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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, 1999
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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 3, 2000 was $306,968,592 (computed on the basis of
$42.00 per share, which was the last sale price of the Company's Common Stock
reported by the Nasdaq National Market on March 3, 2000).*
The number of shares outstanding of each of the Registrant's classes of
Common Stock as of March 3, 2000: Common Stock, $.01 par value - 9,044,624
shares
DOCUMENTS INCORPORATED BY REFERENCE
- - Portions of Registrant's definitive proxy materials relating to its 2000
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, 1999 (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. The 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. The Company's sole current business
activity is to hold all of the outstanding 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 December 10, 1999, Cathay Bank assumed approximately $80.6 million of
the deposits of, and purchased approximately $84.1 million of the assets of, New
York-based Golden City Commercial Bank. Please see Note 2 to the Consolidated
Financial Statements on page 46 of the Annual Report to Stockholders which is
incorporated herein by reference.
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.
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
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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
11 branch offices located in the cities of Monterey Park, Alhambra, City of
Industry, Westminster, San Gabriel, Torrance, Cerritos, Irvine and Diamond Bar
in Southern California, six branch offices located in the cities of San Jose,
Oakland, Cupertino, Fremont, Millbrae and Richmond in Northern California, two
branch offices located in the cities of Flushing and New York in the State of
New York and one loan production office in Houston, Texas. 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
invests 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. The
Bank's services also include 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
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.
Beginning in 1999, the Bank launched a program under the name of Cathay Global
Investment Services to allow its customers to purchase mutual funds, annuities,
equities, bonds and short-term money market instruments offered through BISYS
Brokerage Services, Inc.
Since its inception, the Bank's policy has been to attract business from,
and to focus its primary services for the benefit of, individuals, professionals
and small to medium-sized businesses in the local markets in which its branches
are located. The three general areas to which the Bank has directed its lendable
assets are: (1) loans secured by real estate; (2) commercial loans and trade
financing; and (3) installment loans to individuals for automobile, household
and other consumer expenditures.
SELECTED FINANCIAL DATA
Information concerning changes in the 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.
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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 47
through 49 of the Annual Report to Stockholders, and is incorporated herein by
reference.
LOANS
DISTRIBUTION AND MATURITY OF LOANS. Information concerning loan type and
mix, distribution of loans and maturity of loans is included on pages 22 and 23
of the Annual Report to Stockholders and is incorporated herein by reference.
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 24 through 29 and in
Notes 5 and 6 to the Consolidated Financial Statements on pages 49 through 51 of
the Annual Report to Stockholders and is incorporated herein by reference.
DEPOSITS
Information concerning types of deposit accounts and average deposits and
rates is included on pages 29 through 31 of the Annual Report to Stockholders
and is incorporated herein by reference.
RETURN ON EQUITY AND ASSETS
Information concerning the return on average assets, return on average
stockholders' equity, average 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, and consists of 1,806 square feet. The
lease was renewed for three years from October 5, 1999 to October 4, 2002 for a
monthly rent of approximately $3,500 based on the exchange rate in effect at
December 31, 1999.
CIC sold its property located in Garden Grove, California in April, 1999
for $1.05 million with a net gain of $394,000. As of December 31, 1999, CIC did
not own any properties.
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 accomodates a platform area for consumer
loans and certain business and commercial real estate loans, a new account area,
24 teller stations (including 16 regular tellers, seven commercial tellers, and
one ATM), four pneumatic drive-up teller stations, one walk-up teller station,
the branch's operations area and a vault 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
$15,000.
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.
<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 8,912 Administrative offices 2/98 - 1/01 $8,912
Los Angeles, CA
(Rm 305-306, 308-309,
313-315,320)*
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767 N. Hill Street 1,800 Administrative offices 2/98 - 1/01 $1,800
Los Angeles, CA
(Rm 301-302)
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16025 E. Gale Avenue 4,483 Hacienda Heights branch 7/99 - 6/04 with one $5,229
Suite B-1 office more 5-year option
City of Industry, CA
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2010 Tully Road 4,800 San Jose branch office 3/96 - 4/06 with two $8,640
San Jose, CA 5-year options**
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710 Webster Street Oakland, CA 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 one $3,613
Fremont, CA more 3-year option
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</TABLE>
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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>
15323 Culver Drive 4,450 Irvine branch office 4/89 - 4/09 with two $6,089
Irvine, CA 5-year options
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1095 El Camino Real 3,441 Millbrae branch office 1/00 - 12/04 with one $7,337
Millbrae, CA more 5-year option
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800 N. Hill Street 8,707 Administrative offices 2/99 - 2/04 $5,105
Los Angeles, CA
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43 E. Valley Blvd. 1,976 Valley/Stoneman branch 8/96 - 8/01 with three $4,412
Alhambra, CA office 5-year options
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3288 Pierce Street 2,535 Berkeley/Richmond branch 10/97 - 10/03 with two $6,591
Suite D-101 office 5-year options
Richmond, CA
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420 W. Valley Blvd. 2,000 Previous Valley/Prospect 2/96 - 2/01 (subleased $4,193 (sublease
San Gabriel, CA branch office 4/1/99 -2/14/01) rental income $2,500)
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1195 S. Diamond Bar Blvd. 2,500 Diamond Bar branch office 9/99 - 9/07 $5,875
Diamond Bar, CA
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45 E. Broadway 6,450 New York Chinatown branch 1/97 - 12/06 $25,500
New York, NY office
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10375 Richmond Avenue 1,797 Houston loan production 5/99 - 4/02 $3,414
Suite 1600 office
Houston, TX
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Room 902-3, 9/F 700 Hong Kong representative 1/00 - 1/03 with one $2,000 approximately
Printing House office 2-year option based on the exchange
6 Duddell Street, Central rate in effect at
Hong Kong 3/24/00
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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 20 domestic branch offices, one loan production
office in Houston, Texas, 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. The Houston loan
production office currently does not have loan approval rights. All loans made
at the Houston loan production office must be approved by the Loan Committee of
the Bank's Board of Directors. Activities of the CIC Taiwan office and Hong Kong
representative office are limited to coordinating the transportation of
documents to the Bank's main office and performing liaison services. A list of
the offices of the Bank and CIC is included on page 68 of the Annual Report to
Stockholders and is incorporated herein by reference.
As of December 31, 1999, the Bank's investment in premises and equipment
totaled $25,298,666. See also Note 8 to the Consolidated Financial Statements on
page 52 of the Annual Report to Stockholders, which is incorporated herein by
reference. On March 17, 2000, the Bank received title to the property which
housed the Bank's Flushing branch office at a foreclosure sale. The Bank's
investment in the Flushing property totaled approximately $4.2 million.
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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 most of Cathay Bank's branch offices, is highly competitive. The Bank
competes for deposits and loans with other commercial banks, savings and thrift
institutions, brokerage houses, insurance companies, mortgage companies, credit
unions, credit card companies and other financial and non-financial institutions
and entities. In addition, the Bank also competes with other entities (both
governmental and private industry) that are seeking to raise capital through the
issuance and sale of debt and equity securities. Many of these institutions and
entities offer services that are not offered directly by the Bank and have
substantially greater financial resources than does the Bank.
The direction of federal legislation in recent years seems to favor
increased competition between different types of financial institutions and to
foster new entrants into the financial services market. Competitive conditions
are expected to continue to intensify as legislation is enacted which has the
effect of dissolving historical barriers that limit participation in certain
markets, increasing the cost of doing business for banks, or affecting the
competitive balance between banks and other financial and non-financial
institutions and entities. Technological factors, such as on-line banking and
brokerage services, and economic factors can also be expected to have an ongoing
impact on increasingly competitive conditions.
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 correspondent
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 11 Asian-American banks and one other major
financial institution in the Bank's headquarters branch area, which compete for
California Asian-American customers, as well as other ethnic customers. In
addition, banks from the Pacific Rim countries, such as Taiwan, Hong Kong and
China continue to open branches in the Los Angeles area, thus increasing the
Bank's competition.
EMPLOYEES
As of December 31, 1999, the Company and Cathay Bank (including CIC)
employed approximately 547 persons, including 127 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.
REGULATORY ENVIRONMENT
The banking and financial services industry is heavily regulated.
Regulations, statutes and policies affecting the industry are frequently under
review by Congress and state legislatures, and by the federal and state agencies
charged with supervisory and examination authority over banking institutions.
Changes in the banking and financial services industry can be expected to occur
in the future. Some of the changes may create opportunities for the Company and
the Bank to compete in financial markets with less regulation. However, these
changes also may create new competitors in geographic and product markets which
have historically been limited by law to bank institutions, such as the Bank.
Changes in the regulation, statutes or policies that impact the Company and the
Bank cannot necessarily be predicted and may have a material adverse effect on
their business and earnings.
The operations of bank holding companies and their subsidiaries are
affected by the credit and monetary policies of the Federal Reserve Bank (the
"FRB"). An important function of the FRB is to regulate the national supply of
bank credit. Among the instruments of monetary policy used by the FRB to
implement its objectives are open market operations in U.S. government
securities, changes in the discount rate on bank borrowings and changes in
reserve requirements on bank deposits. These instruments of monetary policy are
used in varying combinations to influence the overall level of bank loans,
investments and deposits, the interest rates charged on loans and paid for
deposits, the price of the dollar in foreign exchange markets, and the level of
inflation. The credit and monetary policies of the FRB will continue to have a
significant effect on the Bank and on the Company.
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
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standards and to specify levels at which regulated institutions will be
considered "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" or "critically undercapitalized". Information
concerning regulations of the risk-based capital requirements prescribed by the
regulatory authorities is included on page 31 of the Annual Report to
Stockholders and is incorporated herein by reference.
The Board has adopted percentage minimum leverage ratios for banking
organizations (including state member banks and bank holding companies). The
Company is expected to maintain at least a four percent minimum leverage ratio
depending on interest rate risk exposure, asset quality, liquidity, earnings,
expansion plans, growth patterns and other relevant factors. The Company was
well capitalized as of December 31, 1999 with a leverage ratio of 8.93%.
The tables presenting the Company and the Bank's risk-based capital and
leverage ratios as of December 31, 1999 are included in Note 11 to the
Consolidated Financial Statements on page 55 of the Annual Report to
Stockholders, which is incorporated herein by reference.
FDIC IMPROVEMENT ACT OF 1991
In December 1991, the FDICIA was enacted into law. The FDICIA provides for
the recapitalization of the Bank Insurance Fund and improved examinations of
insured institutions. It prescribes standards for safety and soundness of all
insured depository institutions and requires each federal banking agency and the
FDIC to take prompt corrective regulatory action to resolve the problems of
insured depository institutions that fall below a certain capital ratio.
The FDICIA also, among other things, (1) limits the percentage of interest
paid on brokered deposits and limits the use of such deposits to only those
institutions that are well-capitalized; (2) requires the FDIC to charge
insurance premiums based on the risk profile of each institution; (3) prohibits
insured state chartered banks from engaging, as principal, in any type of
activity that is not permissible for a national bank unless the FDIC permits
such activity and the bank meets all of its regulatory capital requirements; (4)
directs the appropriate federal banking agency to determine the amount of
readily marketable purchased mortgage servicing rights that may be included in
calculating such institution's tangible, core and risk-based capital; (5)
provides that, subject to certain limitations, any federal savings association
may acquire or be acquired by any insured depository institution, and (6)
restricts capital distributions by institutions that are, or as a result of the
distributions will become, undercapitalized.
On December 31, 1992, the bank regulatory agencies adopted uniform
regulations relating to real estate loans that require institutions to adopt
written real estate policies that are consistent with regulatory guidelines.
Those guidelines include maximum loan-to-value ratios for various categories of
real estate loans. Institutions are permitted to make loans in excess of such
ratios if 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 1999 the Company maintained its compliance with the requirements of
Section 112 of FDICIA. Section 112 affects all banks having $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
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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 authorized the increase of insurance premiums paid by FDIC-insured
institutions. Title VI permitted the acquisition of thrifts by bank holding
companies. Title IX enhanced the enforcement authority of all federal banking
agencies, including their authority to levy civil money penalties and
penalties on criminal offenses, and it also broadened the definition of
insiders, to increase the types of persons subject to regulatory action.
Title XI required appraisals used in making credit decision to be written and
performed in accordance with generally accepted appraisal standards, as
promulgated by the Appraisal Standards Board of the Appraisal Foundation, and
to meet federal guidelines. Title XII expanded the recordkeeping requirements
of reporting under the Home Mortgage Disclosure Act ("HDMA") to cover race,
income and gender; changed the Community Reinvestment Act ("CRA") rating
system to a four-tiered rating system, which includes (1) outstanding record
of meeting community credit needs; (2) satisfactory record of meeting
community credit needs; (3) needs to improve record of meeting community
credit needs, and (4) substantial noncompliance in meeting community credit
needs. It further required 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),
CIC has sold the Garden Grove property. The Bank is in compliance with these
limitations.
11
<PAGE>
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. The
Riegle-Neal Act significantly relaxed or eliminated 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 allowed each state to adopt legislation to "opt-out"
of these interstate merger provisions. Conversely, the Riegle-Neal Act permitted
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 provided for interstate banking and branching in California. This early
opt-in legislation, which became effective on October 2, 1995, required
out-of-state institutions which did not already own a California bank to acquire
an existing whole five-year old bank before establishing a California branch. De
novo branching is not permitted. This act revised much of the original
California interstate banking law first enacted in 1986 that permitted
interstate banking with other states on a reciprocal basis.
Banks and bank holding companies contemplating acquisitions must comply
with the competitive standards of the BHCA, the Change in Bank Control Act
("CBA") or the Bank Merger Act ("BMA"), as applicable. The crucial test under
each Act is whether the proposed acquisition will "result in a monopoly" or will
"substantially" lessen competition in the relevant geographic market. Both the
BHCA and the BMA preclude granting regulatory approval for any transaction that
will "result in" a monopoly or 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 suitable opportunities
present themselves. 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.
12
<PAGE>
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 68,507 shares or $6,850,700 as of
December 31, 1999.
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, 1999, the
maximum dividend that Cathay Bank could have declared, subject to regulatory
approval, was $55,892,000. 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.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Modernization Act"). The Modernization Act
repeals the two affiliation provisions of the Glass-Steagall Act: Section 20,
which restricts the affiliation of Federal Reserve member banks with firms
"engaged principally" in specified securities activities; and Section 32, which
restricts officer, director, or employee interlocks between a member bank and
any company or person "primarily engaged' in specified securities activities. In
addition, the Modernization Act also expressly preempts any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The law establishes a comprehensive framework to permit affiliations
among commercial banks, insurance companies, securities firms, and other
financial service providers by revising and expanding the BHCA framework to
permit a holding company system to engage in a full range of financial
activities through a new entity known as a "Financial Holding Company".
"Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities of a nature incidental to such financial activities, or complementary
activities that do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally.
13
<PAGE>
In order for the Company to take advantage of the ability provided by the
Modernization Act to affiliate with other financial service providers, it would
have to become a "Financial Holding Company." To do so, the Company would have
to file a declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding Companies and certifying that it is eligible
to do so because its insured depository institution subsidiary (the Bank) is
well-capitalized and well-managed. In addition, the Federal Reserve must also
determine that Cathay Bank, as the insured depository institution subsidiary,
has at least a "satisfactory" rating under the Community Reinvestment Act. The
Company has not sought to become a Financial Holding Company. The Company will
continue to monitor its strategic business plan to determine whether, based on
market conditions and other factors, the Company wishes to take steps to use any
of the expanded powers provided in the Modernization Act.
The Modernization Act also includes a new section of the Federal Deposit
Insurance Act governing subsidiaries of state banks that engage in "activities
as principal that would only be permissible" for a national bank to conduct in a
financial subsidiary. It expressly preserves the ability of a state bank to
retain all existing subsidiaries. Because California permits commercial banks
chartered by the state to engage in any activity permissible for national banks,
the Bank will be permitted to form subsidiaries to engage in the activities
authorized by the Modernization Act to the same extent as a national bank. In
order to form a financial subsidiary, the Bank must be well-capitalized, and the
Bank would be subject to the same capital deduction, risk management and
affiliate transaction rules as are applicable to national banks.
Under the Modernization Act, securities firms and insurance companies that
elect to become Financial Holding Companies may acquire banks and other
financial institutions. To the extent that the Modernization Act permits banks,
securities firms, and insurance companies to affiliate, the financial services
industry may experience further consolidation.
The Modernization Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis. Nevertheless, the Modernization Act may have the result of increasing
the amount of competition that the Company and the Bank face from larger
institutions and other types of companies offering financial products, many of
which may have substantially more financial resources than the Company and the
Bank.
The Modernization Act also provides consumers with new protections against
the transfer and use of their nonpublic personal information by financial
institutions. For example, customers of financial institutions gain new rights
to "opt out" of having their personal financial information shared with
unaffiliated third parties, subject to certain exceptions. These federal privacy
protections do not prohibit state governments from imposing more protective
rules, and a variety of such bills are currently pending in the California state
legislature.
