15,555 in 1998 and $15,379 in 1997) 954,561 846,151
Other real estate owned, net 13,373 13,269
Investments in real estate, net 1,521 1,654
Premises and equipment, net 25,534 25,202
Customers' liability on acceptance 9,533 10,296
Accrued interest receivable 10,864 12,246
Goodwill 8,759 9,530
Other assets 10,421 12,892
---------- ----------
Total assets $1,711,702 $1,622,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 165,160 $ 175,875
Interest bearing accounts
NOW accounts 110,397 111,653
Money market deposits 95,579 94,708
Savings deposits 206,833 210,291
Time deposits under $100,000 323,921 307,504
Time deposits of $100,000 or more 595,262 549,090
---------- ----------
Total deposits 1,497,152 1,449,121
Securities sold under agreements to repurchase 21,798 23,419
Advances from Federal Home Loan Bank 20,000 --
Acceptances outstanding 9,533 10,296
Other liabilities 12,030 3,749
---------- ----------
Total liabilities 1,560,513 1,486,585
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 10,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, 8,975,129 and 8,941,743 shares issued and
outstanding in 1998 and 1997, respectively 90 89
Additional paid-in-capital 62,489 61,271
Accumulated other comprehensive income 1,465 370
Retained earnings 87,145 74,147
---------- ----------
Total stockholders' equity 151,189 135,877
---------- ----------
Total liabilities and stockholders' equity $1,711,702 $1,622,462
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
3rd Qtr 3rd Qtr YTD YTD
Sept 1998 Sept 1997 Sept 1998 Sept 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 21,567 $ 18,795 $ 61,473 $ 54,689
Interest on securities available-for-sale 3,226 4,407 9,819 14,515
Interest on securities held-to-maturity 5,759 4,352 17,217 11,857
Interest on Federal funds sold and securities purchased
under agreements to resell 1,257 889 2,696 1,698
Interest on deposits with banks 10 2 27 2
----------- ----------- ----------- -----------
Total interest income 31,819 28,445 91,232 82,761
----------- ----------- ----------- -----------
INTEREST EXPENSE
Time deposits of $100,000 or more 7,792 6,945 22,770 19,441
Other deposits 6,004 5,983 17,761 17,774
Other borrowed funds 1,083 130 1,921 193
----------- ----------- ----------- -----------
Total interest expense 14,879 13,058 42,452 37,408
----------- ----------- ----------- -----------
Net interest income before provision for loan losses 16,940 15,387 48,780 45,353
Provision for loan losses 900 900 2,700 2,700
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 16,040 14,487 46,080 42,653
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Securities gains 7 31 42 35
Letter of credit commissions 505 460 1,460 1,065
Service charges 958 907 3,010 2,571
Other operating income 602 497 1,901 1,244
----------- ----------- ----------- -----------
Total non-interest income 2,072 1,895 6,413 4,915
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,421 4,165 13,232 12,145
Occupancy expense 645 712 1,901 2,143
Computer and equipment expense 586 661 1,785 1,813
Professional services expense 907 746 2,564 2,324
FDIC and State assessments 97 97 297 248
Marketing expense 236 295 901 1,111
Other operating expense 788 577 2,546 2,998
----------- ----------- ----------- -----------
Total non-interest expense 7,680 7,253 23,226 22,782
----------- ----------- ----------- -----------
Income before income tax expense 10,432 9,129 29,267 24,786
Income tax expense 4,172 3,733 11,568 9,992
----------- ----------- ----------- -----------
Net Income $ 6,260 $ 5,396 $ 17,699 $ 14,794
Other comprehensive income, net of tax:
Unrealized holding gain arising during the period 626 979 1,082 1,249
Less: reclassification of the portion of realized
loss (gain) included in net income previously
included in other comprehensive income (2) 259 13 245
----------- ----------- ----------- -----------
Total other comprehensive income, net of tax 624 1,238 1,095 1,494
----------- ----------- ----------- -----------
Total comprehensive income $ 6,884 $ 6,634 $ 18,794 $ 16,288
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Basic $ 0.70 $ 0.60 $ 1.98 $ 1.66
Diluted $ 0.70 $ 0.60 $ 1.98 $ 1.66
Basic average common shares outstanding 8,971,726 8,925,219 8,961,313 8,908,363
Diluted average common shares outstanding 8,972,378 8,925,219 8,961,450 8,925,219
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
CATHAY BANCORP, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 17,699 $ 14,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,700 2,700
Provision for losses on other real estate owned 175 410
Depreciation 924 995
Net gain on sales of other real estate owned (201) (190)
Net gain on sales of investments in real estate -- (222)
Net gain on sales of premises and equipment (2) --
Net gain on sales and calls of securities (42) (35)
Amortization and accretion of investment
security premiums, net 315 163
Amortization of goodwill 771 201
Increase in deferred loan fees, net 71 20
Decrease in accrued interest receivable, net 1,382 5,199
Decrease in other assets, net 2,471 759
Increase in other liabilities, net 8,281 1,939
--------- ---------
Total adjustments 16,845 11,939
--------- ---------
Net cash provided by operating activities 34,544 26,733
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (554,676) (163,814)
Proceeds from maturity and call of securities available-for-sale 594,980 203,340
Purchase of securities held-to-maturity (5,193) (13,113)
Proceeds from maturity and call of securities held-to-maturity 11,345 41,187
Proceeds from sale of securities available-for-sale 6,429 92,700
Purchase of mortgage-backed securities available-for-sale (34,968) (12,444)
Proceeds from repayments of mortgage-backed securities
available-for-sale 21,858 4,664
Purchase of mortgage-backed securities held-to-maturity (51,304) (157,401)
Repayments from mortgage-backed securities held-to-maturity 51,403 10,363
Proceeds from sale of loans -- 1,834
Purchase of loans (6,782) --
Net increase in loans (106,412) (65,627)
Purchase of premises and equipment (1,256) (551)
Proceeds from sale of equipment 2 --
Proceeds from sale of other real estate owned 1,935 4,113
Proceeds from sale of investment in real estate -- 2,292
Decrease in investments in real estate 133 182
--------- ---------
Net cash used in investing activities (72,506) (52,275)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts,
money market and savings deposits (14,558) 10,301
Net increase in time deposits 62,589 44,694
Net decrease in securities sold under agreements to repurchase (1,621) (6,899)
Net increase in advances from Federal Home Loan Bank 20,000 --
Cash dividends (4,701) (4,001)
Proceeds from shares issued to Dividend Reinvestment Plan 1,219 1,072
--------- ---------
Net cash provided by financing activities 62,928 45,167
--------- ---------
Increase in cash and cash equivalents 24,966 19,625
Cash and cash equivalents, beginning of the period 124,728 75,194
--------- ---------
Cash and cash equivalents, end of the period $ 149,694 $ 94,819
--------- ---------
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 42,513 $ 36,805
Income taxes $ 11,797 $ 9,746
Non-cash investing activities:
Transfers to securities available-for-sale
within 90 days of maturity $ 1,340 $ 630
Net change in unrealized holding gain on securities
available-for-sale, net of tax $ 1,095 $ 1,494
Transfers to other real estate owned $ 3,449 $ 2,383
--------- ---------
Loans to facilitate the sale of other real estate owned $ 1,436 $ 6,841
--------- ---------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
CATHAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. SFAS No. 133 amends
FASB Statement No. 52, "Foreign Currency Translation," to permit special
accounting for a hedge of a foreign currency forecasted transaction with a
derivative. It supersedes FASB Statements No. 80, "Accounting for Futures
Contracts," No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," and No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments." It amends FASB Statement No. 107, "Disclosures
about Fair Value of Financial Instruments, to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement 105.
