-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IX0EvMMkoobj25RJ/ywOdRdWmqBtHRUH5tULfiGpbTWHCzostSOvvnTyKQ/FY1H0 zTW3RPSGOE8/vJrk7jh1kw== 0000912057-01-506085.txt : 20010409 0000912057-01-506085.hdr.sgml : 20010409 ACCESSION NUMBER: 0000912057-01-506085 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATHAY BANCORP INC CENTRAL INDEX KEY: 0000861842 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 954274680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18630 FILM NUMBER: 1589286 BUSINESS ADDRESS: STREET 1: 777 N BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 BUSINESS PHONE: 2136254700 MAIL ADDRESS: STREET 1: 777 NORTH BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 10-K405 1 a2041192z10-k405.txt FORM 10-K405 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, 2000 ----------------------------------------------------- [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 0-18630 -------------------------------------------------------- CATHAY BANCORP, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 95-4274680 - -------------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 777 NORTH BROADWAY, LOS ANGELES, CALIFORNIA 90012 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 625-4700 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - -------------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of Registrant as of March 29, 2001 was $339,929,684 (computed on the basis of $46.25 per share, which was the closing price of our Common Stock reported by the Nasdaq National Market on March 29, 2001).* The number of shares outstanding as of March 29, 2001: Common Stock, $.01 par value - 9,085,938 shares DOCUMENTS INCORPORATED BY REFERENCE o Portions of Registrant's definitive proxy materials relating to Registrant's 2001 Annual Meeting of Stockholders, as filed, are incorporated by reference into Part I and Part III. o Portions of Registrant's Annual Report to Stockholders for the Year Ended December 31, 2000 (referred to below as "Annual Report to Stockholders") are incorporated by reference into Parts I, II and IV. - ------------------------- * Estimated solely for the purposes of this cover page. The market value of shares held by Registrant's directors, officers and Employee Stock Ownership Plan have been excluded. PART I In this annual report on Form 10-K, "Bancorp," "we," "us" and "our" refer to Cathay Bancorp, Inc. and the "Bank" refers to Cathay Bank. The statements in this report include forward-looking statements regarding management's beliefs, projections and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, also include words such as "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements 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: o our expansion into new market areas o fluctuations in interest rates o demographic changes o increases in competition o deterioration in asset or credit quality o changes in the availability of capital o adverse regulatory developments o changes in business strategy or development plans, including plans regarding the registered investment company o general economic or business conditions o other factors discussed in the section entitled "Factors that May Affect Future Results" on pages 37 through 40 of Annual Report to Stockholders which is incorporated herein by reference Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, we caution readers not to place undue reliance on any forward-looking statements, which speak as of the date of this report. We have no intention and undertake 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. ITEMS 1 AND 2. BUSINESS AND PROPERTIES BUSINESS OF BANCORP Cathay Bancorp, Inc. is a business corporation organized under the laws of the State of Delaware on March 1, 1990. Our only office, and our principal place of business, is located at the main office of Cathay Bank at 777 North Broadway, Los Angeles, California 90012. Our telephone number is (213) 625-4700. We are the holding company of Cathay Bank, a California state-chartered commercial bank. Our sole current business activity is to hold all of the outstanding stock of Cathay Bank. In the future, we may become an operating company or acquire savings institutions, banks or companies engaged 2 in bank-related activities and may engage in or acquire such other businesses or activities as may be permitted by applicable law. PROPERTY We currently neither own nor lease any real or personal property. We use 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 Our primary business is the business of the Bank. Therefore, the competitive conditions to be faced by us 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, we may face increased competition in undertaking acquisitions of such institutions and in operating after any such acquisition. EMPLOYEES Due to the limited nature of our activities, we currently do not employ any persons other than our management, which includes the President and the Chief Financial Officer. In the future, if we acquire other financial institutions or pursue other lines of business, we may hire additional employees. See "Business of the Bank - Employees" below. BUSINESS OF THE BANK 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 the following branch offices: o Southern California - 11 branches located in the cities of: o Monterey Park o Alhambra (2 locations) o City of Industry (2 locations) o Westminster o San Gabriel o Torrance o Cerritos 3 o Irvine o Diamond Bar o Northern California - Six branches located in the cities of: o San Jose o Oakland o Cupertino o Fremont o Millbrae o Richmond o New York - Two branches located in the cities of: o Flushing o New York o Texas - One branch located in Houston Our primary market area is defined by the Community Reinvestment Act 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. It accepts checking, savings, and time deposits, and makes 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: o letters of credit o wire transfers o spot and forward contracts o traveler's checks o safe deposit o night deposit o social security payment deposit o collection o bank-by-mail o drive-up and walk-up windows o automatic teller machine ("ATM") o Internet banking services o other customary bank services 4 To accommodate those customers who cannot conduct banking businesses during normal banking hours, the Bank has extended its banking hours to include Saturdays for all branches and Sundays for certain branches. In addition, the operations of the drive-up and walk-up facilities are extended past normal banking hours. Since its inception, the Bank's policy has been to attract business from, and to focus its primary services for the benefit of, individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. The three general areas to which the Bank has directed its lendable assets are: o loans secured by real estate o commercial loans and trade financing o installment loans to individuals for automobile, household and other consumer expenditures Beginning in 1999, the Bank launched a program under the name of Cathay Global Investment Services which allows its customers to purchase mutual funds, annuities, equities, bonds and short-term money market instruments through BISYS Brokerage Services, Inc. In 2000, BISYS Brokerage Services, Inc. was replaced by PrimeVest Financial Services. In February 2001, Cathay Bank, in conjunction with Trade.com, became one of the first Chinese-American banks to offer Internet stock trading services. 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 21 through 23 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 51 through 53 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 23 through 25 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 25 through 31 and in Notes 5 and 6 to the Consolidated Financial Statements on pages 53 through 55 of the Annual Report to Stockholders and is incorporated herein by reference. DEPOSITS Information concerning types of deposit accounts, average deposits and rates, and maturity of time deposits of $100,000 or more is included on pages 31 through 33 of the Annual Report to Stockholders and is incorporated herein by reference. 5 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 interest earning asset mix, average interest earning assets, average interest bearing liabilities and the yields on interest earning assets and interest bearing liabilities is included on pages 17 through 19 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 15 through 17 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 60 and 61 of the Annual Report to Stockholders and is incorporated herein by reference. CATHAY INVESTMENT COMPANY Cathay Investment Company is a wholly owned subsidiary of Cathay Bank that was formed in 1984 to invest in real property. In 1987, Cathay Investment Company opened a branch office in Taipei, Taiwan to promote Taiwanese real estate investments in Southern California. The office in Taipei is located at Sixth Floor, Suite 3, 146 Sung Chiang Road, Taipei, Taiwan, and consists of 1,812 square feet. The lease was renewed for three years from October 5, 1999 to October 4, 2002 for a monthly rent of approximately $3,600 based on the exchange rate in effect at March 16, 2001. As of December 31, 2000, Cathay Investment Company did not own any properties. CATHAY SECURITIES FUND, INC. Cathay Securities Fund, Inc. is a registered investment company and a wholly owned subsidiary of the Bank. It was formed in 2000 to engage in the business of investing in, owning and holding loans and securities. Its office is located at 777 North Broadway, Los Angeles, California 90012. The long-term plan for the registered investment company is currently under review. 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 6 feet and constructed of glass and concrete. The Bank owns both the building and the land upon which the building is situated. o The main floor currently accommodates: o a platform area for consumer loans and certain business and commercial real estate loans o a new account area o 24 teller stations (including 16 regular tellers, seven commercial tellers, and one ATM) o four pneumatic drive-up teller stations o one walk-up teller station o an operations area o a vault area o The second floor contains executive offices and the Bank's Board Room o 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. 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 in the following cities where certain of its branch offices are located: o Monterey Park o Alhambra o Westminster o San Gabriel o Torrance o Cerritos o City of Industry o Cupertino In addition to the bank-owned properties, the parking lot lease and the lease for the Cathay Investment Company's Taipei office described above, the Bank leases certain other premises. The following table lists the location, square footage, purpose, lease term and monthly payment of each lease.
- ------------------------------------------------------------------------------------------------------------------- LOCATION SQ. FT. PURPOSE LEASE TERM MONTHLY PAYMENT - ------------------------------------------------------------------------------------------------------------------- 767 N. Hill Street 8,912 Administrative offices 2/01 - 1/04 $8,912 Los Angeles, CA (Rm 305-306, 308-309, 313-315, 320)* - ------------------------------------------------------------------------------------------------------------------- 767 N. Hill Street 1,800 Administrative offices 2/01 - 1/04 $1,800 Los Angeles, CA (Rm 301-302) - ------------------------------------------------------------------------------------------------------------------- 16025 E. Gale Ave., Ste B-1 4,483 Hacienda Heights branch 7/99 - 6/04 with one $5,648 City of Industry, CA office more 5-year option - -------------------------------------------------------------------------------------------------------------------
7
- ------------------------------------------------------------------------------------------------------------------- LOCATION SQ. FT. PURPOSE LEASE TERM MONTHLY PAYMENT - ------------------------------------------------------------------------------------------------------------------- 2010 Tully Road 4,800 San Jose branch office 3/96 - 4/06 with two $8,640 San Jose, CA 5-year options** - ------------------------------------------------------------------------------------------------------------------- 710 Webster Street 5,000 Oakland branch office 9/96 - 9/01 $6,000 Oakland, CA - ------------------------------------------------------------------------------------------------------------------- 1759 N. Milpitas Blvd. 3,121 Milpitas branch office 10/00 - 10/05 with two $6,866 Milpitas, CA 5-year options - ------------------------------------------------------------------------------------------------------------------- 15323 Culver Drive 4,450 Irvine branch office 10/94 - 4/09 with two $6,089 Irvine, CA 5-year options - ------------------------------------------------------------------------------------------------------------------- 1095 El Camino Real 3,441 Millbrae branch office 1/00- 12/04 with one $7,337 Millbrae, CA more 5-year option - ------------------------------------------------------------------------------------------------------------------- 800 N. Hill Street 8,707 Administrative offices 2/99 - 2/04 $5,105 Los Angeles, CA - ------------------------------------------------------------------------------------------------------------------- 43 E. Valley Blvd. 1,976 Valley/Stoneman branch 8/96 - 8/01 with three $4,412 Alhambra, CA office 5-year options - ------------------------------------------------------------------------------------------------------------------- 3288 Pierce Street 2,535 Berkeley/Richmond branch 10/97 - 10/03 with two $6,845 Suite D-101 office 5-year options Richmond, CA - ------------------------------------------------------------------------------------------------------------------- 1195 S. Diamond Bar Blvd. 2,500 Diamond Bar branch office 9/99 - 9/07 $5,875 Diamond Bar, CA - ------------------------------------------------------------------------------------------------------------------- 45 E. Broadway 6,450 New York Chinatown branch 1/97 - 12/06 $25,500 New York, NY office - ------------------------------------------------------------------------------------------------------------------- 10375 Richmond Avenue 1,797 Houston branch 5/99 - 4/02 $3,414 Suite 1600 office Houston, TX - ------------------------------------------------------------------------------------------------------------------- Room 902-3, 9/F 700 Hong Kong representative 1/00 - 1/03 with one $2,200 Printing House office 2-year option approximately 6 Duddell Street, Central based on the Hong Kong exchange rate in effect at 3/16/01 - -------------------------------------------------------------------------------------------------------------------
* The lease is between the Bank and T.C. Realty, Inc., a California corporation owned by the spouse of Mr. Patrick Lee. Mr. Lee is 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 21 domestic branch offices, one branch office of Cathay Investment Company in Taiwan, and one representative office in Hong Kong. Each branch office has loan approval rights subject to the branch manager's authorized lending limits. Activities of Cathay Investment Company's 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 Cathay Investment Company is included on page 74 of the Annual Report to Stockholders and is incorporated herein by reference. 8 As of December 31, 2000, the Bank's investment in premises and equipment totaled $29,723,160. See also Note 8 to the Consolidated Financial Statements on page 56 of the Annual Report to Stockholders, which is incorporated herein by reference. EXPANSION Management of the Bank continues to look for opportunities to expand the Bank's branch network by seeking new branch locations and/or by acquiring other financial institutions to diversify its customer base in order to compete for new deposits and loans, and to be able to serve its 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 the following: o local promotional activities o personal contacts by its officers, directors, employees, and stockholders o extended hours on week days, Saturday banking, and in certain locations Sunday banking o Internet banking o an Internet website o certain other 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. 9 In Southern California, four other major Chinese-American banks compete for loans and deposits with us and two major financial institutions also compete for deposits. In Northern California, one of the four major Chinese-American banks competes for loans and deposits and the same two major financial institutions compete for deposits as well. In addition, there are many other Chinese-American banks in both Southern and Northern California. Banks from the Pacific Rim countries, such as Taiwan, Hong Kong and China also continue to open branches in the Los Angeles area, thus increasing competition in the Bank's primary markets. EMPLOYEES As of December 31, 2000, Bancorp and Cathay Bank (including subsidiaries) employed approximately 559 persons, including 121 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 Bancorp and Cathay Bank. REGULATION OF BANCORP AND THE BANK As a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended and as revised by the Gramm-Leach-Bliley Act of 1999, Bancorp's primary regulatory authority is the Board of Governors of the Federal Reserve System (or the Federal Reserve Board). The Bank Holding Company Act requires Bancorp to file annual reports of its operations with the Federal Reserve Board. Bancorp is also subject to examination by the Federal Reserve Board. Cathay Bank, as a California state-chartered commercial bank, is regulated by the Federal Deposit Insurance Corporation (or FDIC) and by the State of California Department of Financial Institutions. The Bank's deposits are insured, up to the legal maximum, by the FDIC. Although not a member of the Federal Reserve System, the Bank is subject to Federal and State rules and regulations. Regulatory authorities review key operational areas of Bancorp and the Bank, including asset quality, capital adequacy, liquidity, management and administrative ability, compliance with consumer protection laws and security of confidential customer information. Applicable law and regulations also limit the business activities in which Bancorp, the Bank and its subsidiaries may be engaged. See also, "Other Banking Regulations - Interstate Banking" and "- Federal Limits on the Activities and Investments of State-Chartered Banks" below. Bancorp also files periodic reports, proxy statements and other information with the Securities and Exchange Commission. 10 The following summary describes some of the more significant laws, regulations and policies that affect our operations. It is not a complete listing of all laws that apply to Bancorp and the Bank. To the extent that the information in this Section, "Regulation of Bancorp 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, state legislatures and the federal and state agencies charged with supervisory and examination authority over banking institutions. This regulatory framework is intended primarily to protect the Bank's depositors, the federal deposit insurance fund and the safety and soundness of the regulated financial institutions. Generally, the regulatory framework is not intended to protect our stockholders. We expect that changes in the banking and financial services industry will continue to occur in the future. Some of the changes may create opportunities for us 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 banking institutions, such as Cathay Bank. We cannot predict how changes in regulations, statutes or policies will impact us. These changes may have a material adverse effect on our business and earnings. FISCAL AND MONETARY POLICIES The operations of bank holding companies and their subsidiaries are affected by the fiscal and monetary policies of the Federal Reserve Bank. An important function of the Federal Reserve Bank is to regulate the national supply of bank credit. The Federal Reserve Bank uses the following instruments of monetary policy, among others, as a means to implement its objectives: o open market purchases and sales of U.S. government securities o changes in the discount rate on bank borrowings o changes in reserve requirements on bank deposits and borrowings by banks and their affiliates The Federal Reserve Bank uses these instruments of monetary policy in varying combinations to seek 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 Federal Reserve Bank's fiscal and monetary policies will continue to have a significant effect on Bancorp and the Bank. BANK HOLDING COMPANY REGULATION As a bank holding company, Bancorp is subject to regulation, supervision and examination by the Federal Reserve Board. It is required to file reports with the Federal Reserve Board and furnish such other information as may be required by the Federal Reserve Board under the Bank Holding Company Act. 11 The Federal Reserve Board has a policy that bank holding companies must serve as a source of financial and managerial strength to their subsidiary banks and may not conduct their operations in an unsafe or unsound manner. It is the Federal Reserve Bank's position that bank holding companies should stand ready to use their available resources to provide adequate capital to their subsidiary banks during periods of financial stress or adversity. Bank holding companies should also maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting their subsidiary banks. If a bank holding company fails in these requirements, the Federal Reserve Board will generally consider such failure to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. The Federal Reserve Board also has the authority to regulate bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Federal Reserve Board may require Bancorp to file written notice and obtain its approval prior to purchasing or redeeming Bancorp's equity securities. Bancorp must also obtain the prior approval of the Federal Reserve Board if it acquires more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of a bank or bank holding company. The Federal Reserve Board must also give prior approval to any merger or consolidation with another bank holding company. In addition, under the Bank Holding Company Act, Bancorp cannot acquire direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company. It cannot engage directly or indirectly in activities other than banking, managing or controlling banks or furnishing services to its subsidiaries. However, there are some statutory exceptions. Subject to prior approval of the Federal Reserve Board, Bancorp can acquire shares of companies engaged in activities that the Federal Reserve Board deems to be closely related to banking or managing or controlling banks. In addition, as discussed below under "Financial Services Modernization Legislation," if Bancorp becomes a "Financial Holding Company," certain restrictions on acquiring ownership or control of certain non-banking companies will no longer apply. FINANCIAL SERVICES MODERNIZATION LEGISLATION On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (referred to in this report as the Modernization Act), which among other things revised the Bank Holding Company Act. Effective March 12, 2000, the Modernization Act repealed the two affiliation provisions of the Glass-Steagall Act that restricted banks and securities firms from affiliating. The Modernization Act repealed: o Section 20, which restricted the affiliation of Federal Reserve member banks with firms "engaged principally" in specified securities activities, and o Section 33, which restricted officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. 12 In addition, the Modernization Act expressly preempted any state law restricting the establishment of financial affiliations, primarily related to insurance. The law established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. The Modernization Act revised and expanded the Bank Holding Company Act framework and permitted a bank holding company to engage in additional types of financial activities provided that it became a "Financial Holding Company" under the Modernization Act. Such financial activities include banking, insurance, and securities activities; merchant banking; and additional activities 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. To affiliate with other financial service providers, we would have to become a "Financial Holding Company." We would have to file a declaration with the Federal Reserve Board, electing to engage in activities permissible for Financial Holding Companies and certify that we are eligible to do so because Cathay Bank is "well-capitalized" and "well-managed." The Federal Reserve Board must also determine that Cathay Bank, as the insured depository institution subsidiary, has at least a "satisfactory" rating under the Community Reinvestment Act. We have not sought to become a Financial Holding Company. We will continue to monitor our strategic business plan, market conditions and other factors to determine whether we wish to become a Financial Holding Company and take advantage of the expanded powers provided in the Modernization Act. Under the Modernization Act, securities firms and insurance companies that become Financial Holding Companies may acquire banks and other financial institutions. No regulatory approval will be required for a Financial Holding Company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. Prior Federal Reserve Board approval is required before a Financial Holding Company acquires the beneficial ownership or control of more than 5% of the voting shares of a bank holding company, bank or savings association. 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 also added a new section to the Federal Deposit Insurance Act. The new section allowed subsidiaries of state banks to engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserved a state bank's right to retain all existing subsidiaries. California permits state chartered commercial banks to engage in any activity permissible for national banks. Under the Modernization Act, a national bank subsidiary may engage in any financial activity which may be conducted through a Financial Holding Company subsidiary, except for insurance underwriting, insurance investments, real estate investment or development or merchant banking. Therefore, Cathay Bank can form subsidiaries to engage in the activities authorized by the Modernization Act to the same extent as a national bank. To form a financial subsidiary, the Bank must be "well-capitalized" and meet other regulatory requirements. See "Other Banking Regulations - Federal Limits on the Activities and Investments of State-Chartered Banks" below. 13 The Modernization Act may have the result of increasing the amount of competition that Bancorp 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 Bancorp and the Bank. PRIVACY. The Modernization Act provides consumers with new protections against the transfer and use of their nonpublic personal information by financial institutions. The Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision issued final rules on June 1, 2000. Under the new rules, financial institutions must provide among other things: o initial notices to customers about their privacy policies (including a description of the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates) o annual notices of such privacy policies to current customers o subject to certain exceptions, a reasonable method for customers to "opt out" of disclosure to nonaffiliated third parties The rules were effective November 13, 2000, but compliance is optional until July 1, 2001. 