-----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, IgTVH36yWp9QcfLTsVofsZDLAqkAPDL2N4yYiqEP+aeI72+mevxEz/m1XGLN7gKe XmA/Cl6ri36PpBYHdIhpPQ== 0000950150-97-000456.txt : 19970401 0000950150-97-000456.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950150-97-000456 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-18630 FILM NUMBER: 97568609 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 FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] 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 ] 2 The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 6, 1997 was $151,345,173 (computed on the basis of $21.00 per share, which was the last sale price of the Company's Common Stock reported by the Nasdaq National Market on March 6, 1997).* The number of shares outstanding of each of the Registrant's classes of Common Stock as of March 6, 1997: Common Stock, $.01 par value - 8,894,891 shares** DOCUMENTS INCORPORATED BY REFERENCE - - Portions of Registrant's definitive proxy materials relating to its 1997 Annual Meeting of Stockholders, as filed, are incorporated by reference into Part III. - - Portions of Registrant's Annual Report to Stockholders for the Year Ended December 31, 1996 (referred to below as "Annual Report to Stockholders") are incorporated by reference into Parts I, II and IV. * Estimated solely for the purposes of this cover page. The market value of shares held by the Company's directors, executive officers and Employee Stock Ownership Plan have been excluded. ** Includes 51,605 rights to receive Common Stock that are held by former holders of Cathay Bank common stock and that have not yet been submitted for exchange into Common Stock of Cathay Bancorp, Inc. 2 3 PART I The statements in this Annual Report on Form 10-K that relate to future plans, events or performance are forward-looking statements. Actual results could differ materially due to a variety of factors, including the factors described in this Annual Report and the other documents the Registrant files from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEMS 1 AND 2. BUSINESS AND PROPERTIES BUSINESS OF THE COMPANY GENERAL The Company is a business corporation organized under the laws of the State of Delaware on March 1, 1990. The only office of the Company, and its principal place of business, is located at the main office of Cathay Bank (the "Bank" or "Cathay Bank") at 777 North Broadway, Los Angeles, California 90012. Its telephone number is (213) 625-4700. The Company was organized for the purpose of becoming the holding company of Cathay Bank, a California-chartered bank. As a result of a reorganization and merger approved by the Bank's stockholders in July 1990 and effective on December 10, 1990 (the "Reorganization"), the Bank is a wholly-owned subsidiary of the Company. The Company's sole current business activity is to hold the stock of Cathay Bank. In the future, the Company may become an operating company or acquire savings institutions, banks or companies engaged in bank-related activities and may engage in or acquire such other businesses or activities as may be permitted by applicable law. On November 18, 1996, the Company acquired First Public Savings Bank, F.S.B. ("First Public"), through the merger of First Public into the company's wholly owned subsidiary, Cathay Bank. In connection with the acquisition of First Public, the Company paid $15.486 million in cash and issued 905,735 shares of its Common Stock valued at $16.114 million, for a total purchase price of $31.6 million. PROPERTY The Company currently neither owns nor leases any real or personal property. The Company uses the premises, equipment and furniture of the Bank without the payment of any rental fees to the Bank. See "Business of the Bank - Premises " and " - Cathay Investment Company" below. COMPETITION The primary business of the Company is the business of the Bank. Therefore, the competitive conditions to be faced by the Company are expected to continue to include those faced by the Bank. See "Business of the Bank -- Competition." In addition, many banks and financial institutions have formed holding companies. It is likely that these holding companies will attempt to acquire other banks, thrift institutions or companies engaged in bank-related activities. Thus, the Company may face increased competition in undertaking acquisitions of such institutions and in operating after any such acquisition. 3 4 EMPLOYEES The Company currently does not employ any persons other than its management, which includes the President and the Chief Financial Officer, due to the limited nature of its activities. If the Company acquires other financial institutions or pursues other lines of business, it may hire additional employees. See "Business of the Bank - Employees" below. BUSINESS OF THE BANK GENERAL Cathay Bank was incorporated under the laws of the State of California on August 22, 1961 and was licensed by the California State Banking Department 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, with the completion of the merger of First Public Savings Bank, F.S.B. ("First Public") in November 1996, the Bank has 19 other branch offices located in the cities of Monterey Park, Alhambra, Hacienda Heights, Westminster, San Gabriel, Torrance, Cerritos, City of Industry, Irvine, Los Angeles and Rowland Heights in Southern California, as well as the cities of San Jose, Oakland, Cupertino, Fremont and Millbrae in Northern California. Cathay Bank's primary market area is defined by its Community Reinvestment Act (CRA) delineation which includes the contiguous areas surrounding each of the Bank's branch offices. It is the Bank's policy to reach out and actively offer services to low and moderate income groups in the delineated branch service areas. Many of the Bank's employees speak both English and one or more Chinese dialects or Vietnamese, and are thus able to serve the Bank's numerous Chinese and Vietnamese-speaking customers, as well as the English-speaking customers. Cathay Bank conducts substantially the same business operations as a typical commercial bank, including the acceptance of checking, savings, and time deposits, and the making of commercial, real estate, personal, home improvement, automobile and other installment and term loans. It also offers letter of credit, wire transfer, spot and forward contracts, traveler's checks, safe deposit, night deposit, social security payment deposit, collection, bank-by-mail, drive-up and walk-up windows, automatic teller machine ("ATM") and other customary bank services to its customers. The operations of the drive-up and walk-up facilities are extended past normal banking hours to accommodate those customers who cannot conduct banking businesses during normal banking hours. Since its inception, the Bank's policy has been to attract business from, and to focus its primary services for the benefit of, individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. The three general areas to which the Bank has directed its lendable assets are: (i) commercial loans and trade financing; (ii) loans secured by real estate; and (iii) installment loans to individuals for automobile, household and other consumer expenditures. SELECTED FINANCIAL DATA Information concerning changes in the Bank's and the Company's financial condition and results of operations is included under the caption "Selected Consolidated Financial Data" on page 13 of the Annual Report to Stockholders and is incorporated herein by reference. 4 5 SECURITIES Information concerning the carrying value and the maturity distribution and yield analysis of the Bank's securities available-for-sale and securities held-to-maturity portfolios is included on pages 20 and 21 of the Annual Report to Stockholders and is incorporated herein by reference. A summary of the book value and fair value of the Bank's securities by contractual maturity is found in Note 4 to the Consolidated Financial Statements on pages 48 through 50 of the Annual Report to Stockholders, and is incorporated herein by reference. LOANS Distribution and maturity of loans. Information concerning loan type and mix, distribution of loans and maturity of loans is included on pages 22 through 24 of the Annual Report to Stockholders and is incorporated herein by reference. Nonperforming Loans and Allowance for Loan Losses. Information concerning past due loans, allowance for loan losses, loans charged-off, loan recoveries and other real estate owned is included on pages 24 through 30 and in Note 5 to the Consolidated Financial Statements on pages 50 through 52 of the Annual Report to Stockholders and is incorporated herein by reference. DEPOSITS Information concerning types of deposit accounts and average deposits and rates is included on pages 30 through 32 of the Annual Report to Stockholders and is incorporated herein by reference. RETURN ON EQUITY AND ASSETS The following table sets forth information concerning the return on assets, return on stockholders' equity, equity to assets ratio and dividend payout ratio for the periods indicated:
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 ------------------------------------------ Return on Average Assets (net income divided by average assets) 1.05% 1.05% 1.06% 0.91% 1.27% Return on Average Equity (net income divided by average equity) 13.06 11.68 11.43 9.82 13.86 Equity as a Percentage of Average Assets 7.87 8.69 9.07 9.18 9.09 Dividend Payout Ratio (1) 36.14 44.12 48.78 58.82 41.35
(1) Computed by using dividends declared per share divided by net income per share. INTEREST RATES AND DIFFERENTIALS Information concerning average interest-earning assets, average interest-bearing liabilities and the yields on the assets and liabilities is included on pages 17 and 18 of the Annual Report to Stockholders and is incorporated herein by reference. ANALYSIS OF CHANGES IN NET INTEREST INCOME An analysis of changes in net interest income due to changes in rate and volume is included on pages 14 through 16 of the Annual Report to Stockholders and is incorporated herein by reference. 5 6 COMMITMENTS AND LINES OF CREDIT Information concerning the Bank's outstanding loan commitments and letters of credit is included in Note 11 to the Consolidated Financial Statements on pages 56 and 57 of the Annual Report to Stockholders and is incorporated herein by reference. CATHAY INVESTMENT COMPANY Cathay Investment Company ("CIC") is a wholly owned subsidiary of Cathay Bank that was formed in 1984 to invest in real property. In 1987, CIC opened a branch office in Taipei, Taiwan to promote Taiwanese real estate investments in Southern California. The office in Taipei was moved to a new location in October 1996 which consists of 1,512 square feet. The lease is for three years from 10/5/96 to 10/4/99 for a monthly rent of approximately $4,100. In addition, CIC established a place of business in Hong Kong in 1988, which is also a representative office of Cathay Bank. The Bank currently leases approximately 580 square feet of space for the Hong Kong representative office as well as CIC's Hong Kong office at a current monthly rent of approximately $3,500 under a renewed lease from 3/1/96 to 2/28/98. All expenses incurred by the Hong Kong office are recorded as expenses for the Bank's representative office. As of December 31, 1996, CIC owned two properties, representing a net equity investment of $2,837,829. Both properties were purchased for investment purposes. The following table sets forth certain information concerning the properties:
Date of Carrying Value Location of Property Purchase Purchase Price at 12/31/96 - -------------------------------------------------------------------------------------------------------------- Harbor Boulevard (1) 1/31/89 $1,665,000 $ 718,623 Garden Grove, California Tustin Village Way (2) Tustin, California 7/17/89 $4,680,000 $2,119,206
- ------------ (1) The Garden Grove property is an 8,200 square foot strip shopping center located on a 27,000 square foot parcel of land. The carrying value of the Garden Grove property was written down by $0, $277,934 and $215,000 in 1996, 1995 and 1994, respectively, to the estimated fair value. The Bank filed an application for consent for subsidiary to continue to engage in activity on February 4, 1994, and received approval from the FDIC on March 8, 1995 to hold the property for an additional five years. (2) The Tustin property is a 38,508 square foot strip shopping center located on a 142,876 square foot parcel of land. The carrying value of the Tustin property was written down by $0, $442,968 and $400,000 in 1996, 1995 and 1994, respectively, to the estimated fair value. In October 1993, the Tustin property was transferred from CIC to the Bank in anticipation of establishing a branch office therein and permission was granted by the California State Banking Department on December 6, 1993. However, the Bank subsequently elected to withdraw its application to the State Banking Department for approval of a branch therein, as it received approval to establish a different branch in a nearby location, which branch was opened for business on November 17, 1994. The Bank filed an application with the FDIC for consent to continue to hold the Tustin property on November 25, 1995, and finalized a plan with the regulators for full divestiture in 1996. (Please refer to "Federal Limits On the Activities and Investments of State-Chartered Banks" on pages 11 and 12 of this report.) 6 7 PREMISES The Bank's main corporate office and headquarters branch is located in the Chinatown district of Los Angeles. The offices are in a modern and spacious three-story structure containing 26,527 square feet and constructed of glass and concrete. The Bank owns both the building and the land upon which the building is situated. The main floor currently has 24 teller stations (including 16 regular tellers, seven commercial tellers, and one Automatic Teller Machine), four pneumatic drive-up teller stations, one walk-up teller station, a vault area and the Bank's operations area. The second floor contains executive offices and the Bank's Board Room. The third floor houses the Bank's corporate lending department. The Bank purchased one of the lots on which its headquarters is located in 1970 from Ralph Buon-Cristiani, a former member of the Bank's Board of Directors, for $242,656. As payment for the lot, the Bank executed a note, secured by a deed of trust on the property in Mr. Buon-Cristiani's favor, under which the Bank must make annual principal payments of not less than $10,000 nor more than $50,000, plus quarterly payment of interest accrued on the unpaid balance at a rate of eight percent (8%) per annum. Management of the Bank believes that this transaction was on terms at least as favorable to the Bank as would have existed in a transaction with an unrelated third party. The note was paid off on April 3, 1995. Parking for approximately 126 automobiles is provided on three lots adjacent to the Bank's building, two of which are owned by the Bank while the third lot is leased under a 55-year term with a 30-year option commencing in January 1987 at a current monthly rent of approximately $12,000. Moreover, the Bank owns properties located in the cities of Monterey Park, Alhambra, Westminster, San Gabriel, Torrance, Cerritos, City of Industry and Cupertino, where certain of its branch offices are located. Those properties were acquired between years 1979 and 1993. In addition to the aforementioned bank-owned properties, the Bank leases certain premises under the following lease terms and conditions: (1) 8,636 square feet of space for administrative offices in a building located near the Bank's main office at a monthly rent of $10,694 under three leases expiring in May 1997; (2) 4,483 square feet of space for the Hacienda Heights office at a monthly rent of $4,483 under a lease from January 1996 to June 1999 with two five-year options; (3) 4,800 square feet of space for the San Jose office under a re-negotiated lease commencing March 1996 for ten years and two months with two five-year options; current rent is $8,640; the Bank has a one-time right to cancel the lease after the fifth year upon the payment of $55,500 in consideration; (4) 5,000 square feet of space for the Oakland office at a monthly rent of $6,000 under a five-year lease beginning in October 1991 which was renewed for five years from September 1996 to September 2001; (5) 2,400 square feet of space for the Fremont office at a monthly rent of $3,000 under a three-year lease beginning in May 1994 with two three-year options; (6) 4,450 square feet of space for the Irvine office at a monthly rent of $6,089 under a 20-year ground lease commencing in July 1989 with two five-year options; (7) 3,441 square feet of space for the Millbrae Office at a monthly rent of $7,002 under a five-year lease beginning in January 1995 with two five-year options; and (8) 580 square feet of space for the Hong Kong representative office as well as CIC's Hong Kong office at a monthly rent of approximately $3,500 under a renewed lease from 3/1/96 to 2/28/98. The leases referred to under (1) above have been entered into between the Bank and T.C. Realty in which Mr. Patrick Lee, a director of Bancorp and the Bank, has an interest. Management believes that these leases are on terms at least as favorable to the Bank as would have existed in a transaction with an unrelated third party. Moreover, with the acquisition of First Public in November 1996, the following leases were added: (1) 2,800 square feet of space for First Public's corporate office under a lease from May 1996 to November 1997 at a monthly rent of $4,667; (2) 1,100 square feet of space for First Public's administrative offices under a lease from February 1996 to June 1997 at a monthly rent of $1,250, which was terminated in March 1997; (3) 8,707 square feet of space for First Public's Chinatown office under a lease from February 1979 to February 1989 with three five-year 7 8 options. First Public has exercised the second option to renew the lease until February 1999. The current monthly rent is $5,017; (4) 3,600 square feet of space for First Public's Monterey Park office under a lease expiring in June 1997 at a monthly rent of $8,845; (5) 1,976 square feet of space for First Public's Alhambra office under a lease from August 1986 to August 1991 which was extended for five years with three five-year options. The current monthly rent is $4,412; (6) 2,000 square feet of space for First Public's San Gabriel office under a lease from February 1991 to February 1996 which was extended for five years with two five-year options. The current monthly rent is $4,091; and (7) 2,550 square feet of space for First Public's Rowland Heights office under a lease from December 1992 to December 1997 with four five-year options. The current monthly rent is $7,378. The Bank currently operates 20 domestic branch offices, one branch office of CIC in Taiwan, and one representative office/CIC's place of business in Hong Kong. Each branch office has loan approval rights subject to the branch manager's authorized lending limits. Activities of the CIC Taiwan office and Hong Kong representative office/place of business are limited to coordinating the transportation of documents to the Bank's main office and performing liaison services. A list of the offices of the Bank and CIC is included on page 68 of the Annual Report to Stockholders and is incorporated herein by reference. As of December 31, 1996, the Bank's investment in premises and equipment totaled $25,771,302. See also Note 8 to the Consolidated Financial Statements on pages 53 and 54 of the Annual Report to Stockholders, which is incorporated herein by reference. EXPANSION Management of the Bank continues to look for opportunities to expand the Bank's branch network by seeking new branch locations and/or by acquiring other financial institutions to diversify the customer base in order to compete for new deposits and loans, and to be able to serve the customers more effectively. COMPETITION The banking business in California, and specifically in the market areas served by Cathay Bank, is highly competitive with respect to both loans and deposits. The Bank competes for deposits principally with other commercial banks, savings and thrift institutions and other financial institutions operating in the Bank's service areas, some of which offer certain services that are not offered directly by the Bank and some of which have substantially greater financial resources than does the Bank. In addition, other entities (both governmental and private industry) seeking to raise capital through the issuance and sale of debt and equity securities provide competition for the Bank in the acquisition of deposits. In seeking to obtain customers for loans, Cathay Bank competes primarily with other commercial and savings banks, as well as other non-bank financial intermediaries, including insurance companies, mortgage companies, credit unions, and other lending institutions. Certain legislation has served to ease regulatory restrictions on certain such institutions, thus increasing their ability to compete with banks such as Cathay Bank. To compete with the other financial institutions in its primary service areas, the Bank relies principally upon local promotional activities, personal contacts by its officers, directors, employees, and stockholders, extended hours, Saturday banking, and specialized services. For customers whose loan demands exceed the Bank's lending limit, the Bank has attempted in the past, and intends in the future, to arrange for such loans on a participation basis with corresponding banks. The Bank also assists customers requiring other services not offered by the Bank to obtain such services from its correspondent banks. 