<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18630
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CATHAY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-4274680
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 North Broadway, Los Angeles, California 90012
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 625-4700
----------------------------
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, $.01 par value, 9,010,132 shares outstanding as of May 11,
1999.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION ............................................ 3
Item 1. Financial Statements (unaudited) ..................... 4
Notes to Condensed Consolidated Financial Statements
(unaudited)...........................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................22
PART II - OTHER INFORMATION.................................................23
Item 1. Legal Proceedings.....................................23
Item 2. Changes in Securities and Use of Proceeds.............23
Item 3. Defaults upon Senior Securities.......................23
Item 4. Submission of Matters to a Vote of Security Holders...23
Item 5. Other Information ..................................23
Item 6. Exhibits and Reports on Form 8-K......................23
SIGNATURES..................................................................24
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
3
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<TABLE>
<CAPTION>
CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of March 31, 1999 and December 31, 1998
(unaudited)
(in thousands, except share data)
Mar. 31, 1999 Dec. 31, 1998
---------------------- -----------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 47,884 $ 64,656
Federal funds sold and securities purchased under
agreements to resell 40,000 17,000
-------------- --------------
Cash and cash equivalents 87,884 81,656
Securities available-for-sale (amortized cost of
$151,057 in 1999 and $237,877 in 1998) 151,654 239,928
Securities held-to-maturity (estimated fair value
of $468,454 in 1999 and $426,778 in 1998) 464,122 418,156
Loans (net of allowance for loan losses of
$16,840 in 1999 and $15,970 in 1998) 1,006,214 961,876
Other real estate owned, net 10,968 10,454
Investments in real estate, net 16,406 1,457
Premises and equipment, net 25,835 25,827
Customers' liability on acceptance 13,561 10,847
Accrued interest receivable 11,153 11,996
Goodwill 8,421 8,590
Other assets 10,908 10,111
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Total assets $ 1,807,126 $ 1,780,898
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 183,341 $ 178,068
Interest bearing accounts
NOW accounts 114,541 114,982
Money market deposits 107,040 113,869
Savings deposits 206,653 207,365
Time deposits under $100,000 334,989 326,968
Time deposits of $100,000 or more 643,004 619,150
-------------- --------------
Total deposits 1,589,568 1,560,402
Securities sold under agreements to repurchase 3,712 16,436
Advances from Federal Home Loan Bank 30,000 30,000
Acceptances outstanding 13,561 10,847
Other liabilities 9,189 6,561
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Total liabilities 1,646,030 1,624,246
Stockholders' equity
Preferred stock, $.01 par value; 10,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, 8,998,412 and 8,988,760 shares issued and
outstanding in 1999 and 1998, respectively 90 90
Additional paid-in-capital 63,276 62,919
Accumulated other comprehensive income 346 1,189
Retained earnings 97,384 92,454
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Total stockholders' equity 161,096 156,652
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Total liabilities and stockholders' equity $ 1,807,126 $ 1,780,898
-------------- --------------
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998
(unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
INTEREST INCOME
Interest on loans $ 20,635 $ 19,554
Interest on securities available-for-sale 3,250 3,198
Interest on securities held-to-maturity 6,660 5,720
Interest on Federal funds sold and securities sold
under agreements to resell 964 702
Interest on deposits with banks 5 5
---------- ----------
Total interest income 31,514 29,179
---------- ----------
INTEREST EXPENSE
Time deposits of $100,000 or more 7,739 7,373
Other deposits 5,089 5,856
Other borrowed funds 1,178 262
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Total interest expense 14,006 13,491
---------- ----------
Net interest income before provision for loan losses 17,508 15,688
Provision for loan losses 1,050 900
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Net interest income after provision for loan losses 16,458 14,788
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NON-INTEREST INCOME
Securities gains(losses) (32) 35
Letter of credit commissions 486 444
Service charges 944 1,018
Other operating income 520 505
---------- ----------
Total non-interest income 1,918 2,002
---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,664 4,364
Occupancy expense 672 653
Computer and equipment expense 621 595
Professional services expense 925 755
FDIC and State assessments 97 99
Marketing expense 313 332
Real estate operations, net (453) 145
Other operating expense 846 939
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Total non-interest expense 7,685 7,882
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Income before income tax expense 10,691 8,908
Income tax expense 4,188 3,490
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Net Income 6,503 5,418
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Other comprehensive income, net of tax:
Unrealized holding gain arising during the period (637) (96)
Less: reclassification adjustment for realized
gain(loss) on securities included in net income 206 (15)
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Total other comprehensive income, net of tax (843) (81)
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Total comprehensive income $ 5,660 $ 5,337
---------- ----------
---------- ----------
Net income per common share
Basic $ 0.72 $ 0.61
Diluted $ 0.72 $ 0.61
Basic average common shares outstanding 8,995,981 8,949,825
Diluted average common shares outstanding 9,001,465 8,949,825
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
CATHAY BANCORP, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
--------------------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,503 $ 5,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,050 900
Provision for losses on other real estate owned 68 55
Depreciation 369 298
Net gain on sales of other real estate owned (546) (9)
(Gain) loss on sales and calls of investment securities 32 (35)
Amortization and accretion of investment
security premiums, net 187 32
Amortization of goodwill 169 174
Increase (decrease) in deferred loan fees 1 (99)
Decrease in accrued interest receivable 843 1,748
(Increase) decrease in other assets, net (797) 2,555
Increase in other liabilities 2,628 6,706
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Total adjustments 4,004 12,325
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Net cash provided by operating activities 10,507 17,743
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (270,341) (50,513)
Proceeds from maturity and call of securities available-for-sale 354,586 50,723
Proceeds from sale of securities available-for-sale - 6,424
Purchase of mortgage-backed securities available-for-sale - (24,582)
Proceeds from repayments of mortgage-backed securities
available-for-sale 3,347 15,664
Purchase of securities held-to-maturity (45,057) (3,433)
Proceeds from maturity and call of securities held-to-maturity 300 738
Purchase of mortgage-backed securities held-to-maturity (26,553) (15,057)
Proceeds from repayments of mortgage-backed securities held-to-maturity 24,964 11,259
Net increase in loans (46,384) (33,952)
Purchase of premises and equipment (377) (472)
Proceeds from sale of other real estate owned 959 528
(Increase) decrease in investments in real estate (14,949) 44
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Net cash used in investing activities (19,505) (42,629)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts,
money market and savings deposits (2,709) (6,124)
Net increase in time deposits 31,875 24,641
Net decrease in securities sold under agreements to repurchase (12,724) (8,158)
Cash dividends (1,573) (1,565)
Proceeds from shares issued to Dividend Reinvestment Plan 357 395
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Net cash provided by financing activities 15,226 9,189
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Increase (decrease) in cash and cash equivalents 6,228 (15,697)
Cash and cash equivalents, beginning of the period 81,656 124,728
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Cash and cash equivalents, end of the period $ 87,884 $109,031
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Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 14,059 $ 13,450
Income taxes $ 3,300 $ 570
Non-cash investing activities:
Transfers to securities available-for-sale
within 90 days of maturity $ 260 $ 230
Net change in unrealized holding gain on securities
available-for-sale, net of tax $ (843) $ (81)
Transfers to other real estate owned $ 995 $ 786
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
CATHAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended December 31, 1998.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 amends FASB
Statement No. 52, "Foreign Currency Translation", to permit special
accounting for a hedge of a foreign currency forecasted transaction with a
derivative. It supersedes FASB Statements No. 80, "Accounting for Future
Contracts", No. 105, "Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk", and No.119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments". It also amends FASB Statement No.