Effective January 1, 1999, the FDIC's rules limiting the non-agency
activities of state-chartered insured banks and their subsidiaries to those
activities permissable to national banks were revised and liberalized, and these
rules will likely undergo additional changes under the Modernization Act. Such
non-agency activities, including real estate investment and securities
activities, are and will continue to be subject to a variety of general and
specific safety and soundness restrictions.
The precise impact of the Modernization Act on the Company and the Bank
will not be fully known until the last of the Modernization Act's phased
effective dates occurs on November 12, 2004 and until regulatory agencies
complete the promulgation of administrative regulations implementing many
portions of the Act. The Office of the Comptroller of the Currency, the Federal
Reserve System, the Federal Deposit Insurance Corporation and the Office of
Thrift Supervision issued a joint notice of proposed rulemaking on February 22,
2000 relating to proposed privacy rules under the Modernization Act. It can be
expected that state regulatory authorities and/or legislatures may act in
response to the Modernization Act.
14
<PAGE>
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 1999.
15
<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 38 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 3, 2000, 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 38 and "Capital Resources" on page 31 and in Note 11
to the Consolidated Financial Statements on pages 54 through 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 34 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.
16
<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 2000
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
The term of office of each officer is from the time of appointment until
the next annual organizational meeting of the Board of Directors of Bancorp or
Cathay Bank (or action in lieu of a meeting) and until the appointment of his or
her successor unless, before that time, the officer resigns or is removed or is
otherwise disqualified from serving as an officer of Bancorp or Cathay Bank.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 19 of the Company's Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Compensation of Directors",
"Information Concerning Management Compensation" and "Compensation Committee
Interlocks and Insider Participation" on pages 9 through 13 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 3 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 19 and 20 of the Company's Proxy
Statement is incorporated herein by reference.
17
<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, 1999 and 1998 39
Consolidated Statements of Income and Comprehensive Income
for each of the years in the 3-year period
ended December 31, 1999 40
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the 3-year period
ended December 31, 1999 41
Consolidated Statements of Cash Flows
for each of the years in the 3-year period
ended December 31, 1999 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, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 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.
18
<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 1999 Annual Report to
Stockholders being 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.
19
<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, 2000 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, 2000
- ------------------------------------ the Board and Director
Dunson K. Cheng (principal executive officer)
/s/ Anthony M. Tang Executive Vice President, March 29, 2000
- ------------------------------------ Chief Financial Officer/
Anthony M. Tang Treasurer and Director
(principal financial officer)
(principal accounting officer)
/s/ Ralph Roy Buon-Cristiani Director March 29, 2000
- ------------------------------------
Ralph Roy Buon-Cristiani
/s/ Kelly L. Chan Director March 29, 2000
- ------------------------------------
Kelly L. Chan
/s/ Michael M.Y. Chang Director March 29, 2000
- ------------------------------------
Michael M.Y. Chang
</TABLE>
[SIGNATURES CONTINUED]
20
<PAGE>
[SIGNATURES CONTINUED]
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ George T.M. Ching Vice Chairman of the March 29, 2000
- ------------------------------------ Board and Director
George T.M. Ching
/s/ Wing K. Fat Director March 29, 2000
- ------------------------------------
Wing K. Fat
/s/ Patrick S.D. Lee Director March 29, 2000
- ------------------------------------
Patrick S.D. Lee
/s/ Chi-Hung Joseph Poon Director March 29, 2000
- ------------------------------------
Chi-Hung Joseph Poon
/s/ Thomas G. Tartaglia Director March 29, 2000
- ------------------------------------
Thomas G. Tartaglia
/s/ Wilbur K. Woo Secretary of the Board March 29, 2000
- ------------------------------------ and Director
Wilbur K. Woo
</TABLE>
21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------------------
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 1999 Annual Report to
Stockholders being 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.
<PAGE>
Exhibit 13.1
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except Year ended December 31,
share and per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement(1)
Interest income $ 133,046 $ 123,309 $ 111,978 $ 86,098 $ 76,223
Interest expense 57,408 57,225 50,874 39,209 31,282
- ------------------------------------------------------------------------------------------------------------
Net interest income before
provision for loan losses 75,638 66,084 61,104 46,889 44,941
Provision for loan losses 4,200 3,600 3,600 3,600 7,300
- ------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 71,438 62,484 57,504 43,289 37,641
Securities gains (losses) (3) 43 41 22 611
Other non-interest income 8,858 8,093 6,734 5,837 5,610
Non-interest expense 30,282 30,065 30,928 28,013 27,617
- ------------------------------------------------------------------------------------------------------------
Income before income tax expense 50,011 40,555 33,351 21,135 16,245
Income tax expense 19,720 15,976 13,243 7,819 5,624
- ------------------------------------------------------------------------------------------------------------
Net income $ 30,291 $ 24,579 $ 20,108 $ 13,316 $ 10,621
- ------------------------------------------------------------------------------------------------------------
Net income per common share
Basic $ 3.36 $ 2.74 $ 2.26 $ 1.66 $ 1.36
Diluted $ 3.36 $ 2.74 $ 2.26 $ 1.66 $ 1.36
Cash dividends paid per common share $ 0.805 $ 0.700 $ 0.625 $ 0.600 $ 0.600
Weighted average common shares
Basic 9,013,428 8,967,188 8,915,936 8,017,398 7,805,339
Diluted 9,017,760 8,968,393 8,915,936 8,017,398 7,805,339
- ------------------------------------------------------------------------------------------------------------
Statement of Condition
Securities available-for-sale $ 160,991 $ 239,928 $ 216,158 $ 383,391 $ 243,252
Securities held-to-maturity 426,332 418,156 350,336 210,129 174,377
Net loans(2) 1,245,585 961,876 846,151 744,384 542,995
Total assets 1,995,924 1,780,898 1,622,462 1,504,329 1,087,400
Deposits 1,721,736 1,560,402 1,449,121 1,364,740 984,227
Securities sold under agreements to repurchase 46,990 16,436 23,419 10,000 1,500
Advances from Federal Home Loan Bank 30,000 30,000 -- -- --
Stockholders' equity 179,109 156,652 135,877 118,446 94,529
- ------------------------------------------------------------------------------------------------------------
Common Stock Data
Shares of common stock outstanding 9,033,583 8,988,760 8,941,743 8,878,144 7,867,164
Book value per share $ 19.83 $ 17.43 $ 15.20 $ 13.34 $ 12.02
- ------------------------------------------------------------------------------------------------------------
Profitability Ratios
Return on average assets 1.63% 1.44% 1.29% 1.05% 1.05%
Return on average stockholders' equity 18.31 17.00 15.63 13.06 11.68
Dividend payout ratio 23.95 25.55 27.65 36.14 44.12
Average equity to average assets ratio 8.89 8.47 8.25 8.04 8.97
Efficiency ratio 35.84 40.51 45.20 53.11 53.98
- ------------------------------------------------------------------------------------------------------------
</TABLE>
1 INCLUDES THE OPERATING RESULTS OF FIRST PUBLIC SAVINGS BANK, F.S.B.
SUBSEQUENT TO THE NOVEMBER 18, 1996, ITS ACQUISITION DATE, AND THE SELECTED
ASSETS AND ASSUMED DEPOSITS AND LIABILITIES OF GOLDEN CITY COMMERCIAL BANK
SUBSEQUENT TO DECEMBER 10, 1999, THEIR ACQUISITION DATE.
2 NET LOANS REPRESENTS GROSS LOANS NET OF LOAN PARTICIPATIONS SOLD, UNAMORTIZED
DEFERRED LOAN FEES AND THE ALLOWANCE FOR LOAN LOSSES.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OFOPERATIONS
The following discussion is intended to provide information to facilitate the
understanding and assessment of the consolidated financial condition of Cathay
Bancorp, Inc. ("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.
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, 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,
adverse developments or conditions related to or arising from expansion into
new market areas, 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" later in this report. 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 $30.3 million or
$3.36 per diluted common share for 1999 as compared with net income of $24.6
million or $2.74 per diluted common share for 1998 and $20.1 million or $2.26
per diluted common share for 1997.
Pre-tax income increased 23% in 1999 to $50.0 million. The increase was
primarily attributable to a $9.6 million growth in net interest income, which
resulted primarily from an increase of $10.9 million in interest and fees on
loans. In addition, the efficiency ratio improved from 40.51% in 1998 to
35.84% in 1999. Return on average assets ("ROA") and return on average
stockholders' equity ("ROE") were 1.63% and 18.31%, respectively, for 1999
versus 1.44% and 17.00%, respectively, for 1998.
1998 pre-tax income represents an increase of 22% over 1997, attributable
primarily to a $5.0 million increase in net interest income and a $1.4 million
increase in non-interest income, while the efficiency ratio improved from
45.20% in 1997 to 40.51% in 1998. The ROA was 1.44% for 1998 and 1.29% for
1997 and the ROE was 17.00% for 1998 and 15.63% for 1997.
NET INTEREST INCOME Net interest income before provision for loan losses
amounted to $75.6 million in 1999, representing an increase of $9.5 million or
14% over net interest income of $66.1 million for 1998. On a taxable
equivalent basis, net interest income totaled $77.3 million in 1999 versus
$67.4 million in 1998. The primary reason for the increase in 1999 net
interest income was an increase of $190.9 million in average interest-earning
assets, $181.0 million of which was contributed by loan growth. The increase
in average interest-earning assets was funded primarily by increases in
average deposits and by other borrowed funds, proceeds from maturities of
securities and cash.
The increase in average net loans from $907.6 million in 1998 to $1,088.6
million in 1999 added $10.9 million to net interest income. The increase
resulted from an increase of $15.8 million in interest income, due to
increases in average volume, which was partially offset by a decrease of $4.9
million in interest income, due to decreases in average yield. The average
yield on loans decreased 52 basis points from 9.13% in 1998 to 8.61% in 1999,
primarily due to a 36 basis points drop in the Company's average reference
lending rate from 8.60% to 8.24%. Contributing to lower average loan yield in
1999 was increased competition in the Company's marketplace. Yields on other
categories of interest-earning assets decreased as well due to the prevailing
interest rate environment. As a result, the taxable equivalent average yield
on interest-earning assets decreased 28 basis points to 7.66% in 1999 from
7.94% in 1998.
-14-
<PAGE>
However, average cost of funds decreased 35 basis points from 4.15% in 1998
to 3.80% in 1999 which compensated for the decrease in the average yield on
interest-earning assets. The decrease in average cost of funds was substantially
attributable to a decline of 37 basis points in the average cost of deposits
from 4.10% in 1998 to 3.73% in 1999. In addition, average net loans, which
generally yield higher than other types of interest-earning assets, increased as
a percentage of average interest-earning assets from 57.9% in 1998 to 61.9% in
1999. Consequently, net interest margin (defined as taxable equivalent net
interest income to average interest-earning assets) increased 9 basis points
from 4.30% in 1998 to 4.39% in 1999.
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, net
loans 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, held-to-maturity and Federal Home Loan Bank
stock) accounted for $15.7 million and deposits with other banks accounted for
$0.7 million. The increases in average interest-earning assets were funded by:
1) an increase in average deposits of $86.2 million of which $68.5 million were
interest bearing and $17.8 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 $21.6 million.
The increase in average loans in 1998 contributed to an additional $8.9
million in net interest income, which however, 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% in 1998. 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 was reduced by 12
basis points from 4.42% in 1997 to 4.30% in 1998.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
CHANGES DUE TO RATE AND VOLUME(1)
<TABLE>
<CAPTION>
1999 - 1998 1998 - 1997
Increase (Decrease) in Net Interest Income Due to:Increase (Decrease) in 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 Asset
Federal funds sold and
securities purchased under
agreements to resell $ (442) $ (1,627) $ (2,069) $ (29) $ 1,564 $ 1,535
Securities available-for-sale
(Taxable) (1,430) (1,503) (2,933) (1,252) (2,956) (4,208)
Securities available-for-sale
(Nontaxable)(2) 5 (12) (7) (10) 25 15
Securities held-to-maturity
(Taxable) (948) 3,947 2,999 (168) 4,988 4,820
Securities held-to-maturity
(Nontaxable)(2) (193) 1,423 1,230 (129) 623 494
Deposits with other banks (8) (12) (20) (11) 28 17
Federal Home Loan Bank stock (749) 744 (5) (218) 210 (8)
Loans(3) (4,918) 15,832 10,914 (1,700) 10,551 8,851
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ (8,683) $ 18,792 $ 10,109 $ (3,517) $ 15,033 $ 11,516
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Savings deposits,
NOW accounts and others $ (1,934) $ 140 $ (1,794) $ (411) $ (220) $ (631)
Time deposits (2,563) 3,513 950 165 4,099 4,264
Securities sold under
agreements to repurchase (193) 123 (70) (15) 2,368 2,353
Other borrowed funds 11 (16) (5) (1) 4 3
Advances from Federal
Home Loan Bank 4 1,117 1,121 -- 333 333
Mortgage indebtedness 27 (46) (19) 6 23 29
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ (4,648) $ 4,831 $ 183 $ (256) $ 6,607 $ 6,351
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in net interest income $ (4,035) $ 13,961 $ 9,926 $ (3,261) $ 8,426 $ 5,165
- ------------------------------------------------------------------------------------------------------------------------------------
</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 $3,593,000, $3,631,000
AND $3,786,000 IN 1999, 1998, AND 1997, RESPECTIVELY.
INTEREST EARNING ASSET MIX
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998 Amount Percentage
Percentage Percentage Changed Changed
of Total Interest of Total Interest from from
(dollars in thousands) Amount Earning Assets Amount Earning Assets 1998 to 1999 1998 to 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Types of Interest Earning Assets
Federal funds sold and securities
purchased under
agreements to resell $ 5,000 0.27% $ 17,000 1.04% (12,000) (70.59)%
Securities available-for-sale 160,991 8.76 239,928 14.64 (78,937) (32.90)
Securities held-to-maturity 426,332 23.19 418,156 25.52 8,176 1.96
Deposits with other banks 568 0.03 1,376 0.08 (808) (58.72)
Loans (net of unamortized
deferred loan fees and
allowance for loan losses) 1,245,585 67.75 961,876 58.72 283,709 29.50
- ------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $1,838,476 100.00% $1,638,336 100.00% 200,140 12.22%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
-16-
<PAGE>
The following table sets forth information concerning average interest earning
assets, average interest bearing liabilities, and the yields on those assets and
liabilities. Average outstanding amounts included in the table are daily
averages.
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Earning Assets:
Federal Funds Sold and Securities Purchased Under Agreements to Resell
Average outstanding $ 38,013 $ 69,915 $ 42,260
Average yield 4.95% 5.65% 5.72%
Amount of interest earned $ 1,881 $ 3,950 $ 2,415
- -------------------------------------------------------------------------------------------------------------
Securities Available-for-Sale, Taxable
Average outstanding $ 178,188 $ 219,556 $ 289,715
Average yield 5.73% 5.98% 5.99%
Amount of interest earned $ 10,202 $ 13,135 $ 17,343
- -------------------------------------------------------------------------------------------------------------
Securities Available-for-Sale, Nontaxable
Average outstanding $ 345 $ 499 $ 169
Average yield(2) 7.83% 6.73% 11.24%
Amount of interest earned $ 27 $ 34 $ 19
- -------------------------------------------------------------------------------------------------------------
Securities Held-to-Maturity, Taxable
Average outstanding $ 378,753 $ 315,257 $ 237,881
Average yield 6.16% 6.45% 6.52%
Amount of interest earned $ 23,339 $ 20,340 $ 15,520
- -------------------------------------------------------------------------------------------------------------
Securities Held-to-Maturity, Nontaxable
Average outstanding $ 68,702 $ 48,757 $ 40,930
Average yield(2) 7.48% 7.92% 8.34%
Amount of interest earned $ 5,136 $ 3,906 $ 3,412
- -------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Stock
Average outstanding $ 6,309 $ 5,841 $ 5,506
Average yield 5.25% 5.75% 6.24%
Amount of interest earned $ 331 $ 336 $ 344
- -------------------------------------------------------------------------------------------------------------
Deposits with Other Banks
Average outstanding $ 459 $ 958 $ 243
Average yield 2.83% 3.44% 6.58%
Amount of interest earned $ 13 $ 33 $ 16
- -------------------------------------------------------------------------------------------------------------
Loans(1)
Average outstanding $1,088,578 $ 907,627 $ 792,176
Average yield(5) 8.61% 9.13% 9.34%
Amount of interest earned(5) $ 93,780 $ 82,866 $ 74,015
- -------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets
Average outstanding $1,759,347 $1,568,410 $1,408,880
Average yield(5) 7.66% 7.94% 8.03%
Amount of interest earned(5) $ 134,709 $ 124,600 $ 113,084
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-17-
<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) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Bearing Liabilities:
Savings Deposits(3)
Average outstanding $ 424,500 $ 417,105 $ 428,763
Average rate paid 1.46% 1.92% 2.01%
Amount of interest paid or accrued $ 6,212 $ 8,006 $ 8,637
- --------------------------------------------------------------------------------------------------------------
Time Deposits
Average outstanding $1,001,878 $ 900,441 $ 820,310
Average rate paid 4.69% 5.11% 5.09%
Amount of interest paid or accrued $ 46,950 $ 46,000 $ 41,736
- --------------------------------------------------------------------------------------------------------------
Securities Sold Under Agreements to Repurchase
Average outstanding $ 55,486 $ 53,104 $ 8,779
Average rate paid 4.99% 5.34% 5.51%
Amount of interest paid or accrued $ 2,766 $ 2,836 $ 483
- --------------------------------------------------------------------------------------------------------------
Other Borrowed Funds
Average outstanding $ 33 $ 181 $ 82
Average rate paid 6.06% 3.87% 4.88%
Amount of interest paid or accrued $ 2 $ 7 $ 4
- --------------------------------------------------------------------------------------------------------------
Advances from Federal Home Loan Bank
Average outstanding $ 30,000 $ 6,959 $ --
Average rate paid 4.85% 4.79% --
Amount of interest paid or accrued $ 1,454 $ 333 $ --
- --------------------------------------------------------------------------------------------------------------
Mortgage Indebtedness
Average outstanding $ 183 $ 440 $ 190
Average rate paid(6) 13.11% 9.77% 7.37%
Amount of interest paid or accrued(6) $ 24 $ 43 $ 14
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities
Average outstanding $1,512,080 $1,378,230 $1,258,124
Average rate paid 3.80% 4.15% 4.04%
Amount of interest paid or accrued $ 57,408 $ 57,225 $ 50,874
- --------------------------------------------------------------------------------------------------------------
Net interest earnings(7) $ 77,301 $ 67,375 $ 62,210
Net yield on interest earnings assets(4),(7) 4.39% 4.30% 4.42%
Yield spread(7) 3.86% 3.79% 3.99%
- --------------------------------------------------------------------------------------------------------------
</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-
<PAGE>
NON-INTEREST INCOME Non-interest income totaled $8.9 million in 1999, $8.1
million in 1998 and $6.8 million in 1997. The increase of $719,000 or 9% from
1998 to 1999 was primarily from an increase in letter of credit commissions
due to increases in transaction volume, fees and charges related to loans,
wire transfer fees and other miscellaneous income. Partially offsetting these
increases were decreases in service charges due to the Bank's outsourcing of
its merchant bank card portfolio in the third quarter of 1998. As a result,
the Bank received only a percentage of the income from the portfolio rather
than receiving the full income and incurring the related expenses.