This Statement also nullifies or modifies the consensuses reached in a number of
issues addressed by the Emerging Issues Task Force. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management has not yet determined the effect of implementing this Statement.
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65
to require that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. This Statement shall be effective for
the first fiscal quarter beginning after December 15, 1998. Management does not
believe the impact of adopting this Statement will be material to the Company's
financial condition or results of operations.
7
<PAGE> 8
3. STATEMENT OF COMPREHENSIVE INCOME
Effective with the quarter ended March 31, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all items that
are required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
in equal prominence with the other financial statements and to disclose as a
part of stockholders' equity "accumulated other comprehensive income".
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources.
Comprehensive income generally includes net income, foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
investments in certain debt and equity securities (i.e., securities
available-for-sale).
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is given based on the assumption that the reader
has access to the 1997 Annual Report of Cathay Bancorp, Inc. ("Bancorp") and its
subsidiary Cathay Bank ("the Bank"), together ("the Company").
RESULTS OF OPERATIONS
For the third quarter of 1998, the Company reported net income of $6.3
million or $0.70 per basic and diluted common share, compared to $5.4 million or
$0.60 per basic and diluted common share for the third quarter of 1997. This
represents an increase of $864,000 or 16.01%. Income before income tax expense
amounted to $10.4 million for the third quarter of 1998, an increase of $1.3
million or 14.27% over the $9.1 million for the same quarter a year ago. The
increase was attributed primarily to a $1.6 million increase in net interest
income before provision for loan losses due to continued loan growth. The
annualized return on average assets ("ROA") and return on average stockholders'
equity ("ROE") were 1.47% and 16.74%, respectively, for the third quarter of
1998, compared to 1.38% and 16.60%, respectively, for the third quarter of 1997.
For the nine months ended September 30, 1998, the Company reported net
income of $17.7 million or $1.98 per basic and diluted common share, compared to
$14.8 million or $1.66 per basic and diluted common share for the same period a
year ago. This represents an increase of $2.9 million or 19.64%. Income before
income tax expense amounted to $29.3 million and $24.8 million, respectively,
for the nine months ended September 30, 1998 and 1997. The $4.5 million or
18.08% increase resulted primarily from a $3.4 million increase in net interest
income before provision for loan losses and secondarily from a $1.5 million
increase in non-interest income offset by a slight increase in non-interest
expense. The annualized ROA and ROE for the first nine months of 1998 were 1.42%
and 16.49%, respectively, compared to 1.29% and 15.81% for the same period in
1997.
NET INTEREST INCOME
Net interest income before provision for loan losses totaled $48.8 million
for the first nine months of 1998, compared to $45.4 million for the same period
of 1997, representing an increase of $3.4 million or 7.56%. On a taxable
equivalent basis, net interest income amounted to $49.7 million for the nine
months ended September 30, 1998, compared to $46.2 million for the same period a
year ago, an increase of $3.5 million or 7.65%. The increase in net interest
income before provision for loan losses was substantially attributable to a
$139.4 million growth in the average interest-earning assets, primarily in
loans. Average net loans amounted to $889.1 million or 57.99% of average
interest-earning assets in the first nine months of 1998, compared to $780.8
million or 56.02% of average interest-earning assets for the same period a year
ago. The increase in volume contributed an additional $6.8 million to net
interest income, which was partially offset by a 12 basis point decrease in the
average yield on loans despite an increase of eight basis points in the Bank's
average reference rate in the first nine months of 1998 over 1997. The
competition in the Bank's marketplace played an important role in the decrease
in the average loan yield. The taxable equivalent average yield on
interest-earning assets remained approximately at the same level at 8.04% and
8.02% for the first nine months of 1998 and 1997, respectively, while cost of
funds increased 20 basis points from 4.01% in 1997 to 4.21% in 1998 largely due
to higher average rates on time deposits from 5.06% to 5.15% coupled with higher
average rates on securities sold under agreement to repurchase from 5.37% to
5.52%. Consequently, net interest margin, defined as taxable equivalent net
interest income to average earning assets, declined nine basis points from 4.43%
to 4.34% between the first nine months of 1997 and 1998.
For the third quarter of 1998, net interest income before provision for
loan losses totaled $16.9 million, compared to $15.4 million for the same
quarter of 1997. This represents an increase of $1.5 million or 10.09%. On a
taxable equivalent basis, net interest income increased $1.6 million or 10.19%
to $17.3 million for the third quarter of 1998, compared to $15.7 million for
the same quarter of 1997.
9
<PAGE> 10
An increase of $163.1 million in average interest-earning assets, $126.9 million
of which came from average net loans, essentially accounted for the increase in
the quarterly net interest income. The taxable equivalent average yield on
interest-earning assets increased three basis points in the third quarter of
1998 to 8.00% compared to 7.97% for the same quarter a year ago. Meanwhile, the
cost of funds advanced 13 basis points from 4.10% a year ago to 4.23% for the
third quarter of 1998 causing net interest margin to decrease five basis points
from 4.35% to 4.30% between the third quarter of 1997 and 1998.
NON-INTEREST INCOME
For the first nine months of 1998, non-interest income amounted to $6.4
million, compared to $4.9 million for the same period a year ago. This
represents an increase of $1.5 million or 30.48%. The increase in 1998
non-interest income resulted from: 1) an increase in service charges of $439,000
due to fee increases; 2) an increase in letter of credit commissions of $395,000
due to increased transaction volume; 3) net income of $241,000 from other real
estate owned ("OREO"); 4) an increase of $172,000 of rebate income earned in
outsourcing the issuing and processing of cashier's checks and money orders; and
5) higher fees of $120,000 related to loan documentation and other charges.