8 9 There are approximately 13 Asian-American banks and two other major financial institutions in the Bank's headquarters branch area, which compete for California Asian-American customers, as well as other customers. In addition, banks from the Pacific Rim countries, such as Taiwan, Hong Kong and China continue to open branches in the Los Angeles area, thus increasing the Bank's competition. EMPLOYEES As of December 31, 1996, the Company and Cathay Bank (including CIC) employed approximately 495 persons, including 103 officers. None of the employees are represented by a union. Management believes that its employee relations are excellent. EXECUTIVE OFFICERS OF THE REGISTRANT See Part III, Item 10 ("Directors and Executive Officers of the Registrant") below for information regarding the executive officers of the Company and Cathay Bank. REGULATION OF THE COMPANY AND THE BANK GENERAL As a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Company's primary regulatory authority is the Board of Governors of the Federal Reserve System (the "Board"). The Company is required by the BHCA to file annual reports of its operations with, and is subject to examination by, the Board. Cathay Bank, as a state-chartered commercial bank, is regulated by the California State Banking Department. The Bank's deposits are insured, up to the legal maximum, by the FDIC, and the Bank is subject to FDIC rules applicable to insured banks. Although not a member of the Federal Reserve System, the Bank is subject to certain Federal Reserve Board rules and regulations by virtue of its FDIC-insured deposits. The regulatory authorities review key operational areas of the Company and the Bank, including asset quality, capital adequacy, liquidity, and management and administrative ability. Applicable law and regulations also limit the business activities in which the Company, the Bank and its subsidiaries may be engaged. (see, e.g. "Interstate Banking" and "Federal Limits on the Activities and Investments of State-chartered Banks" below). In addition to banking regulations, the Company is subject to periodic reporting and other requirements under the Securities Exchange Act of 1934, as amended. To the extent the information in this Section ("Regulation of the Company and the Bank") describes statutory or regulatory provisions, it is qualified in its entirety by reference to such provisions. CAPITAL REQUIREMENTS Among other matters, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required each federal banking regulatory agency to revise its risk-based capital standards and to specify levels at which regulated institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". Information concerning regulations of the risk-based capital 9 10 requirements prescribed by the regulatory authorities is included on page 32 of the Annual Report to Stockholders and is incorporated herein by reference. The Board has adopted percentage minimum leverage ratios for banking organizations (including state member banks and bank holding companies). Currently, the Company is expected to maintain at least a 4 percent minimum leverage ratio depending on interest rate risk exposure, asset quality, liquidity, earnings, expansion plans, growth patterns and other relevant factors. The tables presenting the Company and the Bank's risk-based capital and leverage ratios as of December 31, 1996 are included in Note 10 to the Consolidated Financial Statements on page 56 of the Annual Report to Stockholders, which is incorporated herein by reference.. FDIC IMPROVEMENT ACT OF 1991 In December 1991, the FDICIA was enacted into law. The FDICIA provides for the recapitalization of the Bank Insurance Fund and improved examinations of insured institutions. It prescribes standards for safety and soundness of all insured depository institutions; and requires each federal banking agency and the FDIC to take prompt corrective regulatory action to resolve the problems of insured depository institutions that fall below a certain capital ratio. The FDICIA also, among other things, (1) limits the percentage of interest paid on brokered deposits and limits the use of such deposits to only those institutions that are well-capitalized; (2) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (3) prohibits insured state chartered banks from engaging, as principal, in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (4) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; (5) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution, and (6) restricts capital distributions by institutions that are, or as a result of the distributions will become, undercapitalized. On December 31, 1992, the bank regulatory agencies adopted uniform regulations relating to real estate loans that require institutions to adopt written real estate policies that are consistent with regulatory guidelines. Those guidelines include maximum loan-to-value ratios for various categories of real estate loans. Institutions are permitted to make loans in excess of such ratios if the loans are supported by other credit factors; however, loans that do not conform to the maximum loan-to-value ratios may not, in the aggregate, exceed the institution's risk-based capital and non-conforming loans secured by property other than 1-4 family residential property may not, in the aggregate, exceed 30% of risk-based capital. The FDICIA also required the regulatory agencies to establish, by the end of 1993, (a) minimum acceptable operational and managerial standards covering internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and employee compensation and (b) standards for asset quality, earnings and valuation of publicly traded shares (which must specify a maximum ratio of market value to book value for publicly traded shares). During 1996 the Company maintained its compliance with the requirements of Section 112 of FDICIA. Section 112 affects all banks of $500 million or more in assets, and reflects the government's growing concern for legislative reform to strengthen bank accounting, auditing, and internal control oversight. Essentially, it establishes standards for composition of a bank's audit committee; requires assessment of the organization's compliance with designated laws and regulations; mandates documentation and testing of the bank's internal control structure as it relates to financial reporting controls; and, compells management's positive report (attested to by 10 11 the bank's independent auditors) as of the end of each fiscal year, concerning the quality, adequacy and efficiency of the bank's internal controls. FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") focused on restructuring the regulation of the savings and loan industry and its deposit insurance; and instituted a new regulatory structure for the resolution of troubled and insolvent savings associations. Nevertheless, a number of provisions (described below) also apply to commercial banks. Title II authorizes the increase of insurance premiums paid by the FDIC-insured institutions. Title VI permits the acquisition of thrifts by bank holding companies. Title IX enhances the enforcement authority of all federal banking agencies, including their authority to levy civil money penalties and penalties on criminal offenses, and it also broadens the current definition of insiders, to increase the types of persons subject to regulatory action. Title XI requires appraisals used in making credit decision be written and performed in accordance with generally accepted appraisal standards, as promulgated by the Appraisal Standards Board of the Appraisal Foundation, and should meet federal guidelines. Title XII expands the recordkeeping requirements of reporting on Home Mortgage Disclosure Act (HDMA) to cover race, income and gender; changes the current Community Reinvestment Act ("CRA") rating system to a four-tiered rating system, which includes (1) outstanding in meeting community credit needs; (2) satisfactory in meeting community credit needs; (3) improvement needed in meeting community credit needs, and (4) substantial noncompliance in meeting community credit needs. It further requires that the CRA rating be publicly disclosed. The aforementioned provisions have not had a material adverse impact on the Company's consolidated financial condition or results of operations. FEDERAL LIMITS ON THE ACTIVITIES AND INVESTMENTS OF STATE-CHARTERED BANKS Federal restrictions on the direct and indirect activities and investments of state-chartered or licensed depository institutions exist if the institution either carries federal deposit insurance or is involved in activities with foreign banks. The FDIC is the regulatory agency with the authority to determine federal restrictions on all direct and indirect activities and investments. As a general matter, subject to a number of grandfathering provisions and a few exceptions, there are three rules which limit the activities and investments of state-chartered banks. These include: (1) A state-chartered bank or thrift may not engage as principal in any type of activity, or in an activity in an amount, that is not permissible for a national bank or federal savings association, respectively, unless the FDIC determines that the activity would pose "no significant risk to the affected deposit insurance fund" and the institution meets its fully phased in capital requirements. (2) A state-chartered bank or thrift may not make or retain an equity investment of a type or in an amount that is not permissible for a national bank or federal savings association, and divestiture is required as soon as possible and within five years of FDICIA or FIRREA in any event. (3) A state-chartered bank or thrift may retain an equity investment in the form of a majority of a subsidiary (for a bank) or an equity investment in a service corporation or a thrift (engaged in each case in activities not permissible for a subsidiary of a national bank or federal savings association, respectively), but only if the FDIC has made the same determinations respecting risk to the insurance fund and capital compliance by the bank or thrift. For a bank, this restriction only applies if the subsidiary is engaged as principal in activities prohibited for a national bank. 11 12 As stated above (see "Cathay Investment Company" at page 6 of this report), Cathay Bank has received FDIC approval of CIC's ownership of the Garden Grove property and the Tustin property. The Bank is in compliance with these limitations. INTERSTATE BANKING The Federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was signed into law on September 29, 1994. When fully effective, the Riegle-Neal Act will significantly relax or eliminate many restrictions on interstate banking. Effective September 29, 1995, the Riegle-Neal Act permits a bank holding company to acquire banks in states other than its "home state", even if applicable state law would not permit that acquisition. Such acquisitions would continue to require Board approval and would remain subject to certain state laws. Effective June 1, 1997, the Riegle-Neal Act will permit interstate mergers of banks, thereby allowing a single, merged bank to operate branches in multiple states. The Riegle-Neal Act allows each state to adopt legislation to "opt-out" of these interstate merger provisions. Conversely, the Riegle-Neal Act permits states to "opt in" to the merger provisions of Act prior to their stated effective date, to permit interstate mergers in that state prior to June 1, 1997. The enactment of the California Interstate Banking and Branching Act of 1995 provides for interstate banking and branching in California. This early opt-in legislation, which became effective on September 29, 1995, requires out-of-state institutions which do not already own a California bank to acquire an existing whole five-year old bank before establishing a California branch. De novo branching is not permitted. This act revised much of the original California interstate banking law first enacted in 1986 that permitted interstate banking with other states on a reciprocal basis. Banks and bank holding companies contemplating acquisitions must comply with the competitive standards of the BHCA, the Change in Bank Control Act ("CBA") or the Bank Merger Act ("BMA"), as applicable. The crucial test under each Act is whether the proposed acquisition will "result in a monopoly" or will "substantially" lessen competition in the relevant geographic market. Both the BHCA and the BMA preclude granting regulatory approval for any transaction that will result in a monopoly or where the furtherance of a plan to create a monopoly. However, where a proposed transaction is likely to cause a substantial reduction in competition, or tends to create a monopoly or otherwise restrain trade, these Acts permit the granting of regulatory approval if the applicable regulator finds that the perceived anti-competitive effects of the proposed transaction "are clearly outweighed in the public interest by the probable effect of the transaction on the convenience and needs of the community to be served." With regard to any interstate banking, the Justice Department issued merger guidelines in April 1992. On the basis of the revised criteria, the Department has challenged several proposed transactions involving institutions that compete directly in the same market(s). In contrast to the Justice Department, the Federal Reserve has recently shown a greater inclination to consider factors that contribute to the safety and soundness of the banking system, or which contribute positively to the "convenience and needs" of the affected communities. To the extent these two Federal Agencies apply different (and at times incompatible) analysis to assess the competitive effects of proposed bank and thrift mergers and acquisitions, federal anti-trust objections must be considered in connection with any interstate acquisition. The Company has no present intent to acquire any non-California institution or to open or establish branches outside of California. 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. 12 13 RECENT ACCOUNTING DEVELOPMENTS Information concerning recent accounting developments is included in Note 1 to the Consolidated Financial Statements under "Recent Accounting Pronouncements" on pages 46 and 47 of the Annual Report to Stockholders and is incorporated herein by reference. INTERAGENCY POLICY STATEMENT ON THE ALLOWANCE FOR LOAN AND LEASE LOSSES In December 1993, the FDIC adopted the interagency policy statement on the allowance for loan and lease losses (ALLL) as recommended by the Federal Financial Institutions Examination Council (FFIEC) to the four federal regulators of banks and savings associations which include the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Office of Thrift Supervision (OTS), and FDIC. This policy statement provides comprehensive guidance on the maintenance of an adequate ALLL and an effective loan review system. This issuance is another step by the agencies to promote consistency in supervisory policies among banks and thrifts. The guidance, which was effective immediately, explains that the ALLL is designed to absorb estimated credit losses associated with the loan and lease portfolio, including binding commitments to lend. It covers the responsibilities of the board of directors, the institution's management, and the examiner. The policy statement also discusses the analysis of the loan and lease portfolio, factors to consider in estimating credit losses, and the characteristics of an effective loan review system. INTERAGENCY APPRAISAL AND EVALUATION GUIDELINES In November 1994, the FDIC joined with the OCC, FRB, and OTS in issuing guidelines regarding appropriate real estate appraisal and evaluation programs for insured institutions. The joint guidelines, which were effective immediately, contain amendments that reduce the number of loans requiring a real estate appraisal by a certified or licensed appraiser and give lenders more flexibility in estimating the value of real estate collateral when consistent with safe and sound banking practices. The new interagency document supersedes each of the agencies' appraisal and evaluation guidelines issued in 1992. Generally, real estate transactions over $250,000 are considered federally related transactions and require appraisals. The agencies' appraisal regulations include five minimum standards for the preparation of an appraisal. The appraisal must: (1) conform to generally accepted appraisal standards as evidenced by the Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal Standards Board of the Appraisal Foundation unless principles of safe and sound banking require compliance with stricter standards; (2) be written and contain sufficient information and analysis to support the institution's decision to engage in the transaction; (3) analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units; (4) be based upon the definition of market value set forth in the regulation; and (5) be performed by State-licensed or certified appraisers in accordance with requirements set forth in the regulation. A formal opinion of market value prepared by a State-licensed or certified appraiser is not always necessary. Instead, less formal evaluations of the real estate may suffice for transactions that are exempt from the agencies' appraisal requirements. The agencies' appraisal regulations allow an institution to use an appropriate evaluation of the real estate rather than an appraisal when the transaction (1) has a value of $250,000 or less; (2) is a business loan of $1,000,000 or less, and the transaction is not dependent on the sale of, or rental income derived from, real estate 13 14 as the primary source of repayment; or (3) involves an existing extension of credit at the lending institution, provided that there has been no obvious and material change in the market conditions or physical aspects of the property that threaten the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or there is no advancement of new monies other than funds necessary to cover reasonable closing costs. The Company's internal appraisal management policy has been revised to coincide with the guidelines issued in November 1994. FEDERAL HOME LOAN BANK The Federal Home Loan Bank System (FHL Bank System) consists of twelve district banks (FHLB) and is supervised by the Federal Housing Finance Board (FHFB). Commercial banks and credit unions are eligible to become members of the FHL Bank System. To qualify for membership, an institution must meet the qualified thrift lender test, which includes any institution with at least ten percent of its total assets in qualified thrift investment on January 1, 1989. After January 1, 1989, any institution may become a member if it met the ten percent asset test requirement by January 1, 1990. Qualified thrift investments include loans related to the purchase, repair or construction of residential housing; home equity loans; mortgage-backed securities; and loans to certain community institutions like schools, churches, hospitals, and nursing homes. The Bank received FHLB membership approval in January 1993, and became a member/stockholder of the FHLB of San Francisco. By becoming a FHLB member, the Bank may have access to a source of low-cost liquidity. To access the credit services offered by the district banks, a member must also become a stockholder of the FHLB in its district. The level of stock ownership is currently governed by the Federal Home Loan Bank Act, and the amount of borrowing is defined by the amount of stock purchased. FHLB stock is purchased and redeemed at par. The Bank's investment in FHLB stock totaled 53,148 shares or $5,314,800 as of December 31, 1996. All credits extended by the district bank require full collateralization. Eligible collateral includes residential first mortgage loans on single and multi-family projects, U.S. government and agency securities, deposits in district banks, and any other real estate related assets permitted by law. DIVIDENDS As a California corporation, Cathay Bank may not pay dividends to the Company in excess of certain statutory limits. As of December 31, 1996, the maximum dividend that Cathay Bank could have declared, subject to regulatory approval, was $19,362,000. The banking regulatory agencies may prohibit a bank from paying dividends to its bank holding company if the agencies determine that such a payment would constitute an unsafe or unsound banking practice. ITEM 3. LEGAL PROCEEDINGS Management is not currently aware of any litigation that will have material adverse impact on the Company's consolidated financial condition, or the results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1996. 