Non-interest income increased $1.4 million or 20% from 1997 to 1998. The
contributing factors to the increase were an increase in letter of credit
commissions due to increase in transaction volume, higher service charges due
to fee increases, rebate income earned in outsourcing the issuing and
processing of cashier's checks and money orders and higher income from
miscellaneous items, such as documentation and charges related to loans, wire
transfer, foreign exchange and safe deposit boxes.
NON-INTEREST EXPENSE Non-interest expense totaled $30.3 million in 1999,
$30.1 million in 1998 and $30.9 million in 1997. From 1998 to 1999,
non-interest expense increased $217,000 or 0.7%. An increase of $1.1 million
in salaries and employee benefits resulting primarily from higher year-end
bonus expense and overall annual salary increases was largely offset by
decreases of $572,000 in other operating expense and an increase of $291,000
in net OREO income. The decrease in other operating expense was primarily due
to the Bank's outsourcing of its merchant bank card portfolio in the third
quarter of 1998 as explained previously. The Company realized a total of $1.5
million in income from gains on sale of OREO properties leading to a net OREO
income of $1.4 million in 1999, as compared with $1.1 million of net OREO
income in 1998. The efficiency ratio, defined as non-interest expense divided
by net interest income before provision for loan losses plus non-interest
income, improved 12% from 40.51% in 1998 to 35.84% in 1999.
From 1997 to 1998, non-interest expense decreased $863,000 or 3% primarily
attributable to a decrease of $1.6 million in OREO expense and a decrease of
$385,000 in occupancy expense. The Company had a net OREO income of $1.1 million
in 1998 as compared with a net OREO expense of $503,000 in 1997. The closures of
the Rowland Heights branch and two corporate offices of First Public Savings
Bank, F.S.B. in December, June and November 1997, respectively, helped to reduce
the 1998 occupancy expense. To partially offset the above decreases in
non-interest expense was an increase of $1.0 million in salaries and employee
benefits. Added 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. The efficiency ratio improved 10% from 45.20% in 1997 to
40.51% in 1998.
FINANCIAL CONDITION OVERVIEW The Company maintained steady growth throughout
1999. Furthermore, on December 10, 1999, the Company substantially completed the
purchase of certain assets and assumption of certain deposits and liabilities of
Golden City Commercial Bank ("Golden City"). Total deposits assumed were
approximately $80.6 million and total assets purchased were approximately $84.1
million.
Comparing December 31, 1999 and 1998, total assets increased 12% to $1,995.9
million; net loans grew by 29% to $1,245.6 million; securities
available-for-sale decreased 33% to $161.0 million while securities
held-to-maturity increased slightly to $426.3 million. Total deposits increased
10% to $1,721.7 million and stockholders' equity increased 14% to $179.1
million.
SECURITIES The Company's investment policy states that those securities 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
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
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 the
Bank's liquidity, it is the Bank's policy to transfer securities
held-to-maturity to the available-for-sale category when securities become 90
days or less to maturity.
Securities available-for-sale decreased $78.9 million or 33% to $161.0
million at year-end 1999 from $239.9 million at year-end 1998. This was mainly
attributable to proceeds from matured securities not being reinvested but used
to meet the strong loan demand. Securities held-to-maturity increased slightly
from $418.2 million at year-end 1998 to $426.3 million at year-end 1999.
As of December 31, 1999, unrealized holding losses on securities
available-for-sale were $1.7 million compared with unrealized holding gains of
$2.1 million as of December 31, 1998. These unrealized holding losses or gains,
net of tax effect, were included in the Company's stockholders' equity for the
years reported. The unrealized holding losses, net of tax, were $1.0 million as
of December 31, 1999 while the unrealized holding gains, net of tax, were $1.2
million as of December 31, 1998. The unrealized holding losses at year-end 1999
resulted mainly from increasing interest rates toward the latter half of 1999.
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) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury securities $ 25 $ 2,014 $ 37,971
U.S. government agencies 40,218 103,020 113,306
State and municipal securities 540 22,317 --
Mortgage-backed securities 14,634 18,266 22,982
Collateralized mortgage obligations 7,823 14,159 6,386
Asset-backed securities 16,448 8,220 19,889
Federal Home Loan Bank stock 6,851 5,991 5,653
Commercial paper 40,076 29,945 9,971
Corporate bonds 34,376 35,996 --
- -------------------------------------------------------------------------------------------------------------
Total $ 160,991 $ 239,928 $ 216,158
- -------------------------------------------------------------------------------------------------------------
Securities Held-to-Maturity:
U.S. Treasury securities $ 24,998 $ 26,026 $ 26,054
U.S. government agencies 64,373 54,426 39,374
State and municipal securities 68,834 61,495 44,497
Mortgage-backed securities 133,282 146,018 140,338
Collateralized mortgage obligations 63,397 83,535 90,234
Asset-backed securities 19,999 -- 923
Corporate bonds 51,449 46,656 8,916
- -------------------------------------------------------------------------------------------------------------
Total $ 426,332 $ 418,156 $ 350,336
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Management constantly seeks to balance the risks and returns on its portfolio
within the Company's investment guidelines. Consequently, during 1999, the
Company increased its holdings of asset-backed securities and corporate bonds .
-20-
<PAGE>
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, 1999
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 $ 25 $ -- $ -- $ -- $ 25
U.S. government agencies 20,020 20,198 -- -- 40,218
State and municipal securities 540 -- -- -- 540
Mortgage-backed securities(2) -- 3,007 2,894 8,732 14,633
Collateralized mortgage obligations(2) 174 -- 3,345 4,305 7,824
Asset-backed securities(2) -- 6,860 9,588 -- 16,448
Federal Home Loan Bank stock 6,851 -- -- -- 6,851
Commercial paper 40,076 -- -- -- 40,076
Corporate bonds -- 29,756 4,620 -- 34,376
- -------------------------------------------------------------------------------------------------------------
Total $ 67,686 $ 59,821 $ 20,447 $ 13,037 $ 160,991
- -------------------------------------------------------------------------------------------------------------
Weighted Average Yield:
U.S. Treasury securities 4.99% -- --% --% 4.99%
U.S. government agencies 5.88 5.92 -- -- 5.90
States and municipal securities(1) 7.78 -- -- -- 7.78
Mortgage-backed securities(2) -- 5.92 6.57 7.33 6.89
Collateralized mortgage obligations(2) 4.20 -- 6.18 6.27 6.18
Asset-backed securities(2) -- 5.78 5.71 -- 5.74
Federal Home Loan Bank stock 5.42 -- -- -- 5.42
Commercial paper 7.46 -- -- -- 7.46
Corporate bonds -- 5.56 7.19 -- 5.78
- -------------------------------------------------------------------------------------------------------------
Total 6.78% 5.73% 6.23% 6.98% 6.33%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
1 AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS.
2 SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS.
SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
<TABLE>
<CAPTION>
As of December 31, 1999
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 $ 24,998 $ -- $ -- $ -- $ 24,998
U.S. government agencies 29,317 35,056 -- -- 64,373
State and municipal securities 1,122 9,722 23,930 34,060 68,834
Mortgage-backed securities(2) 3,465 14,638 38,004 77,175 133,282
Collateralized mortgage obligations(2) -- -- 49,801 13,596 63,397
Asset-backed securities(2) -- 19,999 -- -- 19,999
Corporate bonds -- 46,410 5,039 -- 51,449
- --------------------------------------------------------------------------------------------------------------
Total $ 58,902 $ 125,825 $ 116,774 $ 124,831 $ 426,332
- --------------------------------------------------------------------------------------------------------------
Weighted Average Yield:
U.S. Treasury securities 6.32% --% --% --% 6.32%
U.S. government agencies 6.25 5.52 -- -- 5.86
State and municipal securities(1) 7.17 8.49 8.04 6.74 7.45
Mortgage-backed securities(2) 5.96 6.20 6.14 6.38 6.28
Collateralized mortgage obligations(2) -- -- 6.60 6.30 6.54
Asset-backed securities(2) -- 5.61 -- -- 5.61
Corporate bonds -- 6.00 7.38 -- 6.14
- --------------------------------------------------------------------------------------------------------------
Total 6.28% 6.02% 6.78% 6.47% 6.40%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1 AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS.
2 SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
LOANS Gross loans grew by $287.2 million or 29% from $981.5 million at year-end
1998 to $1,268.7 million at year-end 1999 while net loans increased $283.7
million or 29% to $1,245.6 million. Of the increase, $221 million was from
commercial real estate loans. This was the result of the continued growth in the
California economy, which led to a strong real estate market and, hence, demand.
In addition, the Company purchased 23 seasoned commercial real estate loans with
floating rates totaling $68 million from a major bank in the third quarter of
1999. All of the properties securing these loans are located in California. The
Houston loan production office, which opened for business in March 1999,
contributed over $20 million to the growth in commercial real estate loans.
Total loans acquired from Golden City approximated $31.2 million at year-end
1999, a majority of which were for mixed use of commercial and residential real
estate.
Commercial real estate loans are typically secured by first deeds of trust
on the respective commercial properties, including primarily retail shops and
shopping centers, as well as office buildings, multiple-unit apartments,
warehouses, hotels and motels. 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 percent of the appraised value of the property, and
that there be an adequate debt coverage ratio.
Other notable increases were commercial loans, residential real estate
loans, and real estate construction loans, which added $24.6 million, $23.4
million and $21.8 million, respectively from year-end 1998 to year-end 1999.
Commercial loans totaled $395.1 million at year-end 1999 compared with
$370.5 million at year-end 1998. These 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 primarily markets its commercial lending to
small-to-medium businesses and professionals for their working capital needs.
Residential real estate loans totaled $207.6 million and $184.2 million at
year-end 1999 and 1998, respectively. These loans included home equity lines of
$26.4 million and $20.4 million, respectively, at year-end 1999 and 1998. The
growth in residential real estate loans has slowed down as the interest rates
moved higher toward the latter half of 1999, which discouraged refinancing and
new purchase activities.
Real estate construction loans totaled $62.5 million at year-end 1999
compared with $40.7 million at year-end 1998. The growth in construction loans
was directly affected by the strong local economy and real estate market in
California. The Company makes construction loans on a selective basis to those
projects with good locations developed by experienced and financially strong
borrowers. The projects, which include commercial retail centers, office
buildings, warehouses and single family residences, are all located in
California as of December 31, 1999. Total construction loan commitments
outstanding were approximately $49.0 million at year-end 1999.
The Company's Board of Directors establishes the basic lending policy for
the Bank. Each loan is generally considered in terms of, among other things,
character, repayment ability, financial condition of the borrower, secondary
repayment source, collateral, capital, leverage capacity of the borrower, market
conditions for the borrower's business or project, and prevailing economic
trends and conditions. In addition, the Company's lending policy requires an
independent appraisal on real estate property in accordance with regulatory
guidelines. Although a majority of the Company's loan portfolio, including
commercial loans, is secured by real estate to some extent, management believes
that the Company's underwriting guidelines, including collateral requirements,
and underlying values of real estate in the Company's primary marketplace have
provided the Company with adequate protection against reasonably expected losses
on non-performing loans.
The classification of loans by type as of December 31 for each of the past
five years, as well as the changes in loan portfolio composition for the past
two years and the contractual maturity of the loan portfolio as of December 31,
1999 are presented below:
-22-
<PAGE>
LOAN TYPE AND MIX
<TABLE>
<CAPTION>
Amount outstanding as of December 31,
(in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Type of Loans:
Commercial loans $ 395,138 $ 370,539 $ 338,285 $ 283,894 $ 292,612
Real estate mortgage loans 785,109 540,766 458,417 420,315 231,360
Real estate construction loans 62,516 40,738 41,736 33,510 13,606
Installment loans 25,498 29,165 26,611 23,551 19,748
Other loans 419 269 267 385 533
- --------------------------------------------------------------------------------------------------------------
Gross loans 1,268,680 981,477 865,316 761,655 557,859
- --------------------------------------------------------------------------------------------------------------
Less
Unamortized deferred loan fees (3,593) (3,631) (3,786) (3,742) (2,122)
Allowance for loan losses (19,502) (15,970) (15,379) (13,529) (12,742)
- --------------------------------------------------------------------------------------------------------------
Net loans $ 1,245,585 $ 961,876 $ 846,151 $ 744,384 $ 542,995
- --------------------------------------------------------------------------------------------------------------
</TABLE>
CHANGES IN LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998
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 $ 395,138 31.72% $ 370,539 38.52% 6.64%
Real estate mortgage loans 785,109 63.03 540,766 56.22 45.18
Real estate construction loans 62,516 5.02 40,738 4.24 53.46
Installment loans 25,498 2.05 29,165 3.03 (12.57)
Other loans 419 0.03 269 0.03 55.76
Unamortized deferred loan fees (3,593) (0.29) (3,631) (0.38) (1.05)
Allowance for loan losses (19,502) (1.56) (15,970) (1.66) 22.12
- --------------------------------------------------------------------------------------------------------------
Net loans $1,245,585 100.00% $ 961,876 100.00% 29.50%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
CONTRACTUAL MATURITY OF LOAN PORTFOLIO(1)(2)
<TABLE>
<CAPTION>
(in thousands) Within One Year One to Five Years Over Five Years Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Loans
Floating rate $ 266,081 $ 43,255 $ 23,726 $ 333,062
Fixed rate 43,681 9,599 8,283 61,563
Real Estate Mortgage Loans
Floating rate 36,695 166,309 269,867 472,871
Fixed rate 19,575 41,773 248,163 309,511
Real Estate Construction Loans
Floating rate 51,213 10,950 -- 62,163
Installment Loans
Floating rate -- 32 -- 32
Fixed rate 5,929 19,537 -- 25,466
Other Loans
Floating rate 322 -- -- 322
Fixed rate 89 -- 8 97
- ----------------------------------------------------------------------------------------------------------------
Total loans $ 423,585 $ 291,455 $ 550,047 $ 1,265,087
- ----------------------------------------------------------------------------------------------------------------
Floating rate $ 354,311 $ 220,546 $ 293,593 $ 868,450
Fixed rate 69,274 70,909 256,454 396,637
- ----------------------------------------------------------------------------------------------------------------
Total loans $ 423,585 $ 291,455 $ 550,047 $ 1,265,087
Allowance for loan losses (19,502)
- ----------------------------------------------------------------------------------------------------------------
Net loans $ 1,245,585
- ----------------------------------------------------------------------------------------------------------------
</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.
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
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 borrowers that may not be able to meet the contractual requirements of the
loan agreements. Such loans are placed under close supervision with
consideration given to placing the loans 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 a 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 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.
