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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 June 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
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 625-4700
---------------------------
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(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, 8,965,315 shares outstanding as of June
30, 1998.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION .................................................................................... 3
Item 1. 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 ..................................................... 9-19
PART II - OTHER INFORMATION ....................................................................................... 20-21
Item 1. Legal Proceedings ................................................................................. 20-21
Item 2. Changes in Securities ............................................................................. 20-21
Item 3. Defaults upon Senior Securities ................................................................... 20-21
Item 4. Submission of Matters to a Vote of Security Holders ............................................... 20-21
Item 5. Other Information ................................................................................. 20-21
Item 6. Exhibits and Reports on Form 8-K .................................................................. 20-21
SIGNATURES......................................................................................................... 22
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of June 30, 1998 and December 31, 1997
(in thousands, except for per share data)
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
(unaudited) (unaudited)
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<S> <C> <C>
ASSETS
Cash and due from banks $ 60,472 $ 57,728
Federal funds sold and securities purchased under
agreement to resell 52,000 67,000
------------- -------------
Cash and cash equivalents 112,472 124,728
Securities available-for-sale (with amortized costs of
$188,530 in 1998 and $215,466 in 1997) 189,981 216,158
Securities held-to-maturity (with estimated fair
values of $380,447 in 1998 and $356,187 in 1997) 374,129 350,336
Loans (net of allowance for loan losses of
$16,514 in 1998 and $15,379 in 1997) 894,187 846,151
Other real estate owned, net 12,889 13,269
Investments in real estate, net 1,565 1,654
Premises and equipment, net 25,523 25,202
Customers' liability on acceptance 13,796 10,296
Accrued interest receivable 12,551 12,246
Goodwill 8,928 9,530
Other assets 10,636 12,892
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Total assets $ 1,656,657 $ 1,622,462
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 171,082 $ 175,875
Interest bearing accounts
NOW accounts 113,349 111,653
Money market deposits 95,636 94,708
Savings deposits 205,482 210,291
Time deposits under $100,000 320,133 307,504
Time deposits of $100,000 or more 572,106 549,090
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Total deposits 1,477,788 1,449,121
Securities sold under agreements to repurchase 13,780 23,419
Acceptances outstanding 13,796 10,296
Other liabilities 5,820 3,749
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Total liabilities 1,511,184 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, 8,965,315 and 8,941,743 shares issued and
outstanding in 1998 and 1997, respectively 90 89
Additional paid-in-capital 62,089 61,271
Accumulated other comprehensive income 841 370
Retained earnings 82,453 74,147
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Total stockholders' equity 145,473 135,877
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Total liabilities and stockholders' equity $ 1,656,657 $ 1,622,462
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
2nd Qtr 2nd Qtr YTD YTD
June 1998 June 1997 June 1998 June 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 20,352 $ 18,435 $ 39,906 $ 35,894
Interest on securities available-for-sale 3,395 4,666 6,593 10,108
Interest on securities held-to-maturity 5,738 4,266 11,458 7,505
Interest on Federal funds sold and securities purchased
under agreement to resell 737 233 1,439 809
Interest on deposits with banks 12 -- 17 --
----------- ----------- ----------- -----------
Total interest income 30,234 27,600 59,413 54,316
----------- ----------- ----------- -----------
INTEREST EXPENSE
Time deposits of $100,000 or more 7,605 6,517 14,978 12,496
Other deposits 5,901 5,788 11,757 11,791
Other borrowed funds 576 40 838 63
----------- ----------- ----------- -----------
Total interest expense 14,082 12,345 27,573 24,350
----------- ----------- ----------- -----------
Net interest income before provision for loan losses 16,152 15,255 31,840 29,966
Provision for loan losses 900 900 1,800 1,800
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 15,252 14,355 30,040 28,166
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Securities gains -- -- 35 4
Letter of credit commissions 511 396 955 605
Service charges 1,034 848 2,052 1,664
Other operating income 794 386 1,299 747
----------- ----------- ----------- -----------
Total non-interest income 2,339 1,630 4,341 3,020
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,447 4,029 8,811 7,980
Occupancy expense 603 753 1,256 1,431
Computer and equipment expense 604 552 1,199 1,152
Professional services expense 902 841 1,657 1,578
FDIC and State assessments 101 96 200 151
Marketing expense 333 405 665 816
Net other real estate owned expense -- 220 -- 446
Other operating expense 674 1,005 1,758 1,975
----------- ----------- ----------- -----------
Total non-interest expense 7,664 7,901 15,546 15,529
----------- ----------- ----------- -----------
Income before income tax expense 9,927 8,084 18,835 15,657
Income tax expense 3,906 3,205 7,396 6,259
----------- ----------- ----------- -----------
Net Income $ 6,021 $ 4,879 $ 11,439 $ 9,398
Other comprehensive income, net of tax:
Unrealized holding gain arising during the period 552 1,424 456 270
Less: reclassification of the portion of realized
'loss(gain) included in net income previously
included in other comprehensive gain -- 22 (15) 14
----------- ----------- ----------- -----------
Total other comprehensive gain, net of tax 552 1,402 471 256