107, "Disclosures about Fair Value of Financial Instruments", the disclosure
provisions about concentrations of credit risk from Statement No. 105.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivative) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as (a) a hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. Under SFAS No. 133, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method
it will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The impact of implementing SFAS No. 133 is not expected
to be material to the Company's results of operations or financial condition.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 amends
SFAS No. 65 to require that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investment. SFAS No. 134 was adopted
on January 1, 1999. Adoption of the statement did not have any material
impact on the Company's results of operations or financial condition.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following discussion is given based on the assumption that the
reader has access to and read the Annual Report on Form 10-K for the year
ended December 31, 1998 of Cathay Bancorp, Inc. ("Bancorp") and its
subsidiary Cathay Bank ("the Bank"), together ("the Company").
The following discussion includes forward-looking statements regarding
management's beliefs, projections and assumptions concerning future results
and events. These forward-looking statements may, but do not necessarily,
also include words such as "believes", "expects", "anticipates", "intends",
"plans", "estimates" or similar expressions. Forward-looking statements are
not guarantees. They involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, fluctuations in interest rates,
demographic changes, increases in competition, deterioration in asset or
credit quality, changes in the availability of capital, adverse regulatory
developments, changes in business strategy or development plans, general
economic or business conditions and other factors discussed in the section
entitled "Factors that May Affect Future Results" in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Actual results in
any future period may also vary from the past results discussed herein. Given
these risks and uncertainties, readers are cautioned not to place undue
reliance on any forward-looking statements, which speak as of the date
hereof. The Company has no intention and undertakes no obligation to update
any forward-looking statement or to publicly announce the results of any
revision of any forward-looking statement to reflect future developments or
events.
RESULTS OF OPERATIONS
For the first quarter of 1999, the Company reported net income of $6.5
million or $0.72 per basic common share, compared with $5.4 million or $0.61
per basic common share for the first quarter of 1998, representing an
increase of $1.1 million or 20%. Income before income tax expense amounted to
$10.7 million for the first quarter of 1999, compared with $8.9 million for
the corresponding quarter of 1998, representing an increase of $1.8 million
or 20%. The increase in 1999 first quarter income before income tax expense
was primarily attributable to a $1.8 million increase in net interest income
before provision for loan losses.
The annualized return on average assets ("ROA") and return on average
stockholders' equity ("ROE") were 1.43% and 16.65%, respectively, for the
first quarter of 1999, compared with 1.35% and 15.93%, respectively, for the
first quarter of 1998.
NET INTEREST INCOME
Net interest income before provision for loan losses totaled $17.5
million in the first quarter of 1999, compared with $15.7 million in the
corresponding quarter of 1998. This represents an increase of $1.8 million or
12%.
On a taxable equivalent basis, net interest income totaled $17.9 million
in the first quarter of 1999, representing an increase of $1.9 million or 12%
over the net interest income of $16.0 million in the same period of 1998.
The increase of $1.8 million in net interest income before provision for
loan losses was substantially due to an increase of $242.0 million in average
interest-earning assets, from $1,476.5 million to $1,718.5 million. Of the
$242.0 million increase, loans (net of deferred loan fees and the allowance
for loan losses) accounted for $110.0 million, investment securities
(including available-for-sale and held-to-maturity) accounted for $103.4
million, and Federal funds sold and securities purchased under agreements to
resell accounted for $28.7 million, while deposits with other banks decreased
slightly. The increase in average interest-earning assets was funded by
increases in: 1) average deposits of
8
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$119.0 million, of which $100.9 million were interest bearing and $18.1
million were non-interest bearing; 2) other borrowed funds (including
securities sold under agreements to repurchase and advances from Federal Home
Loan Bank) of $79.0 million; and 3) cash and other sources of approximately
$44.0 million.
The increase in average loans contributed an additional $1.1 million to
net interest income, which was partially offset by a decrease of 60 basis
points in the average yield from 9.28% to 8.68%. This was primarily due to a
decrease of 75 basis points in the Company's average reference lending rate
from 8.75% to 8.00%, as a result of three consecutive 25 basis point rate
cuts by the Federal Reserve Board in the last two quarters of 1998.
Meanwhile, yields on all other categories of interest-earning assets
decreased due to the prevailing interest rate environment causing a 57 basis
point decrease in the average yield on overall interest-earning assets from
8.10% in the first quarter of 1998 to 7.53% in the same quarter of 1999.
During the same period, cost of funds decreased 37 basis points from
4.19% in 1998 to 3.82% in 1999. Consequently, net interest margin (defined as
taxable equivalent net interest income to average interest-earning assets)
was reduced by 17 basis points from 4.39% in 1998 to 4.22% in 1999.
