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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, 1998
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[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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. [ X ]
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 5, 1999 was $286,714,779 (computed on the basis of
$39.50 per share, which was the last sale price of the Company's Common Stock
reported by the Nasdaq National Market on March 5, 1999).*
The number of shares outstanding of each of the Registrant's classes of
Common Stock as of March 5, 1999: Common Stock, $.01 par value - 8,998,396
shares
DOCUMENTS INCORPORATED BY REFERENCE
- - Portions of Registrant's definitive proxy materials relating to its 1999
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, 1998 (referred to below as "Annual Report to Stockholders")
are incorporated by reference into Parts I, II and IV.
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* 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.
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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
Cathay Bancorp, Inc. ("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.
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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, Millbrae and Richmond 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 Chinese, Vietnamese and English speaking customers.
Cathay Bank conducts substantially the same business operations as a
typical commercial bank, which is to accept checking, savings, and time
deposits, and to make commercial, real estate, personal, home improvement,
automobile and other installment and term loans. From time to time, the Bank
also invest available funds in other interest earning assets, such as U.S.
Treasury securities, U.S. government agencies securities, state and municipal
securities, mortgage-backed securities, asset-backed securities and corporate
bonds. 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. To accommodate those customers who cannot conduct banking businesses
during normal banking hours, the Bank has extended its banking hours to include
Saturdays for all branches and Sundays for certain branches. In addition, the
operations of the drive-up and walk-up facilities are extended past 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.
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SELECTED FINANCIAL DATA
Information concerning changes in 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.
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
amortized cost and estimated 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 21 through
23 of the Annual Report to Stockholders and is incorporated herein by reference.
NON-PERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES. Information concerning
non-performing loans, allowance for loan losses, loans charged-off, loan
recoveries and other real estate owned is included on pages 23 through 28 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 28 and 29 of the Annual Report to Stockholders and is
incorporated herein by reference.
RETURN ON EQUITY AND ASSETS
Information concerning the return on assets, return on stockholders'
equity, equity to assets ratio and dividend payout ratio is included on page 13
of the Annual Report to Stockholders and is incorporated herein by reference.
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.
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.
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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 is located at 146 Sung Chiang Road,
Sixth Floor, Suite 3, Taipei, Taiwan 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, 1998.
As of December 31, 1998, CIC owned one property with a net equity
investment of $641,558. 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. The property is currently in escrow and the sale is expected to
close in April 1999.
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.
Furthermore, 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, the parking lot
lease and the lease for the CIC Taipei office, the Bank leases certain other
premises. The following table depicts the location, square footage, purpose,
lease term and monthly payment of each lease.
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<TABLE>
<CAPTION>
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Location Sq. ft. Purpose Lease term Monthly payment
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<S> <C> <C> <C> <C>
767 N. Hill Street, Los Angeles 8,912 Administrative offices 2/1/98 - 1/31/01 $8,912
(Rm 305-306, 308-309, 313-315,
320)*
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767 N. Hill Street, Los Angeles 1,518 Administrative offices 2/1/98 - 1/31/01 $1,800
(Rm 301-302)
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16025 Gale Avenue, Suite B-1, 4,483 Hacienda Heights branch 1/96 - 6/99 with two $4,842
City of Industry office 5-year options
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2010 Tully Road, 4,800 San Jose branch office 3/96 - 4/06 with two $8,640
San Jose 5-year options**
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710 Webster Street, Oakland 5,000 Oakland branch office 9/96 - 9/01 $6,000
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47998 Warm Springs Blvd., 2,400 Fremont branch office 10/97 - 9/00 with $3,471
Fremont one more 3-year
option
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15323 Culver Drive, Irvine 4,450 Irvine branch office 4/89 - 4/09 with two $6,089
5-year options
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1095 El Camino Real, Millbrae 3,441 Millbrae branch office 1/95 - 12/99 with $7,002
two 5-year options
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800 N. Hill Street, 8,707 Hill/Alpine branch office 2/99 - 2/04 $5,017
Los Angeles
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43 E. Valley Blvd., Alhambra 1,976 Valley/Stoneman branch 8/96 - 8/01 with $4,412
office three 5-year options
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3288 Pierce Street, 2,535 Berkeley/Richmond branch 10/97 - 10/03 with $6,338
Suite D-101, Richmond office two 5-year options
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420 W. Valley Blvd., 2,000 Previous Valley/Prospect 2/96 - 2/01 $4,193 (sublease
San Gabriel branch office (subleased 4/1/99 rental income $2,500)
-2/14/01)
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Tak Shing House #103, 20 Des 580 Hong Kong representative 3/1/98 - 2/29/00 $3,200 approximately
Voeux Road Central, Hong Kong office at the exchang rate
in effect at 12/31/98
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</TABLE>
* The lease referred to here has been entered into between the Bank and T.C.
Realty, Inc., a California corporation owned by the spouse of Mr. Patrick Lee, a
director of Bancorp and the Bank. Management believes that the lease is on
terms at least as favorable to the Bank as would have existed in a transaction
with an unrelated third party.
** Cathay Bank has a one-time right to cancel the lease after the fifth year
upon the payment of $55,500 in consideration.
The Bank currently operates 18 domestic branch offices (one domestic branch
office is to be closed in the second quarter of 1999), 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.
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As of December 31, 1998, the Bank's investment in premises and equipment
totaled $25,826,808. See also Note 8 to the Consolidated Financial Statements on
page 52 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 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 on week
days, Saturday banking, and in certain locations Sunday banking, an internet
website 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 12 Asian-American banks and two other major
financial institutions 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, 1998, the Company and Cathay Bank (including CIC)
employed approximately 501 persons, including 114 officers. None of the
employees are represented by a union. Management believes that its relations
with employees 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.
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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 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 30 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, 1998 with a leverage ratio of 8.45%.
The tables presenting the Company and the Bank's risk-based capital and
leverage ratios as of December 31, 1998 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.
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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 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 1998 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
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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.
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
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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 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
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 opportunies 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 59,913 shares or $5,991,300 as of
December 31, 1998.
12
<PAGE>
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, 1998, the
maximum dividend that Cathay Bank could have declared, subject to regulatory
approval, was $41,421,000. 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.
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 1998.
13
<PAGE>
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 1 and under the caption "Additional Information" on
page 68 of the Annual Report to Stockholders is incorporated herein by
reference.
(b) Holders
As of March 5, 1999, there were approximately 1,800 holders of record
of the Company's Common Stock.
(c) Dividends
The information under the captions "Market for Cathay Bancorp, Inc.
Stock" on page 1 and "Capital Resources" on page 30 and in Note 11
to the Consolidated Financial Statements on pages 55 and 56 of the
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 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
Annual Report to Stockholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the captions "Liquidity and Market Risk" and
"Interest Rate Sensitivity" on pages 31 through 33 of the 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 64 of the 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>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Election of Directors" on pages 3
through 7 of the Company's definitive Proxy Statement relating to its 1999
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 84, 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 54, 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 83, 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 45, Executive Vice President of Bancorp since
1994; Senior Executive Vice President of Cathay Bank since December 1998;
Executive Vice President of Cathay Bank from 1994 to December 1998; 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.
John Chen, age 65, Executive Vice President for Northern California
operations of Cathay Bank since January 1998. Mr. Chen was employed by Bank
of America as a Senior Vice President and District Manager from 1993 to
1996 and in various capacities from 1969 to 1993.
Irwin Wong, age 51, Executive Vice President for Southern California
Branch Administration of Cathay Bank since December 1998; Senior Vice
President for Branch Administration of Cathay Bank from 1989 to November
1998; 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.
Milly W. Joe, age 61, Senior Vice President and Cashier of Cathay Bank
from 1989 to February 1999; Vice President and Cashier of Cathay Bank from
1981 to 1989; and various capacities from 1968 to 1981. Ms. Joe retired in
February, 1999.
Elena Chan, age 47, 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 23, 1998 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
15
<PAGE>
time, the officer resigns or is removed or is otherwise disqualified from
serving as an officer of Bancorp or Cathay Bank.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 18 of the Company's Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Information Concerning Management
Compensation" and "Compensation Committee Interlocks and Insider Participation"
on pages 9 through 12 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 7 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 7 and "Certain Transactions" on pages 18 and 19 of the Company's Proxy
Statement is incorporated herein by reference.
16
<PAGE>
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
Financial Statements
of
Cathay Bancorp, Inc. and Subsidiary*
<TABLE>
<CAPTION>
Page No. in
Annual Report
-------------
<S> <C>
Consolidated Statements of Condition
as of December 31, 1998 and 1997 39
Consolidated Statements of Income and Comprehensive Income
for each of the years in the 3-year period
ended December 31, 1998 40
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the 3-year period
ended December 31, 1998 41
Consolidated Statements of Cash Flows
for each of the years in the 3-year period
ended December 31, 1998 42
Notes to Consolidated Financial Statements 43-63
Independent Auditors' Report of KPMG LLP 64
</TABLE>
- -----------------------
*Parent-only condensed financial information of the Company as of December
31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 is
included in Note 16 to the Consolidated Financial Statements on pages 61 and 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>
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 Amended and Restated Cathay Bank Employee Stock Ownership Plan and
Trust, each amended by the First Amendment, and Second Amendment
thereto. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Amendment No.1 to Annual
Report on Form 10-K/A for the year ended December 31, 1998 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 Equity Incentive Plan of the Company. Previously filed with the
Securities and Exchange Commission as an exhibit to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference.*
13.1 Certain portions of the Registrant's 1998 Annual Report to
Stockholders incorporated herein by reference.
22.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27 Financial Data Schedule
* Management compensatory plan
(b) Reports on Form 8-K
There were no reportable events.
18
<PAGE>
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 29, 1999 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 29, 1999
Dunson K. Cheng the Board and Director
(principal executive officer)
/s/ Anthony M. Tang Executive Vice President, March 29, 1999
- ------------------------------------ Chief Financial Officer
Anthony M. Tang /Treasurer and Director
(principal financial officer)
(principal accounting officer)
/s/ Ralph Roy Buon-Cristiani Director March 29, 1999
- ------------------------------------
Ralph Roy Buon-Cristiani
/s/ Kelly L. Chan Director March 29, 1999
- ------------------------------------
Kelly L. Chan
/s/ Michael M.Y. Chang Director March 29, 1999
- ------------------------------------
Michael M.Y. Chang
[SIGNATURES CONTINUED]
19
<PAGE>
[SIGNATURES CONTINUED]
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ George T.M. Ching Vice Chairman of the March 29, 1999
- ------------------------------------ Board and Director
George T.M. Ching
/s/ Wing K. Fat Director March 29, 1999
- ------------------------------------
Wing K. Fat
/s/ Patrick S.D. Lee Director March 29, 1999
- ------------------------------------
Patrick S.D. Lee
/s/ Chi-Hung Joseph Poon Director March 29, 1999
- ------------------------------------
Chi-Hung Joseph Poon
/s/ Thomas G. Tartaglia Director March 29, 1999
- ------------------------------------
Thomas G. Tartaglia
/s/ Wilbur K. Woo Secretary of the Board March 29, 1999
- ------------------------------------ and Director
Wilbur K. Woo
</TABLE>
20
<PAGE>
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 Amended and Restated Cathay Bank Employee Stock Ownership Plan and
Trust, each amended by the First Amendment, and Second Amendment
thereto. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Amendment No.1 to Annual
Report on Form 10-K/A for the year ended December 31, 1998 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 Equity Incentive Plan of the Company. Previously filed with the
Securities and Exchange Commission as an exhibit to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference.*
13.1 Certain portions of the Registrant's 1998 Annual Report to
Stockholders incorporated herein by reference.
22.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
* Management compensatory plan
(b) Reports on Form 8-K
There were no reportable events.
<PAGE>
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended December 31, 1998 and 1997 Increase
(dollars in thousands, except per share data) 1998 1997 Amount Percentage
- --------------------------------------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FOR THE YEAR
Net income $ 24,579 $ 20,108 $ 4,471 22.23%
Basic net income per common share 2.74 2.26 0.48 21.24
Cash dividends paid per common share 0.700 0.625 0.075 12.00
---------- ---------- ----------- ----------
AT YEAR-END
Securities $ 658,084 $ 566,494 $ 91,590 16.17%
Loans, net 961,876 846,151 115,725 13.68
Assets 1,780,898 1,622,462 158,436 9.77
Deposits 1,560,402 1,449,121 111,281 7.68
Stockholders' equity 156,652 135,877 20,775 15.29
Book value per common share 17.43 15.20 2.23 14.67%
---------- ---------- ----------- ----------
PROFITABILITY RATIOS
Return on average assets 1.44% 1.29%
Return on average stockholders' equity 17.00% 15.63%
---------- ---------- ----------- ----------
CAPITAL RATIOS
Tier 1 capital ratio 11.44% 11.73%
Total capital ratio (1) 12.68% 12.98%
Leverage ratio 8.45% 7.94%
---------- ---------- ----------- ----------
</TABLE>
(1) TOTAL CAPITAL RATIO REPRESENTS STOCKHOLDERS' EQUITY PLUS THE ALLOWANCE FOR
LOAN LOSSES ALLOWABLE AS A PERCENTAGE OF RISK-WEIGHTED ASSETS.
MARKET FOR CATHAY BANCORP, INC. STOCK
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market(SM) under the symbol: "CATY". During 1998, total trading
volume was approximately 1,793,000, and the prices ranged from a high of
$48.00 to a low of $27.00. The approximate number of stockholders at year-end
1998 was 1,800. The Company paid an aggregate per share cash dividend of
$0.70 in 1998 and $0.625 in 1997. 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>
1998
First Quarter $ 39.125 $ 32.000 $ 35.750 338,373
Second Quarter 48.000 35.500 46.500 527,920
Third Quarter 46.500 27.375 36.500 601,905
Fourth Quarter 41.563 27.000 41.000 325,019
--------- --------- -------- -------
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
--------- --------- -------- -------
</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.
1 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands, except share and per share data) 1998 1997 1996 1995 1994
----------- ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT(1)
Interest income $ 123,309 $ 111,978 $ 86,098 $ 76,223 $ 61,631
Interest expense 57,225 50,874 39,209 31,282 20,033
Net interest income before ----------- ------------ ---------- --------- -----------
provision for loan losses 66,084 61,104 46,889 44,941 41,598
Provision for loan losses 3,600 3,600 3,600 7,300 7,755
----------- ------------ ---------- --------- -----------
Net interest income after
provision for loan losses 62,484 57,504 43,289 37,641 33,843
Securities gains 43 41 22 611 63
Other non-interest income 8,093 6,734 5,837 5,610 5,781
Non-interest expense 30,065 30,928 28,013 27,617 26,139
----------- ------------ ---------- --------- -----------
Income before income
tax expense 40,555 33,351 21,135 16,245 13,548
Income tax expense 15,976 13,243 7,819 5,624 4,034
----------- ------------ ---------- --------- -----------
Net income $ 24,579 $ 20,108 $ 13,316 $ 10,621 $ 9,514
----------- ------------ ---------- --------- -----------
----------- ------------ ---------- --------- -----------
Net income per common share
Basic $ 2.74 $ 2.26 $ 1.66 $ 1.36 $ 1.23
Diluted $ 2.74 $ 2.26 $ 1.66 $ 1.36 $ 1.23
Cash dividends paid per $ 0.700 $ 0.625 $ 0.600 $ 0.600 $ 0.600
common share
WEIGHTED AVERAGE COMMON SHARES 8,967,188 8,915,936 8,017,398 7,805,339 7,724,752
----------- ------------ ---------- --------- -----------
STATEMENT OF CONDITION
Securities available-for-sale $ 239,928 $ 216,158 $ 383,391 $ 243,252 $ 75,074
Securities held-to-maturity 418,156 350,336 210,129 174,377 180,082
Net loans (2) 961,876 846,151 744,384 542,995 569,363
Total assets 1,780,898 1,622,462 1,504,329 1,087,400 941,051
Deposits 1,560,402 1,449,121 1,364,740 984,227 845,715
Securities sold under agreements to
repurchase 16,436 23,419 10,000 1,500 449
Advances from Federal Home Loan Bank 30,000 -- -- -- 4,000
Other liabilities 6,561 3,749 4,490 3,490 2,290
Stockholders' equity 156,652 135,877 118,446 94,529 85,385
----------- ------------ ---------- --------- -----------
COMMON STOCK DATA
Shares of common stock outstanding 8,988,760 8,941,743 8,878,144 7,867,164 7,798,550
Book value per share $ 17.43 $ 15.20 $ 13.34 $ 12.02 $ 10.95
----------- ------------ ---------- --------- -----------
PROFITABILITY RATIOS
Return on average assets 1.44% 1.29% 1.05% 1.05% 1.06%
Return on average
stockholders' equity 17.00 15.63 13.06 11.68 11.43
Dividend payout ratio 25.55 27.65 36.14 44.12 48.78
Average equity to average assets ratio 8.47 8.25 8.04 8.97 9.25
Efficiency ratio 40.51 45.20 53.11 53.98 55.10
----------- ------------ ---------- --------- -----------
</TABLE>
(1) INCLUDES THE OPERATING RESULTS OF FIRST PUBLIC SAVINGS BANK, F.S.B.