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. CONSUMER PROTECTION RULES - SALE OF INSURANCE PRODUCTS. On December 4, 2000, the federal bank and thrift regulatory agencies adopted consumer protection rules for the sale of insurance products by depository institutions as required by the Modernization Act. The effective date was originally April 1, 2001, but on March 19, 2001, the federal agencies postponed the effective date until October 1, 2001. The rules apply to any depository institution or any person selling, soliciting, advertising or offering insurance products or annuities to a customer at an office of the institution or on behalf of the institution. The rule requires oral and written disclosure, before the completion of the sale of an insurance product or annuity, that such product: o is not a deposit or other obligation of, or guaranteed by, the depository institution or its affiliate o is not insured by the FDIC or any other agency of the United States, the depository institution or its affiliates o has certain risks of investment, including possible loss of value Finally, the depository institution may not condition an extension of credit on the consumer's purchase of an insurance product or annuity from the depository institution or from any of its affiliates; on the consumer's agreement not to obtain an insurance product or annuity from an unaffiliated entity; or by prohibiting a consumer from obtaining an insurance product or annuity from 14 an unaffiliated entity. The disclosure must be understandable and the customer must acknowledge receipt of such disclosure. In addition, to the extent practicable, a depository institution must keep insurance and annuity activities physically segregated from the areas where retail deposits are routinely accepted from the general public. SAFEGUARDING CONFIDENTIAL CUSTOMER INFORMATION. In February 2001, the federal bank and thrift regulatory agencies published guidelines requiring financial institutions to establish an information security program to: o identify and assess the risks that may threaten customer information o develop a written plan containing policies and procedures to manage and control these risks o implement and test the plan o adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information, and internal or external threats to information security Each institution may implement a security program appropriate to its size and complexity and the nature and scope of its operations. The guidelines outline specific security measures that institutions should consider in implementing a security program. A financial institution must adopt those security measures determined to be appropriate. The guidelines require the Board of Directors to oversee an institution's efforts to develop, implement and maintain an effective information security program and approve written information security policies and programs. The guidelines are effective July 1, 2001. The precise impact of the Modernization Act on Bancorp 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 promulgate all the administrative regulations implementing many portions of the Act. It can be expected that state regulatory authorities and/or legislatures may act in response to the Modernization Act. OTHER BANKING REGULATIONS Cathay Bank, as a California state-chartered commercial bank, is subject to primary supervision, periodic examination and regulation by the FDIC and by the State of California Department of Financial Institutions. The Bank's deposits are insured by the FDIC up to the legal maximum 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 Federal and State rules and regulations. CAPITAL REQUIREMENTS. The Federal Reserve Board and the FDIC have established risk-based minimum capital guidelines that seek to ensure that banking organizations are appropriately capitalized. The guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for transactions reported on the balance sheet as assets, and transactions which are recorded as off-balance sheet items, such as letters of 15 credit or recourse arrangements. Under these guidelines, the nominal dollar amounts of assets and the credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjusted percentages. The risk adjusted percentages range from 0% for assets with low credit risk, such as U.S. Treasury Securities, to 100% for assets with high credit risk, such as commercial loans. The federal regulators require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% (10% to be well capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well capitalized). In addition, the federal regulators require a minimum Tier 1 leverage ratio of 4% (5% to be well capitalized). The Bank was well capitalized as of December 31, 2000 with a total risk-based capital ratio of 11.84%, a Tier 1 risk-based capital ratio of 10.64% and Tier 1 leverage ratio of 8.93%. The tables presenting our risk-based capital and leverage ratios as of December 31, 2000 are included in Note 11 to the Consolidated Financial Statements on page 59 of the Annual Report to Stockholders, and are incorporated herein by reference. PROMPT CORRECTIVE ACTION. In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (or FDICIA) was enacted into law. FDICIA provided for the recapitalization of the Bank Insurance Fund and improved examinations of insured depository institutions. It required each federal banking regulatory agency to revise its risk-based capital standards and to specify levels at which regulated institutions are considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." It prescribes standards for safety and soundness of all insured depository institutions. FDICIA requires each federal banking agency and the FDIC to take "prompt corrective action" against those institutions that fail to satisfy their minimum capital requirements. As of December 31, 2000 the Bank was well capitalized for these regulatory purposes. An institution that, based on its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized may be treated as though it were in the next lower capital category, if the appropriate federal banking agency determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. The affected institution must receive proper notice and have an opportunity for a hearing. At each successive lower capital category, an insured bank is subject to more restrictions, including restrictions on the bank's activities, operational practices and ability to pay dividends. In addition to measures taken under the prompt corrective action provision, commercial banking organizations may be subject to potential enforcement actions by federal regulators for, among other things, unsafe or unsound practices in conducting their businesses, or violations of any law, rule, regulation, or any condition imposed in writing by the relevant regulatory agency or any written agreement with a regulatory agency. PREMIUMS FOR DEPOSIT INSURANCE. Cathay Bank's deposit accounts are insured by the Bank Insurance Fund, as administered by the FDIC, up to the maximum permitted by law. The amount of FDIC assessments paid by each Bank Insurance Fund member institution is based on its capitalization risk level and its supervisory subgroup category. The supervisory subgroup category is based on the 16 FDIC's assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The Bank Insurance Fund assessment rate as of December 31, 2000, ranged from zero to 27 basis points per $100 of insured deposits. At December 31, 2000, the Bank's assessment rate was zero. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. An increase in the Bank Insurance Fund assessment rate could have a material adverse effect on our earnings. The FDIC is authorized to terminate a depository institution's deposit insurance if it finds among other things that: o the institution's condition is unsafe or unsound o the institution has engaged in unsafe or unsound practices o the institution has violated any applicable law, rule, regulation, order or condition imposed in writing by the relevant regulating agency or any written agreement with a regulating agency Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, on January 1, 1997, banks began paying an annual assessment towards the retirement of U.S. government issued Financing Corporation bonds. The bonds were issued in the 1980s to capitalize the Federal Savings and Loan Insurance Corporation to assist in the recovery of the savings and loan industry. FDIC insured institutions paid approximately 2.07 cents per $100 of Bank Insurance Fund-assessable deposits in 2000. The FDIC established the assessment rate effective for the first two quarters of 2001 at approximately 1.93 cents annually per $100 of Bank Insurance Fund-assessable deposits. DIVIDENDS. As a California corporation and a state-chartered bank, Cathay Bank may not pay dividends to Bancorp in excess of certain statutory and regulatory limits. As of December 31, 2000, the maximum dividend that Cathay Bank could have declared, subject to regulatory approval, was $71,973,000. The California Commissioner of Financial Institutions and the Federal Reserve Board may also prohibit a bank from paying dividends to its bank holding company if they determine that such payment would constitute an unsafe or unsound banking practice. In addition, if Cathay Bank fails to comply with its minimum capital requirements, its regulators may restrict its ability to pay dividends using prompt corrective action or other enforcement powers. COMMUNITY REINVESTMENT ACT AND FAIR LENDING. Cathay Bank is subject to certain fair lending requirements and reporting obligations involving its home mortgage lending operations and Community Reinvestment Act activities. Under the Community Reinvestment Act, a bank is obligated to help meet the credit needs of its entire community, including low and moderate income neighborhoods, consistent with safe and sound operation. The Community Reinvestment Act does not establish specific lending requirements or programs, nor does it limit a bank's discretion to develop the types of products and services that it believes are best suited to its community. However, the Community Reinvestment Act does require that federal regulators, when examining an institution, assess the institution's record of meeting the credit needs of its community and take such 17 record into account in evaluating certain applications, including an application to become a Financial Holding Company under the Modernization Act. Federal regulators are required to provide a written examination of an institution's Community Reinvestment Act performance. The regulators rate an institution's performance using a four tiered rating system. The ratings are: outstanding record of meeting community credit needs; satisfactory record of meeting community credit needs; needs to improve record of meeting community credit needs; and substantial noncompliance of meeting community credit needs. The ratings are available to the public. Based upon an examination by the FDIC in January 2001, the Bank's Community Reinvestment Act rating was "satisfactory" in meeting community credit needs. Cathay Bank is also subject to other fair lending requirements and reporting obligations related to its home mortgage lending operations. The Equal Credit Opportunity Act and Fair Housing Act prohibit discrimination on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract). A bank can become subject to substantial penalties and corrective measures for violations of fair lending laws. 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. Prior to 1999, subject to a number of grandfathering provisions and a few exceptions, there were three rules which limited the activities and investments of state-chartered banks. 1. A state-chartered bank could not engage as principal in any type of activity that was prohibited for a national bank, unless the FDIC determined the activity posed no significant risk to the affected deposit insurance fund and the institution met its fully phased in capital requirements. 2. A state-chartered bank could not make or retain an equity investment of a type or in an amount that was prohibited for a national bank; and, divestiture of such an investment was required by 1996. 3. A state-chartered bank could retain an equity investment in the form of a majority-owned subsidiary engaged as principal in activities prohibited for a national bank subsidiary, but only if the FDIC had made the same determinations respecting risk to the insurance fund and capital compliance by the bank. The Modernization Act added a new section to the Federal Deposit Insurance Act to provide that an insured state bank may control or hold an interest in a subsidiary engaged as principal in activities that would be permissible for a national bank to conduct through a financial subsidiary, subject to certain conditions. Under the Modernization Act, in January 2001, the FDIC adopted final rules to streamline the certification process. State nonmember banks may self certify that they meet the requirements necessary to qualify for conducting non-agency activities. The insured state bank must certify that: it is "well managed;" it is "well capitalized;" it will deduct the aggregate amount of its outstanding equity investment in all financial subsidiaries that engage in activities as principal from 18 the bank's total assets and tangible equity; and it will deduct such equity investment in such financial subsidiaries from its total risk-based capital. In addition, the bank must have received a Community Reinvestment Act rating of "satisfactory" in meeting community credit needs in its most recent examination. Additional requirements must be satisfied in order for a financial subsidiary of a state nonmember insured bank to conduct securities underwriting. Securities activities are subject to a variety of general and specific safety and soundness restrictions. Further, state banks wishing to engage in activities prohibited to national banks, such as real estate development or investment, must continue to seek FDIC consent by filing a notice or application, as was the procedure before the Modernization Act. INTERSTATE BANKING. The Federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 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 continue to require Federal Reserve Board approval and 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 the 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 became effective on October 2, 1995. It required out-of-state institutions which did not own a California bank to acquire an existing whole five-year old bank before establishing a California branch. De novo interstate branching was 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 following Acts, as applicable: o the competitive standards of the Bank Holding Company Act o the Change in Bank Control Act o the Bank Merger Act 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 Bank Holding Company Act and the Bank Merger Act preclude granting regulatory approval for any transaction that will "result in" a monopoly or is in 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 under certain circumstances. The applicable regulator may approve the transaction if it concludes that the 19 perceived anti-competitive effects are clearly outweighed by the probable beneficial effects of the transaction in meeting the convenience and needs of the community to be served. We seek to expand our market areas by 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. FEDERAL HOME LOAN BANK. The Federal Home Loan Bank System consists of twelve district banks and is supervised by the Federal Housing Finance Board. 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 Federal Home Loan Bank System. In January 1993, the Bank became a member and stockholder of the Federal Home Loan Bank in San Francisco. As a member and stockholder, the Bank has access to a source of low-cost liquidity. 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. Stock is purchased and redeemed at par. The Bank's investment in Federal Home Loan Bank stock totaled 56,133 shares or $5,613,300 as of December 31, 2000. All credit extended by the district bank requires full collateralization. Eligible collateral includes the following: o residential first mortgage loans on single and multi-family projects o U.S. government and agency securities o deposits in district banks o certain other real estate related assets permitted by law ITEM 3. LEGAL PROCEEDINGS Management is not currently aware of any litigation that is expected to have material adverse impact on our consolidated financial condition or the results of operations. The information contained in the second paragraph under the caption "Certain Transactions - Banking Transactions" on Page 21 of the Proxy Statement (as defined below) is incorporated herein by reference. 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 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information 20 The information under the caption "Market for Cathay Bancorp, Inc. Stock"on page 41 and under the caption "Additional Information" on page 74 of the Annual Report to Stockholders is incorporated herein by reference. As of March 29, 2001, the closing price of our Common Stock was $46.25 per share as reported by the Nasdaq National Market. (b) Holders As of March 2, 2001, there were approximately 1,750 holders of record of our Common Stock. (c) Dividends The information under the captions "Market for Cathay Bancorp, Inc. Stock" on page 41 and "Capital Resources" on pages 33 and 34 and in Note 11 to the Consolidated Financial Statements on pages 59 and 60 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 40 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 34 through 37 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 43 through 70 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. 21 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 our definitive Proxy Statement relating to our 2001 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 21 of our Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Compensation of Directors", "Information Concerning Management Compensation", "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report on Executive Compensation" on pages 9 through 19 of our Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The information under the captions "Principal Holders of Securities" on page 2 and "Election of Directors" on pages 3 through 7 of our 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 21 and 22 of our Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Documents Filed as Part of this Report 22 (a)(1) Financial Statements Financial Statements of Cathay Bancorp, Inc. and Subsidiary*
PAGE NO. IN ANNUAL REPORT ------------- Consolidated Statements of Condition as of December 31, 2000 and 1999 43 Consolidated Statements of Income and Comprehensive Income for each of the years in the 3-year period ended December 31, 2000 44 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the 3-year period ended December 31, 2000 45 Consolidated Statements of Cash Flows for each of the years in the 3-year period ended December 31, 2000 46 Notes to Consolidated Financial Statements 47-69 Independent Auditors' Report of KPMG LLP 70
*Parent-only condensed financial information of Bancorp as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 is included in Note 16 to the Consolidated Financial Statements on pages 67 and 68 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. 23 3.2 Restated Bylaws. Previously filed with the Securities and Exchange Commission as an exhibit to Bancorp's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 3.3 Certificate of Designation of Series A Junior Participating Preferred Stock. 4.1 Shareholders Rights Plan. Previously filed with the Securities and Exchange Commission as an exhibit to Bancorp's Registration Statement on Form 8-A on December 20, 2000 and incorporated herein by reference. 10.1 Form of Indemnity Agreements between Bancorp 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 Bancorp'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 Bancorp. 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 Bancorp. Previously filed with the Securities and Exchange Commission as an exhibit to Bancorp's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.* 13.1 Certain portions of Bancorp's 2000 Annual Report to Stockholders being incorporated herein by reference. 22.1 Subsidiaries of Bancorp 23.1 Consent of Independent Auditors * Management compensatory plan (b) Reports on Form 8-K On November 28, 2000, Bancorp filed a Current Report on Form 8-K with the Securities and Exchange Commission to report Bancorp's adoption of a successor rights plan. 24 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 30, 2001 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.
SIGNATURE TITLE DATE /s/ DUNSON K. CHENG President, Chairman of March 30, 2001 - ------------------------------------ the Board and Director Dunson K. Cheng (principal executive officer) /s/ ANTHONY M. TANG Executive Vice President, March 30, 2001 - ------------------------------------ Chief Financial Officer Anthony M. Tang /Treasurer and Director (principal financial officer) (principal accounting officer) /s/ RALPH ROY BUON-CRISTIANI Director March 30, 2001 - ------------------------------------ Ralph Roy Buon-Cristiani
[SIGNATURES CONTINUED] 25 [SIGNATURES CONTINUED]
SIGNATURE TITLE DATE /s/ KELLY L. CHAN Director March 30, 2001 - ------------------------------------ Kelly L. Chan /s/ MICHAEL M.Y. CHANG Director March 30, 2001 - ------------------------------------ Michael M.Y. Chang /s/ GEORGE T.M. CHING Vice Chairman of the March 30, 2001 - ------------------------------------ Board and Director George T.M. Ching /s/ WING K. FAT Director March 30, 2001 - ------------------------------------ Wing K. Fat /s/ PATRICK S.D. LEE Director March 30, 2001 - ------------------------------------ Patrick S.D. Lee /s/ JOSEPH C.H. POON Director March 30, 2001 - ------------------------------------ Joseph C.H. Poon /s/ THOMAS G. TARTAGLIA Director March 30, 2001 - ------------------------------------ Thomas G. Tartaglia /s/ WILBUR K. WOO Secretary of the Board March 30, 2001 - ------------------------------------ and Director Wilbur K. Woo
26 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 Bancorp's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 3.3 Certificate of Designation of Series A Junior Participating Preferred Stock. 4.1 Shareholders Rights Plan. Previously filed with the Securities and Exchange Commission as an exhibit to Bancorp's Registration Statement on Form 8-A on December 20, 2000 and incorporated herein by reference. 10.1 Form of Indemnity Agreements between Bancorp 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 Bancorp'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 Bancorp. 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 Bancorp. Previously filed with the Securities and Exchange Commission as an exhibit to Bancorp's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.* 13.1 Certain portions of Bancorp's 2000 Annual Report to Stockholders being incorporated herein by reference. 22.1 Subsidiaries of Bancorp 23.1 Consent of Independent Auditors * Management compensatory plan EX-3.3 2 a2041192zex-3_3.txt EXHIBIT 3.3 CERTIFICATE OF DESIGNATION of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of CATHAY BANCORP, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware Cathay Bancorp, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority vested in the Board of Directors in accordance with the provisions of the Certificate of Incorporation of the said Corporation, the said Board of Directors on November 16, 2000 adopted the following resolution creating a series of 100,000 shares of Preferred Stock designated as "Series A Junior Participating Preferred Stock": RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Certificate of Incorporation, a series of Preferred Stock, par value $.01 per share, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows: SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 1. DESIGNATION AND AMOUNT. There shall be a series of Preferred Stock that shall be designated as "Series A Junior Participating Preferred Stock," and the number of shares constituting such series shall be 100,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Junior Participating Preferred Stock to less than the number of shares then issued and outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. DIVIDENDS AND DISTRIBUTION. (A) Subject to the prior and superior rights of the holders of any shares of any class or series of stock of the Corporation ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock, in preference to the holders of shares of any class or series of stock of the Corporation ranking junior to the Series A Junior Participating Preferred Stock in respect thereof, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December, in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) the Adjustment Number (as defined below) times the aggregate per share amount of all cash dividends, and the Adjustment Number times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. The "Adjustment Number" shall initially be 1000. In the event the Corporation shall at any time after November 16, 2000 (i) declare and pay any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (A) Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to a number of votes equal to the Adjustment Number on all matters submitted to a vote of the stockholders of the Corporation. (B) Except as required by law, by Section 3(C) and by Section 10 hereof, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (C) If, at the time of any annual meeting of stockholders for the election of directors, the equivalent of six quarterly dividends (whether or not consecutive) payable on any share or shares of Series A Junior Participating Preferred Stock are in default, the number of directors constituting the Board of Directors of the Corporation shall be increased by two. In addition to voting together with the holders of Common Stock for the election of other directors of the Corporation, the holders of record of the Series A Junior Participating Preferred Stock, voting separately as a class to the exclusion of the holders of Common Stock, shall be entitled at said meeting of stockholders (and at each subsequent annual meeting of stockholders), unless all dividends in arrears on the Series A Junior Participating Preferred Stock have been paid or declared and set apart for payment prior thereto, to vote for the election of two directors of the Corporation, the holders of any Series A Junior Participating Preferred Stock being entitled to cast a number of votes per share of Series A Junior Participating Preferred Stock as is specified in paragraph (A) of this Section 3. Each such additional director shall not be a member of Class I, Class II or Class III of the Board of Directors of the Corporation, but shall serve until the next annual meeting of stockholders for the election of directors, or until his successor shall be elected and shall qualify, or until his right to hold such office terminates pursuant to the provisions of this Section 3(C). Until the default in payments of all dividends which permitted the election of said directors shall cease to exist, any director who shall have been so elected pursuant to the provisions of this Section 3(C) may be removed at any time, without cause, only by the affirmative vote of the holders of the shares of Series A Junior Participating Preferred Stock at the time entitled to cast a majority of the votes entitled to be cast for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. If and when such default shall cease to exist, the holders of the Series A Junior Participating Preferred Stock shall be divested of the foregoing special voting rights, subject to revesting in the event of each and every subsequent like default in payments of dividends. Upon the termination of the foregoing special voting rights, the terms of office of all persons who may have been elected directors pursuant to said special voting rights shall forthwith terminate, and the number of directors constituting the Board of Directors shall be reduced by two. The voting rights granted by this Section 3(C) shall be in addition to any other voting rights granted to the holders of the Series A Junior Participating Preferred Stock in this Section 3. 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Junior Participating Preferred Stock, or to such holders and holders of any such shares ranking on a parity therewith, upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired promptly after the acquisition thereof. All such shares shall upon their retirement become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to any conditions and restrictions on issuance set forth herein. 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation, dissolution or winding up of the Corporation, voluntary or otherwise, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount per share (the "Series A Liquidation Preference") equal to the greater of (i) $10.00 plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) the Adjustment Number times the per share amount of all cash and other property to be distributed in respect of the Common Stock upon such liquidation, dissolution or winding up of the Corporation. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other classes and series of stock of the Corporation, if any, that rank on a parity with the Series A Junior Participating Preferred Stock in respect thereof, then the assets available for such distribution shall be distributed ratably to the holders of the Series A Junior Participating Preferred Stock and the holders of such parity shares in proportion to their respective liquidation preferences. (C) Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6. 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the outstanding shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to the Adjustment Number times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. 8. NO REDEMPTION. Shares of Series A Junior Participating Preferred Stock shall not be subject to redemption by the Corporation. 9. RANKING. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, unless the terms of any such series shall provide otherwise, and shall rank senior to the Common Stock as to such matters. 10. AMENDMENT. At any time that any shares of Series A Junior Participating Preferred Stock are outstanding, the Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 11. FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. IN WITNESS WHEREOF, the undersigned has executed this Certificate this 7th day of December, 2000. CATHAY BANCORP, INC. By: /s/ DUNSON K CHENG ------------------- Name: Dunson K. Cheng Title: Chairman and President EX-13.1 3 a2041192zex-13_1.txt EXHIBIT 13.1 Selected Consolidated Financial DATA