----------- ----------- ----------- -----------
Total comprehensive income $ 6,573 $ 6,281 $ 11,910 $ 9,654
=========== =========== =========== ===========
BASIC NET INCOME PER COMMON SHARE, based
on the weighted average number of common shares
outstanding during the periods: $ 0.67 $ 0.55 1.28 1.06
Weighted average number of common shares outstanding 8,962,147 8,908,789 8,956,020 8,899,796
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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CATHAY BANCORP, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
----------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 11,439 $ 9,398
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,800 1,800
Provision for losses on other real estate owned 56 275
Depreciation 610 676
Net (gain) loss on sale of other real estate owned (199) 48
Net gain on sales of premises and equipment (2) --
Net gain on sales and calls of securities (35) (4)
Amortization and accretion of investment
security premiums, net 144 312
Amortization of goodwill 602 106
Increase in deferred loan fees, net 113 28
(Increase) decrease in accrued interest receivable, net (305) 311
(Increase) decrease in other assets, net 2,256 (1,716)
Increase in other liabilities, net 2,071 304
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Total adjustments 7,111 2,140
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Net cash provided by operating activities 18,550 11,538
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (291,318) (25,006)
Proceeds from maturity and call of securities available-for-sale 317,759 81,839
Purchase of securities held-to-maturity (5,193) (10,239)
Proceeds from maturity and call of securities held-to-maturity 1,130 9,747
Proceeds from sale of securities available-for-sale 6,424 --
Purchase of mortgage-backed securities available-for-sale (24,581) --
Proceeds from repayments of mortgage-backed securities
available-for-sale 18,634 2,985
Purchase of mortgage-backed securities held-to-maturity (51,305) (60,592)
Repayments from mortgage-backed securities held-to-maturity 31,196 4,995
Proceeds from sale of loans -- 1,834
Purchase of loans (6,782) --
Net increase in loans (44,445) (30,203)
Purchase of premises and equipment (931) (350)
Proceeds from sale of equipment 2 --
Proceeds from sale of other real estate owned 1,801 3,233
Decrease in investments in real estate 89 137
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Net cash used in investing activities (47,520) (21,620)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts,
money market and savings deposits (6,978) 6,819
Net increase in time deposits 35,645 20,115
Net decrease in securities sold under agreements to repurchase (9,639) (7,078)
Cash dividends (3,132) (2,666)
Proceeds from shares issued to Dividend Reinvestment Plan 818 709
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Net cash provided by financing activities 16,714 17,899
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Increase (decrease) in cash and cash equivalents (12,256) 7,817
Cash and cash equivalents, beginning of the period 124,728 75,194
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Cash and cash equivalents, end of the period $ 112,472 $ 83,011
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Supplemental disclosure of cash flow information
Cash paid during the period
for:
Interest $ 27,644 $ 23,949
Income taxes $ 6,770 $ 6,316
Non-cash investing activities:
Transfers to securities available-for-sale $ 365 $ 630
within 90 days of maturity
Net change in unrealized holding gain on securities
available-for-sale, net of tax $ 471 $ 256
Transfers to other real estate owned $ 2,714 $ 1,742
Loans to facilitate the sale of other real estate owned $ 1,436 $ 6,650
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
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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 six months ended June 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 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards to report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 is effective for financial statement for
periods beginning after December 15, 1997, with comparative information for
earlier years to be restated. The Company has concluded it is in one
segment-banking. Accordingly, the adoption of SFAS No. 131 did not have material
effect on the consolidated financial statements or disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure About
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirement for pension and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate analysis; and eliminates certain disclosure
required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination of Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pension" which are no longer
useful. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997, with comparative information for earlier years to be restated. The impact
on the Company of adopting SFAS No. 132 is not expected to be material.
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
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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 determined the effect of implementing this Statement.
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 shareholders' equity accumulated 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
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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 second quarter of 1998, the Company reported net income of $6.0
million or $0.67 per common share, compared to $4.9 million or $0.55 per common
share for the second quarter of 1997, representing an increase of $1.1 million
or 23.4%. Income before income tax expense amounted to $9.9 million for the
second quarter of 1998, an increase of $1.8 million or 22.8% over the $8.1
million for the same quarter a year ago. The increase was attributed to a
$897,000 increase in net interest income before provision for loan losses and a
$709,000 increase in non-interest income while non-interest expense decreased
$237,000. The annualized return on average assets ("ROA") and return on average
stockholders' equity ("ROE") were 1.46% and 16.92%, respectively, for the second
quarter of 1998, compared to 1.29% and 15.85%, respectively, for the second
quarter of 1997.