NON-INTEREST INCOME
Non-interest income totaled $1.9 million and $2.0 million for the first
quarter of 1999 and 1998, respectively, representing a slight decrease for
1999. This was due to a decrease in service charges, along with moderate
securities losses, which were partially offset by increased letter of credit
commissions and other operating income. The decrease in service charges was
primarily due to the Bank's outsourcing of its merchant bank card portfolio
in the third quarter of 1998, as a result of which the Bank received only a
percentage of the income from the portfolio rather than receiving the full
income and incurring the related expenses.
NON-INTEREST EXPENSE
Non-interest expense amounted to $7.7 million and $7.9 million,
respectively for the first quarter of 1999 and 1998, respectively. This
represents a decrease of $197,000 for 1999. The Bank realized net other real
estate owned (OREO) income of $453,000 in the first quarter of 1999 primarily
due to gains on sales of OREO of $546,000. This compared with net OREO
expense of $145,000 in the same period of 1998. Partially offsetting the
decrease in net OREO expense of $598,000 were increases of $300,000 in
salaries and employee benefits and $170,000 in professional services expense
arising largely from legal fees and expenses related to loan promotion
programs.
The efficiency ratio continued to improve from 44.56% in the first
quarter of 1998 to 39.56% in the first quarter of 1999.
FINANCIAL CONDITION
The Company maintained moderate growth during the first quarter of 1999.
Total assets increased $26.2 million to $1,807.1 million; loans, net of
deferred loan fees, gained $45.2 million to $1,023.1 million; investment
securities (including available-for-sale and held-to-maturity) decreased
$42.3 million to $615.8 million; investments in real estate increased $14.9
million to $16.4 million; deposits grew $29.2 million to $1,589.6 million;
and stockholders' equity increased $4.4 million to $161.1 million, compared
to December 31, 1998.
INTEREST EARNING ASSET MIX
Total interest earning assets increased $24.9 million to $1,679.2
million at March 31, 1999, compared with $1,654.3 million at year-end 1998.
The Bank continued to experience good loan growth in the first quarter of
1999. As a percentage of total interest earning assets, loans (net of
deferred loan fees), continued to increase from 59.1% at year-end 1998 to
60.9% at March 31, 1999;
9
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conversely, investment securities decreased from 39.8% to 36.7% during the
same period. This change in the interest earning asset mix from securities to
loans is generally favorable to net interest income.
The tables below depict the changes in the interest earning asset mix as
of the dates and for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
TYPES OF INTEREST EARNING ASSETS: As of 3/31/99 As of 12/31/98
- -------------------------------- --------------------------- --------------------------
Amount Percentage Amount Percentage
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<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 40,000 2.4% $ 17,000 1.0%
Securities available-for-sale 151,654 9.0 239,928 14.5
Securities held-to-maturity 464,122 27.7 418,156 25.3
Loans (net of deferred loan fees) 1,023,054 60.9 977,846 59.1
Deposits with banks 352 0.0 1,376 0.1
---------- ----- ---------- -----
Total interest-earning assets $1,679,182 100.0% $1,654,306 100.0%
========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
AVERAGE INTEREST EARNING ASSETS: 1st Qtr. 1999 1st Qtr. 1998
- -------------------------------- --------------------------- --------------------------
Amount Percentage Amount Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 77,267 4.5% $ 48,546 3.3%
Securities available-for-sale 231,078 13.3 217,826 14.6
Securities held-to-maturity 445,364 25.7 355,167 23.8
Loans (net of deferred loan fees) 980,700 56.5 870,056 58.3
Deposits with banks 565 0.0 795 0.0
---------- ----- ---------- -----
Total earning assets $1,734,974 100.0% $1,492,390 100.0%
========== ===== ========== =====
</TABLE>
SECURITIES
Securities available-for-sale decreased $88.3 million from $239.9
million to $151.6 million and securities held-to-maturity increased $46.0
million from $418.1 million to $464.1 million during the first quarter of
1999. The overall decrease of $42.3 million in investment securities was
primarily attributable to the good loan demand that the Company experienced
during the period.
As of March 31, 1999, unrealized holding gains on securities
available-for-sale were $597,000 compared with $2,051,000 as of December 31,
1998. These unrealized gains, net of tax effect were included in the
Company's stockholders' equity for the periods reported. The unrealized
holding gains, net of tax, were $346,000 as of March 31, 1999 and $1,189,000
as of year-end 1998.