SUBSEQUENT TO THE NOVEMBER 18, 1996, ACQUISITION DATE.
(2) NET LOANS REPRESENTS GROSS LOANS NET OF LOAN PARTICIPATIONS SOLD,
UNAMORTIZED DEFERRED LOAN FEES AND THE ALLOWANCE FOR LOAN LOSSES.
13 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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. (the "Bancorp") 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. In 1996, the former First Public
Savings Bank, F.S.B.'s ("FPSB") results are included from the acquisition date
of November 18, 1996.
The following discussion, and other sections of this report, include
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 the other factors discussed in "Factors that May
Affect Future Results" below. 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 The Company reported net income of $24.6 million or
$2.74 per basic common share for 1998, compared with $20.1 million or $2.26
per basic common share for 1997 and $13.3 million or $1.66 per basic common
share for 1996.
1998 net income represents an increase of $4.5 million or 22% over 1997
attributable primarily to increases of $5.0 million in net interest income and
$1.4 million in non-interest income. Efficiency ratio, defined as non-interest
expense divided by net interest income before provision for loan losses plus
non-interest income, improved from 45.16% in 1997 to 40.51% in 1998. The return
on average assets was 1.44% for 1998 and 1.29% for 1997 and the return on
average stockholders' equity was 17.00% for 1998 and 15.63% for 1997.
The increase of $6.8 million or 51% in 1997 net income over 1996 was
primarily a result of the growth and related efficiencies from the acquisition
of FPSB in November 1996, which was evidenced by a 33% increase in net interest
income after provision for loan losses and a decrease in the efficiency ratio
from 53.11% to 45.16%. The return on average assets was 1.29% for 1997 and 1.05%
for 1996 and the return on average stockholders' equity was 15.63% for 1997 and
13.06% for 1996.
NET INTEREST INCOME Net interest income before provision for loan losses totaled
$66.1 million in 1998, compared with $61.1 million in 1997 and $46.9 million in
1996. On a taxable equivalent basis, net interest income totaled $67.3 million
in 1998, $62.2 million in 1997 and $48.0 million in 1996.
Comparing 1998 with 1997, net interest income increased $5.0 million or 8%
primarily due to an increase of $159.5 million in average interest-earning
assets, from $1,408.9 million to $1,568.4 million. Of the $159.5 million
increase, loans (net of deferred loan fees and the allowance for loan losses)
accounted for $115.5 million, Federal funds sold and securities purchased under
agreements to resell accounted for $27.6 million, investment securities
(including available-for-sale and held-to-maturity) and Federal Home Loan Bank
(FHLB) stock accounted for $15.7 million and deposits with other banks accounted
for $0.7 million. The increase in average interest earning assets was funded by:
1) an increase in average deposits of $86.2 million, of which $68.5 million were
interest bearing and $17.7 million were non-interest bearing; 2) borrowed funds
(including securities sold under agreements to repurchase, advances from FHLB
and others) of $51.6 million, of which $44.4 million were short-term and $7.2
million were long-term; and 3) cash and other sources of $26.6 million.
14 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
The increase in average loans contributed to an additional $8.9 million in
net interest income, which was partially offset by a decrease of 21 basis points
in the average yield from 9.34% to 9.13%. The Federal Reserve Board made three
consecutive cuts in the Federal funds rate of 25 basis points each in the last
two quarters of 1998. As a result, the Company's average reference lending rate
decreased nine basis points to 8.60% in 1998. In addition, the Company's average
yield on loans decreased due to competitiveness in the marketplace and an
increase in the residential mortgages as a percentage to the Company's total
loan portfolio. Meanwhile, yields on all other categories of interest-earning
assets decreased due to the prevailing interest rate environment, causing a nine
basis point decrease in the average yield on overall interest-earning assets
from 8.03% in 1997 to 7.94% in 1998.
Conversely, cost of funds increased 11 basis points from 4.04% in 1997 to
4.15% in1998. This was primarily due to the repricing of time deposits in
response to the market rate changes. Average time deposits increased $80.1
million to $900.4 million in 1998 while average other interest-bearing deposits
decreased $11.7 million. Consequently, net interest margin (defined as taxable
equivalent net interest income to average interest earning assets) was reduced
by 12 basis points from 4.42% in 1997 to 4.30% in 1998.
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 loans accounted for $212.5 million, securities (including
available-for-sale and held-to-maturity) and FHLB stock accounted for $86.6
million, and Federal funds sold and securities purchased under agreements to
resell accounted for $14.1 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 in 1997 compared to 1996, which was slightly offset by a decrease of $1.1
million due to changes in rates. 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 residential real estate loans from the acquisition of FPSB
in November 1996 ("the acquisition"), and to a lesser extent, the competition in
the Company's marketplace. Average residential real estate 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 increased four
basis points from 4.38% in 1996 to 4.42% in 1997.
15 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
CHANGES DUE TO RATE AND VOLUME(1)
<TABLE>
<CAPTION>
1998 - 1997 1997 - 1996
Increase (Decrease) in Increase (Decrease) in
Net Interest Income Due To: Net Interest Income Due To:
Changes in Changes in Total Changes in Changes in Total
(in thousands) Rate Volume Change Rate Volume Change
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Federal funds sold and securities
purchased under
agreements to resell $ (29) $ 1,564 $ 1,535 $ 136 $ 796 $ 932
Securities available-for-sale
(Taxable) (1,252) (2,956) (4,208) 256 170 426
Securities available-for-sale
(Nontaxable) (2) (10) 25 15 (1) 11 10
Securities held-to-maturity
(Taxable) (168) 4,988 4,820 385 5,821 6,206
Securities held-to-maturity
(Nontaxable) (2) (129) 623 494 (91) 142 51
Deposits with other banks (11) 28 17 -- 13 13
Federal Home Loan Bank stock (218) 210 (8) 8 112 120
Loans (3) (1,700) 10,551 8,851 (1,789) 19,916 18,127
---------- --------- --------- --------- --------- ---------
Total $ (3,517) $ 15,033 $ 11,516 $ (1,096) $ 26,981 $ 25,885
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
INTEREST BEARING LIABILITIES
Savings deposits,
NOW accounts and others $ (411) $ (220) $ (631) $ (213) $ 1,625 $ 1,412
Time deposits 165 4,099 4,264 382 9,528 9,910
Securities sold under
agreements to repurchase (15) 2,368 2,353 2 456 458
Other borrowed funds (1) 4 3 (1) (2) (3)
Advances from Federal
Home Loan Bank -- 333 333 -- -- --
Mortgage indebtedness 6 23 29 (48) (64) (112)
---------- --------- --------- --------- --------- ---------
Total $ (256) $ 6,607 $ 6,351 $ 122 $ 11,543 $ 11,665
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
Change in net interest income $ (3,261) $ 8,426 $ 5,165 $ (1,218) $ 15,438 $ 14,220
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
</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) 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 EFFECTIVE FEDERAL INCOME TAX RATE OF 35%.
(3) AMOUNTS ARE NET OF UNAMORTIZED DEFERRED LOAN FEES OF $3,631,000, $3,786,000
AND $3,743,000 IN 1998, 1997, AND 1996, RESPECTIVELY.
INTEREST EARNING ASSET MIX
<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1997 Amount Percentage
Percentage Percentage Changed Changed
of Total Interest of Total Interest from from
(dollars in thousands) Amount Earning Assets Amount Earning Assets 1997 to 1998 1997 to 1998
----------------------- ----------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
TYPES OF INTEREST EARNING ASSETS
Federal funds sold and securities
purchased under
agreements to resell $ 17,000 1.04% $ 67,000 4.52% $ (50,000) (74.63)%
Securities available-for-sale 239,928 14.64 216,158 14.60 23,770 11.00
Securities held-to-maturity 418,156 25.52 350,336 23.66 67,820 19.36
Deposits with other banks 1,376 0.08 1,056 0.07 320 30.30
Loans (net of unamortized
deferred loan fees and
allowance for loan losses) 961,876 58.72 846,151 57.15 115,725 13.68
----------- ------ ---------- ------ ---------- --------
Total interest earning assets $ 1,638,336 100.00% $1,480,701 100.00% $ 157,635 10.65%
----------- ------ ---------- ------ ---------- --------
----------- ------ ---------- ------ ---------- --------
</TABLE>
16 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Average outstanding $ 69,915 $ 42,260 $ 28,150
Average yield 5.65% 5.72% 5.27%
Amount of interest earned $ 3,950 $ 2,415 $ 1,483
---------- ----------- -----------
SECURITIES AVAILABLE-FOR-SALE, TAXABLE
Average outstanding $ 219,556 $ 289,715 $ 291,419
Average yield 5.98% 5.99% 5.81%
Amount of interest earned $ 13,135 $ 17,343 $ 16,917
---------- ----------- -----------
SECURITIES AVAILABLE-FOR-SALE, NONTAXABLE
Average outstanding $ 499 $ 169 $ 85
Average yield (2) 6.73% 11.24% 10.59%
Amount of interest earned $ 34 $ 19 $ 9
---------- ----------- -----------
SECURITIES HELD-TO-MATURITY, TAXABLE
Average outstanding $ 315,257 $ 237,881 $ 153,393
Average yield 6.45% 6.52% 6.07%
Amount of interest earned $ 20,340 $ 15,520 $ 9,314
---------- ----------- -----------
SECURITIES HELD-TO-MATURITY, NONTAXABLE
Average outstanding $ 48,757 $ 40,930 $ 39,020
Average yield (2) 7.92% 8.34% 8.61%
Amount of interest earned $ 3,906 $ 3,412 $ 3,361
---------- ----------- -----------
FEDERAL HOME LOAN BANK STOCK
Average outstanding $ 5,841 $ 5,506 $ 3,636
Average yield 5.75% 6.24% 6.16%
Amount of interest earned $ 336 $ 344 $ 224
---------- ----------- -----------
DEPOSITS WITH OTHER BANKS
Average outstanding $ 958 $ 243 $ 50
Average yield 3.44% 6.58% 6.00%
Amount of interest earned $ 33 $ 16 $ 3
---------- ----------- -----------
LOANS (1)
Average outstanding $ 907,627 $ 792,176 $ 579,634
Average yield (5) 9.13% 9.34% 9.64%
Amount of interest earned (5) $ 82,866 $ 74,015 $ 55,888
---------- ----------- -----------
TOTAL INTEREST EARNING ASSETS
Average outstanding $1,568,410 $ 1,408,880 $ 1,095,387
Average yield (5) 7.94% 8.03% 7.96%
Amount of interest earned (5) $ 124,600 $ 113,084 $ 87,199
---------- ----------- -----------
</TABLE>
17 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES, CONTINUED
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
INTEREST BEARING LIABILITIES:
Savings Deposits (3)
Average outstanding $ 417,105 $ 428,763 $ 348,941
Average rate paid 1.92% 2.01% 2.07%
Amount of interest paid or accrued $ 8,006 $ 8,637 $ 7,225
---------- ---------- ----------
TIME DEPOSITS
Average outstanding $ 900,441 $ 820,310 $ 632,211
Average rate paid 5.11% 5.09% 5.03%
Amount of interest paid or accrued $ 46,000 $ 41,736 $ 31,826
---------- ---------- ----------
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE
Average outstanding $ 53,104 $ 8,779 $ 502
Average rate paid 5.34% 5.51% 4.98%
Amount of interest paid or accrued $ 2,836 $ 483 $ 25
---------- ---------- ----------
OTHER BORROWED FUNDS
Average outstanding $ 181 $ 82 $ 109
Average rate paid 3.87% 4.88% 6.42%
Amount of interest paid or accrued $ 7 $ 4 $ 7
---------- ---------- ----------
ADVANCES FROM FEDERAL HOME LOAN BANK
Average outstanding $ 6,959 $ -- $ --
Average rate paid 4.79% -- --
Amount of interest paid or accrued $ 333 $ -- $ --
---------- ----------- -----------
MORTGAGE INDEBTEDNESS
Average outstanding $ 440 $ 190 $ 759
Average rate paid (6) 9.77% 7.37% 16.60%
Amount of interest paid or accrued (6) $ 43 $ 14 $ 126
---------- ----------- -----------
TOTAL INTEREST BEARING LIABILITIES
Average outstanding $1,378,230 $ 1,258,124 $ 982,522
Average rate paid 4.15% 4.04% 3.99%
Amount of interest paid or accrued $ 57,225 $ 50,874 $ 39,209
---------- ----------- ----------
Net interest earnings (7) $ 67,375 $ 62,210 $ 47,990
Net yield on interest earnings assets (4) (7) 4.30% 4.42% 4.38%
Yield spread (7) 3.79% 3.99% 3.97%
---------- ----------- ----------
</TABLE>
(1) NONACCRUAL 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.
(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 EARNING ASSETS AND YIELD SPREAD HAVE
BEEN ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS USING AN EFFECTIVE
FEDERAL INCOME TAX RATE OF 35%.
18 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NON-INTEREST INCOME Non-interest income totaled $8.1 million in 1998,
representing an increase of $1.4 million or 20% over the $6.8 million in 1997.
Factors contributing to the increase in 1998 non-interest income included: 1) an
increase of $441,000 in letter of credit commissions due to increased
transaction volume; 2) an increase of $424,000 in service charges to deposit
accounts due to fee increases; 3) an increase of $166,000 of rebate income
earned in outsourcing the issuing and processing of cashier's checks and money
orders; and 4) higher income from documentation and charges related to loans,
wire transfers, foreign exchange transactions, safe deposit boxes and
miscellaneous items totaling approximately $342,000.
1997 non-interest income of $6.8 million represented an increase of
$916,000 or 16% over the $5.9 million in 1996. This was due primarily to: 1) an
increase of $549,000 in service charges resulting substantially from the
addition of FPSB's transaction accounts through the acquisition; 2) an increase
of $159,000 of rebate income earned in outsourcing the issuing and processing of
cashier's checks and money orders; 3) an increase of $122,000 in wire transfer
fees; and 4) an increase in fee income from documentation and charges related to
loans and safe deposit boxes.
NON-INTEREST EXPENSE Non-interest expense decreased slightly from $30.9 million
in 1997 to $30.0 million in 1998. The decrease of $863,000 or 3% resulted
primarily from a decrease in net OREO expense by $1.6 million and occupancy
expense by $385,000, which was partially offset by an increase of $1.0 million
in salaries and employee benefits. Additional personnel to support the
Berkeley/Richmond Branch opened in April 1998, as well as new officers for
northern California branches and overall annual salary increases contributed to
the increase in salaries and employee benefits expense. Conversely, the closures
of the Rowland Heights branch and two FPSB's corporate offices in December, June
and November 1997, respectively, helped to reduce the 1998 occupancy expense.
The Company had net income of $1.1 million from OREO in 1998 compared with net
OREO expense of $503,000 in 1997. The efficiency ratio improved from 45.16% in
1997 to 40.51% in 1998.
The 1997 non-interest expense of $30.9 million represented an increase of
$2.9 million or 10.4% over the $28.0 million for 1996. The higher non-interest
expense in 1997 was primarily attributable 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 paid in December 1997. In addition,
there was a total increase of approximately $1.3 million in occupancy, equipment
and other operating expenses, all of which were directly associated with the
acquisition as well. The $1.2 million decrease in net OREO expense in 1997
reflected a decrease in the number of OREO properties due to the continued
recovery of the California real estate market. The efficiency ratio decreased to
45.16% in 1997 from 53.11% in 1996.
FINANCIAL CONDITION The Company continued to maintain steady growth in 1998.
