<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
------------------------------------------------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission file number 0-18630
---------------------------------------------------------
CATHAY BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 95-4274680
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 North Broadway, Los Angeles, California 90012
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 625-4700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- --------------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
- -------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE> 2
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 6, 1998 was $242,755,116 (computed on the basis of
$33.625 per share, which was the last sale price of the Company's Common Stock
reported by the Nasdaq National Market on March 6, 1998).*
The number of shares outstanding of each of the Registrant's classes of
Common Stock as of March 6, 1998: Common Stock, $.01 par value - 8,952,338
shares**
DOCUMENTS INCORPORATED BY REFERENCE
- - Portions of Registrant's definitive proxy materials relating to its 1998
Annual Meeting of Stockholders, as filed, are incorporated by reference
into Part III.
- - Portions of Registrant's Annual Report to Stockholders for the Year Ended
December 31, 1997 (referred to below as "Annual Report to Stockholders")
are incorporated by reference into Parts I, II and IV.
________________
* Estimated solely for the purposes of this cover page. The market value of
shares held by the Company's directors, officers and Employee Stock
Ownership Plan have been excluded.
** Includes 34,519 and 34,000 rights, respectively, to receive Common Stock
that are held by former holders of Cathay Bank common stock and former
holders of First Public Savings Bank common stock that have not yet been
submitted for exchange into Common Stock of Cathay Bancorp, Inc.
2
<PAGE> 3
PART I
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the factors
described in this Annual Report and the other documents the Registrant files
from time to time with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
BUSINESS OF THE COMPANY
GENERAL
The Company is a business corporation organized under the laws of the State
of Delaware on March 1, 1990. The only office of the Company, and its principal
place of business, is located at the main office of Cathay Bank (the "Bank" or
"Cathay Bank") at 777 North Broadway, Los Angeles, California 90012. Its
telephone number is (213) 625-4700.
The Company was organized for the purpose of becoming the holding company
of Cathay Bank, a California-chartered bank. As a result of a reorganization and
merger approved by the Bank's stockholders in July 1990 and effective on
December 10, 1990 (the "Reorganization"), the Bank is a wholly-owned subsidiary
of the Company.
The Company's sole current business activity is to hold the stock of Cathay
Bank. In the future, the Company may become an operating company or acquire
savings institutions, banks or companies engaged in bank-related activities and
may engage in or acquire such other businesses or activities as may be permitted
by applicable law.
On November 18, 1996, the Company acquired First Public Savings Bank,
F.S.B. ("First Public"), through the merger of First Public into the Company's
wholly owned subsidiary, Cathay Bank. In connection with the acquisition of
First Public, the Company paid $15.486 million in cash and issued 905,735 shares
of its Common Stock valued at $16.114 million, for a total purchase price of
$31.6 million.
PROPERTY
The Company currently neither owns nor leases any real or personal
property. The Company uses the premises, equipment and furniture of the Bank
without the payment of any rental fees to the Bank. See "Business of the Bank -
Premises" and "Cathay Investment Company" below.
COMPETITION
The primary business of the Company is the business of the Bank. Therefore,
the competitive conditions to be faced by the Company are expected to continue
to include those faced by the Bank. See "Business of the Bank -- Competition."
In addition, many banks and financial institutions have formed holding
companies. It is likely that these holding companies will attempt to acquire
other banks, thrift institutions or companies engaged in bank-related
activities. Thus, the Company may face increased competition in undertaking
acquisitions of such institutions and in operating after any such acquisition.
3
<PAGE> 4
EMPLOYEES
The Company currently does not employ any persons other than its
management, which includes the President and the Chief Financial Officer, due to
the limited nature of its activities. If the Company acquires other financial
institutions or pursues other lines of business, it may hire additional
employees. See "Business of the Bank - Employees" below.
BUSINESS OF THE BANK
GENERAL
Cathay Bank was incorporated under the laws of the State of California on
August 22, 1961 and was licensed by the California State Banking Department (now
named the "Department of Financial Institutions") and commenced operations as a
California state-chartered bank on April 19, 1962. Cathay Bank is an insured
bank under the Federal Deposit Insurance Act but, like most state-chartered
banks of similar size in California, it is not a member of the Federal Reserve
System.
Cathay Bank's main office is located in the Chinatown area of Los Angeles,
at 777 North Broadway, Los Angeles, California 90012. In addition, the Bank has
17 other branch offices located in the cities of Monterey Park, Alhambra,
Hacienda Heights, Westminster, San Gabriel, Torrance, Cerritos, City of
Industry, Irvine and Los Angeles in Southern California, as well as the cities
of San Jose, Oakland, Cupertino, Fremont and Millbrae in Northern California.
Cathay Bank's primary market area is defined by its Community Reinvestment Act
(CRA) delineation which includes the contiguous areas surrounding each of the
Bank's branch offices. It is the Bank's policy to reach out and actively offer
services to low and moderate income groups in the delineated branch service
areas. Many of the Bank's employees speak both English and one or more Chinese
dialects or Vietnamese, and are thus able to serve the Bank's numerous Chinese
and Vietnamese-speaking customers, as well as the English-speaking customers.
Cathay Bank conducts substantially the same business operations as a
typical commercial bank, including the acceptance of checking, savings, and time
deposits, and the making of commercial, real estate, personal, home improvement,
automobile and other installment and term loans. It also offers letters of
credit, wire transfers, spot and forward contracts, traveler's checks, safe
deposit, night deposit, social security payment deposit, collection,
bank-by-mail, drive-up and walk-up windows, automatic teller machine ("ATM") and
other customary bank services to its customers. The operations of the drive-up
and walk-up facilities are extended past normal banking hours to accommodate
those customers who cannot conduct banking businesses during normal banking
hours.
Since its inception, the Bank's policy has been to attract business from,
and to focus its primary services for the benefit of, individuals, professionals
and small to medium-sized businesses in the local markets in which its branches
are located. The three general areas to which the Bank has directed its lendable
assets are: (1) loans secured by real estate; (2) commercial loans and trade
financing; and (3) installment loans to individuals for automobile, household
and other consumer expenditures.
SELECTED FINANCIAL DATA
Information concerning changes in the Bank's and the Company's financial
condition and results of operations is included under the caption "Selected
Consolidated Financial Data" on page 13 of the Annual Report to Stockholders and
is incorporated herein by reference.
4
<PAGE> 5
SECURITIES
Information concerning the carrying value and the maturity distribution and
yield analysis of the Bank's securities available-for-sale and securities
held-to-maturity portfolios is included on pages 19 through 21 of the Annual
Report to Stockholders and is incorporated herein by reference. A summary of the
book value and fair value of the Bank's securities by contractual maturity is
found in Note 4 to the Consolidated Financial Statements on pages 48 and 49 of
the Annual Report to Stockholders, and is incorporated herein by reference.
LOANS
Distribution and maturity of loans. Information concerning loan type and
mix, distribution of loans and maturity of loans is included on pages 22 and 23
of the Annual Report to Stockholders and is incorporated herein by reference.
Nonperforming Loans and Allowance for Loan Losses. Information concerning
past due loans, allowance for loan losses, loans charged-off, loan recoveries
and other real estate owned is included on pages 23 through 29 and in Notes 5
and 6 to the Consolidated Financial Statements on pages 50 through 52 of the
Annual Report to Stockholders and is incorporated herein by reference.
DEPOSITS
Information concerning types of deposit accounts and average deposits and
rates is included on pages 29 and 30 of the Annual Report to Stockholders and is
incorporated herein by reference.
RETURN ON EQUITY AND ASSETS
The following table sets forth information concerning the return on assets,
return on stockholders' equity, equity to assets ratio and dividend payout ratio
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on Average Assets (net income
divided by average assets) 1.29% 1.05% 1.05% 1.06% 0.91%
Return on Average Equity (net income
divided by average equity) 15.63 13.06 11.68 11.43 9.82
Average Equity as a Percentage of
Average Assets 8.25 8.04 8.97 9.25 9.22
Dividend Payout Ratio(1) 27.65 36.14 44.12 48.78 58.82
</TABLE>
- ---------
(1) Computed by using dividends declared per common share divided by net income
per common share.
INTEREST RATES AND DIFFERENTIALS
Information concerning average interest-earning assets, average
interest-bearing liabilities and the yields on the assets and liabilities is
included on pages 17 and 18 of the Annual Report to Stockholders and is
incorporated herein by reference.
5
<PAGE> 6
ANALYSIS OF CHANGES IN NET INTEREST INCOME
An analysis of changes in net interest income due to changes in rate and
volume is included on pages 14 through 16 of the Annual Report to Stockholders
and is incorporated herein by reference.
COMMITMENTS AND LINES OF CREDIT
Information concerning the Bank's outstanding loan commitments and letters
of credit is included in Note 12 to the Consolidated Financial Statements on
pages 56 and 57 of the Annual Report to Stockholders and is incorporated herein
by reference.
CATHAY INVESTMENT COMPANY
Cathay Investment Company ("CIC") is a wholly owned subsidiary of Cathay
Bank that was formed in 1984 to invest in real property. In 1987, CIC opened a
branch office in Taipei, Taiwan to promote Taiwanese real estate investments in
Southern California. The office in Taipei was moved to a new location in October
1996 which consists of 1,512 square feet. The lease is for three years from
10/5/96 to 10/4/99 for a monthly rent of approximately $3,400 at the exchange
rate in effect at December 31, 1997.
As of December 31, 1997, CIC owned one property with a net equity
investment of $680,091. The property is an 8,200 square foot strip shopping
center on a 27,000 square foot parcel of land located on Harbor Boulevard,
Garden Grove, California. The Bank filed an application for consent for
subsidiary to continue to engage in activity on February 4, 1994, and received
approval from the FDIC on March 8, 1995 to hold the property for an additional
five years.
PREMISES
The Bank's main corporate office and headquarters branch is located in the
Chinatown district of Los Angeles. The offices are in a spacious traditional
three-story structure containing 26,527 square feet and constructed of glass and
concrete. The Bank owns both the building and the land upon which the building
is situated. The main floor currently has 24 teller stations (including 16
regular tellers, seven commercial tellers, and one Automatic Teller Machine),
four pneumatic drive-up teller stations, one walk-up teller station, a vault
area and the Bank's operations area. The second floor contains executive offices
and the Bank's Board Room. The third floor houses the Bank's corporate lending
department. Parking for approximately 126 automobiles is provided on three lots
adjacent to the Bank's building, two of which are owned by the Bank while the
third lot is leased under a 55-year term with a 30-year option commencing in
January 1987 at a current monthly rent of approximately $14,000.
Moreover, the Bank owns properties located in the cities of Monterey Park,
Alhambra, Westminster, San Gabriel, Torrance, Cerritos, City of Industry and
Cupertino, where certain of its branch offices are located. Those properties
were acquired between years 1979 and 1993.
In addition to the aforementioned bank-owned properties and the lease for
the CIC Taipei office, the Bank leases certain premises under the following
lease terms and conditions: (1) total of 10,430 square feet of space for
administrative offices in a building located near the Bank's main office at a
monthly rent of approximately $12,200 under two separate leases for three years
beginning 2/1/98; (2) 4,483 square feet of space for the Hacienda Heights office
at a monthly rent of $4,842 under a lease from January 1996 to June 1999 with
two five-year options; (3) 4,800 square feet of space for the San Jose office
under a re-negotiated lease commencing March 1996 for ten years and two months
with two five-year options; current rent is $8,640; the Bank has a one-time
right to cancel the lease after the fifth year upon the payment of $55,500 in
6
<PAGE> 7
consideration; (4) 5,000 square feet of space for the Oakland office at a
monthly rent of $6,000 under a renewed lease beginning in September 1996 for
five years; (5) 2,400 square feet of space for the Fremont office at a current
monthly rent of $3,360 under a three-year lease beginning in May 1994 with two
three-year options; the Bank has exercised the first option; (6) 4,450 square
feet of space for the Irvine office at a monthly rent of $6,089 under a 20-year
ground lease commencing in May 1988 with two five-year options; (7) 3,441 square
feet of space for the Millbrae Office at a current monthly rent of $7,002 under
a five-year lease beginning in January 1995 with two five-year options; and (8)
580 square feet of space for the Hong Kong representative office at a current
monthly rent of approximately $3,400 based on the exchange rate in effect on
December 31, 1997 under a renewed lease from March 1, 1998 to February 29, 2000.
In October 1997, the Bank entered into a lease agreement to lease 2,535 square
feet of space for the Berkeley/Richmond Branch expected to be opened in the near
future. The lease calls for a term of six years at a monthly rent of $6,338. One
of the leases referred to under (1) above has been entered into between the Bank
and T.C. Realty in which Mr. Patrick Lee, a director of Bancorp and the Bank,
has an interest. Management believes that these leases are on terms at least as
favorable to the Bank as would have existed in a transaction with an unrelated
third party.
Moreover, with the acquisition of First Public in November 1996, the
following leases were added: (1) 8,707 square feet of space for the Hill/Alpine
office under a lease from February 1979 to February 1989 with three five-year
options; First Public has exercised the second option to renew the lease until
February 1999; the current monthly rent is $5,017; (2) 1,976 square feet of
space for the Valley/Stoneman office under a lease from August 1986 to August
1991 which was extended for five years with three five-year options; the current
monthly rent is $4,412; and (3) 2,000 square feet of space for the
Valley/Prospect office under a lease from February 1991 to February 1996 which
was extended for five years with two five-year options; the current monthly rent
is $4,091.
The Bank currently operates 18 domestic branch offices, one branch office
of CIC in Taiwan, and one representative office in Hong Kong. Each branch office
has loan approval rights subject to the branch manager's authorized lending
limits. Activities of the CIC Taiwan office and Hong Kong representative office
are limited to coordinating the transportation of documents to the Bank's main
office and performing liaison services. A list of the offices of the Bank and
CIC is included on page 68 of the Annual Report to Stockholders and is
incorporated herein by reference.
As of December 31, 1997, the Bank's investment in premises and equipment
totaled $25,201,883. See also Note 8 to the Consolidated Financial Statements on
page 53 of the Annual Report to Stockholders, which is incorporated herein by
reference.
EXPANSION
Management of the Bank continues to look for opportunities to expand the
Bank's branch network by seeking new branch locations and/or by acquiring other
financial institutions to diversify the customer base in order to compete for
new deposits and loans, and to be able to serve the customers more effectively.
COMPETITION
The banking business in California, and specifically in the market areas
served by Cathay Bank, is highly competitive with respect to both loans and
deposits. The Bank competes for deposits principally with other commercial
banks, savings and thrift institutions and other financial institutions
operating in the Bank's service areas, some of which offer certain services that
are not offered directly by the Bank and some of which have substantially
greater financial resources than
7
<PAGE> 8
does the Bank. In addition, other entities (both governmental and private
industry) seeking to raise capital through the issuance and sale of debt and
equity securities provide competition for the Bank in the acquisition of
deposits.
In seeking to obtain customers for loans, Cathay Bank competes primarily
with other commercial and savings banks, as well as other non-bank financial
intermediaries, including insurance companies, mortgage companies, credit
unions, and other lending institutions. Certain legislation has served to ease
regulatory restrictions on certain such institutions, thus increasing their
ability to compete with banks such as Cathay Bank.
To compete with other financial institutions in its primary service areas,
the Bank relies principally upon local promotional activities, personal contacts
by its officers, directors, employees, and stockholders, extended hours,
Saturday banking, and specialized services. For customers whose loan demands
exceed the Bank's lending limit, the Bank has attempted in the past, and intends
in the future, to arrange for such loans on a participation basis with
corresponding banks. The Bank also assists customers requiring other services
not offered by the Bank to obtain such services from its correspondent banks.
There are approximately 13 Asian-American banks and one other major
financial institution in the Bank's headquarters branch area, which compete for
California Asian-American customers, as well as other ethnic customers. In
addition, banks from the Pacific Rim countries, such as Taiwan, Hong Kong and
China continue to open branches in the Los Angeles area, thus increasing the
Bank's competition.
EMPLOYEES
As of December 31, 1997, the Company and Cathay Bank (including CIC)
employed approximately 505 persons, including 109 officers. None of the
employees are represented by a union. Management believes that its employee
relations are excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Part III, Item 10 ("Directors and Executive Officers of the
Registrant") below for information regarding the executive officers of the
Company and Cathay Bank.
REGULATION OF THE COMPANY AND THE BANK
GENERAL
As a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended (the "BHCA"), the Company's primary regulatory authority
is the Board of Governors of the Federal Reserve System (the "Board"). The
Company is required by the BHCA to file annual reports of its operations with,
and is subject to examination by, the Board. Cathay Bank, as a state-chartered
commercial bank, is regulated by the California Department of Financial
Institutions. The Bank's deposits are insured, up to the legal maximum, by the
FDIC, and the Bank is subject to FDIC rules applicable to insured banks.
Although not a member of the Federal Reserve System, the Bank is subject to
certain Federal Reserve Board rules and regulations by virtue of its
FDIC-insured deposits.
The regulatory authorities review key operational areas of the Company and
the Bank, including asset quality, capital adequacy, liquidity, and management
and administrative ability. Applicable law and regulations also limit the
business activities in which the Company, the Bank
8
<PAGE> 9
and its subsidiaries may be engaged. (see, e.g. "Interstate Banking" and
"Federal Limits on the Activities and Investments of State-chartered Banks"
below).
In addition to banking regulations, the Company is subject to periodic
reporting and other requirements under the Securities Exchange Act of 1934, as
amended.
To the extent the information in this Section ("Regulation of the Company
and the Bank") describes statutory or regulatory provisions, it is qualified in
its entirety by reference to such provisions.
CAPITAL REQUIREMENTS
Among other matters, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") required each federal banking regulatory agency to revise
its risk-based capital standards and to specify levels at which regulated
institutions will be considered "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". Information concerning regulations of the risk-based capital
requirements prescribed by the regulatory authorities is included on page 31 of
the Annual Report to Stockholders and is incorporated herein by reference.
The Board has adopted percentage minimum leverage ratios for banking
organizations (including state member banks and bank holding companies). The
Company is expected to maintain at least a four percent minimum leverage ratio
depending on interest rate risk exposure, asset quality, liquidity, earnings,
expansion plans, growth patterns and other relevant factors. The Company was
well capitalized as of December 31, 1997 with a leverage ratio of 7.94%.
The tables presenting the Company and the Bank's risk-based capital and
leverage ratios as of December 31, 1997 are included in Note 11 to the
Consolidated Financial Statements on page 55 of the Annual Report to
Stockholders, which is incorporated herein by reference.
FDIC IMPROVEMENT ACT OF 1991
In December 1991, the FDICIA was enacted into law. The FDICIA provides for
the recapitalization of the Bank Insurance Fund and improved examinations of
insured institutions. It prescribes standards for safety and soundness of all
insured depository institutions; and requires each federal banking agency and
the FDIC to take prompt corrective regulatory action to resolve the problems of
insured depository institutions that fall below a certain capital ratio.
The FDICIA also, among other things, (1) limits the percentage of interest
paid on brokered deposits and limits the use of such deposits to only those
institutions that are well-capitalized; (2) requires the FDIC to charge
insurance premiums based on the risk profile of each institution; (3) prohibits
insured state chartered banks from engaging, as principal, in any type of
activity that is not permissible for a national bank unless the FDIC permits
such activity and the bank meets all of its regulatory capital requirements; (4)
directs the appropriate federal banking agency to determine the amount of
readily marketable purchased mortgage servicing rights that may be included in
calculating such institution's tangible, core and risk-based capital; (5)
provides that, subject to certain limitations, any federal savings association
may acquire or be acquired by any insured depository institution, and (6)
restricts capital distributions by institutions that are, or as a result of the
distributions will become, undercapitalized.
On December 31, 1992, the bank regulatory agencies adopted uniform
regulations relating to real estate loans that require institutions to adopt
written real estate policies that are consistent with regulatory guidelines.
Those guidelines include maximum loan-to-value ratios for various categories of
real estate loans. Institutions are permitted to make loans in excess of such
ratios if
9
<PAGE> 10
the loans are supported by other credit factors; however, loans that do not
conform to the maximum loan-to-value ratios may not, in the aggregate, exceed
the institution's risk-based capital and non-conforming loans secured by
property other than 1-4 family residential property may not, in the aggregate,
exceed 30% of risk-based capital.
The FDICIA also required the regulatory agencies to establish, by the end
of 1993, (a) minimum acceptable operational and managerial standards covering
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth and employee compensation and (b) standards for asset
quality, earnings and valuation of publicly traded shares (which must specify a
maximum ratio of market value to book value for publicly traded shares).
During 1997 the Company maintained its compliance with the requirements of
Section 112 of FDICIA. Section 112 affects all banks of $150 million or more in
assets, and reflects the government's growing concern for legislative reform to
strengthen bank accounting, auditing, and internal control oversight.
Essentially, it establishes standards for composition of a bank's audit
committee; requires assessment of the organization's compliance with designated
laws and regulations; mandates documentation and testing of the bank's internal
control structure as it relates to financial reporting controls; and, compels
management's positive report (attested to by the bank's independent auditors) as
of the end of each fiscal year, concerning the quality, adequacy and efficiency
of the bank's internal controls.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") focused on restructuring the regulation of the savings and loan
industry and its deposit insurance; and instituted a new regulatory structure
for the resolution of troubled and insolvent savings associations. Nevertheless,
a number of provisions (described below) also apply to commercial banks.
Title II authorizes the increase of insurance premiums paid by the
FDIC-insured institutions. Title VI permits the acquisition of thrifts by bank
holding companies. Title IX enhances the enforcement authority of all federal
banking agencies, including their authority to levy civil money penalties and
penalties on criminal offenses, and it also broadens the current definition of
insiders, to increase the types of persons subject to regulatory action. Title
XI requires appraisals used in making credit decision be written and performed
in accordance with generally accepted appraisal standards, as promulgated by the
Appraisal Standards Board of the Appraisal Foundation, and should meet federal
guidelines. Title XII expands the recordkeeping requirements of reporting on
Home Mortgage Disclosure Act (HDMA) to cover race, income and gender; changes
the current Community Reinvestment Act ("CRA") rating system to a four-tiered
rating system, which includes (1) outstanding record of meeting community credit
needs; (2) satisfactory record of meeting community credit needs; (3) needs to
improve record of meeting community credit needs, and (4) substantial
noncompliance in meeting community credit needs. It further requires that the
CRA rating be publicly disclosed.
The aforementioned provisions have not had a material adverse impact on the
Company's consolidated financial condition or results of operations.
FEDERAL LIMITS ON THE ACTIVITIES AND INVESTMENTS OF STATE-CHARTERED BANKS
Federal restrictions on the direct and indirect activities and investments
of state-chartered or licensed depository institutions exist if the institution
either carries federal deposit insurance or is involved in activities with
foreign banks. The FDIC is the regulatory agency with the authority to determine
federal restrictions on all direct and indirect activities and investments.