Total non-performing assets, which include loans past due 90 days or more
and still accruing interest, nonaccrual loans, and OREO, decreased $6.5 million
or 23% from $28.2 million at year-end 1998 to $21.8 million at year-end 1999.
The decrease was primarily due to reductions of $6.1 million in OREO and
$959,000 in loans past due 90 days or more and still accruing interest, which
were offset by an increase of $606,000 in nonaccrual loans. As a percentage of
total loans plus OREO, non-performing assets declined from 2.85% at year-end
1998 to 1.71% at year-end 1999. The nonaccrual coverage ratio, which is the
allowance for loan losses to non-performing loans, increased to 111.95% at
year-end 1999 from 89.86% at year-end 1998.
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) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accruing loans past due 90 days or more $ 3,724 $ 4,683 $ 2,373 $ 2,050 $ 1,344
Nonaccrual loans 13,696 13,090 16,886 9,305 14,012
- -------------------------------------------------------------------------------------------------------------
Total non-performing loans 17,420 17,773 19,259 11,355 15,356
- -------------------------------------------------------------------------------------------------------------
Real estate acquired in foreclosure 4,337 10,454 13,269 18,854 13,879
- -------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 21,757 $ 28,227 $ 32,528 $ 30,209 $ 29,235
- -------------------------------------------------------------------------------------------------------------
Troubled debt restructurings(1) $ 4,581 $ 4,642 $ 4,874 $ 3,201 $ 8,429
Non-performing assets as a percentage
of gross loans and other real estate
owned at year-end 1.71% 2.85% 3.70% 3.87% 5.11%
Allowance for loan losses as a percentage
of non-performing loans 111.95% 89.86% 79.85% 119.15% 82.98%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
1 TROUBLED DEBT RESTRUCTURINGS ARE ACCRUING INTEREST AT THEIR RESTRUCTURED
TERMS.
-24-
<PAGE>
The effect of nonaccrual loans and troubled debt restructurings on interest
income for the years 1999, 1998, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans
Contractual interest due $ 1,396 $ 1,395 $ 1,845 $ 1,121 $ 1,503
Interest recognized 234 112 471 268 200
- -------------------------------------------------------------------------------------------------------------
Net interest foregone $ 1,162 $ 1,283 $ 1,374 $ 853 $ 1,303
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Troubled Debt Restructurings
Contractual interest due $ 429 $ 421 $ 406 $ 339 $ 467
Interest recognized 414 412 387 311 352
- -------------------------------------------------------------------------------------------------------------
Net interest foregone $ 15 $ 9 $ 19 $ 28 $ 115
- -------------------------------------------------------------------------------------------------------------
</TABLE>
NONACCRUAL LOANS Nonaccrual loans were $13.7 million and $13.1 million at
year-end 1999 and 1998, respectively. They consisted mainly of $6.2 million in
commercial real estate loans and $6.8 million in commercial loans at year-end
1999, and $7.4 million in commercial real estate loans and $4.5 million in
commercial loans at year-end 1998. The following tables present the type of
properties securing the loans and the type of businesses the borrowers engaged
in under commercial real estate and commercial nonaccrual loan categories as of
the dates indicated:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
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 $ 1,014 $ 628 $ 348 $ 1,052
Commercial 4,971 5,425 5,533 2,613
Motel -- -- 1,501 30
TCD -- -- -- 696
Others 186 307 -- 93
Unsecured -- 392 -- --
- ----------------------------------------------------------------------------------------------------------------------
Total $ 6,171 $ 6,752 $ 7,382 $ 4,484
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
Nonaccrual Loan Balance Nonaccrual Loan Balance
Commercial Commercial
(in thousands) Real Estate Commercial Real Estate Commercial
- ----------------------------------------------------------------------------------------------------------------------
Type of business:
Real estate development $ 354 $ 347 $ 451 $ 187
Real estate management 4,366 100 3,903 35
Wholesale -- 896 209 1,021
Retail -- -- -- 38
Food/Restaurant -- 889 -- 1,008
Import 621 3,307 -- 918
Motel 425 -- 1,315 --
Investments 334 -- 375 --
Industrial -- 270 -- 310
Clothing -- -- 348 161
Others 71 943 781 806
- ----------------------------------------------------------------------------------------------------------------------
Total $ 6,171 $ 6,752 $ 7,382 $ 4,484
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
-25-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
The previous tables show a $5.0 million balance in nonaccrual commercial
real estate loans at year-end 1999. These loans include five credits, all of
which were secured by the first trust deeds on the respective commercial
properties.
The balance of $5.4 million in nonaccrual commercial loans at year-end
1999 represents 18 credits, the collateral of which includes first, second
and third trust deeds on commercial buildings and warehouses.
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.
At December 31, 1999, the Company's troubled debt restructurings
decreased slightly in comparison to year-end 1998. Troubled debt
restructurings were at $4.6 million at year-end 1999, all of which 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 an existing
valuation allowance with a corresponding charge to the provision for loan
losses.
At December 31, 1999, the Company had identified impaired loans with a
recorded investment of $26.3 million. For 1999, the average balance of
impaired loans was $26.7 million and interest collected on impaired loans
totaled $2.0 million in 1999.
LOAN CONCENTRATION There were no loan concentrations to multiple borrowers
in similar activities, which exceeded 10% of total loans as of December 31,
1999.
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.
-26-
<PAGE>
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $19.5
million or 1.54% of gross loans at year-end 1999, up $3.5 million or 22% from
$16.0 million or 1.63% of gross loans at year-end 1998. Management provided
$4.2 million and $3.6 million to the provision for loan losses in 1999 and
1998, respectively. The Bank recorded net charge-offs of $668,000 in 1999
down from $3.0 million in 1998. Total loans charged off in 1999 were $1.7
million, including $1.1 million in commercial loans, $388,000 in commercial
real estate loans and $227,000 in installment loans. In view of the
significant growth in loans and our strategic out-of-state expansion,
management felt it was prudent to increase the provision to loan losses, even
though the charge-offs in 1999 were less than 1998. 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) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 15,970 $ 15,379 $ 13,528 $ 12,742 $ 12,271
Allowance from acquisition -- -- -- 1,644 --
Provision for loan losses 4,200 3,600 3,600 3,600 7,300
Loans charged-off (1,731) (3,519) (2,139) (5,388) (7,018)
Recoveries of charged-off loans 1,063 510 390 930 189
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 19,502 $ 15,970 $ 15,379 $ 13,528 $ 12,742
- --------------------------------------------------------------------------------------------------------------
Average loans outstanding during the year $1,088,578 $ 907,639 $ 792,176 $ 579,634 $ 549,660
Ratio of net charge-offs to average loans
outstanding during the year 0.06% 0.33% 0.22% 0.77% 1.24%
Provision for loan losses to average loans
outstanding during the year 0.39% 0.40% 0.45% 0.62% 1.33%
Allowance to non-performing loans at year-end 111.95% 89.86% 79.85% 119.15% 82.98%
Allowance to gross loans at year-end 1.54% 1.63% 1.78% 1.78% 2.28%
- --------------------------------------------------------------------------------------------------------------
LOANS CHARGED-OFF BY LOAN TYPE[1]
Year ended December 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Commercial loans $ 1,116 $ 2,394 $ 1,387 $ 4,010 $ 3,895
Percentage of total commercial loans[1] 0.28% 0.65% 0.41% 1.41% 1.33%
- --------------------------------------------------------------------------------------------------------------
Real estate loans $ 388 $ 873 $ 574 $ 1,177 $ 2,885
Percentage of total real estate loans1 0.05% 0.15% 0.11% 0.26% 1.18%
- --------------------------------------------------------------------------------------------------------------
Installment and other loans $ 227 $ 252 $ 178 $ 201 $ 238
Percentage of total installment
and other loans[1] 0.88% 0.86% 0.66% 0.84% 1.17%
- --------------------------------------------------------------------------------------------------------------
Total loans charged-off $ 1,731 $ 3,519 $ 2,139 $ 5,388 $ 7,018
- --------------------------------------------------------------------------------------------------------------
1 PERCENTAGES WERE CALCULATED BASED ON YEAR-END BALANCES.
RECOVERIES BY LOAN TYPE
Year ended December 31,
(in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Commercial loans $ 761 $ 188 $ 219 $ 640 $ 110
Real estate loans 181 280 111 205 17
Installment and other loans 121 42 60 85 62
- --------------------------------------------------------------------------------------------------------------
Total $ 1,063 $ 510 $ 390 $ 930 $ 189
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has established a monitoring system for its loans in order to
identify impaired loans, and potential problem loans and to permit periodic
evaluation of impairment and the adequacy of the allowance for loan losses in
a timely manner. The monitoring system and methodology have evolved over a
period of years, and loan classifications have
-27-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
been incorporated into the determination of the level of allowance. This
monitoring system and allowance methodology includes a loan-by-loan analysis
for significant classified loans as well as loss factors for the balance of
the portfolio that are based on historical loss trend analysis relative to
the Company's unclassified portfolio and other factors such as current
portfolio delinquency and trends, and other inherent risk factors such as
economic conditions, concentrations in the portfolio risk levels of
particular loan categories, internal loan review and management oversight.
The Company's allowance for loan losses consists of specific allowances
and a general allowance. For impaired loans, the Company provides specific
allowances based on an evaluation of impairment and allocates a portion of
the general allowance to each impaired loan based on a loss percentage
assigned. The percentage assigned depends on a number of factors including
the current financial condition of the borrowers and guarantors, the
prevailing value of the underlying collateral, charge-off history,
management's knowledge of the portfolio and general economic conditions. The
remainder of the general allowance is determined by an assessment of the
overall quality of the non-impaired portion of the loan portfolio.
The following 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
1999 (in thousands) Investment Allowance Allowance Balance
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 12,686 $ -- $ 1,831 $ 10,855
Commercial real estate 13,412 -- 1,912 11,500
Other 181 -- 181 --
- -------------------------------------------------------------------------------------------------------------
Total $ 26,279 $ -- $ 3,924 $ 22,355
- -------------------------------------------------------------------------------------------------------------
1998 (in thousands)
- -------------------------------------------------------------------------------------------------------------
Commercial $ 9,379 $ -- $ 1,566 $ 7,813
Commercial real estate 12,515 58 1,769 10,688
Other 55 -- 55 --
- -------------------------------------------------------------------------------------------------------------
Total $ 21,949 $ 58 $ 3,390 $ 18,501
- -------------------------------------------------------------------------------------------------------------
</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 the charge-offs will occur, or if they do occur, that they will be in
the proportion indicated in the following table:
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997 1996 1995
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
(dollars in to average to average to average to average to average
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 $ 8,546 35.06% $ 7,468 38.58% $ 7,480 39.20% $ 6,190 37.27% $ 6,338 52.45%
Real estate
mortgage loans 9,927 58.10 7,768 53.62 6,988 52.88 6,941 55.19 6,084 41.47
Real estate
construction loans 440 4.30 313 4.77 401 4.80 294 4.40 136 2.44
Installment loans 464 2.46 414 2.98 356 3.09 72 3.09 81 3.54
Other loans 125 0.08 7 0.05 154 0.03 31 0.05 103 0.10
- ----------------------------------------------------------------------------------------------------------------------------------
Total $19,502 100.00% $15,970 100.00% $15,379 100.00% $13,528 100.00% $12,742% 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, 1999
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.
-28-
<PAGE>
OTHER REAL ESTATE OWNED The Company's OREO, net of a valuation allowance of
$614,000, was carried at $4.3 million at year-end 1999, compared with OREO,
net of a valuation allowance of $494,000, being carried at $10.5 million at
year-end 1998.
During 1999, the Company acquired three properties in the amount of $1.3
million and disposed of 19 properties totaling $7.2 million with a net gain
of $1.5 million. At year-end 1999, the Company owned eight OREO properties,
which included land and commercial and industrial buildings, all of which are
located in Southern California.
The Company maintains a valuation allowance for OREO properties in order
to reduce the carrying value of OREO to the estimated fair value of the
properties. Periodic evaluation is performed on each property and a
corresponding adjustment is made to the valuation allowance, if necessary.
Any decline in value is recognized by a corresponding increase to the
valuation allowance in the current period. Management provided approximately
$339,000 to the provision for OREO losses in 1999.
The Company recognized net income of $1.4 million from operating its OREO
properties in 1999. In addition to the $1.5 million net gains on sales of
OREO properties, the Company received $575,000 in rental income. These
amounts were partially offset by operating expenses of $369,000 and the
provision for OREO losses of $339,000.
Although the California real estate market showed strong improvements in
1999, the future performance of the market is unpredictable. 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
1999, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense (income) $ (206) $ (321) $ 201
Provision for losses 339 195 476
Net gain on disposal (1,549) (999) (174)
- -------------------------------------------------------------------------------------------------------------
Total $ (1,416) $ (1,125) $ 503
- -------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENTS IN REAL ESTATE Investments in real estate amounted to $17.0
million at year-end 1999, up significantly from $1.5 million at year-end
1998. The Company invested $15.0 million in a California tax credit fund at
the end of the first quarter of 1999, which represented an approximately 36%
limited partnership interest in the fund. The partnership was formed to
invest in multi-family housing in California that is expected to qualify for
Federal and/or State low income housing tax credits.
During the second quarter of 1999, the Company entered into an agreement
to purchase a 99.9% limited partnership interest in a California limited
partnership. The purpose of the partnership is to construct and operate a
housing project consisting of 102 residential units for seniors. During the
second quarter of 1999, the Bank made its initial contribution for $265,000
upon execution of the agreement, and in September 1999, the Bank made its
first contribution of $1.1 million. The total investment for the Bank is
expected to be approximately $5.3 million.
DEPOSITS Total deposits increased $161.3 million or 10% from $1,560.4
million at year-end 1998 to $1,721.7 million at year-end 1999. In addition to
the growth in deposits in California, the Company assumed approximately $80.6
million in deposits as part of the Golden City transaction on December 10,
1999. Total deposits assumed from Golden City approximated $75.0 million at
year-end 1999.
As interest rate spreads widened between time deposits over $100,000
("Jumbo CDs") and other interest-bearing deposits, Jumbo CDs continued to
grow faster than other types of deposits. During 1999, Jumbo CDs increased
$88.9 million or 14%. Core deposits, defined as total deposits minus Jumbo
CDs and brokered deposits, grew $72.4 million or 8%, largely as a result of
the deposits assumed from Golden City. The ratio of core deposits to total
deposits decreased slightly from 60.32% at year-end 1998 to 58.87% at
year-end 1999. The Bank introduced a new tiered money market account in
October 1999 which is expected to help the growth of money market deposits.
As of December 31, 1999, the balance of the new tiered money market account
totaled $2.3 million. The Company had no brokered deposits as of December 31,
1999.
-29-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
Average total deposits grew $111.2 million or 7% from $1,484.2 million in
1998 to $1,595.4 million in 1999. Average Jumbo CDs increased $86.5 million
while average core deposits increased $24.7 million.
Although the Bank's Jumbo CD portfolio continues to grow faster than
other types of deposits, management considers the Bank's Jumbo CDs generally
less volatile primarily due to the following reasons: 1) approximately 50% of
the Bank's Jumbo CDs have stayed with the Bank for more than two years; 2)
the Jumbo CD portfolio continued to be diversified with 4,141 individual
accounts averaging approximately $168,000 per account owned by 2,917
individual depositors as of January 20, 2000; and 3) this phenomenon of
having a relatively higher percentage of Jumbo CDs to total deposits exists
in most of the Asian American banks in the Company's California market due to
the fact that the customers in this market tend to have a higher savings rate.
Management continues to monitor the Jumbo CD portfolio to identify any
changes in the deposit behavior in the market and of the patrons the Bank is
servicing. To discourage the growth in Jumbo CDs, management has continued to
make efforts in the following areas: 1) to offer non-competitive interest
rates paid on Jumbo CDs; 2) to promote transaction-based products; and 3) to
seek to diversify the customer base by branch expansion and/or acquisition as
suitable opportunities arise. In addition to the Golden City transaction in
December 1999, the Company opened a branch in Diamond Bar, California on
January 22, 2000.
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, 1999 and average deposits and
rates.