14 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The information under the caption "Market for Cathay Bancorp, Inc. Stock" on page 37 and under the caption "Additional Information" on page 68 of the Company's Annual Report to Stockholders is incorporated herein by reference. (b) Holders As of March 7, 1997, there were approximately 1,850 holders of record of the Company's Common Stock. (c) Dividends The information in Note 10 to the Consolidated Financial Statements on pages 55 and 56 of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the caption "Selected Consolidated Financial Data" on page 13 of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 through 36 of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Independent Auditors' Report and the Company's Consolidated Financial Statements and Notes thereto on pages 39 through 63 of the Company's Annual Report to Stockholders is incorporated herein by reference. See Item 14 of this report for information concerning financial statements filed with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 15 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Election of Directors" on pages 3 through 6 of the Company's definitive Proxy Statement relating to its 1997 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. The following persons are the executive officers and other significant officers of the Company and/or Cathay Bank: Gerald T. Deal, age 83, Vice-Chairman of the Boards of Directors of Bancorp and Cathay Bank since 1994; Chairman of the Board of Directors of Bancorp from 1990 until 1994; Chairman of the Board of Directors of Cathay Bank from 1964 until 1994 and director of Cathay Bank since 1962; Chairman of the Board of Directors of CIC from 1985 until 1994 and director of CIC since 1984. Mr. Deal resigned as a director and Vice-Chairman of the Boards of Directors of Bancorp and Cathay Bank effective as of December 31, 1996. George T.M. Ching, age 82, Vice-Chairman of the Board of Directors of Bancorp since 1990; Vice-Chairman of the Board of Directors of Cathay Bank since 1985, President of Cathay Bank from 1962 until 1985 and director of Cathay Bank since 1962; President of CIC since 1985 and director of CIC since 1984. Dunson K. Cheng, age 52, Chairman of the Board of Directors of each of Bancorp, Cathay Bank and CIC since 1994; President of Bancorp since 1990; President of Cathay Bank since 1985 and director of Cathay Bank since 1982; Secretary of CIC from 1985 until 1994; Chief Executive Officer of CIC since 1995 and director of CIC since 1984. Wilbur K. Woo, age 81, Secretary of Bancorp since 1990; Secretary of the Board of Directors of Cathay Bank since 1980 and director of Cathay Bank since 1978; Director of CIC since 1987. Anthony M. Tang, age 43, Executive Vice President of Bancorp and Cathay Bank since 1994; Senior Vice President of Bancorp and Cathay Bank from 1990 until 1994; Chief Financial Officer and Treasurer of Bancorp since 1990; Chief Lending Officer of Cathay Bank since 1985; and director of Cathay Bank since 1986. Milly W. Joe, age 59, Senior Vice President and Cashier of Cathay Bank since 1989; and Vice President and Cashier of Cathay Bank from 1981 to 1989. Ms. Joe has been associated with Cathay Bank since 1968. Irwin Wong, age 49, Senior Vice President for Branch Administration of Cathay Bank since 1989; and Vice President for Branch Administration from 1988 until 1989. Mr. Wong was employed by Security Pacific National Bank as a Vice President and Manager from 1983 until 1988. Elena Chan, age 45, Senior Vice President and Chief Financial Officer of Cathay Bank since December 1992; Vice President of Finance from March 1992 to November 1992; and Vice President and Internal Auditor of Cathay Bank from 1985 to February 1992. All of the above-named officers were elected on April 18, 1996 at a regular Board of Directors meeting. The term of office of each officer is from the time of appointment until the next annual organizational meeting of the Board of Directors of Bancorp or Cathay Bank (or action in lieu of a meeting) and until the appointment of his or her successor unless, before that 16 17 time, the officer resigns or is removed or is otherwise disqualified from serving as an officer of Bancorp or Cathay Bank. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Information Concerning Management Compensation", "Compensation Committee Interlocks and Insider Participation", "Compensation Committee Report on Executive Compensation" and "Comparative Stock Performance" on pages 8 through 13 of the Company's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The information under the captions "Principal Holders of Securities" on page 2 and "Election of Directors" on pages 3 through 6 of the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the captions "Election of Directors" on pages 3 through 6 and "Certain Transactions" on page 14 of the Company's Proxy Statement is incorporated herein by reference. 17 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Documents Filed as Part of this Report (a)(1) Financial Statements Financial Statements of Cathay Bancorp, Inc. and Subsidiary*
Page No. in Annual Report ------------- Consolidated Statements of Condition as of December 31, 1996 and 1995 39 Consolidated Statements of Income for each of the years in the 3-year period ended December 31, 1996, 1995 and 1994 40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the 3-year period ended December 31, 1996, 1995 and 1994 41 Consolidated Statements of Cash Flows for each of the years in the 3-year period ended December 31, 1996, 1995 and 1994 42 Notes to Consolidated Financial Statements 43-62 Independent Auditors' Report of KPMG Peat Marwick LLP 63
- ----------------- *Parent-only condensed financial information of the Company as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 is included in Note 14 to the Consolidated Financial Statements on pages 60 through 62 of the Annual Report to Stockholders, which is incorporated herein by reference. (a)(2) Financial Statement Schedules Schedules have been omitted since they are not applicable, they are not required, or the information required to be set forth in the schedules is included in the Consolidated Financial Statements or notes thereto incorporated by reference into this report. (a)(3) Exhibits 3.1 Restated Articles of Incorporation. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 3.2 Restated Bylaws. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 18 19 4.1 Shareholders Rights Plan. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10.1 Form of Indemnity Agreements between the Company and its directors and certain officers. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.2 Employee Stock Ownership Plan and Trust of the Company and First Amendment thereto. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.3 Dividend Reinvestment Plan of the Company. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.4 Second Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.5 Third Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.6 Fourth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.7 Fifth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.8 Sixth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.9 Seventh Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.10 Eighth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 13.1 Certain portions of the Registrant's 1996 Annual Report to Stockholders incorporated herein by reference. 19 20 22.1 Subsidiaries of the Company 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a report on Form 8-K dated May 30, 1996 to report the announcement of the merger with First Public and a report on Form 8-K dated November 18, 1996 to report the completion of the merger with First Public. A subsequent report on Form 8-K/A dated February 13, 1997 was filed to amend the report on Form 8-K dated November 18, 1996. 20 21 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 26, 1997 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 26, 1997 - ------------------------------------ the Board and Director Dunson K. Cheng (Principal executive officer) /s/ Anthony M. Tang Executive Vice President, March 26, 1997 - ------------------------------------ Chief Financial Officer Anthony M. Tang /Treasurer and Director (principal financial officer) (principal accounting officer) /s/ Ralph Roy Buon-Cristiani Director March 26, 1997 - ------------------------------------ Ralph Roy Buon-Cristiani /s/ Kelly L. Chan Director March 26, 1997 - ------------------------------------ Kelly L. Chan /s/ Michael M.Y. Chang Director March 26, 1997 - ------------------------------------ Michael M.Y. Chang
[SIGNATURES CONTINUED] 21 22 [SIGNATURES CONTINUED]
Signature Title Date - --------- ----- ---- /s/ George T.M. Ching - ------------------------------------ Vice Chairman of the March 26, 1997 George T.M. Ching Board and Director /s/ Wing K. Fat - ------------------------------------ Director March 26, 1997 Wing K. Fat /s/ Patrick S.D. Lee - ------------------------------------ Director March 26, 1997 Patrick S.D. Lee /s/ Chi-Hung Joseph Poon - ------------------------------------ Director March 26, 1997 Chi-Hung Joseph Poon /s/ Thomas G. Tartaglia - ------------------------------------ Director March 26, 1997 Thomas G. Tartaglia /s/ Wilbur K. Woo - ------------------------------------ Secretary of the Board March 26, 1997 Wilbur K. Woo and Director
22 23 EXHIBIT INDEX Exhibit No. Description ------- ----------------------------------------------------------------- 3.1 Restated Articles of Incorporation. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 3.2 Restated Bylaws. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 4.1 Shareholders Rights Plan. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10.1 Form of Indemnity Agreements between the Company and its directors and certain officers. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.2 Employee Stock Ownership Plan and Trust of the Company and First Amendment thereto. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.3 Dividend Reinvestment Plan of the Company. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.4 Second Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.5 Third Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.6 Fourth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.7 Fifth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 24 10.8 Sixth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.9 Seventh Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.10 Eighth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 13.1 Certain portions of the Registrant's 1996 Annual Report to Stockholders incorporated herein by reference. 22.1 Subsidiaries of the Company 27 Financial Data Schedule EX-13.1 2 PORTIONS OF THE REGISTRANT'S 1996 ANNUAL REPORT 1 selected consolidated financial data cathay bancorp, inc. and subsidiary
Year ended December 31, (Dollars in thousands except share, per share data) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- Income Statement Interest income $ 86,098 $ 76,223 $ 61,631 $ 55,573 $ 57,712 Interest expense 39,209 31,282 20,033 18,652 22,849 ------------------------------------------------------------------ Net interest income before provision for loan losses 46,889 44,941 41,598 36,921 34,863 Provision for loan losses 3,600 7,300 7,755 5,332 3,348 ------------------------------------------------------------------ Net interest income after provision for loan losses 43,289 37,641 33,843 31,589 31,515 Securities gains 22 611 63 444 2,027 Other non-interest income 5,837 5,610 5,781 5,508 4,902 Non-interest expense 28,013 27,617 26,139 25,305 22,363 ------------------------------------------------------------------ Income before income tax expense 21,135 16,245 13,548 12,236 16,081 Income tax expense 7,819 5,624 4,034 4,448 5,965 ------------------------------------------------------------------ Net income $ 13,316 $ 10,621 $ 9,514 $ 7,788 $ 10,116 ================================================================== Net income per common share(3) $ 1.66 $ 1.36 $ 1.23 $ 1.02 $ 1.33 Cash dividends paid per share $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.55 Weighted average common shares(3) 8,017,398 7,805,339 7,724,752 7,670,454 7,580,112 ------------------------------------------------------------------ Statement of Condition Securities available-for-sale $ 383,391 $ 243,252 $ 75,074 $ 45,870 $ 29,986 Securities held-to-maturity 210,129 174,377 180,082 144,352 82,022 Total net loans(1) 744,384 542,995 569,363 579,646 605,204 Total assets 1,504,329 1,087,400 941,051 877,540 832,710 Deposits 1,364,740 984,227 845,715 790,414 748,943 Other liabilities 21,143 8,644 9,951 6,601 8,034 Stockholders' equity 118,446 94,529 85,385 80,525 75,733 ------------------------------------------------------------------ Common Stock Data Shares of common stock outstanding(3) 8,878,144 7,867,164 7,798,550 7,714,603 7,616,824 Book value per share(2) $ 13.34 $ 12.02 $ 10.95 $ 10.44 $ 9.94 ------------------------------------------------------------------ Profitability Ratios Return on average assets 1.05% 1.05% 1.06% 0.91% 1.27% Return on average stockholders' equity 13.06 11.68 11.43 9.82 13.86 Dividend payout ratio 36.14 44.12 48.78 58.82 41.35 Equity to assets ratio 7.87 8.69 9.07 9.18 9.09 ------------------------------------------------------------------
(1) Total net loans represents total loans net of loan participations sold, unamortized deferred loan fees and the allowance for loan losses. (2) Book value per share is calculated by dividing total stockholders' equity by the number of common shares outstanding, adjusted for the effects of the May 15, 1992 six-for-five stock split. (3) Shares outstanding, weighted average shares and earnings per share have been retroactively adjusted for stock splits. 92-----------------$833 93-----------------$878 94-----------------$941 95-----------------$1.087 96=================$1,504 Total Assets (in millions) 92.................$49 =======================$65 93.................$49 =======================62 94.................$54 =======================$67 95.................$66 =======================$82 96.................$71 =======================$92 Income Before Income Tax Expense (in millions) - ------Operating Expense ======Operating Income 13 2 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary 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 with Bancorp, "the Company") and their consolidated results of operations. It should be read in conjunction with the audited consolidated financial statements and footnotes appearing elsewhere in this report. This discussion includes statements regarding management's beliefs, projections and assumptions regarding future operations. These forward-looking statements are not projections of future results. Actual results for any period may vary from past results discussed herein for numerous reasons, some of which may be foreseen by management and some of which may not. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect future operations. RESULTS OF OPERATIONS The Company reported net income of $13.3 million for 1996, compared with $10.6 million for 1995, and $9.5 million for 1994, representing an increase of $2.7 million or 25.4% for 1996 and $1.1 million or 11.6% for 1995. On a per share basis, net income was $1.66, $1.36, and $1.23 for 1996, 1995 and 1994, respectively. The 1996 pre-tax income amounted to $21.1 million, an increase of $4.9 million or 30.1% over $16.2 million for 1995 which represented an increase of $2.7 million or 19.9% over $13.5 million for 1994. The increase in 1996 pre-tax income was primarily due to a decrease of $3.7 million in the provision for loan losses and an increase of $1.9 million in net interest income, while the increase in 1995 pre-tax income mainly resulted from an increase of $3.3 million in net interest income offset by an increase of $1.5 million in non-interest expense. The return on average assets was 1.05% in 1996, compared with 1.05% in 1995 and 1.06% in 1994, while the return on average stockholders' equity advanced from 11.43% in 1994 to 11.68% in 1995 and to 13.06% in 1996. NET INTEREST INCOME Net interest income before provision for loan losses amounted to $46.9 million in 1996, compared with $44.9 million in 1995, and $41.6 million in 1994. This represents an increase of $2.0 million or 4.3% in 1996 and $3.3 million or 8.0% in 1995. On a taxable equivalent basis, net interest income totaled $48.0 million, $46.2 million, and $42.9 million in 1996, 1995 and 1994, respectively, representing an increase of $1.8 million or 3.8% in 1996 and $3.3 million or 7.7% in 1995. The increase in the 1996 net interest income was primarily attributable to an increase of $210.3 million or 23.8% in average earning assets from $884.3 million to $1,094.6 million. A majority of the increase came from securities available-for-sale of $203.5 million offset by a decrease of $27.0 million in securities held-to-maturity, while average loans and Federal funds sold grew by $29.2 million and $4.5 million, respectively. The increase in average earning assets was funded mostly by interest bearing deposits, specifically time deposits which increased $181.4 million, and to a lesser extent, by non-interest bearing deposits. The volume increase provided additional $13.1 million to net interest income, which however, was partially offset by a decline of 80 basis points in the average taxable equivalent yield on earning assets from 8.76% to 7.96%. This was primarily a result of lower average reference rate on the Bank's loans from 9.08% in 1995 to 8.52% in 1996 reflecting the prevailing interest rate environment, and a relative change in the earning assets from loans to investment securities. Although the Company experienced a good loan growth starting in the third quarter of 1996, 14 3 average loans decreased as a percentage of total average earning assets from 62.2% in 1995 to 52.9% in 1996, while the lower yielding investment securities (including securities available-for-sale and securities held-to-maturity) increased from 35.2% in 1995 to 44.5% in 1996. Cost of funds remained stable at 3.99% and 4.00% in 1996 and 1995, respectively. As a result of the above, the net interest margin, which is the taxable equivalent net interest income to average earning assets, decreased 85 basis points from 5.23% in 1995 to 4.38% in 1996. Comparing 1995 to 1994, the increase in the net interest income was largely due to an increase of $84.9 million in average earning assets from $799.4 million to $884.3 million, of which $66.4 million were from securities held-to-maturity, $37.3 million from securities available-for-sale, and $5.2 million from Federal funds sold offset by a $22.6 million decline in average loans. The increase in 1995 average earning assets was primarily funded by time deposits as well. Owing to the Federal Reserve Board's monetary policy, the Bank's average reference rate on loans was 170 basis points higher in 1995 than in 1994, which led to an increase of 159 basis points in average yield earned on loans from 8.75% in 1994 to 10.34% in 1995. Nevertheless, the increase in loan interest income due to rate was partially offset by the decrease of $22.5 million in average loan volume from $572.2 million to $549.7 million. In the mean time, the cost of funds went up 114 basis points from 2.86% in 1994 to 4.00% in 1995 while the yield earned on earning assets increased only 89 basis points from 7.87% in 1994 to 8.76% in 1995. This was due to the timing difference between repricing of loans and time deposits in a decreasing interest rate environment (starting July 1995). In addition, the 1995 net interest income was also negatively affected by the shift in the earning assets from loans to investment securities. Accordingly, net interest margin shrank 14 basis points from 5.37% in 1994 to 5.23% in 1995. 15 4 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary CHANGES DUE TO RATE AND VOLUME(1)