10
<PAGE> 11
As a general matter, subject to a number of grandfathering provisions and a
few exceptions, there are three rules which limit the activities and investments
of state-chartered banks: (1) a state-chartered bank may not engage as principal
in any type of activity that is not permissible for a national bank, unless the
FDIC determines that the activity would pose no significant risk to the affected
deposit insurance fund and the institution meets its fully phased in capital
requirements; (2) a state-chartered bank may not make or retain an equity
investment of a type or in an amount that is not permissible for a national
bank, and divestiture is required as soon as possible and within five years of
FDICIA in any event; and (3) a state-chartered bank may retain an equity
investment in the form of a majority-owned subsidiary engaged as principal in
activities not permissible for a subsidiary of a national bank, but only if the
FDIC has made the same determinations respecting risk to the insurance fund and
capital compliance by the bank.
As stated above (see "Cathay Investment Company" on page 6 of this report),
Cathay Bank has received FDIC approval of CIC's ownership of the Garden Grove
property. The Bank is in compliance with these limitations.
INTERSTATE BANKING
The Federal Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") was signed into law on September 29, 1994. When
fully effective, the Riegle-Neal Act will significantly relax or eliminate many
restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act permitted a bank holding company to acquire banks in states
other than its "home state", even if applicable state law would not permit that
acquisition. Such acquisitions would continue to require Board approval and
would remain subject to certain state laws.
Effective June 1, 1997, the Riegle-Neal Act permitted interstate mergers of
banks, thereby allowing a single, merged bank to operate branches in multiple
states. The Riegle-Neal Act allows each state to adopt legislation to "opt-out"
of these interstate merger provisions. Conversely, the Riegle-Neal Act permits
states to "opt in" to the merger provisions of Act prior to their stated
effective date, to permit interstate mergers in that state prior to June 1,
1997. The enactment of the California Interstate Banking and Branching Act of
1995 provides for interstate banking and branching in California. This early
opt-in legislation, which became effective on October 2, 1995, requires
out-of-state institutions which do not already own a California bank to acquire
an existing whole five-year old bank before establishing a California branch. De
novo branching is not permitted. This act revised much of the original
California interstate banking law first enacted in 1986 that permitted
interstate banking with other states on a reciprocal basis.
Banks and bank holding companies contemplating acquisitions must comply
with the competitive standards of the BHCA, the Change in Bank Control Act
("CBA") or the Bank Merger Act ("BMA"), as applicable. The crucial test under
each Act is whether the proposed acquisition will "result in a monopoly" or will
"substantially" lessen competition in the relevant geographic market. Both the
BHCA and the BMA preclude granting regulatory approval for any transaction that
will result in a monopoly or where the furtherance of a plan to create a
monopoly. However, where a proposed transaction is likely to cause a substantial
reduction in competition, or tends to create a monopoly or otherwise restrain
trade, these Acts permit the granting of regulatory approval if the applicable
regulator finds that the perceived anti-competitive effects of the proposed
transaction "are clearly outweighed in the public interest by the probable
effect of the transaction on the convenience and needs of the community to be
served."
With regard to any interstate banking, the Justice Department issued
revised merger guidelines in March 1995. On the basis of the revised criteria,
the Department has challenged several proposed transactions involving
institutions that compete directly in the same market(s). In contrast to the
Justice Department, the Federal Reserve has recently shown a greater inclination
11
<PAGE> 12
to consider factors that contribute to the safety and soundness of the banking
system, or which contribute positively to the "convenience and needs" of the
affected communities. To the extent these two Federal Agencies apply different
(and at times incompatible) analysis to assess the competitive effects of
proposed bank and thrift mergers and acquisitions, federal antitrust objections
must be considered in connection with any interstate acquisition.
The Company constantly seeks to expand its market areas through acquiring
other financial institutions or establishing de novo branches in or outside of
California as permitted by applicable laws, whenever opportunities strike. The
Riegle-Neal Act may have the effect of increasing competition by facilitating
entry into the California banking market by out of state banks and bank holding
companies.
RECENT ACCOUNTING DEVELOPMENTS
Information concerning recent accounting developments is included in Note 1
to the Consolidated Financial Statements under "Recent Accounting
Pronouncements" on page 46 of the Annual Report to Stockholders and is
incorporated herein by reference.
FEDERAL HOME LOAN BANK
The Federal Home Loan Bank System (FHL Bank System) consists of twelve
district banks (FHLB) and is supervised by the Federal Housing Finance Board
(FHFB). Commercial banks, credit unions, savings associations, and certain other
insured depository institutions making long-term home mortgage loans are
eligible to become members of the FHL Bank System.
To qualify for membership, an institution not a member on January 1, 1989
must meet the qualified thrift lender test, which means, among other things,
that such institution has at least ten percent of its total assets in
residential mortgage loans. Any new institution formed after January 1, 1989 may
become a member if it met the ten percent asset test requirement within one year
after commencing operations.
The Bank received FHLB membership approval in January 1993, and became a
member/stockholder of the FHLB of San Francisco. By becoming a FHLB member, the
Bank may have access to a source of low-cost liquidity. To access the credit
services offered by the district banks, a member must also become a stockholder
of the FHLB in its district. The level of stock ownership is currently governed
by the Federal Home Loan Bank Act, and the amount of borrowing is defined by the
amount of stock purchased. FHLB stock is purchased and redeemed at par. The
Bank's investment in FHLB stock totaled 56,529 shares or $5,652,900 as of
December 31, 1997.
All credits extended by the district bank require full collateralization.
Eligible collateral includes residential first mortgage loans on single and
multi-family projects, U.S. government and agency securities, deposits in
district banks, and certain other real estate related assets permitted by law.
DIVIDENDS
As a California corporation, Cathay Bank may not pay dividends to the
Company in excess of certain statutory limits. As of December 31, 1997, the
maximum dividend that Cathay Bank could have declared, subject to regulatory
approval, was $29,040,000. The banking regulatory agencies may prohibit a bank
from paying dividends to its bank holding company if the agencies determine that
such a payment would constitute an unsafe or unsound banking practice.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
Management is not currently aware of any litigation that is expected to
have material adverse impact on the Company's consolidated financial condition,
or the results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The information under the caption "Market for Cathay Bancorp, Inc.
Stock" on page 37 and under the caption "Additional Information" on
page 68 of the Company's Annual Report to Stockholders is
incorporated herein by reference.
(b) Holders
As of March 6, 1998, there were approximately 1,800 holders of
record of the Company's Common Stock.
(c) Dividends
The information in Note 11 to the Consolidated Financial Statements
on pages 55 and 56 of the Company's Annual Report to Stockholders
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Consolidated Financial Data" on
page 13 of the Company's Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 14 through 37 of the
Company's Annual Report to Stockholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the captions "Market Risk" and "Liquidity and
Interest Rate Sensitivity" on pages 31 through 34 of the Company's Annual Report
to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report and the Company's Consolidated Financial
Statements and Notes thereto on pages 39 through 63 of the Company's Annual
Report to Stockholders is incorporated herein by reference. See Item 14 of this
report for information concerning financial statements filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
14
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Election of Directors" on pages 3
through 6 of the Company's definitive Proxy Statement relating to its 1998
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
The following persons are the executive officers and other significant
officers of the Company and/or Cathay Bank:
George T.M. Ching, age 83, Vice-Chairman of the Board of Directors of
Bancorp since 1990; Vice-Chairman of the Board of Directors of Cathay Bank
since 1985, President of Cathay Bank from 1962 until 1985 and director of
Cathay Bank since 1962; President of CIC since 1985 and director of CIC
since 1984.
Dunson K. Cheng, age 53, Chairman of the Board of Directors of each of
Bancorp, Cathay Bank and CIC since 1994; President of Bancorp since 1990;
President of Cathay Bank since 1985 and director of Cathay Bank since 1982;
Secretary of CIC from 1985 until 1994; Chief Executive Officer of CIC since
1995 and director of CIC since 1984.
Wilbur K. Woo, age 82, Secretary of Bancorp since 1990; Secretary of
the Board of Directors of Cathay Bank since 1980 and director of Cathay
Bank since 1978; Director of CIC since 1987.
Anthony M. Tang, age 44, Executive Vice President of Bancorp and Cathay
Bank since 1994; Senior Vice President of Bancorp and Cathay Bank from 1990
until 1994; Chief Financial Officer and Treasurer of Bancorp since 1990;
Chief Lending Officer of Cathay Bank since 1985; and director of Cathay
Bank since 1986.
Milly W. Joe, age 60, Senior Vice President and Cashier of Cathay Bank
since 1989; and Vice President and Cashier of Cathay Bank from 1981 to
1989. Ms. Joe has been associated with Cathay Bank since 1968.
Irwin Wong, age 50, Senior Vice President for Branch Administration of
Cathay Bank since 1989; and Vice President for Branch Administration from
1988 until 1989. Mr. Wong was employed by Security Pacific National Bank as
a Vice President and Manager from 1983 until 1988.
Elena Chan, age 46, Senior Vice President and Chief Financial Officer
of Cathay Bank since December 1992; Vice President of Finance from March
1992 to November 1992; and Vice President and Internal Auditor of Cathay
Bank from 1985 to February 1992.
All of the above-named officers were elected on April 17, 1997 at a regular
Board of Directors meeting. The term of office of each officer is from the time
of appointment until the next annual organizational meeting of the Board of
Directors of Bancorp or Cathay Bank (or action in lieu of a meeting) and until
the appointment of his or her successor unless, before that time, the officer
resigns or is removed or is otherwise disqualified from serving as an officer of
Bancorp or Cathay Bank.
15
<PAGE> 16
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Information Concerning Management
Compensation" and "Compensation Committee Interlocks and Insider Participation"
on pages 8 through 10 of the Company's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information under the captions "Principal Holders of Securities" on
page 2 and "Election of Directors" on pages 3 through 6 of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the captions "Election of Directors" on pages 3
through 6 and "Certain Transactions" on page 14 of the Company's Proxy Statement
is incorporated herein by reference.
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Documents Filed as Part of this Report
(a)(1) Financial Statements
<TABLE>
<CAPTION>
Financial Statements
of
Cathay Bancorp, Inc. and Subsidiary*
Page No. in
Annual Report
-------------
<S> <C>
Consolidated Statements of Condition
as of December 31, 1997 and 1996 39
Consolidated Statements of Income
for each of the years in the 3-year period
ended December 31, 1997 40
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the 3-year period
ended December 31, 1997 41
Consolidated Statements of Cash Flows
for each of the years in the 3-year period
ended December 31, 1997 42
Notes to Consolidated Financial Statements 43-62
Independent Auditors' Report of KPMG Peat Marwick LLP 63
</TABLE>
- ----------
*Parent-only condensed financial information of the Company as of December
31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 is
included in Note 15 to the Consolidated Financial Statements on pages 60 through
62 of the Annual Report to Stockholders, which is incorporated herein by
reference.
(a)(2) Financial Statement Schedules
Schedules have been omitted since they are not applicable, they are
not required, or the information required to be set forth in the
schedules is included in the Consolidated Financial Statements or
notes thereto incorporated by reference into this report.
(a)(3) Exhibits
3.1 Restated Articles of Incorporation. Previously filed with the
Securities and Exchange Commission as an exhibit to Registration
Statement No. 33-33767 and incorporated herein by reference.
3.2 Restated Bylaws. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990 and incorporated herein by
reference.
17
<PAGE> 18
4.1 Shareholders Rights Plan. Previously filed with the Securities and
Exchange Commission as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990 and incorporated
herein by reference.
10.1 Form of Indemnity Agreements between the Company and its directors
and certain officers. Previously filed with the Securities and
Exchange Commission as an exhibit to Registration Statement No.
33-33767 and incorporated herein by reference.
10.2 Employee Stock Ownership Plan and Trust of the Company and First
Amendment thereto. Previously filed with the Securities and
Exchange Commission as an exhibit to Registration Statement No.
33-33767 and incorporated herein by reference.
10.3 Dividend Reinvestment Plan of the Company. Previously filed with
the Securities and Exchange Commission as an exhibit to
Registration Statement No. 33-33767 and incorporated herein by
reference.
10.4 Second Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
10.5 Third Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
10.6 Fourth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
10.7 Fifth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
10.8 Sixth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
10.9 Seventh Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
10.10 Eighth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
13.1 Certain portions of the Registrant's 1996 Annual Report to
Stockholders incorporated herein by reference.
18
<PAGE> 19
22.1 Subsidiaries of the Company
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reportable events.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 27, 1998 By: /s/ Dunson K. Cheng
----------------------
Dunson K. Cheng
Chairman and President
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dunson K. Cheng and Anthony M. Tang,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Dunson K. Cheng President, Chairman of March 27, 1998
- ------------------------------------ the Board and Director
Dunson K. Cheng (Principal executive officer)
/s/ Anthony M. Tang Executive Vice President, March 27, 1998
- ------------------------------------ Chief Financial Officer
Anthony M. Tang /Treasurer and Director
(principal financial officer)
(principal accounting officer)
/s/ Ralph Roy Buon-Cristiani Director March 27, 1998
- ------------------------------------
Ralph Roy Buon-Cristiani
/s/ Kelly L. Chan Director March 27, 1998
- ------------------------------------
Kelly L. Chan
/s/ Michael M.Y. Chang Director March 27, 1998
- ------------------------------------
Michael M.Y. Chang
</TABLE>
[SIGNATURES CONTINUED]
20
<PAGE> 21
[SIGNATURES CONTINUED]
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ George T.M. Ching Vice Chairman of the March 27, 1998
- ------------------------------------ Board and Director
George T.M. Ching
/s/ Wing K. Fat Director March 27, 1998
- ------------------------------------
Wing K. Fat
/s/ Patrick S.D. Lee Director March 27, 1998
- ------------------------------------
Patrick S.D. Lee
/s/ Chi-Hung Joseph Poon Director March 27, 1998
- ------------------------------------
Chi-Hung Joseph Poon
/s/ Thomas G. Tartaglia Director March 27, 1998
- ------------------------------------
Thomas G. Tartaglia
/s/ Wilbur K. Woo Secretary of the Board March 27, 1998
- ------------------------------------ and Director
Wilbur K. Woo
</TABLE>
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Restated Articles of Incorporation. Previously filed with the Securities and Exchange
Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by
reference.
3.2 Restated Bylaws. Previously filed with the Securities and Exchange Commission as an exhibit to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated
herein by reference.
4.1 Shareholders Rights Plan. Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
10.1 Form of Indemnity Agreements between the Company and its directors and certain officers.
Previously filed with the Securities and Exchange Commission as an exhibit to Registration
Statement No. 33-33767 and incorporated herein by reference.
10.2 Employee Stock Ownership Plan and Trust of the Company and First Amendment thereto. Previously
filed with the Securities and Exchange Commission as an exhibit to Registration Statement No.
33-33767 and incorporated herein by reference.
10.3 Dividend Reinvestment Plan of the Company. Previously filed with the Securities and Exchange
Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by
reference.
10.4 Second Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1991 and incorporated herein by reference.
10.5 Third Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
10.6 Fourth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
10.7 Fifth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
</TABLE>
<PAGE> 23
<TABLE>
<S> <C>
10.8 Sixth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1991 and incorporated herein by reference.
10.9 Seventh Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.
10.10 Eighth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
13.1 Certain portions of the Registrant's 1997 Annual Report to Stockholders incorporated herein by
reference.
22.1 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT ___
CATHAY BANCORP, INC. AND SUBSIDIARY
1997 ANNUAL REPORT
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands except share, per share data) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement(4)
Interest income $ 111,978 $ 86,098 $ 76,223 $ 61,631 $ 55,573
Interest expense 50,874 39,209 31,282 20,033 18,652
----------------------------------------------------------------------
Net interest income before
provision for loan losses 61,104 46,889 44,941 41,598 36,921
Provision for loan losses 3,600 3,600 7,300 7,755 5,332
----------------------------------------------------------------------
Net interest income after
provision for loan losses 57,504 43,289 37,641 33,843 31,589
Securities gains 41 22 611 63 444
Other non-interest income 6,734 5,837 5,610 5,781 5,508
Non-interest expense 30,928 28,013 27,617 26,139 25,305
----------------------------------------------------------------------
Income before income tax expense 33,351 21,135 16,245 13,548 12,236
Income tax expense 13,243 7,819 5,624 4,034 4,448
----------------------------------------------------------------------
Net income $ 20,108 $ 13,316 $ 10,621 $ 9,514 $ 7,788
======================================================================
Basic net income per common share(3) $ 2.26 $ 1.66 $ 1.36 $ 1.23 $ 1.02
Cash dividends paid per share $ 0.625 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Weighted average common shares(3) 8,915,936 8,017,398 7,805,339 7,724,752 7,670,454
----------------------------------------------------------------------
Statement of Condition
Securities available-for-sale $ 216,158 $ 383,391 $ 243,252 $ 75,074 $ 45,870
Securities held-to-maturity 350,336 210,129 174,377 180,082 144,352
Total net loans(1) 846,151 744,384 542,995 569,363 579,646
Total assets 1,622,462 1,504,329 1,087,400 941,051 877,540
Deposits 1,449,121 1,364,740 984,227 845,715 790,414
Other liabilities 37,464 21,143 8,644 9,951 6,601
Stockholders' equity 135,877 118,446 94,529 85,385 80,525
----------------------------------------------------------------------
Common Stock Data
Shares of common stock outstanding(3) 8,941,743 8,878,144 7,867,164 7,798,550 7,714,603
Book value per share(2) $ 15.20 $ 13.34 $ 12.02 $ 10.95 $ 10.44
----------------------------------------------------------------------
Profitability Ratios
Return on average assets 1.29% 1.05% 1.05% 1.06% 0.91%
Return on average stockholders' equity 15.63 13.06 11.68 11.43 9.82
Dividend payout ratio 27.65 36.14 44.12 48.78 58.82
Average equity to average assets ratio 8.25 8.04 8.97 9.25 9.22
----------------------------------------------------------------------
</TABLE>
(1) Total net loans represents total loans net of loan participations sold,
unamortized deferred loan fees and the allowance for loan losses.
(2) Book value per share is calculated by dividing total stockholders' equity by
the number of common shares outstanding.
(3) Shares outstanding, weighted average shares and earnings per share have been
retroactively adjusted for stock splits.
(4) Includes the operating results of FPSB subsequent to the November 18, 1996,
acquisition date.
[LINE GRAPH OF TOTAL ASSETS]
<TABLE>
<CAPTION>
Total Assets (in million)
<S> <C>
1993................ $ 878
1994................ $ 941
1995................ $1,087
1996................ $1,504
1997................ $1,622
</TABLE>
[LINE GRAPH OF INCOME BEFORE INCOME TAX EXPENSE]
<TABLE>
<CAPTION>
Income Before Income Tax Expense (in million)
<S> <C>
1993................ $12,236
1994................ $13,548
1995................ $16,245
1996................ $21,135
1997................ $33,351
</TABLE>
13.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to facilitate the
understanding and assessment of the consolidated financial condition of Cathay
Bancorp, Inc. and its subsidiary Cathay Bank ("the Bank" and together "the
Company") and their consolidated results of operations. It should be read in
conjunction with the audited consolidated financial statements and footnotes
appearing elsewhere in this report. The 1997 results of operations include the
results of the former First Public Savings Bank, F.S.B. ("FPSB") for the entire
year. In 1996, FPSB's results are included from the acquisition date of November
18, 1996. This discussion includes statements regarding management's beliefs,
projections and assumptions regarding future operations. These forward-looking
statements are not projections of future results. Actual results for any period
may vary from past results discussed herein for numerous reasons, some of which
may be foreseen by management and some of which may not. See "FACTORS THAT MAY
AFFECT FUTURE RESULTS" below for a discussion of some of the factors that may
affect future operations.
RESULTS OF OPERATIONS The Company reported net income of $20.1 million or $2.26
per common share for year 1997 compared with $13.3 million or $1.66 per common
share for year 1996 and $10.6 million or $1.36 per common share for year 1995,
representing an increase of $6.8 million or 51.0% for 1997 and $2.7 million or
25.4% for 1996. In addition to the FPSB acquisition discussed above, the
increase in 1997 net income was primarily due to an increase of $14.2 million or
32.8% in net interest income after provision for loan losses. The efficiency
ratio, defined as non-interest expense divided by net interest income before
provision for loan losses plus non-interest income, improved from 53.1% to
45.6%. The increase in 1996 net income was primarily due to a decrease of $3.7
million in the provision for loan losses and an increase of $1.9 million in net
interest income. The return on average assets was 1.29% for 1997, compared with
1.05% for both 1996 and 1995, while the return on average stockholders' equity
advanced from 11.68% in 1995 to 13.06% in 1996 and to 15.63% in 1997.
NET INTEREST INCOME Net interest income before provision for loan losses reached
$61.1 million in 1997, compared with $46.9 million in 1996 and $44.9 million in
1995. This represents an increase of $14.2 million or 30.3% in 1997 and $2.0
million or 4.5% in 1996. On a taxable equivalent basis, net interest income
totaled $62.2 million, $48.0 million and $46.2 million in 1997, 1996 and 1995,
respectively, representing an increase of $14.2 million or 29.6% in 1997 and
$1.8 million or 3.9% in 1996.
Comparing 1997 with 1996, the increase in net interest income was
substantially attributable to a $313.5 million growth in average earning assets,
of which, average loans accounted for $212.5 million, average securities
(including available-for-sale and held-to-maturity) accounted for $86.6 million,
and Federal funds sold and deposits with other banks accounted for $14.4
million. The increase in average earning assets was primarily funded by time
deposits and, secondarily by other interest-bearing deposits and demand
deposits. The increase in volume provided an additional $27.0 million to
interest income, which was slightly offset by a decrease of $1.1 million due to
changes in rate. The significant increase in average loans contributed $19.9
million to interest income, however, $1.8 million of which was offset due to a
30 basis point drop in yield. The average yield on loans was 9.34% for 1997,
compared with 9.64% for 1996 despite a 15 basis point increase in the Bank's
average reference rate. This was primarily due to substantial increases in
average real estate mortgage loans from the acquisition of FPSB in November 1996
("the acquisition"), and to a lesser extent, the keen competition in the
Company's marketplace. Average real estate mortgage loans comprised
approximately 16.6% of total loans in 1997 as compared with 7.5% in 1996. The
average taxable equivalent yield on securities and Federal funds sold improved
26 basis points and 45 basis points from 6.12% and 5.27% to 6.38% and 5.72%,
respectively, while cost of funds advanced five basis points from 3.99% in 1996
to 4.04% in 1997. As a result of the above, net interest margin, defined as
taxable equivalent net interest income to average earning assets, increased 4
basis points from 4.38% in 1996 to 4.42% in 1997.
14.