DEPOSIT MIX
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
(dollars in thousands) Amount Percentage Amount Percentage Amount Percentage
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 195,140 11.33% $ 178,068 11.41% $ 175,875 12.14%
NOW accounts 121,394 7.05 114,982 7.37 111,653 7.70
Money market accounts 97,821 5.68 113,869 7.30 94,708 6.54
Savings deposits 236,764 13.75 207,365 13.29 210,291 14.51
Time deposits under $100 362,553 21.06 326,968 20.95 307,504 21.22
Time deposits of $100 or more 708,064 41.13 619,150 39.68 549,090 37.89
- --------------------------------------------------------------------------------------------------------------
Total $1,721,736 100.00% $1,560,402 100.00% $1,449,121 100.00%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
TIME DEPOSITS OF $100,000 OR MORE BY MATURITY
<TABLE>
<CAPTION>
(in thousands) At December 31, 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Less than three months $ 352,755
Three to six months 192,051
Six to twelve months 159,526
Over one year 3,732
- ------------------------------------------------------------------------------------------------------------
Total $ 708,064
- ------------------------------------------------------------------------------------------------------------
MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR AT
DECEMBER 31, 1999 FOR EACH OF THE FIVE YEARS FOLLOWING DECEMBER 31, 1999
(in thousands)
- ------------------------------------------------------------------------------------------------------------
2001 $ 17,330
2002 4,117
2003 188
2004 200
2005 16
- ------------------------------------------------------------------------------------------------------------
Total $ 21,851
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-30-
<PAGE>
AVERAGE DEPOSITS AND RATES
<TABLE>
<CAPTION>
(dollars 1999 1998 1997 1996 1995
in thousands) Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 169,013 --% $ 166,657 --% $ 148,907 --% $ 121,952 --% $ 114,435 --%
NOW accounts 117,374 1.22 111,900 1.42 114,453 1.47 96,759 1.50 85,413 1.70
Money market
accounts 99,628 1.59 99,833 2.11 97,470 2.26 100,898 2.30 106,760 2.36
Savings deposits 207,498 1.54 205,372 2.10 216,840 2.19 151,284 2.31 136,750 2.31
Time deposits 1,001,878 4.69 900,441 5.11 820,310 5.09 632,211 5.00 450,834 5.36
- ----------------------------------------------------------------------------------------------------------------------------
Total $1,595,391 3.33% $1,484,203 3.64% $1,397,980 3.60% $1,103,104 3.50% $ 894,192 3.50%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Stockholders' equity increased $22.4 million to $179.1 million or 8.97%
of total assets at year-end 1999, compared with $156.7 million or 8.80% of
total assets at year-end 1998. The increase was primarily due to an addition
of $30.3 million from net income less cash dividends paid of $7.2 million and
$1.6 million from issuance of additional common shares through Dividend
Reinvestment Plan, which were partially offset by an increase of $2.2 million
in the net unrealized holding losses on securities available-for-sale, net of
tax.
The Company declared a cash dividend of $0.175 per common share in
January 1999 on 8,988,760 shares outstanding and a cash dividend of $0.21 per
common share in April, July and October 1999, respectively, on 8,998,412
shares, 9,010,829 shares and 9,022,318 shares outstanding, respectively.
Total cash dividends paid in 1999, amounted to $7.2 million.
Management seeks to retain the Company's capital at a level sufficient to
support future growth, to protect depositors, to absorb any anticipated
losses and to comply with various regulatory requirements.
The primary measure of capital adequacy is based on the ratio of
risk-based capital to risk weighted assets. The Company's Total, Tier 1 and
Tier 1 leverage ratios were 11.71%, 10.50% and 8.93%, respectively, as of
December 31, 1999, compared with 12.68%,11.44% and 8.45%, respectively, at
year-end 1998. The decreases in the Total and Tier 1 capital ratios at
year-end 1999 were primarily attributable to the substantial increase in
loans, which were 100% risk-weighted. Nevertheless, the Company's capital
ratios at year-end 1999 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%.
A table illustrating the Company and the Bank's capital and leverage
ratios at year-end 1999 and 1998 is included in Note 11 to consolidated
financial statements.
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").
Due to significant decreases in short-term and marketable assets and
increases in deposits and securities sold under agreements to repurchase, the
Company's liquidity ratio (defined as net cash, short-term and marketable
securities to net deposits and short-term liabilities) decreased to 33.91% at
year-end 1999, compared with 46.04% at year-end 1998.
-31-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
To supplement its liquidity needs, the Bank maintains a total credit line
of $47 million for Federal funds with two correspondent banks, a repo line of
$110 million with three brokerage firms and a retail certificate of deposit
line of five percent of total deposits with another brokerage firm. The Bank
is also a shareholder of the FHLB, which enables the Bank to have access to
lower cost FHLB financing when necessary. The Bank obtained non-callable
advances from FHLB totaling $30 million in the third quarter of 1998 at fixed
interest rates.
The Company had a significant portion of its time deposits maturing
within one year or less at year-end 1999. Management anticipates that there
may be some outflow of these deposits upon maturity, due to the keen
competition in the Company's marketplace. However, based on its historical
runoff experience, the Company expects 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 operation needs in the foreseeable
future.
Bancorp, on the other hand, obtains funding for its activities only
through dividend income contributed by the Bank and proceeds from investments
in the Dividend Reinvestment Plan. Dividends paid to Bancorp by the Bank are
subject to regulatory limitations. Since the business activities of Bancorp
consist primarily of the operations of the Bank, and no other operating
business activities are proposed for Bancorp in the near future, management
believes Bancorp's liquidity generated from its prevailing sources are
sufficient to meet its operational needs.
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 the interest-earning assets and interest-bearing liabilities
of the Company do not change at the same speed, to the same extent, or on the
same basis.
The Company actively monitors and manages its interest rate risk through
analyzing the repricing characteristics of its loans, securities, and
deposits on an on-going basis. The primary objective is to minimize the
adverse effects of changes in interest rates on its earnings and ultimately
the underlying market value of equity while structuring the Company's
asset-liability composition to obtain the maximum spread. Management uses
certain basic measurement tools in conjunction with established risk limits
to regulate its interest rate exposure. Because of the 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 or the market value of its assets and
liabilities.
The interest rate sensitivity analysis measures the Company's exposure to
differentials in interest rates between assets and liabilities. This analysis
details the expected maturity and repricing opportunities mismatch or
sensitivity gap between interest-earning assets and interest-bearing
liabilities over a specified timeframe. A positive gap exists when rate
sensitive assets which reprice over a given time period exceed rate sensitive
liabilities. During periods of increasing interest rates, net interest margin
may be enhanced with a positive gap. Contrarily, a negative gap exists when
rate sensitive liabilities which reprice over a given time period exceed rate
sensitive assets. During periods of increasing interest rates, net interest
margin may be impaired with a negative gap.
The following table shows the maturity and rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1999. 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 seen from
the table, the Company was asset sensitive with a cumulative gap ratio of a
positive 16.25% within three months, and liability sensitive with a
cumulative gap ratio of a negative 9.78% within one year at year-end 1999,
compared with a positive 15.61% within three months, and a negative 11.48%
within one year at year-end 1998.
-32-
<PAGE>
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
December 31, 1999
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 Earnings Assets:
Cash and due from banks $ -- $ -- $ -- $ -- $ 59,081 $ 59,081
Federal funds sold and
securities purchased
under agreements to resell 5,000 -- -- -- -- 5,000
Securities available-for-sale 47,492 20,194 59,822 33,483 -- 160,991
Securities held-to-maturity -- 58,902 125,825 241,605 -- 426,332
Loans:
Commercial loans 342,677 27,838 9,669 8,347 -- 388,531
Real estate mortgage loans 467,955 19,510 41,918 248,909 -- 778,292
Real estate construction loans 62,516 -- -- -- -- 62,516
Installment loans 2,830 3,123 19,274 -- -- 25,227
Other loans 321 88 9 -- -- 418
- -------------------------------------------------------------------------------------------------------------
Total loans(1) 876,299 50,559 70,870 257,256 -- $1,254,984
- -------------------------------------------------------------------------------------------------------------
Non-interest earning assets -- -- -- -- 89,536 89,536
- -------------------------------------------------------------------------------------------------------------
Total assets $ 928,791 $ 129,655 $ 256,517 $ 532,344 $ 148,617 $1,995,924
- -------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities:
Deposits:
Demand $ -- $ -- $ -- $ -- $ 195,140 $ 195,140
Money market and NOW(2) 16,346 44,224 93,080 65,565 -- 219,215
Savings 17,693 61,342 102,412 55,317 -- 236,764
TCD's under $100 170,702 171,977 19,790 84 -- 362,553
TCD's $100 and over 352,755 351,577 3,732 -- -- 708,064
- -------------------------------------------------------------------------------------------------------------
Total deposits $ 557,496 $ 629,120 $ 219,014 $ 120,966 $ 195,140 $1,721,736
- -------------------------------------------------------------------------------------------------------------
Securities sold under agreements
to repurchase 46,990 -- -- -- -- 46,990
Advances from Federal
Home Loan Bank -- 20,000 10,000 -- -- 30,000
Non-interest bearing liabilities -- -- -- -- 18,089 18,089
Stockholders' equity -- -- -- -- 179,109 179,109
- -------------------------------------------------------------------------------------------------------------
Total liabilities &
stockholders' equity $ 604,486 $ 649,120 $ 229,014 $ 120,966 $ 392,338 $1,995,924
- -------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ 324,305 $ (519,465) $ 27,503 $ 411,378 $(243,721) $ --
- -------------------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap $ 324,305 $ (195,160) $ (167,657) $ 243,721 $ -- $ --
- -------------------------------------------------------------------------------------------------------------
Gap ratio (% of total assets) 16.25% (26.03) 1.38% 20.61% (12.21)% --
- -------------------------------------------------------------------------------------------------------------
Cumulative gap ratio 16.25% (9.78)% (8.40)% 12.21% -- --
- -------------------------------------------------------------------------------------------------------------
</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.
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, the 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
-33-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
level is met or exceeded, the Company then seeks corrective action after
considering, among other things, market conditions, customer reaction and the
estimated impact on profitability. The following table presents the estimated
impacts of immediate changes in interest rates at the specified levels at
December 31, 1999. The results presented may vary if different assumptions
are used or if actual experience differs from the assumptions used.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Changes in Interest Rates Percentage Change in: Percentage Change in:
(in basis points) Net Interest Income(1) Net Portfolio Value(2) Net Interest Income(1) Net Portfolio Value(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+200 15.60% (31.22)% 13.62% (33.88)%
+100 8.35% (16.13)% 7.35% (17.36)%
-100 (6.83)% 16.19% (6.03)% 15.79%
-200 (13.97)% 29.10% (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 increasing its yield-cost spread through growth opportunities 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, 1999. For assets, expected
maturities are based on contractual maturity. For liabilities, the Company
uses its historical experience and decay factors to estimate the deposit
runoffs of its interest bearing transactional deposits. The Company uses
certain assumptions to estimate fair values and expected maturities. The
results presented may vary if different assumptions are used or if actual
experience differs from the assumptions used.
<TABLE>
<CAPTION>
Average Expected Maturity Date at December 31, 1999
Interest
(dollars in thousands) Rate 2000 2001 2002 2003 2004 Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Federal funds sold and
securities purchased under
agreements to resell 4.30% $ 5,000 $ -- $ -- $ -- $ -- $ -- $ 5,000 $ 5,000
Mortgage-backed securities
and collateralized mortgage
obligations 6.10% 3,639 5,585 70 -- 12,011 198,131 219,436 215,592
Investment securities 6.13% 116,123 24,589 31,330 73,334 39,748 77,649 362,773 355,375
Federal Home Loan Bank stock 5.50% 6,851 -- -- -- -- -- 6,851 6,851
Loans
Commercial 8.90% 304,997 10,269 10,558 11,476 19,736 31,515 388,551 380,466
Real estate mortgage 8.64% 55,404 29,746 58,972 43,700 72,451 510,040 770,313 754,727
Real estate construction 9.21% 50,425 10,778 -- -- -- -- 61,203 59,717
Installment & others 8.54% 6,242 3,578 5,920 6,982 2,788 8 25,518 24,426
Interest-Sensitive Liabilities:
Other interest bearing deposits 1.46% 139,605 69,953 54,919 39,815 30,805 120,882 455,979 456,049
Time deposits 4.74% 1,047,000 19,012 4,117 202 200 86 1,070,617 1,059,076
Securities sold under
agreement to repurchase 5.80% 46,990 -- -- -- -- -- 46,990 47,649
Advances from Federal
Home Loan Bank 4.84% 20,000 -- -- 10,000 -- -- 30,000 29,305
Off-Balance Sheet Financial Instruments:
Commitments to extend credit N/A 516,814 27,842 2,003 -- 4,967 29,101 580,727 (328)
Standby letters of credit N/A 11,660 88 -- -- -- -- 11,748 (64)
Other letters of credit N/A 31,866 -- -- -- -- -- 31,866 (193)
Financial guarantee N/A 20,000 -- -- -- -- -- 20,000 35
Bill of lading guarantee N/A 13,924 -- -- -- -- -- 13,924 (69)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
YEAR 2000
The concern over the Year 2000 ("Y2K") issue resulted from computer programs
being written using two digits rather than four digits to identify a year in
the date field. Throughout much of the world, there was concern that this
issue could cause computer systems to fail or create erroneous results at the
Year 2000.
Beginning in 1997, the Company took various steps to mitigate the
potential impact of a Y2K problem. In general, these actions were designed to
identify, assess and design an action plan to mitigate the risks that the
Company might encounter relative to the Y2K problem.
The total cost of the Company's plan to address Y2K issues was
approximately $668,000. Hardware and software upgrades will be depreciated
over their useful lives in accordance with the Company's policy. All other
costs were expensed as incurred. The total amount expensed related to the Y2K
issue was $423,000 in 1999, $223,000 in 1998 and $22,000 in 1997.
Since the end of 1999, the Company has not experienced problems relating
to the Y2K issue that have had a material adverse impact on the Company's
financial condition, results of operations or liquidity. The Company does not
believe at this time that any potential problems relative to the Y2K issue
will have a materially adverse impact on the Company in the future. However,
no assurance can be given that this will be the case.
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, 1999 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 cost 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 effect on net interest income. Prepayment and early withdrawal
levels, which are also impacted by changes in interest rates, can
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.
-35-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
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 cost. 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.
AS THE COMPANY EXPANDS ITS BUSINESS OUTSIDE OF ITS CALIFORNIA MARKETS, THE
COMPANY WILL ENCOUNTER RISKS THAT COULD ADVERSELY AFFECT IT.
The Company primarily operates in California markets with a concentration of
Chinese American individuals and businesses; however, one of its strategies
is to expand beyond California into other domestic markets that have
concentrations of Chinese American individuals and businesses. The Company
has begun this expansion with the opening of its Houston loan production
office and the acquisition of certain assets and the assumption of certain
deposits and other liabilities of Golden City. In the course of this
expansion, the Company will encounter significant risks and uncertainties
that could have a material adverse effect on its operations. These risks and
uncertainties include increased operational difficulties arising from, among
other things, its ability to attract sufficient business in new markets, to
manage operations in noncontiguous market areas and to anticipate events or
differences in markets in which it has no current experience.
To the extent that the Company expands through acquisitions, such
acquisitions may also adversely harm its business, if the Company fails to
adequately address the financial and operational risks associated with such
acquisitions. For example, risks can include difficulties in assimilating the
operations, technology and personnel of the acquired company; diversion of
management's attention from other business concerns; inability to maintain
uniform standards, controls, procedures and policies; potentially dilutive
issuances of equity securities; incurrence of additional debt and contingent
liabilities; use of cash resources; large write-offs; and amortization
expenses related to goodwill and other intangible assets.
POOR ECONOMIC CONDITIONS IN CALIFORNIA AND OTHER REGIONS WHERE THE BANK HAS
OPERATIONS COULD CAUSE THE COMPANY TO INCUR LOSSES.
The Company's banking operations are concentrated primarily in Southern and
Northern California, and to a much lesser extent in Houston, Texas and New
York City. Adverse economic conditions in these regions 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, and to a much lesser extent, in
Houston, Texas and New York City. 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, floods and hurricanes
(which may result in uninsured losses), and other factors beyond the control
of the Company. Although the economy continued to grow in 1999 leading to a
relatively strong real estate market in the markets in which the Company
operates, management cannot predict the future economic performances of these
regions and there can be no assurance that favorable conditions will continue.
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
-36-
<PAGE>
during construction; and lack of permanent take-out financing. Loans
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.
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 areas 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.
While the Asian economy continued to show growth in 1999, it is difficult to
predict the behavior of the Asian economy in the future. U.S. fiscal policy
and an unfavorable global economic condition may adversely impact the Asian
economy. If the Asian economic conditions should deteriorate, the Company
could be exposed to economic and transfer risk, and could experience 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 negatively impact asset values and the
profitability and liquidity of companies operating in this region.
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-
<PAGE>
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 1999, total trading
volume was approximately 1,557,000 and the prices ranged from a high of $43.00
to a low of $32.50. The approximate number of stockholders at year-end 1999 was
1,800. The Company paid an aggregate per share cash dividend of $0.805 in 1999
and $0.70 in 1998. 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>
1999
First Quarter $ 41.000 $ 33.250 $ 37.625 305,330
Second Quarter 43.000 32.500 42.500 416,760
Third Quarter 42.938 34.688 35.688 516,312
Fourth Quarter 42.000 35.000 41.000 318,483
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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
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</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.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The following table shows the daily average balances of the Company's assets,
liabilities, and stockholders' equity for 1999 and 1998. The average balances of
the Company's assets, liabilities, and stockholders' equity for 1997 is based on
quarterly averages.