For the six month ended June 30, 1998, the Company reported net income of
$11.4 million or $1.28 per common share, compared to $9.4 million or $1.06 per
common share for the same period a year ago. This represents an increase of $2.0
million or 21.7%. Income before income tax expense amounted to $18.8 million and
$15.6 million, respectively, for the six months ended June 30, 1998 and 1997.
The $3.2 million or 20.3% increase came from a $1.9 million increase in net
interest income before provision for loan losses and a $1.3 million increase in
non-interest income. The annualized ROA and ROE for the first six months of 1998
were 1.41% and 16.40%, respectively, compared to 1.25% and 15.50% for the same
period in 1997.
NET INTEREST INCOME
Net interest income before provision for loan losses totaled $31.8 million
for the first six months of 1998, which represents an increase of $1.9 million
or 6.3% over the $29.9 million for the same period of 1997. On a taxable
equivalent basis, net interest income rose $1.9 million as well or 6.2% to $32.4
million for the first six months of 1998, compared to $30.5 million for the same
period a year ago. The increase in net interest income before provision for loan
losses was substantially attributable to a $127.4 million growth in the average
interest-earning assets, primarily in loans. Average net loans amounted to
$869.6 million and accounted for 57.9% of average interest-earning assets in the
first six months of 1998, compared to $770.8 million or 56.0% of average
interest-earning assets for the same period a year ago. The increase in average
loans was primarily funded by time deposits. The increase in volume contributed
an additional $4.0 million to net interest income, which was slightly offset by
a 14 basis point decrease in the average yield on loans despite a 12 basis point
increase in the Bank's reference rate in the first six months of 1998. The keen
competition in the Bank's marketplace played an important role in the decrease
in the average loan yield. The taxable equivalent average yield on earning
assets remained approximately at the same level at 8.06% and 8.05% for the first
six months of 1998 and 1997, respectively, while cost of funds increased 23
basis points from 3.96% in 1997 to 4.19% in 1998 largely due to higher average
rates on time deposits from 5.01% to 5.16% coupled with higher average rates on
securities sold under agreement to repurchase. Consequently, net interest
margin, defined as taxable equivalent net interest income to average earning
assets, declined 12 basis points from 4.48% to 4.36% between the first six
months of 1997 and 1998.
For the second quarter of 1998, net interest income before provision for
loan losses totaled $16.2 million, compared to $15.3 million for the same
quarter of 1997. This represents an increase of $897,000 or 5.9%. On a taxable
equivalent basis, net interest income was up $940,000 or 6.1% to $16.4 million
for the second quarter of 1998, compared to $15.5 million for the same quarter
of 1997.
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An increase of $152.4 million in average earning assets essentially accounted
for the increase in the quarterly net interest income. The taxable equivalent
average yield on earning assets decreased 11 basis points in the second quarter
of 1998 to 8.01% compared to 8.12% for the same quarter a year ago, primarily
resulting from a decrease of 17 basis points in average loan yield. Meanwhile,
cost of funds advanced 20 basis points from 4.00% a year ago to 4.20% for the
second quarter of 1998. Therefore, net interest margin decreased 20 basis points
from 4.52% to 4.32% between the second quarter of 1997 and 1998.
NON-INTEREST INCOME
For the first six months of 1998, non-interest income amounted to $4.3
million, compared to $3.0 million for the same period a year ago. This
represents an increase of $1.3 million or 43.7%. The increase in 1998
non-interest income resulted from: 1) higher service charges due to fee
increases; 2) higher letter of credit commissions due to increased transaction
volume; 3) income from other real estate owned ("OREO") and real estate
investment; 4) income earned in outsourcing the issuing and processing of
cashier's checks and money orders; and 5) higher fees related to loan
documentation and other charges.
On a quarterly basis, non-interest income totaled $2.3 million and $1.6
million for the second quarter of 1998 and 1997, respectively. The increase of
$709,000 or 43.5% was attributable significantly to the same factors discussed
above.
The following tables illustrate the components of non-interest income, as
well as the amount and percentage changes for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
-------------------------------------------------------------
Six Months Ended
----------------------------- Increase Percent
Non-interest income: 06/30/98 06/30/97 (Decrease) Change
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Securities Gains $ 35 $ 4 $ 31 775.0%
Letter of credit commissions 955 605 350 57.9
Service charges 2,052 1,664 388 23.3
Other operating income 1,299 747 552 73.9
------------- ------------- -------------
Total non-interest income $ 4,341 $ 3,020 $ 1,321 43.7%
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
2nd Qtr 2nd Qtr. Increase Percent
Non-interest income: 1998 1997 (Decrease) Change
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Letter of credit commissions $ 511 $ 396 $ 115 29.0%
Service charges 1,034 848 186 21.9
Other operating income 794 386 408 105.7
------------- ------------- -------------
Total non-interest income $ 2,339 $ 1,630 $ 709 43.5%
============= ============= =============
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense totaled $15.5 million for the first six months of 1998,
approximately the same as that for the same period of 1997. The more notable
items in non-interest expense were: (1) salaries and employee benefits which
increased $831,000 or 10.4% due to added personnel to support the newly opened
Berkeley/Richmond Branch as well as new officers for northern California
branches plus annual salary increases; (2) a $446,000 decrease in OREO expense;
and (3) a $124,000 decrease in real estate investment expense which is included
in other operating expense. The efficiency ratio, defined as non-interest
expense divided by net interest income before provision for loan losses plus
non-interest income, was 42.97% for the six months ended June 30, 1998 compared
to 47.08% for the same period in 1997.