<PAGE> 3
Comparing 1996 with 1995, the increase in net interest income was primarily
attributable to an increase of $211.1 million or 23.9% in average earning assets
from $884.3 million to $1,095.4 million. A majority of the increase came from
securities available-for-sale of $202.7 million offset by a decrease of $26.4
million in securities held-to-maturity, while average loans and Federal funds
sold grew by $30.0 million and $4.5 million, respectively. The increase in
average earning assets was funded mostly by interest bearing deposits,
specifically time deposits which increased $181.4 million, and on a smaller
scale, by non-interest bearing deposits. The volume increase provided additional
$13.2 million to net interest income, which however, was partially offset by a
decline of $3.5 million due to changes in rate. The average taxable equivalent
yield on earning assets decreased 80 basis points from 8.76% in 1995 to 7.96% in
1996. This was primarily a result of lower average reference rate on the Bank's
loans from 9.08% in 1995 to 8.52% in 1996 reflecting the prevailing interest
rate environment, and a relative change in the earning assets from loans to
investment securities. Average loans decreased as a percentage of total average
earning assets from 62.2% in 1995 to 52.9% in 1996, while the lower yielding
investment securities (including available-for-sale and held-to-maturity)
increased from 35.1% in 1995 to 44.5% in 1996. Cost of funds remained stable at
3.99% and 4.00% in 1996 and 1995, respectively. Consequently, the net interest
margin dropped 85 basis points from 5.23% in 1995 to 4.38% in 1996.
15.
<PAGE> 4
CHANGES DUE TO RATE AND VOLUME(1)
<TABLE>
<CAPTION>
1997 - 1996 1996 - 1995
Amount Increase (Decrease) Due to: Amount Increase (Decrease) Due to:
Changes in Changes in Total Changes in Changes in Total
(dollars in thousands) Rate Volume Change Rate Volume Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in:
Interest Income
Federal funds sold and securities $ 136 $ 796 $ 932 $ (102) $ 214 $ 112
purchased under agreement
to resell
Securities available-for-sale
(Taxable) 256 170 426 161 11,657 11,818
Securities available-for-sale
(Nontaxable)(3) (1) 11 10 1 (7) (6)
Securities held-to-maturity
(Taxable) 385 5,821 6,206 665 (1,514) (849)
Securities held-to-maturity
(Nontaxable)(3) (91) 142 51 (390) (140) (530)
Deposits with other banks -- 13 13 -- 3 3
Federal Home Loan Bank stock 8 112 120 75 8 83
Loans(2) (1,789) 19,916 18,127 (3,900) 2,963 (937)
-----------------------------------------------------------------------------------
Total $ (1,096) $ 26,981 $ 25,885 $ (3,490) $ 13,184 $ 9,694
===================================================================================
Interest Expense
Savings deposits, NOW accounts
and others $ (213) $ 1,625 $ 1,412 $ (300) $ 425 $ 125
Time deposits 382 9,528 9,910 (1,258) 9,006 7,748
Securities sold under agreements
to repurchase 2 456 458 (4) (9) (13)
Other borrowed funds (1) (2) (3) 2 (20) (18)
Mortgage indebtedness (48) (64) (112) 47 38 85
-----------------------------------------------------------------------------------
Total $ 122 $ 11,543 $ 11,665 $ (1,513) $ 9,440 $ 7,927
===================================================================================
Increase in net interest income $ (1,218) $ 15,438 $ 14,220 $ (1,977) $ 3,744 $ 1,767
===================================================================================
</TABLE>
(1) Changes in interest income and interest expense attributable to changes in
both rate and volume have been allocated proportionately to changes due to
rate and changes due to volume.
(2) Amounts are net of unamortized deferred loan fees of $3,786,000, $3,743,000
and $2,122,000 in 1997, 1996, and 1995, respectively.
(3) The amount of interest earned on certain securities of states and political
subdivisions and other securities held have been adjusted to a fully taxable
equivalent basis, using an effective Federal income tax rate of 35%.
EARNING ASSET MIX
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996 Amount Percent
Changed Changed
Percent of Total Percent of Total from from
(dollars in thousands) Amount Earning Assets Amount Earning Assets 1996 to 1997 1996 to 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Types Of Earning Assets
Federal funds sold and securities $ 67,000 4.53% $ 28,000 2.05% $ 39,000 139.29%
purchased under agreement
to resell
Securities available-for-sale 216,158 14.61 383,391 28.07 (167,233) (43.62)
Securities held-to-maturity 350,336 23.68 210,129 15.38 140,207 66.72
Loans (net of unamortized
deferred loan fees and
allowance for loan losses) 846,151 57.18 744,384 54.50 101,767 13.67
-----------------------------------------------------------------------------------------------
Total earning assets $1,479,645 100.00% $1,365,904 100.00% $ 113,741 8.33%
===============================================================================================
</TABLE>
16
<PAGE> 5
The following table sets forth information concerning average interest earning
assets, average interest bearing liabilities and the yields on those assets and
liabilities. Average outstanding amounts included in the table are daily
averages.
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal Funds Sold and Securities Purchased
Under Agreement to Resell
Average outstanding $ 42,260 $ 28,150 $ 23,630 $ 18,416 $ 15,257
Average yield 5.72% 5.27% 5.80% 4.30% 3.00%
Amount of interest earned $ 2,415 $ 1,483 $ 1,371 $ 791 $ 457
------------------------------------------------------------------------------
Securities Available-for-Sale, Taxable
Average outstanding $ 289,715 $ 291,419 $ 88,623 $ 50,876 $ 39,967
Average yield 5.99% 5.81% 5.75% 4.93% 4.23%
Amount of interest earned $ 17,343 $ 16,917 $ 5,099 $ 2,509 $ 1,689
------------------------------------------------------------------------------
Securities Available-for-Sale, Nontaxable
Average outstanding $ 169 $ 85 $ 155 $ 767 $ 322
Average yield(2) 11.24% 10.59% 9.68% 9.39% 11.49%
Amount of interest earned $ 19 $ 9 $ 15 $ 72 $ 37
------------------------------------------------------------------------------
Securities Held-to-Maturity, Taxable
Average outstanding $ 237,881 $ 153,393 $ 178,300 $ 116,523 $ 66,396
Average yield 6.52% 6.07% 5.68% 4.71% 5.46%
Amount of interest earned $ 15,520 $ 9,314 $ 10,127 $ 5,491 $ 3,628
------------------------------------------------------------------------------
Securities Held-to-Maturity, Nontaxable
Average outstanding $ 40,930 $ 39,020 $ 40,527 $ 36,488 $ 32,084
Average yield(2) 8.34% 8.61% 9.60% 10.40% 11.15%
Amount of interest earned $ 3,412 $ 3,361 $ 3,891 $ 3,793 $ 3,578
------------------------------------------------------------------------------
Auction Preferred Stock
Average outstanding -- -- -- $ 1,411 $ 4,965
Average yield(2) -- -- -- 4.18% 3.75%
Amount of interest earned -- -- -- $ 59 $ 186
------------------------------------------------------------------------------
Federal Home Loan Bank Stock
Average outstanding $ 5,506 $ 3,636 $ 2,851 $ 2,654 $ 1,945
Average yield 6.24% 6.16% 4.95% 5.16% 3.75%
Amount of interest earned $ 344 $ 224 $ 141 $ 137 $ 73
------------------------------------------------------------------------------
Deposits with Other Banks
Average outstanding $ 243 $ 50 $ 575 -- --
Average yield 6.58% 6.00% 6.26% -- --
Amount of interest earned $ 16 $ 3 $ 36 -- --
------------------------------------------------------------------------------
Loans(1)
Average outstanding $ 792,176 $ 579,634 $ 549,660 $ 572,244 $ 591,726
Average yield(5) 9.34% 9.64% 10.34% 8.75% 7.98%
Amount of interest earned(5) $ 74,015 $ 55,888 $ 56,825 $ 50,095 $ 47,198
------------------------------------------------------------------------------
Total Interest Earning Assets
Average outstanding $1,408,880 $1,095,387 $ 884,321 $ 799,379 $ 752,662
Average yield(5) 8.03% 7.96% 8.76% 7.87% 7.55%
Amount of interest earned(5) $ 113,084 $ 87,199 $ 77,505 $ 62,947 $ 56,846
------------------------------------------------------------------------------
</TABLE>
17.
<PAGE> 6
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES (continued)
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Bearing Liabilities:
Savings Deposits(3)
Average outstanding $ 428,763 $ 348,941 $ 328,923 $ 357,293 $ 342,347
Average rate paid 2.01% 2.07% 2.16% 2.09% 2.25%
Amount of interest paid or accrued $ 8,637 $ 7,225 $ 7,100 $ 7,463 $ 7,708
------------------------------------------------------------------------------
Time Deposits
Average outstanding $ 820,310 $ 632,211 $ 450,834 $ 342,037 $ 325,443
Average rate paid 5.09% 5.03% 5.34% 3.66 3.30%
Amount of interest paid or accrued $ 41,736 $ 31,826 $ 24,078 $ 12,506 $ 10,748
------------------------------------------------------------------------------
Securities Sold Under
Agreements to Repurchase
Average outstanding $ 8,779 $ 502 $ 695 $ 960 $ 2,180
Average rate paid 5.51% 4.98% 5.47% 3.54% 2.61%
Amount of interest paid or accrued $ 483 $ 25 $ 38 $ 34 $ 57
------------------------------------------------------------------------------
Other Borrowed Funds
Average outstanding $ 82 $ 109 $ 444 $ 107 --
Average rate paid 4.88% 6.42% 5.63% 5.61% --
Amount of interest paid or accrued $ 4 $ 7 $ 25 $ 6 --
------------------------------------------------------------------------------
Mortgage Indebtedness
Average outstanding $ 190 $ 759 $ 455 $ 240 $ 530
Average rate paid(6) 7.37% 16.60% 9.01% 10.00% 26.23%
Amount of interest paid or accrued(6) $ 14 $ 126 $ 41 $ 24 $ 139
------------------------------------------------------------------------------
Total Interest Bearing Liabilities
Average outstanding $1,258,124 $ 982,522 $ 781,351 $ 700,637 $ 670,500
Average rate paid 4.04% 3.99% 4.00% 2.86% 2.78%
Amount of interest paid or accrued $ 50,874 $ 39,209 $ 31,282 $ 20,033 $ 18,652
------------------------------------------------------------------------------
Net interest earnings(7) $ 62,210 $ 47,990 $ 46,223 $ 42,914 $ 38,194
Net yield on interest earnings assets(4),(7) 4.42% 4.38% 5.23% 5.37% 5.07%
Yield spread(7) 3.99% 3.97% 4.76% 5.01% 4.77%
------------------------------------------------------------------------------
</TABLE>
(1) Non-accrual loans are included in the average balances.
(2) The average yield has been adjusted to a fully taxable equivalent basis for
certain securities of states and political subdivisions and other securities
held using an effective Federal income tax rate of 35%.
(3) Savings deposits include NOW accounts and money market accounts.
(4) Calculated by dividing Net Interest Earnings by Average Outstanding Interest
Earning Assets.
(5) Yields and amounts of interest earned include loan fees. Amount of interest
earned does not include interest accrued on non-accrual loans.
(6) Yield and amount of interest paid or accrued include interest paid on senior
debts of other real estate owned, either to bring the loans current or to
pay off the loans when the Company obtained title to the properties and
thereafter.
(7) Net interest earnings, net yield on earnings assets and yield spread have
been adjusted to a fully taxable equivalent basis using an effective Federal
income tax rate of 35%.
18.
<PAGE> 7
NON-INTEREST INCOME Non-interest income totaled $6.8 million in 1997, compared
with $5.9 million in 1996 and $6.2 million in 1995. This represents an increase
of $916,000 or 15.6% in 1997 and a decline of $362,000 or 5.8% in 1996. The
increase in the 1997 non-interest income was due to 1) higher service charges of
$549,000 resulting primarily from the addition of FPSB's transaction accounts
through the acquisition; 2) an increase of $159,000 in other miscellaneous
income largely relating to income earned in outsourcing the issuing and
processing of money orders; 3) higher income of $122,000 for wire transfer fees;
and 4) increases in other operating income, such as documentation fees, other
fees and charges on loans and safe deposit box income.
Comparing 1996 with 1995, the lower non-interest income in 1996 was mainly
due to decreases of $589,000 in securities gains and $127,000 in service
charges, which were offset by increases of $236,000 in
letter of credit commissions and $119,000 in other operating income.
NON-INTEREST EXPENSE Non-interest expense amounted to $30.9 million in 1997,
representing an increase of $2.9 million or 10.4% over the $28.0 million in
1996, which was $396,000 or 1.4% over the $27.6 million in 1995. The higher
non-interest expense in 1997 was primarily attributed to a $3.0 million increase
in salaries and employee benefits mainly due to added personnel from the
acquisition as well as higher cash bonuses in December 1997. In addition, there
was a total increase of $1.3 million in the occupancy, equipment and other
operating expenses, all of which were directly associated with the acquisition
as well. However, net other real estate owned ("OREO") expense declined $1.2
million as the California real estate market recovered gradually while FDIC
assessment and professional services expense were both reduced moderately. The
efficiency ratio improved from 53.11% in 1996 to 45.56% in 1997.
Comparing 1996 with 1995, the slightly higher non-interest expense was a
result of increased salaries and employee benefits expense of $1.1 million
partially due to added personnel from the acquisition plus higher cash bonuses
in December 1996, and higher professional services expense of $637,000 primarily
attributable to legal fees, facility management fees and fees related to the
collection of loans. An offset to the above increases in 1996 non-interest
expense was a decrease of $700,000 in the F.D.I.C. assessment and a reduction of
$594,000 in expense related to the operations of real estate investments ("REI")
due to a provision for REI losses of $721,000 in 1995. The efficiency ratio for
1996 was 53.11% compared slightly favorably with 53.98% for 1995.
FINANCIAL CONDITION The Company maintained a healthy growth in 1997. Total
assets increased $118.1 million or 7.9% from $1,504.3 million at year-end 1996
to $1,622.4 million at year-end 1997; loans, net of deferred loan fees,
increased $103.6 million or 13.7% from $757.9 million to $861.5 million;
securities (including available-for-sale and held-to-maturity) declined $27.0
million or 4.5% from $593.5 million to $566.5 million; Federal funds sold was up
$39.0 million or 139.3% from $28.0 million to $67.0 million; deposits grew $84.4
million or 6.2% from $1,364.7 million to $1,449.1 million; and stockholders'
equity advanced $17.5 million or 14.8% from $118.4 million to $135.9 million.
SECURITIES The Company's investment policy states that those securities which
could be sold in response to changes in interest rates, changes in prepayment
risk, increases in loan demand, the need to increase regulatory capital, general
liquidity needs, or other similar factors will be classified as securities
available-for-sale, and carried at fair value, with unrealized gains or losses,
net of tax, reflected in stockholders' equity. Those securities that the Company
has the positive intent and ability to hold until maturity will be classified as
securities held-to-maturity, and carried at amortized cost. In addition, to
further improve the Bank's liquidity, it is the policy to transfer securities
held-to-maturity to the available-for-sale category when securities have 90 days
or less to maturity.
19.
<PAGE> 8
The Company experienced a gradual shift in its earning assets from securities to
loans in 1997 due to stronger loan demand. Loans, net of deferred loan fees,
composed 57.63% of earning assets at year-end 1997, compared with 54.94% at
year-end 1996 while securities accounted for 37.89% of earning assets at
year-end 1997, compared with 43.03% at year-end 1996. This shift in earning
assets is generally favorable to the net interest margin since loans usually
yield a higher rate.
The following table summarizes the carrying value of the Company's portfolio
of securities for each of the past three years:
<TABLE>
<CAPTION>
As of December 31,
(dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury securities $ 37,971 $121,769 $110,386
U.S. government agencies 113,306 228,377 129,847
State and municipal securities -- 50 95
Mortgage-backed securities 22,982 17,932 --
Collateralized mortgage obligations 6,386 4,950 --
Asset-backed securities 19,889 4,998 --
Federal Home Loan Bank stock 5,653 5,315 2,924
Commercial paper 9,971 -- --
------------------------------------
Total $216,158 $383,391 $243,252
====================================
Securities held-to-maturity:
U.S. Treasury securities $ 26,054 $ 26,081 $ 50,062
U.S. government agencies 39,374 66,900 69,428
State and municipal securities 44,497 40,393 39,620
Mortgage-backed securities 140,338 63,109 266
Collateralized mortgage obligations 90,234 -- --
Asset-backed securities 923 3,545 --
Other securities 8,916 10,101 15,001
------------------------------------
Total $350,336 $210,129 $174,377
====================================
</TABLE>
The average yield on taxable securities available-for-sale and
held-to-maturity were 5.99% and 6.52%, respectively, in 1997, which compared
favorably with the 5.81% and 6.07%, respectively, in 1996. The taxable
equivalent yield on the non-taxable state and municipal securities
held-to-maturity decreased 27 basis points from 8.61% in 1996 to 8.34% in 1997.
This is mainly due to the yields of securities acquired at the prevailing market
rate in 1997 are lower than the yields of those state and municipal securities
that matured or were called during the year.
20.
<PAGE> 9
The scheduled maturities and taxable equivalent yields by security type are
presented in the following tables:
SECURITIES AVAILABLE-FOR-SALE PORTFOLIO MATURITY DISTRIBUTION AND YIELD
ANALYSIS:
<TABLE>
<CAPTION>
As of December 31, 1997
After One After Five
One Year Year to Years to Over Ten
(dollars in thousands) or Less Five Years Ten Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturity Distribution:
U.S. Treasury securities $ 35,953 $ 2,018 $ -- $ -- $ 37,971
U.S. government agencies 20,046 93,260 -- -- 113,306
Mortgage-backed securities(2) -- 5,064 1,519 16,399 22,982
Collateralized mortgage obligations(2) -- 2,733 1,103 2,550 6,386
Asset-backed securities(2) -- 19,889 -- -- 19,889
Federal Home Loan Bank stock 5,653 -- -- -- 5,653
Commercial paper 9,971 -- -- -- 9,971
-------------------------------------------------------------------------------
Total $ 71,623 $ 122,964 $ 2,622 $ 18,949 $ 216,158
===============================================================================
Weighted Average Yield:
U.S. Treasury securities 5.53% 6.38% --% --% 5.58%
U.S. government agencies 6.09 6.82 -- -- 6.69
Mortgage-backed securities(2) -- 6.00 6.00 7.26 6.91
Collateralized mortgage obligations(2) -- 6.50 5.50 6.00 6.13
Asset-backed securities(2) -- 6.14 -- -- 6.14
Federal Home Loan Bank stock 6.24 -- -- -- 6.24
Commercial paper 6.60 -- -- -- 6.60
-------------------------------------------------------------------------------
Total 5.89% 6.66% 5.79% 7.08% 6.43%
===============================================================================
</TABLE>
SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
<TABLE>
<CAPTION>
As of December 31, 1997
After One After Five
One Year Year to Years to Over Ten
(dollars in thousands) or Less Five Years Ten Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturity Distribution:
U.S. Treasury securities $ -- $ 26,054 $ -- $ -- $ 26,054
U.S. government agencies -- 39,374 -- -- 39,374
State and municipal securities 1,341 9,179 18,060 15,917 44,497
Mortgage-backed securities(2) -- 15,174 23,465 101,699 140,338
Collateralized mortgage obligations(2) -- 3,911 25,624 60,699 90,234
Asset-backed securities(2) -- -- -- 923 923
Corporate bond -- 8,916 -- -- 8,916
--------------------------------------------------------------------------------
Total $ 1,341 $ 102,608 $ 67,149 $ 179,238 $ 350,336
================================================================================
Weighted Average Yield:
U.S. Treasury securities --% 6.42% --% --% 6.42%
U.S. government agencies -- 6.41 -- -- 6.41
State and municipal securities(1) 10.05 8.08 8.54 7.93 8.27
Mortgage-backed securities(2) -- 6.14 6.50 6.77 6.65
Collateralized mortgage obligations(2) -- 6.50 7.08 6.85 6.90
Asset-backed securities(2) -- -- -- 6.09 6.09
Corporate bond -- 6.72 -- -- 6.72
--------------------------------------------------------------------------------
Total 10.05% 6.55% 7.27% 6.90% 6.88%
================================================================================
</TABLE>
(1) Average yield has been adjusted to a fully-taxable equivalent basis.
(2) Securities reflect stated maturities and not anticipated prepayments.
21.
<PAGE> 10
LOANS Total gross loans amounted to $865.3 million at year-end 1997, compared
with $761.7 million at year-end 1996, representing an increase of $103.6 million
or 13.6%. Commercial loans, reversing their decreasing trend in 1996, increased
$54.4 million or 19.2% to $338.3 million during 1997. Commercial loans are for
general business purposes and include short-term loans to finance trust
receipts. These loans are generally made based on the financial strength of the
borrowers, and are typically secured by cash or cash equivalents, real estate,
inventory or receivables. The Company emphasizes its commercial lending to
small-to-medium businesses and professionals for their working capital needs.
Commercial real estate loans, residential real estate loans and equity lines
rose $18.4 million, $15.2 million and $4.5 million, respectively to $303.7
million, $137.0 million and $17.7 million, respectively at year-end 1997.
Commercial real estate loans are secured by first deeds of trust primarily on
retail shops and shopping centers, and secondarily on office buildings,
multiple-unit apartments, hotels, motels, and warehouses. The Company's
underwriting policy generally prescribes the loan to value ratio at the time of
origination for commercial real estate loans to be 65% or lower of the appraised
value. Construction loans increased notably as well, from $33.5 million at
year-end 1996 to $41.7 million at year-end 1997, an increase of $8.2 million or
24.5%. Installment loans, which consisted primarily of automobile financing,
showed a moderate increase of $3.0 million from $23.6 million to $26.6 million.
The Company's Board of Directors establishes the basic lending policy for
the Bank. Each loan is generally considered in terms of, among other things,
character, repayment ability, financial condition of the borrower, secondary
repayment source, collateral, capital, leverage capacity of the borrower, market
conditions for the borrower's business or project, and prevailing economic
trends and conditions. In addition, the Company's lending policy requires an
independent appraisal on real estate property in accordance with Regulatory
guidelines. Although a majority of the Company's loan portfolio, including
commercial loans, is secured by real estate to some extent, management believes
that the Company's underwriting guidelines, including collateral requirements,
and underlying values of real estate in the Company's primary marketplace have
provided the Company with adequate protection against reasonably expected losses
on non-performing loans.