The following tables summarize the composition and maturity distribution
of the investment portfolio as of the dates indicated:
<TABLE>
<CAPTION>
(In thousands)
SECURITIES AVAILABLE-FOR-SALE: As of 3/31/99
--------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,001 $ 4 $ -0- $ 2,005
U.S. government agencies 52,357 279 -0- 52,636
State and municipal securities 20,397 23 -0- 20,420
Mortgage-backed securities 28,403 356 38 28,721
Assets-backed securities 6,504 6 74 6,436
Federal Home Loan Bank stock 6,073 -0- -0- 6,073
Corporate bonds 35,322 281 240 35,363
--------- -------- -------- ---------
Total $ 151,057 $ 949 $ 352 $ 151,654
========= ======== ======== =========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
SECURITIES AVAILABLE-FOR-SALE: As of 12/31/98
--------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,005 $ 9 $ -0- $ 2,014
U.S. government agencies 102,524 496 -0- 103,020
State and municipal securities 21,974 343 -0- 22,317
Mortgage-backed securities 31,754 676 5 32,425
Assets-backed securities 8,264 8 52 8,220
Federal Home Loan Bank stock 5,991 -0- -0- 5,991
Commercial paper 29,950 -0- 5 29,945
Corporate bonds 35,415 630 49 35,996
--------- ------- -------- ---------
Total $ 237,877 $ 2,162 $ 111 $ 239,928
========= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
SECURITIES HELD-TO-MATURITY: As of 3/31/99
--------------------------------------------------------------------
Carrying Gross Gross
Value Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,019 $ 395 $ -0- $ 26,414
U.S. government agencies 64,413 387 84 64,716
State and municipal securities 70,953 2,666 351 73,268
Mortgage-backed securities 231,104 1,761 387 232,478
Assets-backed securities 19,995 9 22 19,982
Corporate bonds 51,638 241 283 51,596
--------- ------- -------- ---------
Total $ 464,122 $ 5,459 $ 1,127 $ 468,454
========= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
As of 12/31/98
--------------------------------------------------------------------
Carrying Gross Gross
Value Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,026 $ 578 $ -0- $ 26,604
U.S. government agencies 54,426 819 -0- 55,245
State and municipal securities 61,495 3,144 32 64,607
Mortgage-backed securities 229,553 3,552 323 232,782
Corporate bonds 46,656 884 -0- 47,540
--------- ------- -------- ---------
Total $ 418,156 $ 8,977 $ 355 $ 426,778
========= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: As of 3/31/99
-----------------------------------------------------------------
After 1 But After 5 But
SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10 Yrs Over 10 Yrs Total
----------- ------------ ------------- ----------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 2,005 $ -0- $ -0- $ -0- $ 2,005
U.S. government agencies 32,433 20,203 -0- -0- 52,636
State and municipal securities 20,260 -0- 160 -0- 20,420
Mortgage-backed securities* -0- 5,026 7,005 16,690 28,721
Assets-backed securities* -0- 6,436 -0- -0- 6,436
Federal Home Loan Bank stock 6,073 -0- -0- -0- 6,073
Corporate bonds -0- 30,728 4,635 -0- 35,363
------- ------- ------- ------- --------
Total $60,771 $62,393 $11,800 $16,690 $151,654
======= ======= ======= ======= ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (In thousands)
As of 3/31/99
-----------------------------------------------------------------------------
After 1 But After 5 But
SECURITIES HELD-TO-MATURITY: Within 1 Yr Within 5 Yrs Within 10 Yrs Over 10 Yrs Total
----------- ------------ ------------- ----------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $1,010 $ 25,009 $ -0- $ -0- $ 26,019
U.S. government agencies -0- 64,413 -0- -0- 64,413
State and municipal securities 1,252 9,521 22,263 37,917 70,953
Mortgage-backed securities* 767 10,267 71,968 148,102 231,104
Assets-backed securities* -0- 19,995 -0- -0- 19,995
Corporate bonds -0- 27,874 23,764 -0- 51,638
------ -------- -------- -------- --------
Total $3,029 $157,079 $117,995 $186,019 $464,122
====== ======== ======== ======== ========
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
LOANS
The Bank continued to experience good loan demand in the first quarter
of 1999. Total gross loans increased $45.2 million or 5% to $1,026.7 million
as of March 31, 1999, from $981.5 million at year-end 1998. Commercial real
estate loans, commercial loans and residential real estate loans, which added
$20.8 million, $17.4 million and $6.7 million, respectively, continued to
account for most of the increase. The favorable economic conditions in the
Company's marketplace helped the demand in the commercial real estate loans
and commercial loans. Continuous low interest rates aided in the growth of
residential real estate loans as refinancing activities and new purchases
continued. Real estate construction loans gained slightly in the first
quarter of 1999. The following table sets forth the classification of loans
by type and mix as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
As of 3/31/99 As of 12/31/98
TYPE OF LOANS: -------------------------- -------------------------
Amount Percentage Amount Percentage
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Commercial loans $ 387,962 38.6% $370,539 38.5%
Real estate mortgage loans 568,199 56.5 540,766 56.2
Real estate construction loans 41,963 4.2 40,738 4.3
Installment loans 28,380 2.8 29,165 3.0
Other loans 182 0.0 269 0.1
---------- --------
Total loans - Gross 1,026,686 981,477
Allowance for loan losses (16,840) (1.7) (15,970) (1.7)
Unamortized deferred loan fees (3,632) (0.4) (3,631) (0.4)
---------- ----- -------- -----
Total loans - Net $1,006,214 100.0% $961,876 100.0%
========== ===== ======== =====
</TABLE>
Although there have been no significant improvements in Asian economic
conditions, management continues to believe that the Company's financial
condition and results of operations have not been adversely impacted since
most of the Company's trade financing customers engage in import businesses.
Presently management does not consider the Company's loan portfolio to have
direct exposure to transfer risk.
RISK ELEMENTS OF THE LOAN PORTFOLIO
NON-PERFORMING ASSETS
Non-performing assets include loans past due 90 days or more and still
accruing interest, non-accrual loans, and OREO. Non-performing assets
increased slightly to $29.2 million at March 31,
12
<PAGE>
1999 compared with $28.2 million at year-end 1998. The increase of $1.0
million resulted from increases of $700,000 in loans past due 90 days and
$514,000 in OREO which were partially offset by a decrease of $200,000 in
non-accrual loans. As a percentage of total loans plus OREO, non-performing
assets decreased slightly to 2.82% at March 31, 1999 compared with 2.85% at
year-end 1998.
The non-performing loan coverage ratio, defined as the allowance for
loan losses to non-performing loans, increased from 89.86% at year-end 1998
to 92.16% as of March 31, 1999 primarily due to the increase in the allowance
for loan losses of $870,000. The following table presents the breakdown of
non-performing assets by categories as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
NON-PERFORMING ASSETS: As of 3/31/99 As of 12/31/98
------------- --------------
<S> <C> <C>
Accruing loans past due 90 days or more $ 5,383 $ 4,683
Non-accrual loans 12,890 13,090
------- -------
Total non-performing loans 18,273 17,773
Real estate acquired in foreclosure 10,968 10,454
------- -------
Total non-performing assets $29,241 $28,227
======= =======
Accruing troubled debt restructurings 4,629 4,642
Non-performing assets as a percentage of
total loans plus OREO 2.82% 2.85%
</TABLE>
The non-accrual loans of $12.9 million consisted mainly of $5.9 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>
(in thousands)
3/31/99 12/31/98
----------------------------- -----------------------------
Non-accrual Loan Balance
----------------------------------------------------------------
Commercial Commercial
Real Estate Commercial Real Estate Commercial
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Type of property:
Single/multi-family residence $ 348 $ 1,274 $ 348 $ 1,052
Commercial 5,379 2,683 5,533 2,613
Motel 186 30 1,501 30
UCC -0- 687 -0- -0-
TCD -0- 689 -0- 696
Others -0- -0- -0- 93
Unsecured -0- 146 -0- -0-
-------- -------- -------- --------
Total $ 5,913 $ 5,509 $ 7,382 $ 4,484
======== ======== ======== ========
Type of business:
Real estate development $ 186 $ 179 $ 451 $ 187
Real estate management 3,756 -0- 3,903 35
Wholesale 209 968 209 1,021
Retail -0- -0- -0- 38
Food/Restaurant -0- 973 -0- 1,008
Import 289 1,094 -0- 918
Motel -0- -0- 1,315 -0-
Investments 365 -0- 375 -0-
Industrial -0- 914 -0- 310
Clothing 348 161 348 161
Trading -0- 520 -0- -0-
Others 760 700 781 806
-------- -------- -------- --------
Total $ 5,913 $ 5,509 $ 7,382 $ 4,484
======== ======== ======== ========
</TABLE>
13
<PAGE>
Under the commercial real estate loan category as of March 31, 1999, the
$5.4 million balance in commercial loans represents five credits, 95% of
which were secured by first trust deeds on commercial buildings and
warehouses.