Year ended December 31, (dollars in thousands, ----------------------------------------------------------------------- except share and per share data) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT (1) Interest income $ 164,553 $ 133,046 $ 123,309 $ 111,978 $ 86,098 Interest expense 74,156 57,408 57,225 50,874 39,209 - --------------------------------------------------------------------------------------------------------------------------- Net interest income before provision for loan losses 90,397 75,638 66,084 61,104 46,889 Provision for loan losses 4,200 4,200 3,600 3,600 3,600 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 86,197 71,438 62,484 57,504 43,289 Securities gains (losses) 1,085 (3) 43 41 22 Other non-interest income 11,671 8,858 8,093 6,734 5,837 Non-interest expense 38,504 30,282 30,065 30,928 28,013 - --------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 60,449 50,011 40,555 33,351 21,135 Income tax expense 21,862 19,720 15,976 13,243 7,819 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 38,587 $ 30,291 $ 24,579 $ 20,108 $ 13,316 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Net income per common share Basic $ 4.26 $ 3.36 $ 2.74 $ 2.26 $ 1.66 Diluted $ 4.25 $ 3.36 $ 2.74 $ 2.26 $ 1.66 Cash dividends paid per common share $ 0.880 $ 0.805 $ 0.700 $ 0.625 $ 0.600 Weighted average common shares Basic 9,056,751 9,013,428 8,967,188 8,915,936 8,017,398 Diluted 9,073,885 9,017,760 8,968,393 8,915,936 8,017,398 - --------------------------------------------------------------------------------------------------------------------------- STATEMENT OF CONDITION Securities available-for-sale $ 183,409 $ 160,991 $ 239,928 $ 216,158 $ 383,391 Securities held-to-maturity 387,200 426,332 418,156 350,336 210,129 Net loans2 1,437,307 1,245,585 961,876 846,151 744,384 Total assets 2,206,834 1,995,924 1,780,898 1,622,462 1,504,329 Deposits 1,876,447 1,721,736 1,560,402 1,449,121 1,364,740 Securities sold under agreements to repurchase 68,173 46,990 16,436 23,419 10,000 Advances from Federal Home Loan Bank 10,000 30,000 30,000 -- -- Stockholders' equity 214,787 179,109 156,652 135,877 118,446 - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA Shares of common stock outstanding 9,074,365 9,033,583 8,988,760 8,941,743 8,878,144 Book value per share $ 23.67 $ 19.83 $ 17.43 $ 15.20 $ 13.34 - --------------------------------------------------------------------------------------------------------------------------- PROFITABILITY RATIOS Return on average assets 1.81% 1.63% 1.44% 1.29% 1.05% Return on average stockholders' equity 20.09 18.31 17.00 15.63 13.06 Dividend payout ratio 20.66 23.95 25.55 27.65 36.14 Average equity to average assets ratio 9.03 8.89 8.47 8.25 8.04 Efficiency ratio 37.33 35.84 40.51 45.20 53.11 - ---------------------------------------------------------------------------------------------------------------------------
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 the 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. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition of Cathay Bancorp, Inc. ("Bancorp") and its subsidiary Cathay Bank (the "Bank" and together the "Company" or "we", "us" or "our") 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, also include words such as "believes", "expects", "anticipates", "intends", "plans", "estimates" or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements 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: - Our 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, including plans regarding the registered investment company. - General economic or business conditions. - Other factors discussed in the section entitled "Factors that May Affect Future Results" later in this report. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, we caution readers not to place undue reliance on any forward-looking statements, which speak as of the date of this report. We have no intention and undertake 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 - --------------------- We reported net income of $38.6 million or $4.25 per diluted common share for 2000, compared with $30.3 million or $3.36 per diluted common share for 1999 and $24.6 million or $2.74 per diluted common share for 1998. In 2000, pre-tax income increased $10.4 million or 21% to $60.4 million. The increases in 2000 were primarily due to the following: - A $14.8 million or 20% increase in net interest income before provision for loan losses. - A $3.9 million or 44% increase in non-interest income. - A $8.2 million or 27% increase in non-interest expense. In 1999, pre-tax income increased $9.5 million or 23% to $50.0 million. The increase in net interest income was primarily attributable to growth in interest and fees on loans. The return on average assets and return on average stockholders' equity are presented below for the three years indicated: 2000 1999 1998 - ------------------------------------------------------------------------------- Return on average assets 1.81% 1.63% 1.44% Return on average stockholders' equity 20.09% 18.31% 17.00%
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 14 [Line and arrow graphic beside page numbers] You are here The increases in interest income, interest expense and net interest margin in 2000 and 1999 are discussed below: YEAR 2000 - --------- INTEREST INCOME Interest income increased $31.5 million or 24% to $164.6 million in 2000 primarily due to an increase of $32.6 million from interest income on loans to $126.3 million. The $32.6 million increase in interest income on loans was primarily attributable to the following: - Increase in volume: Average net loans grew $224.6 million or 21% from $1,088.6 million in 1999 to $1,313.2 million in 2000. The growth contributed an additional $20.8 million to interest income. The increase in average net loans was funded primarily by growth in deposits, and secondarily by Federal funds purchased, securities sold under agreements to repurchase and proceeds from matured securities. - Increase in rate: Average loan yield increased 101 basis points from 8.61% to 9.62%. This contributed $11.8 million to interest income. The increase in average loan yield was mainly a result of six consecutive interest rate increases by the Federal Reserve Board from the third quarter of 1999 to the second quarter of 2000, which led to a 124 basis point increase in our average reference rate from 8.24% to 9.48%. A majority of the Bank's loans reprice immediately. - A change in the mix of interest earning assets: Loan demand remained strong in 2000. Average net loans, which yield higher than other types of investments, rose from 61.9% to 68.5% as a percentage of total interest earning assets. In comparison, average securities declined from 35.9% to 30.9% and average Federal funds sold and securities purchased under agreements to resell decreased from 2.2% to 0.6% as a percentage to total interest earning assets. Consequently, the average taxable equivalent yield on interest earning assets increased 95 basis points from 7.66% to 8.61%. INTEREST EXPENSE Interest expense increased $16.7 million or 29% to $74.2 million, which was primarily attributable to an increase of $13.2 million in interest expense on time deposits. Average time deposits grew $115.5 million or 12% to $1,117.4 million, of which $78.3 million were from time deposits over $100,000. - The increase in average time deposits added $5.8 million to interest expense. - The increase of 70 basis points in the average rate on time deposits from 4.69% to 5.39% added $7.5 million to interest expense. This was primarily due to the repricing of time deposits in response to the market rate changes. Interest expense also increased on Federal funds purchased and securities sold under agreements to repurchase by $2.2 million in 2000. The increase was due to increase in average volume to $23.8 million and increase in average rate by 131 basis points from 4.99% to 6.30%. Accordingly, average cost of funds increased 60 basis points from 3.80% to 4.39%. NET INTEREST MARGIN As a result of the factors noted above, the net interest margin, defined as taxable equivalent net interest income to average interest-earning assets, increased 38 basis points from 4.39% in 1999 to 4.77% in 2000. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED - ------------------------------------------------------------------------------- YEAR 1999 INTEREST INCOME Interest income increased $9.7 million or 8% to $133.0 million in 1999 largely resulting from a $10.9 million increase in interest income on loans. The $10.9 million increase in loan interest income was primarily due to a combination of the following: - Increase in volume: Average net loans grew $181.0 million or 20% to $1,088.6 million in 1999, which was funded primarily from increases in average deposits and secondarily from increases in other borrowed funds, proceeds from maturities of securities and cash. The increase in loan volume contributed an additional $15.8 million to interest income. - Decrease in rate: The average yield on loans decreased 52 basis points from 9.13% in 1998 to 8.61% in 1999, which reduced the loan interest income by $4.9 million. The decrease in the average loan yield was primarily due to a 36 basis point drop in our average reference lending rate from 8.60% to 8.24% as a result of the Federal Reserve Board's fiscal policies. Another factor leading to lower average loan yield in 1999 was the increased competition in our 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. INTEREST EXPENSE Average cost of funds decreased 35 basis points from 4.15% in 1998 to 3.80% in 1999. The decrease in average cost of funds was substantially attributable to a decline of 37 basis points in average cost of deposits from 4.10% in 1998 to 3.73% in 1999. The decrease in average cost of deposits helped reduce $4.5 million in interest expense. The decrease in interest expense due to rate reduction was partially offset by $3.7 million, due to an increase of $108.8 million in average interest bearing deposits from $1,317.5 million to $1,426.4 million. Average balance on Federal Home Loan Bank advances increased $23.0 million, which added $1.1 million to interest expense in 1999. NET INTEREST MARGIN As a result of average cost of funds decreasing more than average yield on interest bearing assets, the net interest margin increased 9 basis points from 4.30% in 1998 to 4.39% in 1999. NET INTEREST INCOME - ------------------- Net interest income before provision for loan losses for 2000, 1999 and 1998 are summarized below: 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Net interest income before provision for loan losses $90,397 $75,638 $66,084 Net interest income before provision for loan losses, tax equivalent $92,132 $77,301 $67,375
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 16 [Line and arrow graphic beside page numbers] You are here CHANGES DUE TO RATE AND VOLUME (1) - ----------------------------------
2000-1999 1999-1998 Increase (Decrease) in Increase (Decrease) in Net Interest Income Due to: Net Interest Income Due to: - --------------------------------------------------------------------------------------------------------------------------- Changes in Changes in Total Changes in Changes in Total (in thousands) Rate Volume Change Rate Volume Change - --------------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS Federal funds sold and securities purchased under agreements to resell $ 389 $(1,584) $(1,195) $ (442) $(1,627) $(2,069) Securities available-for-sale (Taxable) 1,441 1,147 2,588 (533) (2,400) (2,933) Securities available-for-sale (Nontaxable)(2) 1 14 15 5 (12) (7) Securities held-to-maturity (Taxable) 150 (2,985) (2,835) (948) 3,947 2,999 Securities held-to-maturity (Nontaxable)(2) (47) 60 13 (231) 1,461 1,230 Agency preferred stock(2) -- 314 314 -- -- -- Federal Home Loan Bank stock 145 (50) 95 (31) 26 (5) Deposits with other banks 4 23 27 (5) (15) (20) Loans(3) 11,801 20,756 32,557 (4,918) 15,832 10,914 - --------------------------------------------------------------------------------------------------------------------------- Total $13,884 $17,695 $31,579 $(7,103) $17,212 $10,109 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES Savings deposits, NOW accounts and others $ 943 $ 606 $ 1,549 $(1,934) $ 140 $(1,794) Time deposits 7,468 5,766 13,234 (2,563) 3,513 950 Securities sold under agreements to repurchase 169 (820) (651) (193) 123 (70) Other borrowed funds -- 2,874 2,874 3 (8) (5) Advances from Federal Home Loan Bank 3 (251) (248) 4 1,117 1,121 Mortgage indebtedness (7) (3) (10) 12 (31) (19) - --------------------------------------------------------------------------------------------------------------------------- Total $ 8,576 $ 8,172 $16,748 $(4,671) $ 4,854 $ 183 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Changes in net interest income $ 5,308 $ 9,523 $14,831 $(2,432) $12,358 $ 9,926 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
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 $4,139,000 in 2000, $3,593,000 in 1999 and $3,631,000 in 1998. INTEREST EARNING ASSET MIX - --------------------------
As of December 31, 2000 As of December 31, 1999 ------------------------ ----------------------- Amount Percentage Percentage of Percentage of Changed Changed Total Interest Total Interest from from (dollars in thousands) Amount Earning Assets Amount Earning Assets 1999 to 2000 1999 to 2000 - ----------------------------------------------------------------------------------------------------------------------------- TYPES OF INTEREST EARNING ASSETS Federal funds sold and securities purchased under agreements to resell $ 19,000 0.94% $ 5,000 0.27% 14,000 280.00% Securities available-for-sale 183,409 9.04 160,991 8.76 22,418 13.93 Securities held-to-maturity 387,200 19.09 426,332 23.19 (39,132) (9.18) Deposits with other banks 899 0.04 568 0.03 331 58.27 Loans (net of unamortized deferred loan fees and allowance for loan losses) 1,437,307 70.89 1,245,585 67.75 191,722 15.39 - --------------------------------------------------------------------------------------------------------------------------- Total interest earning assets $ 2,027,815 100.00% $1,838,476 100.00% 189,339 0 10.30% - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED - ------------------------------------------------------------------------------- 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 - --------------------------------------------------------
Year ended December 31, --------------------------------------------- (dollars in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Federal Funds Sold and Securities Purchased Under Agreements to Resell Average outstanding $ 11,053 $ 38,013 $ 69,915 Average yield 6.21% 4.95% 5.65% Amount of interest earned $ 686 $ 1,881 $ 3,950 - --------------------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE-FOR-SALE, TAXABLE Average outstanding $ 197,004 $ 178,188 $ 219,556 Average yield 6.49% 5.73% 5.98% Amount of interest earned $ 12,790 $ 10,202 $ 13,135 - --------------------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE-FOR-SALE, NONTAXABLE Average outstanding $ 510 $ 345 $ 499 Average yield(2) 8.24% 7.83% 6.73% Amount of interest earned $ 42 $ 27 $ 34 - --------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD-TO-MATURITY, TAXABLE Average outstanding $ 330,841 $ 378,753 $ 315,257 Average yield 6.20% 6.16% 6.45% Amount of interest earned $ 20,504 $ 23,339 $ 20,340 - --------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD-TO-MATURITY, NONTAXABLE Average outstanding $ 69,478 $ 68,702 $ 48,757 Average yield(2) 7.41% 7.48% 7.92% Amount of interest earned $ 5,149 $ 5,136 $ 3,906 - --------------------------------------------------------------------------------------------------------------------------- AGENCY PREFERRED STOCK Average outstanding $ 3,398 $ -- $ -- Average yield(2) 9.24% -- -- Amount of interest earned $ 314 $ -- $ -- - --------------------------------------------------------------------------------------------------------------------------- FEDERAL HOME LOAN BANK STOCK Average outstanding $ 5,858 $ 6,309 $ 5,841 Average yield 7.27% 5.25% 5.75% Amount of interest earned $ 426 $ 331 $ 336 - --------------------------------------------------------------------------------------------------------------------------- DEPOSITS WITH OTHER BANKS Average outstanding $ 1,124 $ 459 $ 958 Average yield 3.56% 2.83% 3.44% Amount of interest earned $ 40 $ 13 $ 33 - --------------------------------------------------------------------------------------------------------------------------- LOANS(1) Average outstanding $1,313,177 $1,088,578 $ 907,627 Average yield(5) 9.62% 8.61% 9.13% Amount of interest earned(5) $ 126,337 $ 93,780 $ 82,866 - --------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EARNING ASSETS Average outstanding $1,932,443 $1,759,347 $ 1,568,410 Average yield(5) 8.61% 7.66% 7.94% Amount of interest earned(5) $ 166,288 $ 134,709 $ 124,600
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 18 [Line and arrow graphic beside page numbers] You are here INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES CONTINUED - ------------------------------------------------------------------
Year ended December 31, ------------------------------------------- (dollars in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES: Savings Deposits(3) Average outstanding $ 463,695 $ 424,500 $ 417,105 Average rate paid 1.67% 1.46% 1.92% Amount of interest paid or accrued $ 7,761 $ 6,212 $ 8,006 - --------------------------------------------------------------------------------------------------- TIME DEPOSITS Average outstanding $1,117,350 $1,001,878 $ 900,441 Average rate paid 5.39% 4.69% 5.11% Amount of interest paid or accrued $ 60,184 $ 46,950 $ 46,000 - --------------------------------------------------------------------------------------------------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Average outstanding $ 39,831 $ 55,486 $ 53,104 Average rate paid 5.31% 4.99% 5.34% Amount of interest paid or accrued $ 2,115 $ 2,766 $ 2,836 - --------------------------------------------------------------------------------------------------- OTHER BORROWED FUNDS Average outstanding $ 44,297 $ 33 $ 181 Average rate paid 6.49% 6.06% 3.87% Amount of interest paid or accrued $ 2,876 $ 2 $ 7 - --------------------------------------------------------------------------------------------------- ADVANCES FROM FEDERAL HOME LOAN BANK Average outstanding $ 24,809 $ 30,000 $ 6,959 Average rate paid 4.86% 4.85% 4.79% Amount of interest paid or accrued $ 1,206 $ 1,454 $ 333 - --------------------------------------------------------------------------------------------------- MORTGAGE INDEBTEDNESS Average outstanding $ 160 $ 183 $ 440 Average rate paid(6) 8.75% 13.11% 9.77% Amount of interest paid or accrued(6) $ 14 $ 24 $ 43 - --------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES Average outstanding $1,690,142 $1,512,080 $ 1,378,230 Average rate paid 4.39% 3.80% 4.15% Amount of interest paid or accrued $ 74,156 $ 57,408 $ 57,225 - --------------------------------------------------------------------------------------------------- Net interest earnings(7) $ 92,132 $ 77,301 $ 67,375 Net yield on interest earnings assets(4,7) 4.77% 4.39% 4.30% Yield spread(7) 4.22% 3.86% 3.79% - ---------------------------------------------------------------------------------------------------