At December 31, 1998, total assets increased $158.4 million or 10% to
$1,780.9 million; loans, net of deferred loan fees, increased $116.3 million
or 14% to $977.8 million; securities (including securities available-for-sale
and held-to-maturity) were up $91.6 million or 16% to $658.1 million;
deposits grew $111.3 million or 8% to $1,560.4 million; and stockholders'
equity increased $20.8 million or 15% to $156.7 million.
SECURITIES The Company's investment policy states that those securities for
which 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. 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
estimated fair value, with unrealized gains or losses, net of tax, reflected
in stockholders' equity. In addition, to further improve liquidity, it is the
Bank's policy to transfer securities held-to-maturity to the
available-for-sale category when securities are within 90 days of maturity.
As of December 31, 1998, unrealized holding gains on securities
available-for-sale were $2,051,000 compared to $692,000 as of December 31,
1997. These unrealized gains, net of tax effect were included in the
Company's stockholders' equity for the years reported. The unrealized holding
gains, net of tax, were $1,189,000 and $370,000 at year-end 1998 and 1997,
respectively.
19 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
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,
(in thousands) 1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 2,014 $ 37,971 $ 121,769
U.S. government agencies 103,020 113,306 228,377
State and municipal securities 22,317 -- 50
Mortgage-backed securities 18,266 22,982 17,932
Collateralized mortgage obligations 14,159 6,386 4,950
Asset-backed securities 8,220 19,889 4,998
Federal Home Loan Bank stock 5,991 5,653 5,315
Commercial paper 29,945 9,971 --
Corporate bonds 35,996 -- --
------------- ----------- -----------
Total $ 239,928 $ 216,158 $ 383,391
------------- ----------- -----------
------------- ----------- -----------
SECURITIES HELD-TO-MATURITY:
U.S. Treasury securities $ 26,026 $ 26,054 $ 26,081
U.S. government agencies 54,426 39,374 66,900
State and municipal securities 61,495 44,497 40,393
Mortgage-backed securities 146,018 140,338 63,109
Collateralized mortgage obligations 83,535 90,234 --
Asset-backed securities -- 923 3,545
Corporate bonds 46,656 8,916 10,101
------------- ----------- -----------
Total $ 418,156 $ 350,336 $ 210,129
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
Management constantly seeks to balance the risks and returns on its portfolio of
securities within the Company's investment guidelines. During 1998, the Company
increased its holdings of corporate bonds, commercial paper and state and
municipal securities, while it decreased the holdings of U.S. Treasury
securities.
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, 1998
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 $ 2,014 $ -- $ -- $ -- $ 2,014
U.S. government agencies 82,678 20,342 -- -- 103,020
State and municipal securities 20,000 -- 2,317 -- 22,317
Mortgage-backed securities(2) -- 3,335 3,651 11,280 18,266
Collateralized mortgage obligations(2) -- 1,145 5,253 7,761 14,159
Asset-backed securities(2) -- 8,220 -- -- 8,220
Federal Home Loan Bank stock 5,991 -- -- -- 5,991
Commercial paper 29,945 -- -- -- 29,945
Corporate bonds -- 31,146 4,850 -- 35,996
------------ ----------- ----------- ----------- ------------
Total $ 140,628 $ 64,188 $ 16,071 $ 19,041 $ 239,928
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
WEIGHTED AVERAGE YIELD:
U.S. Treasury securities 5.73% --% --% --% 5.73%
U.S. government agencies 5.97 5.88 -- -- 5.95
State and municipal securities 5.91 -- 7.23 -- 6.03
Mortgage-backed securities(2) -- 6.01 6.47 7.23 6.85
Collateralized mortgage obligations(2) -- 5.70 6.24 6.30 6.23
Asset-backed securities(2) -- 6.29 -- -- 6.29
Federal Home Loan Bank stock 5.76 -- -- -- 5.76
Commercial paper 6.39 -- -- -- 6.39
Corporate bonds -- 5.56 7.19 -- 5.78
------------ ----------- ----------- ----------- ------------
Total 6.04% 5.78% 6.71% 6.84% 6.08%
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
</TABLE>
(1) AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS.
(2) SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS.
20 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
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 $ 1,013 $ 25,013 $ -- $ -- $ 26,026
U.S. government agencies -- 54,426 -- -- 54,426
State and municipal securities 973 9,265 22,665 28,592 61,495
Mortgage-backed securities (2) -- 10,313 30,989 104,716 146,018
Collateralized mortgage obligations (2) -- 3,999 41,506 38,030 83,535
Corporate bonds -- 27,866 18,790 -- 46,656
------------ ----------- ----------- --------- ----------
Total $ 1,986 $ 130,882 $ 113,950 $ 171,338 $ 418,156
------------ ----------- ----------- --------- ----------
------------ ----------- ----------- --------- ----------
WEIGHTED AVERAGE YIELD:
U.S. Treasury securities 5.80% 6.08% --% --% 6.30%
U.S. government agencies -- 5.91 -- -- 5.91
State and municipal securities(1) 7.59 8.31 8.33 7.03 7.71
Mortgage-backed securities(2) -- 6.17 6.38 6.42 6.39
Collateralized mortgage obligations(2) -- 6.31 6.85 6.72 6.77
Corporate bonds -- 6.20 5.68 -- 6.00
------------ ----------- ----------- --------- ----------
Total 6.67% 6.25% 6.83% 6.59% 6.55%
------------ ----------- ----------- --------- ----------
------------ ----------- ----------- --------- ----------
</TABLE>
(1) AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS.
(2) SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS.
LOANS Gross loans increased $116.2 million or 13%, from $865.3 million at
year-end 1997 to $981.5 million at year-end 1998. Commercial real estate
loans, commercial loans and residential real estate loans, which added $52.9
million, $32.3 million and $26.8 million, respectively, accounted for most of
the increase.
Commercial real estate loans are secured primarily by first deeds of trust
on retail shops and shopping centers, as well as office buildings, multiple-unit
apartments, hotels, motels, and warehouses. The Company's underwriting policy
for commercial real estate loans generally requires that the loan-to-value ratio
at the time of origination not exceed 70% of the appraised value of the
property.
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 markets its
commercial lending primarily to small-to-medium businesses and professionals for
their working capital needs.
Increases in commercial real estate and commercial loans in 1998 reflected
the improved market conditions for these types of loans. Increases in
residential real estate loans were a result of the low prevailing interest rates
which brought refinancing activities, as well as new purchases during 1998.
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,
borrower 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 its loans.
21 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
Although the Asian economic crisis persisted in 1998 and still exists
currently, management believes the Company's financial condition and results
of operations were not adversely impacted due to the fact that most of the
Company's trade financing customers engage in import businesses. These
customers have actually benefited from the devaluation of foreign currencies
to a certain degree. However, it is unpredictable how the Asian economy will
perform in the future. If the crisis persists or worsens, the Company may be
exposed to economic and transfer risk, and its financial condition or results
of operations may be negatively impacted. (See "Factors That May Affect
Future Results" below.) Presently management does not consider the Company's
loan portfolio to have direct exposure to transfer risk.
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, 1998 are presented below (see also Note 5 of the notes to
consolidated financial statements):
LOAN TYPE AND MIX
<TABLE>
<CAPTION>
Amount outstanding as of December 31,
(in thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TYPE OF LOANS:
Commercial loans $ 370,539 $ 338,285 $ 283,894 $ 292,612 $ 324,189
Real estate mortgage loan 540,766 458,417 420,315 231,360 215,945
Real estate construction loans 40,738 41,736 33,510 13,606 14,090
Installment loans 29,165 26,611 23,551 19,748 18,170
Other loans 269 267 385 533 11,707
- ----------------------------------------------------------------------------------------------------------------
Total loans 981,477 865,316 761,655 557,859 584,101
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Less
Unamortized deferred loan fees (3,631) (3,786) (3,742) (2,122) (2,467)
Allowance for loan losses (15,970) (15,379) (13,529) (12,742) (12,271)
- ----------------------------------------------------------------------------------------------------------------
Net loans $ 961,876 $ 846,151 $ 744,384 $ 542,995 $ 569,363
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
CHANGES IN LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1997
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 $ 370,539 38.52% $ 338,285 39.98% 9.53%
Real estate mortgage loans 540,766 56.22 458,417 54.18 17.96
Real estate construction loans 40,738 4.24 41,736 4.93 (2.39)
Installment loans 29,165 3.03 26,611 3.15 9.60
Other loans 269 0.03 267 0.03 0.75
Unamortized deferred loan fees (3,631) (0.38) (3,786) (0.45) (4.09)
Allowance for loan losses (15,970) (1.66) (15,379) (1.82) 3.84
- -----------------------------------------------------------------------------------------------------------------
Net loans $ 961,876 100.00% $ 846,151 100.00% 13.68%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
22 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MATURITY OF LOANS(2): CONTRACTUAL MATURITY OF LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
(in thousands) Within One Year One to Five Years Over Five Years Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL LOANS
Floating rate $ 244,739 $ 41,644 $ 13,469 $ 299,852
Fixed rate 49,985 11,754 8,457 70,196
REAL ESTATE MORTGAGE LOANS
Floating rate 37,861 108,075 137,057 282,993
Fixed rate 5,089 33,576 216,394 255,059
REAL ESTATE CONSTRUCTION LOANS
Floating rate 26,501 13,811 -- 40,312
INSTALLMENT LOANS
Floating rate 34 -- -- 34
Fixed rate 7,703 21,427 -- 29,130
OTHER LOANS
Floating rate 253 -- -- 253
Fixed rate -- -- 17 17
- -----------------------------------------------------------------------------------------------------------------
Total loans $ 372,165 $ 230,287 $ 375,394 $ 977,846
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Floating rate $ 309,388 $ 163,530 $ 150,526 $ 623,444
Fixed rate 62,777 66,757 224,868 354,402
- -----------------------------------------------------------------------------------------------------------------
Total loans $ 372,165 $ 230,287 $ 375,394 $ 977,846
Allowance for loan losses (15,970)
- -----------------------------------------------------------------------------------------------------------------
Net loans $ 961,876
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) IN THE NORMAL COURSE OF BUSINESS, LOANS ARE RENEWED, EXTENDED OR PREPAID
FROM TIME TO TIME; THEREFORE, THE ABOVE SHOULD NOT BE VIEWED AS AN
INDICATION OF FUTURE CASH FLOWS.
(2) LOANS ARE NET OF UNAMORTIZED DEFERRED LOAN FEES.
LOAN PORTFOLIO RISK ELEMENTS
NON-PERFORMING ASSETS Management reviews the loan portfolio regularly for
problem loans. During the ordinary course of business, management becomes
aware of loans that may not be repaid under the contractual requirements of
their loan agreements. Such loans are placed under close supervision with
consideration given to placing the loan on nonaccrual status, the need for an
additional allowance for loan losses, and (if appropriate) partial or full
charge-off.
The Company's policy is to place loans on nonaccrual status if either
interest or principal or both 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 nonaccrual status, any interest previously accrued,
but not yet collected, is generally reversed against current period 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, nonaccrual loans, and OREO. Total non-performing assets
decreased $4.3 million or 13% to $28.2 million at year-end 1998, compared
with $32.5 million at year-end 1997. The decrease was primarily due to
reductions of $3.8 million in nonaccrual loans and $2.8 million in OREO
offset by an increase of $2.3 million in accruing loans past due 90 days. The
nonaccrual coverage ratio, which is the allowance for loan losses to
non-performing loans, increased to 89.86% at year-end 1998 from 79.85% at
year-end 1997. As a percentage of gross loans plus OREO, non-performing
assets decreased to 2.85% at year-end 1998, compared with 3.70% at year-end
1997.
23 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
The following table presents the breakdown of total nonaccrual, past due
and restructured loans for the past five years:
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accruing loans past due 90 days or more $ 4,683 $ 2,373 $ 2,050 $ 1,344 $ 4,104
Nonaccrual loans 13,090 16,886 9,305 14,012 27,860
- -----------------------------------------------------------------------------------------------------------------
Total non-performing loans 17,773 19,259 11,355 15,356 31,964
- -----------------------------------------------------------------------------------------------------------------
Real estate acquired in foreclosure 10,454 13,269 18,854 13,879 6,798
- -----------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 28,227 $ 32,528 $ 30,209 $ 29,235 $ 38,762
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Troubled debt restructurings(1) $ 4,642 $ 4,874 $ 3,201 $ 8,429 $ 5,257
Non-performing assets as a
percentage of gross loans and other
real estate owned at year-end 2.85% 3.70% 3.87% 5.11% 6.56%
Allowance for loan losses as a percentage
of non-performing loans 89.86% 79.85% 119.15% 82.98% 38.39%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) TROUBLED DEBT RESTRUCTURINGS ARE ACCRUING INTEREST AT THEIR RESTRUCTURED
TERMS.
The effect of nonaccrual loans and troubled debt restructurings on
interest income for the years 1998, 1997, 1996, 1995 and 1994 is presented
below:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Contractual interest due $ 1,395 $ 1,845 $ 1,121 $ 1,503 $ 2,712
Interest recognized 112 471 268 200 560
- -----------------------------------------------------------------------------------------------------------------
Net interest foregone $ 1,283 $ 1,374 $ 853 $ 1,303 $ 2,152
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TROUBLED DEBT RESTRUCTURINGS
Contractual interest due $ 421 $ 406 $ 339 $ 467 $ 351
Interest recognized 412 387 311 352 319
- -----------------------------------------------------------------------------------------------------------------
Net interest foregone $ 9 $ 19 $ 28 $ 115 $ 32
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The balance of $13.1 million in nonaccrual loans at year-end 1998 consisted
mainly of $7.4 million in commercial real estate loans and $4.5 million in
commercial loans. A majority of these nonaccrual loans are secured by real
estate properties. The following tables present the type of collateral
properties securing the loans and the type of businesses the borrowers
engaged in under commercial real estate and commercial nonaccrual loan
categories as of the dates indicated:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Nonaccrual Loan Secured by Nonaccrual Loan Secured by
Real Estate Property Real Estate Property
Commercial Commercial
(In thousands) Real Estate Commercial Real Estate Commercial
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TYPE OF PROPERTY:
Single/multi-family residence $ 348 $ 1,052 $ 593 $ 311
Commercial 5,533 2,613 8,471 5,095
Motel 1,501 30 1,350 --
Others -- 93 214 73
- ------------------------------------------------------------------------------------------------------------------
TOTAL $ 7,382 $ 3,788 $ 10,628 $ 5,479
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
24 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Nonaccrual Loan Balance Nonaccrual Loan Balance
Commercial Commercial
(in thousands) Real Estate Commercial Real Estate Commercial
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TYPE OF BUSINESS:
Real estate development $ 451 $ 187 $ -- $ 134
Real estate management 3,903 35 6,303 36
Wholesale 209 1,021 430 2,994
Retail -- 38 -- --
Food/Restaurant -- 1,008 -- 1,190
Import -- 918 752 4
Motel 1,315 -- 1,350 --
Investments 375 -- 1,194 --
Industrial -- 310 214 263
Clothing 348 161 385 441
Others 781 806 -- 454
- ------------------------------------------------------------------------------------------------------------------
TOTAL $ 7,382 $ 4,484 $ 10,628 $ 5,516
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
TROUBLED DEBT RESTRUCTURINGS A troubled debt restructuring is a formal
restructure of a loan when the lender, for economic or legal reasons related
to the borrower's financial difficulties, grants a concession to the
borrower. The concessions may be granted in various forms, including
reduction in the stated interest rate, reduction in the loan balance or
accrued interest, and extension of the maturity date.
The Company's troubled debt restructurings decreased slightly to $4.6
million at year-end 1998, compared with $4.9 million at year-end 1997. All of
the troubled debt restructurings at year-end 1998 were commercial real estate
loans and were accruing interest under their revised terms.
IMPAIRED LOANS A loan is considered impaired when based on current
circumstances and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement.
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 or adjusting valuation
allowance with a corresponding charge to the provision for loan losses.
As of December 31, 1998, the Company had identified impaired loans with
a recorded investment of $21.9 million. For 1998, the average balance of
impaired loans was $21.7 million. During 1998, interest collected on impaired
loans totaled $2.1 million.
LOAN CONCENTRATION There were no loan concentrations to multiple borrowers
in similar activities, which exceeded 10% of total loans as of December 31,
1998.
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.