The classification of loans by type as of December 31 for each of the past
five years, as well as the changes in loan portfolio composition for the past
two years and the contractual maturity of the loan portfolio as of December 31,
1997 are presented below (see also Note 5 of the Notes to the Consolidated
Financial Statements):
LOAN TYPE AND MIX
<TABLE>
<CAPTION>
Amount Outstanding as of December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Type of Loans:
Commercial loans $ 338,285 $ 283,894 $ 292,612 $ 324,189 $ 336,438
Real estate mortgage loans 458,417 420,315 231,360 215,945 190,510
Real estate construction loans 41,736 33,510 13,606 14,090 31,505
Installment loans 26,611 23,551 19,748 18,170 17,982
Other loans 267 385 533 11,707 12,824
-------------------------------------------------------------------------
Total loans 865,316 761,655 557,859 584,101 589,259
-------------------------------------------------------------------------
Less
Unamortized deferred loan fees (3,786) (3,742) (2,122) (2,467) (2,440)
Allowance for loan losses (15,379) (13,529) (12,742) (12,271) (7,173)
-------------------------------------------------------------------------
Total net loans $ 846,151 $ 744,384 $ 542,995 $ 569,363 $ 579,646
-------------------------------------------------------------------------
</TABLE>
22.
<PAGE> 11
CHANGES IN LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
Percentage Percentage Percentage
of Total of Total Increase
(dollars in thousands) Amount Loans Amount Loans (Decrease)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Type of Loans:
Commercial loans $ 338,285 39.98% $ 283,894 38.14% 19.16%
Real estate mortgage loans 458,417 54.18 420,315 56.47 9.07
Real estate construction loans 41,736 4.93 33,510 4.50 24.55
Installment loans 26,611 3.15 23,551 3.16 12.99
Other loans 267 0.03 385 0.05 (30.65)
Unamortized deferred loan fees (3,786) (0.45) (3,742) (0.50) 1.18
Allowance for loan losses (15,379) (1.82) (13,529) (1.82) 13.67
--------------------------------------------------------------------
Total net loans $ 846,151 100.00% $ 744,384 100.00% 13.67%
--------------------------------------------------------------------
</TABLE>
MATURITY OF LOANS: CONTRACTUAL MATURITY OF LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
(dollars in thousands) Within One Year One to Five Years Over Five Years Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Loans
Floating rate $ 213,765 $ 48,208 $ 8,264 $ 270,237
Fixed rate 53,561 6,006 7,911 67,478
Real Estate Mortgage Loans
Floating rate 28,013 111,817 141,526 281,356
Fixed rate 5,234 12,848 156,169 174,251
Real Estate Construction Loans
Floating rate 23,277 3,973 -- 27,250
Fixed rate 14,080 -- -- 14,080
Installment Loans
Floating rate -- -- 37 37
Fixed rate 4,667 21,907 -- 26,574
Other Loans
Floating rate 227 -- -- 227
Fixed rate -- -- 40 40
---------------------------------------------------------------
Total loans(2) $ 342,824 $ 204,759 $ 313,947 $ 861,530
===============================================================
Floating rate $ 265,282 $ 163,998 $ 149,827 $ 579,107
Fixed rate 77,542 40,761 164,120 282,423
---------------------------------------------------------------
Total loans(2) $ 342,824 $ 204,759 $ 313,947 $ 861,530
Allowance for loan losses (15,379)
---------
Total net loans $ 846,151
=========
</TABLE>
(1) In the normal course of business, loans are renewed or extended from time to
time; therefore, the above should not be viewed as an indication of future
cash flows.
(2) Total loans are net of unamortized deferred loan fees.
RISK ELEMENTS OF THE LOAN PORTFOLIO
NON-PERFORMING ASSETS Management reviews the loan portfolio regularly for
problem loans. During the ordinary course of business, management becomes aware
of borrowers that may not be able to meet the contractual requirements of the
loan agreements. Such loans are placed under close supervision with
consideration given to placing the loan on non-accrual status, the need for an
additional allowance for loan losses, and (if appropriate) partial or full
charge-off. Management generally places loans on a non-accrual status if
interest and principal or
23.
<PAGE> 12
either interest or principal is past due 90 days or more, or in cases where
management deems the full collection of principal and interest unlikely. After a
loan is placed on non-accrual status, any interest previously accrued, but not
yet collected, is generally reversed against current income. Depending on the
circumstances management may elect to continue the accrual of interest on
certain past-due loans if partial payment is received and/or the loan is well
collateralized and in the process of collection. The loan is generally returned
to accrual status when the borrower has brought the past due principal and
interest payments current and, in the opinion of management, the borrower has
demonstrated the ability to make future payments of principal and interest as
scheduled. Non-performing assets include loans past due 90 days or more and
still accruing interest, non-accrual loans, and OREO. Non-performing assets
totaled $32.5 million at year-end 1997 compared with $30.2 million at year-end
1996. The increase of $2.3 million in non-performing assets was primarily due to
an increase of $7.6 million in non-accrual loans offset by a reduction of $5.6
million in OREO. The non-performing loan coverage ratio, which is the allowance
for loan losses to non-performing loans, was 79.85% at year-end, 1997 compared
with 119.15% at year-end 1996. The decrease in the non-accrual coverage ratio
was primarily attributable to an increase of $7.9 million in non-performing
loans which include non-accrual loans and loans past due 90 days or more and
still accruing interest combined with a $1.9 million increase in the allowance
for loan losses. Although the coverage ratio declined considerably, management
does not expect substantial losses from the non-performing loans since most of
these loans are well collateralized. The increase in non-accrual loans was
primarily due to two commercial real estate loans and one commercial loan
totaling $6.9 million, all of which are secured by the first trust deeds on the
respective properties. Nevertheless, non-performing assets decreased as a
percentage of total loans plus OREO from 3.87% at year-end 1996 to 3.70% at
year-end 1997.
The following tables present the total non-performing assets and interest
foregone for the past five years:
NON-PERFORMING ASSETS AND INTEREST FOREGONE
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Past due 90 days or more $ 2,373 $ 2,050 $ 1,344 $ 4,104 $ 3,529
Non-accrual 16,886 9,305 14,012 27,860 25,917
---------------------------------------------------------------
Total non-performing loans 19,259 11,355 15,356 31,964 29,446
===============================================================
Real estate acquired in foreclosure
or in-substance foreclosure 13,269 18,854 13,879 6,798 6,212
---------------------------------------------------------------
Total non-performing assets $32,528 $30,209 $29,235 $38,762 $35,658
===============================================================
Accruing troubled debt restructurings $ 4,874 $ 3,201 $ 8,429 $ 5,257 $ 5,214
Non-performing assets as a percentage
of total loans and other real estate
owned at year-end 3.70% 3.87% 5.11% 6.56% 5.99%
Allowance for loan losses as a percentage
of non-performing loans 79.85% 119.15% 82.98% 38.39% 24.36%
===============================================================
</TABLE>
24.
<PAGE> 13
The effect of non-accrual loans and troubled debt restructurings on interest
income for the years 1997, 1996, 1995, 1994, and 1993 is presented below:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans
Contractual interest due $1,845 $1,121 $1,503 $2,712 $1,902
Interest recognized 471 268 200 560 735
-------------------------------------------------------
Net interest foregone $1,374 $ 853 $1,303 $2,152 $1,167
=======================================================
(dollars in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
Troubled Debt Restructurings
Contractual interest due $ 406 $ 339 $ 467 $ 351 $ 495
Interest recognized 387 311 352 319 346
-------------------------------------------------------
Net interest foregone $ 19 $ 28 $ 115 $ 32 $ 149
=======================================================
</TABLE>
The balance of $16.9 million in non-accrual loans at year-end 1997 consisted
mainly of $10.6 million in commercial real estate loans and $5.5 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>
1997 1996
Loan Balance Loan Balance
Commercial Commercial
(dollars in thousands) Real Estate Commercial Real Estate Commercial
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Type of Property:
Single/multi-family residence $ 593 $ 311 $ 583 $ 1,707
Commercial 8,471 5,095 226 3,302
Motel 1,350 -- 1,350 511
Marina -- -- 769 --
Others 214 73 -- 399
Unsecured -- 37 -- 84
---------------------------------------------------------------
$ 10,628 $ 5,516 $ 2,928 $ 6,003
===============================================================
Type of Business:
Real estate development $ -- $ 134 $ 995 $ 562
Real estate management 6,303 36 -- --
Wholesale 430 2,994 -- 780
Food/Restaurant -- 1,190 -- 1,327
Import 752 4 -- 305
Motel 1,350 -- 1,933 511
Investments 1,194 -- -- --
Industrial 214 263 -- 6
Clothing 385 441 -- 1,139
Others -- 454 -- 1,373
---------------------------------------------------------------
$ 10,628 $ 5,516 $ 2,928 $ 6,003
===============================================================
</TABLE>
The $8.5 million balance in non-accrual commercial real estate loans at
year-end 1997 includes seven credits, six of which (totaling $8.2 million) were
secured by the first trust deeds on the respective commercial properties. The
$1.4 million motel loan represents one credit secured by the first trust deed on
the respective motel located in Southern California.
25.
<PAGE> 14
Under the non-accrual commercial loan category as of year-end 1997, the $5.1
million balance consisted of 13 credits with a majority of the loan amounts less
than $300,000. The collateral on these credits include primarily first trust
deeds and secondarily second and third trust deeds on commercial buildings and
warehouses. Although the non-performing coverage ratio declined considerably,
management does not expect substantial losses from the non-accrual loans since a
majority of these loans are adequately secured.
Troubled debt restructurings totaled $4.9 million at year-end 1997, compared
with $3.2 million at year-end 1996. $2.5 million of the troubled debt
restructurings were commercial real estate loans while $2.4 million were
commercial loans. With the exception of two commercial loans in the amount of
$1.8 million, which were 11 and 16 days past due, respectively, all other
restructured loans totaling $3.1 million were current under their revised terms
as of December 31, 1997.
As of December 31, 1997, the Company had identified impaired loans with a
recorded investment of $21.9 million. An allowance of $4.0 million, representing
the difference between the value of collateral supporting the loans and their
outstanding balance, is included in the allowance for loan losses. For the year
1997, the average balance of impaired loans was $23.2 million. During 1997,
interest collected on impaired loans totaled $1.6 million.
There were no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of December 31, 1997. See
"Factors That May Affect Future Results" below for a discussion of some of the
factors that may affect the matters discussed in this Section.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $15.4
million at year-end 1997, representing an increase of $1.9 million or 14.1% over
the $13.5 million at year-end 1996. Management provided $3.6 million to the
provision for loan losses in 1997 and 1996, respectively. The Bank recorded net
charge-offs of $1.7 million in 1997, compared with $4.4 million in 1996. Total
charge-offs of $2.1 million in 1997 included $1.4 million in commercial loans,
$574,000 in real estate loans, and $178,000 in installment and other loans. The
tables below present information relating to the allowance for loan losses,
charge-offs, and recoveries by loan type for the past five years:
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Amount Outstanding as of December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 13,529 $ 12,742 $ 12,271 $ 7,173 $ 6,429
Allowance from acquisition -- 1,644 -- -- --
Provision for loan losses 3,600 3,600 7,300 7,755 5,332
Loans charged-off (2,139) (5,388) (7,018) (4,419) (4,688)
Recoveries of charged-off loans 389 931 189 1,762 100
-----------------------------------------------------------------------------
Balance at end of year $ 15,379 $ 13,529 $ 12,742 $ 12,271 $ 7,173
=============================================================================
Average loans outstanding during year ended $ 792,176 $ 579,634 $ 549,660 $ 572,244 $ 591,726
Ratio of net charge-offs to average loans
outstanding during the year 0.22% 0.77% 1.24% 0.46% 0.78%
Provision for loan losses to average loans
outstanding during the year 0.45% 0.62% 1.33% 1.36% 0.90%
Allowance to non-performing loans at year-end 79.85% 119.15% 82.98% 38.39% 24.36%
Allowance to total loans at year-end 1.78% 1.78% 2.28% 2.10% 1.22%
=============================================================================
</TABLE>
26.
<PAGE> 15
LOANS CHARGED-OFF BY LOAN TYPE
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loan $1,387 $4,010 $3,895 $2,300 $3,449
Percentage of total commercial loans(1) 0.41% 1.33% 1.33% 0.71% 1.03%
----------------------------------------------------------
Real estate loan $ 574 $1,177 $2,885 $1,678 $ 508
Percentage of total real estate loans(1) 0.11% 1.18% 1.18% 0.73% 0.23%
----------------------------------------------------------
Installment and other loan $ 178 $ 201 $ 238 $ 441 $ 731
Percentage of total installment and other loans(1) 0.66% 1.17% 1.17% 1.48% 2.37%
----------------------------------------------------------
Total loans charged-off $2,139 $5,388 $7,018 $4,419 $4,688
==========================================================
</TABLE>
(1) Percentages were calculated based on year-end balances.
RECOVERIES BY LOAN TYPE
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loan $ 218 $ 640 $ 110 $ 1,151 $ 61
Real estate loan 111 205 17 501 1
Installment and other loan 60 86 62 110 38
----------------------------------------------------
Total $ 389 $ 931 $ 189 $ 1,762 $ 100
====================================================
</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.
In applying Statements of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS 114) and No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" (SFAS 118), the Company considers all loans classified and
restructured in its evaluation of loan impairment. The classified loans are
stratified by size, and loans less than the Company's defined selection criteria
are treated as a homogenous portfolio. For loans meeting the defined criteria,
the Company measures the impairment based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, if the loan
is not collateral dependent, and by using the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. If the
measurement of the impaired loan is less than the recorded amount of the loan,
an impairment is recognized by creating a valuation allowance with a
corresponding charge to the provision for loan losses, or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for loan losses.
The Company's allowance for loan losses consists of a specific allowance and
a general allowance. The specific allowance is further broken down to provide
for those impaired loans and the remaining internally classified loans. For the
remaining internally classified loans, management allocates a specific allowance
to each loan based on the percentage assigned and the current financial
condition of the borrowers and guarantors, the prevailing value of the
underlying collateral and the 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
27.
<PAGE> 16
management's knowledge of the quality of the portfolio. The following table
presents a breakdown of impaired loans and the SFAS 114 impairment allowance
related to impaired loans as of the dates indicated:
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
SFAS No. 114 SFAS No. 114
Recorded Impairment Recorded Impairment
(dollars in thousands) Investment Allowance Investment Allowance
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired Loans
Loans with impairment allowance
Commercial $ 7,784 $ 1,499 $ 6,861 $ 1,398
Commercial real estate 14,027 2,396 10,313 1,648
Others 95 95 -- --
----------------------------------------------------------
Total impaired loans with
impairment allowance $ 21,906 $ 3,990 $ 17,174 $ 3,046
----------------------------------------------------------
</TABLE>
The Company allocates the allowance for loan losses to the major loan
categories for purposes of this report as set forth in the following table.
These allocations are estimates based on historical loss experience and
management's judgment. The allocation of the allowance for loan losses is not
necessarily an indication that the charge-offs will occur, or if they do occur,
that they will be in the proportion indicated in the following table:
<TABLE>
<CAPTION>
As of December 31,
1997 1996 1995
Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
Amount total loans(1) Amount total loans(1) Amount total loans(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of loans:
Commercial loans $ 7,480 39.20% $ 6,190 37.27% $ 6,338 52.45%
Real estate
mortgage loans 6,988 52.88 6,942 55.19 6,084 41.47
Real estate
construction loans 401 4.80 294 4.40 136 2.44
Installment loans 356 3.09 72 3.09 81 3.54
Other loans 154 0.03 31 0.05 103 0.10
Unallocated -- N/A -- N/A -- N/A
--------------------------------------------------------------------------------------------
Total $15,379 100.00% $13,529 100.00% $12,742 100.00%
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 1993
Percent of Percent of
loans in each loans in each
category to category to
Amount total loans(1) Amount total loans(1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Type of loans:
Commercial loans $ 5,658 55.76% $ 2,383 58.61%
Real estate
mortgage loans 5,754 36.68 3,891 31.68
Real estate
construction loans 225 2.41 276 5.47
Installment loans 336 3.13 137 3.67
Other loans 186 2.02 100 0.57
Unallocated 112 N/A 386 N/A
----------------------------------------------------------
Total $12,271 100.00% $ 7,173 100.00%
==========================================================
</TABLE>
(1) Total loans means average loans outstanding during the year, before
unamortized deferred loan fees and allowance for loan losses.
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 to be adequate as of December 31, 1997 to absorb
the estimated known and inherent risks identified through its analysis. See
"Factors That May Affect Future Results" below for a discussion of some of the
factors that may affect the matters discussed in this Section.
OTHER REAL ESTATE OWNED The Company's OREO properties, net of valuation
allowance, were carried at $13.3 million at year-end 1997, compared with those
carried at $18.9 million at year-end 1996. During 1997, the Company acquired 12
properties totaling $6.1 million through foreclosures and disposed 17 properties
totaling $11.7 million at a net gain of $174,000. The Company's OREO properties
at year-end 1997 include different types of residential properties, commercial
buildings, warehouses and land. All properties 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
in the current
28.
<PAGE> 17
period. During 1997, management provided approximately $476,000 to the provision
for OREO losses based on new listing prices or new appraisals received bringing
the valuation allowance to $1.1 million at year-end 1997, while $1.5 million
were provided to the provision for OREO losses in 1996 with a balance of $1.6
million in the valuation allowance at year-end 1996. Although the California
real estate market continued to show improvements in 1997, the future
performance of the market is unpredictable, therefore, additional provision for
OREO losses may be made and additional losses on sales of these properties may
be incurred in the future. See "Factors That May Affect Future Results" below
for a discussion of some of the factors that may affect the matters discussed in
this Section.
The following table shows the OREO expense by type for years 1997, 1996 and
1995:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense $ 201 $ 312 $ 923
Provision for losses 476 1,501 875
Net (gain) loss on disposal (174) (85) 79
-------------------------------
Total $ 503 $ 1,728 $ 1,877
===============================
</TABLE>
INVESTMENTS IN REAL ESTATE At year-end 1997, the Company's investments in real
estate consisted of one strip-mall, a 49.5% interest in an apartment purchased
in 1993, and a 99% interest in another apartment purchased in 1995. Both of the
apartments qualify for Federal low income housing tax credits. The aggregate
estimated fair value of the investments in real estate was $1.7 million and $4.0
million as of December 31, 1997 and 1996, respectively. The Company sold one
strip-mall at a gain of $222,000 and realized a net gain of $170,000 from the
operations of the strip-malls in 1997.
DEPOSITS Total deposits reached $1,449.1 million at year-end 1997, compared with
$1,364.7 million at year-end 1996, representing an increase of $84.4 million or
6.2%.
With the interest rate spread widening between time deposits and other
interest-bearing deposits, the Company experienced some shift of deposits from
savings (including NOW accounts and money market accounts) to time deposits,
especially time deposits over $100,000 ("Jumbo CD's") during 1997. Time deposits
increased $65.3 million or 8.3% from $791.3 million to $856.6 million at
year-end 1997, $60.8 million of which were from Jumbo CD's. Savings deposits
decreased $21.4 million or 4.9% from $438.1 million to $416.7 million at
year-end 1997. However, demand deposits grew quite significantly from $135.4
million to $175.9 million at year-end 1997, an increase of $40.5 million or
29.9%. The higher demand deposits helped the Bank's service charge income in
1997. There were no brokered deposits at year-end 1997. As a result of the
above, the ratio of core deposits (defined as all deposits excluding Jumbo CD's
and brokered deposits) to total deposits declined slightly from 64.22% at
year-end 1996 to 62.11% at year-end 1997.
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. The Bank's Jumbo CD's are considered 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 3,434 individual accounts owned by 2,409 individual depositors
as of February 23, 1998 (the balance of the accounts averaged approximately
$164,000); 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.
29.
<PAGE> 18
The following tables display the deposit mix for the past three years, time
deposits of $100,000 or more by maturity, and average deposits and rates.
DEPOSIT MIX
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
(dollars in thousands) Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 175,875 12.1% $ 135,345 9.9% $ 117,974 12.0%
NOW accounts 111,653 7.7 118,498 8.7 88,917 9.0
Money market accounts 94,708 6.6 95,158 7.0 102,167 10.4
Savings deposits 210,291 14.5 224,443 16.4 134,045 13.6
Time deposits under $100,000 307,504 21.2 302,981 22.2 156,928 15.9
Time deposits over $100,000 549,090 37.9 488,315 35.8 384,196 39.1
-----------------------------------------------------------------------------------------
Total deposits $1,449,121 100.0% $1,364,740 100.0% $ 984,227 100.0%
=========================================================================================
</TABLE>
TIME DEPOSITS OF $100,000 OR MORE BY MATURITY
<TABLE>
<CAPTION>
(dollars in thousands) Year ended December 31, 1997
- ----------------------------------------------------------------------------
<S> <C>
Less than three months $ 241,027
Three to six months 141,169
Six to twelve months 155,561
Over one year 11,333
-----------
Total $ 549,090
===========
</TABLE>
MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR
FOR EACH OF THE FIVE YEARS AFTER DECEMBER 31, 1998
<TABLE>
<CAPTION>
(dollars in thousands) Year ended December 31, 1997
- ----------------------------------------------------------------------------
<S> <C>
1999 $ 22,168
2000 4,647
2001 267
2002 228
2003 35
-----------
Total $ 27,345
===========
</TABLE>
AVERAGE DEPOSITS & RATES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 148,907 --% $ 121,952 --% $ 114,435 --% $ 108,528 --% $ 97,209 --%
NOW accounts 114,453 1.5 96,759 1.5 85,413 1.7 80,935 1.6 68,167 1.6
Money market accounts 97,470 2.3 100,898 2.3 106,760 2.4 130,664 2.3 135,769 2.4
Savings deposits 216,840 2.2 151,284 2.3 136,750 2.3 145,694 2.2 138,411 2.4
Time deposits 820,310 5.1 632,211 5.0 450,834 5.4 342,037 3.7 325,443 3.3
---------------------------------------------------------------------------------------------------
Total deposits $1,397,980 3.6% $1,103,104 3.5% $ 894,192 3.5% $ 807,858 2.5% $ 764,999 2.4%
===================================================================================================
</TABLE>
30.
<PAGE> 19
CAPITAL RESOURCES The Company's primary capital source has historically been
retained earnings and to a lesser extent, the issuance of additional common
stock through its Dividend Reinvestment Plan and the ESOP. Total stockholders'
equity amounted to $135.9 million or 8.37% of total assets at year-end 1997,
compared with $118.4 million or 7.87% of total assets at year-end 1996. The
increase of $17.5 million or 14.8% was due to net income of $20.1 million plus
$1.5 million from issuance of additional common shares through Dividend
Reinvestment Plan and a positive net change in the securities valuation
allowance, net of tax, of $1.4 million, offset by dividends paid in the amount
of $5.6 million.
The Company declared a cash dividend of $0.15 per share in January, April
and July, 1997, on 8,878,144, 8,895,878 and 8,914,260 shares outstanding,
respectively. In October 1997, the Company increased its cash dividend by $.025
or 16.7% to $.175 per common share on 8,929,508 shares outstanding bringing
total cash dividends paid in 1997 to $5.6 million.