1996 - 1995 1995 - 1994 AMOUNT AMOUNT INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO: CHANGES IN CHANGES IN TOTAL CHANGES IN CHANGES IN TOTAL (Dollars in thousands) RATE VOLUME CHANGE RATE VOLUME CHANGE - -------------------------------------------------------------------------------------------------------- Increase (Decrease) in: Interest Income Federal funds sold and securities purchased under agreement to resell $ (102) $ 214 $ 112 $ 320 $ 260 $ 580 Securities available-for-sale (Taxable) 161 11,657 11,818 1,157 1,433 2,590 Securities available-for-sale (Nontaxable)(3) 1 (7) (6) 2 (59) (57) Securities held-to-maturity (Taxable) 665 (1,511) (846) 752 3,920 4,672 Securities held-to-maturity (Nontaxable)(3) (390) (140) (530) (223) 321 98 Auction preferred stock(3) -- -- -- -- (59) (59) Federal Home Loan Bank stock 75 8 83 (32) 36 4 Loans(2) (3,900) 2,963 (937) 8,766 (2,036) 6,730 ------------------------------------------------------------------ Total $(3,490) $ 13,184 $ 9,694 $ 10,742 $ 3,816 $ 14,558 ================================================================== Interest Expense Savings deposits, NOW accounts and others $ (300) $ 425 $ 125 $ 244 $ (607) $ (363) Time deposits (1,258) 9,006 7,748 6,835 4,735 11,570 Securities sold under agreements to repurchase (4) (9) (13) 15 (11) 4 Other borrowed funds 2 (20) (18) 1 20 21 Mortgage indebtedness 47 38 85 (2) 19 17 ------------------------------------------------------------------ Total $(1,513) $ 9,440 $ 7,927 $ 7,093 $ 4,156 $ 11,249 ================================================================== Increase in net interest income $(1,977) $ 3,744 $ 1,767 $ 3,649 $ (340) $ 3,309 ==================================================================
(1) Changes in interest income and interest expense attributable to changes in both rate and volume have been allocated proportionately to changes due to rate and changes due to volume. (2) Amounts are net of unamortized deferred loan fees of $3,743,000, $2,122,000 and $2,467,000 in 1996, 1995 and 1994, respectively. (3) The amount of interest earned on certain securities of states and political subdivisions and other securities held have been adjusted to a fully taxable equivalent basis, using effective Federal income tax rates of 35%, 35% and 35% for 1996, 1995 and 1994, respectively. EARNING ASSET MIX
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 AMOUNT PERCENT CHANGED CHANGED PERCENT OF TOTAL PERCENT OF TOTAL FROM FROM (Dollars in thousands) AMOUNT EARNING ASSETS AMOUNT EARNING ASSETS 1995 TO 1996 1995 TO 1996 - ----------------------------------------------------------------------------------------------------------------------------- Types Of Earning Assets Federal funds sold and securities purchased under agreement to resell $ 28,000 2.05% $ 1,200 0.12% $ 26,800 2233.33% Securities available-for-sale 383,391 28.07 243,252 25.29 140,139 57.61 Securities held-to-maturity 210,129 15.38 174,377 18.13 35,752 20.50 Loans (net of unamortized deferred loan fees and allowance for loan losses) 744,384 54.50 542,995 56.46 201,389 37.09 ============================================================================== Total earning assets $1,365,904 100.00% $961,824 100.00% $404,080 42.01% ==============================================================================
16 5 The following table sets forth certain 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) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------ Interest Earning Assets: Federal Funds Sold and Securities Purchased Under Agreement to Resell Average outstanding $ 28,150 $ 23,630 $ 18,416 $ 15,257 $ 6,220 Average yield 5.27% 5.80% 4.30% 3.00% 3.30% Amount of interest earned $ 1,483 $ 1,371 $ 791 $ 457 $ 205 ---------------------------------------------------------- Securities Available-for-Sale, Taxable Average outstanding $ 291,419 $ 88,623 $ 50,876 $ 39,967 $ 7,131 Average yield 5.81% 5.75% 4.93% 4.23% 5.79% Amount of interest earned $ 16,917 $ 5,099 $ 2,509 $ 1,689 $ 413 ---------------------------------------------------------- Securities Available-for-Sale, Nontaxable Average outstanding $ 85 $ 155 $ 767 $ 322 -- Average yield(2) 10.59% 9.56% 9.39% 11.49% -- Amount of interest earned $ 9 $ 15 $ 72 $ 37 -- ---------------------------------------------------------- Securities Held-to-Maturity, Taxable Average outstanding $ 153,443 $178,875 $116,523 $ 66,396 $ 68,046 Average yield 6.07% 5.68% 4.71% 5.46% 7.00% Amount of interest earned $ 9,317 $ 10,163 $ 5,491 $ 3,628 $ 4,764 ---------------------------------------------------------- Securities Held-to-Maturity, Nontaxable Average outstanding $ 39,020 $ 40,527 $ 36,488 $ 32,084 $ 32,028 Average yield(2) 8.61% 9.60% 10.40% 11.15% 11.56% Amount of interest earned $ 3,361 $ 3,891 $ 3,793 $ 3,578 $ 3,703 ---------------------------------------------------------- Auction Preferred Stock Average outstanding -- -- $ 1,411 $ 4,965 $ 1,290 Average yield(2) -- -- 4.18% 3.75% 4.81% Amount of interest earned -- -- $ 59 $ 186 $ 62 ---------------------------------------------------------- Federal Home Loan Bank Stock Average outstanding $ 3,636 $ 2,851 $ 2,654 $ 1,945 -- Average yield 6.16% 4.95% 5.16% 3.75% -- Amount of interest earned $ 224 $ 141 $ 137 $ 73 -- ---------------------------------------------------------- Loans(1) Average outstanding $ 579,634 $549,660 $572,244 $591,726 $577,403 Average yield(5) 9.64% 10.34% 8.75% 7.98% 8.62% Amount of interest earned(5) $ 55,888 $ 56,825 $ 50,095 $ 47,198 $ 49,779 ---------------------------------------------------------- Total Interest Earning Assets Average outstanding $1,095,387 $884,321 $799,379 $752,662 $692,118 Average yield(5) 7.96% 8.76% 7.87% 7.55% 8.51% Amount of interest earned(5) $ 87,199 $ 77,505 $ 62,947 $ 56,846 $ 58,926 ----------------------------------------------------------
17 6 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES (CONTINUED)
YEAR ENDED DECEMBER 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities: Savings Deposits(3) Average outstanding $348,941 $328,923 $357,293 $342,347 $295,520 Average rate paid 2.07% 2.16% 2.09% 2.25% 3.06% Amount of interest paid or accrued $ 7,225 $ 7,100 $ 7,463 $ 7,708 $ 9,029 -------------------------------------------------------- Time Deposits Average outstanding $632,211 $450,834 $342,037 $325,443 $322,138 Average rate paid 5.03% 5.34% 3.66% 3.30% 4.26% Amount of interest paid or accrued $ 31,826 $ 24,078 $ 12,506 $ 10,748 $ 13,718 -------------------------------------------------------- Securities Sold Under Agreements to Repurchase Average outstanding $ 502 $ 695 $ 960 $ 2,180 $ 3,192 Average rate paid 4.98% 5.47% 3.54% 2.61% 3.10% Amount of interest paid or accrued $ 25 $ 38 $ 34 $ 57 $ 99 -------------------------------------------------------- Other Borrowed Funds Average outstanding $ 109 $ 444 $ 107 -- -- Average rate paid 6.42% 5.63% 5.61% -- -- Amount of interest paid or accrued $ 7 $ 25 $ 6 -- -- -------------------------------------------------------- Mortgage Indebtedness Average outstanding $ 759 $ 455 $ 240 $ 530 $ 35 Average rate paid(6) 16.60% 9.01% 10.00% 26.23% 8.57% Amount of interest paid or accrued(6) $ 126 $ 41 $ 24 $ 139 $ 3 -------------------------------------------------------- Total Interest Bearing Liabilities Average outstanding $982,522 $781,351 $700,637 $670,500 $620,885 Average rate paid 3.99% 4.00% 2.86% 2.78% 3.68% Amount of interest paid or accrued $ 39,209 $ 31,282 $ 20,033 $ 18,652 $ 22,849 -------------------------------------------------------- Net interest earnings $ 47,990 $ 46,223 $ 42,914 $ 38,194 $ 36,074 Net yield on interest earnings assets(4) 4.38% 5.23% 5.37% 5.07% 5.21% Yield spread 3.97% 4.76% 5.01% 4.77% 4.83% --------------------------------------------------------
(1) Non-accrual loans are included in the average balances. (2) The average yield has been adjusted to a fully taxable equivalent basis for certain securities of states and political subdivisions and other securities held using effective Federal income tax rates of 35%, 35%, 35%, 34% and 34% for 1996, 1995, 1994, 1993 and 1992, respectively. (3) Savings deposits include NOW accounts and money market accounts. (4) Calculated by dividing Net Interest Earnings by Average Outstanding Interest Earning Assets. (5) Yields and amounts of interest earned include loan fees. Amount of interest earned does not include interest accrued on non-accrual loans. (6) Yield and amount of interest paid or accrued include interest paid on senior debts of other real estate owned, either to bring the loans current or to pay off the loans when the Company obtained title to the properties and thereafter. 18 7 NON-INTEREST INCOME Non-interest income totaled $5.9 million in 1996, compared with $6.2 million in 1995 and $5.8 million in 1994. This represents a decline of $362,000 or 5.8% in 1996 and an increase of $377,000 or 6.5% in 1995. The lower non-interest income in 1996 was due to a combination of the following: 1) a decrease of $589,000 in securities gains; 2) an increase of $235,000 in letter of credit commissions; 3) a decrease of $127,000 in service charges primarily attributable to escrow fee earnings in 1995; and 4) an increase of $119,000 in other operating income. Other operating income includes, among other things, documentation fees, wire transfer fees, credit card fees, foreign exchange income, safe deposit box income, deluxe check commissions, and miscellaneous income. The higher other operating income in 1996 mainly came from higher wire transfer fees. Comparing 1995 to 1994, the higher non-interest income in 1995 primarily resulted from a $548,000 increase in securities gains which was partially offset by a decrease of $105,000 in letter of credit commissions. NON-INTEREST EXPENSE Non-interest expense amounted to $28.0 million for 1996, representing a moderate increase of $396,000 or 1.4% over $27.6 million for 1995, which was $1.5 million or 5.7% higher than $26.1 million for 1994. Comparing 1996 to 1995, the more notable items in the non-interest expense category were: 1) salaries and employee benefits expense which increased $1.1 million resulting largely from higher salaries expense partially due to added personnel from the acquisition of First Public Savings Bank ("FPSB") in November 1996 ("the acquisition") and higher cash bonus in December 1996; and 2) professional services expense which increased $637,000 attributable to legal fees, facility management fees, collection expense, accounting fees, appraisal report expense, and consulting fees. The F.D.I.C. assessment decreased $700,000 while expense related to operations of real estate investments ("REI") reduced by $594,000 due to a provision for REI losses of $721,000 in 1995. Comparing 1995 to 1994, the increase in non-interest expense was attributable to higher expenses totaling $2.3 million in salaries and employee benefits, occupancy, computer and equipment, marketing as well as other operating expense, a majority of which were related to branch expansion. Other operating expense consists of office supplies, communications, postage, travel, administrative, general insurance and miscellaneous expense. These increases were offset by decreases in the F.D.I.C. assessment of $660,000 and net other real estate owned ("OREO") expense of $268,000. The decrease in the 1995 OREO expense was primarily attributable to a reduction of $734,000 in the provision for OREO losses which was partially offset by increases of $328,000 in the operating expense, and $139,000 in losses on sale of OREO properties. The OREO operating expense generally contains trust fees, legal fees, rent, property taxes, repair and maintenance, utilities, interest and miscellaneous items. Property taxes amounted to $615,000 and accounted for 66.6% of the entire operating expense in 1995, compared with $148,000 or 24.9% in 1994. FINANCIAL CONDITION As a result of the acquisition as well as the Bank's internal growth, total assets increased $416.9 million or 38.3% from $1,087.4 million at year-end 1995 to $1,504.3 million at year-end 1996. Deposits increased $380.5 million or 38.7% from $984.2 million to $1,364.7 million; loans, net of deferred loan fees, increased $202.2 million or 36.4% from $555.7 million to $757.9 million; securities available-for-sale increased $140.1 million or 57.6% from $243.3 million to $383.4 million while securities held-to-maturity increased $50.8 million or 31.8% from $159.4 million to $210.1 million; and stockholders' equity increased $23.9 million or 25.3% from $94.5 million to $118.4 million. As of December 31, 1996, FPSB contributed $237.8 million, $236.1 million, $144.4 million and $78.8 million, respectively to growth in total assets, deposits, loans and securities. 19 8 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary SECURITIES The Company's investment policy states that those securities which could be sold in response to changes in interest rates, changes in prepayment risk, increases in loan demand, the need to increase regulatory capital, general liquidity needs, or other similar factors will be classified as securities available-for-sale, and carried at estimated fair value, with unrealized gains or losses, net of tax, reflected in stockholders' equity. Those securities that the Company has the positive intent and ability to hold until maturity will be classified as securities held-to-maturity, and carried at amortized cost. In addition, all securities holdings which through the passage of time become 90 days or less to maturity or call date, will automatically become classified as securities available-for-sale irrespective of the original classification at the time of their acquisition. The following table summarizes the carrying value of the Company's portfolio of securities for each of the past three years:
AS OF DECEMBER 31, (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------ Securities available-for-sale: U.S. Treasury securities $121,769 $110,386 $ 72,032 U.S. government agencies 228,377 129,847 -- State and municipal securities 50 95 313 Mortgage-backed securities 22,882 -- -- Asset-backed securities 4,998 -- -- Federal Home Loan Bank stock 5,315 2,924 2,729 --------------------------------- Total $383,391 $243,252 $ 75,074 ================================= Securities held-to-maturity: U.S. Treasury securities $ 26,081 $ 50,062 $129,992 U.S. government agencies 66,900 69,428 10,000 State and municipal securities 40,393 39,620 39,786 Mortgage-backed securities 63,109 266 304 Asset-backed securities 3,545 -- -- Other securities 10,101 -- -- --------------------------------- Total $210,129 $159,376 $180,082 =================================
The average yield on taxable securities available-for-sale and held-to-maturity were 5.81% and 6.07%, respectively in 1996 compared to 5.75% and 5.68% in 1995, both showing slight improvements. The taxable equivalent yield on the non-taxable state and municipal securities held-to-maturity decreased 99 basis points from 9.60% in 1995 to 8.61% in 1996. These securities generally bear longer maturity terms, therefore maturities or calling of previous higher yielding securities were replaced by the lower yielding securities at effective prevailing rates. 20 9 The scheduled maturities and taxable equivalent yields by security type are presented in the following tables: SECURITIES AVAILABLE-FOR-SALE PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
AS OF DECEMBER 31, 1996 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. Treasury securities $ 63,083 $ 58,686 $ -- $ -- $ 121,769 U.S. government agencies 30,008 176,393 21,976 -- 228,377 State and municipal securities 50 -- -- -- 50 Mortgage-backed securities(2) -- -- 4,950 17,932 22,882 Asset-backed securities(2) -- 4,998 -- -- 4,998 Federal Home Loan Bank stock 5,315 -- -- -- 5,315 --------------------------------------------------------------------- Total $ 98,456 $ 240,077 $ 26,926 $ 17,932 $ 383,391 ===================================================================== Weighted Average Yield: U.S. Treasury securities 5.87% 5.54% --% --% 5.71% U.S. government agencies 5.72 6.37 7.16 -- 6.36 State and municipal securities(l) 8.14 -- -- -- 8.14 Mortgage-backed securities(2) -- -- 5.50 7.28 6.89 Asset-backed securities(2) -- 5.75 -- -- 5.75 Federal Home Loan Bank stock 6.16 -- -- -- 6.16 --------------------------------------------------------------------- Total 5.84% 6.16% 6.86% 7.28% 6.19% =====================================================================
SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
AS OF DECEMBER 31, 1996 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. Treasury securities $ -- $26,081 $ -- $ -- $26,081 U.S. government agencies -- 46,900 20,000 -- 66,900 State and municipal securities 630 10,322 15,209 14,232 40,393 Mortgage-backed securities(2) -- 17,995 5,491 39,623 63,109 Asset-backed securities(2) -- -- -- 3,545 3,545 Other securities 10,101 -- -- -- 10,101 ---------------------------------------------------------------- Total $10,731 $101,298 $40,700 $57,400 $210,129 ================================================================ Weighted Average Yield: U.S. Treasury securities --% 6.42% --% --% 6.42% U.S. government agencies -- 6.39 7.18 -- 6.62 State and municipal securities(1) 8.36 8.70 8.72 8.31 8.31 Mortgage-backed securities(2) -- 6.12 6.60 7.09 6.77 Asset-backed securities(2) -- -- -- 6.09 6.09 Other securities 5.97 -- -- -- 5.97 ---------------------------------------------------------------- Total 6.32% 6.57% 7.67% 7.33% 6.97% ================================================================