Under the commercial loan category as of March 31, 1999, the $2.7
million balance was comprised of 20 credits, a majority of which are less
than $200,000 each. The collateral on these credits include primarily first
trust deeds, as well as second and third trust deeds on commercial buildings
and warehouses.
Troubled debt restructurings stayed approximately the same at $4.6
million as of March 31, 1999 and at year-end 1998. All of these restructured
loans were current under their revised terms as of March 31, 1999.
There were no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of March 31, 1999.
OTHER REAL ESTATE OWNED
The Company's OREO, net of a valuation allowance of $562,000, was
carried at $11.0 million as of March 31, 1999, compared with OREO, net of a
valuation allowance of $494,000, being carried at $10.5 million at year-end
1998.
During the first quarter of 1999, the Company acquired one property in
the amount of $1.0 million and disposed of nine properties totaling $413,000
with a net gain of $546,000. The Bank owned 15 OREO properties at March 31,
1999 which include land, commercial buildings, a warehouse, a single family
residence, condominiums and a motel, all of which are located in Southern
California.
The Company maintains a valuation allowance for OREO properties in order
to reduce the carrying value of OREO to the estimated fair value of the
properties. Periodic evaluation is performed on each property and a
corresponding adjustment is made to the valuation allowance, if necessary.
Any decline in value is recognized by a corresponding increase to the
valuation allowance in the current period. Management provided approximately
$68,000 to the provision for OREO losses in the first quarter of 1999.
For the first quarter of 1999, the Bank recognized net income of
$453,000 from operating its OREO properties. In addition to the $546,000 net
gains on sales of OREO properties, the Bank received $67,000 rental income.
These amounts were partially offset by operating expenses of $92,000 and the
provision for OREO losses of $68,000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $16.8 million or 1.64% of
total loans as of March 31, 1999, compared with $16.0 million or 1.63% of
total loans at year-end 1998.
In view of the increasing outstanding loan balance, the Company
increased the provision for loan losses by $150,000 to $1.05 million in the
first quarter of 1999 compared with $900,000 in the same quarter a year ago.
The charge-offs of $387,000 in the first quarter of 1999 were primarily
related to commercial real estate loans. The following table presents
information relating to the allowance for loan losses for the periods
indicated:
14
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES: (Dollars in thousands)
As of 3/31/99 As of 12/31/98
------------- --------------
<S> <C> <C>
Balance at beginning of period $ 15,970 $ 15,379
Provision for loan losses 1,050 3,600
Loans charged-off (387) (3,519)
Recoveries of charged-off loans 207 510
-------- --------
Balance at end of period $ 16,840 $ 15,970
======== ========
Average loans outstanding during the period $964,177 $907,639
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.08% 0.33%
Provision for loan losses to average loans
outstanding during the period (annualized) 0.44% 0.40%
Allowance to non-performing loans at period-end 92.16% 89.86%
Allowance to total loans at period-end 1.64% 1.63%
</TABLE>
In determining the allowance for loan losses, management continues to
assess the risks inherent in the loan portfolio, the possible impact of known
and potential problem loans, and other factors such as collateral value,
portfolio composition, loan concentration, financial strength of borrower,
and trends in local economic conditions.
The Company's allowance for loan losses consists of specific allowances
and a general allowance. For impaired loans, the Company provides specific
allowances based on an evaluation of impairment and allocates a portion of
the general allowance to each impaired loan based on a loss percentage
assigned. The percentage assigned depends on a number of factors including
the current financial condition of the borrowers and guarantors, the
prevailing value of the underlying collateral, charge-off history,
management's knowledge of the portfolio and general economic conditions. The
remainder of the general allowance is determined by an assessment of the
overall quality of the non-impaired portion of the loan portfolio.
The following tables present a breakdown of impaired loans and the
related specific allowances and allocated general allowances as of the dates
indicated:
<TABLE>
<CAPTION>
(In thousands)
As of 3/31/99
---------------------------------------------------------
Allocated
Recorded Specific General Net
Investment Allowance Allowance Balance
---------- --------- --------- -------
<S> <C> <C> <C> <C>
Commercial $16,632 $ -0- $2,816 $13,816
Commercial real estate 11,817 31 1,668 10,118
Other 156 -0- 156 -0-
------- ------ ------ -------
Total $28,605 $ 31 $4,640 $23,934
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
As of 12/31/98
---------------------------------------------------------
Allocated
Recorded Specific General Net
Investment Allowance Allowance Balance
---------- --------- --------- -------
<S> <C> <C> <C> <C>
Commercial $ 9,379 $ -0- $1,565 $ 7,814
Commercial real estate 12,515 58 1,769 10,688
Other 55 -0- 55 -0-
------- ------ ------ -------
Total $21,949 $ 58 $3,389 $18,502
======= ====== ====== =======
</TABLE>
15
<PAGE>
Based on the Company's evaluation process and the methodology to
determine the level of the allowance for loan losses mentioned previously,
management believes the allowance level as of March 31, 1999 to be adequate
to absorb estimable and probable losses identified through its analysis.