Management is committed to retain the Company's capital at a level
sufficient to support future growth, to protect depositors and stockholders, and
to comply with various regulatory requirements. The primary measure of capital
adequacy is based on the ratio of risk-based capital to risk weighted assets.
The risk-based capital ratio is strongly impacted by the management of the
securities portfolio since the U.S. Treasury securities are assigned a zero risk
weighting, and other instruments in which the company has often placed a
significant amount of funds which include U.S. Agency securities, State and
Municipal securities, Federal funds sold, and bankers' acceptances, have a 20%
risk weighting. Loans are generally risk-weighted at 100% with the exceptions of
loans secured by time certificates of deposits which are 20% risk-weighted and
loans secured by 1-4 family and multi-family residential properties which are
50% risk-weighted. Management is constantly trying to maximize the yields on
earning assets and as a result of a substantial growth in loans and a decrease
in U.S. Treasury securities, the Company's risk-based capital ratio decreased
from 13.97% at year-end 1996 to 12.98% at year-end 1997.
A table illustrating the Company and the Bank's capital and leverage ratios
at year-end 1997 is included in Note 11 to consolidated financial statements.
Those ratios not only exceeded the regulatory minimum requirements but also
placed the Bank in the "well capitalized" category which is defined as
institutions with total risk-based ratio equal to or greater than 10.0%, and
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%.
MARKET RISK Market risks are the risks that apply to the Company by nature of
its activities and the economic environment. 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 Company actively monitors the impact of the
fluctuations in interest rates on its net interest income using risk management
tools. Because of the limitation inherent in any individual risk management
tool, the Company uses both 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 Company's Interest Rate Sensitivity Analysis (as described in "Liquidity
and Interest Rate Sensitivity") measures the Company's exposure to differential
changes in interest rates between assets and liabilities. However, an interest
rate sensitivity analysis can only show the mismatches in the maturities and
repricing opportunities of assets and liabilities and has limited usefulness in
measuring or managing interest rate risks related to timing differences in the
repricing of assets and liabilities or the basis risk which is the differences
in the behavior of the lending and funding rates. To quantify the extent of
these risks, the Company uses a simulation model to take basis risk into account
and project future earnings or market values under alternative interest rate
scenarios. The simulation measures the volatility of net interest income and net
portfolio value under immediate rising or falling interest rate scenarios in 100
basis point increments. Net portfolio value is defined as net present value of
assets and liabilities. The Company establishes a tolerance level in its policy
to define and limit interest income
31.
<PAGE> 20
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. The
following table presents the estimated impacts of immediate changes in interest
rates at the specified levels at December 31, 1997:
<TABLE>
<CAPTION>
Changes in Interest Rates Percentage Change in:
(in basis points) Net Interest Income(1) Net Portfolio Value(2)
- -------------------------------------------------------------------------------------
<S> <C> <C>
+200 15.33% (12.28)%
+100 8.56% (5.52)%
- - 100 (5.20)% 3.16%
- - 200 (11.86)% 6.95%
</TABLE>
(1) The percentage change represents net interest income for 12 months in a
stable interest rate environment versus the net interest income in the
various rate scenarios.
(2) The percentage change represents net portfolio value of the Company in a
stable interest rate environment versus the net portfolio value in various
rate scenarios.
The Company seeks to manage and control its interest rate risk to minimize the
adverse impact of changes in interest rates on the Company's net interest income
and capital, while structuring the Company's asset-liability composition to
obtain the maximum spread. The Company is concentrating its efforts in
increasing its yield-cost spread through growth opportunities and competitive
pricing. 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 following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997. For assets, expected
maturities are based on contractual maturity. For liabilities, the Company uses
its historical experience and decay factors to estimate the deposit runoffs of
its interest bearing transactional deposits. The Company uses certain
assumptions to estimate fair values and expected maturities. The results
presented may vary if different assumptions are used or if actual experience
differs from the assumptions used.
<TABLE>
<CAPTION>
Average Expected Maturity Date at December 31, 1997
Interest
(dollars in thousands) Rate 1998 1999 2000 2001 2002 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Federal funds sold and
securities purchased
under agreement to resell 7.06% $ 67,000 $ -- $ -- $ -- $ -- $ -- $ 67,000 $ 67,000
Mortgage-backed securities 6.75% -- -- 14,312 11,974 124 232,852 259,262 262,668
Investment securities 6.29% 67,344 47,376 108,988 18,133 24,147 34,899 300,887 304,024
Federal Home
Loan Bank stock 6.03% 5,653 -- -- -- -- -- 5,653 5,653
Loans
Commercial 9.12% 259,641 19,261 15,041 9,778 10,033 16,167 329,921 336,821
Real estate mortgage 8.91% 26,269 27,250 24,767 22,787 50,311 297,355 448,739 454,925
Real estate construction 9.00% 36,956 35 3,938 -- -- -- 40,929 41,438
Installment & others 8.63% 4,579 3,078 6,921 7,618 4,289 77 26,562 26,927
Interest-Sensitive
Liabilities:
Other interest bearing
deposits 2.04% 75,956 69,748 46,498 48,373 32,249 143,828 416,652 416,738
Time deposits 5.20% 829,111 22,168 4,647 267 79 322 856,594 860,173
Securities sold under
agreement to repurchase 7.03% 23,419 -- -- -- -- -- 23,419 23,419
</TABLE>
32.
<PAGE> 21
LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity is the Company's ability to
maintain sufficient cash flow to meet maturing financial obligations and
customer credit needs, and to take advantage of investment opportunities as they
are presented in the marketplace. 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 45.59% at
year-end 1997, compared to 46.46% at year-end 1996.
The Bank maintains, to supplement its primary sources of liquidity, a total
credit line of $45 million for Federal funds with three correspondent banks, a
repo line of $30 million with a brokerage firm and a total retail certificate of
deposit (CD) line of approximately $212 million with three other 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.
The Company had, at year-end 1997, a significant portion of its time deposit
portfolio maturing in one year or less. Management anticipates that there may be
some outflow of these deposits upon maturity, due to the current competitive
rate environment. However, based on its historical runoff experience, the
Company expects these outflows will be minimal and can be replenished through
its normal growth in deposits.
Management believes all the sources discussed above will provide adequate
liquidity for the Company to meet its normal operating needs.
Bancorp, on the other hand, obtains funding for its activities only through
dividend income contributed by the Bank and proceeds from investments in the
Dividend Reinvestment Plan. Dividends paid to Bancorp by the Bank are subject to
regulatory limitations. Since the business activities of Bancorp consist
primarily of the operations of the Bank, and no other operating business
activities are proposed for Bancorp in the near future, management believes
Bancorp's liquidity generated from its prevailing sources are sufficient to meet
its operational needs.
The Company actively monitors the impact of changes in interest rates on its
net interest income due to mismatching of its interst earning assets and
interest bearing liabilities. The Company estimates the impact of the mismatch
by examining the extent of the sensitivity of such assets and liabilities and by
monitoring the level of the Company's interest rate sensitivity gap.
An asset or liability is said to be interest rate sensitive within a
specific time period if it will mature or reprice within that time period. The
interest rate sensitivity gap is defined as the difference between the amount of
interest earning assets maturing or repricing within a specific time period and
the amount of interest bearing liabilities maturing or repricing within that
time period. A positive gap exists when rate sensitive assets which reprice over
a given time period exceed rate sensitive liablilities and may enhance net
interest margin during periods of increasing interest rates, while a negative
gap exists when rate sensitive liabilities which reprice over a given time
period exceed rate sensitive assets and may impair net interest margin during
periods of increasing interest rates.
33.
<PAGE> 22
The following table sets forth the maturity and rate sensitivity of the
Company's interest earning assets and interest bearing liabilities as of
December 31, 1997. The Company's exposure as reflected in the table, represents
the estimated difference between the amount of interest earning assets and
interest bearing liabilities repricing during future periods based on certain
assumptions. The interest rate sensitivity of the Company assets and liabilities
presented in the table may vary if different assumptions were used or if actual
experience differs from the assumptions used. As of December 31, 1997, the
Company was asset sensitive with a cumulative gap ratio of a positive 17.28%
within three months, and liability sensitive with a cumulative gap ratio of a
negative 10.49% within a 1-year period.
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
December 31, 1997
Interest Sensitivity Period
0 to 90 91 to 365 1 Year to Over Non-interest
(dollars in thousands) Days Days 5 Years 5 Years Bearing Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Cash and due from banks $ -- $ -- $ -- $ -- $ 57,728 $ 57,728
Federal funds sold and securities
purchased under agreement to resell 67,000 -- -- -- -- 67,000
Securities available-for-sale 32,627 38,995 122,965 21,571 -- 216,158
Securities held-to-maturity -- 1,340 102,609 246,387 -- 350,336
Loans:
Commercial loans 291,174 27,601 6,037 7,955 -- 332,767
Real estate mortgage loans 276,278 967 12,949 156,975 -- 447,169
Real estate construction loans 41,736 -- -- -- -- 41,736
Installment loans 2,305 2,395 21,798 -- -- 26,498
Other loans 222 -- -- 40 -- 262
----------------------------------------------------------------------------------------
Total loans(1) 611,715 30,963 40,784 164,970 -- 848,432
========================================================================================
Non-earning assets -- -- -- -- 82,808 82,808
----------------------------------------------------------------------------------------
Total assets $ 711,342 $ 71,298 $ 266,358 $ 432,928 $ 140,536 $1,622,462
========================================================================================
Source of Funds for Assets:
Deposits:
Demand $ -- $ -- $ -- $ -- $ 175,875 $ 175,875
Money market and NOW(2) 9,064 33,018 102,452 61,827 -- 206,361
Savings(2) 14,581 43,565 101,530 50,615 -- 210,291
TCD's under $100,000 142,931 148,423 16,115 35 -- 307,504
TCD's $100,000 and over 241,027 296,730 11,333 -- -- 549,090
----------------------------------------------------------------------------------------
Total deposits 407,603 521,736 231,430 112,477 175,875 1,449,121
========================================================================================
Securities sold under
agreements to repurchase 23,419 -- -- -- -- 23,419
Other liabilities -- -- -- -- 14,045 14,045
Stockholders' equity -- -- -- -- 135,877 135,877
----------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $ 431,022 $ 521,736 $ 231,430 $ 112,477 $ 325,797 $1,622,462
========================================================================================
Interest sensitivity gap $ 280,320 $ (450,438) $ 34,928 $ 320,451 $ (185,261) $ --
----------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ 280,320 $ (170,118) $ (135,190) $ 185,261 $ -- $ --
----------------------------------------------------------------------------------------
Gap ratio (% of total assets) 17.28% (27.76)% 2.15% 19.75% (11.42)% --
----------------------------------------------------------------------------------------
Cumulative gap ratio 17.28% (10.49)% (8.33)% 11.42% -- --
----------------------------------------------------------------------------------------
</TABLE>
(1) Loans are before unamortized deferred loan fees and allowance for loan
losses. Non-accrual loans are included in non-earning assets. Adjustable
loans are included in the "0 to 90 days" category, as they are subject to an
interest adjustment depending upon terms of the loans.
(2) The Company's own historical experience and decay factors are used to
estimate the money market and NOW, and savings deposit runoff.
34.
<PAGE> 23
FACTORS THAT MAY AFFECT FUTURE RESULTS Results for any period of less than
twelve months are not necessarily indicative of the results that may be expected
for the full year or for any other interim period.
Management believes that the provision for loan losses is adequate to cover
reasonably expected losses from the loan portfolio. Although management believes
it uses the best information available to calculate the provision for loan
losses and the level of the allowance for loan losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
or adverse developments arise with respect to the Company's non-performing or
performing loans. No assurance can be given that the Company will not sustain
loan losses in excess of present or future levels of the allowance for possible
loan losses. Material increases in the Company's allowance for loan losses would
result in a decrease in the Company's net income and capital.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. Although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in general market interest rates, while interest rates on other types
may lag behind changes in general market rates. In addition, certain assets,
such as fixed and adjustable rate mortgage loans, have features which limit
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, prepayment and early withdrawal
levels also could deviate significantly from those assumed in calculating the
interest-rate gap. The ability of many borrowers to service their debts also may
decrease in the event of an interest rate increase.
The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on the
operation of the Company is reflected in increased operating costs. Virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services.
The Company's lending operations have been concentrated primarily in
Southern and Northern California. Accordingly, real estate securing such lending
activity has been principally located in such areas. The value of such
collateral is dependent upon conditions in the relevant real estate markets,
including general or local economic conditions and neighborhood characteristics,
real estate tax rates, the cost of operating the properties, governmental
regulations and fiscal policies, acts of nature including earthquakes and floods
(which may result in uninsured losses), and other factors which are beyond the
control of the Company. Although California economic indicators continued to
show improvements in 1997, management cannot foresee the future performance of
the regional real estate market. Worsening of the regional economic conditions
could increase the amount of the Company's non-performing assets, erode the
value of loan collateral and have an adverse effect on the Company's efforts to
collect its non-performing loans or otherwise liquidate its non-performing
assets (including other real estate owned) on terms favorable to the Company.
The risks of making construction loans include the possibility of failure by
contractors to complete, or to complete on a timely basis, construction of such
properties, substantial cost overruns in excess of original estimates and
financing, market deterioration pending construction and the lack of permanent
take-out financing, among other things. Loans secured by such properties may
also involve additional risk because such properties have no operating history
and because loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to completion of construction,
and the operating cash flow to be generated by the project. There is no
assurance that such properties will be sold or leased so as to generate the cash
flow anticipated by the borrower. Such considerations can affect borrowers'
ability to repay their obligations to the Company and the value of the Company's
security interest in collateral.
35.
<PAGE> 24
Although the Company, in considering whether to make a loan on or secured by
real property, utilized appraisals, an appraisal is only an estimate of the
value of the property at the time the appraisal is made. Accordingly, there can
be no assurance that upon sale or foreclosure of the property the borrower or
the Company will realize an amount equal the amounts secured thereby.
The Company faces substantial competition for deposits and loans throughout
its market area, where major banks dominate the commercial banking industry.
Among the advantages which these banks may have over the Company are their
ability to finance advertising campaigns and to allocate their investment
assets, including loans, to regions of higher yield and demand. By virtue of
their larger capital bases, such institutions have substantially greater lending
limits than the Company and perform certain functions, including trust services,
which are not presently offered by the Company. The Company also competes for
loans and deposits with savings and loan associations, finance companies, money
market funds, brokerage houses, credit unions and non-financial institutions.
The Riegle-Neal Interstate Company and Branching Efficiency Act of 1994 may have
an effect on the Company's competitive position.
From time to time, legislation is proposed or enacted which has the effect
of increasing the cost of doing business, limiting permissible activities or
affecting the competitive balance between banks and other financial
institutions. It is impossible to predict the competitive impact these and other
changes in legislation will have on commercial banking in general or on the
business of the Company in particular.
During 1997 and presently there are adverse economic conditions in the Asia
Pacific region. The impact of these adverse economic conditions may increase the
Company's exposure to economic and transfer risk. Transfer risk may increase
because of an entity's incapacity to obtain the foreign exchange needed to meet
its obligations or to provide liquidity. This may impact the recoverability of
investments with or loans to entities unable to obtain the necessary foreign
exchange. In addition, these adverse economic conditions may continue to
negatively impact asset values and the profitability and liquidity of companies
operating in this region. It is the opinion of management that the Company will
not be adversely impacted by these factors. Management does not consider its
loan portfolio to have direct exposure to transfer risk.
The circumstances in Asia may also have an impact on the deposit customers
of the Company, resulting in outflows of deposits. Management of the Company
does not expect such potential outflows to significantly impact the financial
condition or operating results of the Company based on its current customers'
profiles. However, no assurance can be given as to the level of deposit outflows
if the economic conditions in Asia continue or worsen, then there may be an
adverse effect on the deposit amounts.
YEAR 2000 The "Year 2000" problem is the result of computer programs being
written using two digits to identify a year in the date field, rather than four
digits to define the applicable year. Consequently, any computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. That inability, if not addressed, could cause systems
to fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations worldwide.
This century date change problem creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with whom
the Company deals on financial transactions. Such failures of the Company's
and/or third parties' computer systems could have a material impact on the
Company's ability to conduct its business, to process customer transactions or
provide customer services.
The Company established a task force to address the Year 2000 issues
relating to its business, its operations (including operating sytems) and its
relationships with customers, suppliers, and other constituents. First,
management initiated a company-wide program to identify and prioritize all the
mission critical systems that may be affected by the "Year 2000" issue. Next,
the task force developed a remediation program to modify or replace these
systems. During the year, the Company obtained assurance from its vendor that
the software operating its core computer system is Year 2000 ready, and that
this capability will be tested by a third party in 1998. The Company is also
coordinating with other entities, including suppliers, customers, creditors,
borrowers, and financial service organizations, to ensure that their systems
will also be Year 2000 ready.
36.
<PAGE> 25
The Company reviews the costs and the progress of its remediation program to
ensure that unforeseen problems and uncertainties associated with Year 2000
consequences are resolved in a timely manner. The Company estimates the costs to
modify or convert its remaining systems, including costs incurred in 1997, range
approximately between $500,000 to $1,000,000. No assurance can be given that the
ultimate costs to prepare the Company to be Year 2000 ready will not exceed the
Company's current estimate. There can also be no assurance that the systems of
other companies on which the Company's systems rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's operations. The Company is expanding its
contingency plan to address the failure of third party systems to be Year 2000
ready. See also Note 1 of the Notes to Consolidated Financial Statements.
MARKET FOR CATHAY BANCORP, INC. STOCK
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock MarketSM under the symbol: "CATY". During 1997, total trading
volume was approximately 1,211,000, and the prices ranged from a high of $37.375
to a low of $19.25. The approximate number of stockholders at year-end 1997 was
1,800. The Company paid an aggregate per share cash dividend of $0.625 in 1997
and $0.60 in 1996. The following table summarizes the quarterly high, low and
closing prices, and the trading volume for the past two years:
BANCORP STOCK TRADING HISTORY(1)
<TABLE>
<CAPTION>
End of Trading
High Low Period Volume
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
First Quarter $ 21.750 $ 19.250 $ 21.500 258,334
Second Quarter 25.000 20.750 24.750 236,313
Third Quarter 33.000 24.000 31.750 373,211
Fourth Quarter 37.375 30.500 36.500 343,347
----------------------------------------------------
1996
First Quarter $ 18.000 $ 15.000 $ 17.125 236,717
Second Quarter 17.250 15.875 16.250 189,939
Third Quarter 16.750 15.125 16.375 206,660
Fourth Quarter 20.000 15.875 19.625 392,644
----------------------------------------------------
</TABLE>
(1) The company does not represent that the outstanding shares may either be
bought or sold at a certain price. The stock is traded on the Nasdaq.
37.
<PAGE> 26
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The following table shows the average balances (based on quarterly averages) of
the Company's assets, liabilities, and stockholders' equity accounts presented
for the years indicated.
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
(dollars in thousands) Amount %1 Amount %1 Amount %1
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and due
from banks $ 59,297 3.80% $ 39,407 3.11% $ 52,592 5.18%
Federal funds sold
and securities
purchased under
agreement to resell 35,000 2.25 36,050 2.84 17,875 1.76
Securities
available-for-sale,
taxable 281,938 18.08 320,533 25.28 116,042 11.44
Securities
available-for-sale,
nontaxable 158 0.01 89 0.01 149 0.01
Securities held-to-
maturity, taxable 256,310 16.44 151,534 11.95 171,287 16.88
Securities held-to-
maturity, nontaxable 41,831 2.68 39,208 3.09 40,245 3.97
Total net loans(2) 802,577 51.48 605,000 47.71 547,948 54.01
Premises and
equipment, net 25,380 1.63 26,059 2.06 26,854 2.65
Other assets 56,582 3.63 50,129 3.95 41,488 4.10
---------------------------------------------------------------------------------------
Total assets $1,559,073 100.00% $1,268,009 100.00% $1,014,480 100.00%
=======================================================================================
Liabilities
Demand deposits $ 156,072 10.01% $ 124,051 9.78% $ 116,476 11.48%
Savings deposits(3) 426,244 27.34 363,410 28.66 328,473 32.38
Time deposits 826,520 53.01 665,725 52.51 470,222 46.35
---------------------------------------------------------------------------------------
Total deposits 1,408,836 90.36 1,153,186 90.95 915,171 90.21
=======================================================================================
Other borrowings 7,916 0.51 2,700 0.21 800 0.08
Mortgage
indebtedness 190 0.01 655 0.05 540 0.05
Other liabilities 13,469 0.87 9,515 0.75 6,997 0.69
---------------------------------------------------------------------------------------
Total liabilities 1,430,411 91.75 1,166,056 91.96 923,508 91.03
=======================================================================================
Stockholders'
Equity
Common stock
and additional
paid-in-capital 60,795 3.90 47,194 3.72 41,767 4.12
Retained earnings 67,867 4.35 54,759 4.32 49,205 4.85
---------------------------------------------------------------------------------------
Total
stockholders' equity 128,662 8.25 101,953 8.04 90,972 8.97
=======================================================================================
Total liabilities and
stockholders' equity $1,559,073 100.00% $1,268,009 100.00% $1,014,480 100.00%
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 1993
(dollars in thousands) Amount %1 Amount %1
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and due
from banks $ 38,213 4.25% $ 40,180 4.67%
Federal funds sold
and securities
purchased under
agreement to resell 12,550 1.39 18,250 2.12
Securities
available-for-sale,
taxable 59,776 6.64 39,601 4.61
Securities
available-for-sale,
nontaxable 701 0.08 634 0.07
Securities held-to-
maturity, taxable 123,147 13.69 76,821 8.94
Securities held-to-
maturity, nontaxable 38,494 4.28 38,102 4.43
Total net loans(2) 570,040 63.35 591,686 68.82
Premises and
equipment, net 26,430 2.94 25,838 3.01
Other assets 30,500 3.38 28,660 3.33
------------------------------------------------------
Total assets $ 899,851 100.00% $ 859,772 100.00%
======================================================
Liabilities
Demand deposits $ 108,250 12.03% $ 102,189 11.89%
Savings deposits(3) 354,159 39.36 344,382 40.05
Time deposits 347,437 38.61 325,254 37.83
------------------------------------------------------
Total deposits 809,846 90.00 771,825 89.77
======================================================
Other borrowings 1,400 0.15 1,750 0.20
Mortgage
indebtedness 250 0.03 25 0.01
Other liabilities 5,097 0.57 6,882 0.80
------------------------------------------------------
Total liabilities 816,593 90.75 780,482 90.78
======================================================
Stockholders'
Equity
Common stock
and additional
paid-in-capital 40,896 4.54 39,658 4.61
Retained earnings 42,362 4.71 39,632 4.61
------------------------------------------------------
Total
stockholders' equity 83,258 9.25 79,290 9.22
======================================================
Total liabilities and
stockholders' equity $ 899,851 100.00% $ 859,772 100.00%
======================================================
</TABLE>
(1) Percentage of categories under Assets, Liabilities and Stockholders' Equity
are shown as a percentage of average assets.