(1) Average yield has been adjusted to a fully-taxable equivalent basis. (2) Securities reflect stated maturities and not anticipated prepayments. 21 10 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary LOANS Total gross loans amounted to $761.7 million at year-end 1996, compared with $557.9 million at year-end 1995, representing an increase of $202.2 million or 36.4%, $144.4 million or 71.4% of which were from FPSB. A bulk of the loans acquired from FPSB were real estate loans. Therefore, commercial real estate loans and residential real estate loans rose $94.2 million and $94.3 million, respectively from $191.2 million and $27.4 million at year-end 1995 to $285.3 million and $121.8 million at year-end 1996, respectively. Commercial real estate loans are secured primarily by first deeds of trust on retail shops and shopping centers, and secondarily by office buildings, multiple-unit apartments, hotels, motels, and warehouses. The Company's underwriting policy generally prescribes the loan to value ratio at the time of origination for commercial real estate loans to be 65% or lower of the appraised value. Construction loans increased considerably as well, from $13.6 million at year-end 1995 to $33.5 million at year-end 1996, an increase of $19.9 million or 146.3%. A portion of the new construction loan projects are located in the Las Vegas area. Installment loans, which consisted primarily of automobile financing, showed a slight increase of $3.8 million from $19.7 million to $23.6 million. Despite increases in other loan categories, commercial loans continued to drop from $292.6 million at year-end 1995 to $283.9 million at year-end 1996 due to pay-offs and pay-downs. Commercial loans are for general business purposes and include short-term loans to finance trust receipts. These loans are generally made based on the financial strength of the borrowers, and are typically secured by cash or cash equivalents, real estate, inventory or receivables. The Company emphasizes its commercial lending to small-to-medium businesses and professionals for their working capital needs. As a percentage of total net loans, commercial, commercial real estate, and residential real estate accounted for 38.1%, 38.3% and 16.4%, respectively at year-end 1996, compared with 53.9%, 35.2% and 5.1%, respectively at year-end 1995. The Company's Board of Directors establishes the basic lending policy for the Bank. Each loan is generally considered in terms of, among other things, character, repayment ability, financial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower's business or project, and prevailing economic trends and conditions. In addition, the Company's lending policy requires an independent appraisal on real estate property in accordance with Regulatory guidelines. Although a majority of the Company's loan portfolio, including commercial loans, is secured by real estate to some extent, management believes that the Company's underwriting guidelines, including collateral requirements, and underlying values of real estate in the Company's primary market area have provided the Company with protection against reasonably expected losses on non-performing loans. 22 11 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, 1996 are presented below: LOAN TYPE AND MIX
AMOUNT OUTSTANDING AS OF DECEMBER 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------- Type of Loans: Commercial loans $283,894 $292,612 $324,189 $336,438 $356,808 Real estate mortgage loans(1) 420,315 231,360 215,945 190,510 196,112 Real estate construction loans 33,510 13,606 14,090 31,505 31,658 Installment loans 23,551 19,748 18,170 17,982 27,109 Other loans 385 533 11,707 12,824 2,933 --------------------------------------------------------- Total loans 761,655 557,859 584,101 589,259 614,620 ========================================================= Unamortized deferred loan fees (3,742) (2,122) (2,467) (2,440) (2,987) Allowance for loan losses (13,529) (12,742) (12,271) (7,173) (6,429) --------------------------------------------------------- Total net loans $744,384 $542,995 $569,363 $579,646 $605,204 =========================================================
(1) Cathay sells participations in certain residential real estate loans to buyers in the secondary market. These participations cover substantially all of the loan balances and are sold without recourse. No losses have been incurred on these sales. As of December 31, 1996, Cathay had $12,824,604 of these loans in its servicing portfolio. There are no loans held for sale as of December 31, 1996. CHANGES IN LOAN PORTFOLIO COMPOSITION
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 PERCENTAGE PERCENTAGE PERCENTAGE OF TOTAL OF TOTAL INCREASE (Dollars in thousands) AMOUNT LOANS AMOUNT LOANS (DECREASE) - --------------------------------------------------------------------------------------------- Type of Loans: Commercial loans $283,894 38.14% $292,612 53.89% (2.98)% Real estate mortgage loans 420,315 56.47 231,360 42.61 81.67 Real estate construction loans 33,510 4.50 13,606 2.50 146.29 Installment loans 23,551 3.16 19,748 3.64 19.26 Other loans 385 0.05 533 0.10 (27.77) Unamortized deferred loan fees (3,742) (0.50) (2,122) (0.39) 76.34 Allowance for loan losses (13,529) (1.82) (12,742) (2.35) 6.18 ------------------------------------------------------- Total net loans $744,384 100.00% $542,995 100.00% 37.09% =======================================================
92................ $605 93................ $580 94................ $569 95................ $543 96................ $744 Net Loans (in millions) 23 12 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary MATURITY OF LOANS: CONTRACTUAL MATURITY OF LOAN PORTFOLIO(1)
(Dollars in thousands) WITHIN ONE YEAR ONE TO FIVE YEARS OVER FIVE YEARS TOTAL - ----------------------------------------------------------------------------------------------------- Commercial Loans Floating rate $161,871 $70,293 $ 4,875 $237,039 Fixed rate 36,453 3,041 6,744 46,238 Real Estate Mortgage Loans Floating rate 44,078 105,020 126,428 275,526 Fixed rate 3,249 11,116 127,588 141,953 Real Estate Construction Loans Floating rate 108 -- -- 108 Fixed rate 29,905 3,208 -- 33,113 Installment Loans Floating rate 39 -- -- 39 Fixed rate 3,823 19,668 21 23,512 Other Loans Floating rate 288 -- -- 288 Fixed rate -- -- 97 97 -------------------------------------------------------------------- Total loans(2) $279,814 $212,346 $265,753 $757,913 ==================================================================== Floating rate $206,384 $175,313 $131,303 $513,000 Fixed rate 73,430 37,033 134,450 244,913 -------------------------------------------------------------------- Total loans(2) $279,814 $212,346 $265,753 $757,913 Allowance for loan losses (13,529) -------- Total net loans $744,384 ========
(1) In the normal course of business, loans are renewed or extended from time to time; therefore, the above should not be viewed as an indication of future cash flows. (2) Total loans are net of unamortized deferred loan fees. RISK ELEMENTS OF THE LOAN PORTFOLIO NON-PERFORMING ASSETS Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. Management generally places loans on a non-accrual status if interest and principal or either interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any interest previously accrued, but not yet collected, is generally reversed against current income. Depending on the circumstances management may elect to continue the accrual of interest on certain past-due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. Non-performing assets include loans past due 90 days or more (including both loans that are still accruing interest, and those on a non-accrual status) and real estate acquired through foreclosure. The Company's non-performing assets increased slightly from $29.2 million at year-end 1995 to $30.2 million at year-end 1996. This was due to an increase of $5.0 million in OREO, and an increase of $706,000 in loans past due 90 days or more and still accruing interest, offset 24 13 by a reduction of $4.7 million in non-accrual loans. The coverage ratio, which is the allowance for loan losses to total past due loans, jumped from 82.98% at year-end 1995 to 119.15% at year-end 1996. The substantial increase in the coverage ratio was mainly due to a decrease of $4.0 million in total past due loans coupled with a $787,000 increase in the allowance for loan losses. The following tables present the total non-performing assets and interest foregone for the past five years: NON-PERFORMING ASSETS AND INTEREST FOREGONE
DECEMBER 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------- Past due 90 days or more $ 2,050 $ 1,344 $ 4,104 $ 3,529 $4,573 Non-accrual 9,305 14,012 27,860 25,917 10,529 -------------------------------------------- Total past due loans 11,355 15,356 31,964 29,446 15,102 Real estate acquired in foreclosure or in-substance foreclosure 18,854 13,879 6,798 6,212 8,363 -------------------------------------------- Total non-performing assets $30,209 $29,235 $38,762 $35,658 $23,465 ============================================ Accruing troubled debt restructurings 3,201 8,429 5,257 5,214 586 Non-performing assets as a percentage of total loans and other real estate owned outstanding at year-end 3.87% 5.11% 6.56% 5.99% 3.77% Allowance for loan losses as a percentage of non-performing loans 119.15% 82.98% 38.39% 24.36% 42.57% ============================================
The effect of non-accrual loans and troubled debt restructurings on interest income for the years 1996, 1995, 1994, 1993 and 1992 is presented below:
(Dollars in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------ Non-Accrual Loans Contractual interest due $ 1,121 $ 1,503 $ 2,712 $ 1,902 $ 838 Interest recognized 268 200 560 735 555 -------------------------------------------- Net interest foregone $ 853 $ 1,303 $ 2,152 $ 1,167 $ 283 ============================================
(Dollars in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------ Troubled Debt Restructurings Contractual interest due $ 339 $ 467 $ 351 $ 495 $ 59 Interest recognized 311 352 319 346 -- -------------------------------------------- Net interest foregone $ 28 $ 115 $ 32 $ 149 $ 59 ============================================
25 14 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary The reduction of $4.7 million in non-accrual loans since year-end 1995 was mainly due to foreclosures on a commercial real estate property and two marinas totaling $4.5 million, both of which were subsequently sold. At year-end 1996, the balance of $9.3 million in non-accrual loans were essentially made up of $6.0 million in commercial loans and $2.9 million in commercial real estate loans while the 1995 year-end balance of $14.0 million non-accrual loans comprised mainly $8.8 million in commercial loans and $4.5 million in commercial real estate loans. These loans are substantially secured by real estate. The type of properties securing the loans, and the type of businesses the borrowers engaged in are presented below in millions as of December 31, 1996 and 1995:
1996 1995 LOAN BALANCE LOAN BALANCE COMMERCIAL COMMERCIAL (DOLLARS IN MILLIONS) REAL ESTATE COMMERCIAL REAL ESTATE COMMERCIAL - --------------------------------------------------------------------------------------------------- Type of Property: Residential $ 0.6 $ 1.7 $ -- $ 2.9 Commercial 0.2 3.3 -- 2.8 Motel 1.3 0.5 4.5 0.6 Marina 0.8 -- -- 1.9 Others -- 0.4 -- 0.5 Unsecured -- 0.1 -- 0.1 ---------------------------------------------------------------- $ 2.9 $ 6.0 $ 4.5 $ 8.8 ================================================================ Type of Business: Real Estate Development $ 1.0 $ 0.6 $ -- $ -- Retail -- -- -- 0.6 Wholesale -- 0.8 -- 3.1 Import -- 0.3 -- 1.0 Motel 1.9 0.5 4.5 0.9 Marina -- -- -- 1.9 Others -- 3.8 -- 1.3 ---------------------------------------------------------------- $ 2.9 $ 6.0 $ 4.5 $ 8.8 ================================================================
The above schedule shows that the balance of the motel loans at year-end 1996 was reduced to $1.3 million compared with $4.5 million at year-end 1995 due to the foreclosure on one motel in the amount of $2.6 million which has been sold and partial charge-offs plus pay down on the other loan. The remaining balance of $1.3 million in the motel loan represents one loan secured by the first trust deed on the respective motel located in Southern California which is in foreclosure. In the non-accrual commercial loan category, the balance of $3.3 million secured by commercial properties comprise nine loans, a majority of which are collateralized by first trust deeds on various commercial properties. Troubled debt restructurings totaled $3.2 million at year-end 1996, compared with $8.4 million at year-end 1995. $2.0 million of the troubled debt restructurings were commercial loans while $1.2 million were commercial real estate loans. With the exception of one loan in the amount of $473,000 which was 11 days past due, all other restructured loans totaling $2.7 million were current under their revised terms as of December 31, 1996. As of December 31, 1996, the Company had identified impaired loans with a recorded investment of $17.2 million. An allowance of $3.0 million, representing the difference between the value of collateral supporting the loans and their outstanding balance is included in the allowance for loan losses. For the year 1996, the average balance of impaired loans was $27.8 million. During 1996, interest collected on impaired loans totaled $1.2 million. 26 15 There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of December 31, 1996. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the results discussed in this Section. ALLOWANCE FOR LOAN LOSSES As of December 31, 1996, the allowance for loan losses amounted to $13.5 million or 1.8% of total loans. This compares with $12.7 million or 2.3% of total loans at year-end 1995. Management provided $3.6 million and $7.3 million to the provision for loan losses in 1996 and 1995, respectively. The Bank recorded net charge-offs of $4.4 million in 1996, compared with $6.8 million in 1995. Total charge-offs of $5.4 million in 1996 included $4.0 million in commercial loans, $1.2 million in real estate loans, and $201,000 in installment and other loans. The tables below present information relating to the allowance for loan losses, charge-offs, and recoveries by loan type for the past five years: ALLOWANCE FOR LOAN LOSSES
AMOUNT OUTSTANDING AS OF DECEMBER 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- Balance at beginning of year $12,742 $12,271 $ 7,173 $ 6,429 $5,500 Allowance from acquisition 1,644 -- -- -- -- Provision for loan losses 3,600 7,300 7,755 5,332 3,348 Loans charged-off (5,388) (7,018) (4,419) (4,688) (2,457) Recoveries of charged-off loans 931 189 1,762 100 38 --------------------------------------------------------- Balance at end of year $13,529 $12,742 $12,271 $ 7,173 $6,429 ========================================================= Average loans outstanding during year ended $579,634 $549,660 $572,244 $591,726 $577,403 Ratio of net charge-offs to average loans outstanding during the year 0.77% 1.24% 0.46% 0.78% 0.42% Provision for loan losses to average loans outstanding during the year 0.62% 1.33% 1.36% 0.90% 0.58% Allowance to non-performing loans at year-end 119.15% 82.98% 38.39% 24.36% 42.57% Allowance to total loans at year-end 1.78% 2.28% 2.10% 1.22% 1.05% =========================================================
LOANS CHARGED-OFF BY LOAN TYPE
YEAR ENDED DECEMBER 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- Commercial loan losses $ 4,010 $ 3,895 $ 2,300 $ 3,449 $1,661 Percentage of total commercial loans(1) 1.33% 1.33% 0.71% 1.03% 0.47% ----------------------------------------------------- Real estate loan losses $ 1,177 $ 2,885 $ 1,678 $ 508 $ 207 Percentage of total real estate loans(1) 1.18% 1.18% 0.73% 0.23% 0.09% ----------------------------------------------------- Installment and other loan losses $ 201 $ 238 $ 441 $ 731 $ 589 Percentage of total installment and other loans(1) 1.17% 1.17% 1.48% 2.37% 1.96% ----------------------------------------------------- Total loans charged-off $ 5,388 $ 7,018 $ 4,419 $ 4,688 $2,457 =====================================================
(1) Percentages were calculated based on year-end balances. 27 16 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary RECOVERIES BY LOAN TYPE
YEAR ENDED DECEMBER 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------- Commercial loan losses $ 640 $ 110 $ 1,151 $ 61 $ -- Real estate loan losses 205 17 501 1 -- Installment and other loan losses 86 62 110 38 38 --------------------------------------------- Total $ 931 $ 189 $ 1,762 $ 100 $ 38 =============================================
In determining the allowance for loan losses, management continues to assess the risks inherent in the loan portfolio, the possible impact of known and potential problem loans, and other factors such as collateral value, portfolio composition, loan concentration, financial strength of borrower, and trends in local economic conditions. In January 1995, the Company adopted Statement of Financial Accounting Standards No. 114, Accounting for Loan Impairment ("SFAS 114"), and Statement of Financial Accounting Standards No. 118 ("SFAS 118"), Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, which amended certain provisions of SFAS 114. The Company considers all loans classified and restructured in its evaluation of loan impairment. The classified loans are stratified by size, and loans less than the Company's defined selection criteria are treated as a homogenous portfolio. For loans meeting the defined criteria, the Company measures the impairment based on the present value of the expected future cash flows discounted at the loan's effective interest rate, if the loan is not collateral dependent, and by using the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by creating a valuation allowance with a corresponding charge to the provision for loan losses, or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. The Company's allowance for loan losses consists of a specific allowance and a general allowance. The specific allowance is further broken down to provide for those impaired loans and the remaining internally classified loans. For the remaining internally classified loans, management allocates a specific allowance to each loan based on the percentage assigned and the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral and the general economic conditions. The general allowance is determined by an assessment of the overall quality of the unclassified portion of the loan portfolio as a whole, and by loan type. Management maintained the percentage assigned to the general allowance based on charge-off history and management's knowledge of the quality of the 28 17 portfolio. The adoption of SFAS 114 did not have a material impact on the Company's results of operations or financial condition. The following table presents a breakdown of impaired loans and the SFAS 114 impairment allowance related to impaired loans:
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 SFAS 114 SFAS 114 RECORDED IMPAIRMENT RECORDED IMPAIRMENT (Dollars in thousands) INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE - --------------------------------------------------------------------------------------------------------- Impaired loans: Loans with impairment allowance Commercial $ 6,861 $1,398 $ 9,734 $1,560 Commercial real estate 10,313 1,648 26,022 3,799 ----------------------------------------------- Total impaired loans with impairment allowance 17,174 3,046 35,756 5,359 ----------------------------------------------- Loans without impairment allowance Commercial -- -- 5,634 -- Commercial real estate -- -- 9,346 -- ----------------------------------------------- Total impaired loans without impairment allowance -- -- 14,980 -- ----------------------------------------------- Total impaired loans and impairment allowance $17,174 $3,046 $50,736 $5,359 ===============================================
The Company allocates the allowance for loan losses to the major loan categories for purposes of this report as set forth in the following table. These allocations are estimates based on historical loss experience and management's judgment. The allocation of the allowance for loan losses is not necessarily an indication that the charge-offs will occur, or if they do occur, that they will be in the proportion indicated in the following table:
AS DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1994 PERCENT OF PERCENT OF PERCENT OF LOANS IN EACH LOANS IN EACH LOANS IN EACH CATEGORY TO CATEGORY TO CATEGORY TO (Dollars in thousands) AMOUNT TOTAL LOANS(1) AMOUNT OTAL LOANS(1) AMOUNT TOTAL LOANS(1) - ------------------------------------------------------------------------------------------------------------------------- Type of loans: Commercial loans $6,190 37.27% $ 6,338 52.45% $ 5,658 55.76% Real estate mortgage loans 6,942 55.19 6,084 41.47 5,754 36.68 Real estate construction loans 294 4.40 136 2.44 225 2.41 Installment loans 72 3.09 81 3.54 336 3.13 Other loans 31 0.05 103 0.10 186 2.02 Unallocated -- N/A -- N/A 112 N/A ------------------------------------------------------------------------------------ Total $13,529 100.00% $12,742 100.00% $12,271 100.0% ====================================================================================
AS OF OF DECEMBER 31, 1993 PERCENT OF LOANS IN EACH CATEGORY TO AMOUNT TOTAL LOANS(1) - ----------------------------------------------------------------------- Type of loans: Commercial loans $2,383 58.61% Real estate mortgage loans 3,891 31.68 Real estate construction loans 276 5.47 Installment loans 137 3.67 Other loans 100 0.57 Unallocated 386 N/A ----------------------------- Total $7,173 100.0% =============================