On a quarterly basis, non-interest income totaled $2.1 million and $1.9
million for the third quarter of 1998 and 1997, respectively. The slight
increase of $177,000 or 9.34% was attributable significantly to the same factors
discussed above.
NON-INTEREST EXPENSE
Non-interest expense totaled $23.2 million for the first nine months of
1998, representing a slight increase of $444,000 or 1.95% over the $22.8 million
for the same period of 1997. The only notable increases in the year-to-date
non-interest expense were salaries and employee benefits ("salary expense") and
professional services expense. The $1.1 million or 8.95% increase in salary
expense from $12.1 million to $13.2 million was primarily due to added personnel
to support the Berkeley/Richmond Branch opened in April 1998 as well as new
officers for northern California branches and secondarily due to annual salary
increases. As for the professional services expense, the increase of $240,000 or
10.33% was essentially from legal fees related to litigation which arose during
the normal course of business. The Company had a net income of $241,000 from
OREO which was included in other operating income. The efficiency ratio, defined
as non-interest expense divided by net interest income before provision for loan
losses plus non-interest income, improved from 45.32% for the nine months ended
September 30, 1997 to 42.08% for the same period in 1998.
Quarterly, non-interest expense totaled $7.7 million and $7.3 million for
the third quarter of 1998 and 1997, respectively. In addition to increases in
salary expense and professional services expense which were due to approximately
the same reasons as explained above, other operating expense for the third
quarter of 1998 increased as well compared to the same quarter a year ago. This
was mainly attributable to a $222,000 gain on sale of a real estate investment
property in the third quarter of 1997. The efficiency ratio for the third
quarter of 1998 was further reduced to 40.40% from 41.97% a year ago.
FINANCIAL CONDITION
The Company grew moderately during the first nine months of 1998 and the
third quarter had the highest growth rate. As of September 30, 1998, total
assets increased $89.2 million or 5.50% to $1,711.7 million; loans, net of
deferred loan fees, grew $108.6 million or 12.60% to $970.1 million; deposits
increased $48.0 million or 3.31% to $1,497.2 million; and stockholders' equity
increased $15.3 million or 11.27% to $151.2 million, compared to December 31,
1997. The Company obtained an advance of $20.0 million from Federal Home Loan
Bank in the third quarter of 1998 to fund loan program and investments due to
its lower interest rate.
10
<PAGE> 11
EARNING ASSET MIX
Total earning assets amounted to $1,578.0 million at September 30, 1998,
compared with $1,495.9 million at year-end 1997, representing an increase of
$82.2 million or 5.49%. The increase came primarily from an increase of $108.6
million in loans, net of deferred loan fees, while investment securities
(including available-for-sale and held-to-maturity) decreased $39.1 million.
Average interest-earning assets amounted to $1,608.2 million for the third
quarter of 1998 compared to $1,444.2 million for the same period in 1997, an
increase of $164.0 million or 11.36%. The year-to-date average interest-earning
assets for 1998 totaled $1,549.0 million versus $1,407.9 million for the same
period a year ago, representing an increase of $141.1 million or 10.02%. As a
result of continued loan demand in 1998, average loans continued to increase as
a percentage of total interest-earning assets from 56.47% for the nine months
ended September 30, 1997 to 58.43% for the same period in 1998, while investment
securities (including available-for-sale and held-to-maturity) decreased from
40.68% to 37.54% at the same time. The change in the earning asset mix from
securities to loans is generally favorable to net interest income.
The tables below depict the changes in the earning asset mix as of the
dates and for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
TYPES OF EARNING ASSETS: As of 9/30/98 As of 12/31/97
------------------------------ ------------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 80,000 5.07% $ 67,000 4.48%
Securities available-for-sale 184,698 11.70 216,158 14.45
Securities held-to-maturity 342,744 21.72 350,336 23.42
Loans (net of deferred loan fees) 970,116 61.48 861,530 57.59
Deposits with banks 489 0.03 855 0.06
---------- ---------- ---------- ----------
Total earning assets $1,578,047 100.00% $1,495,879 100.00%
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AVERAGE EARNING ASSETS: 3rd Qtr, 1998 3rd Qtr, 1997
------------------------------ ------------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreement to resell $ 85,685 5.33% $ 60,787 4.21%
Securities available-for-sale 218,235 13.57 274,814 19.03
Securities held-to-maturity 360,618 22.42 293,710 20.34
Loans (net of deferred loan fees) 942,656 58.62 814,916 56.42
Deposits with banks 962 0.06 -0- 0.00
---------- ---------- ---------- ----------
Total earning assets $1,608,156 100.00% $1,444,227 100.00%
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AVERAGE EARNING ASSETS: YTD 9/30/98 YTD 9/30/97
------------------------------ ------------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreement to resell $ 61,704 3.98% $ 40,183 2.85%
Securities available-for-sale 221,469 14.30 317,659 22.56
Securities held-to-maturity 360,012 23.24 255,031 18.12
Loans (net of deferred loan fees) 904,996 58.43 795,000 56.47
Deposits with banks 819 0.05 -0- 0.00
---------- ---------- ---------- ----------
Total earning assets $1,549,000 100.00% $1,407,873 100.00%
========== ========== ========== ==========
</TABLE>
SECURITIES
As of September 30, 1998 securities available-for-sale and held-to-maturity
decreased $31.5 million and $7.6 million to $184.7 million and $342.7 million,
respectively, compared to $216.2 million and $350.3 million, respectively at
year-end 1997. Combined together, investment securities at September
11
<PAGE> 12
30, 1998 represented a decrease of $39.1 million or 6.89% from the year-end
levels. This was primarily attributable to increasing loan demand that the
Company experienced during the first nine months of 1998, particularly in the
third quarter. The following tables summarize the composition and maturity
distribution of the investment portfolio as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
SECURITIES AVAILABLE-FOR-SALE: As of 9/30/98
---------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
-------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 3,007 $ 17 $ -0- $ 3,024