INVESTMENTS IN REAL ESTATE
At the end of the first quarter of 1999, the Company invested $15
million for an approximate 40% limited partnership interest in a partnership
that was formed to invest in multi-family housing in California that will
qualify for Federal and/or State low income housing tax credits.
DEPOSITS
Total deposits increased $29.2 million or 2% from $1,560.4 million at
year-end 1998 to $1,589.6 million at March 31, 1999. Time deposits over
$100,000 ("Jumbo CD's"), which increased $23.9 million, continued to account
for most of the increase in total deposits. As a result, the ratio of core
deposits (defined as all deposits excluding Jumbo CD's and brokered deposits)
to total deposits declined from 60.32% at year-end 1998 to 59.55% at March
31, 1999. There were no brokered deposits as of March 31, 1999.
Comparing the first quarter of 1999 and 1998, average total deposits
grew $118.9 million or 8% from $1,449.1 million in 1998 to $1,568.0 million
in 1999. Average Jumbo CD's increased $68.3 million or 12% and average core
deposits increased $50.7 million or 6% with the most increase in average
demand deposits of $18.1 million.
Although the Bank's Jumbo CD portfolio continues to grow faster than
other types of deposits, management considers the Bank's Jumbo CD's generally
less volatile primarily due to the following reasons: 1) approximately 50% of
the Bank's Jumbo CD's have stayed with the Bank for more than two years; 2)
the Jumbo CD portfolio continued to be diversified with 3,781 individual
accounts averaging approximately $165,000 per account owned by 2,671
individual depositors as of January 29, 1999; and 3) this phenomenon of
having a relatively higher percentage of Jumbo CD's to total deposits exists
in most of the Asian American banks in the Company's market due to the fact
that the customers in this market tend to have a higher savings rate.
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. To discourage the growth in Jumbo CD's, management has continued
to make efforts in the following areas: 1) to offer non-competitive interest
rates paid on Jumbo CD's; 2) to promote transaction-based products; and 3) to
seek to diversify the customer base by branch expansion and/or acquisition as
opportunities arise.
The following tables display the deposit mix as of the dates and for the
periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
As of 3/31/99 As of 12/31/98
TYPES OF DEPOSITS: ------------------------- ------------------------
Amount Percentage Amount Percentage
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Demand $ 183,341 11.5% $ 178,068 11.4%
NOW accounts 114,541 7.2 114,982 7.4
Money market accounts 107,040 6.7 113,869 7.3
Savings deposits 206,653 13.0 207,365 13.3
Time deposits under $100,000 334,989 21.1 326,968 20.9
Time deposits of $100,000 or more 643,004 40.5 619,150 39.7
---------- ----- ----------- -----
Total deposits $1,589,568 100.0% $1,560,402 100.0%
========== ===== ========== =====
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
1st Qtr, 1999 1st Qtr, 1998
------------------------- -------------------------
AVERAGE DEPOSITS: Amount Percentage Amount Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Demand $ 179,305 11.4% $ 161,192 11.1%
NOW accounts 114,331 7.3 112,139 7.7
Money market accounts 111,218 7.1 95,354 6.6
Savings deposits 204,381 13.0 206,236 14.2
Time deposits under $100,000 333,162 21.3 316,752 21.9
Time deposits of $100,000 or more 625,643 39.9 557,377 38.5
---------- ----- ---------- -----
Total deposits $1,568,040 100.0% $1,449,050 100.0%
========== ====== ========== =====
</TABLE>
CAPITAL RESOURCES
Stockholders' equity amounted to $161.1 million or 8.91% of total assets
as of March 31, 1999, compared with $156.7 million or 8.80% of total assets
at year-end 1998. The increase of $4.4 million or 3% in stockholders' equity
was primarily from an addition of $6.5 million from net income, less
dividends paid of $1.6 million, and $356,000 from issuance of additional
common shares through the Dividend Reinvestment Plan. These amounts were
partially offset by a decrease of $843,000 in the net unrealized holding
gains on securities available-for-sale, net of tax.
The Company declared a cash dividend of $0.175 per common share in
January 1999 on 8,988,760 shares outstanding. In April 1999, the Company
increased its cash dividend by 20% to $.21 per common share. Total cash
dividends paid in 1999, including the $1.9 million paid in April 1999,
amounted to $3.5 million.
Management seeks to retain the Company's capital at a level sufficient
to support future growth, protect depositors and stockholders, and comply
with various regulatory requirements.
The Company and the Bank's regulatory capital continued to well exceed
the regulatory minimum requirements despite slight decreases in the ratios at
March 31, 1999. In addition, the capital ratios of the Bank place it in the
"well capitalized" category which is defined as institutions with total
risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital
ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio equal
to or greater than 5.0%.
The following tables present the Company and the Bank's capital and
leverage ratios as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
COMPANY
--------------------------------------------------------------
As of 3/31/99 As of 12/31/98
---------------------------- ----------------------------
Balance Percentage Balance Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 152,329(1) 11.42% $ 146,874(2) 11.44%
Tier 1 capital minimum requirement 53,381 4.00 51,372 4.00
---------- ------ ---------- ------
Excess $ 98,948 7.42% $ 95,502 7.44%
========== ====== ========== ======
Total capital (to risk-weighted assets) $ 169,013(1) 12.67% $ 162,844(2) 12.68%
Total capital minimum requirement 106,761 8.00 102,744 8.00
---------- ------ ---------- ------
Excess $ 62,252 4.67% $ 60,100 4.68%
========== ====== ========== ======
Risk-weighted assets $1,334,516 $1,284,296
Tier 1 capital (to average assets)
- Leverage ratio $ 152,329(1) 8.28% $ 146,874(2) 8.45%
Minimum leverage requirement 73,630 4.00 69,508 4.00
---------- ------ ---------- ------
Excess $ 78,699 4.28% $ 77,366 4.45%
========== ====== ========== ======
Total average assets $1,840,748 $1,737,710
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
BANK
--------------------------------------------------------------
As of 3/31/99 As of 12/31/98
---------------------------- ----------------------------
Balance Percentage Balance Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 146,966(1) 11.01% $ 141,834(2) 11.04%
Tier 1 capital minimum requirement 53,380 4.00 51,372 4.00
---------- ------ ---------- ------
Excess $ 93,586 7.01% $ 90,462 7.04%
========== ====== ========== ======
Total capital (to risk-weighted assets) $ 163,650(1) 12.26% $ 157,804(2) 12.29%
Total capital minimum requirement 106,761 8.00 102,744 8.00
---------- ------ ---------- ------
Excess $ 56,889 4.26% $ 55,060 4.29%
========== ====== ========== ======
Risk-weighted assets $1,334,507 $1,284,296
Tier 1 capital (to average assets)
- Leverage ratio $ 146,966(1) 7.98% $ 141,834(2) 8.16%
Minimum leverage requirement 73,630 4.00 69,508 4.00
---------- ------ ---------- ------
Excess $ 73,336 3.98% $ 72,326 4.16%
========== ====== ========== ======
Total average assets $1,840,742 $1,737,709
</TABLE>
(1) Excluding the unrealized holding gains on securities available-for-sale of
$346,000, and goodwill of $8,421,000.