(1) Total loans mean average loans outstanding during the year, before unamortized deferred loan fees and allowance for loan losses. Based on the Company's evaluation process and the methodology to determine the level of the allowance for loan losses mentioned previously and the fact that a majority of the Company's non-performing loans are secured, management believes the allowance level to be adequate as of December 31, 1996 to absorb the estimated known and inherent risks identified through its analysis. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the results discussed in this Section. 29 18 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary OTHER REAL ESTATE OWNED The Company's OREO properties, net of valuation allowance, were carried at $18.8 million at year-end 1996, compared with those carried at $13.9 million at year-end 1995. During 1996, the Company acquired 16 properties totaling $15.7 million through foreclosures and sold 17 properties totaling $9.2 million at a net gain of $85,000. Another property in the amount of $3.6 million was sold in January 1997. The existing OREO properties include different types of residential properties, commercial buildings, retail stores, land, and one motel. With the exception of one residential property which is in Texas, all of the other properties are located in Southern California. The Company maintains a valuation allowance for the OREO properties in order to record fair estimated value of these properties. Periodic evaluation is performed on each property and corresponding adjustments are made to the valuation allowance. Any decline in value is recognized as non-interest expense in the current period and any balance in the valuation allowance is reversed when the respective property is sold. Management provided $1.5 million to the provision for OREO losses which brought the valuation allowance to $1.6 million at year-end 1996, while $875,000 were provided to the provision for OREO losses in 1995 with a balance of $869,000 in the valuation allowance at year-end 1995. Although the California real estate market showed some improvements in 1996, some areas are still not fully recovered from the depressed condition, therefore additional provision for OREO losses may be made in the future and additional losses on sales of these properties may be incurred. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the results discussed in this Section. The following table shows the OREO expense by type for years 1996, 1995 and 1994:
(Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------ Operating expense $ 312 $ 923 $ 595 Provision for losses 1,501 875 1,609 Net loss (gain) on disposal (85) 79 (60) -------------------------------- Total $ 1,728 $ 1,877 $ 2,144 ================================
INVESTMENTS IN REAL ESTATE The Company's investments in real estate consist of two strip-malls, a 49.5% interest in an apartment purchased in 1993, and a 99% interest in another apartment purchased in 1995. Both of the apartments qualify for Federal low income housing tax credits. The aggregate estimated fair value of the investments in real estate was $4.0 million and $4.3 million as of December 31, 1996 and 1995, respectively. The carrying value of the two strip-malls were written down $721,000 in 1995 due to continued high vacancy rate. The Company recognized a net loss of $106,000 from the operations of the strip-malls in 1996. DEPOSITS The Company continued to experience significant deposit growth in 1996. Total deposits reached $1,364.7 million at year-end 1996, compared with $984.2 million at year-end 1995, representing an increase of $380.5 million or 38.7%, of which $236.1 million were contributed by the FPSB. During 1996, all categories of deposits increased considerably except money market accounts. From year-end 1995 to year-end 1996, time deposits over $100,000 ("Jumbo CD's") increased $104.1 million from $384.2 million to $488.3 million, $30.3 million of which were from FPSB; time deposits under $100,000 rose $146.1 million from $156.9 million to $303.0 million, $103.5 million of which were from FPSB; savings deposits grew by $90.4 million from 134.0 million to $224.4 million, $74.3 million of which were from FPSB; NOW accounts increased $29.6 million from $88.9 million to $118.5 million, $28.0 million of which were from FPSB; demand deposits advanced $17.3 million from $118.0 million to $135.3 million; while money market accounts decreased $7.0 million from $102.2 million to $95.2 30 19 million. Since a majority of the deposits from FPSB were core deposits (defined as all deposits excluding Jumbo CD's and brokered deposits), the ratio of core deposits to total deposits improved from 60.96% at year-end 1995 to 64.22% at year-end 1996. The Company had no brokered deposits as of December 31, 1996. Jumbo CD's consisted of 39.04% of total deposits at year-end 1995, but decreased to 35.78% at year-end 1996. Management continues to monitor the Jumbo CD portfolio and maintains they are not considered generally volatile since 1) a majority of the Company's Jumbo CD's have been fairly consistent based on statistics which support that a considerable portion of the Jumbo CD's stayed with the Bank for more than two years; 2) the Jumbo CD portfolio continued to be diversified with 2,900 individual accounts owned by 2,083 individual depositors as of January 28, 1997; and 3) this phenomenon of having relatively higher percentage of Jumbo CD's exists in most of the financial institutions (Chinese American banks) in the Company's market area which is dictated by the fact that the customers in this market tend to have a higher savings rate. However, management has taken steps to discourage the continued growth in Jumbo CD's, such as to diversify the customer base by branch expansion and acquisition, to lower the interest rates paid on Jumbo CD's and to develop new products to attract depositors. The following tables display the deposit mix for the past three years, time deposits of $100,000 or more by maturity, and average deposits and rates. DEPOSIT MIX
YEAR ENDED DECEMBER 31, 1996 1995 1994 (Dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT - --------------------------------------------------------------------------------------------- Demand $135,345 9.9% $117,974 12.0% $ 120,629 14.3% NOW accounts 118,498 8.7 88,917 9.0 81,727 9.6 Money market accounts 95,158 7.0 102,167 10.4 118,402 14.0 Savings deposits 224,443 16.4 134,045 13.6 148,166 17.5 Time deposits under $100,000 302,981 22.2 156,928 15.9 118,152 14.0 Time deposits over $100,000 488,315 35.8 384,196 39.1 258,639 30.6 ---------------------------------------------------------------- Total deposits $1,364,740 100.0% $984,227 100.0% $845,715 100.0% ================================================================
TIME DEPOSITS OF $100,000 OR MORE BY MATURITY
(Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------ Less than three months $232,980 Three to six months 133,903 Six to twelve months 115,446 Over one year 5,986 -------- Total $488,315 ========
MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR FOR EACH OF THE FIVE YEARS AFTER DECEMBER 31, 1996
(Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------ 1998 $ 13,095 1999 3,783 2000 150 2001 164 2002 2 ----------- Total $ 17,194 ===========
31 20 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary AVERAGE DEPOSITS AND RATES
1996 1995 1994 1993 1992 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE (Dollars in thousands) DEPOSITS RATE DEPOSITS RATE DEPOSITS RATE DEPOSITS RATE DEPOSITS RATE - ---------------------------------------------------------------------------------------------------------------------------------- Demand $ 121,952 --% $114,435 --% $108,528 --% $ 97,209 --% $ 81,375 --% NOW accounts 96,759 1.5 85,413 1.7 80,935 1.6 68,167 1.6 59,931 2.4 Money market accounts 100,898 2.3 106,760 2.4 130,664 2.3 135,769 2.4 119,135 3.3 Savings deposits 151,284 2.3 136,750 2.3 145,694 2.2 138,411 2.4 116,454 3.2 Time deposits 632,211 5.0 450,834 5.4 342,037 3.7 325,443 3.3 322,138 4.3 ---------------------------------------------------------------------------------------------------------- Total deposits $1,103,104 3.5% $894,192 3.5% $807,858 2.5% $764,999 2.4% $699,033 3.3% ==========================================================================================================
CAPITAL RESOURCES Management is committed to retain the Company's capital at a level sufficient to support future growth, to protect depositors, to absorb any unanticipated losses and to comply with various regulatory requirements. The Company has historically acquired its capital primarily from retained earnings and secondarily from the issuance of additional common stock through its Dividend Reinvestment Plan and the ESOP. On November 18, 1996, the Company acquired all the outstanding stock of FPSB for $31.6 million with $15.5 million in cash and $16.1 million in Bancorp's stock. As a result, 905,735 shares were issued in payment of the stock portion of the acquisition. As of December 31, 1996, total stockholders' equity amounted to $118.4 million or 7.87% of total assets, compared with $94.5 million or 8.69% of total assets at year-end 1995. The Company declared a cash dividend of $0.15 per share in January, April, July and October 1996, respectively. Total cash dividends paid in 1996 amounted to $4.7 million. In January 1997, the Company declared another cash dividend of $0.15 per share on 8,878,144 shares outstanding. As of December 31, 1996, the Company's Tier 1 risk-based capital ratio was 12.72% which exceeded the 4% minimum by 8.72%, and the total risk-based capital ratio was 13.97% which was 5.97% above the 8% minimum. The leverage ratio (defined as Tier 1 capital to the average assets of the most recent quarter) stood at 8.17% and exceeded the 4% minimum requirement by 4.17%. Additionally, each institution is assigned to one of the three capital groups, which are well capitalized; adequately capitalized; and undercapitalized under Risk Related Premium System. The Bank's Tier 1 risk-based capital ratio, total risk-based capital ratio and Tier 1 leverage capital ratio was 12.46%, 13.71% and 8.01%, respectively at year-end 1996. These capital ratios place the Bank in the "well capitalized" category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, and Tier 1 risk-based capital ratio equal to or greater than 6.0%, and Tier 1 leverage capital ratio equal to or greater than 5.0%. 32 21 LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity is the Company's ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs. The Company's liquidity came primarily from various types of deposits and, to a minimal extent, from purchased funds. In addition, the Company obtains liquidity from assets as well, which include cash and cash equivalents, Federal funds sold, securities available-for-sale, and securities held-to-maturity, adjusted by the depreciation/appreciation of securities held-to-maturity, securities pledged, and purchased funds. Such net liquid assets totaled $634.0 million as of December 31, 1996. Due to the gradual shift in the earning assets from loans to securities and other investments, the Company's liquidity ratio (defined as net liquid assets to total deposits) has continued to improve from 43.64% at year-end 1995 to 46.46% at year-end 1996. To further enhance liquidity, the Company maintains contingency funding facilities including Federal funds lines, retail certificate of deposit credit lines and a line of credit with the Federal Home Loan Bank totaling approximately $253 million as of December 31, 1996. Management believes all of the sources discussed above will provide the Bank with adequate operating liquidity to meet its normal operating needs. Bancorp obtains funding for its activities through dividend income contributed by the Bank and proceeds from investments in the Dividend Reinvestment Plan. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. Since the business activities of Bancorp consist primarily of the operations of the Bank, and no other operating business activities are proposed for Bancorp in the near future, management believes Bancorp's liquidity generated from its prevailing sources are sufficient to meet its operational needs. Interest sensitivity risk management attempts to minimize the risk to net interest income resulting from the changes in market interest rates. The Company's Investment Committee monitors interest sensitivity risk on an on-going basis by using, among other things, simulation model, gap analysis and certain key ratios. Gap analysis is a measure to identify the differences between rate sensitive assets and rate sensitive liabilities over certain periods of time. A positive gap exists when rate sensitive assets exceed rate sensitive liabilities and a negative gap exists when rate sensitive liabilities exceed rate sensitive assets. Generally, a positive gap would enhance net interest margin during periods of increasing interest rates and vice versa, and a negative gap would impair net interest margin during periods of increasing interest rates and vice versa. Beginning in 1995, the Company's rate sensitive liabilities also included distribution of non-maturity deposit balances over certain periods of time based on the Bank's own assumptions and experiences. These non-maturity deposits, which contain money market accounts, NOW accounts and savings deposits, were included in the immediate repricing period prior to the third quarter of 1995. As of December 31, 1996, the Company's rate sensitive liabilities exceeded rate sensitive assets by $246.7 million with a cumulative gap ratio of a negative 16.4% within a one-year period. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the results discussed in this Section. 92................... $749 93................... $790 94................... $846 95................... $984 96...................$1,365 Deposits (in millions)
33 22 management's discussion and analysis of financial condition and results of operations cathay bancorp, inc. and subsidiary The following table indicates the Company's interest rate sensitivity position as of December 31, 1996, and may not be reflective of positions in subsequent periods. In addition, significant variations in interest rate sensitivity may exist within the repricing periods presented in which the Bank has interest rate positions. INTEREST RATE SENSITIVITY
DECEMBER 31, 1996 INTEREST SENSITIVITY PERIOD 0 TO 90 91 TO 365 1 YEAR TO OVER NON-INTEREST (Dollars in thousands) DAYS DAYS 5 YEARS 5 YEARS BEARING TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Earnings Assets: Cash and due from banks $ -- $ -- $ -- $ -- $ 47,194 $ 47,194 Federal funds sold and securities purchased under agreement to resell 28,000 -- -- -- -- 28,000 Securities available-for-sale 61,345 37,111 240,077 44,858 -- 383,391 Securities held-to-maturity 100 10,631 101,297 98,101 -- 210,129 Loans: Commercial loans 249,631 18,978 3,046 6,800 -- 278,455 Real estate mortgage loans 274,000 2,634 11,184 128,688 -- 416,506 Real estate construction loans 26,843 6,667 -- -- -- 33,510 Installment loans 1,169 2,693 19,631 21 -- 23,514 Other loans 365 -- -- -- -- 365 ----------------------------------------------------------------------------------------- Total loans(1) 552,008 30,972 33,861 135,509 -- 752,350 ----------------------------------------------------------------------------------------- Non-earning assets -- -- -- -- 83,265 83,265 ----------------------------------------------------------------------------------------- Total assets $641,453 $ 78,714 $ 375,235 $278,468 $ 130,459 $1,504,329 ========================================================================================= Source of Funds for Assets: Deposits: Demand $ -- $ -- $ -- $ -- $ 135,345 $ 135,345 Money market 74,285 31,024 72,303 36,044 -- 213,656 Savings 47,169 29,667 92,054 55,553 -- 224,443 TCD's under $100,000 148,072 143,542 11,206 161 -- 302,981 TCD's $100,000 and over 232,980 249,349 5,986 -- -- 488,315 ----------------------------------------------------------------------------------------- Total deposits 502,506 453,582 181,549 91,758 135,345 1,364,740 ----------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 10,000 -- -- -- -- 10,000 Mortgage indebtedness 773 -- -- -- -- 773 Other liabilities -- -- -- -- 10,370 10,370 Stockholders' equity -- -- -- -- 118,446 118,446 ----------------------------------------------------------------------------------------- Total liabilities & stockholders' equity $513,279 $ 453,582 $ 181,549 $ 91,758 264,161 $1,504,329 ========================================================================================= Interest sensitivity gap $128,174 $(374,868) $ 193,686 $186,710 $(133,702) $ -- ----------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $128,174 $(246,694) $ (53,008) $133,702 $ -- $ -- ----------------------------------------------------------------------------------------- Gap ratio (% of total assets) 8.52% (24.92)% 12.88% 12.41% (8.89)% ------------------------------------------------------------------------- Cumulative gap ratio 8.52% (16.40)% (3.52)% 8.89% -- -------------------------------------------------------------------------