U.S. government agencies 72,741 781 -0- 73,522
State and municipal securities 8,950 356 -0- 9,306
Mortgage-backed securities 35,396 950 2 36,344
Assets-backed securities 10,166 40 -0- 10,206
Federal Home Loan Bank stock 5,904 -0- -0- 5,904
Commercial paper 10,497 -0- -0- 10,497
Corporate bonds 35,508 387 -0- 35,895
-------- -------- -------- --------
Total $182,169 $ 2,531 $ 2 $184,698
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of 12/31/97
----------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
-------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 38,020 $ 11 $ 60 $ 37,971
U.S. government agencies 113,255 97 46 113,306
Mortgage-backed securities 28,689 685 6 29,368
Assets-backed securities 19,878 11 -0- 19,889
Federal Home Loan Bank stock 5,653 -0- -0- 5,653
Commercial paper 9,971 -0- -0- 9,971
-------- -------- -------- --------
Total $215,466 $ 804 $ 112 $216,158
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
SECURITIES HELD-TO-MATURITY: As of 9/30/98
---------------------------------------------------------------
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
-------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,033 $ 782 $-0- $ 26,815
U.S. government agencies 29,355 836 -0- 30,191
State and municipal securities 47,914 3,115 2 51,027
Mortgage-backed securities 230,512 5,622 31 236,103
Corporate bonds 8,930 421 -0- 9,351
-------- -------- -------- --------
Total $342,744 $ 10,776 $ 33 $353,487
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of 12/31/97
---------------------------------------------------------------
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
-------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,054 $ 354 $-0- $ 26,408
U.S. government agencies 39,374 291 -0- 39,665
State and municipal securities 44,497 2,264 -0- 46,761
Mortgage-backed securities 230,573 2,762 35 233,300
Assets-backed securities 922 -0- 6 916
Corporate bonds 8,916 221 -0- 9,137
--------- --------- --------- ---------
Total $ 350,336 $ 5,892 $ 41 $ 356,187
========= ========= ========= =========
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (Dollars in thousands)
As of September 30, 1998
Maturity Schedule
----------------------------------------------------------------------------------------
After 1 But After 5 But
SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10 Yrs Over 10 Yrs Total
------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 3,024 $-0- $-0- $-0- $ 3,024
U.S. government agencies 32,638 40,884 -0- -0- 73,522
State and municipal securities 6,976 -0- 2,330 -0- 9,306
Mortgage-backed securities* -0- 5,017 7,189 24,138 36,344
Assets-backed securities* -0- 10,206 -0- -0- 10,206
Federal Home Loan Bank stock 5,904 -0- -0- -0- 5,904
Commercial paper 10,497 -0- -0- -0- 10,497
Corporate bonds -0- 30,972 4,923 -0- 35,895
------------- ------------- -------------- -------------- -------------
Total $ 59,039 $ 87,079 $ 14,442 $ 24,138 $ 184,698
============= ============= ============== ============== =============
SECURITIES HELD-TO-MATURITY:
U.S. Treasury securities $ -0- $ 26,033 $ -0- $ -0- $ 26,033
U.S. government agencies -0- 29,355 -0- -0- 29,355
State and municipal securities 427 9,934 22,073 15,480 47,914
Mortgage-backed securities* -0- 13,438 69,355 147,719 230,512
Corporate bonds -0- 8,930 -0- -0- 8,930
------------- ------------- ------------- ------------- -------------
Total $ 427 $ 87,690 $ 91,428 $ 163,199 $ 342,744
============= ============= ============= ============= =============
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and do not consider anticipated prepayments.
LOANS
The Bank experienced high loan demand in the first nine months of 1998.
Total gross loans increased $108.7 million or 12.56% to $974.0 million as of
September 30, 1998, from $865.3 million at year-end 1997. Excluding the $18.1
million investments in banker's acceptances which were included in commercial
loans at year-end 1997, total commercial loans increased $61.8 million or 19.30%
to $382.0 million at September 30, 1998. Real estate mortgage loans consisted
primarily of commercial real estate loans and residential real estate loans,
which increased $28.6 million or 9.43% and $23.8 million or 17.41%,
respectively, to $332.3 million and $160.8 million, respectively, during the
first three quarters of 1998. The increase in residential real estate loans was
highly attributable to prevailing low interest rates which increased new home
purchases and refinancing activities. Construction loans showed a noticeable
increase as well from $41.7 million at year-end 1997 to $49.0 million as of
September 30, 1998. The following table sets forth the classification of loans
by type and mix as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
TYPES OF LOANS: As of 9/30/98 As of 12/31/97
--------------------------- ---------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial loans $ 381,976 40.02% $ 338,285 39.98%
Real estate mortgage loans 513,488 53.79 458,417 54.18
Real estate construction loans 49,027 5.14 41,736 4.93
Installment loans 28,961 3.03 26,611 3.14
Other loans 522 0.05 267 0.03
---------- ----------
Total loans - Gross 973,974 865,316
Allowance for loan losses (15,555) (1.63) (15,379) (1.82)
Unamortized deferred loan fees (3,858) (0.40) (3,786) (0.44)
---------- ---------- ---------- ----------
Total loans - Net $ 954,561 100.00% $ 846,151 100.00%
========== ========== ========== ==========
</TABLE>
13
<PAGE> 14
On an average basis, total gross loans net of deferred loan fees amounted
to $905.0 million for the nine months ended September 30, 1998, compared to
$795.0 million for the same period a year ago, an increase of $110.0 million or
13.84%. For the third quarter, average gross loans net of deferred loan fees
totaled $942.7 million in 1998, compared to $814.9 million in 1997, an increase
of $127.8 million or 15.68%.
RISK ELEMENTS OF THE LOAN PORTFOLIO
NON-PERFORMING ASSETS
Non-performing assets, which include loans past due 90 days or more and
still accruing interest ("loans past due 90 days"), non-accrual loans, and OREO,
totaled $33.9 million or 3.43% of total loans plus OREO as of September 30,
1998, compared to $32.5 million or 3.70% of total loans plus OREO at year-end
1997. The slight increase of $1.4 million or 4.18% was primarily from a $4.8
million increase in loans past due 90 days offset by a $3.6 million decrease in
non-accrual loans. However, the loans representing the increase in loans past
due 90 days were secured by certificates of deposits and the interest on those
loans have been brought to less than 90 days past due as of November 12, 1998.