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Quarterly, non-interest expense totaled $7.7 million and $7.9 million for
the second quarter of 1998 and 1997, respectively. The lower quarterly
non-interest expense in 1998 was attributable to decreases in OREO expense,
occupancy expense and marketing expense offset by increases in salaries and
employee benefits, professional services expense and computer and equipment
expense. The efficiency ratios for the second quarter of 1998 and 1997 were
41.45% and 46.79%, respectively.
The following tables present the components of the non-interest expense with
the amount and percentage changes for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
-----------------------------------------------------------------
Six Months Ended
------------------------------ Increase Percent
Non-interest expense: 06/30/98 06/30/97 (Decrease) Change
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 8,811 $ 7,980 $ 831 10.4%
Occupancy expense 1,256 1,431 (175) (12.2)
Computer and equipment expense 1,199 1,152 47 4.1
Professional services expense 1,657 1,578 79 5.0
FDIC and State assessments 200 151 49 32.5
Marketing expense 665 816 (151) (18.5)
Net other real estate owned expense -0- 446 (446) (100.0)
Other operating expense 1,758 1,975 (217) (11.0)
------------- ------------- -------------
Total non-interest expense $ 15,546 $ 15,529 $ 17 0.1%
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
2nd Qtr 2nd Qtr. Increase Percent
Non-interest expense: 1998 1997 (Decrease) Change
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 4,447 $ 4,029 $ 418 10.4%
Occupancy expense 603 753 (150) (19.9)
Computer and equipment expense 604 552 52 9.4
Professional services expense 902 841 61 7.3
FDIC and State assessments 101 96 5 5.2
Marketing expense 333 405 (72) (17.8)
Net other real estate owned expense -0- 220 (220) (100.0)
Other operating expense 674 1,005 (331) (32.9)
------------- ------------- -------------
Total non-interest expense $ 7,664 $ 7,901 $ (237) (3.0)%
============= ============= =============
</TABLE>
FINANCIAL CONDITION
The Company experienced moderate growth during the first six months of 1998.
As of June 30, 1998, total assets increased $34.2 million to $1,656.7 million;
loans, net of deferred loan fees, grew $49.2 million to $910.7 million;
investment securities (including available-for-sale and held-to-maturity)
decreased $2.4 million to $564.1 million; deposits grew $28.7 million to
$1,477.8 million; and stockholders' equity increased $9.6 million to $145.5
million, compared to December 31, 1997.
EARNING ASSET MIX
Total earning assets amounted to $1,528.2 million at June 30, 1998, compared
with $1,495.9 million at year-end 1997, representing an increase of $32.3
million or 2.2%. The increase was primarily due to a $49.2 million increase in
loans, net of deferred fees, offset by a $15.0 million decrease in securities
purchased under agreement to resell and a slight decrease in investment
securities (including available-for-sale and held-to-maturity). On an average
basis, interest-earning assets amounted to $1,502.7 million for the first
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six months of 1998 compared to $1,375.3 million for the same period in 1997, an
increase of $127.4 million. As a result of continued loan demand in the first
six months of 1998, average net loans continued to increase as a percentage of
total interest-earning assets from 56.0% for the first six months of 1997 to
57.9% for the same period of 1998, while investment securities (including
available-for-sale and held-to-maturity) decreased from 41.8% for the first six
months of 1997 to 38.8% for the same period of 1998. The change in the earning
asset mix from securities to loans is generally favorable to net interest
income.