25 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses increased slightly
to $16.0 million or 1.63% of gross loans at year-end 1998, compared with
$15.4 million or 1.78% of total loans at year-end 1997. The provision for
loan losses totalled $3.6 million in 1998 and 1997, respectively. The Bank
recorded net charge-offs of $3.0 million in 1998 up from $1.7 million in
1997. Total charge-offs of $3.5 million in 1998 included $2.4 million in
commercial loans, $873,000 in real estate loans, $244,000 in installment
loans and $8,000 in 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) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 15,379 $ 13,529 $ 12,742 $ 12,271 $ 7,173
Allowance from acquisition -- -- 1,644 -- --
Provision for loan losses 3,600 3,600 3,600 7,300 7,755
Loans charged-off (3,519) (2,139) (5,388) (7,018) (4,419)
Recoveries of charged-off loans 510 389 931 189 1,762
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 15,970 $ 15,379 $ 13,529 $ 12,742 $ 12,271
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Average loans outstanding during year ended $ 907,639 $ 792,176 $ 579,634 $ 549,660 $ 572,244
Ratio of net charge-offs to average loans
outstanding during the year 0.33% 0.22% 0.77% 1.24% 0.46%
Provision for loan losses to average loans
outstanding during the year 0.40% 0.45% 0.62% 1.33% 1.36%
Allowance to non-performing loans at year-end 89.86% 79.85% 119.15% 82.98% 38.39%
Allowance to total loans at year-end 1.63% 1.78% 1.78% 2.28% 2.10%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS CHARGED-OFF BY LOAN TYPE(1)
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loan $ 2,394 $ 1,387 $ 4,010 $ 3,895 $ 2,300
Percentage of total commercial loans 0.65% 0.41% 1.33% 1.33% 0.71%
- -----------------------------------------------------------------------------------------------------------------------------
Real estate loan $ 873 $ 574 $ 1,177 $ 2,885 $ 1,678
Percentage of total real estate loans 0.15% 0.11% 1.18% 1.18% 0.73%
- -----------------------------------------------------------------------------------------------------------------------------
Installment and other loan $ 252 $ 178 $ 201 $ 238 $ 441
Percentage of total installment and other loans 0.85% 0.66% 1.17% 1.17% 1.48%
- -----------------------------------------------------------------------------------------------------------------------------
Total loans charged-off $ 3,519 $ 2,139 $ 5,388 $ 7,018 $ 4,419
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) PERCENTAGES WERE CALCULATED BASED ON YEAR-END BALANCES.
RECOVERIES BY LOAN TYPE
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loan $ 188 $ 218 $ 640 $ 110 $ 1,151
Real estate loan 279 111 205 17 501
Installment and other loan 42 60 86 62 110
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 509 $ 389 $ 931 $ 189 $ 1,762
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In determining the allowance for loan losses, management assesses 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, borrower financial strength, 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
26 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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 table presents a breakdown of impaired loans and the
related specific allowances and allocated general allowance as of the dates
indicated:
<TABLE>
<CAPTION>
Allocated
Recorded Specific General Net
1998 ( in thousands) Investment Allowance Allowance Balance
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 9,379 $ -- $ 1,565 $ 7,814
Commercial real estate 12,515 58 1,769 10,688
Other 55 -- 55 --
- -----------------------------------------------------------------------------------------------------
Total $ 21,949 $ 58 $ 3,389 $ 18,502
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1997 ( in thousands)
- -----------------------------------------------------------------------------------------------------
Commercial $ 7,784 $ 445 $ 1,055 $ 6,284
Commercial real estate 14,027 460 1,935 11,631
Other 95 -- 95 --
- -----------------------------------------------------------------------------------------------------
Total $ 21,906 $ 905 $ 3,085 $ 17,915
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
The Company allocates the allowance for loan losses to the major loan
categories 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 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,
1998 1997 1996 1995 1994
Percentage of Percentage of Percentage of Percentage of Percentage of
loans in each loans in each loans in each loans in each loans in each
category category category category category
to average to average to average to average to average
(dollars in thousands) Amount gross loans Amount gross loans Amount gross loans Amount gross loans Amount gross loans
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOANS:
Commercial loans $ 7,468 38.58% $ 7,480 39.20% $ 6,190 37.27% $ 6,338 52.45% $ 5,658 55.76%
Real estate
mortgage loans 7,768 53.62 6,988 52.88 6,942 55.19 6,084 41.47 5,754 36.68
Real estate
construction loans 313 4.77 401 4.80 294 4.40 136 2.44 225 2.41
Installment loans 414 2.98 356 3.09 72 3.09 81 3.54 336 3.13
Other loans 7 0.05 154 0.03 31 0.05 103 0.10 186 2.02
Unallocated -- N/A -- N/A -- N/A -- N/A 112 N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 15,970 100.00% $ 15,379 100.00% $ 13,529 100.00% $ 12,742 100.00% $ 12,271 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 for loan losses to be adequate as of December 31, 1998
to absorb estimated probable future losses 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, net of a valuation allowance of
$494,000, was carried at $10.5 million at year-end 1998, compared with OREO,
net of a valuation allowance of $1.1 million, being carried at $13.3 million
at year-end 1997. This represents a decrease of $2.8 million or 21%.
27 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
In 1998, the Company acquired ten properties totaling $4.3 million and
disposed of 17 properties totaling $7.7 million with a net gain of $1.0
million. As of December 31, 1998, the Company had 17 OREO properties which
included commercial buildings, warehouses, land, single family residences and
condominiums, 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 OREO
valuation allowance in the current period. During 1998, management provided
$195,000 to the provision for OREO losses, bringing the valuation allowance
to $494,000 at year-end 1998.
In 1998, the Bank recognized net income of $1.1 million from operating
its OREO properties. In addition to the $1.0 million net gain on sales of
OREO properties, the Bank received rental income of $748,000. Such amount was
offset by operating expenses of $426,000 and the provision for OREO losses of
$195,000.
Although the California real estate market continued to show improvement
in 1998, 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 (income) by type for years
1998, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense (income) $ (321) $ 201 $ 312
Provision for losses 195 476 1,501
Net gain on disposal (999) (174) (85)
- -----------------------------------------------------------------------------
Total $ (1,125) $ 503 $ 1,728
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
INVESTMENTS IN REAL ESTATE As of December 31, 1998, 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 $1.5 million and $1.7 million as of December 31, 1998 and
1997, respectively. Another strip mall was owned and sold in 1997 at a gain
of $222,000. The Company realized net gains of $95,000, and $170,000 from the
operations of the strip-malls in 1998 and 1997, respectively.
DEPOSITS Total deposits increased $111.3 million or 8% from $1,449.1
million at year-end 1997 to $1,560.4 million at year-end 1998. Approximately
63% of the increase was from time deposits over $100,000 ("Jumbo CD's").
Consequently, the ratio of core deposits (defined as all deposits excluding
Jumbo CD's and brokered deposits) to total deposits continued to decline from
62.11% at year-end 1997 to 60.32% at year-end 1998. The Company had no
brokered deposits as of December 31, 1998.
Average total deposits were up $75.4 million or 5% from $1,408.8 million
for 1997 to $1,484.2 million. Average Jumbo CD's increased $66.3 million or
13%. Average core deposits increased $24.3 million or 3%. Although average
demand deposits increased $22.3 million or 15%, the increase was offset by
decreases in interest bearing checking and savings accounts. This was largely
attributable to the low prevailing interest rates paid on those
interest-bearing checking and savings accounts as a result of the Federal
Reserve Board's three consecutive cuts in the Federal funds rate in the last
two quarters of 1998.
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.
28 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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 transactional-based products; and 3)
to diversify the customer base by branch expansion and/or acquisition as
opportunities arise.
The following tables display the deposit mix for the past three years,
time deposits of $100,000 or more by maturity, time deposits with remaining
term of more than one year at December 31, 1998 and average deposits and
rates.
DEPOSIT MIX
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
(dollars in thousands) Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 178,068 11.4% $ 175,875 12.1% $ 135,345 9.9%
NOW accounts 114,982 7.4 111,653 7.7 118,498 8.7
Money market accounts 113,869 7.3 94,708 6.6 95,158 7.0
Savings deposits 207,365 13.3 210,291 14.5 224,443 16.4
Time deposits under $100,000 326,968 20.9 307,504 21.2 302,981 22.2
Time deposits of $100,000 or more 619,150 39.7 549,090 37.9 488,315 35.8
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 1,560,402 100.0% $1,449,121 100.0% $1,364,740 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TIME DEPOSITS OF $100,000 OR MORE BY MATURITY
<TABLE>
<CAPTION>
(in thousands) At December 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
Less than three months $ 277,524
Three to six months 183,228
Six to twelve months 152,715
Over one year 5,683
- ----------------------------------------------------------------------------------------------
Total $ 619,150
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR AT
DECEMBER 31, 1998 FOR EACH OF THE FIVE YEARS FOLLOWING DECEMBER 31, 1998
<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------------------------------------------
<S> <C>
2000 $ 19,235
2001 6,194
2002 204
2003 120
2004 15
- -----------------------------------------------------------------------------------
Total $ 25,768
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
AVERAGE DEPOSITS AND RATES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(dollars in thousands) Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 166,657 --% $ 148,907 --% $ 121,952 --% $114,435 --% $108,528 --%
NOW accounts 111,900 1.4 114,453 1.5 96,759 1.5 85,413 1.7 80,935 1.6
Money market
accounts 99,833 2.1 97,470 2.3 100,898 2.3 106,760 2.4 130,664 2.3
Savings deposits 205,372 2.1 216,840 2.2 151,284 2.3 136,750 2.3 145,694 2.2
Time deposits 900,441 5.1 820,310 5.1 632,211 5.0 450,834 5.4 342,037 3.7
- --------------------------------------------------------------------------------------------------------------------------------
Total $1,484,203 3.6% $1,397,980 3.6% $1,103,104 3.5% $894,192 3.5% $807,858 2.5%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
CAPITAL RESOURCES The Company obtains capital primarily from retained
earnings and to a lesser extent, the issuance of additional common stock
through its Dividend Reinvestment Plan.
At year-end 1998, stockholders' equity amounted to $156.7 million or
8.80% of total assets, compared with $135.9 million or 8.37% of total assets
at year-end 1997. The increase of $20.8 million or 15% in stockholders'
equity was primarily due to an addition of $24.6 million from net income less
cash dividends paid of $6.3 million, $1.7 million from issuance of additional
common shares through the Dividend Reinvestment Plan and an increase of
$819,000 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, April, July and October of 1998, respectively, on 8,941,743,
8,953,307, 8,965,315 and 8,975,129 shares outstanding, respectively. Total
cash dividends paid in 1998 amounted to $6.3 million.
On February 19, 1998, the Company's Board of Directors adopted an Equity
Incentive Plan (the "Plan") which was approved by stockholders at the 1998
Annual Meeting of Stockholders. The Plan currently expires on February 18,
2008. On September 17, 1998, the Company granted options to purchase a total
of 45,000 shares of its common stock, with an exercise price of $33.00 per
share, to ten eligible bank officers and nine non-employee directors.
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 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 type of the
securities in the Company's portfolio. U.S. Treasury securities are assigned a
zero risk weighting, while other instruments, in which the Company has often
placed a significant amount of funds including 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 exception 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 constantly seeks to maximize the yields on earning
assets and as a result of continued growth in loans and a decrease in U.S.
Treasury securities, the Company's total risk-based capital ratio decreased from
12.98% at year-end 1997 to 12.68% at year-end 1998.
A table illustrating the Company and the Bank's capital and leverage
ratios at year-end 1998 and 1997 is included in Note 11 to the consolidated
financial statements. The Company's Total risk-based, Tier 1 risk-based and
Tier 1 leverage capital ratios of 12.68%, 11.44% and 8.45%, respectively, at
year-end 1998 not only exceeded the regulatory minimum requirements, but also
placed 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%.
30 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
LIQUIDITY AND MARKET RISK
LIQUIDITY 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 primary 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 (FHLB). At year-end 1998, the Company's liquidity
ratio (defined as net cash, short-term and marketable securities to net
deposits and short-term liabilities) increased slightly to 46.04%, compared
with 45.59% at year-end 1997.
To supplement its liquidity needs, the Company 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 the FHLB which enables the Bank to access lower
cost FHLB financing when necessary. The Bank obtained advances from the FHLB
totaling $30 million in the third quarter of 1998. These advances are at
fixed interest rates and are non-callable.
The Company had significant portion of its time deposit portfolio at
year-end 1998 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 above-mentioned sources provide adequate
liquidity to 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 operation 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.
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 its interest rate risk through analyzing the
repricing characteristics of its loans, securities, and deposits on an
on-going basis. The Company seeks 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 evaluate its interest rate
exposure. Because of the limitations 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 and 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 time frame. 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 decreasing interest rates, net
interest margin may be impaired with a negative gap.
31 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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, 1998. 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's assets
and liabilities presented in the table may vary if different assumptions are
used or if actual experience differs from the assumptions used. As of
December 31, 1998, the Company was asset sensitive with a cumulative gap
ratio of a positive 15.61% within three months, and liability sensitive with
a cumulative gap ratio of a negative 11.48% within a 1-year period, compared
with a positive 17.28% within three months, and a negative 10.49% within a
1-year period at year-end 1997.
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
December 31, 1998
Interest Rate 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>
INTEREST EARNING ASSETS:
Cash and due from banks $ -- $ -- $ -- $ -- $ 64,656 $ 64,656
Federal funds sold and
securities purchased
under agreements to resell 17,000 -- -- -- -- 17,000
Securities available-for-sale 105,919 34,709 64,188 35,112 -- 239,928
Securities held-to-maturity -- 1,986 130,883 285,287 -- 418,156
Loans:
Commercial loans 314,090 31,675 11,785 8,504 -- 366,054
Real estate mortgage loans 279,468 2,370 33,307 217,080 -- 532,225
Real estate construction loans 40,738 -- -- -- -- 40,738
Installment loans 3,089 4,646 21,378 -- -- 29,113
Other loans 241 -- -- -- 16 257
- --------------------------------------------------------------------------------------------------------------------------
Total loans(1) 637,626 38,691 66,470 225,584 16 968,387
- --------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets -- -- -- -- 72,771 72,771
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 760,545 $ 75,386 $ 261,541 $ 545,983 $ 137,443 $1,780,898
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits:
Demand $ -- $ -- $ -- $ -- $ 178,068 $ 178,068
Money market and NOW(2) 10,018 36,507 113,427 68,899 -- 228,851
Savings 14,370 42,842 100,220 49,933 -- 207,365
TCD's under $100,000 164,275 142,534 19,747 324 88 326,968
TCD's $100,000 and over 277,524 335,943 5,683 -- -- 619,150
- --------------------------------------------------------------------------------------------------------------------------
Total deposits $ 466,187 $ 557,826 $ 239,077 $ 119,156 $ 178,156 $1,560,402
- --------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements
to repurchase 16,436 -- -- -- -- 16,436
Advances from Federal
Home Loan Bank -- -- 30,000 -- -- 30,000
Non-interest bearing liabilities -- -- -- -- 17,408 17,408
Stockholders' equity -- -- -- -- 156,652 156,652
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities &
stockholders' equity $ 482,623 $ 557,826 $ 269,077 $ 119,156 $ 352,216 $1,780,898
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ 277,922 $(482,440) $ (7,536) $ 426,827 $(214,773) $ --
- --------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ 277,922 $(204,518) $ (212,054) $ 214,773 $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------
Gap ratio (% of total assets) 15.61% (27.09)% (0.42)% 23.97% (12.06)% --
- --------------------------------------------------------------------------------------------------------------------------
Cumulative gap ratio 15.61% (11.48)% (11.91)% 12.06% -- --
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 LOANS ARE GROSS OF UNAMORTIZED DEFERRED LOAN FEES AND THE ALLOWANCE FOR
LOAN LOSSES. NONACCRUAL 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.
32 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
Since interest rate sensitivity analysis does not measure the timing
differences in the repricing of assets and liabilities, the Company uses a
simulation model to quantify the extent of the differences in the behavior of
the lending, investing and funding rates, to project impact to future
earnings and market values under alternative interest 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 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 impact of immediate changes in interest rates at
the specified levels at December 31, 1998. The results presented may vary if
different assumptions are used or if actual experience differs from the
assumptions used.