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
(dollars in thousands) Amount % 1 Amount % 1 Amount % 1
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 50,969 2.74% $ 58,892 3.45% $ 59,297 3.80%
Federal funds sold and securities purchased
under agreements to resell 38,013 2.04 69,915 4.09 35,000 2.25
Securities available-for-sale, taxable 184,497 9.91 225,397 13.20 281,938 18.08
Securities available-for-sale, nontaxable 345 0.02 499 0.03 158 0.01
Securities held-to-maturity, taxable 378,753 20.35 315,257 18.46 256,310 16.44
Securities held-to-maturity, nontaxable 68,702 3.69 48,757 2.85 41,831 2.68
Total net loans(2) 1,088,578 58.48 907,627 53.15 802,577 51.48
Premises and equipment, net 25,668 1.38 25,571 1.50 25,380 1.63
Other assets 25,799 1.39 55,888 3.27 56,582 3.63
- -------------------------------------------------------------------------------------------------------------------------
Total assets $1,861,324 100.00% $1,707,803 100.00% $ 1,559,073 100.00%
- -------------------------------------------------------------------------------------------------------------------------
Liabilities
Demand deposits $ 169,013 9.08% $ 166,657 9.76% $ 156,072 10.01%
Savings deposits(3) 424,500 22.81 417,105 24.42 426,244 27.34
Time deposits 1,001,878 53.82 900,441 52.73 826,520 53.01
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 1,595,391 85.71 1,484,203 86.91 1,408,836 90.36
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Securities sold under agreements
to repurchase 55,519 2.98 53,285 3.12 7,916 0.51
Advances from Federal Home Loan Bank 30,000 1.61 6,959 0.40 -- --
Mortgage indebtedness 183 0.01 440 0.03 190 0.01
Other liabilities 14,770 0.80 18,304 1.07 13,469 0.87
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,695,863 91.11 1,563,191 91.53 1,430,411 91.75
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock and additional paid-in-capital 63,897 3.43 62,259 3.65 60,795 3.90
Retained earnings 101,564 5.46 82,353 4.82 67,867 4.35
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 165,461 8.89 144,612 8.47 128,662 8.25
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,861,324 100.00% $1,707,803 100.00% $ 1,559,073 100.00%
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</TABLE>
1 PERCENTAGE OF CATEGORIES UNDER ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
ARE SHOWN AS A PERCENTAGE OF AVERAGE ASSETS.
2 TOTAL NET LOANS MEANS GROSS LOANS
NET OF LOAN PARTICIPATIONS SOLD, UNAMORTIZED DEFERRED LOAN FEES AND ALLOWANCE
FOR LOAN LOSSES.
3 SAVINGS DEPOSITS INCLUDE NOW, MONEY MARKET AND SAVINGS ACCOUNTS.
-38-
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(in thousands, except share and per share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 59,081 $ 64,656
Federal funds sold and securities purchased under agreements to resell 5,000 17,000
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 64,081 81,656
Securities available-for-sale (amortized cost of
$162,728 in 1999 and $237,877 in 1998) 160,991 239,928
Securities held-to-maturity (estimated fair value of
$416,827 in 1999 and $426,778 in 1998) 426,332 418,156
Loans (net of allowance for loan losses of
$19,502 in 1999 and $15,970 in 1998) 1,245,585 961,876
Other real estate owned, net 4,337 10,454
Investments in real estate, net 16,987 1,457
Premises and equipment, net 25,299 25,826
Customers' liability on acceptances 13,721 10,847
Accrued interest receivable 13,150 11,996
Goodwill 10,559 8,590
Other assets 14,882 10,112
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,995,924 $ 1,780,898
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 195,140 $ 178,068
Interest bearing accounts
NOW accounts 121,394 114,982
Money market deposits 97,821 113,869
Savings deposits 236,764 207,365
Time deposits under $100 362,553 326,968
Time deposits of $100 or more 708,064 619,150
- -----------------------------------------------------------------------------------------------------------------
Total deposits 1,721,736 1,560,402
- -----------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 46,990 16,436
Advances from Federal Home Loan Bank 30,000 30,000
Acceptances outstanding 13,721 10,847
Other liabilities 4,368 6,561
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,816,815 1,624,246
Stockholders' equity
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized, 9,033,583 and 8,988,760 shares
issued and outstanding in 1999 and 1998, respectively 90 90
Additional paid-in-capital 64,529 62,920
Accumulated other comprehensive income (loss), net (1,006) 1,189
Retained earnings 115,496 92,453
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 179,109 156,652
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,995,924 $ 1,780,898
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-39-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands, except share and per share data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest on loans $ 93,780 $ 82,866 $ 74,015
Interest on securities available-for-sale 10,551 13,494 17,701
Interest on securities held-to-maturity 26,821 22,966 17,831
Interest on Federal funds sold and securities
purchased under agreements to resell 1,881 3,950 2,415
Interest on deposits with banks 13 33 16
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 133,046 123,309 111,978
- ------------------------------------------------------------------------------------------------------------------------
Interest Expense
Time deposits of $100 or more 32,724 30,691 26,634
Other deposits 20,438 23,316 23,738
Other borrowed funds 4,246 3,218 502
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 57,408 57,225 50,874
- ------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 75,638 66,084 61,104
Provision for loan losses 4,200 3,600 3,600
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 71,438 62,484 57,504
- ------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Securities gains (losses) (3) 43 41
Letter of credit commissions 2,179 1,944 1,503
Service charges 3,635 3,915 3,491
Other operating income 3,044 2,234 1,740
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest income 8,855 8,136 6,775
- ------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits 19,150 18,024 17,009
Occupancy expense 2,521 2,546 2,931
Computer and equipment expense 2,573 2,412 2,365
Professional services expense 3,165 3,234 3,060
FDIC and State assessments 409 393 356
Marketing expense 1,036 1,028 1,200
Real estate operations, net (1,416) (1,125) 503
Other operating expense 2,844 3,553 3,504
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 30,282 30,065 30,928
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Income before income tax expense 50,011 40,555 33,351
Income tax expense 19,720 15,976 13,243
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Net income 30,291 24,579 20,108
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gain (loss) arising during the year (2,229) 859 1,465
Less: reclassification adjustment for realized
gain (loss) on securities included in net income (34) 40 36
- ------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of tax (2,195) 819 1,429
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 28,096 $ 25,398 $ 21,537
- ------------------------------------------------------------------------------------------------------------------------
Net income per common share
Basic $ 3.36 $ 2.74 $ 2.26
Diluted $ 3.36 $ 2.74 $ 2.26
- ------------------------------------------------------------------------------------------------------------------------
Basic average common shares outstanding 9,013,428 8,967,188 8,915,936
Diluted average common shares outstanding 9,017,760 8,968,393 8,915,936
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-40-
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accumulated
Year ended December 31, Additional Other Total
1999, 1998 and 1997 Number Paid-in- Comprehensive Retained Stockholders'
(in thousands, except share and per share amounts) of Shares Amount Capital Income (Loss) Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 8,878,144 $ 89 $ 59,812 $ (1,059) $ 59,604 $ 118,446
- ----------------------------------------------------------------------------------------------------------------------------------
Issuances of common stock --
Dividend Reinvestment Plan 63,599 -- 1,460 -- -- 1,460
Cash dividends of $.625 per share -- -- -- -- (5,566) (5,566)
Change in unrealized holding
gain (loss) on securities
available-for-sale, net of tax -- -- -- 1,429 -- 1,429
Net income -- -- -- -- 20,108 20,108
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,941,743 89 61,272 370 74,146 135,877
- ----------------------------------------------------------------------------------------------------------------------------------
Issuances of common stock --
Dividend Reinvestment Plan 47,017 1 1,648 -- -- 1,649
Cash dividends of $.70 per share -- -- -- -- (6,272) (6,272)
Change in unrealized holding
gain (loss) on securities
available-for-sale, net of tax -- -- -- 819 -- 819
Net income -- -- -- -- 24,579 24,579
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,988,760 90 62,920 1,189 92,453 156,652
- ----------------------------------------------------------------------------------------------------------------------------------
Issuances of common stock --
Dividend Reinvestment Plan 44,523 -- 1,600 -- -- 1,600
Stock options exercised 300 -- 9 -- -- 9
Cash dividends of $0.805 per share -- -- -- -- (7,248) (7,248)
Change in unrealized holding
gain (loss) on securities
available-for-sale, net of tax -- -- -- (2,195) -- (2,195)
Net income -- -- -- -- 30,291 30,291
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 9,033,583 $ 90 $ 64,529 $ (1,006) $115,496 $ 179,109
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-41-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1999 1998 1997
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<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 30,291 $ 24,579 $ 20,108
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 4,200 3,600 3,600
Provision for losses on other real estate owned 339 195 476
Deferred tax benefit (2,291) (10) (493)
Depreciation 1,331 1,241 1,335
Net gain on sale of other real estate owned (1,549) (999) (174)
Gain on sale of investments in real estate (394) -- (222)
Gain on disposal of premises and equipment -- (2) (2)
(Gain) Loss on sales and calls of securities 3 (43) (41)
Amortization of investment security premiums, net 557 286 63
Amortization of goodwill 681 940 685
Increase (decrease) in deferred loan fees, net (38) (155) 43
(Increase) decrease in accrued interest receivable (1,154) 251 2,761
(Increase) decrease in other assets, net (2,480) 3,443 (2,437)
Increase (decrease) in other liabilities (2,193) 2,158 (741)
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (2,988) 10,905 4,853
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Net cash provided by operating activities 27,303 35,484 24,961
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (1,090,732) (1,025,244) (217,418)
Proceeds from maturity and call of investment securities available-for-sale 1,160,919 1,006,491 300,394
Proceeds from sale of investment securities available-for-sale -- 6,429 92,706
Purchase of mortgage-backed securities available-for-sale (911) (34,968) (12,443)
Proceeds from repayments and sale of mortgage-backed securities
available-for-sale 9,906 25,492 6,800
Purchase of investment securities held-to-maturity (45,255) (82,268) (15,346)
Proceeds from maturity and call of investment securities held-to-maturity 1,385 12,025 41,932
Purchase of mortgage-backed securities held-to-maturity (38,157) (73,787) (186,621)
Proceeds from repayment of mortgage-backed securities held-to-maturity 70,851 74,817 19,212
Net increase in loans (282,413) (120,021) (104,474)
Purchase of premises and equipment (803) (1,866) (766)
Proceeds from sale of equipment -- 2 2
Proceeds from sale of other real estate owned 4,730 4,470 4,346
Proceeds from sale of investments in real estate 1,026 -- 2,292
Net (increase) decrease in investments in real estate (16,162) 197 263
Cash paid for the acquisition of Golden City (5,511) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (231,127) (208,231) (69,121)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts, money market and savings deposits 36,835 21,757 19,083
Net increase in time deposits 124,499 89,524 65,298
Net increase (decrease) in securities sold under agreements to repurchase 30,554 (6,983) 13,419
Increase in borrowing from Federal Home Loan Bank -- 30,000 --
Cash dividends (7,248) (6,272) (5,566)
Proceeds from shares issued under Dividend Reinvestment Plan 1,600 1,649 1,460
Proceeds from exercise of stock options 9 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 186,249 129,675 93,694
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (17,575) (43,072) 49,534
Cash and cash equivalents, beginning of the year 81,656 124,728 75,194
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Cash and cash equivalents, end of the year $ 64,081 $ 81,656 $ 124,728
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 56,857 $ 57,232 $ 50,184
Income taxes $ 20,350 $ 15,413 $ 13,736
Non-cash investing activities:
Transfer to investment securities available-for-sale within
90 days of maturity $ 2,515 $ 1,340 $ 630
Transfers to other real estate owned $ 886 $ 4,334 $ 6,012
Loans to facilitate the sale of other real estate owned $ 3,483 $ 3,483 $ 6,949
Acquisition:
The Company purchased certain assets and assumed certain deposits and
liabilities of Golden City for $5,511. In conjunction with the
acquisition, liabilities were assumed as follows. See Note 2.
Fair value of assets acquired$ 86,779
Cash paid (5,511)
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ 81,268
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-42-
<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 1999 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 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
-43-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
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 is discontinued 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
initially recorded at fair value and subsequently is carried at the lower of
cost or 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.
-44-
<PAGE>
INVESTMENTS IN REAL ESTATE At December 31, 1999, the Company is a limited
partner in four different partnerships that invest in low income housing
projects that qualify for Federal income tax credits. As further discussed in
Note 7, the significant partnership interests are accounted for utilizing the
equity method of accounting. Those limited partnership interests which are
considered immaterial are accounted for 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.
GOODWILL Goodwill, which represents the excess of purchase price over fair
value of net assets acquired and the related acquisition costs, is amortized
on a straight-line basis over the expected periods to be benefited (generally
15 years). 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 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. Comprehensive
income is a financial reporting concept and does not affect the Company's
financial position or results of operations.
NET INCOME PER COMMON SHARE Earnings per share ("EPS") is computed on a basic
and diluted basis. Basis 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.
STOCK BASED COMPENSATION The Company applies the intrinsic value method to
account for stock based compensation reflecting the impact of the fair value
of options granted on net income and income per share.
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.
-45-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SEGMENTS INFORMATION AND DISCLOSURES Generally accepted accounting principles
establish 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. The Company has concluded that it has one segment.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No.133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. It specifies necessary conditions to be met to
designate a derivative as a hedge. As amended by SFAS No.137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No.133," SFAS No.133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Management is in
the process of determining what effect, if any, adoption will have on the
Company's financial statements.
2 - ACQUISITION
On December 10, 1999, the Bank entered into a Purchase and Assumption
Agreement ("P&A Agreement") with the Federal Deposit Insurance Corporation
("FDIC"), as the Receiver of Golden City to purchase certain assets and to
assume certain deposits and other liabilities of Golden City as of close of
business on December 10, 1999 for $5.5 million in cash. The loans,
securities, cash, Federal funds sold and deposits assumed by the Bank as of
the closing on December 10, 1999 were $31.2 million, $22.1 million, $8.4
million, $22.0 million, and $80.6 million, respectively. Immediately upon
acquisition, the branch operations of Golden City were merged into the Bank,
and the two branches of Golden City were made branches of the Bank. The
acquisition has been accounted for by the purchase method and, accordingly,
the results of operations of Golden City subsequent to the closing on
December 10, 1999 have been included in the Company's consolidated financial
statements. The excess of the purchase price over the fair value of the net
identifiable assets acquired totaled approximately $2.65 million has been
recorded as goodwill to be amortized over 15 years.
The P&A Agreement allows the Bank to put back certain assets and
contracts to the FDIC based on a six-month settlement schedule set by the
FDIC. Upon completion of the settlement period, goodwill will be adjusted in
accordance with the settlement schedule, if necessary.
The following table presents an unaudited pro forma combined summary of
operations of the Company and Golden City for the year ended December 31,
1999 and 1998, respectively. The unaudited pro forma combined summary of
operations is presented as if the merger had been effective January 1, 1999
and 1998, respectively. This information combines the historical results of
the Company and Golden City 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 Golden
City. 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>
(Unaudited)
Year ended December 31,
(in thousands, except per share data) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net interest income before provision for loan losses $ 75,865 $ 69,275
- -----------------------------------------------------------------------------------------------
Net income $ 30,040 $ 24,249
- -----------------------------------------------------------------------------------------------
Basic and diluted net income per common share $ 3.33 $ 2.70
- -----------------------------------------------------------------------------------------------
</TABLE>
-46-
<PAGE>
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 1999 and 1998 were $2,788,000 and
$11,130,000, respectively.
Securities purchased under agreements to resell are collateralized by
U.S. government agencies and Collateralized Mortgage Obligations securities
at December 31, 1999 and 1998, respectively. 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>
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31 $ 3,000 $ 17,000
Weighted average interest rate, December 31 4.50% 5.35%
Average amount outstanding during the year $ 36,741 $ 69,915
Weighted average interest rate for the year 5.06% 5.65%
Maximum amount outstanding at any month end $ 80,000 $ 105,000
- -----------------------------------------------------------------------------------------------
</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 $1.9 million, $4.0 million and $2.4 million, respectively,
for 1999, 1998 and 1997.
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, 1999 and 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 (in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 25 $ -- $ -- $ 25
U.S. government agencies 40,553 3 338 40,218
State and municipal securities 540 -- -- 540
Mortgage-backed securities 14,813 1 181 14,633
Collateralized mortgage obligations 7,945 -- 121 7,824
Asset-backed securities 16,867 -- 419 16,448
Federal Home Loan Bank stock 6,851 -- -- 6,851
Commercial paper 40,100 -- 24 40,076
Corporate bonds 35,034 13 671 34,376
- ----------------------------------------------------------------------------------------------------------------
Total $ 162,728 $ 17 $ 1,754 $ 160,991
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
-47-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 (in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,005 $ 9 $ -- $ 2,014
U.S. government agencies 102,524 496 -- 103,020
State and municipal securities 21,974 343 -- 22,317
Mortgage-backed securities 17,683 588 5 18,266
Collateralized mortgage obligations 14,071 88 -- 14,159
Asset-backed securities 8,264 8 52 8,220
Federal Home Loan Bank stock 5,991 -- -- 5,991
Commercial paper 29,950 -- 5 29,945
Corporate bonds 35,415 630 49 35,996
- ----------------------------------------------------------------------------------------------------------------
Total $ 237,877 $ 2,162 $ 111 $ 239,928
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available-for-sale except for
mortgage-backed securities and collaterallized mortgage obligations at
December 31, 1999, 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
(in thousands) Cost Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less (1) $ 67,536 $ 67,512
Due after one year through five years 57,814 56,813
Due after five years through ten years 14,620 14,209
Mortgage-backed securities and collateralized mortgage obligations 22,758 22,457
- ---------------------------------------------------------------------------------------------------------------
Total $ 162,728 $ 160,991
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) EQUITY SECURITIES ARE REPORTED IN THIS CATEGORY.