The table below shows the changes in the earning asset mix as of the dates
indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
---------------------------------------------------------------------
As of 06/30/98 As of 12/31/97
--------------------------------- ---------------------------------
Types of earning assets: Amount Percent Amount Percent
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreement to resell $ 52,000 3.4% $ 67,000 4.5%
Securities available-for-sale 189,981 12.4 216,158 14.4
Securities held-to-maturity 374,129 24.5 350,336 23.4
Loans (net of deferred fees) 910,701 59.6 861,530 57.6
Deposits with banks 1,344 0.1 855 0.1
------------- ------------- ------------- -------------
Total earning assets $ 1,528,155 100.0% $ 1,495,879 100.0%
============= ============= ============= =============
</TABLE>
SECURITIES
As of June 30, 1998 securities available-for-sale decreased $26.2 million to
$190.0 million while securities held-to-maturity increased $23.8 million to
$374.1 million from the year-end 1997 levels. Combined together, investment
securities at June 30, 1998 decreased $2.4 million to $564.1 million from $566.5
million at year-end 1997. The slight decrease in investment securities was
primarily attributable to increasing loan demand that the Company experienced
during the first six months of 1998. 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 06/30/98
-----------------------------------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 20,008 $ 7 $ 22 $ 19,993
U.S. government agencies 107,908 479 -0- 108,387
State and municipal securities 9,130 100 -0- 9,230
Mortgage-backed securities 28,241 771 25 28,987
Assets-backed securities 12,782 46 -0- 12,828
Federal Home Loan Bank stock 5,819 -0- -0- 5,819
Other securities 4,642 95 -0- 4,737
-------------------- -------------------- -------------------- --------------------
Total $ 188,530 $ 1,498 $ 47 $ 189,981
==================== ==================== ==================== ====================
</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>
12
<PAGE> 13
<TABLE>
<CAPTION>
(Dollars in thousands)
SECURITIES HELD-TO-MATURITY: As of 06/30/98
-----------------------------------------------------------------------------------------
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,041 $ 396 $ -0- $ 26,437
U.S. government agencies 39,360 387 -0- 39,747
State and municipal securities 49,107 1,994 20 51,081
Mortgage-backed securities 250,696 3,316 27 253,985
Other securities 8,925 272 -0- 9,197
-------------------- -------------------- -------------------- --------------------
Total $ 374,129 $ 6,365 $ 47 $ 380,447
==================== ==================== ==================== ====================
</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
Other securities 8,916 221 -0- 9,137
-------------------- -------------------- -------------------- --------------------
Total $ 350,336 $ 5,892 $ 41 $ 356,187
==================== ==================== ==================== ====================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (Dollars in thousands)
As of June 30, 1998
Maturity Schedule
------------------------------------------------------------------------------------
After 1 But After 5 But
SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 19,993 $ -0- $ -0- $ -0- $ 19,993
U.S. government agencies 32,058 76,329 -0- -0- 108,387
State and municipal securities 6,136 -0- 3,094 -0- 9,230
Mortgage-backed securities* -0- 5,939 5,913 17,135 28,987
Assets-backed securities* -0- 12,828 -0- -0- 12,828
Federal Home Loan Bank stock 5,819 -0- -0- -0- 5,819
Other securities -0- -0- 4,737 -0- 4,737
------------ ------------ ------------ ------------ ------------
Total $ 64,006 $ 95,096 $ 13,744 $ 17,135 $ 189,981
============ ============ ============ ============ ============
SECURITIES HELD-TO-MATURITY:
U.S. Treasury securities $ -0- $ 26,041 $ -0- $ -0- $ 26,041
U.S. government agencies -0- 39,360 -0- -0- 39,360
State and municipal securities 1,236 9,553 21,321 16,997 49,107
Mortgage-backed securities* -0- 15,540 67,207 167,949 250,696
Corporate bonds -0- 8,925 -0- -0- 8,925
------------ ------------ ------------ ------------ ------------
Total $ 1,236 $ 99,419 $ 88,528 $ 184,946 $ 374,129
============ ============ ============ ============ ============
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
13
<PAGE> 14
LOANS
The Bank continued to experience satisfying loan demand in the first six
months of 1998. Total gross loans increased $49.3 million or 5.7% to $914.6
million as of June 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 $27.3
million or 8.5% to $347.5 million at June 30, 1998. Real estate mortgage loans
consisted primarily of real estate commercial loans and real estate residential
loans, which increased $23.0 million or 7.6% and $15.7 million or 11.5%,
respectively, to $326.7 million and $152.7 million, respectively, during the
first six months of 1998. The increase in real estate residential loans was
highly attributable to low interest rates which brought up new purchases and
refinancing activities. The following table sets forth the classification of
loans by type and mix as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
--------------------------------------------------------------------------
As of 06/30/98 As of 12/31/97
--------------------------------- ---------------------------------
Types of loans: Amount Percent Amount Percent
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Commercial loans $ 347,490 38.9% $ 338,285 40.0%
Real estate mortgage loans 498,358 55.7 458,417 54.2
Real estate construction loans 40,773 4.6 41,736 4.9
Installment loans 28,076 3.1 26,611 3.1
Other loans (96) (0.0) 267 0.1
------------- ------------- ------------- -------------
Total loans - Gross 914,601 865,316
Allowance for loan losses (16,514) (1.9) (15,379) (1.8)
Unamortized deferred loan fees (3,900) (0.4) (3,786) (0.5)
------------- ------------- ------------- -------------
Total loans - Net $ 894,187 100.0% $ 846,151 100.0%
============= ============= ============= =============
</TABLE>
RISK ELEMENTS OF THE LOAN PORTFOLIO
NON-PERFORMING ASSETS
Non-performing assets were reduced by $1.6 million or 5.1% from $32.5
million or 3.7% of total loans plus OREO at year-end 1997 to $30.9 million or