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%. PROVISION FOR LOAN LOSSES - -------------------------- Management provided an additional $4.2 million for loan losses in each of 2000 and 1999, and an additional $3.6 million in 1998. Net charge-offs were $1.7 million for 2000, $668,000 for 1999 and $3.0 million for 1998. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED - ------------------------------------------------------------------------------- NON-INTEREST INCOME - ------------------- Non-interest income totaled $12.8 million in 2000, $8.9 million in 1999 and $8.1 million in 1998. The increase of $3.9 million or 44% from 1999 to 2000 was primarily due to the following: - A $1.1 million unrealized gain on a Forward Rate Agreement ("FRA") contract that was included in securities gains. The FRA was entered into on August 31, 2000 and settled on March 5, 2001. - A $1.1 million increase in wire transfer fees due to increased transaction volume largely from our New York branches. We have operated these branches since December 1999. - Increases in non-interest income due to normal growth of operations including, among others, increases in safe deposit box income, fees and charges related to loans and letter of credit commissions. Fee income from Cathay Global Investment Services' alternative investment program increased in 2000. This program was established in September 1999, and the year 2000 was its first full year of operation. The increase of $719,000 or 9% from 1998 to 1999 primarily resulted from the following: - Increase in letter of credit commissions due to increased transaction volume. - Increase in fees and charges related to loans. - Increase in wire transfer fees and miscellaneous income. - Partially offsetting the above increases were decreases in service charges due to the Bank's outsourcing of its merchant bank card portfolio in the third quarter of 1998. NON-INTEREST EXPENSE - -------------------- Non-interest expense amounted to $38.6 million in 2000, $30.3 million in 1999 and $30.1 million in 1998. The $8.2 million or 27% increase in the 2000 non-interest expense was substantially attributable to the operations of the two new New York branches, which we have been operating since December 1999, and the new Diamond Bar branch in California, which opened for business in January 2000. The more significant items are discussed below: - An increase of $3.6 million in salaries and employee benefits. The increase included additional payroll expense for the three new branches described above, annual salary adjustments and an additional $1.1 million in year-end bonuses in 2000. - An increase of $1.2 million in net other real estate owned ("OREO") expense. The Bank recorded $1.5 million in net gains on sales of OREO properties in 1999 versus $263,000 in net gains on disposal in 2000. - An increase of $1.1 million in other operating expense. These expenses included primarily operating supplies, communications, postage, travel, administrative, amortization of goodwill and general insurance expenses. The increase in these expenses was partially related to the growth of our operations, including the three new offices. - An increase of $350,000 in operations of investments in real estate. This was due to higher expense in operations of investments in real estate arising from operational losses on low income housing. - An increase of $460,000 in professional services expense. Professional services expenses consisted of, among other things, bank paid appraisal fees, delivery service, armored service, legal fees, accounting fees, consulting fees, computer related expense, facility management expense and fees related to the formation of the registered investment company. Due to the foregoing, the efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, increased to 37.33% in 2000 compared with 35.84% in 1999. From 1998 to 1999, non-interest expense increased $217,000 or 0.7% primarily due to the following: - An increase of $1.1 million in salaries and employee benefits. This was resulted primarily from higher year-end bonus expense and overall annual salary increases. - A decrease of $572,000 in other operating expense. 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. - An increase of $291,000 in net OREO income. The Bank realized $1.5 million in gains on sale of OREO properties leading to a net OREO income of $1.4 million in 1999, compared with $1.1 million of net OREO income in 1998. The efficiency ratio improved from 40.51% in 1998 to 35.84% in 1999. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 20 [Line and arrow graphic beside page numbers] You are here INCOME TAX EXPENSE - ------------------ Our effective tax rates were 36.17% in 2000, 39.43% in 1999 and 39.39% in 1998. The decline in our 2000 effective tax rate was due primarily to the impact of the formation of a registered investment company subsidiary that provides flexibility to raise additional capital in a tax efficient manner. The long-term plan for the registered investment company is currently under review. There can be no assurance that the subsidiary will continue to be a registered investment company, that any past tax benefit will continue or as to our timing or ability to raise capital through this subsidiary. FINANCIAL CONDITION OVERVIEW - ---------------------------- We continued our steady growth during 2000. Changes of the major balance sheet items during 2000 are listed below: - Total assets increased 11% to $2,206.8 million. - Total net loans grew 15% to $1,437.3 million. - Securities available-for-sale increased 14% to $183.4 million. - Securities held-to-maturity decreased 9% to $387.2 million. - Total deposits increased 9% to $1,876.4 million. - Federal funds purchased and securities sold under agreements to repurchase increased 45% to $68.2 million. - Stockholders' equity rose 20% to $214.8 million. SECURITIES - ---------- Under our investment policy, we classify the Bank's investment securities portfolio as follows: - Those securities which we have the positive intent and ability to hold until maturity are classified as securities held-to-maturity, and carried at amortized cost. - Those securities may be sold in response to changes in interest rates, changes in prepayment risk, increases in loan demand, the need to increase regulatory capital, general liquidity needs, or other similar factors are classified as securities available-for-sale, and carried at estimated fair value, with unrealized gains or losses, net of tax, reflected in stockholders' equity. - Securities held-to-maturity are transferred to the available-for-sale category when they are within 90 days of maturity to further enhance the Bank's liquidity. Securities available-for-sale increased $22.4 million or 14% to $183.4 million at year-end 2000 from $161.0 million at year-end 1999. Securities held-to-maturity decreased $39.1 million or 9% to $387.2 million at year-end 2000 from $426.3 million at year-end 1999. Average securities as a whole decreased $25 million or 4% to $607.1 million from 1999 to 2000 primarily due to proceeds from some matured or called securities not being reinvested to meet strong loan demand. Management constantly seeks to maximize the yields on interest-earning assets within the Company's investment guidelines. As a result, we increased our holdings of U.S. government agencies and corporate bonds with longer maturities at year-end 2000 compared with year-end 1999. The average taxable equivalent yield on securities rose 28 basis points to 6.45% in 2000, compared to 6.17% in 1999 as some matured securities were replaced at higher prevailing interest rates. At year-end 2000, we had $4.0 million in unrealized holding gains on securities available-for-sale compared with unrealized holding losses of $1.7 million at year-end 1999. These unrealized holding gains or losses, net of tax effect, were included in the Company's stockholders' equity for the periods reported. The unrealized holding gains, net of tax, were $2.3 million at year-end 2000 and the unrealized holding losses, net of tax, were $1.0 million at year-end 1999. The unrealized holding gains at year-end 2000 resulted from the decreasing interest rate environment in the fourth quarter of 2000. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED - ------------------------------------------------------------------------------- The following table summarizes the carrying value of our portfolio of securities for each of the past three years:
As of December 31, ---------------------------------- (in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE-FOR-SALE: U.S. Treasury securities $ -- $ 25 $ 2,014 U.S. government agencies 78,317 40,218 103,020 State and municipal securities 1,277 540 22,317 Mortgage-backed securities 13,207 14,634 18,266 Collateralized mortgage obligations 5,804 7,823 14,159 Asset-backed securities 10,370 16,448 8,220 Federal Home Loan Bank stock 5,613 6,851 5,991 Commercial paper -- 40,076 29,945 Corporate bonds 60,370 34,376 35,996 Equity securities 8,451 -- -- - ------------------------------------------------------------------------------------------------- Total $183,409 $160,991 $239,928 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- SECURITIES HELD-TO-MATURITY: U.S. Treasury securities $ -- $ 24,998 $ 26,026 U.S. government agencies 64,689 64,373 54,426 State and municipal securities 68,820 68,834 61,495 Mortgage-backed securities 135,494 133,282 146,018 Collateralized mortgage obligations 48,694 63,397 83,535 Asset-backed securities 13,156 19,999 -- Corporate bonds 56,347 51,449 46,656 - ------------------------------------------------------------------------------------------------- Total $387,200 $426,332 $418,156 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
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: - --------------------------------------------------------------------------------- As of December 31, 2000 ---------------------------------------------------------------- After One After Five One Year Year to Years to Over Ten (dollars in thousands) or Less Five Years Ten Years Years Total - -------------------------------------------------------------------------------------------------------------------- MATURITY DISTRIBUTION: U.S. government agencies $ -- $17,081 $61,236 $ -- $ 78,317 State and municipal securities 1,277 -- -- -- 1,277 Mortgage-backed securities(2) 2,214 512 1,696 8,785 13,207 Collateralized mortgage obligations(2) -- -- 2,618 3,186 5,804 Asset-backed securities(2) 462 -- 9,908 -- 10,370 Corporate bond 11,496 41,691 7,183 -- 60,370 Equity securities 8,451 -- -- -- 8,451 Federal Home Loan Bank stock 5,613 -- -- -- 5,613 - -------------------------------------------------------------------------------------------------------------------- Total $29,513 $59,284 $82,641 $11,971 $183,409 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE YIELD: U.S. government agencies --% 8.00% 7.27% --% 7.43% States and municipal securities(1) 8.52 -- -- -- 8.52 Mortgage-backed securities(2) 4.43 6.06 6.59 7.34 6.65 Collateralized mortgage obligations(2) -- -- 6.08 6.49 6.30 Asset-backed securities(2) 6.48 -- 5.70 -- 5.74 Corporate bond 5.47 6.82 7.56 -- 6.64 Equity securities 6.76 -- -- -- 6.76 Federal Home Loan Bank stock 7.15 -- -- -- 7.15 - -------------------------------------------------------------------------------------------------------------------- Total 6.16% 7.15% 7.04% 7.09% 6.95% - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
(1) Average yield has been adjusted to a fully-taxable equivalent basis. (2) Securities reflect stated maturities and not anticipated prepayments. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 22 [Line and arrow graphic beside page numbers] You are here SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS: - -------------------------------------------------------------------------------
As of December 31, 2000 ---------------------------------------------------------------- After One After Five One Year Year to Years to Over Ten (dollars in thousands) or Less Five Years Ten Years Years Total - -------------------------------------------------------------------------------------------------------------------- MATURITY DISTRIBUTION: U.S. government agencies $ -- $ 54,699 $ 9,990 $ -- $ 64,689 State and municipal securities 2,312 8,961 23,667 33,880 68,820 Mortgage-backed securities(2) 1,140 7,410 60,042 66,902 135,494 Collateralized mortgage obligations(2) -- -- 39,234 9,460 48,694 Asset-backed securities(2) -- 13,156 -- -- 13,156 Corporate bonds 4,001 42,150 10,196 -- 56,347 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Total $7,453 $126,376 $143,129 $110,242 $387,200 - -------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE YIELD: U.S. government agencies --% 6.17% 7.53% --% 6.38% State and municipal securities(1) 7.21 8.71 7.96 6.71 7.42 Mortgage-backed securities(2) 5.91 6.25 6.14 7.05 6.60 Collateralized mortgage obligations(2) -- -- 6.64 6.39 6.59 Asset-backed securities(2) -- 5.61 -- -- 5.61 Corporate bonds 6.95 5.91 7.38 -- 6.14 - -------------------------------------------------------------------------------------------------------------------- Total 6.87% 6.21% 6.74% 6.89% 6.61% - --------------------------------------------------------------------------------------------------------------------
(1) Average yield has been adjusted to a fully-taxable equivalent basis. (2) Securities reflect stated maturities and not anticipated prepayments. LOANS - ----- Loan demand remained strong throughout year 2000. Total gross loans grew $194.7 million or 15% to $1,463.4 million at year-end 2000, compared with $1,268.7 million at year-end 1999. The growth was primarily attributable to the following: - Real estate construction loans increased $79.5 million or 127% to $142.0 million. Although the California economy began to moderate in the third quarter of 2000, it still continued to be strong compared to other regions in the country. Consequently, construction loan demand increased for both residential and commercial real estate in California in 2000. Our construction loan projects are located primarily in California and secondarily in Texas and Nevada. The construction loan projects in Texas and Nevada totaled approximately $19 million. As of December 31, 2000, we had approximately $58 million in construction loan commitments. - Commercial mortgage loans increased $53.1 million or 9% to $630.7 million. Commercial mortgage loans are typically secured by first deeds of trust on the respective commercial properties, including primarily commercial retail properties, shopping centers and owner-occupied industrial facilities, and secondarily office buildings, multiple-unit apartments, hotels and motels. The Company's underwriting policy for commercial mortgage 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 service coverage ratio. In view of recent general economic slowdown, management has tightened the lending standards for commercial mortgage loans as well as construction loans. - Commercial loans gained $47.0 million or 12% to $442.2 million. Commercial loans are for general business purposes and include short-term loans to finance trade. General business loans are made based on the financial strength of the borrowers. Trade finance loans are typically secured by companies' accounts receivables and inventories. We target our commercial lending to small-to-medium businesses and professionals for their working capital needs. - Residential mortgage loans advanced $13.2 million or 6% to $220.7 million. These loans included home equity lines of $33.8 million. The growth in residential mortgage loans in 2000 was largely due to new purchases. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED - ------------------------------------------------------------------------------- Our 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. For real estate loans, our lending policy requires an independent appraisal on real estate property in accordance with regulatory guidelines. 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, 2000 are presented below: LOAN TYPE AND MIX - -----------------
Amount outstanding as of December 31, ----------------------------------------------------------------------- (in thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- TYPE OF LOANS: Commercial loans $ 442,181 $ 395,138 $370,539 $338,285 $283,894 Residential mortgage loans 220,720 207,725 184,158 154,692 134,966 Commercial mortgage loans 630,662 577,384 356,608 303,725 285,349 Real estate construction loans 142,048 62,516 40,738 41,736 33,510 Installment loans 27,329 25,498 29,165 26,611 23,551 Other loans 473 419 269 267 385 - --------------------------------------------------------------------------------------------------------------------------- Gross loans 1,463,413 1,268,680 981,477 865,316 761,655 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Less Unamortized deferred loan fees (4,139) (3,593) (3,631) (3,786) (3,742) Allowance for loan losses (21,967) (19,502) (15,970) (15,379) (13,529) - --------------------------------------------------------------------------------------------------------------------------- Net loans $1,437,307 $1,245,585 $961,876 $846,151 $744,384 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
CHANGES IN LOAN PORTFOLIO COMPOSITION - -------------------------------------
As of December 31, 2000 As of December 31, 1999 - --------------------------------------------------------------------------------------------------------------------------- Percentage Percentage Percentage of Total of Total Increase (dollars in thousands) Amount Loans Amount Loans (Decrease) - --------------------------------------------------------------------------------------------------------------------------- TYPE OF LOANS: Commercial loans $ 442,181 30.77% $ 395,138 31.72% 11.91% Residential mortgage loans 220,720 15.36 207,725 16.68 6.26 Commercial mortgage loans 630,662 43.88 577,384 46.35 9.23 Real estate construction loans 142,048 9.88 62,516 5.02 127.22 Installment loans 27,329 1.90 25,498 2.05 7.18 Other loans 473 0.03 419 0.03 12.89 Unamortized deferred loan fees (4,139) (0.29) (3,593) (0.29) 15.20 Allowance for loan losses (21,967) (1.53) (19,502) (1.56) 12.64 - --------------------------------------------------------------------------------------------------------------------------- Net loans $ 1,437,307 100.00% $1,245,585 100.00% 15.39% - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 24 [Line and arrow graphic beside page numbers] You are here MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED - -------------------------------------------------------------------------------
CONTRACTUAL MATURITY OF LOAN PORTFOLIO (1,2) - ----------------------------------------- Within One to Over (in thousands) One Year Five Years Five Years Total - --------------------------------------------------------------------------------------------------------------------------- COMMERCIAL LOANS Floating rate $298,443 $ 43,488 $ 14,582 $ 356,513 Fixed rate 56,379 13,900 14,923 85,202 REAL ESTATE RESIDENTIAL MORTGAGE LOANS Floating rate 81 525 49,263 49,869 Fixed rate 234 8,633 161,254 170,121 REAL ESTATE COMMERCIAL MORTGAGE LOANS Floating rate 40,126 176,431 269,157 485,714 Fixed rate 8,533 49,044 85,248 142,825 REAL ESTATE CONSTRUCTION LOANS Floating rate 93,459 34,193 -- 127,652 Fixed rate 13,576 -- -- 13,576 INSTALLMENT LOANS Floating rate -- 29 -- 29 Fixed rate 7,516 19,784 -- 27,300 OTHER LOANS Floating rate -- -- -- -- Fixed rate 469 -- 4 473 - --------------------------------------------------------------------------------------------------------------------------- Total loans $518,816 $346,027 $594,431 $1,459,274 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Floating rate $432,109 $254,666 $333,002 $1,019,777 Fixed rate 86,707 91,361 261,429 439,497 - --------------------------------------------------------------------------------------------------------------------------- Total loans $518,816 $346,027 $594,431 $1,459,274 Allowance for loan losses (21,967) - --------------------------------------------------------------------------------------------------------------------------- Net loans $1,437,307 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
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. RISK ELEMENTS OF THE LOAN PORTFOLIO - ----------------------------------- NON-PERFORMING ASSETS Non-performing assets include loans past due 90 days or more and still accruing interest, nonaccrual loans, and OREO. Our non-performing assets decreased $1.3 million or 6% to $20.5 million at year-end 2000 as compared to $21.8 million at year-end 1999. The decrease was due to a combination of the following: - A decrease of $3.1 million in loans past due 90 days or more and still accruing interest. - An increase of $1.0 million in nonaccrual loans. - An increase of $837,000 in OREO. As a percentage of gross loans plus OREO, our non-performing assets decreased to 1.39% at year-end 2000 from 1.71% at year-end 1999. The non-performing loan coverage ratio, defined as the allowance for loan losses to non-performing loans, increased to 143.72% at year-end 2000, which was considerably higher than that of 111.95% at year-end 1999. This was primarily due to the reduction of $2.1 million in the non-performing loans from $17.4 million to $15.3 million. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on nonaccrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. Our policy is to place loans on a nonaccrual status if interest and principal or either interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on nonaccrual status, any interest accrued in the previous three months, is generally reversed against current income. The payment received is generally first applied towards the principal. 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. 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 - ------------------------------------------- December 31, ----------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $ 589 $ 3,724 $ 4,683 $ 2,373 $ 2,050 Nonaccrual loans 14,696 13,696 13,090 16,886 9,305 - --------------------------------------------------------------------------------------------------------------------------- Total non-performing loans 15,285 17,420 17,773 19,259 11,355 - --------------------------------------------------------------------------------------------------------------------------- Real estate acquired in foreclosure 5,174 4,337 10,454 13,269 18,854 - --------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $ 20,459 $ 21,757 $ 28,227 $ 32,528 $ 30,209 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Troubled debt restructurings(1) $ 4,531 $ 4,581 $ 4,642 $ 4,874 $ 3,201 Non-performing assets as a percentage of gross loans and other real estate owned at year-end 1.39% 1.71% 2.85% 3.70% 3.87% Allowance for loan losses as a percentage of non-performing loans 143.72% 111.95% 89.86% 79.85% 119.15% - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Troubled debt restructurings are accruing interest at their restructured terms. The effect of nonaccrual loans and troubled debt restructurings on interest income for the years 2000, 1999, 1998, 1997 and 1996 is presented below:
- --------------------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- NONACCRUAL LOANS Contractual interest due $ 1,408 $ 1,396 $ 1,395 $ 1,845 $ 1,121 Interest recognized 627 234 112 471 268 - --------------------------------------------------------------------------------------------------------------------------- Net interest foregone $ 781 $ 1,162 $ 1,283 $ 1,374 $ 853 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- TROUBLED DEBT RESTRUCTURINGS Contractual interest due $ 422 $ 429 $ 421 $ 406 $ 339 Interest recognized 407 414 412 387 311 - --------------------------------------------------------------------------------------------------------------------------- Net interest foregone $ 15 $ 15 $ 9 $ 19 $ 28 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 26 [Line and arrow graphic beside page numbers] You are here NONACCRUAL LOANS Nonaccrual loans were $14.7 million at year-end 2000 and $13.7 million at year-end 1999. They consisted mainly of $9.5 million in commercial loans and $4.9 million in commercial mortgage loans at year-end 2000, and $6.8 million in commercial loans and $6.2 million in commercial mortgage loans at year-end 1999. The following tables present the type of properties securing the loans and the type of businesses the borrowers engaged in under commercial mortgage and commercial nonaccrual loan categories as of the dates indicated:
December 31, 2000 December 31, 1999 Nonaccrual Loan Secured by Nonaccrual Loan Secured by Real Estate Property Real Estate Property - --------------------------------------------------------------------------------------------------------------------------- Commercial Commercial (in thousands) Mortgage Commercial Mortgage Commercial - --------------------------------------------------------------------------------------------------------------------------- TYPE OF PROPERTY - --------------------------------------------------------------------------------------------------------------------------- Single/multi-family residence $ 174 $ 531 $ 1,014 $ 628 Commercial 2,277 1,139 4,971 5,425 Land 2,403 -- -- -- UCC -- 7,083 -- -- Others -- 540 186 307 Secured -- 231 -- 392 - --------------------------------------------------------------------------------------------------------------------------- Total $ 4,854 $ 9,524 $ 6,171 $ 6,752 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 Nonaccrual Loan Balance Nonaccrual Loan Balance - --------------------------------------------------------------------------------------------------------------------------- Commercial Commercial Mortgage Commercial Mortgage Commercial - --------------------------------------------------------------------------------------------------------------------------- TYPE OF BUSINESS - --------------------------------------------------------------------------------------------------------------------------- Real estate development $ 2,648 $ 166 $ 354 $ 347 Real estate management -- -- 4,366 100 Wholesale/retail 174 4,798 -- 896 Food/restaurant -- 2,005 --- 889 Import -- 2,092 621 3,307 Motel -- -- 425 -- Investments 2,032 -- 334 -- Manufacturing -- 220 -- 270 Others -- 243 71 943 - --------------------------------------------------------------------------------------------------------------------------- Total $ 4,854 $ 9,524 $ 6,171 $ 6,752 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE NONACCRUAL LOANS - The balance of $2.3 million consisted of four credits secured by first trust deeds on respective commercial properties. - The balance of $2.4 million represented one credit secured by first trust deed on land. COMMERCIAL NONACCRUAL LOANS - The balance of $7.1 million comprised eight credits secured by borrowers' assets, mainly accounts receivables and inventories. - The balance of $1.1 million consisted of five credits secured primarily by first trust deeds on commercial buildings and warehouses. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED 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. Our troubled debt restructurings decreased slightly to $4.5 million at year-end 2000, compared with $4.6 million at year-end 1999. All of the troubled debt restructurings at year-end 2000 were commercial mortgage loans and were accruing interest under their revised terms. IMPAIRED LOANS A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. We consider all loans classified and restructured in our evaluation of loan impairment. The classified loans are stratified by size, and loans less than our defined selection criteria are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan's effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan's observable market price or the fair value of the collateral. If the measurement of the impaired loan is less than the recorded amount of the loan, we then recognize an impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. We identified impaired loans with a recorded investment of $27.8 million at year-end 2000, compared to $26.3 million at year-end 1999. The average balance of impaired loans was $29.5 million and interest collected on impaired loans totaled $2.1 million in 2000. LOAN CONCENTRATION We have no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as of December 31, 2000. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the matters discussed in this Section. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $22.0 million or 1.50% of total loans at year-end 2000, representing an increase of $2.5 million or 13% over the $19.5 million or 1.54% of total loans at year-end 1999. The Bank recorded net charge-offs of $1.7 million in 2000, up from $668,000 in 1999. Nonetheless, the non-performing coverage ratio increased to 143.72% in 2000, up from 111.95% in 1999 primarily due to a reduction of $2.1 million in the non-performing loans. The tables below present information relating to the allowance for loan losses, charge-offs, and recoveries by loan type for the past five years:
ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------------------------------------------------------------------------- Amount outstanding as of December 31, - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 19,502 $ 15,970 $ 15,379 $ 13,528 $ 12,742 Allowance from acquisition -- -- -- -- 1,644 Provision for loan losses 4,200 4,200 3,600 3,600 3,600 Loans charged-off (1,905) (1,731) (3,519) (2,139) (5,388) Recoveries of charged-off loans 170 1,063 510 390 930 - --------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 21,967 $ 19,502 $ 15,970 $ 15,379 $ 13,528 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Average loans outstanding during year ended $1,313,177 $1,088,578 $ 907,639 $ 792,176 $ 579,634 Ratio of net charge-offs to average loans outstanding during the year 0.13% 0.06% 0.33% 0.22% 0.77% Provision for loan losses to average loans outstanding during the year 0.32% 0.39% 0.40% 0.45% 0.62% Allowance to non-performing loans at year-end 143.72% 111.95% 89.86% 79.85% 119.15% Allowance to total loans at year-end 1.50% 1.54% 1.63% 1.78% 1.78% - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 28 [Line and arrow graphic beside page numbers] You are here
LOANS CHARGED-OFF BY LOAN TYPE(1) - --------------------------------- Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Commercial loan $ 537 $ 1,116 $ 2,394 $ 1,387 $ 4,010 Percentage of total commercial loans 0.12% 0.28% 0.65% 0.41% 1.41% - --------------------------------------------------------------------------------------------------------------------------- Real estate loan $ 1,066 $ 388 $ 873 $ 574 $ 1,177 Percentage of total real estate loans 0.11% 0.05% 0.15% 0.11% 0.26% - --------------------------------------------------------------------------------------------------------------------------- Installment and other loan $ 302 $ 227 $ 252 $ 178 $ 201 Percentage of total installment and other loans 1.09% 0.88% 0.86% 0.66% 0.84% - --------------------------------------------------------------------------------------------------------------------------- Total loans charged-off $ 1,905 $ 1,731 $ 3,519 $ 2,139 $ 5,388 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Percentages were calculated based on year-end balances.