(2) Total net loans means total loans net of loan participations sold,
unamortized deferred loan fees and allowance for loan losses.
(3) Savings deposits include NOW, money market and savings accounts.
38.
<PAGE> 27
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
As of December 31,
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 57,727,974 $ 47,193,911
Federal funds sold and securities purchased under agreement to resell 67,000,000 28,000,000
------------------------------------
Cash and cash equivalents 124,727,974 75,193,911
Securities available-for-sale (with amortized costs of
$215,465,568 in 1997 and $385,228,392 in 1996) 216,157,845 383,391,003
Securities held-to-maturity (with estimated fair values of
$356,187,000 in 1997 and $212,002,000 in 1996) 350,336,415 210,128,511
Loans (net of allowance for loan losses of
$15,379,408 in 1997 and $13,528,568 in 1996) 846,151,425 744,383,939
Other real estate owned, net 13,269,382 18,854,186
Investments in real estate, net 1,653,722 3,987,224
Premises and equipment, net 25,201,883 25,771,302
Customers' liability on acceptance 10,295,812 6,653,156
Accrued interest receivable 12,246,270 15,007,454
Goodwill 9,529,827 9,897,449
Other assets 12,891,013 11,061,271
------------------------------------
Total assets $ 1,622,461,568 $ 1,504,329,406
====================================
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing demand deposits $ 175,875,463 $ 135,345,436
Interest bearing accounts
NOW accounts 111,652,490 118,497,560
Money market deposits 94,708,279 95,158,361
Savings deposits 210,290,931 224,442,618
Time deposits under $100,000 307,503,579 302,980,795
Time deposits of $100,000 or more 549,090,061 488,314,939
------------------------------------
Total deposits 1,449,120,803 1,364,739,709
------------------------------------
Securities sold under agreements to repurchase 23,418,942 10,000,000
Acceptances outstanding 10,295,812 6,653,156
Other liabilities 3,749,470 4,490,536
------------------------------------
Total liabilities 1,486,585,027 1,385,883,401
------------------------------------
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, 8,941,743 and 8,878,144 shares
issued and outstanding in 1997 and 1996, respectively 89,417 88,781
Additional paid-in-capital 61,270,739 59,811,940
Unrealized holding gain (loss) on securities
available-for-sale, net of tax 369,922 (1,059,347)
Retained earnings 74,146,463 59,604,631
------------------------------------
Total stockholders' equity 135,876,541 118,446,005
------------------------------------
Total liabilities and stockholders' equity $ 1,622,461,568 $ 1,504,329,406
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
39.
<PAGE> 28
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year ended December 31
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 74,015,063 $ 55,887,756 $ 56,825,101
Interest on securities available-for-sale 17,700,422 17,146,782 5,249,753
Interest on securities held-to-maturity 17,831,320 11,578,557 12,740,884
Interest on Federal funds sold and securities
purchased under agreement to resell 2,415,226 1,482,592 1,371,334
Interest on deposits with banks 16,402 3,289 35,875
------------------------------------------------
Total interest income 111,978,433 86,098,976 76,222,947
------------------------------------------------
Interest Expense
Time deposits of $100,000 or more 26,633,484 22,576,698 17,594,425
Other deposits 23,738,144 16,474,889 13,582,511
Other borrowed funds 502,413 157,829 104,379
------------------------------------------------
Total interest expense 50,874,041 39,209,416 31,281,315
------------------------------------------------
Net interest income before provision for loan losses 61,104,392 46,889,560 44,941,632
Provision for loan losses 3,600,000 3,600,000 7,300,402
------------------------------------------------
Net interest income after provision for loan losses 57,504,392 43,289,560 37,641,230
------------------------------------------------
Non-Interest Income
Securities gains 40,913 21,862 610,847
Letter of credit commissions 1,502,961 1,508,407 1,272,867
Service charges 3,490,801 2,942,170 3,069,213
Other operating income 1,739,847 1,386,589 1,267,949
------------------------------------------------
Total non-interest income 6,774,522 5,859,028 6,220,876
------------------------------------------------
Non-Interest Expense
Salaries and employee benefits 17,008,737 13,996,253 12,911,639
Occupancy expense 2,931,290 2,320,718 2,272,137
Computer and equipment expense 2,364,675 2,001,985 2,139,756
Professional services expense 3,059,906 3,153,993 2,517,141
FDIC and State assessments 356,537 454,850 1,154,808
Marketing expense 1,200,198 1,163,455 982,232
Net other real estate owned expense 503,104 1,728,382 1,876,471
Other operating expense 3,503,788 3,193,619 3,763,174
------------------------------------------------
Total non-interest expense 30,928,235 28,013,255 27,617,358
------------------------------------------------
Income before income tax expense 33,350,679 21,135,333 16,244,748
------------------------------------------------
Income tax expense 13,242,941 7,819,382 5,624,109
------------------------------------------------
Net Income $ 20,107,738 $ 13,315,951 $ 10,620,639
================================================
Basic net income per common share $ 2.26 $ 1.66 $ 1.36
------------------------------------------------
Weighted average common shares outstanding 8,915,936 8,017,398 7,805,339
------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
40.
<PAGE> 29
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Unearned
For the year ended December 31, Number Paid-in- ESOP
1997, 1996 and 1995 of Shares Amount Capital Shares
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 7,798,550 $ 77,986 $ 41,158,925 $ (421,786)
=====================================================================
Issuances of common stock -
Dividend
Reinvestment Plan 68,614 686 854,762 --
Cash dividends of
$.60 per share -- -- -- --
Allocation of unearned
ESOP shares -- -- -- 421,786
Dividend on unallocated
ESOP shares -- -- -- --
Change in unrealized
holding gain (loss) on
securities available-for-sale,
net of tax -- -- -- --
Net income for the year -- -- -- --
---------------------------------------------------------------------
Balance at December 31, 1995 7,867,164 78,672 42,013,687 --
=====================================================================
Issuances of common stock -
Dividend
Reinvestment Plan 105,245 1,052 1,693,718 --
Issuance of stock for
the acquisition of
First Public Savings
Bank, F.S.B 905,735 9,057 16,104,535 --
Cash dividends of
$.60 per share -- -- -- --
Change in unrealized
holding gain (loss) on
securities available-for-sale,
net of tax -- -- -- --
Net income for the year -- -- -- --
---------------------------------------------------------------------
Balance at December 31, 1996 8,878,144 88,781 59,811,940 --
=====================================================================
Issuances of common stock -
Dividend
Reinvestment Plan 63,599 636 1,458,799 --
Cash dividends of
$.625 per share -- -- -- --
Change in unrealized
holding gain (loss) on
securities available-for-sale,
net of tax -- -- -- --
Net income for the year -- -- -- --
---------------------------------------------------------------------
Balance at December 31, 1997 8,941,743 $ 89,417 $ 61,270,739 $ --
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Holding Gain
(Loss) on
Securities Total
For the year ended December 31, Available- Retained Stockholders'
1997, 1996 and 1995 for-Sale Earnings Equity
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 $ (546,635) $ 45,116,556 $ 85,385,046
=====================================================
Issuances of common stock -
Dividend
Reinvestment Plan -- -- 855,448
Cash dividends of
$.60 per share -- (4,694,445) (4,694,445)
Allocation of unearned
ESOP shares -- -- 421,786
Dividend on unallocated
ESOP shares -- (9,623) (9,623)
Change in unrealized
holding gain (loss) on
securities available-for-sale,
net of tax 1,949,962 -- 1,949,962
Net income for the year -- 10,620,639 10,620,639
-----------------------------------------------------
Balance at December 31, 1995 1,403,327 51,033,127 94,528,813
=====================================================
Issuances of common stock -
Dividend
Reinvestment Plan -- -- 1,694,770
Issuance of stock for
the acquisition of
First Public Savings
Bank, F.S.B -- -- 16,113,592
Cash dividends of
$.60 per share -- (4,744,447) (4,744,447)
Change in unrealized
holding gain (loss) on
securities available-for-sale,
net of tax (2,462,674) -- (2,462,674)
Net income for the year -- 13,315,951 13,315,951
-----------------------------------------------------
Balance at December 31, 1996 (1,059,347) 59,604,631 118,446,005
=====================================================
Issuances of common stock -
Dividend
Reinvestment Plan -- -- 1,459,435
Cash dividends of
$.625 per share -- (5,565,906) (5,565,906)
Change in unrealized
holding gain (loss) on
securities available-for-sale,
net of tax 1,429,269 -- 1,429,269
Net income for the year -- 20,107,738 20,107,738
-----------------------------------------------------
Balance at December 31, 1997 $ 369,922 $ 74,146,463 $ 135,876,541
=====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41.
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 20,107,738 $ 13,315,951 $ 10,620,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,600,000 3,600,000 7,300,402
Provision for losses on other real estate owned 475,796 1,501,268 874,759
Provision for losses on investments in real estate -- -- 720,902
Provision (benefit) for deferred taxes (493,366) (503,186) 222,388
Depreciation 1,335,400 1,336,363 1,356,916
Net (gain) loss on sale of other real estate owned (173,961) (85,313) 78,553
Gain on sale of investments in real estate (222,310) -- --
Premises and equipment disposal (gain) loss (1,650) 1,595 1,203
Net gain on sales and calls of securities (40,913) (21,862) (610,847)
Amortization and accretion of investment security premiums, net 63,310 734,931 97,026
Amortization of goodwill 684,579 83,172 --
Increase (decrease) in deferred loan fees, net 43,208 247,476 (345,719)
(Increase) decrease in accrued interest receivable, net 2,761,184 (1,107,418) (4,011,816)
(Increase) decrease in other assets, net (2,436,773) 19,583,814 (499,847)
Increase (decrease) in other liabilities, net (741,066) (3,130,696) 1,177,459
-----------------------------------------------------
Total adjustments 4,853,438 22,240,144 6,361,379
-----------------------------------------------------
Net cash provided by operating activities 24,961,176 35,556,095 16,982,018
-----------------------------------------------------
Cash Flows From Investing Activities
Purchase of securities available-for-sale (217,418,506) (90,261,346) (128,043,049)
Proceeds from maturity and call of securities available-for-sale 300,394,371 58,609,947 68,492,524
Proceeds from sale of securities available-for-sale 92,705,983 989,297 30,388,281
Purchase of mortgage-backed securities available-for-sale (12,442,974) (18,874,200) --
Proceeds from repayments and sale of mortgage-backed
securities available-for-sale 6,799,700 24,213,775 --
Purchase of securities held-to-maturity (15,345,814) (24,796,858) (149,158,643)
Proceeds from maturity and call of securities held-to-maturity 41,931,722 26,365,854 19,779,542
Purchase of mortgage-backed securities held-to-maturity (186,620,681) (65,925,846) --
Repayments from mortgage-backed securities held-to-maturity 19,211,765 3,105,726 37,896
Proceeds from sale of loans 4,827,657 -- --
Purchase of loans (975,045) -- --
Net (increase) decrease in loans (108,326,821) (68,372,708) 6,030,865
Purchase of premises and equipment (765,981) (530,193) (1,065,696)
Proceeds from sale of equipment 1,650 7,278 6,394
Proceeds from sale of other real estate owned 4,346,484 5,283,597 5,347,860
Proceeds from sale of investments in real estate 2,292,468 -- --
Net (increase) decrease in investments in real estate 263,344 317,131 (438,308)
Payment for purchase of FPSB, net of cash acquired -- (1,906,354) --
-----------------------------------------------------
Net cash used in investing activities (69,120,678) (151,774,900) (148,622,334)
-----------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in demand deposits, NOW accounts,
money market and savings deposits 19,083,188 25,763,682 (25,820,764)
Net increase in time deposits 65,297,906 103,873,201 164,332,791
Increase in securities sold under agreements to repurchase 13,418,942 8,500,000 1,500,000
Decrease in borrowing from Federal Home Loan Bank -- -- (4,000,000)
Payments to decrease direct loan to ESOP -- -- (447,481)
Cash dividends (5,565,906) (4,744,447) (4,704,068)
Decrease in unearned ESOP shares -- -- 421,786
Proceeds from shares issued to Dividend Reinvestment Plan 1,459,435 1,694,770 855,448
-----------------------------------------------------
Net cash provided by financing activities 93,693,565 135,087,206 132,137,712
-----------------------------------------------------
Increase in cash and cash equivalents 49,534,063 18,868,401 497,396
-----------------------------------------------------
Cash and cash equivalents, beginning of the year 75,193,911 56,325,510 55,828,114
-----------------------------------------------------
Cash and cash equivalents, end of the year $ 124,727,974 $ 75,193,911 $ 56,325,510
-----------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 50,183,513 $ 39,123,990 $ 30,818,671
Income taxes $ 13,736,000 $ 5,540,000 $ 7,223,000
Non-cash investing activities:
Transfer to securities available-for-sale $ 629,894 $ 30,362,405 $ 135,236,133
Transfer to securities held-to-maturity $ -- $ 3,733,023 $ --
Net change in unrealized gain (loss) on securities
available-for-sale, net of tax $ 1,429,269 $ (2,462,674) $ 1,949,962
Transfers to other real estate owned $ 6,012,016 $ 13,329,482 $ 19,952,054
Loans to facilitate the sale of other real estate owned $ 6,948,500 $ 3,524,000 $ 6,570,000
The Company acquired all the outstanding stock of FPSB for
$31.6 million in 1996 ($15.5 million in cash and $16.1
million in the Company's common stock). See Note 2.
-----------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
42.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant
Accounting Policies
The accompanying consolidated financial statements include the accounts of
Cathay Bancorp, Inc. ("Bancorp"), a Delaware corporation and its wholly-owned
subsidiary, Cathay Bank ("Bank"), a California state-chartered bank (together,
"the Company"). All significant inter-company transactions and balances have
been eliminated in consolidation. The consolidated financial statements of the
Company are prepared in conformity with generally accepted accounting principles
and general practices within the banking industry. The following are
descriptions of the more significant of these policies.
ORGANIZATION AND BACKGROUND Effective December 10, 1990, Bancorp began
operations as a bank holding company and shares of Bancorp were exchanged on a
one-for-one basis for all of the outstanding common stock of the Bank.
The business activities of Bancorp consist solely of the operations of the
Bank and its wholly-owned subsidiary, Cathay Investment Company ("CIC"). There
are no operating business activities currently proposed for the Bancorp. The
Bancorp may, from time to time, explore various acquisition possibilities. The
Bancorp currently does not employ any persons other than its management, which
includes the President and the Chief Financial Officer, and does not own or
lease any real or personal property. The Bancorp uses the employees, premises,
equipment and furniture of the Bank without the payment of any service or rental
fees to the Bank. It is expected that for the near future the primary business
of the Bancorp will be the ongoing business of the Bank.
Cathay Bank is a commercial bank, servicing primarily the individuals,
professionals and small to medium-sized businesses in the local markets in which
its branches are located. Its operations include the acceptance of checking,
savings, and time deposits, and the making of commercial, real estate and
consumer loans. The Bank also offers trade financing, letter of credit, wire
transfer, spot and forward contracts, and other customary banking services to
its customers.
SECURITIES The Company applies Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Securities are classified as held-to-maturity when management has
the ability and intent to hold these securities until maturity. Securities are
classified as available-for-sale when management intends to hold the securities
for an indefinite period of time, or when the securities may be utilized for
tactical asset/liability purposes, and may be sold from time to time to
effectively manage interest rate exposure and resultant prepayment risk and
liquidity needs. Securities purchased subsequent to the initial classification
are designated as held-to-maturity or available-for-sale at the time of
acquisition.
Securities held-to-maturity are stated at cost, adjusted for the
amortization of premiums and the accretion of discounts on a level-yield basis.
Securities available-for-sale are carried at fair value, and any unrealized
holding gains or losses are excluded from earnings and reported as a separate
component of stockholders' equity, net of tax, until realized. Realized gains or
losses are determined on the specific identification method. Premium and
discounts are amortized or accreted as adjustment of yield on a level-yield
basis.
The cost basis of an individual security is written down, if the decline in
its fair value below the amortized cost basis is other than temporary. The
write-down is accounted for as a realized loss, and is included in earnings. The
new cost basis is not changed for subsequent recoveries in fair value.
Dividend and interest income, including amortization of the premium and
discount arising at acquisition, for both categories of securities are included
in earnings.
43.
<PAGE> 32
LOANS Loans are carried at amounts advanced, less principal payments collected
and deferred loan fees. Interest is accrued and earned daily on an actual or
360-day basis.
Interest accruals on business loans and non-residential real estate loans
are generally discontinued whenever the payment of interest or principal is 90
days or more past due. Such loans are placed on non-accrual status, unless the
loan is well secured, and there is a high probability of recovery in full, as
determined by management. When loans are placed on a non-accrual status,
previously accrued but unpaid interest is reversed and charged against current
income, and interest is subsequently recognized only to the extent cash is
received. Management believes the allowance for loan losses is being maintained
at a level considered adequate to provide for known and probable impairment that
might be reasonably anticipated. Additions to the allowance for loan losses are
made monthly by charges to operating expense in the form of a provision for loan
losses. All loans judged to be uncollectible are charged against the allowance
while any recoveries are credited to the allowance. Management monitors changing
economic conditions, the loan mix by category, the industry segregation and
geographic distribution of the portfolio and the type of borrowers in
determining the adequacy of the allowance for loan losses. Management also
closely reviews its past, present and expected overall net loan losses in
comparison to the existing level of the allowance. In addition, the Bank's
regulators, as an integral part of their examination process, periodically
review the Bank's allowances for estimated losses. Such agencies may require the
Bank to make additions to such allowances based on their judgements of the
information available to them at the time of their examination.
The Bank applies the provisions of SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." Under SFAS No. 114,
a loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e. both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment in the loan exceeds the measure of the impaired loan is recognized by
recording a valuation allowance with a corresponding charge to provision for
loan losses. In accordance with SFAS No. 118, the Bank stratifies its loan
portfolio by size and treats smaller performing loans with an outstanding
balance less than the Bank's defined criteria as a homogenous portfolio. For
loans with a balance in excess of $750,000, the Bank conducts a periodic review
of each loan in order to test for impairment. The statement also applies to
restructured loans and eliminates the requirement that a creditor account for
certain loans as foreclosed assets until the creditor has taken possession of
the collateral. The Bank recognizes interest income on impaired loans based on
its existing method of recognizing interest income on nonaccrual loans.
Loan origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.
LETTER OF CREDIT FEES Issuance and commitment fees received for the issuance of
commercial or standby letters of credit are recognized over the term of the
instruments.
PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less
accumulated depreciation. Depreciation is computed on the straight-line method
based on the following estimated useful lives of the assets:
<TABLE>
<CAPTION>
Type Estimated Useful Life
- -------------------------------------------------------------------------------------------------------
<S> <C>
Buildings 15 to 45 years
Building improvements 5 to 20 years
Furniture, fixtures and equipment 3 to 25 years
Leasehold improvements Over the shorter of useful lives or the terms of the lease
</TABLE>
Improvements are capitalized and amortized to occupancy expense over the
shorter of the estimated useful life of the improvement or the term of the
lease.
44.
<PAGE> 33
OTHER REAL ESTATE OWNED Real estate acquired in the settlement of loans is
carried at the lower of cost or estimated fair value, less estimated costs to
sell. Specific valuation allowances on other real estate owned are recorded
through charges to operations to recognize deterioration in fair value
subsequent to transfer.
INVESTMENTS IN REAL ESTATE Real estate acquired for sale or development is
stated at the lower of cost or estimated fair value. Costs directly related to
the development or the improvement of real estate are capitalized. Gains on
sales are recognized when certain criteria relating to the buyer's initial and
continuing investment in the property are met.
GOODWILL Goodwill, which represents the excess of purchase price over fair value
of net assets acquired and the related acquisition costs are amortized on a
straight-line basis over the expected periods to be benefited generally 15
years. The Company applies the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Live Assets to be Disposed Of." The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
DERIVATIVES It is the policy of the Company not to speculate on the future
direction of interest rates. However, the Company may enter into hedge
transactions to protect its position against inherent interest rate risk in the
balance sheet and against risk in specific transactions.
As of December 31, 1997 and 1996, the Company had not entered into any types
of hedging transactions, or invested in, or issued any derivative financial
instruments such as futures, forwards, swaps, or option contracts, or other
financial instruments with similar characteristics defined in Statement of
Financial Accounting Standards No. 105, "Disclosure of Information about
Financial Instruments with Off-balance-sheet risk and Financial Instruments with
Concentrations of Credit Risk," and Statement of Financial Accounting Standards
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments."
To the extent the Company does engage in hedging or derivative transactions
in the future, the transactions will be accounted for in consistent with the
guidance in Statement of Financial Accounting Standards No. 80, "Accounting for
Future Contracts."
INCOME TAXES The provision for income taxes is based on income reported for
financial statement purposes and differs from the amount of taxes currently
payable, since certain income and expense items are reported for financial
statement purposes in different periods than those for tax reporting
purposes.
The Company applies Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The objective of the asset and liability method
is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. A valuation allowance is established
for deferred tax assets if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. A valuation allowance is established, when necessary, to reduce
the deferred tax assets to the amount that is more likely than not to be
realized.
NET INCOME PER COMMON SHARE The Company applies the provisions of the Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" issued by
the Financial Accounting Standards Board (FASB) as of December 31, 1997.
Earnings per share (EPS) are computed on a basic and diluted basis. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then share in
the earnings of the Company.
45.
<PAGE> 34
The Company presents only the basic EPS on its statement of income since the
Company does not have any securities or contracts to issue common stock which if
exercised or converted into common stock or resulted in the issuance of common
stock for each of the years in the three-year period ending December 31, 1997.
The weighted-average shares were 8,915,936, 8,017,398 and 7,805,339 for 1997,
1996 and 1995, respectively. ESOP shares committed to be released in 1995 are
considered as outstanding for EPS purposes.
STATEMENT OF CASH FLOWS Cash and cash equivalents include short-term, highly
liquid investments that generally have an original maturity of three months or
less.
USE OF ESTIMATES Management of the Bank has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates. The most
significant estimate subject to change relates to the allowance for loan losses.
RECLASSIFICATION Certain reclassifications have been made to the prior years'
financial statements to conform with the 1997 presentation.
YEAR 2000 The "Year 2000" problem is the result of computer programs being
written using two digits to identify a year in the date field, rather than four
digits to define the applicable year. Consequently, any computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. In 1997, the Company established a program to address
the Year 2000 issues. The Company is funding these costs through operating cash
flows and is expensing the costs as incurred. The amount expensed in 1997 was
immaterial to the Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The impact on the Company of adopting
SFAS No. 130 is not expected to be material to the Company's existing
disclosure.