3.3% of total loans plus OREO as of June 30, 1998. Non-performing assets include
loans past due 90 days or more and still accruing interest, non-accrual loans,
and OREO. The decrease resulted primarily from a reduction of $1.1 million in
non-accrual loans. The non-performing loan coverage ratio, defined as the
allowance for loan losses to non-performing loans, increased from 79.85% at
year-end 1997 to 91.84% as of June 30, 1998, due to the combination of a $1.1
million net increase in the allowance for loans losses and a $1.3 million
decrease 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
Non-Performing Assets: 06/30/98 03/31/98 12/31/97 09/30/97
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Loans past due 90 days or more and
still accruing interest $ 2,242 $ 1,463 $ 2,373 $ 3,516
Non-accrual loans 15,740 16,971 16,886 16,841
------------- ------------- ------------- -------------
Total non-performing loans 17,982 18,434 19,259 20,357
Real estate acquired in foreclosure 12,889 13,481 13,269 10,063
------------- ------------- ------------- -------------
Total non-performing assets $ 30,871 $ 31,915 $ 32,528 $ 30,420
============= ============= ============= =============
Accruing troubled debt restructurings 4,369 4,379 4,874 2,911
Non-performing assets as a percentage of
period-end total loans plus OREO 3.33% 3.50% 3.70% 3.63%
</TABLE>
14
<PAGE> 15
The non-accrual loans of $15.7 million as of June 30, 1998 consisted mainly
of $8.7 million in commercial real estate loans and $6.4 million in commercial
loans. The following tables present the type of properties 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)
---------------------------------------------------------------
06/30/98 12/31/97
----------------------------- -----------------------------
Non-accrual Loan Balance
---------------------------------------------------------------
Commercial Commercial
Type of property: Real Estate Commercial Real Estate Commercial
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Single/multi-family residence $ 914 $ 374 $ 593 $ 311
Commercial 5,966 3,968 8,471 5,095
Motel 1,602 -0- 1,350 -0-
UCC -0- 2,007 -0- -0-
Others 184 16 214 110
------------ ------------ ------------ ------------
Total $ 8,666 $ 6,365 $ 10,628 $ 5,516
============ ============ ============ ============
Type of business:
Real estate development $ 554 $ 122 $ -0- $ 134
Real estate management 4,112 35 6,303 36
Wholesale 678 1,964 430 2,994
Food/Restaurant -0- 1,093 -0- 1,190
Import -0- 2,155 752 4
Motel 1,602 -0- 1,350 -0-
Investments 396 -0- 1,194 -0-
Industrial 183 209 214 263
Clothing 361 162 385 441
Others 780 625 -0- 454
------------ ------------ ------------ ------------
Total $ 8,666 $ 6,365 $ 10,628 $ 5,516
============ ============ ============ ============
</TABLE>
As shown in the above tables under the commercial real estate loan category
as of June 30, 1998, the $6.0 million balance in commercial loans represents
five credits, all of which were secured by first trust deeds on commercial
buildings and warehouses. The $1.6 million balance in motel loans represents two
credits secured by first trust deeds on the respective motels located in
Southern California. Under the commercial loan category as of June 30, 1998, the
$4.0 million balance consisted of 14 credits. The collateral on these credits
include primarily first trust deeds and secondarily second and third trust deeds
on commercial buildings and warehouses. The $2.0 million balance secured by UCC
comprised of five credits.
Troubled debt restructurings were $4.4 million as of June 30, 1998, compared
to $4.9 million at year-end 1997, representing a decrease of $505,000 or 10.4%.
All of these restructured loans were current under their revised terms as of
June 30, 1998.
There were no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of June 30, 1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $16.5 million or 1.81% of total
loans as of June 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:
15
<PAGE> 16
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------------------
YTD YTD
Allowance for loan losses: 06/30/98 12/31/97
------------- -------------
<S> <C> <C>
Balance at beginning of period $ 15,379 $ 13,529
Provision for loan losses 1,800 3,600
Loans charged-off (1,003) (2,139)
Recoveries of charged-off loans 338 389
------------- -------------
Balance at end of period $ 16,514 $ 15,379
============= =============
Average loans outstanding during the period $ 869,633 $ 792,176
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.15% 0.22%
Provision for loan losses to average loans
outstanding during the period (annualized) 0.42% 0.45%
Allowance to non-performing loans at period-end 91.84% 79.85%
Allowance to total loans at period-end 1.81% 1.78%
</TABLE>
In determining 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 June 30, 1998 As of December 31, 1997
------------------------------ ------------------------------
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 $ 8,084 $ 1,828 $ 7,784 $ 1,499
Commercial real estate 13,285 2,318 14,027 2,396
Other 47 47 95 95
------------- ------------- ------------- -------------
Total impaired loans with impairment allowance $ 21,416 $ 4,193 $ 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 mentioned previously and the fact
that a majority of the Company's non-performing loans are secured, management
believes the allowance level as of June 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
$12.9 million as of June 30, 1998, compared to those carried at $13.3 million at
year-end 1997. During the first six months of 1998, the Company acquired four
properties totaling $2.7 million and disposed nine properties totaling $3.4
million with a net gain of $199,000. As of June 30, 1998, the Bank's OREO
16
<PAGE> 17
properties include commercial buildings, warehouses, land, single family
residences and apartments, 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 six months of 1998, management provided approximately $56,000 to the
provision for OREO losses based on new listing prices or new appraisals received
bringing the valuation allowance to $726,000 as of June 30, 1998. Year to date
1998, the Bank had a net income from its OREO properties totaling $182,000 which
is included in the other operating income in the accompanying condensed
consolidated financial statements.