RECOVERIES BY LOAN TYPE - ------------------------ Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Commercial loan $ 74 $ 761 $ 188 $ 219 $ 640 Real estate loan 3 181 280 111 205 Installment and other loan 93 121 42 60 85 - --------------------------------------------------------------------------------------------------------------------------- Total $ 170 $ 1,063 $ 510 $ 390 $ 930 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
We have established a monitoring system for our loans that seeks to identify impaired 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 been incorporated into the determination of the level of allowance. This monitoring system and allowance methodology include a loan-by-loan analysis for significant classified loans and loss factors for the balance of the portfolio that are based on historical loss trend analysis relative to our unclassified portfolio, other factors such as current portfolio delinquency and trends, and other inherent risk factors including economic conditions and concentrations in the portfolio risk levels of particular loan categories. Our allowance for loan losses consists of the following: - Specific allowances: For impaired loans, we provide specific allowances based on an evaluation of impairment. For other classified loans, we allocate 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. - General allowance: The unclassified portfolio is categorized by loan types. The allocation is arrived by assigning a loss percentage to each loan type based on an evaluation of the degree of inherent risk, potential loan losses and other significant risk factors inherent in the loans. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED The following tables present a breakdown of impaired loans and the related allowances as of the dates indicated:
Recorded Net 2000 (in thousands) Investment Allowance Balance - ------------------------------------------------------------------------------------------------------------------------ Commercial $ 13,868 $ 3,682 $ 10,186 Commercial mortgage 13,208 1,881 11,327 Other 742 133 609 - ------------------------------------------------------------------------------------------------------------------------ Total $ 27,818 $ 5,696 $ 22,122 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
Recorded Net 1999 (in thousands) Investment Allowance Balance - ------------------------------------------------------------------------------------------------------------------------- Commercial $ 12,686 $ 1,831 $ 10,855 Commercial mortgage 13,412 1,912 11,500 Other 181 181 -- - ------------------------------------------------------------------------------------------------------------------------- Total $ 26,279 $ 3,924 $ 22,355 - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
We allocate 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:
As of December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 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 - ----------------------------------------------------------------------------------------------------------------------------------- TYPE OF LOANS: Commercial loans $10,231 30.00% $8,546 35.06% $7,468 38.58% $7,480 39.20% $6,190 37.27% Residential mortgage loans 808 15.61 1,743 18.15 1,901 18.46 1,549 17.81 1,517 17.72 Commercial mortgage loans 8,564 45.25 7,781 39.95 5,815 35.16 5,439 35.07 5,424 37.47 Real estate construction loans 1,855 7.11 843 4.30 365 4.77 401 4.80 294 4.40 Installment loans 380 1.99 464 2.46 414 2.98 356 3.09 72 3.09 Other loans 129 0.04 125 0.08 7 0.05 154 0.03 31 0.05 - --------------------------------------------------------------------------------------------------------------------------------- Total $21,967 100.00% $19,502 100.00% $15,970 100.00% 15,379 100.00% $13,528 100.00% - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
Based on our 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, 2000 to absorb estimable and probable losses identified through its analysis. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the matters discussed in this Section. OTHER REAL ESTATE OWNED Our OREO, net of a valuation allowance of $131,000, was carried at $5.2 million at year-end 2000 compared with OREO, net of a valuation allowance of $614,000, being carried at $4.3 million at year-end 1999. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 30 [Line and arrow graphic beside page numbers] You are here During 2000, we acquired six properties in the amount of $5.3 million and disposed of nine properties totaling $5.0 million with a net gain of $263,000. There were five outstanding OREO properties at year-end 2000, which included land, commercial buildings, and a single family residence. All properties are located in California. We maintain a valuation allowance for OREO properties to reduce the carrying value of OREO to the estimated fair value of the properties less estimated costs to sell. We perform periodic evaluations on each property and make corresponding adjustments 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 $71,000 to the provision for OREO losses in 2000. We recognized net income of $185,000 in 2000, $1.4 million in 1999 and $1.1 million in 1998 from operating our OREO properties. Net gains on sales of OREO properties was $263,000 in 2000, $1.5 million in 1999 and $1.0 million in 1998. In addition to the gains on sales, we also received rental income of $311,000 in 2000, $575,000 in 1999 and $748,000 in 1998. These amounts were partially offset by operating expenses of $318,000 and the provision for OREO losses of $71,000 in 2000, by operating expenses of $369,000 and the provision for OREO losses of $339,000 in 1999 and by operating expenses of $426,000 and the provision for OREO losses of $195,000 in 1998. Although the California real estate market continued to show strength in 2000, the market started to moderate in the last quarter and may continue to slow in future periods. 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 by type for years 2000, 1999 and 1998:
- ----------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Operating expense (income) $ 7 $ (206) $ (321) Provision for losses 71 339 195 Net gain on disposal (263) (1,549) (999) - ----------------------------------------------------------------------------------------------------------------- Total $(185) $(1,416) $(1,125) - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
INVESTMENTS IN REAL ESTATE Investments in real estate increased $361,000 to $17.3 million at year-end 2000, from $17.0 million at year-end 1999. They consisted of investments in four limited partnerships formed for the purpose of investing in low income housing projects, which qualify for Federal low income housing tax credits and/or California tax credit. The following table summarizes the composition of investments in real estate as of the dates indicated:
Percentage of Acquisition December 31, ----------------------- (dollars in thousands) Ownership Date 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Las Brisas 49.50% 12/93 $ 189 $ 209 Los Robles 99.00% 08/95 393 431 California tax credit fund 36.00% 03/99 14,127 14,841 Wilshire Courtyard 99.90% 05/99 2,639 1,506 - ---------------------------------------------------------------------------------------------------------------- $ 17,348 $ 16,987 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
DEPOSITS Total deposits increased $154.7 million or 9% from $1,721.7 million at year-end 1999 to $1,876.4 million at year-end 2000. - Core deposits increased $65.1 million or 6%. Contributing to the growth in core deposits were primarily increases in demand deposits and money market accounts arising from various bank promotions. Time deposits under $100,000 also increased $17.3 million, which contributed to 26% of the increase of core deposits. - Time deposits of $100,000 or more ("Jumbo CDs") increased $89.6 million or 13%. The growth was largely attributable to deposits received from the State of California in the fourth quarter of 2000, totaling $68 million. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED The following table displays the deposit mix for the past three years and average deposits and rates for the past five years:
DEPOSIT MIX - ----------- Year ended December 31, --------------------------------------------------------------------------------------- 2000 1999 1998 (dollars in thousands) Amount Percentage Amount Percentage Amount Percentage - --------------------------------------------------------------------------------------------------------------------------- Demand $ 221,805 11.82% $ 195,140 11.33% $ 178,068 11.41% NOW accounts 125,647 6.70 121,394 7.05 114,982 7.37 Money market accounts 119,805 6.38 97,821 5.68 113,869 7.30 Savings deposits 231,761 12.36 236,764 13.75 207,365 13.29 Time deposits under $100 379,809 20.24 362,553 21.06 326,968 20.95 Time deposits of $100 or more 797,620 42.50 708,064 41.13 619,150 39.68 - ---------------------------------------------------------------------------------------------------------------------------- Total $1,876,447 100.00% $1,721,736 100.00% $1,560,402 100.00% - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
Average deposits grew $197.6 million or 12% from $1,595.4 million in 1999 to $1,793.0 million in 2000. - - Average core deposits increased $119.3 million or 13%. - - Average Jumbo CDs increased $78.3 million or 12%. The following table displays average deposits and rates for the past five years:
AVERAGE DEPOSITS AND RATES - --------------------------- 2000 1999 1998 1997 1996 (dollars in ---------------------------------------------------------------------------------------------------------------- thousands) Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage - ----------------------------------------------------------------------------------------------------------------------------------- Demand $ 211,975 -- % $ 169,013 -- % $ 166,657 -- % $ 148,907 --% $ 121,952 --% NOW accounts 122,851 1.2 117,374 1.2 111,900 1.4 114,453 1.5 96,759 1.5 Money market accounts 112,817 2.3 99,628 1.6 99,833 2.1 97,470 2.3 100,898 2.3 Savings deposits 228,027 1.6 207,498 1.5 205,372 2.1 216,840 2.2 151,284 2.3 Time deposits 1,117,350 5.4 1,001,878 4.7 900,441 5.1 820,310 5.1 632,211 5.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total $1,793,020 3.8% $1,595,391 3.3% $1,484,203 3.6% $1,397,980 3.6% $1,103,104 3.5% - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
As interest rate spreads broadened between Jumbo CDs and other types of interest-bearing deposits under the prevailing interest rate environment, our Jumbo CD portfolio continued to grow faster than other types of deposits. Management believes our Jumbo CDs are generally less volatile primarily due to the following reasons: - Approximately 50% of the Bank's Jumbo CDs have stayed with the Bank for more than two years. - The Jumbo CD portfolio continued to be diversified with 4,318 individual accounts averaging approximately $173,000 per account owned by 3,048 individual depositors as of January 19, 2001. - This phenomenon of having a relatively higher percentage of Jumbo CDs to total deposits exists in most of the Asian American banks in our 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 concentration in Jumbo CDs, management has continued to make efforts in the following areas: - To offer non-competitive interest rates paid on Jumbo CDs. - To offer new transaction-based products, such as the tiered money market accounts. - To promote transaction-based products from time to time, such as demand deposits. - To seek to diversify the customer base by branch expansion and/or acquisition as opportunities arise. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 32 [Line and arrow graphic beside page numbers] You are here The following tables display time deposits of $100,000 or more by maturity and time deposits with remaining term of more than one year at December 31, 2000:
TIME DEPOSITS OF $100 OR MORE BY MATURITY - ----------------------------------------- (in thousands) At December 31, 2000 - --------------------------------------------------------------------------------------------------------------------------- Less than three months $ 384,775 Three to six months 242,355 Six to twelve months 164,436 Over one year 6,054 - --------------------------------------------------------------------------------------------------------------------------- Total $ 797,620 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR AT DECEMBER 31, 2000 FOR - ------------------------------------------------------------------------------------------------- EACH OF THE FIVE YEARS FOLLOWING DECEMBER 31, 2000 - -------------------------------------------------- (in thousands) - --------------------------------------------------------------------------------------------------------------------------- 2002 $ 13,450 2003 5,463 2004 249 2005 82 2006 16 - --------------------------------------------------------------------------------------------------------------------------- Total $ 19,260 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
CAPITAL RESOURCES We obtain capital primarily from retained earnings and to a lesser extent, the issuance of additional common stock through our Dividend Reinvestment Plan and options exercised. Stockholders' equity amounted to $214.8 million or 9.73% of total assets as of year-end 2000, compared with $179.1 million or 8.97% of total assets at year-end 1999. The increase of $35.7 million in stockholders' equity was primarily due to the following: - An addition of $38.6 million from net income, less dividends paid of $8.0 million. - $1.7 million from the issuance of additional common stock through the Dividend Reinvestment Plan and from the exercise of stock options. - A favorable difference of $3.3 million in the net unrealized holding gains and the net unrealized holding losses on securities available-for-sale, net of tax. We paid a cash dividend of $0.21 per common share in January on 9,033,583 shares outstanding, in April on 9,044,685 shares outstanding and in July 2000 on 9,054,782 shares outstanding. In October 2000, the Board of Directors authorized and paid a cash dividend of $.25 per share, an increase of $.04 or 19% per common share, on 9,064,486 shares outstanding. Total cash dividends paid in 2000 amounted to $8.0 million. On February 19, 1998 our Board of Directors adopted an "Equity Incentive Plan" ("the Plan") which was approved by our stockholders at the Annual Meeting of Stockholders in 1998. The Plan will expire on February 18, 2008. - On September 17, 1998, we granted 45,000 options to purchase 45,000 shares of common stock with an exercise price of $33.00 per share to eligible senior officers and directors. - On January 20, 2000, we granted 55,000 options to purchase 55,000 shares of common stock with an exercise price of $42.50 per share to eligible officers and directors. - On January 18, 2001, we granted 55,500 options to purchase 55,500 shares of common stock with an exercise price of $60.19 per share to eligible officers and directors. Management seeks to retain the Company's capital at a level sufficient to support future growth, to protect depositors and stockholders, to absorb any unanticipated 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. At year-end 2000, our Total capital ratio was 12.25%, our Tier 1 capital ratio was 11.05% and our Tier 1 leverage ratio was 9.28%. At year-end 1999, our Total capital ratio was 11.71%, our Tier 1 capital ratio was 10.50% and our Tier 1 leverage ratio was 8.93%. These capital ratios not only exceeded the regulatory minimum requirements but also Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED placed the Company 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 displaying the Company and the Bank's capital and leverage ratios at year-end 2000 and 1999 is included in Note 11 to consolidated financial statements. LIQUIDITY AND MARKET RISK LIQUIDITY Liquidity is our 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 Bank's principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, Federal funds purchased and securities sold under agreements to repurchase and advances from Federal Home Loan Bank ("FHLB"). The Bank's liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) decreased to 30.76% at year-end 2000, compared with 33.91% at year-end 1999. The decrease was due to a combination of: - A reduction of $6.9 million in net cash, short-term and marketable securities. - An increase of $153.6 million in net deposit and short-term liabilities. To supplement its liquidity needs, the Bank maintains a total credit line of $52 million for Federal funds with three correspondent banks, repo lines 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 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, $20 million of which expired during the third quarter of 2000. We had significant portion of our time deposits maturing within one year or less as of December 31, 2000. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in our marketplaces. However, based on our historical runoff experience, we expect the outflow will be minimal and can be replenished through our normal growth in deposits. Management believes all the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs. Bancorp, on the other hand, obtains funding for its activities primarily through dividend income contributed by the Bank and proceeds from investments in the Dividend Reinvestment Plan and the exercise of stock options. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. The business activities of Bancorp consist primarily of the operation of the Bank with limited activities in other investments. 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. Our principal market risk is the interest rate risk inherent in our lending, investing and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same extent, or on the same basis. We actively monitor and manage our interest rate risk through analyzing the repricing characteristics of our loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse effects of changes in interest rates on our earnings, and ultimately the underlying market value of equity, while structuring our 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. Due to the limitations inherent in any individual risk management tool, we use both an interest rate sensitivity analysis and a simulation model to measure and quantify the impact to our profitability or the market value of our assets and liabilities. The interest rate sensitivity analysis details the expected maturity and repricing opportunities mismatch or sensitivity gap between interest-earning assets and interest-bearing liabilities over a specified timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates, net interest margin may be enhanced with a positive gap. A negative gap exists Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 34 [Line and arrow graphic beside page numbers] You are here 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 indicates the maturity and rate sensitivity of our interest-earning assets and interest-bearing liabilities as of December 31, 2000. Our 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 our assets and liabilities presented in the table may vary if different assumptions were used or if actual experience differs from the assumptions used. As seen from the table, we were asset sensitive with a cumulative gap ratio of a positive 18.13% within three months, and liability sensitive with a cumulative gap ratio of a negative 9.78% within one year at year-end 2000, compared with a positive 16.25% within three months, and a negative 9.78% within one year at year-end 1999. INTEREST RATE SENSITIVITY
December 31, 2000 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 Sensitive Total - ----------------------------------------------------------------------------------------------------------------------------- INTEREST EARNINGS ASSETS: Cash and due from banks $ 844 $ 55 $ -- $ -- $ 64,788 $ 65,687 Federal funds sold and securities purchased under agreements to resell 19,000 -- -- -- -- 19,000 Securities available-for-sale 16,176 13,338 59,283 94,612 -- 183,409 Securities held-to-maturity -- 7,453 126,376 253,371 -- 387,200 Loans: Commercial loans 373,556 30,184 13,941 14,975 -- 432,656 Residential mortgage loans 49,901 226 8,646 161,694 -- 220,467 Commercial mortgage loans 488,082 5,381 49,197 85,552 -- 628,212 Real estate construction loans 139,645 -- -- -- -- 139,645 Installment loans 3,744 3,800 19,727 -- -- 27,271 Other loans 450 12 -- 4 -- 466 - ----------------------------------------------------------------------------------------------------------------------------- Total loans(1) 1,055,378 39,603 91,511 262,225 -- 1,448,717 - ----------------------------------------------------------------------------------------------------------------------------- Non-interest earning assets, net -- -- -- -- 102,821 102,821 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $1,091,398 $ 60,449 $ 277,170 $ 610,208 $ 167,609 $2,206,834 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES: Deposits: Demand $ -- $ -- $ -- $ -- $ 221,805 $ 221,805 Money market and NOW(2) 18,302 49,518 104,222 73,410 -- 245,452 Savings(2) 17,318 60,042 100,242 54,159 -- 231,761 TCDs under $100 183,327 179,392 17,009 81 -- 379,809 TCDs $100 and over 404,265 387,338 6,017 -- -- 797,620 - ----------------------------------------------------------------------------------------------------------------------------- Total deposits 623,212 676,290 227,490 127,650 221,805 1,876,447 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 68,173 -- -- -- -- 68,173 Advances from Federal Home Loan Bank -- -- 10,000 -- -- 10,000 Non-interest bearing other liabilities -- -- -- -- 37,427 37,427 Stockholders' equity -- -- -- -- 214,787 214,787 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities & stockholders' equity $ 691,385 $ 676,290 $ 237,490 $ 127,650 $ 474,019 $2,206,834 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ 400,013 $ (615,841) $ 39,680 $ 482,558 $ (306,410) $ -- - ----------------------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $ 400,013 $ (215,828) $ (176,148) $ 306,410 $ -- $ -- - ----------------------------------------------------------------------------------------------------------------------------- Gap ratio (% of total assets) 18.13% (27.91)% 1.80% 21.87% (13.88)% -- - ----------------------------------------------------------------------------------------------------------------------------- Cumulative gap ratio 18.13% (9.78)% (7.98)% 13.88% -- -- - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
(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. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED - ------------------------------------------------------------------------------- Since interest rate sensitivity analysis does not measure the timing differences in the repricing of assets and liabilities, we use a simulation model to quantify the extent of the differences in the behavior of the lending and funding rates, so as to project future earnings or market values under alternative interest scenarios. The simulation measures the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments. We establish a tolerance level in our policy to define and limit interest income volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the tolerance level is met or exceeded, we then seek 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, 2000. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used.