In June 1997, the FASB issued 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 will have no 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.
46.
<PAGE> 35
2. Acquisition
On November 18, 1996, the Bank acquired all the outstanding stock of First
Public Savings Bank, F.S.B. ("FPSB") for $31.6 million ($15.5 million in cash
and $16.1 million in Bancorp's stock) in a transaction that has been accounted
for as a purchase. Immediately prior to the close, FPSB had total assets, loans,
securities, cash, other assets and deposits of $276 million, $144 million, $94
million, $14 million, $24 million, and $251 million respectively. Immediately
upon acquisition FPSB was merged into the Bank. As a result of the adjustment of
FPSB's assets and liabilities to fair value immediately prior to the closing of
the merger, the Company recorded goodwill of approximately $10 million.
The following table presents an unaudited pro forma combined summary of
operations of the Company and FPSB for the years ended December 31, 1996 and
1995, respectively. The unaudited pro forma combined summary of operations is
presented as if the merger had been effective January 1, 1996 and 1995,
respectively. This information combines the historical results of the Company
and FPSB after giving effect to amortization of purchase accounting adjustments.
The unaudited pro forma combined summary of operations is based on the Company's
historical results and those of FPSB. These pro forma statements are intended
for informational purposes only and are not necessarily indicative of the future
results of the Company or of the results of the Company that would have occurred
had the acquisition been in effect for the full years presented.
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands, except per share data) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest income $104,921 $ 94,066
Interest expense 48,064 39,710
----------------------
Net interest income before provision for loan losses 56,857 54,356
Provision for loan losses 3,789 7,601
----------------------
Net interest income after provision for loan losses 53,068 46,755
Non-interest income 6,090 6,878
Non-interest expense 34,241 31,330
----------------------
Income before income tax expense 24,917 22,303
Income tax expense 9,986 8,385
----------------------
Net income $ 14,931 $ 13,918
======================
Basic net income per common share $ 1.67 $ 1.60
======================
</TABLE>
The unaudited pro forma combined basic net income per common share were
calculated based on the pro forma combined net income and the actual average
common shares assumed to be outstanding during the years presented.
3. Cash and Due from Banks
The Company is required to maintain reserves with the Federal Reserve Bank.
Reserve requirements are based on a percentage of deposit liabilities. The
average reserve balances required for 1997 and 1996 were $14,060,000 and
$11,159,000, respectively.
47.
<PAGE> 36
4. Securities
SECURITIES AVAILABLE-FOR-SALE The following table reflects the amortized cost,
gross unrealized gains, gross unrealized losses and fair values of securities
available-for-sale as of December 31, 1997 and 1996 respectively:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 38,020,254 $ 11,152 $ 60,146 $ 37,971,260
U.S. government agencies 113,254,847 97,099 46,386 113,305,560
Mortgage-backed securities 22,304,922 680,211 3,129 22,982,004
Collaterized mortgage obligations 6,383,688 4,782 2,542 6,385,928
Asset-backed securities 19,878,290 11,303 -- 19,889,593
Federal Home Loan Bank stock 5,652,900 -- -- 5,652,900
Commercial paper 9,970,667 -- 67 9,970,600
------------------------------------------------------
Total $ 215,465,568 $ 804,547 $ 112,270 $216,157,845
======================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 122,115,946 $ 196,958 $ 543,994 $121,768,910
U.S. government agencies 229,695,441 127,458 1,445,450 228,377,449
State and municipal securities 50,008 61 -- 50,069
Mortgage-backed securities 18,108,640 1,504 178,264 17,931,880
Collateralized mortgage obligations 4,944,533 5,712 -- 4,950,245
Asset-backed securities 4,999,024 -- 1,374 4,997,650
Federal Home Loan Bank stock 5,314,800 -- -- 5,314,800
------------------------------------------------------
Total $ 385,228,392 $ 331,693 $ 2,169,082 $383,391,003
======================================================
</TABLE>
The Company restructured its securities portfolio upon completion of the
acquisition of FPSB to improve its interest rate risk position. The
classification on certain securities with an amortized cost basis of $30,007,377
and an unrealized loss of $172,485 was changed from held-to-maturity to
available-for-sale.
The amortized cost and fair value of securities available-for-sale except
for mortgage-backed securities at December 31, 1997, by contractual maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or repay obligations with or
without call or repayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less(1) $ 71,655,718 $ 71,622,840
Due after one year through five years 115,121,240 115,167,073
Mortgage-backed securities 28,688,610 29,367,932
----------------------------
Total $215,465,568 $216,157,845
============================
</TABLE>
(1) Equity securities are reported in this category.
Proceeds from sales and repayments of securities available-for-sale during
1997 and 1996 were $99,505,683 and $25,203,072, respectively. Proceeds from
maturities and calls of securities available-for-sale during 1997 and 1996 were
$300,394,371 and $58,609,947, respectively. Gross realized gains of $303,504 and
$416,344 were realized for 1997 and 1995, respectively. No gain was realized in
1996. Gross realized losses of $268,255 were realized for 1997. No losses were
realized for 1996 and 1995.
48.
<PAGE> 37
SECURITIES HELD-TO-MATURITY The carrying value, gross unrealized gains, gross
unrealized losses and estimated fair values of securities held-to-maturity are
as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
1997 Value Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,054,385 $ 353,615 $ -- $ 26,408,000
U.S. government agencies 39,373,671 291,329 -- 39,665,000
State and municipal securities 44,496,557 2,264,443 -- 46,761,000
Mortgage-backed securities 140,338,342 1,539,166 28,508 141,849,000
Collateralized mortgage obligations 90,234,450 1,223,161 6,611 91,451,000
Asset-backed securities 922,754 -- 6,754 916,000
Corporate bond 8,916,256 220,744 -- 9,137,000
-------------------------------------------------------
Total $ 350,336,415 $ 5,892,458 $ 41,873 $356,187,000
=======================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
1996 Value Gains Losses Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,080,797 $ 91,181 $ 8,978 $ 26,163,000
U.S. government agencies 66,899,762 -- 105,762 66,794,000
State and municipal securities 40,392,876 1,512,807 30,683 41,875,000
Mortgage-backed securities 63,108,582 504,449 103,031 63,510,000
Asset-backed securities 3,545,044 -- 1,044 3,544,000
Other securities 10,101,450 14,550 -- 10,116,000
-----------------------------------------------------------
Total $ 210,128,511 $ 2,122,987 $ 249,498 $212,002,000
===========================================================
</TABLE>
The carrying value and estimated fair value of securities held-to-maturity,
except for mortgage-backed securities, at December 31, 1997, by contractual
maturities are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or repay obligations
with or without call or repayment penalties.
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,340,546 $ 1,367,000
Due after one year through five years 83,523,619 84,696,000
Due after five years through ten years 18,059,943 19,119,000
Due after ten years 16,839,514 17,704,000
Mortgage-backed securities 230,572,793 233,301,000
----------------------------
Total $350,336,415 $356,187,000
============================
</TABLE>
Proceeds from the maturity and call of securities held-to-maturity during
1997 and 1996 were $41,931,722 and $26,365,854, respectively. Gross realized
gains of $5,664, $21,862 and $194,503 were realized for 1997, 1996 and 1995,
respectively. No losses were realized for 1997, 1996 and 1995.
Securities having a carrying value of $24,606,816 and $30,577,856 at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits, treasury tax and loan, and securities sold under agreements to
repurchase.
49.
<PAGE> 38
5. Loans
The components of loans in the consolidated statements of condition as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Commercial loans $338,285,520 $283,893,881
Real estate mortgage loans 458,417,697 420,315,411
Real estate construction loans 41,735,722 33,510,438
Installment loans 26,610,915 23,550,608
Other loans 267,153 385,135
----------------------------
865,317,007 761,655,473
----------------------------
Less
Unamortized deferred loan fees 3,786,174 3,742,966
Allowance for loan losses 15,379,408 13,528,568
----------------------------
Total $846,151,425 $744,383,939
============================
</TABLE>
The Company sells participations in certain residential mortgage loans to
buyers in the secondary market. These participations cover substantially all of
the loan balances and are sold without recourse. As of December 31, 1997, the
Company had $15,105,374 of these loans in its servicing portfolio. There were no
loans held for sale as of December 31, 1997 and 1996. Approximately $3,425,000
and $4,260,000 of residential mortgage loans were pledged to secure a line of
credit with the Federal Home Loan Bank as of December 31, 1997 and December 31,
1996, respectively.
An analysis of the activity in the allowance for loan losses for the years
ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $13,528,568 $12,742,427 $12,270,918
Allowance acquired from merger -- 1,644,171 --
Loans charged-off (2,138,803) (5,388,389) (7,017,666)
Recoveries on loans previously charged-off 389,643 930,359 188,773
Provision for loan losses 3,600,000 3,600,000 7,300,402
--------------------------------------------
Balance, end of year $15,379,408 $13,528,568 $12,742,427
============================================
</TABLE>
At December 31, 1997 and 1996, the Company had identified impaired loans
with a net recorded investment of $21,905,856 and $17,173,964, respectively. An
allowance of $3,991,224 and $3,046,106, representing the difference between the
value of collateral supporting certain of the loans and their outstanding
balances are included in the allowance for loan losses for 1997 and 1996,
respectively. For the years 1997 and 1996, the average balances of impaired
loans were $23,171,000 and $27,782,000, and interest collected on impaired loans
totaled $1,564,000 and $1,220,000, respectively. The following table is a
breakdown of impaired loans and the SFAS No. 114 impairment allowance related to
impaired loans:
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
SFAS No. 114 SFAS No. 114
Recorded Impairment Recorded Impairment
Investment Allowance Investment Allowance
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans:
Loans with impairment allowance
Commercial $ 7,783,610 $ 1,499,320 $ 6,861,285 $ 1,397,619
Commercial real estate 14,027,194 2,395,852 10,312,679 1,648,487
Other 95,052 95,052 -- --
---------------------------------------------------------
Total impaired loans with
impairment allowance $ 21,905,856 $ 3,990,224 $ 17,173,964 $ 3,046,106
=========================================================
</TABLE>
50.
<PAGE> 39
The Company has entered into transactions with its directors, significant
stockholders and their affiliates ("Related Parties"). Such transactions were
made in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features. All loans to Related Parties were current as of December
31, 1997. An analysis of the activity with respect to loans to Related Parties
is as follows:
<TABLE>
- -----------------------------------------------------------------------------
<S> <C>
December 31, 1995 $ 2,171,338
Additional loans made 3,625,000
Payments received (3,850,694)
-----------
December 31, 1996 1,945,644
Additional loans made 5,523,396
Payments received (160,721)
-----------
December 31, 1997 $ 7,308,319
===========
</TABLE>
Most of the Company's business activity is with customers located in the
predominantly Asian areas of Southern and Northern California. The Company has
no specific industry concentration, and generally its loans are collateralized
with real property or other pledged collateral of the borrowers. Loans are
generally expected to be paid-off from the operating profits of the borrowers,
refinancing by another lender or through sale by the borrowers of the secured
collateral. The following real estate secured loans were outstanding as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage commercial $137,003,972 $121,755,629
Construction 41,735,722 33,510,438
Mortgage residential 303,725,974 284,681,699
Equity lines 17,687,751 13,878,083
----------------------------
Total $500,153,419 $453,825,849
============================
</TABLE>
The following is a summary of non-accrual loans and troubled debt
restructurings as of December 31, 1997, 1996 and 1995 and the related net
interest foregone for the years then ended:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $16,886,460 $ 9,304,994 $14,012,337
===========================================
Contractual interest due $ 1,845,513 $ 1,121,136 $ 1,503,069
Interest recognized 471,398 268,050 200,385
-------------------------------------------
Net interest foregone $ 1,374,115 $ 853,086 $ 1,302,684
===========================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Troubled debt restructurings $ 4,874,277 $ 3,201,462 $ 8,429,265
===========================================
Contractual interest due $ 406,015 $ 338,382 $ 467,496
Interest recognized 387,420 310,783 352,412
-------------------------------------------
Net interest foregone $ 18,595 $ 27,599 $ 115,084
===========================================
</TABLE>
As of December 31, 1997, there was no commitment to lend additional funds to
those borrowers whose loans have been restructured.
51.
<PAGE> 40
6. Other Real Estate Owned
The balance of other real estate owned at December 31, 1997 and 1996 was
$13,269,382 and $18,854,186, respectively. The valuation allowance was
$1,081,370 and $1,568,387 at December 31, 1997 and 1996, respectively. The
following table presents the components of other real estate owned expense for
the year-ended:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense $ 201,269 $ 312,427 $ 923,159
Provision for losses 475,796 1,501,268 874,759
Net (gain) loss on disposal (173,961) (85,313) 78,553
-------------------------------------------
Total other real estate owned expense $ 503,104 $ 1,728,382 $ 1,876,471
===========================================
</TABLE>
An analysis of the activity in the allowance for other real estate losses
for the years ended December 31, 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,568,387 $ 869,262 $ 1,592,238
Provision for losses 475,796 1,501,268 874,759
Charge-offs on disposal (962,813) (802,143) (1,597,735)
-------------------------------------------
Balance, end of year $ 1,081,370 $ 1,568,387 $ 869,262
===========================================
</TABLE>
7. Investments in Real Estate
The Company's investments in real estate consist of a strip-mall, and interests
in two limited partnerships in low income housing projects which qualify for
Federal low income housing tax credits. The following table presents the
components of investments in real estate for the year ended:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Strip-mall $ 680,091 $ 2,837,829
Low income housing 973,631 1,149,395
---------------------------
$ 1,653,722 $ 3,987,224
===========================
</TABLE>
The value of the investments in the strip-malls is dependent upon real
estate values, the local economies, and real estate sales activity. Management
incorporates these factors in its evaluation of the fair value of the
properties. The investment was written down $720,902 during the year ended
December 31, 1995. The Company sold one of the strip malls in 1997, recognizing
a gain of $222,310. For the year 1997, the Company recognized a net gain of
$170,021 from the operations, and a net loss of $106,065 and $753,833 in 1996
and 1995, respectively from the properties, resulting primarily from write
downs.
The Company has interests in two limited partnerships at 49.5% and 99.0%
respectively, formed for the purpose of investing in real estate projects which
qualify for low income housing tax credits. The limited partnerships will
generate tax credits over a weighted average remaining period of approximately
ten years. See Note 9 of the notes to consolidated financial statements for
income tax effects. The Company's 99.0% interest in the limited partnership was
not consolidated as of December 31, 1997 and 1996 because the amount of
investment was not material to the Company's results of operations or financial
condition. The Company recognized a net loss of approximately $144,000, $181,000
and $127,000 in 1997, 1996 and 1995 from the partnerships' operations.
52.
<PAGE> 41
8. Premises and Equipment
Premises and equipment consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $11,371,120 $11,371,120
Building and building improvements 13,775,815 13,761,925
Furniture, fixtures and equipment 11,037,154 12,189,995
Other 1,808,329 2,540,823
Construction in process 480,485 11,320
---------------------------
38,472,903 39,875,183
Less: Accumulated depreciation 13,271,020 14,103,881
---------------------------
Premises and equipment, net $25,201,883 $25,771,302
===========================
</TABLE>
The amount of depreciation included in non-interest expense was $1,335,400,
$1,336,363 and $1,356,916 in 1997, 1996 and 1995, respectively.
9. Securities Sold under Agreements
to Repurchase
The underlying collateral pledged for the repurchase agreements consists of U.S.
Treasury securities. These borrowings generally mature in less than 30 days. The
table below provides comparative data for securities sold under agreements to
repurchase.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding1 $ 8,861,458 $ 611,749 $ 1,138,630
Highest month-end balances2 23,418,942 10,000,000 3,500,000
Year-end balance 23,418,942 10,000,000 1,500,000
Rate at year-end 7.03% 6.83% 5.13%
</TABLE>
1 Average balances were computed using daily averages.
2 Highest month-end balances were at December 1997, December 1996, and August
1995.
10. Income Taxes
For the years ended December 31, 1997, 1996 and 1995, the current and deferred
amounts of the income tax expense are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 10,280,310 $ 6,080,034 $ 3,961,419
State 3,455,997 2,242,534 1,571,755
--------------------------------------------------
13,736,307 8,322,568 5,533,174
==================================================
Deferred
Federal (478,483) (460,651) 116,384
State (14,883) (42,535) 106,004
--------------------------------------------------
(493,366) (503,186) 222,388
==================================================
Change in valuation allowance -- -- (131,453)
--------------------------------------------------
Total income tax expense $ 13,242,941 $ 7,819,382 $ 5,624,109
==================================================
</TABLE>
53.
<PAGE> 42
Temporary differences between the amounts reported in the financial
statements and the tax basis of assets and liabilities give rise to deferred
taxes. Deferred tax assets and liabilities for the years ended December 31, 1997
and 1996 were as fololows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Difference between provisions for loan losses for tax and
financial reporting purposes $ 6,419,983 $ 5,350,461
Difference between provisions for other real estate owned
for tax and financial reporting purposes 1,058,223 2,169,603
State income tax 891,637 384,966
Unrealized holding losses on securities available for sale, net -- 778,042
Other, net 107,920 17,018
------------------------------
Gross deferred tax assets 8,477,763 8,700,090
------------------------------
Deferred tax liabilities
Use of accelerated depreciation for tax purposes (1,154,886) (1,104,765)
Deferred loan fees (400,025) (406,012)
FHLB stock dividend (649,018) (491,430)
Acquisition of FPSB (584,264) (723,637)
Unrealized holding gain on securities available for sale, net (322,355) --
------------------------------
Gross deferred tax liabilities (3,110,548) (2,725,844)
------------------------------
Net tax assets $ 5,367,215 $ 5,974,246
------------------------------
</TABLE>
Amounts for the current year are based upon estimates and assumptions as of
the date of this report and could vary from amounts shown on the tax returns as
filed. Accordingly, the variances from the amounts previously reported for 1996
are primarily the result of adjustments to conform to the tax returns as filed.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Bank will realize
all benefits related to these deductible temporary difference.
Included in other assets in the statements of condition, at December 31,
1997 and 1996 were net deferred tax assets of $5,367,215 and $5,974,246,
respectively. Other assets as of December 31, 1996 include current net income
tax receivable of $340,419. Other liabilities as of December 31, 1997 include
current income tax payable of $190,767.
Income tax expense results in effective tax rates that differ from the
statutory Federal income tax rate for the years indicated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at Federal statutory rate $ 11,672,737 35.00% $ 7,397,367 35.00% $ 5,685,662 35.00%
State income taxes 2,236,724 6.71 1,429,999 6.77 1,090,543 6.71
Interest on obligations of state
and political subdivisions,
which are exempt from Federal taxation (722,348) (2.17) (709,350) (3.35) (832,437) (5.12)
Low income housing tax credits (319,183) (0.96) (319,183) (1.51) (223,833) (1.38)
Non-deductible expense-
Amortization of goodwill 239,603 0.72 28,760 0.14 -- --
Valuation allowance -- -- -- -- (131,453) (0.81)
Other, net 135,408 0.41 (8,211) (0.05) 35,627 0.22
------------ ----- ------------ ----- ------------ -----
Total income tax expense $ 13,242,941 39.71% $ 7,819,382 37.00% $ 5,624,109 34.62%
------------ ----- ------------ ----- ------------ -----
</TABLE>
54
<PAGE> 43
11. Stockholders' Equity
As a bank holding company, Bancorp's ability to pay dividends will depend upon
the dividends it receives from the Bank and on the income which it may generate
from any other activities in which Bancorp may engage, either directly or
through other subsidiaries. Currently, since Bancorp does not have any other
significant business activities outside the Bank's and CIC's operations, its
ability to pay dividends will depend solely on dividends received from the Bank.
Under California State banking law, the Bank may not pay a cash dividend
which exceeds the lesser of the Bank's retained earnings or its net income for
the last three fiscal years, less any cash distributions made during that
period. The amount of retained earnings available for cash dividends as of
December 31, 1997 is restricted to approximately $29,040,000 under this
regulation.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
The Federal Deposit Insurance Corporation established five capital ratio
categories: "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized." A well
capitalized institution must have a Tier 1 capital ratio of at least 6%, a total
risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. At
December 31, 1997, the Bank was in compliance with the minimum capital
requirements and is considered well capitalized.
The Company and the Bank's capital and leverage ratios as of December 31,
1997 and 1996 are presented in the tables below:
<TABLE>
<CAPTION>
Company Bank
As of December 31, 1997 As of December 31, 1997
Balance Percent Balance Percent
-------------- ----- -------------- -----
<S> <C> <C> <C> <C>
Tier I Capital
(to risk-
weighted
assets) $ 125,976,792(1) 11.73% $ 122,431,400(1) 11.40%
Tier I Capital
minimum
requirement 42,956,701 4.00 42,956,587 4.00
-------------- ----- -------------- -----
Excess $ 83,020,091 7.73% $ 79,474,813 7.40%
-------------- ----- -------------- -----
Total Capital (to
risk-weighted
assets) $ 139,424,917(1) 12.98% $ 135,879,487(1) 12.65%
Total Capital
minimum
requirement 85,913,402 8.00 85,913,174 8.00
-------------- ----- -------------- -----
Excess $ 53,511,515 4.98% $ 49,966,313 4.65%
-------------- ----- -------------- -----
Risk-weighted
assets $1,073,917,525 $1,073,914,670
Tier I Capital
(to average
assets) -
Leverage ratio $ 125,976,792(1) 7.94% $ 122,431,400(1) 7.71%
Minimum
leverage
requirement 63,483,951 4.00 63,483,844 4.00
-------------- ----- -------------- -----
Excess $ 62,492,841 3.94% $ 58,947,556 3.71%
-------------- ----- -------------- -----
Total average
assets $1,587,098,783(3) $1,587,096,105(3)
</TABLE>
<TABLE>
<CAPTION>
Company Bank
As of December 31, 1996 As of December 31, 1996
Balance Percent Balance Percent
-------------- ----- -------------- -----
<S> <C> <C> <C> <C>
Tier I Capital
(to risk-
weighted
assets) $ 109,607,902(2) 12.72% $ 107,386,397(2) 12.46%
Tier I Capital
minimum
requirement 34,479,798 4.00 34,479,798 4.00
-------------- ----- -------------- -----
Excess $ 75,128,104 8.72% $ 72,906,599 8.46%
-------------- ----- -------------- -----
Total Capital (to
risk-weighted
assets) $ 120,416,815(2) 13.97% $ 118,195,309(2) 13.71%
Total Capital
minimum
requirement 68,959,596 8.00 68,959,596 8.00
-------------- ----- -------------- -----
Excess $ 51,457,219 5.97% $ 49,235,713 5.71%
-------------- ----- -------------- -----
Risk-weighted
assets $ 861,994,951 $ 861,994,945
Tier I Capital
(to average
assets) -
Leverage ratio $ 109,607,902(2) 8.17% $ 107,386,397(2) 8.01%
Minimum
leverage
requirement 53,656,584 4.00 53,656,560 4.00
-------------- ----- -------------- -----
Excess $ 55,951,318 4.17% $ 53,729,837 4.01%
-------------- ----- -------------- -----
Total average
assets $1,341,414,610(3) $1,341,413,989(3)
</TABLE>
(1) Excluding the unrealized holding gains on securities available-for-sale of
$369,922 and goodwill of $9,529,827.