<TABLE>
<CAPTION>
Changes in Interest Rates Percentage Change in:
(in basis points) Net Interest Income(1) Net Portfolio Value(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
+200 13.62% (33.88)%
+100 7.35% (17.36)%
- -100 (6.03)% 15.79%
- -200 (12.26)% 30.31%
- -------------------------------------------------------------------------------------------
</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.
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 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, 1998. For assets, expected
maturities, projected repayments and prepayments of principal are based on
contractual maturity. For liabilities, the Company uses its historical
experience and decay factors to estimate the 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, 1998
Interest
(dollars in thousands) Rate 1999 2000 2001 2002
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Federal funds sold and
securities purchased under
agreements to resell 5.35% $ 17,000 $ -- $ -- $ --
Mortgage-backed securities
and collateralized mortgage
obligations 6.53% -- 7,748 8,293 97
Investment securities 5.88% 136,411 76,378 19,549 37,988
Federal Home Loan Bank stock 5.76% 5,991 -- -- --
Loans
Commercial 7.84% 289,924 11,291 16,473 9,787
Real estate mortgage 8.33% 42,242 18,417 23,595 44,025
Real estate construction 8.78% 26,065 13,584 -- --
Installment & others 8.41% 7,860 3,740 6,397 7,304
INTEREST-SENSITIVE LIABILITIES:
Other interest bearing deposits 1.46% 104,043 67,134 66,776 39,601
Time deposits 4.92% 920,277 19,235 6,194 204
Securities sold under
agreement to repurchase 4.53% 16,436 -- -- --
Advances from Federal
Home Loan Bank 4.84% -- 20,000 -- --
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit N/A 351,961 9,003 4,039 2,000
Commercial letters of credit N/A 29,029 -- -- --
Standby letters of credit N/A 9,855 207 50 --
Bill of lading guarantee N/A 11,517 -- -- --
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity Date at December 31, 1998
(dollars in thousands) 2003 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Federal funds sold and securities
purchased under agreements to resell $ -- $ -- $ 17,000 $ 17,000
Mortgage-backed securities
and collateralized mortgage obligations 2,621 242,548 261,307 265,207
Investment securities 41,747 76,662 388,735 395,508
Federal Home Loan Bank stock -- -- 5,991 5,991
Loans
Commercial 14,976 21,567 364,018 369,379
Real estate mortgage 53,297 347,678 529,254 542,143
Real estate construction -- -- 39,649 40,399
Installment & others 3,637 17 28,955 29,465
INTEREST-SENSITIVE LIABILITIES:
Other interest bearing deposits 40,199 118,463 436,216 436,285
Time deposits 120 88 946,118 950,628
Securities sold under agreement to repurchase -- -- 16,436 16,436
Advances from Federal Home Loan Bank 10,000 -- 30,000 30,000
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit -- 22,301 389,304 (336)
Commercial letters of credit -- -- 29,029 (174)
Standby letters of credit -- -- 10,112 (87)
Bill of lading guarantee -- -- 11,517 (50)
</TABLE>
33 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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.
PROGRESS SCHEDULE
The Company established a Y2K Committee (the "Committee") in 1997, made up of
representatives from key sectors of the Company. The Committee 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. The
progress of the Company's Y2K efforts is discussed below.
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.
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.
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.
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 is expected to be
completed by March 31, 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 for the turn of the century. The
Company has also obtained Y2K compliance certifications from its other
material non-IT systems providers.
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.
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 these Y2K issues, including
estimates of personnel costs and hardware and software upgrades, is currently
estimated to be $750,000. 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 operation. The amount expensed as of
February 28, 1999 was approximately $450,000.
34 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
THE RISKS TO THE COMPANY OF THE YEAR 2000 ISSUE
The Company relies on its core computer system for its information technology
needs, as it supports virtually all of the Company's deposits, loan 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.
Notwithstanding 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.
CONTINGENCY PLAN
As a precautionary measure, the Company has also 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. The final plan is expected to be in
place by June 30, 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE ALLOWANCE FOR LOAN LOSSES IS AN ESTIMATE OF FUTURE LOAN LOSSES. ACTUAL
LOAN LOSSES IN EXCESS OF THE ESTIMATE COULD ADVERSELY AFFECT THE COMPANY'S
NET INCOME AND CAPITAL.
The allowance for loan losses is based on management's estimate of the
probable future losses from its loan portfolio. If actual losses exceed the
estimate, the excess losses could adversely affect the Company's net income
and capital. Such excess could also lead to larger allowances for loan losses
in future periods, which could in turn adversely affect net income and
capital. Management believes that the allowance for loan losses at December
31, 1998, is adequate to cover estimable and probable losses from its loan
portfolio as of that date. If economic conditions differ substantially from
the assumptions used in the estimate or adverse developments arise with
respect to the Company's loans, future losses may occur, and increases in the
allowance may be necessary. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the adequacy
of the Company's allowance. These agencies may require the Company to
establish additional valuation allowances based on their judgement of the
information available at the time of their examinations. No assurance can be
given that the Company will not sustain loan losses in excess of present or
future levels of the allowance for loan losses.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS.
The interest rate risk inherent in the Company's lending, investing and deposit
taking activities is a significant market risk to the Company and its business.
Income associated with interest earning assets and costs associated with
interest bearing liabilities may not be affected uniformly by fluctuations in
interest rates. The magnitude and duration of changes in interest rates, events
over which the Company has no control, may have an adverse affect on net
interest income. Prepayment and early withdrawal levels, which are also impacted
by changes in interest rates, can
35 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
significantly affect the Company's assets and liabilities. Increases in
interest rates may adversely affect the ability of the Company's floating
rate borrowers to meet their higher payment obligations, which could in turn
lead to an increase in non-performing assets and net charge-offs.
Generally, the interest rates on 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. Even assets and liabilities with similar
maturities or periods of repricing 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 of assets and liabilities may lag
behind changes in general market rates. Certain assets, such as fixed and
adjustable rate mortgage loans, have features which limit change in interest
rates on a short-term basis and over the life of the asset.
The Company seeks to minimize the adverse effects of changes in interest
rates by structuring the Company's asset-liability composition to obtain the
maximum spread. The Company uses interest rate sensitivity analysis and a
simulation model to assist it in estimating the optimal asset-liability
composition. However, such management tools have inherent limitations that
impair their effectiveness. There can be no assurance that the Company will
be successful in minimizing the adverse effects of changes in interest rates.
See also, "Loan Portfolio Risk Elements" and "Liquidity and Market Risk -
Market Risk" above.
INFLATION MAY ADVERSELY AFFECT THE COMPANY'S FINANCIAL PERFORMANCE.
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles. Generally accepted accounting principles 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 the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance
than the 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.
POOR ECONOMIC CONDITIONS IN CALIFORNIA COULD CAUSE THE COMPANY TO INCUR
LOSSES.
The Company's banking operations are concentrated primarily in Southern and
Northern California. Adverse economic conditions in California could impair
borrowers' ability to service their loans, decrease the level and duration of
deposits by customers, and erode the value of loan collateral. These events
could increase the amount of the Company's non-performing assets 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.
Real estate securing the Company's lending activity is also principally
located in Southern and Northern California. The value of such collateral
depends upon conditions in the relevant real estate markets. These include
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
flood (which may result in uninsured losses), and other factors beyond the
control of the Company. Although California economic indicators continued to
show improvement in 1998, management cannot predict the future economic
performance of the region. The current economic crisis in Asia and the
unstable economic conditions in Latin America may also negatively impact
economic conditions in California, which could adversely affect the Company's
business and results of operations.
THE RISKS INHERENT IN CONSTRUCTION LENDING MAY ADVERSELY AFFECT THE COMPANY'S
NET INCOME.
The risks inherent in construction lending may adversely affect the Company's
net income. Such risks include, among other things, the possibility that
contractors may fail to complete, or complete on a timely basis, construction
of the relevant properties; substantial cost overruns in excess of original
estimates and financing; market deterioration during construction; and lack
of permanent take-out financing. Loan secured by such properties also involve
additional risk because such properties have no operating history. In these
loans, 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 completed
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 consideration
can affect the borrowers' ability to repay their obligations to the Company
and the value of the Company's security interest in collateral.
36 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
THE COMPANY'S USE OF APPRAISALS IN DECIDING WHETHER TO MAKE A LOAN ON OR
SECURED BY REAL PROPERTY DOES NOT INSURE THE VALUE OF THE REAL PROPERTY
COLLATERAL.
The Company, in considering whether to make a loan on or secured by real
property, generally requires an appraisal of such property. However, the
appraisal is only an estimate of the value of the property at the time the
appraisal is made. If the appraisal does not reflect the amount that may be
obtained upon any sale or foreclosure of the property, the Company may not
realize an amount equal to the indebtedness secured by the property.
THE COMPANY FACES SUBSTANTIAL COMPETITION FROM LARGER COMPETITORS.
The Company faces substantial competition for deposits and loans throughout
its market area from the major banks and financial institutions that dominate
the commercial banking industry. This may cause the Company's cost of funds
to exceed that of its competitors. It may also result in the Company making
less desirable loans. Such banks and financial institutions have greater
resources than the Company, including the ability to finance advertising
campaigns and allocate their investment assets 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.
ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS
COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS.
The Company is governed by significant federal and state regulation and
supervision, which is primarily for the benefit and protection of the
Company's customers and not for the benefit of its stockholders. In the past,
the Company's business has been materially affected by such regulation and
supervision. This trend is likely to continue in the future. Laws,
regulations or policies currently affecting the Company may change at any
time. Regulatory authorities may also change their interpretation of existing
laws and regulations. Such changes may, among other things, increase the cost
of doing business, limit permissible activities or affect the competitive
balance between banks and other financial institutions. It is impossible to
predict the competitive impact that any such changes would have on commercial
banking in general or on the business of the Company in particular.
POOR ECONOMIC CONDITIONS IN ASIA COULD CAUSE THE COMPANY TO INCUR LOSSES.
Continuing or worsening adverse economic conditions in Asia could increase
the Company's exposure to economic and transfer risk, and could result in an
outflow of deposits by the Company's Asian-American customers. Transfer risk
may result when an entity is unable to obtain the foreign exchange needed to
meet its obligations or to provide liquidity. This may adversely impact the
recoverability of investments with or loans made to such entities. Adverse
economic conditions may also continue to negatively impact asset values and
the profitability and liquidity of companies operating in this region.
Management does not believe that the Company will be directly affected by
such transfer risk, as a majority of its trade finance customers are
importers. Based on its current customer profiles, the Company also does not
anticipate significant deposit outflows. However, no assurance can be given
that the Company's past experience will continue, especially if conditions in
Asia or other parts of the world continue to worsen.
THE Y2K PROBLEM COULD DISRUPT THE COMPANY'S BUSINESS.
The Y2K problem results from an inability of certain computer systems to
accurately recognize dates on and after the year 2000. The Y2K problem could
disrupt the Company's business if the Company fails to achieve Y2K readiness
or if the Company's vendors or customers fail to achieve Y2K readiness. See
"Year 2000 Readiness Disclosures - The Company's State of Readiness" above.
STATUTORY RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS FROM THE BANK MAY
ADVERSELY IMPACT THE COMPANY.
A substantial portion of the Company's cash flow comes from dividends that
the Bank pays to it. Various statutory provisions restrict the amount of
dividends that the Bank can pay without regulatory approval. In addition, if
the Bank were to liquidate, the Bank's creditors would be entitled to receive
distributions from the assets of the Bank to satisfy their claims against the
Bank before the Company, as a holder of an equity interest in the Bank, would
be entitled to receive any of the assets of the Bank.
37 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
As of December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 64,655,921 $ 57,727,974
Federal funds sold and securities purchased under agreements to resell 17,000,000 67,000,000
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 81,655,921 124,727,974
Securities available-for-sale (amortized cost of
$237,877,049 in 1998 and $215,465,568 in 1997) 239,927,818 216,157,845
Securities held-to-maturity (estimated fair value of
$426,778,000 in 1998 and $356,187,000 in 1997) 418,156,587 350,336,415
Loans (net of allowance for loan losses of
$15,970,034 in 1998 and $15,379,408 in 1997) 961,875,850 846,151,425
Other real estate owned, net 10,454,005 13,269,382
Investments in real estate, net 1,457,051 1,653,722
Premises and equipment, net 25,826,808 25,201,883
Customers' liability on acceptance 10,847,075 10,295,812
Accrued interest receivable 11,995,728 12,246,270
Goodwill 8,589,702 9,529,827
Other assets 10,111,791 12,891,013
- --------------------------------------------------------------------------------------------------------------
Total assets $ 1,780,898,336 $ 1,622,461,568
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 178,067,712 $ 175,875,463
Interest bearing accounts
NOW accounts 114,981,640 111,652,490
Money market deposits 113,868,789 94,708,279
Savings deposits 207,365,550 210,290,931
Time deposits under $100,000 326,967,670 307,503,579
Time deposits of $100,000 or more 619,150,214 549,090,061
- --------------------------------------------------------------------------------------------------------------
Total deposits 1,560,401,575 1,449,120,803
- --------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 16,436,039 23,418,942
Advances from Federal Home Loan Bank 30,000,000 --
Acceptances outstanding 10,847,075 10,295,812
Other liabilities 6,561,428 3,749,470
- --------------------------------------------------------------------------------------------------------------
Total liabilities 1,624,246,117 1,486,585,027
- --------------------------------------------------------------------------------------------------------------
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, 8,988,760 and 8,941,743 shares
issued and outstanding in 1998 and 1997, respectively 89,888 89,417
Additional paid-in-capital 62,919,694 61,270,739
Accumulated other comprehensive income 1,188,502 369,922
Retained earnings 92,454,135 74,146,463
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 156,652,219 135,876,541
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,780,898,336 $ 1,622,461,568
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 82,865,886 $ 74,015,063 $ 55,887,756
Interest on securities available-for-sale 13,493,891 17,700,422 17,146,782
Interest on securities held-to-maturity 22,966,538 17,831,320 11,578,557
Interest on Federal funds sold and securities
purchased under agreements to resell 3,949,645 2,415,226 1,482,592
Interest on deposits with banks 32,805 16,402 3,289
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 123,308,765 111,978,433 86,098,976
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Time deposits of $100,000 or more 30,690,733 26,633,484 22,576,698
Other deposits 23,315,890 23,738,144 16,474,889
Other borrowed funds 3,218,319 502,413 157,829
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 57,224,942 50,874,041 39,209,416
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 66,083,823 61,104,392 46,889,560
Provision for loan losses 3,600,000 3,600,000 3,600,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 62,483,823 57,504,392 43,289,560
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Securities Gains 43,048 40,913 21,862
Letter of credit commissions 1,944,259 1,502,961 1,508,407
Service charges 3,914,599 3,490,801 2,942,170
Other operating income 2,233,773 1,739,847 1,386,589
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 8,135,679 6,774,522 5,859,028
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 18,024,104 17,008,737 13,996,253
Occupancy expense 2,546,172 2,931,290 2,320,718
Computer and equipment expense 2,411,572 2,364,675 2,001,985
Professional services expense 3,233,988 3,059,906 3,153,993
FDIC and State assessments 393,309 356,537 454,850
Marketing expense 1,027,729 1,200,198 1,163,455
Real estate operations, net (1,125,105) 503,104 1,728,382
Other operating expense 3,553,189 3,503,788 3,193,619
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 30,064,958 30,928,235 28,013,255
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 40,554,544 33,350,679 21,135,333
- ----------------------------------------------------------------------------------------------------------------------------------
Income tax expense 15,975,661 13,242,941 7,819,382
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 24,578,883 20,107,738 13,315,951
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding loss (gain) arising during the year 810,412 1,174,644 (2,507,793)
Less: reclassification adjustment for realized
gain (loss) on securities included in net income (8,168) (254,625) (45,119)
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income, net of tax 818,580 1,429,269 (2,462,674)
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income $ 25,397,463 $ 21,537,007 $ 10,853,277
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per common share
Basic $ 2.74 $ 2.26 $ 1.66
Diluted $ 2.74 $ 2.26 $ 1.66
- ----------------------------------------------------------------------------------------------------------------------------------
Basic average common shares outstanding 8,967,188 8,915,936 8,017,398
Diluted average common shares outstanding 8,968,393 8,915,936 8,017,398
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accumulated
Additional Other Total
For the years ended December 31, Number Paid-in- Comprehensive Retained Stockholders'
1998, 1997 and 1996 of Shares Amount Capital Income Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,867,164 $ 78,672 $ 42,013,687 $ 1,403,327 $ 51,033,127 $ 94,528,813