The non-performing loan coverage ratio, defined as the allowance for loan losses
to non-performing loans, decreased slightly from 79.85% at year-end 1997 to
75.82% as of September 30, 1998, primarily due to a $1.3 million increase in
non-performing loans. The following table presents the breakdown of
non-performing assets by categories as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
As of As of As of As of
9/30/98 6/30/98 3/31/98 12/31/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Loans past due 90 days or more and
still accruing interest $ 7,189 $ 2,242 $ 1,463 $ 2,373
Non-accrual loans 13,327 15,740 16,971 16,886
------- ------- ------- -------
Total non-performing loans 20,516 17,982 18,434 19,259
Real estate acquired in foreclosure 13,373 12,889 13,481 13,269
------- ------- ------- -------
Total non-performing assets $33,889 $30,871 $31,915 $32,528
======= ======= ======= =======
Accruing troubled debt restructurings 4,658 4,369 4,379 4,874
Non-performing assets as a percentage of
period-end total loans plus OREO 3.43% 3.33% 3.50% 3.70%
</TABLE>
The non-accrual loans of $13.3 million as of September 30, 1998 consisted
mainly of $7.5 million in commercial real estate loans and $4.8 million in
commercial loans. The following tables present the type of collaterals securing
the loans and the type of businesses the borrowers engaged in under commercial
real estate and commercial non-accrual loan categories as of the dates
indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
9/30/98 12/31/97
------------------------ -------------------------
Non-accrual Loan Balance
-----------------------------------------------------
Commercial Commercial
TYPES OF COLLATERALS: Real Estate Commercial Real Estate Commercial
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Single/multi-family residence $ 353 $ 1,055 $ 593 $ 311
Commercial real estate 5,603 3,063 8,471 5,095
Motel 1,598 30 1,350 -0-
UCC -0- 564 -0- -0-
Others -0- 50 214 110
------- ------- ------- -------
Total $ 7,554 $ 4,762 $10,628 $ 5,516
======= ======= ======= =======
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
(Dollars in thousands)
9/30/98 12/31/97
------------------------ -------------------------
Non-accrual Loan Balance
-----------------------------------------------------
Commercial Commercial
TYPES OF BUSINESSES: Real Estate Commercial Real Estate Commercial
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate development $ 283 $ 198 $ -0- $ 134
Real estate management 4,008 36 6,303 36
Wholesale/Retail/Trading 429 2,074 430 2,994
Food/Restaurant -0- 1,075 -0- 1,190
Import -0- 643 752 4
Motel 1,315 -0- 1,350 -0-
Investments 386 -0- 1,194 -0-
Industrial -0- 320 214 263
Clothing 353 153 385 441
Others 780 263 -0- 454
------- ------- ------- -------
Total $ 7,554 $ 4,762 $10,628 $ 5,516
======= ======= ======= =======
</TABLE>
As shown in the above tables under the commercial real estate loan category
as of September 30, 1998, the $5.6 million balance in loans secured by
commercial real estate represents four credits, all of which were secured by
first trust deeds on commercial buildings. The $1.6 million balance in loans
secured by motels represents two credits secured by first trust deeds on the
respective motels located in California. Under the commercial loan category as
of September 30, 1998, the $3.1 million balance in loans secured by commercial
real estate consisted of 12 credits. The collateral on these credits include
primarily first trust deeds and secondarily second and third trust deeds on
commercial buildings and warehouses.
Troubled debt restructurings were $4.7 million as of September 30, 1998,
slightly less than the $4.9 million at year-end 1997. All of these restructured
loans were current under their revised terms as of September 30, 1998.
There were no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of September 30, 1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $15.6 million or 1.60% of total
loans as of September 30, 1998, compared to $15.4 million or 1.78% of total
loans at year-end 1997. The following table presents information relating to the
allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
YTD YTD
ALLOWANCE FOR LOAN LOSSES: 9/30/98 12/31/97
--------- ---------
<S> <C> <C>
Balance at beginning of period $ 15,379 $ 13,529
Provision for loan losses 2,700 3,600
Loans charged-off (2,904) (2,139)
Recoveries of charged-off loans 380 389
--------- ---------
Balance at end of period $ 15,555 $ 15,379
========= =========
Average loans outstanding during the period $ 889,065 $ 792,176
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.38% 0.22%
Provision for loan losses to average loans
outstanding during the period (annualized) 0.41% 0.45%
Allowance to non-performing loans at period-end 75.82% 79.85%
Allowance to total loans at period-end 1.60% 1.78%
</TABLE>
15
<PAGE> 16
In determing the allowance for loan losses, management continues to assess
the risks inherent in the loan portfolio, the possible impact of known and
potential problem loans, and other factors such as collateral value, portfolio
composition, loan concentration, financial strength of borrower, and trends in
local economic conditions.
The Bank's allowance for loan losses consists of a specific allowance and a
general allowance. The specific allowance is further broken down to provide for
impaired loans and the remaining internally classified loans. Management
allocates a specific allowance to those remaining internally classified loans
which do not require impairment allowance, based on the current financial
condition of the borrowers and guarantors, the prevailing value of the
underlying collateral and general economic conditions. The general allowance is
determined by an assessment of the overall quality of the unclassified portion
of the loan portfolio as a whole, and by loan type. Management maintained the
percentage assigned to the general allowance based on charge-off history and
management's knowledge of the quality of the portfolio. The following table
presents a breakdown of impaired loans and the impairment allowance related to
impaired loans:
<TABLE>
<CAPTION>
(Dollars in thousands)
As of 9/30/98 As of 12/31/97
----------------------- ------------------------
SFAS No. 114 SFAS No. 114
Recorded Impairment Recorded Impairment
IMPAIRED LOANS WITH IMPAIRMENT ALLOWANCE: Investment Allowance Investment Allowance
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Commercial $ 8,273 $ 1,152 $ 7,784 $ 1,499
Commercial real estate 13,011 2,051 14,027 2,396
Other 59 59 95 95
------- ------- ------- -------
Total impaired loans with impairment allowance $21,343 $ 3,262 $21,906 $ 3,990
======= ======= ======= =======
</TABLE>
Based on the Company's evaluation process and the methodology to determine
the level of the allowance for loan losses, management believes the allowance
level as of September 30, 1998 to be adequate to absorb the estimated known and
inherent risks identified through its analysis.
OTHER REAL ESTATE OWNED
The Company's OREO properties, net of valuation allowance, were carried at
$13.4 million as of September 30, 1998, approximately at the same level as those
carried at $13.3 million at year-end 1997. During the first nine months of 1998,
the Company acquired nine properties totaling $3.4 million and disposed of nine
properties totaling $3.8 million with a net gain of $201,000. Subsequent to
September 30, 1998, five more properties totaling $2.3 million have been
disposed of. The Bank has 23 OREO properties at September 30, 1998 which include
commercial buildings, warehouses, land, single family residences, apartments and
condominiums, all of which are located in Southern California.
The Bank continues to maintain a valuation allowance for the OREO
properties in order to record estimated fair value of the properties. Periodic
evaluation is performed on each property and corresponding adjustment is made to
the valuation allowance. Any decline in value is recognized as non-interest
expense under the provision for OREO losses in the current period and any
balance in the valuation allowance is reversed when the respective property is
sold. During the first nine months of 1998, management provided approximately
$175,000 to the provision for OREO losses based on new listing prices or new
appraisals received bringing the valuation allowance to $632,000 as of September
30, 1998. For the nine months ended September 30, 1998, the Bank recognized net
income from its OREO properties totaling $241,000 which is included in the other
operating income in the accompanying condensed consolidated financial
statements.