(2) Excluding the unrealized holding losses on securities available-for-sale of
$1,059,347 and goodwill of $9,897,449.
(3) Average assets represent average balance for the fourth quarter of 1997 and
1996, respectively.
55
<PAGE> 44
The Board of Directors of Bancorp is authorized to issue preferred stock in
one or more series and to fix the voting powers, designations, preferences or
other rights of the shares of each such class or series and the qualifications,
limitations and restrictions thereon. Any preferred stock issued by Bancorp may
rank prior to Bancorp common stock as to dividend rights, liquidation
preferences, or both, may have full or limited voting rights, and may be
convertible into shares of Bancorp common stock. No preferred stock has been
issued as of December 31, 1997.
12. Commitments and Contingencies
The Company is involved in various litigation concerning transactions entered
into during the normal course of business. Management, after consultation with
legal counsel, does not believe that the resolution of such litigation will have
a material effect upon its financial condition.
In the normal course of business, the Company becomes a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments included commitments to extend credit in
the form of loans or through commercial and standby letters of credit. Those
instruments represent varying degrees of exposure to risk in excess of the
amounts included in the accompanying consolidated statements of condition. The
contractual or notional amount of these instruments indicates a level of
activity associated with a particular class of financial instrument and is not a
reflection of the level of expected losses, if any.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on balance sheet instruments. Unless noted otherwise, the Company does
not require collateral or other security to support financial instruments with
credit risk.
Financial instruments whose contract amounts represent the amount of credit
risk include the following:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
Commitments to extend credit $ 344,798,000
Standby letters of credit 11,498,000
Other letters of credit 30,612,000
Bill of lading guarantee 10,402,000
-------------
Total $ 397,310,000
=============
</TABLE>
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the commitment agreement.
These commitments generally have fixed expiration dates and are expected to
expire without being drawn upon. The total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the borrowers.
As of December 31, 1997, the Company does not have fixed-rate or
variable-rate commitments with characteristics similar to options, which provide
the holder, for a premium paid at inception to the Company, the benefits of
favorable movements in the price of an underlying asset or index with limited or
no exposure to losses from unfavorable price movements.
Letters of credit and bill of lading guarantee are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is essentially the
same as that involved in making loans to customers.
As of December 31, 1997, the Company had available credit lines with other
financial institutions in the amount of $287,000,000.
56
<PAGE> 45
The Company is obligated under a number of operating leases for premises and
equipment with terms ranging from 1 to 55 years, many of which provide for
periodic adjustment of rentals based on changes in various economic indicators.
Rental expense was $1,792,633, $1,328,502 and $1,433,861 for 1997, 1996 and
1995, respectively. The following table shows future minimum payments under
operating leases with terms in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
(dollars in thousands) Commitments
- -----------------------------------------------------------------------------------------
<S> <C>
Year ended December 31,
1998 $ 1,660
1999 1,488
2000 1,332
2001 581
2002 507
Thereafter 8,299
-----------
Total minimum lease payments $ 13,867
===========
</TABLE>
Rental income was $436,892, $504,689 and $482,037 for 1997, 1996 and 1995,
respectively. The following table shows future rental payments to be received
under operating leases with terms in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
(dollars in thousands) Commitments
- -----------------------------------------------------------------------------------------
<S> <C>
Year ended December 31,
1998 $ 386
1999 148
2000 98
2001 75
2002 15
-----------
Total minimum lease payments to be received $ 722
===========
</TABLE>
During 1997 and presently there are adverse economic conditions in the Asia
Pacific region. The impact of these adverse economic conditions may increase the
Company's exposure to economic and transfer risk. Transfer risk may increase
because of an entity's incapacity to obtain the foreign exchange needed to meet
its obligations or to provide liquidity. This may impact the recoverability of
investments with or loans to entities unable to obtain the necessary foreign
exchange. In addition, these adverse economic conditions may continue to
negatively impact asset values and the profitability and liquidity of companies
operating in this region. It is the opinion of management that the Company will
not be adversely impacted by these factors. Management does not consider its
loan portfolio to have direct exposure to transfer risk.
The circumstances in Asia may also have an impact on the deposit customers
of the Company, resulting in outflows of deposits. Management of the Company
does not expect such potential outflows to significantly impact the financial
condition or operating results of the Company based on its current customers'
profiles.
57
<PAGE> 46
13. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
CASH AND SHORT-TERM INSTRUMENTS For cash and short-term instruments, the
carrying amount was assumed to be a reasonable estimate of fair value.
INVESTMENT SECURITIES For securities (which include securities
available-for-sale and securities held-to-maturity), fair values were based on
quoted market prices at the reporting date. If a quoted market price was not
available, fair value was estimated using quoted market prices for similar
securities.
LOANS Fair values were estimated for portfolios of loans with similar financial
characteristics. Each loan category was further segmented into fixed and
adjustable rate interest terms and by performing and non-performing categories.
The fair value of performing loans was calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan.
Fair value for non-performing real estate loans was based on recent external
appraisals of the underlying collateral of the loan. If appraisals were not
available, estimated cash flows are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows, and discount rates were judgementally determined using
available market information and specific borrower information.
DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and
certain money market deposits was assumed to be the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit was
estimated using the rates currently offered for deposits with similar remaining
maturities.
OTHER BORROWINGS This category includes Federal funds purhased and securities
sold under repurchase agreements, and other short-term borrowings. The carrying
amount is a reasonable estimate of fair value because of the relatively short
period of time between the origination of the instrument and its expected
realization.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN The fair value of commitments was estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of guarantees and letters of credit was based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting date.
Fair value estimates were made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Bank's
financial instruments, fair value estimates were based on judgements regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates were subjective in nature and involved uncertainties and matters of
significant judgement and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
58
<PAGE> 47
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
(dollars in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 57,728 $ 57,728 $ 47,194 $ 47,194
Federal funds sold and securities
purchased under agreement to resell 67,000 67,000 28,000 28,000
Securities available-for-sale 216,158 216,158 383,391 383,391
Securities held-to-maturity 350,336 356,187 210,129 212,002
Loans, net 846,151 860,111 744,384 753,601
-------------------------------------------------------------
Financial Liabilities
Deposits $1,449,121 $1,452,787 $1,364,740 $1,367,217
Securities sold under agreements
to repurchase 23,419 23,419 10,000 10,000
Mortgage indebtedness -- -- 773 773
-------------------------------------------------------------
</TABLE>
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
(dollars in thousands) Contract Amount Fair Value Contract Amount Fair Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $344,798 $ (417) $268,247 $ (317)
Commercial letters of credit 30,612 (202) 19,824 (138)
Standby letters of credit 11,498 (69) 12,675 (60)
Bill of lading guarantee 10,402 (25) 6,653 (41)
------------------------------------------------------
</TABLE>
14. Employee Benefit Plans
EMPLOYEE STOCK OWNERSHIP PLAN In January 1985, the Board of Directors approved
an Employee Stock Ownership Plan (ESOP). Under the ESOP, the Company makes
annual contributions to a trust in the form of either cash or common stock of
the Company for the benefit of eligible employees. Employees are eligible to
participate in the ESOP Plan after completing two years of service for salaried
full-time employees or 1,000 hours for each of two consecutive years for
salaried part-time employees. The amount of the annual contribution is
discretionary except that it must be sufficient to enable the trust to meet its
current obligations. The Company also pays for the administration of this plan
and of the trust. During 1997, 1996 and 1995, the ESOP purchased 38,491, 45,959,
and 0 shares, respectively, of the Company's stock at an aggregate cost of
$878,620, $754,269 and $0, respectively. The shares purchased in 1997 included
21,200 shares bought on the open market and 17,291 shares bought through the
Dividend Reinvestment Plan. The shares purchased in 1996 included 31,224 shares
of newly issued shares and 14,735 shares bought through the Dividend
Reinvestment Plan. The Company contributed $453,000, $515,850 and $490,400 to
the trust in 1997, 1996 and 1995, respectively, which was charged to salaries
and related benefits in the accompanying consolidated statements of income. In
1997, distribution of benefits to participants totaled 14,410 shares. As of
December 31, 1997, the ESOP owned 554,881 shares or 6.21% of the Company's
outstanding common stock.
59
<PAGE> 48
Dividends on ESOP shares allocated to participants but used for debt service
are allocated shares with a fair value no less than the amount of the dividends
used for debt service. Only dividends on allocated shares are charged to
retained earnings. Dividends on unallocated shares was $9,623 in 1994. These
dividends were allocated during the year ended December 31, 1995.
ESOP shares committed to be released are considered outstanding for basic
earnings per common share (EPS) purposes.
CATHAY BANCORP, INC. 401(K) PLAN In 1997, the Board approved the Cathay Bancorp,
Inc. 401(k) Profit Sharing Plan, which began on March 1, 1997. Salaried
employees who have completed one year of service and have attained the age of 21
are eligible to participate. Enrollment dates are on January 1st and July 1st of
each year.
Participants may contribute up to 15% of their compensation for the year but
not to exceed the dollar limit set by the Internal Revenue Service (IRS).
Participants may change their contribution election on the enrollment dates. The
Company matches 50% of the participants' contribution up to 4% of their
compensation. The vesting schedule for matching contribution is 0% for less than
two years of service, 25% after two years of service and from then on, at an
increment of 25% each year until 100% vested after five years of service. In
1997, the Company's contribution amounted to $138,000.
The Plan allows participants to withdraw all or part of their vested amount
in the plan due to certain financial hardship as designated by the IRS.
Participants may also borrow up to 50% of the vested amount, up to a maximum of
$50,000. The minimum loan amount is $1,000.
15. Condensed Financial Information of Cathay Bancorp, Inc.
The condensed financial information of Cathay Bancorp, Inc. as of December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 were as
follows:
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 3,613,233 $ 2,272,875
Investment in subsidiary - Cathay Bank 132,331,149 116,224,500
Other 2,855 6
---------------------------------
Total assets $ 135,947,237 $ 118,497,381
=================================
LIABILITIES
Accrued expenses $ 70,696 $ 51,376
---------------------------------
Total liabilities 70,696 51,376
=================================
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized, 8,941,738 and
8,878,144 shares issued and outstanding in 1997 and 1996, respectively 89,417 88,781
Additional paid-in-capital 61,270,739 59,811,940
Unrealized holding gain (loss) on securities available-for-sale, net of tax 369,922 (1,059,347)
Retained earnings 74,146,463 59,604,631
---------------------------------
Total stockholders' equity 135,876,541 118,446,005
=================================
Total liabilities and stockholders' equity $ 135,947,237 $ 118,497,381
=================================
</TABLE>
60
<PAGE> 49
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash dividends from Cathay Bank $ 5,565,906 $ 4,744,447 $ 4,694,445
Amortization of organizational costs and other expenses (233,385) (217,766) (300,794)
----------------------------------------------------
Income before income tax expense 5,332,521 4,526,681 4,393,651
Income tax benefit 97,837 92,213 86,445
----------------------------------------------------
Income before undistributed earnings of subsidiary 5,430,358 4,618,894 4,480,096
----------------------------------------------------
Equity in undistributed earnings of subsidiary 14,677,380 8,697,057 6,140,543
----------------------------------------------------
Net income $ 20,107,738 $ 13,315,951 $ 10,620,639
----------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 20,107,738 $ 13,315,951 $ 10,620,639
Equity in undistributed earnings of subsidiary (14,677,380) (8,697,057) (6,140,543)
Amortization of organizational costs -- 786 91,755
Other, net 16,471 135,924 252,113
----------------------------------------------------
Net cash provided by operating activities 5,446,829 4,755,604 4,823,964
----------------------------------------------------
Cash Flows From Investing Activities
Capital contribution to Cathay Bank -- -- (580,000)
----------------------------------------------------
Net cash used in investing activities -- -- (580,000)
----------------------------------------------------
Cash Flows From Financing Activities
Payments to decrease direct loan to ESOP -- -- (447,481)
Proceeds from issuance of common stock 1,459,435 1,694,770 855,448
Cash dividends (5,565,906) (4,744,447) (4,704,068)
Decrease in unearned ESOP shares -- -- 421,786
----------------------------------------------------
Net cash used in financing activities (4,106,471) (3,049,677) (3,874,315)
----------------------------------------------------
Increase in cash and cash equivalents 1,340,358 1,705,927 369,649
Cash and cash equivalents, beginning of year 2,272,875 566,948 197,299
----------------------------------------------------
Cash and cash equivalents, end of year $ 3,613,233 $ 2,272,875 $ 566,948
----------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 150,471 $ 150,000 $ 150,000
Non-cash investing activities:
Net change in unrealized holding gain (loss) on
securities available-for-sale, net of tax $ 1,429,269 $ (2,462,674) $ 1,949,962
Issuance of common stock for the
acquisition of FPSB $ -- $ 16,113,592 $ --
</TABLE>
61
<PAGE> 50
Bancorp guaranteed a direct loan to the Employee Stock Ownership Plan for
the purchase of the Company's shares in 1994. The loan was paid in full in 1995.
Bancorp was formed by exchanging all the outstanding shares of the Bank's
common stock for newly issued shares of Bancorp's common stock. Bancorp has
accounted for its interest in the Bank as a reorganization of an entity under
common control and has reflected its equity in the net earnings of the Bank as
if it had been reorganized as of January 1, 1990. There was no change in
stockholders' equity as a result of this transaction.
16. Dividend Reinvestment Plan
The Company has a dividend reinvestment plan which allows for participants'
reinvestment of cash dividends and certain additional optional investments in
the Company's common stock. Shares issued under the plan and consideration
received were 63,599, 105,245 and 68,614 and $1,459,435, $1,694,770 and $855,448
for 1997, 1996 and 1995, respectively.
17. Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly financial data.
Summary of Operations
<TABLE>
<CAPTION>
1997 1996
(dollars in thousands Fourth Third Second First Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $29,217 $28,445 $27,600 $26,716 $24,109 $21,362 $20,791 $19,836
Interest expense 13,466 13,058 12,345 12,005 10,966 9,622 9,513 9,108
------------------------------------------------------------------------------------
Net interest income 15,751 15,387 15,255 14,711 13,143 11,740 11,278 10,728
Provision for loan losses 900 900 900 900 900 900 900 900
------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 14,851 14,487 14,355 13,811 12,243 10,840 10,378 9,828
Non-interest income 1,860 1,895 1,630 1,390 1,658 1,535 1,339 1,328
Non-interest expense 8,146 7,253 7,901 7,628 8,472 5,957 7,023 6,562
------------------------------------------------------------------------------------
Income before income tax expense 8,565 9,129 8,084 7,573 5,429 6,418 4,694 4,594
Income tax expense 3,251 3,733 3,205 3,054 1,827 2,688 1,598 1,706
------------------------------------------------------------------------------------
Net income $ 5,314 $ 5,396 $ 4,879 $ 4,519 $ 3,602 $ 3,730 $ 3,096 $ 2,888
------------------------------------------------------------------------------------
Basic net income per
common share $ 0.59 $ 0.60 $ 0.55 $ 0.51 $ 0.43 $ 0.47 $ 0.39 $ 0.37
------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 51
Independent Auditors' Report
The Stockholders and the Board of Directors of Cathay Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Cathay
Bancorp, Inc. and subsidiary (the Company) as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cathay Bancorp, Inc.
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 16, 1998
63
<PAGE> 52
Corporate, Branch and Overseas Offices
Corporate Office:
777 North Broadway
Los Angeles, CA 90012
Tel: (213) 625-4700
Fax: (213) 625-1368
Branch and Overseas Offices:
Los Angeles
777 North Broadway
Los Angeles, CA 90012
Tel: (213) 625-4700
Fax: (213) 625-1368
Claudia My Lu
Vice President and Manager
MONTEREY PARK
250 South Atlantic Boulevard
Monterey Park, CA 91754
Tel: (626) 281-8808
Fax: (626) 281-2956
Frank Chen
Regional Vice President and Manager
ALHAMBRA
601 North Atlantic Boulevard
Alhambra, CA 91801
Tel: (626) 284-6556
Fax: (626) 282-3496
Christina Tsui
Assistant Vice President and Manager
HACIENDA HEIGHTS
16025 East Gale Avenue
City of Industry, CA 91745
Tel: (626) 333-8533
Fax: (626) 336-4227
Jack Sun
Assistant Vice President and Manager
WESTMINSTER
9121 Bolsa Avenue
Westminster, CA 92683
Tel: (714) 890-7118
Fax: (714) 898-9267
Kenneth Chan
Assistant Vice President and Manager
SAN JOSE
2010 Tully Road
San Jose, CA 95122
Tel: (408) 238-8880
Fax: (408) 238-2302
Edward Wong
Vice President and Manager
SAN GABRIEL
825 East Valley Boulevard
San Gabriel, CA 91776
Tel: (626) 573-1000
Fax: (626) 573-0983
Daniel Liu
Vice President and Manager
TORRANCE
23228 Hawthorne Boulevard
Torrance, CA 90505
Tel: (310) 791-8700
Fax: (310) 791-1862
Phoebe Yu
Assistant Vice President and Manager
OAKLAND
710 Webster Street
Oakland, CA 94607
Tel: (510) 208-3700
Fax: (510) 208-3727
Edward Wong
Vice President and Manager
CERRITOS
11355 South Street
Cerritos, CA 90701
Tel: (562) 860-7300
Fax: (562) 860-2296
Henry Yoh
Manager
CITY OF INDUSTRY
1250 South Fullerton Road
City of Industry, CA 91748
Tel: (626) 810-1088
Fax: (626) 810-2188
Shu Lee
Regional Vice President and Manager
CUPERTINO
10480 South De Anza Boulevard
Cupertino, CA 95014
Tel: (408) 255-8300
Fax: (408) 255-8373
David Lin
Assistant Vice President and Manager
FREMONT
47998 Warm Springs Boulevard
Fremont, CA 94539
Tel: (510) 770-5151
Fax: (510) 770-5150
Tony Wen
Vice President and Manager
IRVINE
15323 Culver Drive
Irvine, CA 92714
Tel: (714) 559-7500
Fax: (714) 559-7508
Linda Kuo
Assistant Vice President and Manager
MILLBRAE
Millbrae Plaza
1095 El Camino Real
Millbrae, CA 94030
Tel: (650) 652-0188
Fax: (650) 652-0180
Stanley Wong
Vice President and Manager
HILL-ALPINE
800 North Hill Street
Los Angeles, CA 90012
Tel: (213) 346-3700
Fax: (213) 346-3746
Claudia My Lu
Vice President and Manager
VALLEY-STONEMAN
43 East Valley Boulevard
Alhambra, CA 91801
Tel: (626) 576-7600
Fax: (626) 576-5831
Mimy Luc
Manager
VALLEY-PROSPECT
420 West Valley Boulevard
San Gabriel, CA 91776
Tel: (626) 300-0668
Fax: (626) 300-0117
Jennifer Mak
Assistant Vice President and Manager
BERKELEY-RICHMOND OFFICE
3254 Pierce Street
Richmond, CA 94804
Tel: (510) 526-8898
Fax: (510) 526-0639
Pansy Lock
Assistant Manager
HONG KONG
Tak Shing House #103
20 Des Voeux Road Central
Hong Kong
Tel: (852) 2522-0071
Fax: (852) 2810-1652
Paul Y. Li
Representative
CATHAY INVESTMENT COMPANY
777 North Broadway
Los Angeles, CA 90012
Tel: (213) 625-4700
Fax: (213) 625-1368
George T.M. Ching
President
TAIWAN C.I.C.
Sixth Floor, Suite 3
146 Sung Chiang Road
Taipei, Taiwan, R.O.C.
Tel: (886) (2) 2537-5057
Fax: (886) (2) 2537-5059
Li Sung
Representative and Manager
Additional Information:
MARKET MAKERS
The following firms make a market
in Cathay Bancorp, Inc. stock:
Herzog, Heine, Geduld, Inc.
Wedbush Morgan Securities Inc.
Hoefer & Arnett, Inc.
Sutro & Co., Inc.
REGISTRAR AND TRANSFER AGENT
American Stock Transfer and Trust Company
40 Wall Street
New York, NY 10005
Tel: (800) 937-5449
CATHAY SERVICE HOTLINE
(800) 9 CATHAY / 922-8429
Service available 24 hours throughout California.
Cathay Bank Web site
www.cathaybank.com
68.
<PAGE> 1
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(3) EXHIBITS
22.1 Subsidiaries of the Company
<TABLE>
<S> <C>
CATHAY BANK CATHAY INVESTMENT COMPANY
a California Corporation a California Corporation
100% owned 100% owned by Cathay Bank
</TABLE>
Exhibit 22.1
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 56,873
<INT-BEARING-DEPOSITS> 855
<FED-FUNDS-SOLD> 67,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 216,158
<INVESTMENTS-CARRYING> 350,336
<INVESTMENTS-MARKET> 356,187
<LOANS> 861,531
<ALLOWANCE> 15,379
<TOTAL-ASSETS> 1,622,462
<DEPOSITS> 1,449,121
<SHORT-TERM> 23,419
<LIABILITIES-OTHER> 14,045
<LONG-TERM> 0
0
0
<COMMON> 89
<OTHER-SE> 135,788
<TOTAL-LIABILITIES-AND-EQUITY> 1,622,462
<INTEREST-LOAN> 74,015
<INTEREST-INVEST> 35,548
<INTEREST-OTHER> 2,415
<INTEREST-TOTAL> 111,978
<INTEREST-DEPOSIT> 50,372
<INTEREST-EXPENSE> 50,874
<INTEREST-INCOME-NET> 61,104
<LOAN-LOSSES> 3,600
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 30,928
<INCOME-PRETAX> 33,351
<INCOME-PRE-EXTRAORDINARY> 33,351
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,108
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.26
<YIELD-ACTUAL> 4.42
<LOANS-NON> 16,886
<LOANS-PAST> 2,373
<LOANS-TROUBLED> 4,874
<LOANS-PROBLEM> 5,310
<ALLOWANCE-OPEN> 13,529
<CHARGE-OFFS> 2,139
<RECOVERIES> 389
<ALLOWANCE-CLOSE> 15,379
<ALLOWANCE-DOMESTIC> 15,379
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