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Issuances of common stock --
Dividend Reinvestment Plan 105,245 1,052 1,693,718 -- -- 1,694,770
Issuance of stock for
the acquisition of First
Public Savings Bank, F.S.B. 905,735 9,057 16,104,535 -- -- 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 -- -- -- -- 13,315,951 13,315,951
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,878,144 88,781 59,811,940 (1,059,347) 59,604,631 118,446,005
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Issuances of common stock --
Dividend Reinvestment Plan 63,599 636 1,458,799 -- -- 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 -- -- -- -- 20,107,738 20,107,738
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,941,743 $ 89,417 $ 61,270,739 $ 369,922 $ 74,146,463 $ 135,876,541
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Issuances of common stock --
Dividend Reinvestment Plan 47,017 471 1,648,955 -- -- 1,649,426
Cash dividends of $.70 per share -- -- -- -- (6,271,211) (6,271,211)
Change in unrealized holding
gain (loss) on securities
available-for-sale, net of tax -- -- -- 818,580 -- 818,580
Net income -- -- -- -- 24,578,883 24,578,883
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,988,760 $ 89,888 $ 62,919,694 $ 1,188,502 $ 92,454,135 $ 156,652,219
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41 CATHAY BANCORP INC. AND SUBSIDIARIES 1998 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 24,578,883 $ 20,107,738 $ 13,315,951
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,600,000 3,600,000 3,600,000
Provision for losses on other real estate owned 195,560 475,796 1,501,268
Benefit for deferred taxes (10,460) (493,366) (503,186)
Depreciation 1,241,354 1,335,400 1,336,363
Net gain on sale of other real estate owned (999,145) (173,961) (85,313)
Gain on sale of investments in real estate -- (222,310) --
Gain (loss) on disposal of premises and equipment (2,225) (1,650) 1,595
Net gain on sales and calls of securities (43,048) (40,913) (21,862)
Amortization and accretion of investment security
premiums, net 285,705 63,310 734,931
Amortization of goodwill 940,125 684,579 83,172
Increase (decrease) in deferred loan fees, net (154,858) 43,208 247,476
(Increase) decrease in accrued interest receivable 250,542 2,761,184 (1,107,418)
(Increase) decrease in other assets, net 3,443,262 (2,436,773) 19,583,814
Increase (decrease) in other liabilities 2,158,378 (741,066) (3,130,696)
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments 10,905,190 4,853,438 22,240,144
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,484,073 24,961,176 35,556,095
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (1,025,244,049) (217,418,506) (90,261,346)
Proceeds from maturity and call of investment securities
available-for-sale 1,006,489,646 300,394,371 58,609,947
Proceeds from sale of investment securities available-for-sale 6,429,518 92,705,983 989,297
Purchase of mortgage-backed securities available-for-sale (34,968,026) (12,442,974) (18,874,200)
Proceeds from repayments and sale of mortgage-backed
securities available-for-sale 25,492,037 6,799,700 24,213,775
Purchase of investment securities held-to-maturity (82,268,138) (15,345,814) (24,796,858)
Proceeds from maturity and call of investment securities
held-to-maturity 12,024,824 41,931,722 26,365,854
Purchase of mortgage-backed securities held-to-maturity (73,786,854) (186,620,681) (65,925,846)
Proceeds from repayment of mortgage-backed securities
held-to-maturity 74,816,820 19,211,765 3,105,726
Proceeds from sale of loans -- 4,827,657 --
Purchase of loans (6,782,068) (975,045) --
Net increase in loans (113,238,614) (108,326,821) (68,372,708)
Purchase of premises and equipment (1,866,279) (765,981) (530,193)
Proceeds from sale of equipment 2,225 1,650 7,278
Proceeds from sale of other real estate owned 4,470,077 4,346,484 5,283,597
Proceeds from sale of investments in real estate -- 2,292,468 --
Net decrease in investments in real estate 196,671 263,344 317,131
Payment for purchase of FPSB -- -- (1,906,354)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (208,232,210) (69,120,678) (151,774,900)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market and savings deposits 21,756,528 19,083,188 25,763,682
Net increase in time deposits 89,524,244 65,297,906 103,873,201
Net increase (decrease) in securities sold under agreements
to repurchase (6,982,903) 13,418,942 8,500,000
Increase in borrowing from Federal Home Loan Bank 30,000,000 -- --
Cash dividends (6,271,211) (5,565,906) (4,744,447)
Proceeds from shares issued to Dividend Reinvestment Plan 1,649,426 1,459,435 1,694,770
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 129,676,084 93,693,565 135,087,206
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (43,072,053) 49,534,063 18,868,401
Cash and cash equivalents, beginning of the year 124,727,974 75,193,911 56,325,510
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 81,655,921 $ 124,727,974 $ 75,193,911
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 57,231,606 $ 50,183,513 $ 39,123,990
Income taxes $ 15,413,002 $ 13,736,000 $ 5,540,000
Non-cash investing activities:
Transfer to securities available-for-sale
within 90 days of maturity $ 1,339,932 $ 629,894 $ 30,362,405
Transfer to securities held-to-maturity $ -- $ -- $ 3,733,023
Net change in unrealized holding gain (loss) on securities
available-for-sale, net of tax $ 818,580 $ 1,429,269 $ (2,462,674)
Transfers to other real estate owned $ 4,333,865 $ 6,012,016 $ 13,329,482
Loans to facilitate the sale of other real estate owned $ 3,482,750 $ 6,948,500 $ 3,524,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
42 CATHAY BANCORP INC. AND SUBSIDIARIES 1998 ANNUAL REPORT
<PAGE>
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.
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. Certain
reclassifications have been made to the prior years' financial statements to
conform with the 1998 presentation. The following are descriptions of the
more significant of these policies.
ORGANIZATION AND BACKGROUND 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 at Bancorp. Bancorp may, from time to time, explore various
acquisition possibilities. 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.
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.
The 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 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 manage interest rate exposure and resultant prepayment risk and
liquidity needs. Securities purchased 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. The carrying value of these assets is not adjusted for temporary
declines in fair value since the Company has the positive intent and ability
to hold them to maturity. 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, in
accumulated other comprehensive income 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.
INTEREST INCOME ON LOANS Loans are carried at amounts advanced, less
principal payments collected and net 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 nonaccrual 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 nonaccrual status, previously accrued
but unpaid interest is reversed and charged against current period income,
and interest is subsequently recognized only to the extent cash is received.
Interest collected on nonaccrual loans is applied to the outstanding
principal balance unless the loan is returned to accrual status. In order to
be returned to accrual status, all past due
43 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
payments must be received and the loan must be paying in accordance with its
payment terms. 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. If a loan is placed on
nonaccrual status, the amortization of the loan fees and the accretion of
discounts discontinue until such time when the loan is reverted back to
accruing status.
ALLOWANCE FOR LOAN LOSSES Management believes the allowance for loan losses
is being maintained at a level considered adequate to provide for estimable
and probable losses. 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 allowance for loan
losses. Such agencies may require the Bank to make additions to its allowance
for loan losses based on their judgements of the information available to
them at the time of their examination.
IMPAIRED LOANS A loan is considered 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 the provision for loan
losses. 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 Bank recognizes interest income on impaired loans based
on its existing method of recognizing interest income on nonaccrual loans.
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.
OTHER REAL ESTATE OWNED Real estate acquired in the settlement of loans is
carried at the estimated fair value, less estimated costs to sell. Specific
valuation allowances on other real estate owned are recorded through charges
to operations to recognize declines in fair value subsequent to foreclosure.
INVESTMENTS IN REAL ESTATE Real estate acquired for sale or development is
stated at the lower of cost or net realizable 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.
44 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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 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.
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 accounts for income taxes using the asset and liability
approach, the objective of which 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.
FOREIGN EXCHANGE OPERATIONS The Company engages in foreign exchange
transactions on behalf of its customers. Stated trading limits are maintained
and monitored to ensure efficient operations. The majority of all
transactions are settled on a cash and carry basis to minimize settlement
risk to the Company. The Company requires cash collateral or an approved line
of credit on all forward transactions.
COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be
reported in a financial statement that is displayed in equal prominence with
the other financial statements and to disclose as a part of stockholders'
equity "accumulated other comprehensive income." Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Comprehensive income
generally includes net income, foreign items, minimum pension liability
adjustments, and unrealized gains and losses on investments in securities
available-for-sale. The Company reports and displays comprehensive income and
its components in its consolidated statements of income and comprehensive
income. All periods presented have been restated to reflect the new
disclosure standard. The statement requires only additional disclosures in
the consolidated financial statements; it does not affect the Company's
financial position or results of operations.
NET INCOME PER COMMON SHARE Earnings per share (EPS) are computed on a basic
and diluted basis. Basic EPS excludes dilution and is computed by dividing
net 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. All
periods presented have been restated to reflect the new disclosures.
STOCK BASED COMPENSATION The Company applies APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), the intrinsic value method, to
account for stock based compensation. In accordance with Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No.
123"), the Company includes pro forma disclosures reflecting the impact of
the fair value method on net income and income per share as if SFAS No. 123
had been adopted for purposes of preparing its basic financial statements for
stock options granted.
45 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
SEGMENTS INFORMATION AND DISCLOSURES On January 1, 1998, the Company adopted
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
stockholders. 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 concluded it is in one segment-banking. Accordingly, the adoption of
SFAS No. 131 did not have material effect on the consolidated financial
statements or disclosures.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, FASB issued 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 is
effective for the first fiscal quarter beginning after December 15, 1998. The
impact on the Company of adopting SFAS No. 134 is not expected to be material
to its results of operations or financial condition.
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 closing of the merger, the Company recorded goodwill of
approximately $10 million.
46 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
The following table presents an unaudited pro forma combined summary of
operations of the Company and FPSB for the year ended December 31, 1996. The
unaudited pro forma combined summary of operations is presented as if the
merger had been effective January 1, 1996. 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, 1996
(dollars in thousands, except per share data) (Unaudited)
- ------------------------------------------------------------------------------
<S> <C>
Interest income $104,921
Interest expense 48,064
- ------------------------------------------------------------------------------
Net interest income before provision for loan losses 56,857
Provision for loan losses 3,789
- ------------------------------------------------------------------------------
Net interest income after provision for loan losses 53,068
Non-interest income 6,090
Non-interest expense 34,241
- ------------------------------------------------------------------------------
Income before income tax expense 24,917
Income tax expense 9,986
- ------------------------------------------------------------------------------
Net income $ 14,931
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Basic and diluted net income per common share $ 1.67
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</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 CASH EQUIVALENTS
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 1998 and 1997 were $11,130,000 and
$14,060,000, respectively.
Securities purchased under agreements to resell are collateralized by
Collateralized Mortgage Obligations securities at December 31, 1998 and 1997.
These agreements generally mature in one business day. The counterparties to
these agreements are nationally recognized investment banking firms that meet
credit requirements of the Company and with whom a master repurchase
agreement has been duly executed. The following table sets forth information
with respect to securities purchased under resale agreements.
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31 $ 17,000,000 $67,000,000
Weighted average interest rate, December 31 5.35% 7.06%
Average amount outstanding during the year $ 69,915,475 $42,260,112
Weighted average interest rate for the year 5.65% 5.72%
Maximum amount outstanding at any month end $105,000,000 $88,475,516
- ------------------------------------------------------------------------------
</TABLE>
For those securities obtained under the resale agreements, the collateral is
either held by a third party custodian or by the counterparty and segregated
under written agreements that recognize the Company's interest in the
securities. Interest income associated with securities purchased under resale
agreements totaled $4.0 million, $2.4 million and $1.5 million, respectively,
for 1998, 1997 and 1996.
47 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,004,345 $ 9,255 $ -- $ 2,013,600
U.S. government agencies 102,523,865 495,624 -- 103,019,489
State and municipal securities 21,974,147 342,989 -- 22,317,136
Mortgage-backed securities 17,682,988 587,769 5,165 18,265,592
Collateralized mortgage obligations 14,071,085 88,282 -- 14,159,367
Asset-backed securities 8,264,563 7,914 52,503 8,219,974
Federal Home Loan Bank stock 5,991,300 -- -- 5,991,300
Commercial paper 29,949,840 -- 4,840 29,945,000
Corporate bonds 35,414,916 630,415 48,971 35,996,360
- ---------------------------------------------------------------------------------------------------------
Total $237,877,049 $2,162,248 $111,479 $239,927,818
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<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
Collateralized 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>
The amortized cost and fair value of securities available-for-sale except for
mortgage-backed securities and collateralized mortgage obligations at
December 31, 1998, 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
1997 Cost Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less(1) $140,416,052 $140,628,389
Due after one year through five years 59,092,747 59,707,274
Due after five years through ten years 6,614,177 7,167,196
Mortgage-backed securities and collateralized mortgage obligations 31,754,073 32,424,959
- ---------------------------------------------------------------------------------------------------------
Total $237,877,049 $239,927,818
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) EQUITY SECURITIES ARE REPORTED IN THIS CATEGORY.
Proceeds from sales and repayments of securities available-for-sale during
1998 and 1997 were $31,921,555 and $99,505,683, respectively. Proceeds from
maturities and calls of securities available-for-sale during 1998 and 1997
were $1,006,489,646 and $300,394,371, respectively. Gross realized gains of
$58,780 and $303,504 were realized for 1998 and 1997, respectively. No gains
were realized in 1996. Gross realized losses of $18,561 and $268,255 were
realized for 1998 and 1997, respectively. No losses were realized for 1996.
48 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
1998 Value Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,026,308 $ 577,692 $ -- $ 26,604,000
U.S. government agencies 54,426,068 818,932 -- 55,245,000
State and municipal securities 61,494,654 3,144,484 32,138 64,607,000
Mortgage-backed securities 146,018,736 2,351,559 317,295 148,053,000
Collateralized Mortgage Obligations 83,534,779 1,200,181 5,960 84,729,000
Corporate bonds 46,656,042 883,958 -- 47,540,000
- ---------------------------------------------------------------------------------------------------------
Total $418,156,587 $8,976,806 $355,393 $426,778,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<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 bonds 8,916,256 220,744 -- 9,137,000
- ---------------------------------------------------------------------------------------------------------
Total $350,336,415 $5,892,458 $ 41,873 $356,187,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The carrying value and estimated fair value of securities held-to-maturity,
except for mortgage-backed securities and collateralized mortgage obligations,
at December 31, 1998, 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 $ 1,986,304 $ 2,009,000
Due after one year through five years 116,569,468 118,974,000
Due after five years through ten years 41,455,234 43,485,000
Due after ten years 28,592,066 29,528,000
Mortgage-backed securities and collateralized mortgage obligations 229,553,515 232,782,000
- ---------------------------------------------------------------------------------------------------------
Total $418,156,587 $426,778,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the maturity and call of securities held-to-maturity during
1998 and 1997 were $12,024,824 and $41,931,722, respectively. Gross realized
gains of $2,829, $5,664 and $21,862 were realized for 1998, 1997 and 1996,
respectively. No losses were realized for 1998, 1997 and 1996.
Securities having a carrying value of $46,806,222 and $24,606,816 at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits, treasury tax and loan, securities sold under agreements to
repurchase and a line of credit with the Federal Home Loan Bank.
49 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5 - LOANS
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 components of loans in the
consolidated statements of condition as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Commercial loans $370,539,071 $338,285,520
Residential mortgage loans 163,756,611 137,003,972
Commercial mortgage loans 356,607,886 303,725,974
Equity lines 20,401,541 17,687,751
Real estate construction loans 40,738,133 41,735,722
Installment loans 29,164,465 26,610,915
Other loans 269,493 267,153
- ---------------------------------------------------------------------------
981,477,200 865,317,007
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Less
Unamortized deferred loan fees 3,631,316 3,786,174
Allowance for loan losses 15,970,034 15,379,408
- ---------------------------------------------------------------------------
Total $961,875,850 $846,151,425
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
The Company previously sold participations in certain residential mortgage
loans to buyers in the secondary market. These participations covered
substantially all of the loan balances and were sold without recourse. No
such sales have been made since 1993. As of December 31, 1998, the Company
had $9,937,316 of these loans in its servicing portfolio. There were no loans
held for sale as of December 31, 1998 and 1997. Approximately $87,324,000 and
$3,425,000 residential mortgage loans were pledged to secure a line of credit
with the Federal Home Loan Bank as of December 31, 1998 and December 31,
1997, respectively.