DEPOSITS
Total deposits increased $48.1 million or 3.31% from $1,449.1 million at
year-end 1997 to $1,497.2 million at September 30, 1998. Approximately 96% of
the increase was from time deposits over
16
<PAGE> 17
$100,000 ("Jumbo CD's"). Consequently, the ratio of core deposits (defined as
all deposits excluding Jumbo CD's and brokered deposits) to total deposits
continued to decline from 62.11% at year-end 1997 to 60.24% at September 30,
1998. There were no brokered deposits as of September 30, 1998.
Average total deposits were up $87.6 million or 6.26% from $1,400.3 million
for the third quarter of 1997 to $1,487.9 million for the same quarter of 1998.
The average deposits grew $83.9 million or 6.06% from $1,383.6 million for the
nine months ended September 30, 1997 to $1,467.4 million for the same period in
1998.
Management continues to monitor the Jumbo CD portfolio to identify any
changes in the deposit behavior in the market and of the patrons the Bank is
servicing. Although the Bank's Jumbo CD portfolio kept growing, management
considers the Bank's Jumbo CD's generally less volatile since 1) a majority of
the Bank's Jumbo CD's have stayed with the Bank for more than two years; 2) the
Jumbo CD portfolio continued to be diversified with 3,510 individual accounts
averaging approximately $165,000 per account owned by 2,516 individual
depositors as of July 23, 1998; and 3) this phenomenon of having relatively
higher percentage of Jumbo CD's exists in most of the Asian American banks in
the Company's market which is dictated by the fact that the customers in this
market tend to have a higher savings rate. To discourage the growth in Jumbo
CD's, management has continued to make efforts in the following areas: 1) to
offer non-competitive interest rates paid on Jumbo CD's; 2) to develop new
transaction-based products and to promote such products to attract depositors;
and 3) to diversify the customer base by branch expansion and/or acquisition as
opportunities arise. The following table illustrates the deposit mix as of the
dates and for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
As of 9/30/98 As of 12/31/97
--------------------------- ---------------------------
TYPES OF DEPOSITS: Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Demand $ 165,160 11.03% $ 175,875 12.14%
NOW accounts 110,397 7.37 111,653 7.70
Money market accounts 95,579 6.38 94,708 6.54
Savings deposits 206,833 13.82 210,291 14.51
Time deposits under $100,000 323,921 21.64 307,504 21.22
Time deposits of $100,000 or more 595,262 39.76 549,090 37.89
---------- ---------- ---------- ----------
Total deposits $1,497,152 100.00% $1,449,121 100.00%
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
3rd Qtr, 1998 3rd Qtr, 1997
--------------------------- ---------------------------
AVERAGE DEPOSITS: Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Demand $ 168,997 11.36% $ 145,543 10.39%
NOW accounts 111,879 7.52 114,065 8.15
Money market accounts 96,754 6.50 100,836 7.20
Savings deposits 206,018 13.85 213,925 15.28
Time deposits under $100,000 323,340 21.73 307,139 21.93
Time deposits of $100,000 or more 580,996 39.05 518,838 37.05
---------- ---------- ---------- ----------
Total deposits $1,487,984 100.00% $1,400,346 100.00%
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YTD 9/30/98 YTD 9/30/97
--------------------------- ---------------------------
AVERAGE DEPOSITS: Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Demand $ 164,362 11.20% $ 140,194 10.13%
NOW accounts 112,017 7.63 114,721 8.29
Money market accounts 95,762 6.53 98,077 7.09
Savings deposits 205,421 14.00 218,258 15.78
Time deposits under $100,000 320,003 21.81 307,497 22.23
Time deposits of $100,000 or more 569,855 38.83 504,807 36.49
---------- ---------- ---------- ----------
Total deposits $1,467,420 100.00% $1,383,554 100.00%
========== ========== ========== ==========
</TABLE>
17
<PAGE> 18
CAPITAL RESOURCES
On February 19, 1998 the Company's Board of Directors adopted an "Equity
Incentive Plan" ("the Plan") which was approved by stockholders at the April 20,
1998 Annual Meeting of Stockholders. The Plan will expire on February 18, 2008.
On September 17, 1998, the Company granted 45,000 shares of common stock options
with an exercise price of $33.00 per share to ten eligible senior officers and
nine outside directors.
Stockholders' equity amounted to $151.2 million or 8.83% of total assets as
of September 30, 1998, compared to $135.9 million or 8.37% of total assets at
year-end 1997. The increase of $15.3 million or 11.3% in stockholders' equity
was primarily due to an addition of $17.7 million from year-to-date net income,
$1.2 million from issuance of additional common shares through Dividend
Reinvestment Plan and an increase of $1.1 million in the net unrealized holding
gains on securities available-for-sale, net of tax, which were partially offset
by dividends paid in the amount of $4.7 million.
The Company declared a cash dividend of $0.175 per common share in January,
April, July and October of 1998, respectively, on 8,941,743, 8,953,307,
8,965,315 and 8,975,129 shares outstanding, respectively. Total cash dividends
paid in 1998, including the $1.6 million paid in October 1998, amounted to $6.3
million.
Management is committed to retain the Company's capital at a level
sufficient to support future growth, to protect depositors, to absorb any
unanticipated losses and to comply with various regulatory requirements.
The following tables present the Company and the Bank's capital and
leverage ratios as of September 30, 1998 and December 31, 1997. Despite slight
decreases in Tier 1 and Total capital ratios comparing September 30, 1998 to
December 31, 1997, the Bank's regulatory capital continued to be well above the
regulatory minimum requirements. In addition, the capital ratios of the Bank
place it in the "well capitalized" category which is defined as institutions
with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based
capital ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio
equal to or greater than 5.0%.