Proceeds from sales and repayments of securities available-for-sale during
1999 and 1998 were $9,906,000 and $31,921,000, respectively. Proceeds from
maturities and calls of securities available-for-sale during 1999 and 1998
were $1,160,919,000 and $1,006,490,000, respectively. There were no gains
realized in 1999. Gross realized gains of $59,000 and $304,000 were realized
for 1998 and 1997, respectively. Gross realized losses of $34,000, $19,000
and $268,000 were realized for 1999, 1998 and 1997, respectively.
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, 1999 and 1998:
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
1999 (in thousands) Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 24,998 $ 114 $ -- $ 25,112
U.S. government agencies 64,373 79 1,274 63,178
State and municipal securities 68,834 375 3,193 66,016
Mortgage-backed securities 133,282 53 2,809 130,526
Collateralized mortgage obligations 63,397 3 791 62,609
Asset-backed securities 19,999 -- 209 19,790
Corporate bonds 51,449 37 1,890 49,596
- -----------------------------------------------------------------------------------------------------------------
Total $ 426,332 $ 661 $ 10,166 $ 416,827
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
1998 (in thousands) Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,026 $ 578 $ -- $ 26,604
U.S. government agencies 54,426 819 -- 55,245
State and municipal securities 61,495 3,144 32 64,607
Mortgage-backed securities 146,019 2,351 317 148,053
Collateralized mortgage obligations 83,534 1,201 6 84,729
Corporate bonds 46,656 884 -- 47,540
- -----------------------------------------------------------------------------------------------------------------
Total $ 418,156 $ 8,977 $ 355 $ 426,778
- -----------------------------------------------------------------------------------------------------------------
</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, 1999, 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
(in thousands) Value Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 55,437 $ 55,631
Due after one year through five years 111,187 107,936
Due after five years through ten years 28,969 28,931
Due after ten years 34,060 31,194
Mortgage-backed securities and collateralized mortgage obligations 196,679 193,135
- -----------------------------------------------------------------------------------------------------------------
Total $ 426,332 $ 416,827
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the maturity and call of securities held-to-maturity during
1999 and 1998 were $1,385,000 and $12,025,000, respectively. Gross realized
gains of $31,000 , $3,000 and $6,000 were realized for 1999, 1998 and 1997,
respectively. No losses were realized for 1999, 1998 and 1997.
Securities having a carrying value of $128,904,000 and $46,806,000 at
December 31, 1999 and 1998, 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.
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, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial loans $ 395,138 $ 370,539
Residential mortgage loans 181,131 163,756
Commercial mortgage loans 577,541 356,608
Equity lines 26,437 20,402
Real estate construction loans 62,516 40,738
Installment loans 25,498 29,165
Other loans 419 269
- -------------------------------------------------------------------------------------------------------------
1,268,680 981,477
- -------------------------------------------------------------------------------------------------------------
Less
Unamortized deferred loan fees 3,593 3,631
Allowance for loan losses 19,502 15,970
- -------------------------------------------------------------------------------------------------------------
Total $ 1,245,585 $ 961,876
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-49-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1999, the Company
had $7,252,000 of these loans in its servicing portfolio. There were no loans
held for sale as of December 31, 1999 and 1998. Approximately $88,763,000 and
$87,324,000 in residential mortgage loans were pledged to secure a line of
credit with the Federal Home Loan Bank as of December 31, 1999 and December
31, 1998, respectively.
An analysis of the activity in the allowance for loan losses for the
years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 15,970 $ 15,379 $ 13,528
Loans charged-off (1,731) (3,519) (2,139)
Recoveries on loans previously charged-off 1,063 510 390
Provision for loan losses 4,200 3,600 3,600
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 19,502 $ 15,970 $ 15,379
- -------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999 and 1998, the Company had identified impaired loans with
a recorded investment of approximately $26,279,000, $21,949,000 and
$23,171,000, respectively. For 1999, 1998 and 1997, the average balances of
impaired loans were $26,707,000, $21,713,000 and $23,171,000 and interest
collected on impaired loans totaled $2,047,000, $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>
Recorded Impairment Net
1999 (in thousands) Investment Allowance Balance
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 12,686 $ 1,831 $ 10,855
Commercial real estate 13,412 1,912 11,500
Other 181 181 --
- ------------------------------------------------------------------------------------------------------------
Total $ 26,279 $ 3,924 $ 22,355
- ------------------------------------------------------------------------------------------------------------
Recorded Impairment Net
1998 (in thousands) Investment Allowance Balance
- ------------------------------------------------------------------------------------------------------------
Commercial $ 9,379 $ 1,566 $ 7,813
Commercial real estate 12,515 1,827 10,688
Other 55 55 --
- ------------------------------------------------------------------------------------------------------------
Total $ 21,949 $ 3,448 $ 18,501
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1999. An analysis of the activity with respect to loans to
Related Parties is as follows:
<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1997 $ 7,308
- -------------------------------------------------------------------------------------------------------------
Additional loans made 18,627
Payments received (10,031)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 15,904
Additional loans made 918
Payments received (4,710)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 12,112
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-50-
<PAGE>
The following is a summary of nonaccrual loans and troubled debt
restructurings as of December 31, 1999, 1998 and 1997 and the related net
interest foregone for the years then ended:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 13,696 $ 13,090 $ 16,886
Contractual interest due $ 1,396 $ 1,395 $ 1,845
Interest recognized 234 112 471
- ------------------------------------------------------------------------------------------------------------
Net interest foregone $ 1,162 $ 1,283 $ 1,374
- ------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Troubled debt restructurings $ 4,581 $ 4,642 $ 4,874
- ------------------------------------------------------------------------------------------------------------
Contractual interest due $ 429 $ 421 $ 406
Interest recognized 414 412 387
- ------------------------------------------------------------------------------------------------------------
Net interest foregone $ 15 $ 9 $ 19
- ------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1999, 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, 1999 and 1998 was
$4,337,000 and $10,454,000, respectively. The valuation allowance was
$614,000 and $494,000 at December 31, 1999 and 1998, respectively. The
following table presents the components of other real estate owned expense
(income) for the year-ended:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense (income) $ (206) $ (321) $ 201
Provision for losses 339 195 476
Net gain on disposal (1,549) (999) (174)
- -------------------------------------------------------------------------------------------------------------
Real estate operations, net $ (1,416) $ (1,125) $ 503
- -------------------------------------------------------------------------------------------------------------
</TABLE>
An analysis of the activity in the allowance for other real estate losses for
the years ended December 31, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 494 $ 1,081 $ 1,568
Provision for losses 339 195 476
Charge-offs on disposal (219) (782) (963)
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 614 $ 494 $ 1,081
</TABLE>
7 - INVESTMENTS IN REAL ESTATE
The Company's investments in real estate were $16,987,000 and $1,457,000, as
of December 31, 1999 and 1998, respectively. In 1999, the Company sold a
strip mall and invested in a California tax credit fund and a senior housing
project. At December 31, 1999 all four investments are limited partnerships
formed for the purpose of investing in low income housing projects and
qualify for Federal low income housing tax credits. The limited partnerships
are
-51-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
expected to generate tax credits over a weighted average remaining period
of approximately seven years. See Note 10 of the notes to consolidated
financial statements for income tax effects. The following table presents the
details of the four projects as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Percentage of Acquisition December 31
(dollars in thousands) Ownership Date 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Las Brisas 49.50 % Dec 1993 $ 209 $ 338
Los Robles 99.00 % Aug 1995 431 478
California tax credit fund 36.00 % Mar 1999 14,841 --
Wilshire Courtyard 99.90 % May 1999 1,506 --
-----------------------
$ 16,987 $ 816
-----------------------
</TABLE>
In addition to the limited partnerships detailed above, the Company has
investment in a strip mall that totaled $641,000 at December 31, 1998.
The Company's 99.00% and 99.90% limited partnership interest in the Los
Robles and Wilshire Courtyard limited partnerships were not consolidated as
of December 31, 1999 and 1998 because the Company did not have ability to
exercise significant influence over the operation of the partnerships. The
Company's investment in Wilshire Courtyard and the California tax credit fund
is accounted for utilizing the equity method of accounting. Las Brisas and
Los Robles are accounted for utilizing the cost method. The difference
between the cost and equity methods for the Las Brisas and the Los Robles
investments is immaterial. The Company recognized a net loss of approximately
$334,000, $158,000 and $176,000 in 1999, 1998 and 1997, respectively, from
the partnerships' operations.
In 1999, the Company recognized a gain of $394,000 from the sale of the
strip mall, and a net gain of $409,000, $95,000, and $170,000, for 1999, 1998
and 1997, respectively from real estate operations.
8 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 11,495 $ 11,484
Building and building improvements 13,623 13,779
Furniture, fixtures and equipment 13,155 12,058
Other 2,193 2,170
Construction in process 292 837
- ------------------------------------------------------------------------------------------------------------
40,758 40,328
Less: Accumulated depreciation 15,459 14,502
- ------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 25,299 $ 25,826
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of depreciation included in operating expense was $1,331,000,
$1,241,000 and $1,335,000 in 1999, 1998 and 1997, respectively.
9 - BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. The underlying collateral
pledged for the repurchase agreements consists of U.S. government agency
securities with a carrying value of $47,085,000 and a fair value of
$46,771,000. These borrowings generally mature in less than 30 days. The
table below provides comparative data for securities sold under agreements to
repurchase.
-52-
<PAGE>
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding (1) $ 55,519 $ 53,285 $ 8,861
Highest month-end balances (2) 79,185 55,185 23,419
Year end balance 46,990 16,436 23,419
Rate at year-end 5.80% 4.53% 7.03%
Weighted average interest rate for the year 5.73% 5.98% 5.99%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) AVERAGE BALANCES WERE COMPUTED USING DAILY AVERAGES.
(2) HIGHEST MONTH-END BALANCES WERE AT FEBRUARY 1999, NOVEMBER 1998 AND
DECEMBER 1997, RESPECTIVELY.
ADVANCES FROM THE FEDERAL HOME LOAN BANK. During the third quarter of 1998, the
Bank obtained advances from the FHLB for $20,000,000 to mature in September
1999 and $10,000,000 to mature in October 2003. These advances bear an
average interest rate of 4.84% and are non-callable.
10 - INCOME TAXES
For the years ended December 31, 1999, 1998 and 1997, the current and
deferred amounts of the income tax expense are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 15,377 $ 11,697 $ 10,280
State 5,815 4,289 3,456
- -------------------------------------------------------------------------------------------------------------
21,192 15,986 13,736
- -------------------------------------------------------------------------------------------------------------
Deferred
Federal (1,159) (105) (478)
State (313) 95 (15)
- -------------------------------------------------------------------------------------------------------------
(1,472) (10) (493)
- -------------------------------------------------------------------------------------------------------------
Total income tax expense $ 19,720 $ 15,976 $ 13,243
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Difference between provisions for loan losses for tax and
financial reporting purposes $ 8,563 $ 6,767
Difference between provisions for other real estate owned losses
for tax and financial reporting purposes 549 789
State income tax 1,855 1,321
Unrealized holding loss on securities available-for-sale, net 731 --
- -------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 11,698 8,877
- -------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities
Use of accelerated depreciation for tax purposes (1,148) (1,134)
Deferred loan fees (45) (145)
FHLB stock dividend (1,088) (936)
Acquisition of FPSB (485) (485)
Unrealized holding gain on securities available-for-sale, net -- (862)
Other, net (1,672) (1,120)
- -------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (4,438) (4,682)
- -------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 7,260 $ 4,195
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-53-
<PAGE>
NOTES TO CONSOLIATED FINANCIAL STATEMENTS, CONTINUED
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
1998 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,
1999 and 1998 were net deferred tax assets of $7,260,000 and $4,195,000,
respectively. Other assets as of December 31, 1999 and 1998 included a
current income tax receivable of $1,447,000 and $1,040,000, respectively.
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>
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at Federal statutory rate $17,504 35.00% $ 14,194 35.00% $ 11,673 35.00%
State income taxes, net of
Federal income tax benefit 3,576 7.15 2,850 7.03 2,237 6.71
Interest on obligations of state
and political subdivisions,
which are exempt from
Federal taxation (1,081) (2.16) (927) (2.29) (722) (2.17)
Low income housing tax credits (319) (0.64) (319) (0.79) (319) (0.96)
Non-deductible expense --
Amortization of goodwill 240 0.48 239 0.59 239 0.72
Other, net (200) (0.40) (61) (0.15) 135 0.41
- ----------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 19,720 39.43% $ 15,976 39.39% $ 13,243 39.71%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1999 is restricted to
approximately $55,892,000 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.
-54-
<PAGE>
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, 1999, 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,
1999 and 1998 are presented in the tables below:
<TABLE>
<CAPTION>
Company Bank Company Bank
As of December 31, 1999 As of December 31, 1999 As of December 31, 1998 As of December 31, 1998
(dollars in thousands) Balance Percentage Balance Percentage Balance Percentage Balance Percentage
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier I Capital (to risk-
weighted assets) $ 169,556(1) 10.50% $ 163,093(1) 10.10% $ 146,873(2) 11.44% $ 141,835(2) 11.04%
Tier I Capital
minimum requirement 64,588 4.00 64,588 4.00 51,372 4.00 51,372 4.00
- -----------------------------------------------------------------------------------------------------------------------------------
Excess $ 104,968 6.50% $ 98,505 6.10% $95,501 7.44% $ 90,463 7.04%
Total Capital (to risk-
weighted assets) $ 189,058(1) 11.71% $ 182,595(1) 11.31% $ 162,844(2) 12.68% $ 157,805(2) 12.29%
Total Capital minimum
requirement 129,176 8.00 129,176 8.00 102,744 8.00 102,744 8.00
- -----------------------------------------------------------------------------------------------------------------------------------
Excess $ 59,882 3.71% $ 53,419 3.31% $ 60,100 4.68% $ 55,061 4.29%
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-weighted assets $ 1,614,695 $ 1,614,695 $ 1,284,296 $1,284,296
Tier I Capital
(to average assets) --
Leverage ratio $ 169,556(1) 8.93% $ 163,093(1) 8.59% $ 146,873(2) 8.45% $ 141,835(2) 8.16%
Minimum leverage
requirement 75,974 4.00 75,974 4.00 69,508 4.00 69,508 4.00
- -----------------------------------------------------------------------------------------------------------------------------------
Excess $ 93,582 4.93% $ 87,119 4.59% $ 77,365 4.45% $ 72,327 4.16%
- -----------------------------------------------------------------------------------------------------------------------------------
Total average assets $ 1,899,358(3) $ 1,899,356(3) $ 1,737,710(3) $1,737,709(3)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) EXCLUDING THE UNREALIZED HOLDING LOSSES ON SECURITIES AVAILABLE-FOR-SALE OF
$1,006,000 AND GOODWILL OF $10,559,000.
(2) EXCLUDING THE UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE-FOR-SALE OF
$1,189,000 AND GOODWILL OF $8,590,000.
(3) AVERAGE ASSETS REPRESENT AVERAGE BALANCES FOR THE FOURTH QUARTER OF 1999
AND 1998, RESPECTIVELY.
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, 1999
-55-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1999 December 31, 1998
Per Per
(in thousands, except share Income Shares Share Income Shares Share
and per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 30,291 $ 24,579
- --------------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available
to stockholders $ 30,291 9,013,428 $ 3.36 $ 24,579 8,967,188 $ 2.74
Effect of Dilutive
Stock Options 4,332 1,205
Diluted EPS
Income available
to common
stockholders
plus assumed
conversions $ 30,291 9,017,760 $ 3.36 $ 24,579 8,968,393 $ 2.74
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
Per
(in thousands, except share Income Shares Share
and per share data) (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 20,108
- -------------------------------------------------------------------------------
Basic EPS
Income available
to stockholders $ 20,108 8,915,936 $ 2.26
Effect of Dilutive
Stock Options --
Diluted EPS
Income available
to common
stockholders
plus assumed
conversions $ 20,108 8,915,936 $ 2.26
- -------------------------------------------------------------------------------
</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 financial guarantees,
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>
(in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $ 580,727 $ 389,304
Standby letters of credit 11,748 10,112
Other letters of credit 31,866 29,029
Financial guarantee 20,000 --
Bill of lading guarantee 13,924 11,517
- ------------------------------------------------------------------------------------------------------------
Total $ 658,265 $ 439,962
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-56-
<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, 1999, 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.