An analysis of the activity in the allowance for loan losses for the
years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $15,379,408 $13,528,568 $12,742,427
Allowance acquired from merger -- -- 1,644,171
Loans charged-off (3,518,890) (2,138,803) (5,388,389)
Recoveries on loans previously charged-off 509,516 389,643 930,359
Provision for loan losses 3,600,000 3,600,000 3,600,000
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $15,970,034 $15,379,408 $13,528,568
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the Company had identified impaired loans with
a recorded investment of approximately $21,949,000 and $21,906,000,
respectively. For the year 1998 and 1997, the average balances of impaired
loans were $21,713,000 and $23,171,000, and interest collected on impaired
loans totaled $2,080,000 and $1,564,000, respectively. The Bank recognizes
interest income on impaired loans based on its existing method of recognizing
interest income on nonaccrual loans. The following table is a breakdown of
impaired loans and the related specific allowance and allocated general
allowance:
<TABLE>
<CAPTION>
Allocated
Recorded Specific General Net
1998 Investment Allowance Allowance Balance
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 9,378,807 $ -- $1,565,389 $ 7,813,418
Commercial real estate 12,515,142 58,316 1,768,524 10,688,302
Other 54,629 -- 54,629 --
- -------------------------------------------------------------------------------------------------------------------
Total $21,948,578 $ 58,316 $3,388,542 $18,501,720
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------
Commercial $ 7,783,610 $444,766 $1,054,554 $ 6,284,290
Commercial real estate 14,027,194 460,909 1,934,943 11,631,342
Other 95,052 -- 95,052 --
- -------------------------------------------------------------------------------------------------------------------
Total $21,905,856 $905,675 $3,084,549 $17,915,632
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
50 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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, 1998. An analysis of the activity with respect to loans to
Related Parties is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
<S> <C>
Balance at December 31, 1996 $ 1,945,644
Additional loans made 5,523,396
Payments received (160,721)
- ---------------------------------------------------------------------
Balance at December 31, 1997 7,308,319
Additional loans made 18,626,870
Payments received (10,031,398)
- ---------------------------------------------------------------------
Balance at December 31, 1998 $ 15,903,791
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
The following is a summary of nonaccrual loans and troubled debt
restructurings as of December 31, 1998, 1997 and 1996 and the related net
interest foregone for the years then ended:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $13,089,808 $16,886,460 $9,304,994
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Contractual interest due $ 1,395,212 $ 1,845,513 $1,121,136
Interest recognized 112,641 471,398 268,050
- ----------------------------------------------------------------------------------
Net interest foregone $ 1,282,571 $ 1,374,115 $ 853,086
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Troubled debt restructurings $4,642,886 $ 4,874,277 $3,201,462
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Contractual interest due $ 420,823 $ 406,015 $ 338,382
Interest recognized 411,588 387,420 310,783
- ----------------------------------------------------------------------------------
Net interest foregone $ 9,235 $ 18,595 $ 27,599
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, there were no commitments to lend additional funds to
those borrowers whose loans have been restructured.
6 - OTHER REAL ESTATE OWNED
The balance of other real estate owned at December 31, 1998 and 1997 was
$10,454,005 and $13,269,382, respectively. The valuation allowance was $494,027
and $1,081,370 at December 31, 1998 and 1997, respectively. The following table
presents the components of other real estate owned expense (income) for the
year-ended:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense (income) $ (321,520) $ 201,269 $ 312,427
Provision for losses 195,560 475,796 1,501,268
Net gain on disposal (999,145) (173,961) (85,313)
- ---------------------------------------------------------------------------------
Real estate operations, net $(1,125,105) $ 503,104 $1,728,382
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
51 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
An analysis of the activity in the allowance for other real estate losses
for the years ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $1,081,370 $1,568,387 $ 869,262
Provision for losses 195,560 475,796 1,501,268
Charge-offs on disposal (782,903) (962,813) (802,143)
- --------------------------------------------------------------------------------
Balance, end of year $ 494,027 $1,081,370 $1,568,387
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
7 - INVESTMENTS IN REAL ESTATE
As of December 31, 1998, 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 at
December 31:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Strip-malls $ 641,558 $ 680,091
Low income housing 815,493 973,631
- --------------------------------------------------------------------------------
$1,457,051 $1,653,722
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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 Company sold another strip mall in 1997, recognizing a
gain of $222,310. The Company recognized net gains of $95,060 and $170,021
from the operations of the properties, respectively, in 1998 and 1997, and a
net loss of $106,065 in 1996 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 six years. See Note 10 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, 1998 and 1997
because the Company did not have ability to exercise significant influence
over the operation of the partnership. The Company recognized a net loss of
approximately $158,000, $176,000 and $181,000 in 1998, 1997 and 1996,
respectively, from the partnerships' operations.
8 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $11,483,793 $11,371,120
Building and building improvements 13,779,697 13,775,815
Furniture, fixtures and equipment 12,057,782 11,037,154
Other 2,169,974 1,808,329
Construction in process 837,796 480,485
- ---------------------------------------------------------------------------------
40,329,042 38,472,903
Less: Accumulated depreciation 14,502,234 13,271,020
- ---------------------------------------------------------------------------------
Premises and equipment, net $25,826,808 $25,201,883
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
The amount of depreciation included in operating expense was $1,241,354,
$1,335,400 and $1,336,363 in 1998, 1997 and 1996, respectively.
52 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
9 - BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The underlying collateral pledged for the repurchase agreements consists of
U.S. government agency 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,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding(1) $ 53,284,503 $ 8,861,458 $ 611,749
Highest month-end balances(2) 55,184,962 23,418,942 10,000,000
Year end balance 16,436,039 23,418,942 10,000,000
Rate at year-end 4.53% 7.03% 6.83%
- -------------------------------------------------------------------------------------
</TABLE>
(1) AVERAGE BALANCES WERE COMPUTED USING DAILY AVERAGES.
(2) HIGHEST MONTH-END BALANCES WERE AT NOVEMBER 1998, DECEMBER 1997 AND
DECEMBER 1996, RESPECTIVELY.
ADVANCES FROM THE FEDERAL HOME LOAN BANK
During the third quarter of 1998, the Bank obtained advances from the FHLB,
totaling $30,000,000. These advances bear an average interest rate of 4.84% and
are non-callable.
10 - INCOME TAXES
For the years ended December 31, 1998, 1997 and 1996, the current and deferred
amounts of the income tax expense are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT
Federal $ 11,696,795 $ 10,280,310 $ 6,080,034
State 4,289,326 3,455,997 2,242,534
- -------------------------------------------------------------------------------------
15,986,121 13,736,307 8,322,568
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
DEFERRED
Federal (105,480) (478,483) (460,651)
State 95,020 (14,883) (42,535)
- -------------------------------------------------------------------------------------
(10,460) (493,366) (503,186)
- -------------------------------------------------------------------------------------
Total income tax expense $ 15,975,661 $ 13,242,941 $ 7,819,382
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
53 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Difference between provisions for loan losses for tax and
financial reporting purposes $ 6,916,944 $ 6,324,398
Difference between provisions for other real estate owned losses
for tax and financial reporting purposes 788,985 1,058,223
State income tax 1,320,988 891,637
- ----------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 9,026,917 8,274,258
- ----------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Use of accelerated depreciation for tax purposes (1,131,216) (1,127,316)
Deferred loan fees (269,739) (275,717)
FHLB stock dividend (936,091) (648,948)
Acquisition of FPSB (485,154) (584,264)
Unrealized holding gain on securities available-for-sale, net (862,266) (322,355)
Other, net (1,055,357) (478,193)
- ----------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (4,739,823) (3,436,793)
- ----------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 4,287,094 $ 4,837,465
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</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 1997
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 differences.
Included in other assets in the statements of condition, at December 31,
1998 and 1997 were net deferred tax assets of $4,287,094 and $4,837,465,
respectively. Other assets as of December 31, 1997 included a current income
tax receivable of $374,029. Other liabilities as of December 31, 1998 include
a current income tax payable of $199,090.
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>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at Federal statutory rate $ 14,194,090 35.00% $ 11,672,737 35.00% $ 7,397,367 35.00%
State income taxes, net of
Federal income tax benefit 2,849,825 7.03 2,236,724 6.71 1,429,999 6.77
Interest on obligations of state
and political subdivisions,
which are exempt from
Federal taxation (927,316) (2.29) (722,348) (2.17) (709,350) (3.35)
Low income housing tax credits (319,183) (0.79) (319,183) (0.96) (319,183) (1.51)
Non-deductible expense --
Amortization of goodwill 239,323 0.59 239,603 0.72 28,760 0.14
Other, net (61,078) (0.15) 135,408 0.41 (8,211) (0.05)
- ----------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 15,975,661 39.39% $ 13,242,941 39.71% $ 7,819,382 37.00%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
54 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
11 - STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
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, without regulatory approval, 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, 1998 is restricted to
approximately $41,421,000 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 has 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, 1998, 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, 1998 and 1997 are presented in the tables below:
<TABLE>
<CAPTION>
Company Bank Company Bank
As of December 31, 1998 As of December 31, 1998 As of December 31, 1997 As of December 31, 1997
Balance Percentage Balance Percentage Balance Percentage Balance Percentage
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier I Capital
(to risk-
weighted assets) $ 146,874,015 (1) 11.44% $ 141,834,342 (1) 11.04% $ 125,976,792 (2) 11.73% $ 122,431,400 (2) 11.40%
Tier I Capital
minimum
requirement 51,371,838 4.00 51,371,838 4.00 42,956,701 4.00 42,956,587 4.00
- -----------------------------------------------------------------------------------------------------------------------------------
Excess $ 95,502,177 7.44% $ 90,462,504 7.04% $ 83,020,091 7.73% $ 79,474,813 7.40%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capital
(to risk-
weighted assets) $ 162,844,048 (1) 12.68% $ 157,804,375 (1) 12.29% $ 139,424,917 (2) 12.98% $ 135,879,487 (2) 12.65%
Total Capital
minimum
requirement 102,743,677 8.00 102,743,677 8.00 85,913,402 8.00 85,913,174 8.00
- -----------------------------------------------------------------------------------------------------------------------------------
Excess $ 60,100,371 4.68% $ 55,060,698 4.29% $ 53,511,515 4.98% $ 49,966,313 4.65%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-weighted
Assets $1,284,295,962 $1,284,295,962 $1,073,917,525 $1,073,914,670
Tier I Capital
(to average
assets) --
Leverage ratio $ 146,874,015 (1) 8.45% $ 141,834,341 (1) 8.16% $ 125,976,792 (2) 7.94% $ 122,431,400 (2) 7.71%
Minimum leverage
requirement 69,508,412 4.00 69,508,348 4.00 63,483,951 4.00 63,483,844 4.00
- -----------------------------------------------------------------------------------------------------------------------------------
Excess $ 77,365,603 4.45% $ 72,325,993 4.16% $ 62,492,841 3.94% $ 58,947,556 3.71%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total average assets $1,737,710,294 (3) $1,737,708,705 (3) $1,587,098,783 (3) $1,587,096,105 (3)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) EXCLUDING THE UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE-FOR-SALE OF
$1,188,502 AND GOODWILL OF $8,589,702.
(2) EXCLUDING THE UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE-FOR-SALE OF
$369,922 AND GOODWILL OF $9,529,827.
(3) AVERAGE ASSETS REPRESENT AVERAGE BALANCES FOR THE FOURTH QUARTER OF 1998
AND 1997, RESPECTIVELY.
55 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1998.
The following is the reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the years
indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $24,578,883 $20,107,738
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to
stockholders $24,578,883 8,967,188 $2.74 $20,107,738 8,915,936 $2.26
Effect of Dilutive Stock
Options 1,205 -- --
Diluted EPS
Income available
to common
stockholders
plus assumed
conversions $24,578,883 8,968,393 $2.74 $20,107,738 8,915,936 $2.26
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
Per
Income Shares Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------
<S> <C>
Net income $13,315,951
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Basic EPS
Income available to
stockholders $13,315,951 8,017,398 $1.66
Effect of Dilutive Stock
Options
Diluted EPS
Income available
to common
stockholders
plus assumed
conversions $13,315,951 8,017,398 $1.66
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
12 - COMMITMENTS AND CONTINGENCIES
LITIGATION 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
or results of operations.
LENDING 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>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $ 389,304,000 $ 344,798,000
Standby letters of credit 10,112,000 11,498,000
Other letters of credit 29,029,000 30,612,000
Bill of lading guarantee 11,517,000 10,402,000
- --------------------------------------------------------------------------------
Total $ 439,962,000 $ 397,310,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
56 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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, 1998, 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, 1998, the Company had available credit lines with
other financial institutions in the amount of $145,000,000.
LEASES 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 $1,750,592, $1,792,633 and $1,328,502
for 1998, 1997 and 1996, respectively. The following table shows future
minimum payments under operating leases with terms in excess of one year as
of December 31, 1998:
<TABLE>
<CAPTION>
(in thousands) Commitments
- --------------------------------------------------------------------------------
<S> <C>
Year ended December 31,
1999 $ 1,879
2000 1,704
2001 1,350
2002 669
2003 614
Thereafter 9,553
- -------------------------------------------------------------------------------
Total minimum lease payments $ 15,769
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Rental income was $455,209, $436,892 and $504,689 for 1998, 1997 and 1996,
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,
1998:
<TABLE>
<CAPTION>
(in thousands) Commitments
- -------------------------------------------------------------------------------
<S> <C>
Year ended December 31,
1999 $ 407
2000 342
2001 298
2002 257
2003 166
Thereafter 337
- --------------------------------------------------------------------------------
Total minimum lease payments to be received $ 1,807
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
YEAR 2000 (UNAUDITED) The "Year 2000" problem is the result of computer
programs recognizing a date using "00" as the year 1900 rather than the year
2000, due to computer programs being written using two digits rather than
four for the date field. The failure to correct the Y2K problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could lead to material and adverse effects on the
Company's operations, liquidity and financial condition.
57 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company began its Y2K efforts in 1997 and continued in 1998, in
accordance with its remediation program. The program adopted by the Company
was designed to bring its information technology and non-information
technology systems into Y2K compliance, and also to determine whether the
Company's material third-party suppliers, service providers and borrowers
will be Y2K ready at the turn of the century.
The remediation program divided the Company's Y2K efforts into five
phases - awareness, assessment, renovation, validation and implementation.
The awareness and assessment phases were completed in 1998. The Company is
currently in the renovation, validation and implementation phases. The
Company expects these remaining three phases to be completed by June 30,
1999.
Due to the general uncertainty inherent in the Y2K problem, the
Company's remediation efforts may not effectively address all the Y2K issues
or achieve Y2K compliance, partly due to the uncertainty of the Y2K readiness
of third-party suppliers and customers. The Company cannot, at this time,
determine whether the consequences of any Y2K failures will have a material
impact on the Company's operations, liquidity or financial condition. The
Company is in the process of establishing contingency procedures for the key
functions of the Company, in the event that any of its information technology
or non-information technology should fail at the turn of the century.
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 purchased 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.
ADVANCES FROM FEDERAL HOME LOAN BANK The fair value of the advances is
estimated by discounting the projected cash flows using the U.S. Treasury
curve adjusted to approximate current entry-value interest rates applicable
and similar obligations issued by the Bank.
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.
58 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1997
(in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 64,656 $ 64,656 $ 57,728 $ 57,728
Federal funds sold and securities
purchased under agreements to resell 17,000 17,000 67,000 67,000
Securities available-for-sale 239,928 239,928 216,158 216,158
Securities held-to-maturity 418,156 426,778 350,336 356,187
Loans, net 961,876 981,386 846,151 860,111
- --------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Deposits $ 1,560,402 $ 1,564,981 $ 1,449,121 $ 1,452,787
Securities sold under agreements to repurchase 16,436 16,436 23,419 23,419
Advances from Federal Home Loan Bank 30,000 30,000 -- --
- --------------------------------------------------------------------------------------------------------------
As of December 31, 1998 As of December 31, 1997
(in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- --------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL STATEMENTS
Commitments to extend credit $ 389,304 $ (336) $ 344,798 $ (417)
Standby letters of credit 10,112 (87) 11,498 (69)
Other letters of credit 29,029 (174) 30,612 (202)
Bill of lading guarantee 11,517 (50) 10,402 (25)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
14 - EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN Under the Company's 1985 Employee Stock
Ownership Plan ("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 1998, 1997 and 1996, the ESOP purchased 23,669, 38,491 and 45,959
shares, respectively, of the Company's stock at an aggregate cost of
$821,021, $878,620 and $754,269, respectively. The shares purchased in 1998
included 11,000 shares bought on the open market and 12,669 shares bought
through the Dividend Reinvestment Plan. 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 $486,120, $453,000 and $515,850 to
the trust in 1998, 1997 and 1996, respectively, which was charged to salaries
and employee benefits in the accompanying consolidated statements of income
and comprehensive income. In 1998, distribution of benefits to participants
totaled 16,764 shares. As of December 31, 1998, the ESOP owned 561,786 shares
or 6.25% of the Company's outstanding common stock.