DEPOSITS
Total deposits increased moderately to $1,477.8 million at June 30, 1998,
compared to $1,449.1 million at year-end 1997. Of the $28.7 million or 2.0%
increase in deposits, $23.0 million came from time deposits over $100,000
("Jumbo CD's"). This continued growth in Jumbo CD's was primarily a result of
the widened interest rate spread between time deposits and other
interest-bearing deposits. 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 61.29% at June 30, 1998.
There were no brokered deposits as of June 30, 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 been fairly consistent based on statistics which
support that a considerable portion of the Jumbo CD's stayed with the Bank for
more than two years; 2) the Jumbo CD portfolio continued to be diversified with
3,512 individual accounts owned by 2,518 individual depositors as of July 23,
1998. The balance of the accounts averaged approximately $165,000; 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.
However, management has constantly made efforts to discourage the continued
growth in Jumbo CD's, such as to diversify the customer base by branch expansion
and acquisition, to offer non-competitive interest rates paid on Jumbo CD's and
to develop new transaction-based products to attract depositors. The following
table illustrates the deposit mix as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
---------------------------------------------------------------------
As of 06/30/98 As of 12/31/97
--------------------------------- ---------------------------------
Types of deposits: Amount Percent Amount Percent
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Demand $ 171,082 11.6% $ 175,875 12.1%
NOW accounts 113,349 7.7 111,653 7.7
Money market accounts 95,636 6.5 94,708 6.6
Savings deposits 205,482 13.9 210,291 14.5
Time deposits under $100,000 320,133 21.6 307,504 21.2
Time deposits of $100,000 or more 572,106 38.7 549,090 37.9
------------- ------------- ------------- -------------
Total deposits $ 1,477,788 100.0% $ 1,449,121 100.0%
============= ============= ============= =============
</TABLE>
CAPITAL RESOURCES
Stockholders' equity amounted to $145.5 million or 8.78% of total assets as
of June 30, 1998, compared to $135.9 million or 8.37% of total assets at
year-end 1997. The $9.6 million or 7.1% increase in stockholders' equity was
primarily due to an addition of $11.4 million from year-to-date net income,
$819,000 from issuance of additional common shares through Dividend Reinvestment
Plan and
17
<PAGE> 18
an increase of $471,000 in the unrealized holding gains on securities
available-for-sale, net of tax, which were partially offset by dividends paid in
the amount of $3.1 million.
The Company declared a cash dividend of $0.175 per common share in January,
April and July of 1998, respectively, on 8,941,743, 8,953,307 and 8,965,315
shares outstanding, respectively. Total cash dividends paid in 1998, including
the $1.6 million paid in July 1998, amounted to $4.7 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.
As presented in the following tables, the Company and the Bank's capital and
leverage ratios as of June 30, 1998 continued to be well above the regulatory
minimum requirements. 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 Bank
As of 06/30/1998 As of 06/30/1998
---------------------------------- ----------------------------------
Balance Percent Balance Percent
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 135,705* 11.69% $ 131,434* 11.33%
Tier 1 capital minimum requirement 46,415 4.00 46,415 4.00
------------- ------------- ------------- -------------
Excess $ 89,290 7.69% $ 85,019 7.33%
============= ============= ============= =============
Total capital (to risk-weighted assets) $ 150,235* 12.95% $ 145,963* 12.58%
Total capital minimum requirement 92,830 8.00 92,830 8.00
------------- ------------- ------------- -------------
Excess $ 57,405 4.95% $ 53,133 4.58%
============= ============= ============= =============
Risk-weighted assets $ 1,160,380 $ 1,160,374
Tier 1 capital (to average assets)
- Leverage ratio $ 135,705* 8.27% $ 131,434* 8.01%
Minimum leverage requirement 65,628 4.00 65,628 4.00
------------- ------------- ------------- -------------
Excess $ 70,077 4.27% $ 65,806 4.01%
============= ============= ============= =============
Total average assets $ 1,640,699 $ 1,640,691
</TABLE>
* Excluding the unrealized holding gains on securities available-for-sale of
$841,000, and goodwill of $8,928,000.