(2) Excluding the unrealized holding gains on securities available-for-sale of
$1,189,000, and goodwill of $8,590,000.
LIQUIDITY AND MARKET RISK
LIQUIDITY
The Company's principal sources of liquidity are growth in deposits,
proceeds from the maturity or sale of securities and other financial
instruments, repayments from securities and loans and advances from Federal
Home Loan Bank. The Company's liquidity ratio (defined as net cash,
short-term and marketable securities to net deposits and short-term
liabilities) decreased moderately to 43.34% as of March 31, 1999, compared
with 46.04% at year-end 1998.
To supplement its liquidity needs, the Bank maintains a total credit
line of $45 million for Federal funds with three correspondent banks, a repo
line of $110 million with three brokerage firms and a retail certificate of
deposit line of approximately $100 million with another brokerage firm. The
Bank is also a shareholder of Federal Home Loan Bank (FHLB) which enables the
Bank to have access to lower cost FHLB financing when necessary. The Bank
obtained non-callable advances from FHLB totaling $30 million in the third
quarter of 1998 at fixed interest rates.
The Company had significant portion of its time deposits maturing within
one year or less as of March 31, 1999. Management anticipates that there may
be some outflow of these deposits upon maturity due to the keen competition
in the Company's marketplace. However, based on its historical runoff
experience, the Company expects the outflow will be minimal and can be
replenished through its normal growth in deposits.
Management believes all the above-mentioned sources will provide
adequate liquidity to the Company to meet its daily 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 operation of the Bank, and no other operating
business activities are
18
<PAGE>
proposed for Bancorp in the near future, management believes Bancorp's
liquidity generated from its prevailing sources are sufficient to meet its
operational needs.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. 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 and manages its interest rate risk through
analyzing the repricing characteristics of its loans, securities, and
deposits on an on-going basis. The primary objective is to minimize the
adverse effects of changes in interest rates on its earnings, and ultimately
the underlying market value of equity, while structuring the Company's
asset-liability composition to obtain the maximum spread. Management uses
certain basic measurement tools in conjunction with established risk limits
to regulate its interest rate exposure. Because of the limitation inherent in
any individual risk management tool, the Company uses both an interest rate
sensitivity analysis and a simulation model to measure and quantify the
impact to the Company's profitability or the market value of its assets and
liabilities.
The interest rate sensitivity analysis measures the Company's exposure
to differential changes in interest rates between assets and liabilities.
This analysis details the expected maturity and repricing opportunities
mismatch or sensitivity gap between interest-earning assets and
interest-bearing liabilities over a specified timeframe. A positive gap
exists when rate sensitive assets which reprice over a given time period
exceed rate sensitive liabilities. During periods of increasing interest
rates, net interest margin may be enhanced with a positive gap. A negative
gap exists when rate sensitive liabilities which reprice over a given time
period exceed rate sensitive assets. During periods of increasing interest
rates, net interest margin may be impaired with a negative gap. As of March
31, 1999, the Company was asset sensitive with a cumulative gap ratio of a
positive 12.48% within three months, and liability sensitive with a
cumulative gap ratio of a negative 15.14% within a 1-year period. This
compared with a positive 15.61% within three months, and a negative 11.48%
within a 1-year period as of year-end 1998.
Since interest rate sensitivity analysis does not measure the timing
differences in the repricing of asset and liabilities, the Company uses a
simulation model to quantify the extent of the differences in the behavior of
the lending and funding rates, so as to project future earnings or market
values under alternative interest scenarios.
The simulation measures the volatility of net interest income and net
portfolio value (defined as net present value of assets and liabilities)
under immediate rising or falling interest rate scenarios in 100 basis point
increments. The Company establishes a tolerance level in its policy to define
and limit interest income volatility to a change of plus or minus 30% when
the hypothetical rate change is plus or minus 200 basis points. When the
tolerance level is met or exceeded, the Company then seeks corrective action
after considering, among other things, market conditions, customer reaction
and the estimated impact on profitability. As of March 31, 1999, the
Company's interest income volatility was within the Company's established
tolerance level.
To manage and control its interest rate risk, the Company concentrates
its efforts on seeking to increase its yield-cost spread through growth and
competitive pricing. The Company 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 composition of the Company's
financial instruments that are sensitive to changes in interest rates have
not significantly changed since December 31, 1998.
19
<PAGE>
YEAR 2000 READINESS DISCLOSURES
THE COMPANY'S STATE OF READINESS
The "Year 2000" ("Y2K") problem is the result of computer programs being
written using two digits rather than four to identify a year in the date
field. Consequently, computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
issue, if not properly addressed, could cause systems to fail or create
erroneous results by or at the Year 2000.
Y2K issues impact both the Company's information technology ("IT")
systems, such as its computer hardware and software, and its non-IT systems,
such as its utilities, telephones, elevators, automated teller machines,
copiers, fax machines, security systems and emergency communications. Y2K
issues may also affect the Company's vendors, suppliers and customers.