<TABLE>
<CAPTION>
(Dollars in thousands)
COMPANY
--------------------------------------------------------------------
As of 9/30/1998 As of 12/31/1997
------------------------------ ------------------------------
Balance Percent Balance Percent
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 140,965(1) 11.37% $ 125,977(2) 11.73%
Tier 1 capital minimum requirement 49,581 4.00 42,957 4.00
------------- ------------- ------------- -------------
Excess $ 91,384 7.37% $ 83,020 7.73%
============= ============= ============= =============
Total capital (to risk-weighted assets) $ 156,460(1) 12.62% $ 139,425(2) 12.98%
Total capital minimum requirement 99,162 8.00 85,913 8.00
------------- ------------- ------------- -------------
Excess $ 57,298 4.62% $ 53,512 4.98%
============= ============= ============= =============
Risk-weighted assets $ 1,239,521 $ 1,073,918
Tier 1 capital (to average assets)
- Leverage ratio $ 140,965(1) 8.41% $ 125,977(2) 7.94%
Minimum leverage requirement 67,017 4.00 63,484 4.00
------------- ------------- ------------- -------------
Excess $ 73,948 4.41% $ 62,493 3.94%
============= ============= ============= =============
Total average assets $ 1,675,421 $ 1,587,099
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
BANK
--------------------------------------------------------------------
As of 9/30/1998 As of 12/31/1997
------------------------------ ------------------------------
Balance Percent Balance Percent
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 136,323(1) 11.00% $ 122,431(2) 11.40%
Tier 1 capital minimum requirement 49,581 4.00 42,957 4.00
------------- ------------- ------------- -------------
Excess $ 86,742 7.00% $ 79,474 7.40%
============= ============= ============= =============
Total capital (to risk-weighted assets) $ 151,818(1) 12.25% $ 135,879(2) 12.65%
Total capital minimum requirement 99,161 8.00 85,913 8.00
------------- ------------- ------------- -------------
Excess $ 52,656 4.25% $ 49,966 4.65%
============= ============= ============= =============
Risk-weighted assets $ 1,239,518 $ 1,073,915
Tier 1 capital (to average assets)
- Leverage ratio $ 136,323(1) 8.14% $ 122,431(2) 7.71%
Minimum leverage requirement 67,017 4.00 63,484 4.00
------------- ------------- ------------- -------------
Excess $ 69,306 4.14% $ 58,947 3.71%
============= ============= ============= =============
Total average assets $ 1,675,416 $ 1,587,096
</TABLE>
(1) Excluding the unrealized holding gains/losses on securities
available-for-sale of $1,465,000, and goodwill of $8,759,000.
(2) Excluding the unrealized holding gains on securities available-for-sale of
$370,000, and goodwill of $9,530,000.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The Company manages its assets and liabilities to maximize its net interest
income through growth opportunities and competitive pricing, while striving to
minimize its market risk and to maintain adequate liquidity to meet the maturing
financial obligations and customer credit needs. The Company can but is not
utilizing hedging instruments currently to maintain and/or augment its spread,
as management believes that it is not cost-effective at this time.
The Company manages various market risks in the ordinary course of business.
The principal market risk to the Company is the interest rate risk inherent in
its lending, investing and deposit taking activities, due to the fact that
interest-earning assets and interest-bearing liabilities of the Company do not
change at the same speed, to the same extent, or on the same basis. The
composition of the Company's financial instruments that are sensitive to changes
in interest rates have not significantly changed since December 31, 1997.
The Company actively monitors and manages its interest rate risk through
analyzing the repricing characteristics of its loans, securities, and deposits
on an on-going basis. The primary objective is to minimize the adverse effects
of changes in interest rates on its earnings and ultimately the underlying
market value of equity while structuring the Company's asset-liability
composition to obtain the maximum spread. Management uses certain basic
measurement tools in conjunction with established risk limits to regulate its
interest rate exposure. Because of the limitation inherent in any individual
risk management tool, the Company uses both an interest rate sensitivity
analysis and a simulation model to measure and quantify the impact to the
Company's profitability or the market value of its assets and liabilities.
The interest rate sensitivity analysis measures the Company's exposure to
differential changes in interest rates between assets and liabilities. This
analysis details the expected maturity and repricing opportunities mismatch or
sensitivity gap between interest-earning assets and interest-bearing liabilities
over a specified timeframe. A positive gap exists when rate sensitive assets
which reprice over a given time period exceed rate sensitive liabilities. During
periods of increasing interest rates environment, net interest margin may be
enhanced with a positive gap. Contrarily, a negative gap exists when rate
19
<PAGE> 20
sensitive liabilities which reprice over a given time period exceed rate
sensitive assets. During periods of increasing interest rates, net interest
margin may be impaired. As of September 30, 1998, the Company was asset
sensitive with a cumulative gap ratio of a positive 19.23% within three months,
and liability sensitive with a cumulative gap ratio of a negative 11.10% within
a 1-year period, compared to a positive 17.28% within three months, and a
negative 10.49% within a 1-year period as of December 31, 1997.
Since interest rate sensitivity analysis does not measure the timing
differences in the repricing of asset and liabilities, the Company uses a
simulation model to quantify the extent of the differences in the behavior of
the lending and funding rates, so as to project future earnings or market values
under alternative interest scenarios.
The simulation measures the volatility of net interest income and market
value of equity under immediate rising or falling interest rate scenarios in 25
to 100 basis point increments. The Company establishes a tolerance level in its
policy to define and limit interest income volatility to a change of plus or
minus 30% when the hypothetical rate change is plus or minus 200 basis points.
When the tolerance level is met or exceeded, the Company then seeks corrective
action after considering, among other things, market conditions, customer
reaction and the estimated impact on profitability. As of September 30, 1998,
the Company's interest income volatility was within the Company's established
tolerance level.
The Company's principal sources of liquidity have been growth in deposits,
proceeds from the maturity or sale of securities and other financial
instruments, repayments from securities and loans and advances from Federal Home
Loan Bank. The Company's liquidity ratio (defined as net cash, short-term and
marketable securities to net deposits and short-term liabilities) decreased
slightly to 43.29% as of September 30, 1998, compared to 45.59% at year-end
1997.
To supplement its liquidity needs, the Bank maintains a total credit line
of $40 million for Federal funds with two correspondent banks, a repo line of
$100 million with a brokerage firm and a total retail certificate of deposit
line of approximately $175 million with two brokerage firms. The Bank is also a
shareholder of Federal Home Loan Bank (FHLB) which enables the Bank to have
access to lower cost FHLB financing when necessary. The Bank started to make
advances from FHLB in the third quarter which amounted to $20 million as of
September 30, 1998. Management believes all the above-mentioned sources will
provide adequate liquidity to the Company to meet its daily operating needs.
YEAR 2000 READINESS DISCLOSURES
The Company's State of Readiness
1. Progress Schedule
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ----------------------- ----------------------- ----------------------
Phase I Phase II Phase III Phase IV Phase V
Awareness Assessment Renovation Testing/Validation Implementation
- ------------------------ ---------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Completed by 12/31/97 - Completed by 6/30/98 Underway Underway - the Underway
on schedule - on schedule simultaneously with majority of the simultaneously with
the Testing and testing on mission the Renovation,
Validation phase and critical systems is Testing and
is scheduled for scheduled for Validation phases and
completion by 12/31/98 completion by 12/31/98 is scheduled for
completion by 12/31/98
- ------------------------ ---------------------- ----------------------- ----------------------- ----------------------
</TABLE>
20
<PAGE> 21
2. Status of Efforts
During the Assessment Phase, the Bank determined its mission critical
systems for the Year 2000 ("Y2K") project. The FDIC defines "mission critical"
systems to be "vital to the successful continuance of a core business activity".