(1) Loans are before unamortized deferred loan fees and allowance for loan losses. Non-accrual loans are included in non-earning assets. 34 23 FACTORS THAT MAY AFFECT FUTURE RESULTS Results for any period of less than twelve months are not necessarily indicative of the results that may be expected for the full year or for any other interim period. Management believes that the provision for loan losses is adequate to cover reasonably expected losses from the loan portfolio. Although management believes it uses the best information available to calculate the provision for loan losses and the level of the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to the Company's non-performing or performing loans. No assurance can be given that the Company will not sustain loan losses in excess of present or future levels of the allowance for possible loan losses. Material increases in the Company's allowance for loan losses would result in a decrease in the Company's net income and capital. A simple interest rate gap analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as fixed and adjustable rate mortgage loans, have features which limit changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest-rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase. The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operation of the Company is reflected in increased operating costs. Virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. The Company's lending operations have been concentrated primarily in Southern and Northern California. Accordingly, real estate securing such lending activity has been principally located in such areas. The economic recession materially and adversely affected the ability of some borrowers to repay their loans out of cash flow. Consequently, the real estate collateral securing these commercial and industrial loans as a source of repayment has assumed greater importance. The value of such collateral is dependent upon conditions in the relevant real estate markets, including general or local economic conditions and neighborhood characteristics, real estate tax rates, the cost of operating the properties, govern- 35 24 mental regulations and fiscal policies, acts of nature including earthquakes and floods (which may result in uninsured losses), and other factors which are beyond the control of the Company. Although economic indicators have improved, management cannot foresee when the current conditions adversely affecting the regional real estate market will end. Lengthy continuation or worsening of these conditions could increase the amount of the Company's non-performing assets, erode the value of loan collateral and have an adverse effect on the Company's efforts to collect its non-performing loans or otherwise liquidate its non-performing assets (including other real estate owned) on terms favorable to the Company. The risks of making construction loans include the possibility of failure by contractors to complete, or to complete on a timely basis, construction of such properties, substantial cost overruns in excess of original estimates and financing, market deterioration pending construction and the lack of permanent take-out financing, among other things. Loans secured by such properties may also involve additional risk because such properties have no operating history and because loan funds are advanced upon the security of the project under construction, which is of uncertain value prior to completion of construction, and the operating cash flow to be generated by the project. There is no assurance that such properties will be sold or leased so as to generate the cash flow anticipated by the borrower. Such considerations can affect borrowers' ability to repay their obligations to the Company and the value of the Company's security interest in collateral. Although the Company, in considering whether to make a loan on or secured by real property, utilized appraisals, an appraisal is only an estimate of the value of the property at the time the appraisal is made. Accordingly, there can be no assurance that upon sale or foreclosure of the property the borrower or the Company will realize an amount equal the amounts secured thereby. The Company faces substantial competition for deposits and loans throughout its market area, where major banks dominate the commercial banking industry. Among the advantages which these banks may have over the Company are their ability to finance advertising campaigns and to allocate their investment assets, including loans, to regions of higher yield and demand. By virtue of their larger capital bases, such institutions have substantially greater lending limits than the Company and perform certain functions, including trust services, which are not presently offered by the Company. The Company also competes for loans and deposits with savings and loan associations, finance companies, money market funds, brokerage houses, credit unions and non-financial institutions. The Riegle-Neal Interstate Company and Branching Efficiency Act of 1994, among other things, made it easier for out-of-state banks to enter the California market and, thus, may have an adverse effect on the Company's competitive position. From time to time, legislation is proposed or enacted which has the effect of increasing the cost of doing business, limiting permissible activities or affecting the competitive balance between banks and other financial institutions. It is impossible to predict the competitive impact these and other changes in legislation will have on commercial banking in general or on the business of the Company in particular. 36 25 market for cathay bancorp, inc. stock cathay bancorp, inc. and subsidiary The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market(SM) under the symbol: "CATY". During 1996, total trading volume was approximately 1,026,100, and the prices ranged from a high of $20.00 to a low of $15.00. The approximate number of stockholders at year-end 1996 was 1,900. The Company paid an aggregate cash dividend of $0.60 in both 1996 and 1995. 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 - ------------------------------------------------------------------------------------- 1996 First Quarter $ 18.000 $ 15.000 $ 17.125 236,717 Second Quarter 17.250 15.875 16.250 189,939 Third Quarter 16.750 15.125 16.375 206,660 Fourth Quarter 20.000 15.875 19.625 392,644 ------------------------------------------------ 1995 First Quarter $ 14.250 $ 11.500 $ 13.000 178,731 Second Quarter 14.000 11.250 11.250 212,019 Third Quarter 13.500 11.250 13.500 201,844 Fourth Quarter 17.000 15.000 15.500 192,274 ------------------------------------------------
(1) The company does not represent that the outstanding shares may either be bought or sold at a certain price. The stock is traded on the Nasdaq. 37 26 distribution of assets, liabilities and stockholders' equity cathay bancorp, inc. and subsidiary The following table shows the average balances (based on quarterly averages) of the Company's assets, liabilities, and stockholders' equity accounts presented for the years indicated:
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 (Dollars in thousands) AMOUNT %(1) AMOUNT %(1) AMOUNT %(1) AMOUNT %(1) AMOUNT %(1) - -------------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 39,407 3.11% $ 52,592 5.18% $ 38,213 4.25% $ 40,180 4.67% $ 42,597 5.36% Federal funds sold and securities purchased under agreement to resell 36,050 2.84 17,875 1.76 12,550 1.39 18,250 2.12 4,900 0.62 Securities available- for-sale, taxable 320,533 25.28 116,042 11.44 59,776 6.64 39,601 4.61 15,055 1.89 Securities available- for-sale, nontaxable 89 0.01 149 0.01 701 0.08 634 0.07 -- - Securities held-to- maturity, taxable 151,534 11.95 171,287 16.88 123,147 13.69 76,821 8.94 60,122 7.57 Securities held-to- maturity, nontaxable 39,208 3.09 40,245 3.97 38,494 4.28 38,102 4.43 35,123 4.42 Total net loans(2) 605,000 47.71 547,948 54.01 570,040 63.35 591,686 68.82 586,115 73.74 Premises and equipment, net 26,059 2.06 26,854 2.65 26,430 2.94 25,838 3.01 25,977 3.27 Other assets 50,129 3.95 41,488 4.10 30,500 3.38 28,660 3.33 24,897 3.13 --------------------------------------------------------------------------------------------------------- Total assets $1,268,009 100.00% $1,014,480 100.00% $899,851 100.00% $859,772 100.00% $794,786 100.00% ========================================================================================================= Liabilities Demand deposits $ 124,051 9.78% $ 116,476 11.48% $108,250 12.03% $102,189 11.89% $ 88,330 11.11% Savings deposits(3) 363,410 28.66 328,473 32.38 354,159 39.36 344,382 40.05 301,627 37.95 Time deposits 665,725 52.51 470,222 46.35 347,437 38.61 325,254 37.83 319,875 40.25 --------------------------------------------------------------------------------------------------------- Total deposits 1,153,186 90.95 915,171 90.21 809,846 90.00 771,825 89.77 709,832 89.31 ========================================================================================================= Other borrowings 2,700 0.21 800 0.08 1,400 0.15 1,750 0.20 4,525 0.57 Mortgage indebtedness 655 0.05 -- -- 250 0.03 25 0.01 35 0.01 Other liabilities 9,515 0.75 7,537 0.74 5,097 0.57 6,882 0.80 7,415 0.93 --------------------------------------------------------------------------------------------------------- Total liabilities 1,166,056 91.96 923,508 91.03 816,593 90.75 780,482 90.78 721,807 90.82 --------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock and additional paid-in-capital 47,194 3.72 41,767 4.12 40,896 4.54 39,658 4.61 38,102 4.79 Retained earnings 54,759 4.32 49,205 4.85 42,362 4.71 39,632 4.61 34,877 4.39 --------------------------------------------------------------------------------------------------------- Total stockholders' equity 101,953 8.04 90,972 8.97 83,258 9.25 79,290 9.22 72,979 9.18 --------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,268,009 100.00% $1,014,480 100.00% $899,851 100.00% $859,772 100.00% $794,786 100.00% =========================================================================================================
1 Percentage of categories under Assets, Liabilities and Stockholders' Equity are shown as a percentage of average assets. 2 Total net loans means total loan net of loan participations sold, unamortized deferred loan fees and allowance for loan losses. 3 Savings deposits include NOW, money market and savings accounts. 38 27 consolidated statements of condition cathay bancorp, inc. and subsidiary
AS OF DECEMBER 31, 1996 1995 - ------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 47,193,911 $ 55,125,510 Federal funds sold and securities purchased under agreement to resell 28,000,000 1,200,000 ----------------------------------- Cash and cash equivalents 75,193,911 56,325,510 Securities available-for-sale (with amortized costs of $385,228,392 in 1996 and $240,817,574 in 1995) 383,391,003 243,251,581 Securities held-to-maturity (with estimated fair values of $212,002,000 in 1996 and $179,259,000 in 1995) 210,128,511 174,377,018 Loans (net of allowance for loan losses of $13,528,568 in 1996 and $12,742,427 in 1995) 744,383,939 542,995,041 Other real estate owned, net 18,854,186 13,878,957 Investments in real estate, net 3,987,224 4,304,355 Premises and equipment, net 25,771,302 26,586,345 Customers' liability on acceptance 6,653,156 3,675,161 Accrued interest receivable 15,007,454 11,714,979 Goodwill 9,897,449 -- Other assets 11,061,271 10,291,265 ----------------------------------- Total assets $ 1,504,329,406 $1,087,400,212 =================================== Liabilities and Stockholders' Equity Deposits Non-interest bearing demand deposits $ 135,345,436 $ 117,974,197 Interest bearing accounts NOW accounts 118,497,560 88,917,118 Money market deposits 95,158,361 102,167,167 Savings deposits 224,442,618 134,044,634 Time deposits under $100,000 302,980,795 156,927,391 Time deposits of $100,000 or more 488,314,939 384,196,029 ----------------------------------- Total deposits 1,364,739,709 984,226,536 ----------------------------------- Securities sold under agreements to repurchase 10,000,000 1,500,000 Acceptances outstanding 6,653,156 3,675,161 Other liabilities 4,490,536 3,469,702 ----------------------------------- Total liabilities 1,385,883,401 992,871,399 ----------------------------------- Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value; $10,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized, 8,878,144 and 7,867,164 shares issued and outstanding in 1996 and 1995, respectively 88,781 78,672 Additional paid-in-capital 59,811,940 42,013,687 Unrealized holding gain (loss) on securities available-for-sale, net of tax (1,059,347) 1,403,327 Retained earnings 59,604,631 51,033,127 ----------------------------------- Total stockholders' equity 118,446,005 94,528,813 ----------------------------------- Total liabilities and stockholders' equity $ 1,504,329,406 $1,087,400,212 ===================================
See accompanying notes to consolidated financial statements. 39 28 consolidated statements of income cathay bancorp, inc. and subsidiary
YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Interest Income Interest and fees on loans $55,887,756 $56,825,101 $50,094,902 Interest on securities available-for-sale 17,146,782 5,249,753 2,692,820 Interest on securities held-to-maturity 11,581,846 12,776,759 8,052,307 Interest on Federal funds sold and securities purchased under agreement to resell 1,482,592 1,371,334 790,779 ------------------------------------------- Total interest income 86,098,976 76,222,947 61,630,808 =========================================== Interest Expense Time deposits of $100,000 or more 22,576,698 17,594,425 8,816,921 Other deposits 16,474,889 13,582,511 11,152,096 Other borrowed funds 157,829 104,379 64,387 ------------------------------------------- Total interest expense 39,209,416 31,281,315 20,033,404 =========================================== Net interest income before provision for loan losses 46,889,560 44,941,632 41,597,404 Provision for loan losses 3,600,000 7,300,402 7,754,594 ------------------------------------------- Net interest income after provision for loan losses 43,289,560 37,641,230 33,842,810 ------------------------------------------- Non-Interest Income Securities gains 21,862 610,847 63,412 Letter of credit commissions 1,508,407 1,272,867 1,377,664 Service charges 2,942,170 3,069,213 3,102,908 Other operating income 1,386,589 1,267,949 1,299,865 ------------------------------------------- Total non-interest income 5,859,028 6,220,876 5,843,849 =========================================== Non-Interest Expense Salaries and employee benefits 13,996,253 12,911,639 12,062,724 Occupancy expense 2,320,718 2,272,137 1,884,469 Computer and equipment expense 2,001,985 2,139,756 1,916,770 Professional services expense 3,153,993 2,517,141 2,580,298 FDIC and State assessments 454,850 1,154,808 1,815,022 Marketing expense 1,163,455 982,232 789,458 Net other real estate owned expense 1,728,382 1,876,471 2,143,537 Operations of investments in real estate 286,568 881,238 744,985 Other operating expense 2,907,051 2,881,936 2,201,871 ------------------------------------------- Total non-interest expense 28,013,255 27,617,358 26,139,134 =========================================== Income before income tax expense 21,135,333 16,244,748 13,547,525 =========================================== Income tax expense 7,819,382 5,624,109 4,033,526 =========================================== Net Income $13,315,951 $10,620,639 $ 9,513,999 =========================================== Net income per common share $ 1.66 $ 1.36 $ 1.23 Weighted average common shares outstanding 8,017,398 7,805,339 7,724,752 -------------------------------------------
See accompanying notes to consolidated financial statements. 40 29 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY cathay bancorp, inc. and subsidiary
Unrealized Holding Gain (Loss) on Common Stock Additional Unearned Securities Total For the year ended December 31, Number Paid-in ESOP Available-for- Retained Stockholders' 1996, 1995 and 1994 of Shares Amount Capital Shares Sale Earnings Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 7,714,603 $ 77,146 $40,114,776 $ -- $ 90,659 $ 40,242,185 $ 80,524,766 =================================================================================================== Issuances of stock - Dividend Reinvestment Plan 83,947 840 1,044,149 -- -- -- 1,044,989 Cash dividends of $.60 per share -- -- -- -- -- (4,649,251) (4,649,251) Unearned ESOP shares -- -- -- (421,786) -- -- (421,786) Dividend on unallocated ESOP shares -- -- -- -- -- 9,623 9,623 Change in unrealized holding gain(loss) on securities available-for-sale, net of tax -- -- -- -- (637,294) -- (637,294) Net income for the year -- -- -- -- -- 9,513,999 9,513,999 --------------------------------------------------------------------------------------------------- Balance at December 31, 1994 7,798,550 77,986 41,158,925 (421,786) (546,635) 45,116,556 85,385,046 =================================================================================================== Issuances of stock - Dividend Reinvestment Plan 68,614 686 854,762 -- -- -- 855,448 Cash dividends of $.60 per share -- -- -- -- -- (4,694,445) (4,694,445) Allocation of unearned ESOP shares -- -- -- 421,786 -- -- 421,786 Dividend on ESOP shares -- -- -- -- -- (9,623) (9,623) Change in unrealized holding gain(loss) on securities available-for-sale, net of tax -- -- -- -- 1,949,962 -- 1,949,962 Net income for the year -- -- -- -- -- 10,620,639 10,620,639 --------------------------------------------------------------------------------------------------- Balance at December 31, 1995 7,867,164 78,672 42,013,687 -- 1,403,327 51,033,127 94,528,813 =================================================================================================== Issuances of stock - Dividend Reinvestment Plan 105,245 1,052 1,693,718 -- -- -- 1,694,770 Issuance of stock for the acquisition of First Public Savings Bank, F.S.B 905,735 9,057 16,104,535 -- -- -- 16,113,592 Cash dividends of $.60 per share -- -- -- -- -- (4,744,447) (4,744,447) Change in unrealized holding gain(loss) on securities available-for-sale, net of tax -- -- -- -- (2,462,674) -- (2,462,674) Net income for the year -- -- -- -- -- 13,315,951 13,315,951 --------------------------------------------------------------------------------------------------- Balance at December 31, 1996 8,878,144 $ 88,781 $59,811,940 $ -- $ (1,059,347) $ 59,604,631 $ 118,446,005 ===================================================================================================
See accompanying notes to consolidated financial statements. 41 30 CONSOLIDATED STATEMENTS OF CASH FLOWS cathay bancorp, inc. and subsidiary
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net Income $ 13,315,951 $ 10,620,639 $ 9,513,999 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,600,000 7,300,402 7,754,594 Provision for losses on other real estate owned 1,501,268 874,759 1,608,557 Provision for investments in real estate -- 720,902 615,000 Depreciation 1,336,363 1,356,916 1,192,541 Net (gain) loss on sale of other real estate owned (85,313) 78,553 (60,455) Premises and equipment disposal losses 1,595 1,203 252 Net gain on sales and calls of securities (21,862) (610,847) (63,412) Amortization and accretion of investment security premiums, net 734,931 97,026 (15,643) Increase (decrease) in deferred loan fees, net 247,476 (345,719) 26,752 Increase in accrued interest receivable, net (1,107,418) (4,011,816) (1,863,668) (Increase) decrease in other assets, net 19,163,800 (277,459) (3,726,342) Increase (decrease) in other liabilities, net (3,130,696) 1,177,459 388,595 ---------------------------------------------------- Total adjustments 22,240,144 6,361,379 5,856,771 ---------------------------------------------------- Net cash provided by operating activities 35,556,095 16,982,018 15,370,770 ---------------------------------------------------- Cash Flows From Investing Activities Purchase of securities available-for-sale (89,272,049) (128,043,049) (37,990,205) Proceeds from sale, maturity and call of securities available-for-sale 58,609,947 98,880,805 43,945,614 Purchase of securities held-to-maturity (24,796,858) (149,158,643) (90,625,502) Proceeds from maturity and call of securities held-to-maturity 26,365,854 19,779,542 18,381,285 Purchase of mortgage-backed securities available-for-sale (9,006,116) -- -- Proceeds from repayments and sale of mortgage-backed securities available-for-sale 14,345,691 -- -- Purchase of mortgage-backed securities held-to-maturity (65,925,846) -- -- Repayments from mortgage-backed securities held-to-maturity 3,105,726 37,896 269,987 Net change in loans (68,372,708) 6,030,865 (1,500,211) Purchase of premises and equipment (530,193) (1,065,696) (1,958,547) Proceeds from sale of equipment 7,278 6,394 108,601 Proceeds from sale of other real estate owned 5,283,597 5,347,860 1,868,176 (Increase) decrease in investments in real estate 317,131 (438,308) 71,502 Payment for purchase of FPSB, net on cash acquired (1,906,354) -- -- ---------------------------------------------------- Net cash used in investing activities (151,774,900) (148,622,334) (67,429,300) ---------------------------------------------------- Cash Flows From Financing Activities Net increase (decrease) in demand deposits, NOW accounts, money market and savings deposits 25,763,682 (25,820,764) 5,310,388 Net increase in time deposits 103,873,201 164,332,791 49,989,582 Increase (decrease) in securities sold under agreements to repurchase 8,500,000 1,500,000 (800,000) Increase (decrease) of borrowing from Federal Home Loan Bank -- (4,000,000) 4,000,000 Proceeds from direct loan to ESOP -- -- 940,000 Payments to decrease direct loan to ESOP -- (447,481) (492,519) (Increase) decrease in unearned ESOP shares -- 421,786 (421,786) Cash dividends (4,744,447) (4,704,068) (4,639,628) Proceeds from shares issued to Dividend Reinvestment Plan 1,694,770 855,448 1,044,989 ---------------------------------------------------- Net cash provided by financing activities 135,087,206 132,137,712 54,931,026 ---------------------------------------------------- Increase in cash and cash equivalents 18,868,401 497,396 2,872,496 Cash and cash equivalents, beginning of the year 56,325,510 55,828,114 52,955,618 ---------------------------------------------------- Cash and cash equivalents, end of the year $ 75,193,911 $ 56,325,510 $ 55,828,114 ==================================================== Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 39,123,990 $ 30,818,671 $ 19,633,351 Income taxes $ 5,540,000 $ 7,223,000 $ 7,857,000 Non-cash investing activities: Transfer to securities available-for-sale $ 30,362,405 $ 135,236,133 $ 36,300,060 Transfer to securities held-to-maturity $ 3,733,023 $ -- $ -- Net change in unrealized gain(loss) on securities available-for-sale, net of tax $ (2,462,674) $ 1,949,962 $ (637,294) Transfers to other real estate owned $ 13,329,482 $ 19,952,054 $ 5,296,885 Loans to facilitate the sale of other real estate owned $ 3,524,000 $ 6,570,000 $ 1,294,605 The Company acquired all the outstanding stock of FPSB for $31.6 million ($15.5 million in cash and $16.1 million in the Company's common stock). See Note 2.