The Company established a Y2K Committee (the "Committee") in 1997. The
Committee is made up of representatives from key sectors of the Company and
is assigned the responsibility of identifying, assessing and designing an
action plan to mitigate the risks that the Company may encounter relative to
the Y2K problem. The actions undertaken by the Committee to date include
formulating and initiating a company-wide program to identify and prioritize
all the mission critical systems (defined as systems to be vital to the
successful continuance of a core business activity) that may be affected by
the Y2K issue and developing and implementing a comprehensive remediation
program to provide that the Company's IT and non-IT systems are Y2K compliant
in time.
PROGRESS SCHEDULE
The progress of the Company's Y2K efforts is discussed below:
1. AWARENESS: During the awareness phase, the Company sought to educate
its employees and directors about the material Y2K issues facing the
Company and its vendors and customers. This phase was completed by
December 31, 1997.
2. ASSESSMENT: During the assessment phase, the Company inventoried its
mission critical IT and non-IT systems, and identified third-party
vendors and service providers whose failures to adequately address Y2K
issues would likely affect the financial condition or operations of the
Company. This phase was completed by June 30, 1998.
3. RENOVATION: During the renovation phase, which is being conducted
concurrent with the validation and implementation phases discussed
below, the Company is implementing hardware and software upgrades of
its material IT systems and seeking vendor certifications of Y2K
readiness of the Company's material existing systems and upgrades. This
phase was substantially completed by December 31, 1998, and is expected
to be finished by June 30, 1999.
4. VALIDATION: This phase consists of the testing of the Company's IT and
non-IT systems, and the testing of third-party vendors and service
providers for Y2K readiness. The Company has completed the testing of
its core computer systems. Testing of its other mission-critical IT
systems has also been substantially completed as of May 5, 1999 with
the exception of a newly installed system which is expected to be
completed by September 30, 1999.
The Company has received written assurances from its utilities and
telephone suppliers that the non-IT services or systems provided by
such suppliers will be Y2K compliant in time. The Company has also
obtained Y2K compliance certifications from its other material non-IT
system providers.
20
<PAGE>
As a part of the validation phase, the Company also seeks to evaluate
its major borrowers' Y2K readiness. Such evaluation began in June 1998,
is in its final stage and is expected to be completed by June 30, 1999.
5. IMPLEMENTATION: This phase began shortly after the validation phase.
The Company is progressing through the implementation phase by
determining the necessary remedial actions and establishing timelines
for alternative actions with respect to third-party vendors, service
providers or borrowers who are not yet Y2K compliant. The Company
believes its material operations will be Y2K compliant by June 30,
1999.
COSTS TO ADDRESS THE COMPANY'S Y2K ISSUES
The total cost of the Company's plan to address the Y2K issues is
currently estimated to be $750,000 which includes allocated human resource
expense and hardware and software upgrades. Hardware and software upgrades
will be depreciated over their useful lives in accordance with the Company's
policy. All other costs, including human resources, system testings,
consulting services, training and any other contingency expenses will be
expensed as incurred. The Company is funding these costs through operating
cash flows, and does not expect such costs to have a material adverse effect
on the Company's financial condition or results of operations. The amount
expensed as of May 5, 1999 was approximately $625,000.
THE RISKS TO THE COMPANY OF THE Y2K ISSUES
The Company relies on its core computer system for its information
technology needs, as it supports virtually all of the Company's deposits,
loans and accounting processing. A failure of the core computer system to be
Y2K compliant could cause substantial disruption to the Company's operations,
including the ability to conduct its business, to process transactions and to
provide customer services, and could have a material adverse financial impact
on the Company.
Essential third-party services upon which the Company depends, including
telecommunications and electrical power, could be interrupted if such
third-party servicers are not Y2K compliant. As a result, the Company would
be unable to operate normally which could have a material adverse financial
impact on the Company.
Borrowers may be unable to repay their loans and comply with other loan
covenants, if their businesses or operations are disrupted. Such failures
could impair the credit quality of the Company's loan portfolio and adversely
affect the amount and timing of the recognition of the anticipated revenue
related to these loans.
The inability of the Company's correspondent banks, such as the Federal
Reserve Bank, to provide currency or related services, could materially
impair the Company's liquidity, and therefore, affect the Company's ability
to fund loans and meet deposit withdrawals. Liquidity may also be adversely
affected if the Company experiences an increase in the outflow of deposits
due to depositors who may be concerned about the possibility of computer
failure.
Despite the Company's effort to address the Y2K problem, (1) the
Company's remediation efforts may not effectively address all Y2K issues or
achieve complete Y2K compliance; (2) the ultimate time and cost to prepare
the Company for Y2K compliance may substantially exceed the Company's current
estimates; (3) the systems of borrowers or other companies upon which the
company's operations rely may not be timely converted; and (4) depositors
concerned about the possibility of computer failure may seek to withdraw
their funds from the Company. In any such event, the Company's financial
condition, results of operations and liquidity could be materially and
adversely affected.
21
<PAGE>
THE COMPANY'S CONTINGENCY PLANS
As a precautionary measure, the Company has formed a Y2K contingency
team to address key functions of the Company and to determine alternate
resources and procedures should the normal business operations fail. The
Company cannot, at this time, determine whether the consequences of any Y2K
failure will have a material impact on the Company's operations, liquidity or
financial condition. The contingency plan covers critical dates in 1999 and
2000. The contingency procedures will be tested and will continue to be
revised based upon the test results. Currently the contingency procedures are
being validated by the Company's Internal Audit Department and the
contingency plan is on schedule to meet the expected timeline of June 30,
1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning market risk, see "Liquidity and Market Risk--
Market Risk" in Management's Discussion and Analysis of Financial Condition
and Results of Operations above on page 19.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, including its wholly-owned subsidiary, Cathay Bank, has been
a party to ordinary routine litigation incidental to various aspects of its
operations.
Management is not currently aware of any other litigation that is
expected to have material adverse impact on the Company's consolidated
financial condition, or the results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 1999, there were no reportable events.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
27 Financial Data Schedule
Form 8-K:
None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cathay Bancorp, Inc.
-------------------------------
(Registrant)
Date: May 14, 1999 By /s/ DUNSON K. CHENG
------------ -------------------------------
Dunson K. Cheng
Chairman and President
Date: May 14, 1999 by /s/ ANTHONY M. TANG
------------ -------------------------------
Anthony M. Tang
Chief Financial Officer
24
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