59 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 the 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 1998, the Company's contribution amounted to $178,510.
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 - EQUITY INCENTIVE PLAN
On February 19, 1998, the Board adopted the Cathay Bancorp, Inc. Equity
Incentive Plan. Under the Equity Incentive Plan, directors and eligible
employees may be granted incentive or nonstatutory stock options, or awarded
restricted stock, for up to 1,075,000 shares of the Company's common stock.
The Equity Incentive Plan currently terminates on February 18, 2008.
On September 17, 1998, the Company granted nonstatutory stock options to
purchase a total of 45,000 shares of the Company's common stock to selected
bank officers and non-employee directors, with an exercise price per share
equal to the fair market value of a share of the Company's common stock on
the date of grant. Such options have a maximum ten-year term and vest in 20%
annual increments (subject to early termination in certain events). If such
options expire or terminate without having been exercised, any unpurchased
shares will again be available for future grants or awards.
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1997 -- --
Granted 45,000 $ 33
Exercised -- --
Forfeited -- --
Expired -- --
Cancelled -- --
- -------------------------------------------------------------------------------
Balance, December 31, 1998 45,000 $ 33
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 there were no options exercisable.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
its Plan. Accordingly, no compensation cost has been recognized for its stock
option plans in the consolidated financial statements for 1998.
The Company estimates the fair value of options granted during 1998
using the Black-Scholes option-pricing model with following assumptions: (i)
an expected life of the option of 4 years, (ii) a stock price volatility of
33.5% based on daily market prices for the preceding four-year period, (iii)
an expected dividend yield of 1.9% per share per annum, and (iv) a risk-free
interest rate of 4.5%. The fair value of the options is calculated to be
$9.21 per share at the date of grant.
60 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
If the compensation cost for the Company's stock option plan had been
determined with the fair value at the grant dates, computed using the
assumptions above, for awards under the Plan consistent with the method of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share for 1998 would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) 1998
- -------------------------------------------------------------------------------
<S> <C>
Net income
As reported $ 24,579
Pro forma 24,564
Basic net income per share
As reported 2.74
Pro forma 2.74
Diluted net income per share
As reported 2.74
Pro forma 2.74
- -------------------------------------------------------------------------------
</TABLE>
The pro forma amounts shown may not be representative of the effects on
reported net income for future periods.
16 - CONDENSED FINANCIAL INFORMATION OF CATHAY BANCORP, INC. (UNAUDITED)
The condensed financial information of Cathay Bancorp, Inc. as of December
31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996
were as follows:
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Year ended December 31
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 5,080,369 $ 3,613,233
Investment in subsidiary -- Cathay Bank 151,612,546 132,331,149
Other -- 2,855
- ----------------------------------------------------------------------------------------------
Total assets $ 156,692,915 $ 135,947,237
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
LIABILITIES
Accrued expenses $ 40,696 $ 70,696
- ----------------------------------------------------------------------------------------------
Total liabilities 40,696 70,696
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 10,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized,
8,988,760 and 8,941,738 shares issued and outstanding in
1998 and 1997, respectively 89,888 89,417
Additional paid-in-capital 62,919,694 61,270,739
Accumulated other comprehensive income 1,188,502 369,922
Retained earnings 92,454,135 74,146,463
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 156,652,219 135,876,541
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 156,692,915 $ 135,947,237
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
61 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash dividends from Cathay Bank $ 6,271,211 $ 5,565,906 $ 4,744,447
Amortization of organizational costs and other expenses (267,702) (233,385) (217,766)
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 6,003,509 5,332,521 4,526,681
Income tax benefit 112,558 97,837 92,213
- ------------------------------------------------------------------------------------------------------------------------
Income before undistributed earnings of subsidiary 6,116,067 5,430,358 4,618,894
- ------------------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings of subsidiary 18,462,816 14,677,380 8,697,057
- ------------------------------------------------------------------------------------------------------------------------
Net income 24,578,883 20,107,738 13,315,951
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding loss (gain) arising during the year 810,412 1,174,644 (2,507,793)
Less: reclassification adjustment for realized gain (loss)
on securities included in net income (8,168) (254,625) (45,119)
Total comprehensive income, net of tax 818,580 1,429,269 (2,462,674)
Total comprehensive income $ 25,397,463 $ 21,537,007 $ 10,853,277
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 24,578,883 $ 20,107,738 $ 13,315,951
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (18,462,816) (14,677,380) (8,697,057)
Amortization of organizational costs -- -- 786
Increase (decrease) in accrued expenses (30,000) 19,320 (19,320)
Other 2,854 (2,849) 155,244
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,088,921 5,446,829 4,755,604
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,649,426 1,459,435 1,694,770
Cash dividends (6,271,211) (5,565,906) (4,744,447)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,621,785) (4,106,471) (3,049,677)
- ------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 1,467,136 1,340,358 1,705,927
Cash and cash equivalents, beginning of year 3,613,233 2,272,875 566,948
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,080,369 $ 3,613,233 $ 2,272,875
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 150,000 $ 150,471 $ 150,000
Non-cash investing activities:
Net change in unrealized holding gain (loss) on
securities available-for-sale, net of tax $ 818,580 $ 1,429,269 $ (2,462,674)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
62 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
17 - 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 47,017, 63,599 and 105,245 and $1,649,426, $1,459,435 and
$1,694,770 for 1998, 1997 and 1996, respectively.
18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected unaudited quarterly financial data.
<TABLE>
<CAPTION>
Summary of Operations 1998
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 32,077 $ 31,819 $ 30,234 $ 29,179
Interest expense 14,773 14,879 14,082 13,491
- --------------------------------------------------------------------------------------
Net interest income 17,304 16,940 16,152 15,688
Provision for loan losses 900 900 900 900
- --------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 16,404 16,040 15,252 14,788
Non-interest income 1,964 2,072 2,339 2,002
Non-interest expense 7,080 7,680 7,664 7,882
- --------------------------------------------------------------------------------------
Income before income
tax expense 11,288 10,432 9,927 8,908
Income tax expense 4,408 4,172 3,906 3,490
- --------------------------------------------------------------------------------------
Net income 6,880 6,260 6,021 5,418
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Other comprehensive
income, net of tax:
Unrealized holding
loss (gain) arising
during the year (272) 626 552 (96)
Less: reclassification
adjustment for realized
gain (loss) on securities
included in net income 4 2 -- (15)
- --------------------------------------------------------------------------------------
Total other comprehensive
income, net of tax (276) 624 552 (81)
- --------------------------------------------------------------------------------------
Total comprehensive income $ 6,604 $ 6,884 $ 6,573 $ 5,337
- --------------------------------------------------------------------------------------
Basic net income per
common share $ 0.77 $ 0.70 $ 0.67 $ 0.61
Diluted net income
per common share $ 0.77 $ 0.70 $ 0.67 $ 0.61
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations 1997
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 29,217 $ 28,445 $ 27,600 $ 26,716
Interest expense 13,466 13,058 12,345 12,005
- --------------------------------------------------------------------------------------
Net interest income 15,751 15,387 15,255 14,711
Provision for loan losses 900 900 900 900
- --------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 14,851 14,487 14,355 13,811
Non-interest income 1,860 1,895 1,630 1,390
Non-interest expense 8,146 7,253 7,901 7,628
- --------------------------------------------------------------------------------------
Income before income
tax expense 8,565 9,129 8,084 7,573
Income tax expense 3,251 3,733 3,205 3,054
- --------------------------------------------------------------------------------------
Net income 5,314 5,396 4,879 4,519
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Other comprehensive
income, net of tax:
Unrealized holding
loss (gain) arising
during the year (74) 979 1,424 (1,154)
Less: reclassification
adjustment for realized
gain (loss) on securities
included in net income (9) (259) 22 (8)
- --------------------------------------------------------------------------------------
Total other comprehensive
income, net of tax (65) 1,238 1,402 (1,146)
- --------------------------------------------------------------------------------------
Total comprehensive income $ 5,249 $ 6,634 $ 6,281 $ 3,373
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Basic net income per
common share $ 0.59 $ 0.60 $ 0.55 $ 0.51
Diluted net income
per common share $ 0.59 $ 0.60 $ 0.55 $ 0.51
- --------------------------------------------------------------------------------------
</TABLE>
63 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
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, 1998 and 1997, and
the related consolidated statements of income and comprehensive income, changes
in stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Los Angeles, California
January 15, 1999
64 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
<TABLE>
CORPORATE, BRANCH AND OVERSEAS OFFICES
<S> <C> <C>
CORPORATE OFFICE: TORRANCE VALLEY-STONEMAN
23228 Hawthorne Boulevard 43 East Valley Boulevard
777 North Broadway Torrance, CA 90505 Alhambra, CA 91801
Los Angeles, CA 90012 Tel: (310) 791-8700 Tel: (626) 576-7600
Tel: (213) 625-4700 Fax: (310) 791-1862 Tel: (626) 576-7600
Fax: (213) 625-1368 Phoebe Yu Mimy Luc
ASSISTANT VICE PRESIDENT AND MANAGER MANAGER
OAKLAND BERKELEY-RICHMOND
BRANCH AND OVERSEAS OFFICES: 710 Webster Street 3288 Pierce Street
Oakland, CA 94607 Richmond, CA 94804
LOS ANGELES Tel: (510) 208-3700 Tel: (510) 526-8898
777 North Broadway Fax: (510) 208-3727 Fax: (510) 526-0639
Los Angeles, CA 90012 Thomas Chow Thomas Chow
Tel: (213) 625-4700 VICE PRESIDENT AND MANAGER VICE PRESIDENT AND MANAGER
Fax: (213) 625-1368
Claudia My Lu
VICE PRESIDENT AND MANAGER CERRITOS HONG KONG
11355 South Street Tak Shing House #103
MONTEREY PARK Cerritos, CA 90701 20 Des Voeux Road Central
250 South Atlantic Boulevard Tel: (562) 860-7300 Hong Kong
Monterey Park, CA 91754 Fax: (562) 860-2296 Tel: (852) 2522-0071
Tel: (626) 281-8808 Henry Yoh Fax: (852) 2810-1652
Fax: (626) 281-2956 MANAGER Matthew Chui
Frank Chen REPRESENTATIVE
REGIONAL VICE PRESIDENT AND MANAGER CITY OF INDUSTRY
1250 South Fullerton Road CATHAY INVESTMENT COMPANY
ALHAMBRA City of Industry, CA 91748 777 North Broadway
601 North Atlantic Boulevard Tel: (626) 810-1088 Los Angeles, CA 90012
Alhambra, CA 91801 Fax: (626) 810-2188 Tel: (213) 625-4700
Tel: (626) 284-6556 Shu Lee Fax: (213) 625-1368
Fax: (626) 282-3496 REGIONAL VICE PRESIDENT AND MANAGER George T.M. Ching
Christina Tsui PRESIDENT
ASSISTANT VICE PRESIDENT AND MANAGER CUPERTINO
10480 South De Anza Boulevard TAIWAN C.I.C.
HACIENDA HEIGHTS Cupertino, CA 95014 Sixth Floor, Suite 3
16025 East Gale Avenue Tel: (408) 255-8300 146 Sung Chiang Road
City of Industry, CA 91745 Fax: (408) 255-8373 Taipei, Taiwan, R.O.C.
Tel: (626) 333-8533 David Lin Tel: (886) (2) 2537-5057
Fax: (626) 336-4227 ASSISTANT VICE PRESIDENT AND MANAGER Fax: (886) (2) 2537-5059
Jack Sun Li Sung
VICE PRESIDENT AND MANAGER FREMONT REPRESENTATIVE AND MANAGER
47998 Warm Springs Boulevard
WESTMINSTER Fremont, CA 94539 ADDITIONAL INFORMATION:
9121 Bolsa Avenue Tel: (510) 770-5151
Westminster, CA 92683 Fax: (510) 770-5150 MARKET MAKERS
Tel: (714) 890-7118 Tony Wen THE FOLLOWING FIRMS MAKE A MARKET
Fax: (714) 898-9267 VICE PRESIDENT AND MANAGER IN CATHAY BANCORP, INC. STOCK:
Kenneth Chan
ASSISTANT VICE PRESIDENT AND MANAGER IRVINE Herzog, Heine, Geduld, Inc.
15323 Culver Drive Wedbush Morgan Securities Inc.
SAN JOSE Irvine, CA 92714 Hoefer & Arnett, Inc.
2010 Tully Road Tel: (949) 559-7500
San Jose, CA 95122 Fax: (949) 559-7508 REGISTRAR AND TRANSFER AGENT
Tel: (408) 238-8880 Linda Kuo American Stock Transfer and Trust
Fax: (408) 238-2302 ASSISTANT VICE PRESIDENT AND MANAGER Company
Edward Wong 40 Wall Street
VICE PRESIDENT AND MANAGER MILLBRAE New York, NY 10005
Millbrae Plaza Tel: (800) 937-5449
SAN GABRIEL 1095 El Camino Real
825 East Valley Boulevard Millbrae, CA 94030 CATHAY SERVICE HOTLINE
San Gabriel, CA 91776 Tel: (650) 652-0188 (800) 9 CATHAY / 922-8429
Tel: (626) 573-1000 Fax: (650) 652-0180 SERVICE AVAILABLE 24 HOURS THROUGHOUT CALIFORNIA.
Fax: (626) 573-0983 Stanley Wong
Daniel Liu VICE PRESIDENT AND MANAGER CATHAY BANK WEB SITE
VICE PRESIDENT AND MANAGER www.cathaybank.com
</TABLE>
68 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(3) EXHIBITS
22.1 Subsidiaries of the Company
CATHAY BANK CATHAY INVESTMENT COMPANY
a California Corporation a California Corporation
100% owned 100% owned by Cathay Bank
Exhibit 22.1
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cathay Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
033-33767) on Form S-3 of Cathay Bancorp, Inc. of our report dated January 15,
1999 relating to the consolidated statements of condition of Cathay Bancorp,
Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of Cathay Bancorp, Inc.
KPMG LLP
Los Angeles, California
March 26, 1999
Exhibit 23.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 63,280
<INT-BEARING-DEPOSITS> 1,376
<FED-FUNDS-SOLD> 17,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 239,928
<INVESTMENTS-CARRYING> 418,156
<INVESTMENTS-MARKET> 426,778
<LOANS> 977,846
<ALLOWANCE> 15,970
<TOTAL-ASSETS> 1,780,898
<DEPOSITS> 1,560,402
<SHORT-TERM> 16,436
<LIABILITIES-OTHER> 17,408
<LONG-TERM> 30,000
0
0
<COMMON> 90
<OTHER-SE> 156,562
<TOTAL-LIABILITIES-AND-EQUITY> 1,780,898
<INTEREST-LOAN> 82,866
<INTEREST-INVEST> 36,493
<INTEREST-OTHER> 3,950
<INTEREST-TOTAL> 123,309
<INTEREST-DEPOSIT> 54,007
<INTEREST-EXPENSE> 57,225
<INTEREST-INCOME-NET> 66,084
<LOAN-LOSSES> 3,600
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 30,065
<INCOME-PRETAX> 40,555
<INCOME-PRE-EXTRAORDINARY> 40,555
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,579
<EPS-PRIMARY> 2.74
<EPS-DILUTED> 2.74
<YIELD-ACTUAL> 4.30
<LOANS-NON> 13,090
<LOANS-PAST> 4,683
<LOANS-TROUBLED> 4,642
<LOANS-PROBLEM> 7,377
<ALLOWANCE-OPEN> 15,379
<CHARGE-OFFS> 3,519
<RECOVERIES> 510
<ALLOWANCE-CLOSE> 15,970
<ALLOWANCE-DOMESTIC> 15,970
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