The financial guarantee represents a conditional commitment issued by the
Company to guarantee the credit performance on $20 million of corporate debt.
The Company's exposure to credit risk from this financial guarantee is
essentially the same as if the Company was the owner of the corporate debt.
At December 31, 1999, the corporate debt was current under its contractual
term and the rating on the debt was BBB+ by Standard & Poors and Baa3 by
Moodys.
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, 1999, the Company had available credit lines with
other financial institutions in the amount of $230,000,000.
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 $1,823,000, $1,751,000 and $1,793,000
for 1999, 1998 and 1997, respectively. The following table shows future
minimum payments under operating leases with terms in excess of one year as
of December 31, 1999:
<TABLE>
<CAPTION>
(in thousands) Commitments
- ----------------------------------------------------------------------------------------------
<S> <C>
Year ended December 31,
2000 $ 1,774
2001 1,453
2002 1,303
2003 1,173
2004 969
Thereafter 10,260
- ----------------------------------------------------------------------------------------------
Total minimum lease payments $ 16,932
- ----------------------------------------------------------------------------------------------
</TABLE>
Rental income was $443,000, $455,000 and $437,000 for 1999, 1998 and 1997,
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,
1999:
<TABLE>
<CAPTION>
(in thousands) Commitments
- ----------------------------------------------------------------------------------------------
<S> <C>
Year ended December 31,
2000 $ 371
2001 340
2002 306
2003 239
2004 140
Thereafter --
- ----------------------------------------------------------------------------------------------
Total minimum lease payments to be received $ 1,396
- ----------------------------------------------------------------------------------------------
</TABLE>
-57-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
Fair value estimates were made at specific points in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates were based on
judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates were subjective in nature and involved uncertainties
and matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
-58-
<PAGE>
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998
(in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 59,081 $ 59,081 $ 64,656 $ 64,656
Federal funds sold and securities
purchased under agreements to resell 5,000 5,000 17,000 17,000
Securities available-for-sale 160,991 160,991 239,928 239,928
Securities held-to-maturity 426,332 416,827 418,156 426,778
Loans, net 1,245,585 1,219,336 961,876 981,386
- -------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Deposits $ 1,721,736 $ 1,515,125 $ 1,560,402 $ 1,564,981
Securities sold under agreements
to repurchase 46,990 47,649 16,436 16,436
Advances from Federal Home Loan Bank 30,000 29,305 30,000 30,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998
(in thousands) Notional Amount Fair Value Notional Amount Fair Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OFF-BALANCE SHEET FINANCIAL STATEMENTS
Commitments to extend credit $ 580,727 $ (328) $ 389,304 $ (336)
Standby letters of credit 11,748 (64) 10,112 (87)
Other letters of credit 31,866 (193) 29,029 (174)
Financial guarantee 20,000 35 -- --
Bill of lading guarantee 13,924 (69) 11,517 (50)
- -------------------------------------------------------------------------------------------------------------
</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 1999, 1998 and 1997, the ESOP purchased 33,163, 23,669 and 38,491
shares, respectively, of the Company's stock at an aggregate cost of
$1,162,829, $821,021 and $878,620, respectively. The shares purchased in 1999
included 20,160 shares bought on the open market and 13,003 shares bought
through the Dividend Reinvestment Plan. 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 Company contributed $537,200, $486,120 and
$453,000 to the trust in 1999, 1998 and 1997, respectively, which was charged
to salaries and employee benefits in the accompanying consolidated statements
of income and comprehensive income. In 1999, distribution of benefits to
participants totaled 23,299 shares. As of December 31, 1999, the ESOP owned
571,650 shares or 6.33% of the Company's outstanding common stock.
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.
-59-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 1999, the Company's contribution amounted to $186,736, $178,150
and $138,000 in 1999, 1998 and 1997, respectively.
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
In 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 in February 2008.
In September 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
- ------------------------------------------------------------------------------------------------------------
Granted -- --
Exercised (300) 33
Forfeited -- --
Expired -- --
Cancelled -- --
Balance, December 31, 1999 44,700 $ 33
- ------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999 and 1998, 9,000 and none of the options were
exercisable, respectively.
The Company applies Accounting Principles Board Option 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 1999 or 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
34.1%
-60-
<PAGE>
based on daily market prices for the preceding four-year period, (iii) an
expected dividend yield of 2.1% per share per annum, and (iv) a risk-free
interest rate of 6.3%. The fair value of the options was calculated to be
$9.98 per share at the date of grant.
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 1999 and 1998 would have been reduced to
the pro forma amounts indicated below.
<TABLE>
<CAPTION>
(in thousands, except per share data) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income
As reported $ 30,291 24,579
Pro forma 30,237 24,564
Basic net income per share
As reported 3.36 2.74
Pro forma 3.35 2.74
Diluted net income per share
As reported 3.36 2.74
Pro forma 3.35 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.
The condensed financial information of Cathay Bancorp, Inc. as of December
31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997
were as follows:
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands, except share and per share data) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 6,504 $ 5,080
Investment in subsidiary-- Cathay Bank 172,646 151,613
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 179,150 $ 156,693
- --------------------------------------------------------------------------------------------------------------------
Liabilities
Accrued expenses $ 41 $ 41
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 41 41
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $0.01par value; 10,000,000 shares authorized, none issued -- --
Common stock, $0.01par value; 25,000,000 shares authorized, 9,033,583 and 8,988,760
shares issued and outstanding in 1999 and 1998, respectively 90 90
Additional paid-in-capital 64,529 62,920
Accumulated other comprehensive income (1,006) 1,189
Retained earnings 115,496 92,453
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 179,109 156,652
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 179,150 $ 156,693
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-61-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash dividends from Cathay Bank $ 7,248 $ 6,272 $ 5,566
Amortization of organizational costs and other expenses (321) (268) (233)
- -------------------------------------------------------------------------------------------------------------
Income before income tax expense 6,927 6,004 5,333
Income tax benefit 136 113 98
- -------------------------------------------------------------------------------------------------------------
Income before undistributed earnings of subsidiary 7,063 6,117 5,431
- -------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings of subsidiary 23,228 18,462 14,677
- -------------------------------------------------------------------------------------------------------------
Net income 30,291 24,579 20,108
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gain (loss) arising during the year (2,229) 859 1,465
Less: reclassification adjustment for realized gain (loss)
on securities included in net income (34) 40 36
- -------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of tax (2,195) 819 1,429
- -------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 28,096 $ 25,398 $ 21,537
- -------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 30,291 $ 24,579 $ 20,108
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (23,228) (18,462) (14,677)
Increase (decrease) in accrued expenses -- (30) 19
Other -- 3 (3)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,063 6,090 5,447
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 1,609 1,649 1,460
Cash dividends (7,248) (6,272) (5,566)
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,639) (4,623) (4,106)
- -------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 1,424 1,467 1,341
Cash and cash equivalents, beginning of year 5,080 3,613 2,272
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,504 $ 5,080 $ 3,613
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 150 $ 150 $ 150
Non-cash investing activities:
Net change in unrealized holding gain (loss) on
securities available-for-sale, net of tax $ (2,195) $ 819 $ 1,429
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-62-
<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 44,523, 47,017 and 63,599 and $1,600,173, $1,649,426 and
$1,459,435 for 1999, 1998 and 1997, respectively.
18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected unaudited quarterly financial data.
<TABLE>
<CAPTION>
Summary of Operations 1999 1998
Fourth Third Second First Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 35,460 $ 33,489 $ 32,583 $ 31,514 $ 32,077 $ 31,819 $ 30,234 $ 29,179
Interest expense 14,985 14,094 14,323 14,006 14,773 14,879 14,082 13,491
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 20,475 19,395 18,260 17,508 17,304 16,940 16,152 15,688
Provision for loan losses 1,050 1,050 1,050 1,050 900 900 900 900
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 19,425 18,345 17,210 16,458 16,404 16,040 15,252 14,788
Non-interest income 2,395 2,361 2,181 1,918 1,963 2,018 2,153 2,002
Non-interest expense 7,481 7,643 7,473 7,685 7,079 7,626 7,478 7,882
- --------------------------------------------------------------------------------------------------------------------------
Income before
income tax expense 14,339 13,063 11,918 10,691 11,288 10,432 9,927 8,908
Income tax expense 5,629 5,170 4,733 4,188 4,408 4,172 3,906 3,490
- --------------------------------------------------------------------------------------------------------------------------
Net income 8,710 7,893 7,185 6,503 6,880 6,260 6,021 5,418
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive
income, net of tax:
Unrealized holding
gain (loss) arising
during the year (899) 223 (678) (875) (276) 626 552 (46)
Less: reclassification
adjustment for realized
gain (loss) on securities
included in net income -- (2) -- (32) -- 5 -- 35
- --------------------------------------------------------------------------------------------------------------------------
Total other comprehensive
income, net of tax (899) 225 (678) (843) (276) 624 552 (81)
- --------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 7,811 $ 8,118 $ 6,507 $ 5,660 $ 6,604 $ 6,884 $ 6,573 $ 5,337
- --------------------------------------------------------------------------------------------------------------------------
Basic net income per
common share $ 0.96 $ 0.88 $ 0.80 $ 0.72 $ 0.77 $ 0.70 $ 0.67 $ 0.61
Diluted net income
per common share $ 0.96 $ 0.87 $ 0.80 $ 0.72 $ 0.77 $ 0.70 $ 0.67 $ 0.61
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
-63-
<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, 1999 and
1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Los Angeles, California
January 14, 2000
-64-
<PAGE>
OFFICES
<TABLE>
<S> <C> <C> <C>
CORPORATE OFFICE: SAN GABRIEL MILLBRAE OVERSEAS OFFICE:
825 East Valley Boulevard Millbrae Plaza
777 North Broadway San Gabriel, CA 91776 1095 El Camino Real HONG KONG
Los Angeles, CA 90012 Tel: (626) 573-1000 Millbrae, CA 94030 Room 902-3, 9/F
Tel: (213) 625-4700 Fax: (626) 573-0983 Tel: (650) 652-0188 Printing House
Fax: (213) 625-1368 Jack Sun Fax: (650) 652-0180 6 Duddell Street
VICE PRESIDENT AND MANAGER Stanley Wong Central, Hong Kong
Branch Offices: VICE PRESIDENT AND MANAGER Tel: (852) 2522-0071
TORRANCE Fax: (852) 2810-1652
CALIFORNIA 23228 Hawthorne Boulevard VALLEY-STONEMAN Matthew Chui
Torrance, CA 90505 43 East Valley Boulevard REPRESENTATIVE
Los Angeles Tel: (310) 791-8700 Alhambra, CA 91801
777 North Broadway Fax: (310) 791-1862 Tel: (626) 576-7600 SUBSIDIARY:
Los Angeles, CA 90012 Allen Lin Fax: (626) 576-5831
Tel: (213) 625-4700 ASSISTANT VICE PRESIDENT AND Mimy Luc CATHAY INVESTMENT COMPANY
Fax: (213) 625-1368 MANAGER MANAGER 777 North Broadway
Claudia My Lu Los Angeles, CA 90012
VICE PRESIDENT AND MANAGER OAKLAND BERKELEY-RICHMOND Tel: (213) 625-4700
710 Webster Street 3288 Pierce Street Fax: (213) 625-1368
MONTEREY PARK Oakland, CA 94607 Richmond, CA 94804 George T.M. Ching
250 South Atlantic Boulevard Tel: (510) 208-3700 Tel: (510) 526-8898 PRESIDENT
Monterey Park, CA 91754 Fax: (510) 208-3727 Fax: (510) 526-0639
Tel: (626) 281-8808 Sumiko Wu TAIWAN C.I.C.
Fax: (626) 281-2956 CERRITOS ASSISTANT VICE PRESIDENT AND Sixth Floor, Suite 3
Frank Chen 11355 South Street ASSISTANT MANAGER 146 Sung Chiang Road
REGIONAL VICE PRESIDENT AND Cerritos, CA 90701 Taipei, Taiwan, R.O.C.
MANAGER Tel: (562) 860-7300 DIAMOND BAR Tel: (886) (2) 2537-5057
Fax: (562) 860-2296 1195 South Diamond Bar Boulevard Fax: (886) (2) 2537-5059
ALHAMBRA Henry Yoh Diamond Bar, CA 91765 Li Sung
601 North Atlantic Boulevard ASSISTANT VICE PRESIDENT AND Tel: (909) 860-8299 REPRESENTATIVE AND MANAGER
Alhambra, CA 91801 MANAGER Fax: (909) 861-0920
Tel: (626) 284-6556 Shu Lee ADDITIONAL INFORMATION:
Fax: (626) 282-3496 CITY OF INDUSTRY REGIONAL VICE PRESIDENT AND
Frank Chen 1250 South Fullerton Road MANAGER MARKET MAKERS
REGIONAL VICE PRESIDENT AND City of Industry, CA 91748 THE FOLLOWING FIRMS MAKE A MARKET
MANAGER Tel: (626) 810-1088 NEW YORK IN CATHAY BANCORP, INC. STOCK:
Fax: (626) 810-2188 Herzog, Heine, Geduld, Inc.
HACIENDA HEIGHTS Shu Lee FLUSHING Wedbush Morgan Securities Inc.
16025 East Gale Avenue REGIONAL VICE PRESIDENT AND 40-14/16 Main Street Hoefer & Arnett, Inc.
City of Industry, CA 91745 MANAGER Flushing, NY 11354
Tel: (626) 333-8533 Tel: (718) 886-5225 REGISTRAR AND TRANSFER AGENT
Fax: (626) 336-4227 CUPERTINO Fax: (718) 886-0220 American Stock Transfer and
Shu Lee 10480 South De Anza Betty Chou Trust Company
REGIONAL VICE PRESIDENT AND Boulevard ASSISTANT VICE PRESIDENT AND MANAGER 40 Wall Street
MANAGER Cupertino, CA 95014 New York, NY 10005
Tel: (408) 255-8300 New York Chinatown Tel: (800) 937-5449
WESTMINSTER Fax: (408) 255-8373 45 East Broadway
9121 Bolsa Avenue David Lin New York, NY 10002 CATHAY SERVICE HOTLINE
Westminster, CA 92683 VICE PRESIDENT AND MANAGER Tel: (212) 732-0200 (800) 9 CATHAY / 922-8429
Tel: (714) 890-7118 Fax: (212) 732-7389 SERVICE AVAILABLE 24 HOURS
Fax: (714) 898-9267 FREMONT Louisa Ting THROUGHOUT CALIFORNIA.
Kenneth Chan 47998 Warm Springs Boulevard VICE PRESIDENT AND MANAGER
ASSISTANT VICE PRESIDENT AND Fremont, CA 94539 CATHAY BANK WEB SITE
MANAGER Tel: (510) 770-5151 LOAN PRODUCTION OFFICE: www.cathaybank.com
Fax: (510) 770-5150
SAN JOSE Tony Wen HOUSTON
2010 Tully Road VICE PRESIDENT AND MANAGER 10375 Richmond Avenue #1600
San Jose, CA 95122 Houston, TX 77042
Tel: (408) 238-8880 IRVINE Tel: (713) 278-9599
Fax: (408) 238-2302 15323 Culver Drive Fax: (713) 278-9699
Edward Wong Irvine, CA 92714 Herbert Ng
VICE PRESIDENT AND MANAGER Tel: (949) 559-7500 VICE PRESIDENT AND MANAGER
Fax: (949) 559-7508
Linda Kuo
VICE PRESIDENT AND MANAGER
</TABLE>
-68-
<PAGE>
Exhibit 22.1
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(3) EXHIBITS
Subsidiaries of the Company
CATHAY BANK CATHAY INVESTMENT COMPANY
a California Corporation a California Corporation
100% owned 100% owned by Cathay Bank
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cathay Bancorp, Inc.:
We consent to the incorporation by reference in the registration statement (No.
033-33767) on Form S-3 and the registration statement (No. 333-87225) on Form
S-8 of our report dated January 14, 2000, relating to the consolidated
statements of condition of Cathay Bancorp, Inc. as of December 31, 1999 and
1998, 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, 1999, which report appears in the
December 31, 1999, annual report on Form 10-K of Cathay Bancorp, Inc.
KPMG LLP
Los Angeles, California
March 22, 2000
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 58,513
<INT-BEARING-DEPOSITS> 568
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 160,991
<INVESTMENTS-CARRYING> 426,332
<INVESTMENTS-MARKET> 416,827
<LOANS> 1,265,087
<ALLOWANCE> 19,502
<TOTAL-ASSETS> 1,995,924
<DEPOSITS> 1,721,736
<SHORT-TERM> 46,990
<LIABILITIES-OTHER> 18,089
<LONG-TERM> 30,000
0
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<INTEREST-OTHER> 1,881
<INTEREST-TOTAL> 133,046
<INTEREST-DEPOSIT> 53,162
<INTEREST-EXPENSE> 57,408
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<EXPENSE-OTHER> 30,282
<INCOME-PRETAX> 50,011
<INCOME-PRE-EXTRAORDINARY> 50,011
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