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.
18
<PAGE> 19
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
sensitive liabilities which reprice over a given time period exceed rate
sensitive assets. During periods of increasing interest rate environment, net
interest margin may be impaired. As of June 30, 1998, the Company was asset
sensitive with a cumulative gap ratio of a positive 10.05% within three months,
and liability sensitive with a cumulative gap ratio of a negative 18.58% 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 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 June 30, 1998, the Company's
interest income volatility was within the Company's established tolerance level.
The Company derives liquidity primarily from various types of deposits. The
Company's principal sources of liquidity have been growth in deposits, proceeds
from the maturity or sale of securities and other financial instruments, and
repayments from securities and loans. The Company's liquidity ratio (defined as
net cash, short-term and marketable securities to net deposits and short-term
liabilities) stood at 44.40% as of June 30, 1998, compared to 45.59% at year-end
1997.
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 $174 million with two
brokerage firms. Moreover, the Bank is a shareholder of Federal Home Loan Bank
(FHLB) which enables the Bank to have access to lower cost FHLB financing when
and if necessary. Management believes all the above-mentioned sources will
provide adequate liquidity to the Company to meet its daily operating needs.
19
<PAGE> 20
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
The Annual Meeting of stockholders was held on April 20, 1998. At the 1998
Annual Meeting, the stockholders approved the following proposals:
PROPOSAL I: ELECTION OF DIRECTORS
The following directors (Class II) were elected to serve until 2001:
Ralph Roy Buon-Cristiani
Kelly L. Chan
Dunson K. Cheng
Chi-Hung Joseph Poon
The number of votes cast for or withheld, with respect to the election
of each Class II Director was as follows:
<TABLE>
<CAPTION>
BROKER
FOR WITHHELD AGAINST NON-VOTE
--- -------- ------- --------
<S> <C> <C> <C> <C>
Ralph Roy Buon-Cristiani 6,747,345 56,176 -0- -0-
Kelly L. Chan 6,766,809 32,066 -0- -0-
Dunson K. Cheng 6,766,422 32,553 -0- -0-
Chi-Hung Joseph Poon 6,766,909 32,553 -0- -0-
</TABLE>
Other directors whose terms of office continued after the meeting:
<TABLE>
<CAPTION>
Term Ending in 1999 (Class III) Term Ending in 2000 (Class I)
------------------------------- -----------------------------
<S> <C>
George T.M. Ching Michael M.Y. Chang
Wing K. Fat Patrick S.D. Lee
Wilbur K. Woo Anthony M. Tang
Thomas G. Tartaglia
</TABLE>
PROPOSAL II: EQUITY INCENTIVE PLAN
The number of votes cast for, against or abstain, with respect to the
Equity Incentive Plan was as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C>
5,174,307 465,983 258,092 -0-
</TABLE>
20
<PAGE> 21
ITEM 5. OTHER INFORMATION
There were no reportable events.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
27 Financial Data Schedule
21
<PAGE> 22
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: August 13, 1998 DUNSON K. CHENG
--------------- ---------------
Dunson K. Cheng
Chairman and President
Date: August 13, 1998 ANTHONY M. TANG
--------------- ---------------
Anthony M. Tang
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 59,128
<INT-BEARING-DEPOSITS> 1,344
<FED-FUNDS-SOLD> 52,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,981
<INVESTMENTS-CARRYING> 374,129
<INVESTMENTS-MARKET> 380,447
<LOANS> 910,701
<ALLOWANCE> 16,514
<TOTAL-ASSETS> 1,656,657
<DEPOSITS> 1,477,788
<SHORT-TERM> 13,780
<LIABILITIES-OTHER> 19,616
<LONG-TERM> 0
0
0
<COMMON> 90
<OTHER-SE> 145,383
<TOTAL-LIABILITIES-AND-EQUITY> 1,656,657
<INTEREST-LOAN> 39,906
<INTEREST-INVEST> 18,068
<INTEREST-OTHER> 1,439
<INTEREST-TOTAL> 59,413
<INTEREST-DEPOSIT> 26,735
<INTEREST-EXPENSE> 27,573
<INTEREST-INCOME-NET> 31,840
<LOAN-LOSSES> 1,800
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 15,546
<INCOME-PRETAX> 18,835
<INCOME-PRE-EXTRAORDINARY> 18,835
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,439
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 4.36
<LOANS-NON> 15,740
<LOANS-PAST> 2,242
<LOANS-TROUBLED> 4,369
<LOANS-PROBLEM> 4,905
<ALLOWANCE-OPEN> 15,379
<CHARGE-OFFS> 1,003
<RECOVERIES> 338
<ALLOWANCE-CLOSE> 16,514
<ALLOWANCE-DOMESTIC> 16,514
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