The mission critical systems are as follows:
- IBM mainframe ES9221-191;
- Kirchman D-3000;
- Olivetti Aladdin teller system;
- S.W.I.F.T. Pan America wire transfer;
- FRB Fedline, Midanet, etc.;
- Zions Bank's TPG Procomm Plus and Sendero investment tracking systems;
and
- CFI Deposit Pro and Laser Pro processing systems.
Each of these systems has been evaluated for Y2K readiness. The necessary
software upgrades have been ordered and installed as they have become available
from the vendors. As the upgrades are completed, the systems will then be tested
for Y2K readiness in the Bank working environment.
In addition to the above information technology systems, the Company has
also identified the material non information technology systems' Y2K compliant
issues, such as utilities, telephone, elevator, fax and copier, etc. With the
exception of utilities and telephone systems, all other material non information
technology systems are Y2K compliant. The utilities and telephone companies have
also assured the Company in writing that they will be Y2K ready in time.
3. Results of Testing
The status of testing the mission critical systems is as follows:
- IBM mainframe: Y2K update received in 1/98 and is installed; one
additional upgrade is due to be installed by 12/31/98; testing to be
done by IBM by 12/31/98
- Kirchman D-3000: Y2K certified by vendor; testing results received in
6/98; Bank officers reviewed test results in 8/98; interface testing
scheduled for 12/31/98
- Olivetti Aladdin: Upgrade installed; preliminary tests completed, but
more testing is required by 12/31/98
- S.W.I.F.T. wire: Y2K certified by vendor; upgraded PC operating
system; now testing upgrade S.W.I.F.T. software per S.W.I.F.T. testing
protocols to be completed by 12/31/98
- FRB Fedline, etc.: FRB upgrades installed; upgraded PC operating
system; testing successful; will test subsequent upgrades as they are
issued by FRB
- Zions Bank programs: Y2K certified by vendor; Zions Bank is on
schedule for its Y2K readiness by 12/31/98
- CFI processing systems: Laser Pro - Upgrade is Y2K certified; will
upgrade PCs and install upgrade by 3/31/99; Deposit Pro - Y2K
certified, no upgrade is needed
4. Results of Y2K Borrower Review Process
The Borrower Review Process began in 6/98 to determine the Y2K readiness of
the Bank's major borrowers. A Y2K questionnaire has been mailed to each
borrower with total commitments of
21
<PAGE> 22
$1,000,000 or more. A loan officer was scheduled to contact each borrower
during the past quarter of 1998 and to complete a Y2K risk evaluation based
upon the questionnaire and interview.
The Costs to Address the Company's Y2K Issues
The total cost of the Company's plan to address the Y2K issues is currently
estimated to be $750,000 which includes allocated human resource expense,
hardware replacements, software upgrades and testing, coordinating, training and
other miscellaneous expenses. Any allocated human resource costs have been and
will continue to be expensed as incurred. These estimated Y2K compliant costs
are expected to be funded through the Company's operating cash flow. As of
November 12, 1998, the costs incurred related to Y2K issues are estimated to be
$150,000.
However, there is no assurance that the actual costs to address the Y2K
issues will not exceed the Company's current estimate. It is not expected that
these costs will have a material adverse effect on the Company's financial
condition or results of operations.
The Risks of the Company's Year 2000 Issues
The Company reviews the costs and the progress of its remediation program
to ensure that unforeseen problems and uncertainties associated with Y2K
consequences are resolved in a timely manner. Although the Company believes it
has addressed all aspects of the Y2K issues, there can be no assurance that the
systems of other companies on which the Company's systems rely or the systems of
the Company's borrowers also will be timely converted. Any such failure to
convert by another company may result in the Company's inability to operate
properly and to produce accurate customer statements causing the loss of
customers, therefore, may have an adverse effect on the Company's financial
condition or results of operations.
The Company's Contingency Plans
A Year 2000 contingency team is working to provide detailed answers to
internal contingency plan questionnaires. 98% of the backup procedures have been
identified for the mission critical systems and processes. The backup procedures
are scheduled for testing by year end. The plan is on schedule to be finalized
in the first quarter of 1999. The final contingency plan will cover
contingencies for December 31, 1999 and for January 1, 2000.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, including its wholly-owned subsidiary, Cathay Bank, has been a
party to ordinary routine litigation incidental to various aspects of its
operations.
Management is not currently aware of any other litigation that will have
material adverse impact on the Company's consolidated financial condition, or
the results of operations.
ITEM 2. CHANGES IN SECURITIES
There have been no changes in securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no reportable events.
ITEM 5. OTHER INFORMATION
There were no reportable events.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
27 Financial Data Schedule
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cathay Bancorp, Inc.
(Registrant)
Date: November 12, 1998 DUNSON K. CHENG
----------------- ---------------
Dunson K. Cheng
Chairman and President
Date: November 12, 1998 ANTHONY M. TANG
----------------- ---------------
Anthony M. Tang
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 69,205
<INT-BEARING-DEPOSITS> 489
<FED-FUNDS-SOLD> 80,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 184,698
<INVESTMENTS-CARRYING> 342,744
<INVESTMENTS-MARKET> 353,487
<LOANS> 970,116
<ALLOWANCE> 15,555
<TOTAL-ASSETS> 1,711,702
<DEPOSITS> 1,497,152
<SHORT-TERM> 21,798
<LIABILITIES-OTHER> 21,563
<LONG-TERM> 20,000
90
0
<COMMON> 0
<OTHER-SE> 151,099
<TOTAL-LIABILITIES-AND-EQUITY> 1,711,702
<INTEREST-LOAN> 61,473
<INTEREST-INVEST> 27,063
<INTEREST-OTHER> 2,696
<INTEREST-TOTAL> 91,232
<INTEREST-DEPOSIT> 40,531
<INTEREST-EXPENSE> 42,452
<INTEREST-INCOME-NET> 48,780
<LOAN-LOSSES> 2,700
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 23,226
<INCOME-PRETAX> 29,267
<INCOME-PRE-EXTRAORDINARY> 29,267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,699
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 4.34
<LOANS-NON> 13,327
<LOANS-PAST> 7,189
<LOANS-TROUBLED> 4,658
<LOANS-PROBLEM> 7,245
<ALLOWANCE-OPEN> 15,379
<CHARGE-OFFS> 2,904
<RECOVERIES> 380
<ALLOWANCE-CLOSE> 15,555
<ALLOWANCE-DOMESTIC> 15,555
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