Changes in Interest Rates Percentage Change in: ------------------------------------------------ (in basis points) Net Interest Income(1) Net Portfolio Value(2) - --------------------------------------------------------------------------------------------------------------------------- +200 14.59% (27.14)% +100 7.80 (13.95) - -100 (6.63) 12.53 - -200 (13.38) 25.00
(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. In 2000, we entered into a limited number of derivative financial instruments in order to mitigate the risk of interest rate exposures related to our interest earning assets and interest bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the balance and against identified risk in specific transactions. In such instances, the Bank may protect its position through the purchase or sale of future contracts for a specific cash or interest rate risk position. Other hedge transactions may be implemented using interest rate swaps, interest rate caps, floors, financial futures, forward rate agreements, and options on futures or bonds. Prior to considering any off-balance sheet hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All off-balance sheet hedges require an assessment of basis risk and must be approved by the Bank's Investment Committee. In the first quarter of 2000, we entered into an interest rate swap agreement with a major financial institution in the notional amount of $20 million for a period of five years. The interest rate swap was for the purpose of hedging a portion of our floating rate loans against declining interest rates. In the third quarter of 2000, we entered into a forward rate agreement ("FRA") with a major financial institution in the notional amount of $100 million with a term of six months. The FRA was for the purpose of hedging a portion of our Jumbo CD portfolio against declining interest rates. We recognized $1.1 million unrealized gain on the FRA as of December 31, 2000. The FRA settled on March 5, 2001. The following table shows our financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at December 31, 2000. For assets, expected maturities are based on contractual maturity. For liabilities, we use our historical experience and decay factors to estimate the deposit runoffs of interest bearing transactional deposits. Off-balance sheet commitments to extend credit, letters of credit and bill of lading guarantees represent the contractual unfunded amounts. Off-balance sheet financial instruments represent the underlying notional amounts. We use 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. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 36 [Line and arrow graphic beside page numbers] You are here
As of As of Expected Maturity Date at December 31, Dec. 31, 2000 Dec. 31, 1999 Average ---------------------------------------------------------- -------------- ------------- Interest Fair Fair (dollars in thousands) Rate 2001 2002 2003 2004 2005 Thereafter Total Value Total Value - -------------------------------------------------------------------------------------------------------------------------------- INTEREST-SENSITIVE ASSETS: Federal funds sold and securities purchased under agreements to resell 6.18% $ 19,000 $ -- $ -- $ -- $ -- $ -- $ 19,000 $ 19,000 $ 5,000 $ 5,000 Mortgage-backed securities and collateralized mortgage obligations 6.69% 3,354 31 -- 7,891 -- 191,923 203,199 204,007 219,436 215,592 Investment securities 6.42% 27,999 28,861 64,801 40,322 43,753 156,061 361,797 362,445 362,773 355,375 Federal Home Loan Bank stock 6.64% 5,613 -- -- -- -- -- 5,613 5,613 6,851 6,851 Loans Commercial 9.71% 349,481 14,304 12,614 23,219 6,386 29,060 435,064 434,854 388,551 380,466 Real estate mortgage 9.10% 48,237 57,417 44,755 63,378 65,551 556,418 835,756 828,645 770,313 754,727 Real estate construction 9.88% 105,424 33,678 -- -- -- -- 139,102 139,949 61,203 59,717 Installment & others 8.46% 7,864 3,317 5,870 6,761 3,569 4 27,385 27,508 25,518 24,426 INTEREST-SENSITIVE LIABILITIES: Other interest bearing deposits 1.67% 145,448 76,734 57,760 41,773 31,981 123,517 477,213 477,292 455,979 456,049 Time deposits 5.42% 1,158,104 13,450 5,463 249 82 81 1,177,429 1,181,975 1,070,617 1,059,076 Federal funds purchased and securities sold under agreements to repurchase 6.09% 68,173 -- -- -- -- -- 68,173 68,201 46,990 47,649 Advances from Federal Home Loan Bank 4.90% 10,000 -- -- -- -- -- 10,000 9,951 30,000 29,305 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit N/A 500,493 79,937 2,155 128 217 36,942 619,872 (509) 580,727 (328) Standby letters of credit N/A 15,335 100 -- -- -- -- 15,435 (63) 11,748 (64) Others letters of credit N/A 44,371 -- -- -- -- -- 44,371 (238) 31,866 (193) Bill of lading guarantee N/A 20,729 -- -- -- -- -- 20,729 (125) 13,924 (69) Interest rate swap N/A -- -- -- -- 20,000 -- 20,000 977 20,000 35 Forward rate agreement N/A 100,000 -- -- -- -- -- 100,000 1,104 -- --
FACTORS THAT MAY AFFECT FUTURE RESULTS - --------------------------------------- THE ALLOWANCE FOR LOAN LOSSES IS AN ESTIMATE OF ESTIMABLE AND PROBABLE LOSSES. ACTUAL LOAN LOSSES IN EXCESS OF THE ESTIMATE COULD ADVERSELY AFFECT OUR NET INCOME AND CAPITAL. The allowance for loan losses is based on management's estimate of the estimable and probable losses from our loan portfolio. If actual losses exceed the estimate, the excess losses could adversely affect our 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, 2000 is adequate to cover estimable and probable losses from our 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 our 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 our allowance. These agencies Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED may require us to establish additional allowances based on their judgement of the information available at the time of their examinations. We may sustain loan losses in excess of present or future levels of the allowance for loan losses. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS. The interest rate risk inherent in our lending, investing and deposit taking activities is a significant market risk to us and our 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 we have 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 our assets and liabilities. Increases in interest rates may adversely affect the ability of our 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 our interest-earning assets and interest-bearing liabilities 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 the change in interest rates on a short-term basis and over the life of the asset. We seek to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition to obtain the maximum spread. We use interest rate sensitivity analysis and a simulation model to assist us in estimating the optimal asset-liability composition. However, such management tools have inherent limitations that impair their effectiveness. We may not be successful in minimizing the adverse effects of changes in interest rates. See also, "Risk Elements of the Loan Portfolio" and "Liquidity and Market Risk--Market Risk" above. INFLATION MAY ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE. The consolidated financial statements and related financial data presented in this report have been prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require the measurement of our 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 our operations is reflected in increased operating costs. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. AS WE EXPAND OUR BUSINESS OUTSIDE OF CALIFORNIA MARKETS, WE WILL ENCOUNTER RISKS THAT COULD ADVERSELY AFFECT US. We primarily operate in California markets with a concentration of Chinese American individuals and businesses; however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Chinese American individuals and businesses. We have begun this expansion with the acquisition of certain assets and assumption of certain liabilities of Golden City Commercial Bank in New York and the conversion of our Houston loan production office into a branch facility. In the course of this expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations. These risks and uncertainties include increased operational difficulties arising from, among other things, our 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 we have no current experience. To the extent that we expand through acquisitions, such acquisitions may also adversely harm our business, if we fail 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 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 38 [Line and arrow graphic beside page numbers] You are here 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 US TO INCUR LOSSES. Our banking operations are concentrated primarily in Southern and Northern California, and to a 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, erode the value of loan collateral, increase claims and lawsuits, and reduce the demand for our products and services. These events could increase the amount of our non-performing assets, and have an adverse effect on our ability to collect our non-performing loans or otherwise liquidate our non-performing assets (including other real estate owned) on terms favorable to us, and otherwise adversely affect our business. Real estate securing our lending activity is also principally located in Southern and Northern California, and to a 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, flood and hurricanes (which may result in uninsured losses), and other factors beyond our control. Although the California economy and its real estate market continued to be relatively strong in 2000, they began to moderate in the third quarter of 2000. The economic conditions in Houston and New York were both favorable in 2000, but have also moderated recently. It is difficult for management to predict the future economic performance of these regions, and economic condition in one or more of these regions may decline in the future. THE RISKS INHERENT IN CONSTRUCTION LENDING MAY ADVERSELY AFFECT OUR NET INCOME. The risks inherent in construction lending may adversely affect our net income. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. 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 estimated operating cash flow to be generated by the completed project. If these properties cannot be sold or leased so as to generate the cash flow anticipated by the borrowers, the borrowers may not be able to repay their obligations to us and the value of our security interest in collateral may be adversely impaired. OUR 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. In considering whether to make a loan on or secured by real property, we generally require 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, we may not realize an amount equal to the indebtedness secured by the property. OUR NEED TO CONTINUE TO ADAPT TO OUR INFORMATION TECHNOLOGY SYSTEMS TO ALLOW US TO PROVIDE NEW AND EXPANDED SERVICES COULD PRESENT OPERATIONAL ISSUES AND REQUIRE SIGNIFICANT CAPITAL SPENDING. As we begin to offer internet banking and other on-line services to our customers, and continue to expand our existing conventional banking services, we will need to adapt our information technology systems to handle these changes in a way that meets constantly changing industry standards. This can be very expensive and may require significant capital expenditures. In addition, our success will depend, among other things, on our ability to provide secure and reliable services, anticipate changes in technology and efficiently develop and introduce services that are accepted by our customers and cost effective for us to provide. Systems failures, delays, breaches of confidentiality and other problems could harm our reputation and business. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED WE FACE SUBSTANTIAL COMPETITION FROM LARGER COMPETITORS. We face substantial competition for deposits and loans as well as other banking services throughout our market area from the major banks and financial institutions that dominate the commercial banking industry. This may cause our cost of funds to exceed that of our competitors. It may also result in us making less desirable loans. Such banks and financial institutions have greater resources than us, 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 us and perform certain functions, including trust services, which are not presently offered by us. We also compete for loans and deposits as well as other types of banking services 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 OUR BUSINESS. We are governed by significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of our stockholders. In the past, our 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 us 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 our business in particular. POOR ECONOMIC CONDITIONS IN ASIA COULD CAUSE US TO INCUR LOSSES. While the Asian economic conditions were satisfactory in 2000, it is difficult to predict the behavior of the Asian economy in the future. The U.S. fiscal policy and an unfavorable global economic condition may adversely impact the Asian economy. If the Asian economic conditions should deteriorate, we could be exposed to economic and transfer risk, and could experience an outflow of deposits by our 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 US. A substantial portion of our cash flow comes from dividends that the Bank pays to us. 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 we, as a holder of an equity interest in the Bank, would be entitled to receive any of the assets of the Bank. CERTAIN PROVISIONS OF OUR CHARTER, BYLAWS AND RIGHTS AGREEMENT COULD MAKE THE ACQUISITION OF OUR COMPANY MORE DIFFICULT. Certain provisions of our Charter, Bylaws and recently adopted successor Rights Agreement between us and American Stock Transfer and Trust Company, as Rights Agent, could make the acquisition of our company more difficult. These provisions include authorized but unissued shares of preferred and common stock that may be issued without stockholder approval; three classes of directors serving staggered terms; preferred share purchase rights that generally become exercisable if a person or group acquires 15% or more of our common stock or announces a tender offer for 15% or more of our common stock; special requirements for stockholder proposals and nominations for director; and supermajority voting requirements in certain situations including certain types of business combinations. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 40 [Line and arrow graphic beside page numbers] You are here MARKET FOR CATHAY BANCORP, INC. STOCK The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol: "CATY". During 2000, total trading volume was approximately 2,248,605 and the prices ranged from a high of $80.00 to a low of $38.50. As of February 26, 2001, the closing price per share was $60.13. The approximate number of stockholders at year-end 2000 was 1,700. The Company paid an aggregate per share cash dividend of $0.880 in 2000 and $0.805 in 1999. 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) - --------------------------------------------------------------------------------------------- End of Trading High Low Period Volume - --------------------------------------------------------------------------------------------- 2000 First Quarter $ 80.000 $38.500 $46.000 754,407 Second Quarter 49.000 40.750 46.380 439,881 Third Quarter 50.000 43.000 48.750 348,929 Fourth Quarter 57.380 47.000 59.000 705,388 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
(1) The Company does not represent that the outstanding shares may either be bought or sold at a certain price. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 41 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 the years 2000, 1999 and 1998.
Year ended December 31, - -------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 (dollars in thousands) Amount %(1) Amount %(1) Amount %(1) - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 56,793 2.67% $ 50,969 2.74% $ 58,892 3.45% Federal funds sold and securities purchased under agreements to resell 11,053 0.52 38,013 2.04 69,915 4.09 Securities available-for-sale, taxable 205,154 9.65 184,497 9.91 225,397 13.20 Securities available-for-sale, nontaxable 510 0.02 345 0.02 499 0.03 Securities held-to-maturity, taxable 330,841 15.56 378,753 20.35 315,257 18.46 Securities held-to-maturity, nontaxable 69,478 3.27 68,702 3.69 48,757 2.85 Total net loans(2) 1,343,970 63.19 1,088,578 58.48 907,627 53.15 Premises and equipment, net 28,691 1.35 25,668 1.38 25,571 1.50 Other assets 80,363 3.77 25,799 1.39 55,888 3.27 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 2,126,853 100.00% $ 1,861,324 100.00% $ 1,707,803 100.00% - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES Demand deposits $ 211,975 9.97% $ 169,013 9.08% $ 166,657 9.76% Savings deposits(3) 463,695 21.80 424,500 22.81 417,105 24.42 Time deposits 1,117,350 52.54 1,001,878 53.82 900,441 52.73 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 1,793,020 84.31 1,595,391 85.71 1,484,203 86.91 - --------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 79,276 3.73 55,519 2.98 53,285 3.12 Advances from Federal Home Loan Bank 29,781 1.40 30,000 1.61 6,959 0.40 Mortgage indebtedness 40 -- 183 0.01 440 0.03 Other liabilities 32,619 1.53 14,770 0.80 18,304 1.07 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,934,736 90.97 1,695,863 91.11 1,563,191 91.53 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock and additional paid-in-capital 65,578 3.08 63,897 3.43 62,259 3.65 Retained earnings 126,539 5.95 101,564 5.46 82,353 4.82 - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 192,117 9.03 165,461 8.89 144,612 8.47 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,126,853 100.00% $ 1,861,324 100.00% $ 1,707,803 100.00% - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Percentage of categories under Assets, Liabilities and Stockholders' Equity are shown as a percentage of average assets. (2) Total net loans means total loans net of loan participations sold, unamortized deferred loan fees and allowance for loan losses. (3) Savings deposits include NOW, money market and savings accounts. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 42 [Line and arrow graphic beside page numbers] You are here CONSOLIDATED STATEMENTS OF CONDITION
As of December 31, ------------------------------ (in thousands, except share and per share data) 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 65,687 $ 59,081 Federal funds sold and securities purchased under agreements to resell 19,000 5,000 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 84,687 64,081 Securities available-for-sale (amortized costs of $179,454 in 2000 and $162,728 in 1999) 183,409 160,991 Securities held-to-maturity (estimated fair values of $388,656 in 2000 and $416,827 in 1999) 387,200 426,332 Loans (net of allowance for loan losses of $21,967 in 2000 and $19,502 in 1999 ) 1,437,307 1,245,585 Other real estate owned, net 5,174 4,337 Investments in real estate, net 17,348 16,987 Premises and equipment, net 29,723 25,299 Customers' liability on acceptance 20,355 13,721 Accrued interest receivable 15,633 13,150 Goodwill 9,744 10,559 Other assets 16,254 14,882 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 2,206,834 $ 1,995,924 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand deposits $ 221,805 $ 195,140 Interest bearing accounts NOW accounts 125,647 121,394 Money market deposits 119,805 97,821 Savings deposits 231,761 236,764 Time deposits under $100 379,809 362,553 Time deposits of $100 or more 797,620 708,064 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 1,876,447 1,721,736 - --------------------------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 68,173 46,990 Advances from Federal Home Loan Bank 10,000 30,000 Acceptances outstanding 20,355 13,721 Other liabilities 17,072 4,368 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,992,047 1,816,815 - --------------------------------------------------------------------------------------------------------------------------- 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, 9,074,365 and 9,033,583 shares issued and outstanding in 2000 and 1999, respectively 91 90 Additional paid-in-capital 66,275 64,529 Accumulated other comprehensive income (loss) 2,303 (1,006) Retained earnings 146,118 115,496 - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 214,787 179,109 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,206,834 $ 1,995,924 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 43
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Year ended December 31, ------------------------------------------------- (in thousands, except share and per share data) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on loans $ 126,337 $ 93,780 $ 82,866 Interest on securities available-for-sale 13,473 10,551 13,494 Interest on securities held-to-maturity 24,017 26,821 22,966 Interest on Federal funds sold and securities purchased under agreements to resell 686 1,881 3,950 Interest on deposits with banks 40 13 33 - --------------------------------------------------------------------------------------------------------------------------- Total interest income 164,553 133,046 123,309 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Time deposits of $100 or more 41,431 32,724 30,691 Other deposits 26,514 20,438 23,316 Other borrowed funds 6,211 4,246 3,218 - --------------------------------------------------------------------------------------------------------------------------- Total interest expense 74,156 57,408 57,225 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Net interest income before provision for loan losses 90,397 75,638 66,084 Provision for loan losses 4,200 4,200 3,600 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 86,197 71,438 62,484 - --------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Securities gains 1,085 (3) 43 Letter of credit commissions 2,439 2,179 1,944 Service charges 4,558 3,635 3,915 Other operating income 4,674 3,044 2,234 - --------------------------------------------------------------------------------------------------------------------------- Total non-interest income 12,756 8,855 8,136 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 22,735 19,150 18,024 Occupancy expense 3,242 2,521 2,546 Computer and equipment expense 2,773 2,573 2,412 Professional services expense 3,625 3,165 3,234 FDIC and State assessments 462 409 393 Marketing expense 1,172 1,036 1,028 Real estate operations, net (185) (1,416) (1,125) Operations of investments in real estate 683 (74) 63 Other operating expense 3,997 2,918 3,490 - --------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 38,504 30,282 30,065 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 60,449 50,011 40,555 Income tax expense 21,862 19,720 15,976 - --------------------------------------------------------------------------------------------------------------------------- Net Income 38,587 30,291 24,579 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year 3,309 (2,229) 810 Less: reclassification adjustment for realized gains (losses) on securities included in net income -- (34) (8) - --------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss), net of tax 3,309 (2,195) 818 - --------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 41,896 $ 28,096 $ 25,397 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Net income per common share Basic $ 4.26 $ 3.36 $ 2.74 Diluted $ 4.25 $ 3.36 $ 2.74 - --------------------------------------------------------------------------------------------------------------------------- Basic average common shares outstanding 9,056,751 9,013,428 8,967,188 Diluted average common shares outstanding 9,073,885 9,017,760 8,968,393 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 44 [Line and arrow graphic beside page numbers] You are here CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, Common Stock Accumulated 2000, 1999 and 1998 -------------------------- Additional Other Total (in thousands, except share Number Paid-in- Comprehensive Retained Stockholders' and per share amounts) of Shares Amount Capital Income (Loss) Earnings Equity - ---------------------------------------------------------------------------------------------------------------------------- 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 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 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Issuances of common stock-- Dividend Reinvestment Plan 39,330 1 1,690 -- -- 1,691 Stock options exercised 1,452 -- 56 56 Cash dividends of $0.880 per share -- -- -- -- (7,965) (7,965) Change in unrealized holding gain on securities available-for-sale, net of tax -- -- -- 3,309 -- 3,309 - ------------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- -- 38,587 38,587 - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 9,074,365 $ 91 $ 66,275 $ 2,303 $ 146,118 $ 214,787 - ---------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 45
CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, ------------------------------------------------ (dollars in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 38,587 $ 30,291 $ 24,579 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,200 4,200 3,600 Provision for losses on other real estate owned 71 339 195 Benefit for deferred taxes 637 (1,472) (10) Depreciation 1,500 1,331 1,241 Net gain on sale of other real estate owned (263) (1,549) (999) Gain on sale of investments in real estate -- (394) -- Gain (loss) on disposal of premises and equipment -- -- (2) (Gain) loss on sales and calls of securities (1,085) 3 (43) Amortization of investment security premiums, net (926) 557 286 Amortization of goodwill 815 681 940 Increase (decrease) in deferred loan fees, net 544 (38) (155) (Increase) decrease in accrued interest receivable (2,483) (1,154) 251 (Increase) decrease in other assets, net (1,372) (2,480) 3,443 Increase (decrease) in other liabilities 9,666 (3,012) 2,158 - --------------------------------------------------------------------------------------------------------------------------- Total adjustments 11,304 (2,988) 10,905 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 49,891 27,303 35,484 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities available-for-sale (660,275) (1,090,732) (1,025,244) Proceeds from maturity and call of investment securities available-for-sale 678,638 1,160,919 1,006,491 Proceeds from sale of investment securities available-for-sale 21,443 -- 6,429 Purchase of mortgage-backed securities available-for-sale (949) (911) (34,968) Proceeds from repayments and sale of mortgage-backed securities available-for-sale 6,955 9,906 25,492 Purchase of investment securities held-to-maturity (47,824) (45,255) (82,268) Proceeds from maturity and call of investment securities held-to-maturity 17,519 1,385 12,025 Purchase of mortgage-backed securities held-to-maturity (29,604) (38,157) (73,787) Proceeds from repayment of mortgage-backed securities held-to-maturity 38,802 70,851 74,817 Net increase in loans (200,298) (282,413) (120,021) Purchase of premises and equipment (5,924) (803) (1,866) Proceeds from sale of equipment -- -- 2 Proceeds from sale of other real estate owned 3,187 4,730 4,470 Proceeds from sale of investments in real estate -- 1,026 -- Net (increase) decrease in investments in real estate (361) (16,162) 197 Cash paid for the acquisition of Golden City -- (5,511) -- - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (178,961) (231,127) (208,231) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, money market and savings deposits 47,899 36,835 21,757 Net increase in time deposits 106,812 124,499 89,524 Net increase (decrease) in securities sold under agreements to repurchase 21,183 30,554 (6,983) Increase (decrease) in borrowing from Federal Home Loan Bank (20,000) -- 30,000 Cash dividends (7,965) (7,248) (6,272) Proceeds from shares issued to Dividend Reinvestment Plan 1,691 1,600 1,649 Proceeds from exercise of stock options 56 9 -- - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 149,676 186,249 129,675 - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 20,606 (17,575) (43,072) Cash and cash equivalents, beginning of the year 64,081 81,656 124,728 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of the year $ 84,687 $ 64,081 $ 81,656 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 72,644 $ 56,857 $ 57,232 Income taxes $ 17,411 $ 20,350 $ 15,413 Non-cash investing activities: Transfer to investment securities available-for-sale within 90 days of maturity $ 59,858 $ 2,515 $ 1,340 Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax $ 3,309 $ (2,195) $ 819 Transfers to other real estate owned $ 5,347 $ 886 $ 4,334 Loans to facilitate the sale of other real estate owned $ 1,515 $ 3,483 $ 3,483 Acquisition: The Company purchased certain assets and assumed certain 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 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 46 [Line and arrow graphic beside page numbers] You are here 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 accounting principles generally accepted in the United States of America ("GAAP") 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 GAAP. 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 2000 presentation. The following are descriptions of the more significant of these policies. ORGANIZATION AND BACKGROUND The business activities of Bancorp consist primarily of the operations of the Bank and its wholly-owned subsidiaries, Cathay Investment Company ("CIC") and Cathay Securities Fund, Inc. 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, internet banking, global investment services, 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 net income. The new cost basis is not changed for subsequent recoveries in fair value. 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 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED probability of recovery in full, as determined by management. When loans are placed on a nonaccrual status, previously accrued but unpaid interest is reversed and charged against current period income, and interest is subsequently recognized only to the extent cash is received. Interest collected on nonaccrual loans is applied to the outstanding principal balance unless the loan is returned to accrual status. In order to be returned to accrual status, all past due payments must be received and the loan must be paying in accordance with its payment terms. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. If a loan is placed on nonaccrual status, the amortization of the loan fees and the accretion of discounts discontinue until such time when the loan is reverted back to accruing status. ALLOWANCE FOR LOAN LOSSES Management believes the allowance for loan losses is being maintained at a level considered adequate to provide for estimable and probable losses. Additions to the allowance for loan losses are made monthly by charges to operating expense in the form of a provision for loan losses. All loans judged to be uncollectible are charged against the allowance while any recoveries are credited to the allowance. Management monitors changing economic conditions, the loan mix by category, the industry segregation and geographic distribution of the portfolio and the type of borrowers in determining the adequacy of the allowance for loan losses. Management also closely reviews its past, present and expected overall net loan losses in comparison to the existing level of the allowance. In addition, the Bank's regulators, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additions to its allowance for loan losses based on their judgements of the information available to them at the time of their examination. IMPAIRED LOANS A loan is considered impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e. both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to the provision for loan losses. The Bank stratifies its loan portfolio by size and treats smaller performing loans with an outstanding balance less than the Bank's defined criteria as a homogenous portfolio. For loans with a balance in excess of $750,000, the Bank conducts a periodic review of each loan in order to test for impairment. The Bank recognizes interest income on impaired loans based on its existing method of recognizing interest income on nonaccrual loans. LETTER OF CREDIT FEES Issuance and commitment fees received for the issuance of commercial or standby letters of credit are recognized over the term of the instruments. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed on the straight-line method based on the following estimated useful lives of the assets:
Type Estimated Useful Life - ----------------------------------------------------------------------------------------------- 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
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. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 48 [Line and arrow graphic beside page numbers] You are here OTHER REAL ESTATE OWNED Real estate acquired in the settlement of loans is initially recorded and, subsequently is carried at 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. Gains on sales are recognized when certain criteria relating to the buyer's initial and continuing investment in the property are met. INVESTMENTS IN REAL ESTATE At December 31, 2000, 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 partnership interests are accounted for utilizing the equity method of accounting. Costs directly related to the development or the improvement of real estate are capitalized. 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. STOCK-BASED COMPENSATION The Company applies the intrinsic value method to account for stock-based compensation whereby expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pro forma net income and pro forma net income per share disclosures for employee stock option grants are based on the recognition as expense, over the vesting period, of the fair value on the date of grant of all stock-based awards. DERIVATIVE FINANCIAL INSTRUMENTS For those interest rate instruments that alter interest rate characteristics of assets or liabilities, the net differential to be paid or received on the instrument is treated as an adjustment to the yield on the underlying assets or liabilities (the accrual method). To qualify for the accrual method, the interest rate instrument must be designated to specific assets or liabilities or pools of assets or liabilities, and must be effective at altering the interest rate characteristics of the related assets or liabilities. Interest rate instruments that do not qualify for the accrual method, are recorded at fair value, with gains and losses recorded in earnings. 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 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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") are 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. 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. SEGMENT 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 Statement of Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivative Instruments and Hedging Activities" is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. 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." The impact of adopting SFAS No. 133 on January 1, 2001 did not have a material impact on the Company. 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 Commercial Bank ("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 allowed 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 was adjusted in accordance with the settlement schedule. 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. The unaudited pro forma combined summary of operations is presented as if the merger had been effective January 1, 1999. This information combines the historical results of the Company and Golden City after giving effect to amortization of purchase accounting adjustments. The unaudited Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 50 [Line and arrow graphic beside page numbers] You are here pro forma combined summary of operations is based on the Company's historical results and those 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 year presented.
(Unaudited) Year ended December 31, ---------------- (in thousands, except per share data) 1999 - ------------------------------------------------------------------------------- Net interest income before provision for loan losses $ 75,865 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Net income $ 30,040 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Basic and diluted net income per common share $ 3.33 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
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 were $2,500,000 for 2000 and $2,788,000 for 1999. Securities purchased under agreements to resell are collateralized by U.S. agencies, asset-backed, corporate bond, and Collateralized Mortgage Obligations securities at December 31, 2000 and 1999 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.
(in thousands) 2000 1999 - ------------------------------------------------------------------------------------- Balance, December 31 $ 19,000 $ 3,000 Weighted average interest rate, December 31 6.18% 4.50% Average amount outstanding during the year $ 11,053 $ 36,741 Weighted average interest rate for the year 6.21% 5.06% Maximum amount outstanding at any month end $ 19,500 $ 80,000
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 $686,000 for 2000, $1,881,000 for 1999 and $3,950,000 for 1998. 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, 2000 and 1999:
Gross Gross Amortized Unrealized Unrealized Fair 2000 (in thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------- U.S. government agencies $ 75,187 $ 3,130 $ -- $ 78,317 State and municipal securities 1,275 2 -- 1,277 Mortgage-backed securities 19,001 71 61 19,011 Asset-backed securities 10,452 -- 82 10,370 Federal Home Loan Bank stock 5,613 -- -- 5,613 Equity securities 8,460 9 18 8,451 Corporate bonds 59,466 1,119 215 60,370 - --------------------------------------------------------------------------------------------------------------------------- Total $ 179,454 $ 4,331 $ 376 $ 183,409 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Gross Gross Amortized Unrealized Unrealized Fair 1999 (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------- 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 22,758 1 302 22,457 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 - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------
The amortized cost and fair value of securities available-for-sale except for mortgage-backed securities and collateralized mortgage obligations at December 31, 2000, 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.
- ------------------------------------------------------------------------------------------------------------------ Amortized Fair Cost Value - ------------------------------------------------------------------------------------------------------------------ Due in one year or less(1) $ 27,331 $ 27,300 Due after one year through five years 57,649 58,771 Due after five years through ten years 75,474 78,328 Mortgage-backed securities and collateralized mortgage obligations 19,000 19,010 - ------------------------------------------------------------------------------------------------------------------ Total $ 179,454 $ 183,409 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
(1) Equity securities are reported in this category. Proceeds from sales and repayments of securities available-for-sale were $6,955,000 during 2000 and $9,906,000 during 1999. Proceeds from maturities and calls of securities available-for-sale were $678,638,000 during 2000 and $1,160,919,000 during 1999. There were no gains realized in 2000 and 1999. Gross realized gains of $59,000 were realized in 1998. The Company realized no losses in 2000. Gross realized losses of $34,000 was realized for 2000 and $19,000 for, 1999. 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, 2000 and 1999:
- ------------------------------------------------------------------------------------------------------------------ Gross Gross Estimated Carrying Unrealized Unrealized Fair 2000 (in thousands) Value Gains Losses Value - ------------------------------------------------------------------------------------------------------------------ U.S. government agencies $ 64,689 $ 586 $ 262 $ 65,013 State and municipal securities 68,820 1,567 422 69,965 Mortgage-backed securities 184,188 1,564 756 184,996 Asset-backed securities 13,156 -- 80 13,076 Corporate bonds 56,347 159 900 55,606 - ------------------------------------------------------------------------------------------------------------------ Total $ 387,200 $ 3,876 $ 2,420 $ 388,656 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 52 [Line and arrow graphic beside page numbers] You are here
Gross Gross Estimated Carrying Unrealized Unrealized Fair 1999 (in thousands) Value Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- 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 196,679 56 3,600 193,135 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 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 2000, 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.
Carrying Estimated Value Fair Value - ------------------------------------------------------------------------------------------------------------------ Due in one year or less $ 6,313 $ 6,339 Due after one year through five years 118,966 118,517 Due after five years through ten years 43,853 45,020 Due after ten years 33,880 33,784 Mortgage-backed securities and collateralized mortgage obligations 184,188 184,996 - ------------------------------------------------------------------------------------------------------------------ Total $ 387,200 $ 388,656 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
Proceeds from the maturities and calls of securities held-to-maturity were $17,519,000 during 2000 and $1,385,000 during 1999. The Company realized gross realized gains of less than $1000 in 2000, $31,000 in 1999 and $3,000 in 1998. No losses were realized for 2000, 1999 and 1998. Securities having a carrying value of $209,537,000 at December 31, 2000 and $128,904,000 at December 31, 1999 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, New York and Houston. 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, 2000 and 1999 were as follows:
(in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Commercial loans $ 442,181 $ 395,138 Residential mortgage loans 186,926 181,131 Commercial mortgage loans 630,662 577,541 Equity lines 33,794 26,437 Real estate construction loans 142,048 62,516 Installment loans 27,329 25,498 Other loans 473 419 - ------------------------------------------------------------------------------------------------------------------- Gross loans 1,463,413 1,268,680 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Less Unamortized deferred loan fees 4,139 3,593 Allowance for loan losses 21,967 19,502 - ------------------------------------------------------------------------------------------------------------------- Net loans $1,437,307 $ 1,245,585 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 53 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 1998. As of December 31, 2000, the Company had $6,151,000 of these loans in its servicing portfolio. There were no loans held for sale as of December 31, 2000 and 1999. The Company pledged approximately $76,463,000 of its residential mortgage loans as of December 31, 2000 and $88,763,000 as of December 31, 1999 to secure a line of credit with the Federal Home Loan Bank. An analysis of the activity in the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 is as follows:
(in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 19,502 $ 15,970 $ 15,379 Loans charged-off (1,905) (1,731) (3,519) Recoveries on loans previously charged-off 170 1,063 510 Provision for loan losses 4,200 4,200 3,600 - ------------------------------------------------------------------------------------------------------------------- Balance, end of year $ 21,967 $ 19,502 $ 15,970 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
The Company had identified impaired loans with a recorded investment of approximately $27,818,000 as of December 31, 2000 and $26,279,000 as of December 31, 1999. The average balances of impaired loans were $29,516,000 for the year 2000, $26,707,000 for the year 1999 and $21,713,000 for the year 1998, and interest collected on impaired loans totaled $2,120,000 in 2000, $2,047,000 in 1999 and $2,080,000 in 1998. 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:
Recorded Allocated 2000 (in thousands) Investment Allowance Net Balance - ------------------------------------------------------------------------------------------------------------------ Commercial $ 13,868 $ 3,682 $ 10,186 Commercial mortgage 13,208 1,881 11,327 Other 742 133 609 - ------------------------------------------------------------------------------------------------------------------ Total $ 27,818 $ 5,696 $ 22,122 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Recorded Allocated 1999 (in thousands) Investment Allowance Net Balance - ------------------------------------------------------------------------------------------------------------------ Commercial $ 12,686 $ 1,831 $ 10,855 Commercial mortgage 13,412 1,912 11,500 Other 181 181 -- - ------------------------------------------------------------------------------------------------------------------ Total $ 26,279 $ 3,924 $ 22,355 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
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. In management's opinion, these transactions did not involve more than normal credit risk or present other unfavorable features. All loans to Related Parties were current as of December 31, 2000. An analysis of the activity with respect to loans to Related Parties is as follows:
(in thousands) - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 $ 15,904 Additional loans made 918 Payments received (4,710) - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 12,112 Additional loans made 1,036 Payments received (249) - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 $ 12,899 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 54 [Line and arrow graphic beside page numbers] You are here The following is a summary of nonaccrual loans and troubled debt restructurings as of December 31, 2000, 1999 and 1998 and the related net interest foregone for the years then ended:
(in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Nonaccrual loans $ 14,696 $ 13,696 $ 13,090 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Contractual interest due $ 1,408 $ 1,396 $ 1,395 Interest recognized 627 234 112 - ------------------------------------------------------------------------------------------------------------------- Net interest foregone $ 781 $ 1,162 $ 1,283 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Troubled debt restructurings $ 4,531 $ 4,581 $ 4,642 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Contractual interest due $ 422 $ 429 $ 421 Interest recognized 407 414 412 - ------------------------------------------------------------------------------------------------------------------- Net interest foregone $ 15 $ 15 $ 9 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
As of December 31, 2000, 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, 2000 was $5,174,000 and December 31, 1999 was $4,337,000. The valuation allowance was $131,000 at December 31, 2000 and $614,000 at December 31, 1999. The following table presents the components of the valuation allowance balance at December 31, 2000, 1999 and 1998. The following table presents the components of other real estate owned expense (income) for the year-ended:
(in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Operating expense (income) $ 7 $ (206) $ (321) Provision for losses 71 339 195 Net gain on disposal (263) (1,549) (999) - ------------------------------------------------------------------------------------------------------------------- Real estate operations, net $ (185) $ (1,416) $ (1,125) - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 2000, 1999, and 1998 is as follows:
(in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 614 $ 494 $ 1,081 Provision for losses 71 339 195 Charge-offs on disposal (554) (219) (782) - ------------------------------------------------------------------------------------------------------------------- Balance, end of year $ 131 $ 614 $ 494 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED - -------------------------------------------------------------------------------- 7. INVESTMENTS IN REAL ESTATE - ----------------------------- The Company's investments in real estate were $17,348,000 as of December 31, 2000 and $16,987,000 as of December 31, 1999 consisted of four investments in limited partnerships formed for the purpose of investing in low income housing projects, qualified for Federal low income housing tax credits. The limited partnerships are 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. In 2000, the Company contributed approximately $1,134,000 to Wilshire Courtyard, the senior housing construction project. The following table presents the details of the four projects as of December 31, 2000 and 1999:
Percentage of Acquisition December 31, ----------------- (in thousands) Ownership Date 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Las Brisas 49.50% Dec 1993 $ 189 $ 209 Los Robles 99.00% Aug 1995 393 431 California Tax Credit Funds 36.00% Mar 1999 14,127 14,841 Wilshire Courtyard 99.90% May 1999 2,639 1,506 - -------------------------------------------------------------------------------------------------------------------- $ 17,348 $ 16,987 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
The Company's 99.0% and 99.90% interest in the Los Robles and Wilshire Courtyard limited partnerships were not consolidated as of December 31, 2000 and 1999 because the Company did not have ability to exercise significant influence over the operation of the partnerships. The Company's investments are accounted for utilizing the equity method of accounting. The Company recognized a net loss of approximately $684,000 in 2000, $334,000 in 1999 and $158,000 in 1998 from the partnerships' operations. The Company recognized a gain of $394,000 from the sale of a strip mall in 1999, and a net gain of $409,000 in 1999 and $95,000 in 1998 from the operations. 8. PREMISES AND EQUIPMENT - --------------------------- Premises and equipment consisted of the following at December 31, 2000 and 1999:
(in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Land and land improvements $ 11,800 $ 11,495 Building and building improvements 17,525 13,623 Furniture, fixtures and equipment 14,169 13,155 Other 2,199 2,193 Construction in process 716 292 - ------------------------------------------------------------------------------------------------------------------- 46,409 40,758 Less: Accumulated depreciation 16,686 15,459 - ------------------------------------------------------------------------------------------------------------------- Premises and equipment, net $ 29,723 $ 25,299 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
The amount of depreciation included in operating expense was $1,500,000 in 2000, $1,330,732 in 1999 and $1,241,354 in 1998. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 56 [Line and arrow graphic beside page numbers] You are here 9. BORROWINGS - ------------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASEThe underlying collateral pledged for the repurchase agreements consists of U.S. government agency and mortgage-backed securities with a carrying value of $49,369,000 and a fair value of $50,196,000 as of December 31, 2000. Pledged collateral is maintained at a custodian outside the control of the Company. These borrowings generally mature in less than 30 days. The table below provides comparative data for securities sold under agreements to repurchase.
December 31, -------------------------------------- (dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Average amount outstanding(1) $ 70,701 $ 55,519 $ 53,285 Highest month-end balances(2) 110,145 79,185 55,185 Year end balance 68,173 46,990 16,436 Rate at year-end 6.09% 5.80% 4.53% Weighted average interest rate for the year 6.25% 5.73% 5.98% - --------------------------------------------------------------------------------------------------------------------
(1) Average balances were computed using daily averages. (2) Highest month-end balances were at October 2000, February 1999 and November 1998, respectively. ADVANCES FROM THE FEDERAL HOME LOAN BANK As of December 31, 2000, advance with the Federal Home Loan Bank totaled $10 million at a fixed interest rate of 4.90%. The advance is non-callable and will mature in 2003. 10. INCOME TAXES For the years ended December 31, 2000, 1999 and 1998, the current and deferred amounts of the income tax expense are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Current Federal $ 19,321 $ 15,377 $ 11,697 State 1,904 5,815 4,289 - -------------------------------------------------------------------------------------------------------------------- 21,225 21,192 15,986 ==================================================================================================================== Deferred Federal 479 (1,159) (105) State 158 (313) 95 - -------------------------------------------------------------------------------------------------------------------- 637 (1,472) (10) - -------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 21,862 $ 19,720 $ 15,976 ====================================================================================================================
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED - ------------------------------------------------------------------------------- Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities give rise to deferred taxes. Deferred tax assets and liabilities for the years ended December 31, 2000 and 1999 were as follows:
(in thousands) 2000 1999 - -------------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Difference between provisions for loan losses for tax and financial reporting purposes $ 8,508 $ 9,531 Difference between provisions for other real estate owned losses for tax and financial reporting purposes 55 -- State income tax 307 1,855 Unrealized holding loss on securities available-for-sale, net -- 730 - -------------------------------------------------------------------------------------------------------------------- Gross deferred tax assets 8,870 12,116 - -------------------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Difference between provisions for other real estate owned losses for tax and financial reporting purposes $ -- $ (412) Use of accelerated depreciation for tax purposes (1,272) (1,534) Deferred loan fees (2) (7) FHLB stock dividend (1,170) (1,088) Acquisition of FPSB -- (485) Unrealized holding gain on securities available-for-sale, net (1,670) -- Other, net (855) (1,652) - -------------------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities (4,969) (5,178) - -------------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 3,901 6,938 ====================================================================================================================
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 1999 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, 2000 and 1999 were net deferred tax assets of $3,901,011 and $6,938,370, respectively. Other assets as of December 31, 2000 included a current income tax receivable of $1,675,244. Other liabilities as of December 31, 2000 and 1999 include a current income tax payable of $4,429,275 and $1,059,867, respectively. Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years indicated as follows:
(in thousands) 2000 1999 1998 -------------------------------------------------------------------- Tax provision at Federal statutory rate $ 21,157 35.00% $ 17,504 35.00% $ 14,194 35.00% State income taxes, net of Federal income tax benefit 1,340 2.22 3,576 7.15 2,850 7.03 Interest on obligations of state and political subdivisions, which are exempt from Federal taxation (1,240) (2.05) (1,081) (2.16) (927) (2.29) Low income housing tax credits (947) (1.57) (319) (0.64) (319) (0.79) Non-deductible expense-- Amortization of goodwill 231 0.38 240 0.48 239 0.59 Other, net 1,321 2.19 (200) (0.40) (61) (0.15) - ------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 21,862 36.17% $ 19,720 39.43% $ 15,976 39.39% - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 58 [Line and arrow graphic beside page numbers] You are here 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, 2000 is restricted to approximately $71,973,000 under this regulation. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. The Federal Deposit Insurance Corporation has established five capital ratio categories: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized." A well capitalized institution must have a Tier 1 capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. At December 31, 2000, the Bank was in compliance with the minimum capital requirements and is considered well capitalized. The Company and the Bank's capital and leverage ratios as of December 31, 2000 and 1999 are presented in the tables below:
Company Bank Company Bank As of December 31, 2000 As of December 31, 2000 As of December 31, 1999 As of December 31, 1999 ------------------------------------------------------------------------------------------------ (dollars in thousands) Balance Percentage Balance Percentage Balance Percentage Balance Percentage - --------------------------------------------------------------------------------------------------------------------------- Tier I Capital (to risk-weighted assets)$ 202,741(1) 11.05% $ 194,694(1) 10.64% $ 169,556(2) 10.50% $ 163,093(2) 10.10% Tier I Capital minimum requirement 73,392 4.00 73,206 4.00 64,588 4.00 64,588 4.00 - --------------------------------------------------------------------------------------------------------------------------- Excess $ 129,349 7.05% $ 121,488 6.64% $ 104,968 6.50% $ 98,505 6.10% =========================================================================================================================== Total Capital (to risk-weighted assets)$ 224,708(1) 12.25% $ 216,661(1) 11.84% $ 189,058(2) 11.71% $ 182,595(2) 11.31% Total Capital minimum requirement 146,784 8.00 146,412 8.00 129,176 8.00 129,176 8.00 - --------------------------------------------------------------------------------------------------------------------------- Excess $ 77,924 4.25% $ 70,249 3.84% $ 59,882 3.71% $ 53,419 3.31% =========================================================================================================================== Risk-weighted assets $1,834,804 $1,830,161 $1,614,695 $1,614,695 Tier I Capital (to average assets)-- Leverage ratio $ 202,741(1) 9.28% $ 194,694(1) 8.93% $ 169,556(2) 8.93% $ 163,093(2) 8.59% Minimum leverage requirement 87,387 4.00 87,251 4.00 75,974 4.00 75,974 4.00 - --------------------------------------------------------------------------------------------------------------------------- Excess $ 115,354 5.28% $ 107,443 4.93% $ 93,582 4.93% $ 87,119 4.59% =========================================================================================================================== Total average assets $2,184,666(3) $2,181,272(3) $1,899,358(3) $ 1,899,356(3) ===========================================================================================================================
(1) Excluding the unrealized holding gains on securities available-for-sale of $2,303,000 and goodwill of $9,744,000. (2) Excluding the unrealized holding losses on securities available-for-sale of $1,006,000 and goodwill of $10,559,000. (3) Average assets represent average balances for the fourth quarter of 2000 and 1999, respectively. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Board of Directors of Bancorp is authorized to issue preferred stock in one or more series and to fix the voting powers, designations, preferences or other rights of the shares of each such class or series and the qualifications, limitations and restrictions thereon. Any preferred stock issued by Bancorp may rank prior to Bancorp common stock as to dividend rights, liquidation preferences, or both, may have full or limited voting rights, and may be convertible into shares of Bancorp common stock. No preferred stock has been issued as of December 31, 2000. On November 16, 2000, Bancorp's Board of Directors adopted a Rights Agreement between Bancorp and American Stock Transfer and Trust Company, as Rights Agent, and declared a dividend of one preferred share purchase right for each outstanding share of Bancorp common stock. The dividend was payable on January 19, 2001 to stockholders of record at the close of business on the record date, December 20, 2000. Each preferred share purchase right entitles the registered holder to purchase from Bancorp one one-thousandth of a share of Bancorp's series A junior participating preferred stock at a price of $200, subject to adjustment. In general, the rights become exercisable if, after December 20, 2000, a person or group acquires 15% or more of Bancorp's common stock or announces a tender offer for 15% or more of the common stock. The Board of Directors is entitled to redeem the rights at one cent per right at any time before any such person acquires 15% or more of the outstanding common stock. The rights will expire in ten years. The complete terms and conditions of the rights are contained in the Rights Agreement, between Bancorp and the Rights Agent, which was filed as an exhibit to Bancorp's Form 8-A on December 20, 2000. The Rights Agreement is a successor to Bancorp's prior rights agreement, which expired at the close of business on December 20, 2000. The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years indicated.
Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 --------------------------------- --------------------------------- -------------------------------- (in thousands, Per Per Per except share and Income Shares Share Income Shares Share Income Shares Share per share data) (Numerator)(Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 38,587 $ 30,291 $ 24,579 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Basic EPS Income available to stockholders $ 38,587 9,056,751 $ 4.26 $ 30,291 9,013,428 $ 3.36 $ 24,579 8,967,188 $ 2.74 Effect of Dilutive Stock Options 17,134 4,332 1,205 Diluted EPS income available to common stockholders plus assumed conversions conversions $ 38,587 9,073,885 $ 4.25 $ 30,291 9,017,760 $ 3.36 $ 24,579 8,968,393 $ 2.74 ===============================================================================================================================
12. COMMITMENTS AND CONTINGENCIES - ---------------------------------- LITIGATION The Company is involved in various litigation concerning transactions entered into during the normal course of business. Management, after consultation with legal counsel, does not believe that the resolution of such litigation will have a material effect upon its financial condition or results of operations. LENDING In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments included commitments to extend credit in the form of loans or through commercial, standby letters of credit and financial guarantees. Those instru- Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 60 [Line and arrow graphic beside page numbers] You are here ments 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:
(in thousands) 2000 1999 - --------------------------------------------------------------------- Commitments to extend credit $ 619,872 $ 580,727 Standby letters of credit 15,435 11,748 Other letters of credit 44,371 31,866 Financial guarantees -- 20,000 Bill of lading guarantee 20,729 13,924 - --------------------------------------------------------------------- Total $ 700,407 $ 658,265 - --------------------------------------------------------------------- - ---------------------------------------------------------------------
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, 2000, 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 guarantees represent 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 corporation debt. At December 31, 2000 the Company has no outstanding financial guarantees. Letters of credit and bill of lading guarantees 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, 2000, the Company had available credit lines with other financial institutions in the amount of $252,000,000. DERIVATIVE FINANCIAL INSTRUMENTS The Company entered into derivative financial instruments in order to seek to mitigate the risk of interest rate exposures related to its interest earning assets and interest bearing liabilities. The Company entered into a pay fixed interest rate swap agreement with a notional amount of $20.0 million in order to alter interest rate exposures related to the mismatch of assets and liabilities. The difference between amounts receivable and payable under the terms of the interest rate swap were accrued and recognized over the term of the swap as an adjustment to net interest income. The Company entered into a forward rate agreement with a notional amount of $100.0 million that was recorded at fair value, with unrealized gains recorded as securities gains in the accompanying consolidated statements of income and comprehensive income. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED - -------------------------------------------------------------------------------- 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 $2,200,000 for 2000, $1,823,000 for 1999 and $1,751,000 for 1998. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 2000:
(in thousands) Commitments - ------------------------------------------------------------------------- Year ended December 31, 2001 $ 1,476 2002 1,358 2003 1,188 2004 1,016 2005 974 Thereafter 9,306 - ------------------------------------------------------------------------- Total minimum lease payments $ 15,318 =========================================================================
Rental income was $436,596 for 2000, $443,000 for 1999 and $455,000 for 1998. The following table shows future rental payments to be received under operating leases with terms in excess of one year as of December 31, 2000:
(in thousands) Commitments - ------------------------------------------------------------------------- Year ended December 31, 2001 $ 389 2002 353 2003 280 2004 171 2005 24 Thereafter -- - ------------------------------------------------------------------------- Total minimum lease payments to be received $ 1,217 =========================================================================
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. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 62 [Line and arrow graphic beside page numbers] You are here 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. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of commitments to extend credit, standby letters of credit, and financial guarantees written were 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. The fair value of interest rate swap and forward rate agreements 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. 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. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED - --------------------------------------------------------------------------------
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS - ------------------------------------------ As of December 31, 2000 As of December 31, 1999 ---------------------------- --------------------------- (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value - ------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks $ 65,687 $ 65,687 $ 59,081 $ 59,081 Federal funds sold and securities purchased under agreements to resell 19,000 19,000 5,000 5,000 Securities available-for-sale 183,409 183,409 160,991 160,991 Securities held-to-maturity 387,200 388,656 426,332 416,827 Loans, net 1,437,307 1,430,956 1,245,585 1,219,336 - ------------------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES Deposits $ 1,876,447 $ 1,881,071 $ 1,721,736 $ 1,710,265 Securities sold under agreements to repurchase 68,173 68,201 46,990 47,649 Advances from Federal Home Loan Bank 10,000 9,951 30,000 29,305 - ------------------------------------------------------------------------------------------------------------------- As of December 31, 2000 As of December 31, 1999 ---------------------------- ---------------------------- (in thousands) Notional Amount Fair Value Notional Amount Fair Value - ------------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Commitments to extend credit $ 619,872 $ (509) $ 580,727 $ (328) Standby letters of credit 15,435 (63) 11,748 (64) Other letters of credit 44,371 (238) 31,866 (193) Financial guarantee -- -- 20,000 35 Bill of lading guarantee 20,729 (125) 13,924 (69) Interest rate swap 20,000 977 -- -- Forward rate agreement 100,000 1,104 -- -- - -------------------------------------------------------------------------------------------------------------------
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. The ESOP purchased 18,755 shares in 2000, 33,163 shares in 1999 and 23,669 shares in 1998 of the Company's stock at an aggregate cost of $812,359 in 2000, $1,162,829 in 1999, and $821,021 in 1998. The shares purchased in 2000 included 7,500 shares bought on the open market and 11,255 shares bought through the Dividend Reinvestment Plan. 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 Company contributed $564,800 in 2000, $537,200 in 1999 and $486,120 in 1998 to the trust which was charged to salaries and employee benefits in the accompanying consolidated statements of income and comprehensive income. In 2000, distribution of benefits to participants totaled 38,769 shares. As of December 31, 2000, the ESOP owned 551,636 shares or 6.08% of the Company's outstanding common stock. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 64 [Line and arrow graphic beside page numbers] You are here 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 three months of service and have attained the age of 21 are eligible to participate. Enrollment dates are on January 1st, April 1st, July 1st and October 1st of each year. Participants may contribute up to 15% of their compensation for the year but not to exceed the dollar limit set by the Internal Revenue Service (IRS). Participants may change their contribution election on the enrollment dates. The Company matches 50% of the participants' contribution up to 4% of their compensation after one year of service. 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 2000, the Company's contribution amounted to $198,119 in 2000, $186,736 in 1999 and $128,150 in 1998. 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. The Company granted nonstatutory stock options to selected bank officers and non-employee directors in September 1999 to purchase a total of 45,000 shares, and in January 2000 to purchase a total of 55,000 shares of the Company's common stock. The exercise price per share of these nonstatutory stock options is 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.
Weighted-Average Shares Exercise Price - --------------------------------------------------------------------------------------- Balance, December 31, 1997 -- $ -- Granted 45,000 33.00 Exercised -- -- Forfeited -- -- Expired -- -- Cancelled -- -- - --------------------------------------------------------------------------------------- Balance, December 31, 1998 45,000 $ 33.00 - --------------------------------------------------------------------------------------- Granted -- -- Exercised (300) 33.00 Forfeited -- -- Expired -- -- Cancelled -- -- - --------------------------------------------------------------------------------------- Balance, December 31, 1999 44,700 $ 33.00 - --------------------------------------------------------------------------------------- Granted 55,000 42.50 Exercised (1,452) 33.00 Forfeited (420) 42.50 Expired -- -- Cancelled -- -- - --------------------------------------------------------------------------------------- Balance, December 31, 2000 97,828 $ 38.30 - ---------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED - ------------------------------------------------------------------------------- The following table shows stock options outstanding and exercisable as of December 31, 2000, the corresponding exercise price and the weighted average contractual life remaining.
Outstanding ---------------------------- Weighted-Average Exercise Remaining Contractual Exercisable Price Shares Life (in Years) Shares - ---------------------------------------------------------------------------------------- $ 33.00 43,248 7.8 16,348 42.50 54,580 9.1 -- - ---------------------------------------------------------------------------------------- 97,828 8.5 16,348 - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
No compensation cost has been recognized for its stock option plans in the consolidated financial statements. The Company estimates the fair value of options granted during 2000 and 1998 using the Black-Scholes option-pricing model with following assumptions: (i) an expected life of the option of 4 years, (ii) a stock price volatility of 33.88% in 2000 and 33.50% in 1998 based on daily market prices for the preceding four-year period, (iii) an expected dividend yield of 2.1% per share per annum in 2000, and 1.9% per share per annum in 1998, and (iv) a risk-free interest rate of 5.1% in 2000 and 4.5% in 1998. The fair value of the options was calculated to be $12.05 per share for options granted in 2000 at the date of grant and $9.21 per share for options granted in 1998 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 2000, 1999 and 1998 would have been reduced to the pro forma amounts indicated below.
(in thousands, except per share data) 2000 1999 1998 - ------------------------------------------------------------------------------------ Net income As reported $ 38,587 $ 30,291 24,579 Pro forma 38,457 30,237 24,564 Basic net income per share As reported 4.26 3.36 2.74 Pro forma 4.25 3.35 2.74 Diluted net income per share As reported 4.25 3.36 2.74 Pro forma 4.24 3.35 2.74 - -------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 66 [Line and arrow graphic beside page numbers] You are here 16. CONDENSED FINANCIAL INFORMATION OF CATHAY BANCORP, INC. (UNAUDITED) - -------------------------------------------------------------------------- The condensed financial information of Cathay Bancorp, Inc. as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 were as follows: STATEMENTS OF CONDITION - -----------------------
Year ended December 31, ------------------------- (in thousands, except share and per share data) 2000 1999 - -------------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 4,701 $ 6,504 Investment securities 3,409 -- Investment in subsidiary--Cathay Bank 206,740 172,646 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 214,850 $ 179,150 ==================================================================================================================== LIABILITIES Accrued expenses $ 63 $ 41 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 63 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, 9,074,365 and 9,033,583 shares issued and outstanding in 2000 and 1999, respectively 91 90 Additional paid-in-capital 66,275 64,529 Accumulated other comprehensive income (loss) 2,303 (1,006) Retained earnings 146,118 115,496 - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 214,787 179,109 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 214,850 $ 179,150 ====================================================================================================================
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - ---------------------------------------------
Year ended December 31, ------------------------- (in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Cash dividends from Cathay Bank $ 7,965 $ 7,248 $ 6,272 Amortization of organizational costs and other expenses (280) (321) (268) - -------------------------------------------------------------------------------------------------------------------- Income before income tax expense 7,685 6,927 6,004 Income tax benefit 118 136 113 - -------------------------------------------------------------------------------------------------------------------- Income before undistributed earnings of subsidiary 7,803 7,063 6,117 - -------------------------------------------------------------------------------------------------------------------- Equity in undistributed earnings of subsidiary 30,784 23,228 18,462 - -------------------------------------------------------------------------------------------------------------------- Net income 38,587 30,291 24,579 ==================================================================================================================== Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year 3,309 (2,229) 810 Less: reclassification adjustment for realized gains (losses) on securities included in net income -- (34) (8) - -------------------------------------------------------------------------------------------------------------------- Total comprehensive income (loss), net of tax 3,309 (2,195) 818 - -------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 41,896 $ 28,096 $ 25,397 ====================================================================================================================
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED - ------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS - ------------------------
Year ended December 31, --------------------------------------------- (in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 38,587 $ 30,291 $ 24,579 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (30,784) (23,228) (18,462) Increase (decrease) in accrued expenses 22 -- (30) Other -- -- 3 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 7,825 7,063 6,090 =========================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities (3,409) -- -- - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,409) -- -- =========================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 1,746 1,609 1,649 Cash dividends (7,965) (7,248) (6,272) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (6,219) (5,639) (4,623) =========================================================================================================================== Increase in cash and cash equivalents (1,803) 1,424 1,467 Cash and cash equivalents, beginning of year 6,504 5,080 3,613 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 4,701 $ 6,504 $ 5,080 =========================================================================================================================== 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 gains (losses) on securities available-for-sale, net of tax $ 3,309 $ (2,195) $ 818 - ---------------------------------------------------------------------------------------------------------------------------
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 39,330 for $1,690,664 in 2000, 44,523 for $1,600,173 in 1999 and 47,017 for $1,649,426 in 1998. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 68 [Line and arrow graphic beside page numbers] You are here 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - ------------------------------------------------ The following table sets forth selected unaudited quarterly financial data.
Summary of Operations 2000 1999 ------------------------------------------ ------------------------------------------ (in thousands, Fourth Third Second First Fourth Third Second First except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------- Interest income $ 43,834 $ 43,039 $ 40,292 $ 37,388 $ 35,460 $ 33,489 $ 32,538 $ 31,514 Interest expense 20,644 19,557 17,861 16,094 14,985 14,094 14,278 14,006 - ------------------------------------------------------------------------------------------------------------------- Net interest income 23,190 23,482 22,431 21,294 20,475 19,395 18,260 17,508 Provision for loan losses 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 22,140 22,432 21,381 20,244 19,425 18,345 17,210 16,458 Non-interest income 4,466 2,746 2,795 2,749 2,395 2,361 2,181 1,918 Non-interest expense 10,463 9,493 9,296 9,252 7,481 7,643 7,473 7,685 - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense 16,143 15,685 14,880 13,741 14,339 13,063 11,918 10,691 Income tax expense 6,449 4,233 5,793 5,387 5,629 5,170 4,733 4,188 - ------------------------------------------------------------------------------------------------------------------- Net income 9,694 11,452 9,087 8,354 8,710 7,893 7,185 6,503 =================================================================================================================== Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year 2,152 986 336 (165) (899) 231 (659) (875) Less: reclassification adjustment for realized gains (losses) on securities included in net income -- -- -- -- -- 6 19 (32) - -------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss), net of tax 2,152 986 336 (165) (899) 225 (678) (843) Total comprehensive income $ 11,846 $ 12,438 $ 9,423 $ 8,189 $ 7,811 $ 8,118 $ 6,507 $ 5,660 ==================================================================================================================== Basic net income per common share $ 1.07 $ 1.26 $ 1.00 $ 0.92 $ 0.96 $ 0.88 $ 0.80 $ 0.72 Diluted net income per common share $ 1.07 $ 1.26 $ 1.00 $ 0.92 $ 0.96 $ 0.87 $ 0.80 $ 0.72 - --------------------------------------------------------------------------------------------------------------------
Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here [Line and arrow graphic beside page numbers] 69 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. [SIGNATURE] Los Angeles, California January 15, 2001 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 70 [Line and arrow graphic beside page numbers] You are here OFFICES - ------------------------------------------------------------------------------- CORPORATE OFFICE: - ------------------------- 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 BRANCH OFFICES: - ------------------------- CALIFORNIA LOS ANGELES 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 Kenneth Chan ASSISTANT VICE PRESIDENT AND MANAGER MONTEREY PARK 250 South Atlantic Boulevard Monterey Park, CA 91754 Tel: (626) 281-8808 Fax: (626) 281-2956 Frank Chen REGIONAL VICE PRESIDENT AND MANAGER ALHAMBRA 601 North Atlantic Boulevard Alhambra, CA 91801 Tel: (626) 284-6556 Fax: (626) 282-3496 Frank Chen REGIONAL VICE PRESIDENT AND MANAGER HACIENDA HEIGHTS 16025 East Gale Avenue City of Industry, CA 91745 Tel: (626) 333-8533 Fax: (626) 336-4227 Shu Lee REGIONAL VICE PRESIDENT AND MANAGER WESTMINSTER 9121 Bolsa Avenue Westminster, CA 92683 Tel: (714) 890-7118 Fax: (714) 898-9267 Allen Vi ASSISTANT VICE PRESIDENT AND MANAGER SAN JOSE 2010 Tully Road San Jose, CA 95122 Tel: (408) 238-8880 Fax: (408) 238-2302 Edward Wong VICE PRESIDENT AND MANAGER SAN GABRIEL 825 East Valley Boulevard San Gabriel, CA 91776 Tel: (626) 573-1000 Fax: (626) 573-0983 Jack Sun VICE PRESIDENT AND MANAGER TORRANCE 23228 Hawthorne Boulevard Torrance, CA 90505 Tel: (310) 791-8700 Fax: (310) 791-1862 Allen Lin ASSISTANT VICE PRESIDENT AND MANAGER OAKLAND 710 Webster Street Oakland, CA 94607 Tel: (510) 208-3700 Fax: (510) 208-3727 CERRITOS 11355 South Street Cerritos, CA 90701 Tel: (562) 860-7300 Fax: (562) 860-2296 Henry Yoh ASSISTANT VICE PRESIDENT AND MANAGER CITY OF INDUSTRY 1250 South Fullerton Road City of Industry, CA 91748 Tel: (626) 810-1088 Fax: (626) 810-2188 Shu Lee REGIONAL VICE PRESIDENT AND MANAGER CUPERTINO 10480 South De Anza Boulevard Cupertino, CA 95014 Tel: (408) 255-8300 Fax: (408) 255-8373 David Lin VICE PRESIDENT AND MANAGER MILPITAS 1759 North Milpitas Boulevard Milpitas, CA 95035 Tel: (408) 262-0280 Fax: (408) 262-0780 Tony Wen VICE PRESIDENT AND MANAGER IRVINE 15323 Culver Drive Irvine, CA 92714 Tel: (949) 559-7500 Fax: (949) 559-7508 Linda Kuo VICE PRESIDENT AND MANAGER MILLBRAE Millbrae Plaza 1095 El Camino Real Millbrae, CA 94030 Tel: (650) 652-0188 Fax: (650) 652-0180 Stanley Wong VICE PRESIDENT AND MANAGER VALLEY-STONEMAN 43 East Valley Boulevard Alhambra, CA 91801 Tel: (626) 576-7600 Fax: (626) 576-5831 Claudia My Lu VICE PRESIDENT AND MANAGER BERKELEY-RICHMOND 3288 Pierce Street Richmond, CA 94804 Tel: (510) 526-8898 Fax: (510) 526-0639 Sumiko Wu ASSISTANT VICE PRESIDENT AND ASSISTANT MANAGER DIAMOND BAR 1195 South Diamond Bar Boulevard Diamond Bar, CA 91765 Tel: (909) 860-8299 Fax: (909) 861-0920 Shu Lee REGIONAL VICE PRESIDENT AND MANAGER NEW YORK FLUSHING 40-14/16 Main Street Flushing, NY 11354 Tel: (718) 886-5225 Fax: (718) 886-0220 Betty Chou ASSISTANT VICE PRESIDENT AND MANAGER NEW YORK CHINATOWN 45 East Broadway New York, NY 10002 Tel: (212) 732-0200 Fax: (212) 732-7389 Louisa Ting VICE PRESIDENT AND MANAGER TEXAS HOUSTON 10375 Richmond Avenue #1600 Houston, TX 77042 Tel: (713) 278-9599 Fax: (713) 278-9699 Herbert Ng VICE PRESIDENT AND MANAGER OVERSEAS OFFICE: - ------------------------- HONG KONG Room 902-3, 9/F Printing House 6 Duddell Street Central, Hong Kong Tel: (852) 2522-0071 Fax: (852) 2810-1652 Winnie Lau REPRESENTATIVE SUBSIDIARY: - ------------------------- CATHAY INVESTMENT COMPANY 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 George T.M. Ching PRESIDENT TAIWAN C.I.C. Sixth Floor, Suite 3 146 Sung Chiang Road Taipei, Taiwan, R.O.C. Tel: (886) (2) 2537-5057 Fax: (886) (2) 2537-5059 Li Sung REPRESENTATIVE AND MANAGER ADDITIONAL INFORMATION: - ------------------------- MARKET MAKERS The following firms make a market in Cathay Bancorp, Inc. stock: Herzog, Heine, Geduld, Inc. Wedbush Morgan Securities Inc. Hoefer & Arnett, Inc. REGISTRAR AND TRANSFER AGENT American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Tel: (800) 937-5449 CATHAY SERVICE HOTLINE (800) 9 CATHAY / 922-8429 Service available 24 hours throughout California. CATHAY BANK WEB SITE WWW.CATHAYBANK.COM Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 74 [Line and arrow graphic beside page numbers] You are here EX-22.1 4 a2041192zex-22_1.txt EXHIBIT 22.1 EXHIBIT 22.1 Subsidiaries of Bancorp o CATHAY BANK A California Corporation, 100% owned by Cathay Bancorp, Inc. o CATHAY INVESTMENT COMPANY A California Corporation, 100% owned by Cathay Bank o CATHAY SECURITIES FUND, INC. A Maryland Corporation, 100% owned by Cathay Bank EX-23.1 5 a2041192zex-23_1.txt EXHIBIT 23.1 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 15, 2001, relating to the consolidated statements of condition of Cathay Bancorp, Inc. as of December 31, 2000 and 1999, 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, 2000, which report appears in the December 31, 2000, annual report on Form 10-K of Cathay Bancorp, Inc. KPMG LLP Los Angeles, California March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----