See accompanying notes to consolidated financial statements. 42 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS cathay bancorp, inc. and subsidiary 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Cathay Bancorp, Inc. ("Bancorp"), a Delaware corporation, and its wholly-owned subsidiary, Cathay Bank ("Bank"), a California state-chartered bank (together, "the Company"). All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements of the Company are prepared in conformity with generally accepted accounting principles and general practices within the banking industry. The following are descriptions of the more significant of these policies. ORGANIZATION AND BACKGROUND Effective December 10, 1990, Bancorp began operations as a bank holding company and shares of Bancorp were exchanged on a one-for-one basis for all of the outstanding common stock of Cathay Bank. The business activities of Bancorp consist solely of the operations of the Bank and its wholly-owned subsidiary, Cathay Investment Company ("CIC"). There are no operating business activities currently proposed for the Bancorp. The Bancorp may, from time to time, explore various acquisition possibilities. The Bancorp currently does not employ any persons other than its management, which includes the President and the Chief Financial Officer, and does not own or lease any real or personal property. The Bancorp uses the employees, premises, equipment and furniture of the Bank without the payment of any service or rental fees to the Bank. It is expected that for the near future the primary business of the Bancorp will be the ongoing business of the Bank. Cathay Bank is a commercial bank, servicing primarily the individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. Its operations include the acceptance of checking, savings, and time deposits, and the making of commercial, real estate and consumer loans. The Bank also offers trade financing, letter of credit, wire transfer, spot and forward contracts, and other customary banking services to its customers. SECURITIES The Company accounts for securities under Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities". Securities are classified as held-to-maturity when management has the ability and intent to hold these securities until maturity. Securities are classified as available-for-sale when management intends to hold the securities for an indefinite period of time, or when the securities may be utilized for tactical asset/liability purposes, and may be sold from time to time to effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Securities purchased subsequent to the initial classification are designated as held-to-maturity or available-for-sale at the time of acquisition. Securities held-to-maturity are stated at cost, adjusted for the amortization of premiums and the accretion of discounts on a level-yield basis. The cost basis of an individual security is written down, if the decline in its fair value below the amortized cost basis is other than temporary. The write-down is accounted for as a realized loss, and is included in earnings. The new cost basis is not changed for subsequent recoveries in fair value. Securities available-for-sale are carried at fair value, and any unrealized holding gains or losses are excluded from earnings and reported as a separate component of stockholders' equity, net of tax, until realized. Realized gains or losses are determined on the specific identification method. Premiums and discounts are amortized or accreted as adjustment of yield on a level-yield basis. In November 1995, the Financial Accounting Standards Board issued its Guide to Implementation of SFAS 115 and allowed companies a single opportunity during the period from November 15, 1995 to December 31, 1995 to reevaluate 43 32 notes to consolidated financial statements cathay bancorp, inc. and subsidiary and, if necessary, to reclassify securities between held-to-maturity and available-for-sale without tainting the classification of any securities. In November 1995, the Bank reclassified securities with a book value of approximately $130,000,000 from held-to-maturity to available-for-sale. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for both categories of securities are included in earnings. LOANS Loans are carried at amounts advanced, less principal payments collected and deferred loan fees. Interest is accrued and earned daily on an actual or 360-day basis. Interest accruals on business loans and non-residential real estate loans are generally discontinued whenever the payment of interest or principal is 90 days or more past due. Such loans are placed on non-accrual status, unless the loan is well secured, and there is a high probability of recovery in full, as determined by management. When loans are placed on a non-accrual status, previously accrued but unpaid interest is reversed and charged against current income, and interest is subsequently recognized only to the extent cash is received. Management believes the allowance for loan losses is being maintained at a level considered adequate to provide for known and probable impairment that might be reasonably anticipated. Additions to the allowance for loan losses are made monthly by charges to operating expense in the form of a provision for loan losses. All loans judged to be uncollectible are charged against the allowance while any recoveries are credited to the allowance. Management monitors changing economic conditions, the loan mix by category, the industry segregation and geographic distribution of the portfolio and the type of borrowers in determining the adequacy of the allowance for loan losses. Management also closely reviews its past, present and expected overall net loan losses in comparison to the existing level of the allowance. In addition, the Bank's regulators, as an integral part of their examination process, periodically review the Bank's allowances for estimated losses. Such agencies may require the Bank to make additions to such allowances based on their judgements of the information available to them at the time of their examination. The Bank adopted the provisions of Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan," and Statement of Financial Accounting Standards No. 118 (SFAS 118), "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," on January 1, 1995. Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to provision for loan losses. In accordance with SFAS 118, the Bank stratifies its loan portfolio by size and treats smaller performing loans with an outstanding balance less than the Bank's defined criteria as a homogenous portfolio. For loans with balance in excess of the Bank's defined criteria, the Bank conducts a periodic review of each loan in order to test for impairment. The statement also applies to restructured loans and eliminates the requirement that a creditor account for certain loans as foreclosed assets until the creditor has taken possession of the collateral. The Bank recognizes interest income on impaired loans based on its existing method of recognizing interest income on nonaccrual loans. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. 44 33 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 life 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. OTHER REAL ESTATE Owned Real estate acquired in the settlement of loans is carried at the lower of cost or estimated fair value, less estimated costs to sell. Specific valuation allowances on other real estate owned are recorded through charges to operations to recognize deterioration in fair value subsequent to transfer. INVESTMENTS IN REAL ESTATE Real estate acquired for sale or development is stated at the lower of cost or estimated fair value. Costs directly related to the development or the improvement of real estate are capitalized. Gains on sales are recognized when certain criteria relating to the buyer's initial and continuing investment in the property are met. GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired and the related acquisition costs, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. DERIVATIVES It is the policy of the Company not to speculate on the future direction of interest rates. However, the Company may enter into hedge transactions to protect its position against inherent interest rate risk in the balance sheet and against risk in specific transactions. As of December 31, 1996 and 1995, the Company had not entered into any types of hedging transactions or invested in, hold or issue derivative financial instruments such as futures, forwards, swaps, or option contracts, or other financial instruments with similar charcacteristics defined in Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with Off-balance-sheet risk and Financial Instruments with Concentrations of Credit Risk", and Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". To the extent the Company does engage in hedging or derivative transactions in the future, the transactions will be accounted for in consistent with the guidance in Statement of Financial Accounting Standards No. 80, "Accounting for Future Contracts". 45 34 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 tax under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" as of January 1, 1993. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. NET INCOME PER COMMON SHARE Net income per common share is computed on the basis of the weighted average number of shares outstanding during each year. Weighted average shares were 8,017,398, 7,805,339, and 7,724,752 for 1996, 1995 and 1994, respectively. ESOP shares committed to be released in 1995 are considered in 1995 as outstanding for earnings per share (EPS) purposes. STATEMENT OF CASH FLOWS Cash and cash equivalents include short-term, highly liquid investments that generally have an original maturity of three months or less. USE OF ESTIMATES Management of the Bank has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. The most significant estimate subject to change relates to the allowance for loan losses. RECLASSIFICATION Certain reclassifications have been made to the prior years' financial statements to conform with the 1996 presentation. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted the provisions of the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is determined by comparing the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial condition or results of operations. 46 35 The Company adopted the provisions of the Statement of Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights", which amends Statement of Financial Accounting Standards No. 65 (SFAS 65), "Accounting for Certain Mortgage Banking Activities" on January 1, 1996. This statement requires mortgage servicing rights to be measured at cost by allocating the cost of the mortgage loans between the mortgage servicing rights and the mortgage loans based on their relative fair values. The adoption of this Statement did not have a material impact on the Company's financial condition or results of operations. In 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, " Accounting for Stock-based Compensation" which supersedes Accounting Principles Board Opinions No. 25, "Accounting for Stock Issued to Employees" effective for financial statements issued for fiscal years beginning after December 15, 1995. The Company has not adopted any stock-based compensation plan as of December 31, 1996, and therefore the new statement did not have any impact on its financial condition or results of operations of the Company. In June 1996, the FASB issued the Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that secured borrowings. Management of the Company does not expect that adoption of SFAS 125 will have a material impact on the Company's financial condition and the results of operations. 2. ACQUISITION Effective November 18, 1996, the Bank acquired all the outstanding stock of First Public Savings Bank, F.S.B. ("FPSB") for $31,600,000 ($15,500,000 in cash and $16,100,000 in Bancorp's stock) in a transaction that has been accounted for as a purchase. Immediately prior to the close, FPSB had total assets, loans, securities, cash, other assets and deposits of $276,000,000, $144,000,000, $94,000,000, $14,000,000, $24,000,000 and $251,000,000, respectively. Immediately upon acquisition, FPSB was merged into the Bank. As a result of the adjustment of FPSB's assets and liabilities to fair value immediately prior to the closing of the merger, the Company recorded goodwill of approximately $10,000,000. Net income for 1996 includes the operation of FPSB only from November 18, 1996. The following table presents an unaudited pro forma combined summary of operations of the Company and FPSB for the years ended December 31, 1996 and 1995, respectively. The unaudited pro forma combined summary of operations is presented as if the merger had been effective January 1, 1996 and 1995, respectively. This information combines the historical results of the Company and FPSB after giving effect to amortization of purchase accounting adjustments. The unaudited pro forma combined summary of operations is based on the Company's historical results and those of FPSB. These pro forma statements are intended for informational purposes only and are not necessarily indicative of the future results of the Company or of the results of the Company that would have occurred had the acquisition been in effect for the full years presented. 47 36 notes to consolidated financial statements cathay bancorp, inc. and subsidiary
YEAR ENDED DECEMBER 31, (UNAUDITED) (Dollars in thousands, except per share data) 1996 1995 - ------------------------------------------------------------------------------ Interest income $ 104,921 $ 94,066 Interest expense 48,064 39,710 ---------------------- Net interest income before provision for loan losses 56,857 54,356 Provision for loan losses 3,789 7,601 ---------------------- Net interest income after provision for loan losses 53,068 46,755 Non-interest income 6,090 6,878 Non-interest expense 34,241 31,330 ---------------------- Income before income tax expense 24,917 22,303 Income tax expense 9,986 8,385 ---------------------- Net income $ 14,931 $ 13,918 ====================== Net income per common share $ 1.67 $ 1.60 ======================
The unaudited pro forma combined net income per share were calculated based on the pro forma combined net income and the average common shares assumed to be outstanding during the years presented. 3. CASH AND DUE FROM BANKS The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserve balances required for 1996 and 1995 were $11,159,000 and $10,313,000, respectively. 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, 1996 and 1995 respectively:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR 1996 COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------- U.S. Treasury securities $122,115,946 $ 196,958 $ 543,994 $121,768,910 U.S. government agencies 229,695,441 127,458 1,445,450 228,377,449 State and municipal securities 50,008 61 -- 50,069 Mortgage-backed securities 23,053,173 7,216 178,264 22,882,125 Asset-backed securities 4,999,024 -- 1,374 4,997,650 Federal Home Loan Bank stock 5,314,800 -- -- 5,314,800 --------------------------------------------------------------- Total $385,228,392 $ 331,693 $2,169,082 $383,391,003 ===============================================================
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR 1995 COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------- U.S. Treasury securities $110,049,430 $ 748,731 $ 412,219 $110,385,942 U.S. government agencies 127,749,643 2,097,233 -- 129,846,876 State and municipal securities 95,001 262 -- 95,263 Federal Home Loan Bank stock 2,923,500 -- -- 2,923,500 --------------------------------------------------------------- Total $240,817,574 $2,846,226 $ 412,219 $243,251,581 ===============================================================
48 37 The Company restructured its securities portfolio upon completion of the acquisition of FPSB to improve its interest rate risk position. The classification on certain securities with an amortized cost basis of $30,007,377 and an unrealized loss of $172,485 was changed from held-to-maturity to available-for-sale. The amortized cost and fair value of securities available-for-sale except for mortgage-backed securities at December 31, 1996, 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) $ 98,417,333 $ 98,455,515 Due after one year through five years 241,792,491 240,077,063 Due after five years through ten years 21,965,395 21,976,300 Mortgage-backed securities 23,053,173 22,882,125 ---------------------------- Total $385,228,392 $383,391,003 ============================
1 Equity securities are reported in this category. Proceeds from sales of securities available-for-sale during 1996 and 1995 were $10,857,381 and $30,388,281, respectively. Proceeds from maturities and calls of securities available-for-sale during 1996 and 1995 were $57,400,000 and $68,492,524, respectively. Gross realized gains of $416,344 and $131,463 were realized for 1995 and 1994, respectively. Gross losses of $133,141 were realized for 1994. No gain was realized in 1996 and no losses were realized for 1996 and 1995. 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, 1996 and 1995:
GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED FAIR 1996 VALUE GAINS LOSSES VALUE - ------------------------------------------------------------------------------------ U.S. Treasury securities $ 26,080,797 $ 91,181 $ 8,978 $ 26,163,000 U.S. government agencies 66,899,762 -- 105,762 66,794,000 State and municipal securities 40,392,876 1,512,807 30,683 41,875,000 Mortgage-backed securities 63,108,582 504,449 103,031 63,510,000 Asset-backed securities 3,545,044 -- 1,044 3,544,000 Other securities 10,101,450 14,550 -- 10,116,000 ---------------------------------------------------- Total $210,128,511 $2,122,987 $ 249,498 $212,002,000 ====================================================
GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED FAIR 1995 VALUE GAINS LOSSES VALUE - ------------------------------------------------------------------------------------ U.S. Treasury securities $ 50,062,033 $ 921,955 $ 95,988 $ 50,888,000 U.S. government agencies 69,427,920 1,693,080 -- 71,121,000 State and municipal securities 39,620,301 2,274,089 24,390 41,870,000 Other securities 15,000,720 113,280 -- 15,114,000 Mortgage-backed securities 266,044 -- 44 266,000 ----------------------------------------------------- Total $174,377,018 $5,002,404 $120,422 $179,259,000 =====================================================
49 38 The carrying value and estimated fair value of securities held-to-maturity except for mortgage-backed securities at December 31, 1996, 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.
ESTIMATED CARRYING FAIR VALUE VALUE - --------------------------------------------------------------------------------- Due in one year or less $ 10,731,340 $ 10,753,000 Due after one year through five years 83,302,355 83,597,000 Due after five years through ten years 35,208,809 35,818,000 Due after ten years 17,777,425 18,324,000 Mortgage-backed securities 63,108,582 63,510,000 -------------------------- Total $210,128,511 $212,002,000 ==========================
Proceeds from the calls of securities held-to-maturity during 1996 and 1995 were $11,168,136 and $19,817,438, respectively. Gross realized gains of $21,862, $194,503 and $65,245 were realized for 1996, 1995 and 1994, respectively. Gross losses for $155 was realized in 1994. No losses were realized for 1996 and 1995. Securities having a carrying value of $30,577,856 and $47,464,563 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits, treasury tax and loan, securities sold under agreements to repurchase, and borrowing from the Federal Home Loan Bank. 5. LOANS The components of loans in the consolidated statements of condition as of December 31, 1996 and 1995 were as follows:
1996 1995 - ------------------------------------------------------------------------------------ Commercial loans $283,893,881 $292,612,200 Real estate mortgage loans 420,315,411 231,359,434 Real estate construction loans 33,510,438 13,606,488 Installment loans 23,550,608 19,747,608 Other loans 385,135 533,228 ---------------------------- 761,655,473 557,858,958 ---------------------------- Less Unamortized deferred loan fees 3,742,966 2,121,490 Allowance for loan losses 13,528,568 12,742,427 ---------------------------- Total $744,383,939 $542,995,041 ============================
The Company originates certain residential mortgage loans for the specific purpose of resale. Loans are sold without recourse. There were no loans held for sale as of December 31, 1996 and 1995. Approximately $4,260,000 and $4,741,000 of residential mortgage loans were pledged to secure a line of credit with the Federal Home Loan Bank as of December 31, 1996 and December 31, 1995, respectively. 50 39 An analysis of the activity in the allowance for loan losses for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 - ---------------------------------------------------------------------------------------- Balance, beginning of year $12,742,427 $12,270,918 $7,172,684 Allowance acquired from merger 1,644,171 -- -- Loans charged-off (5,388,389) (7,017,666) (4,419,095) Recoveries on loans previously charged-off 930,359 188,773 1,762,735 Provision for loan losses 3,600,000 7,300,402 7,754,594 ------------------------------------------ Balance, end of year $13,528,568 $12,742,427 $12,270,918 ==========================================
At December 31, 1996 and 1995, the Company had identified impaired loans with a net recorded investment of $17,200,000 and $50,700,000, respectively. An allowance of $3,000,000 million and $5,400,000 million, representing the difference between the value of collateral supporting certain of the loans and their outstanding balances are included in the allowance for loan losses for 1996 and 1995, respectively. For the year 1996 and 1995, the average balances of impaired loans were $27,800,000 million and $41,500,000 million, and interest collected on impaired loans total $1,220,000 and $2,800,000, respectively. The following table is a breakdown of impaired loans and the SFAS 114 impairment allowance related to impaired loans:
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 SFAS 114 SFAS 114 RECORDED IMPAIRMENT RECORDED IMPAIRMENT (Dollars in thousands) INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE - ----------------------------------------------------------------------------------------------- Impaired loans: Loans with impairment allowance Commercial $ 6,861 $ 1,398 $ 9,734 $ 1,560 Commercial real estate 10,313 1,648 26,022 3,799 Total impaired loans with impairment allowance 17,174 3,046 35,756 5,359 ------------------------------------------------- Loans without impairment allowance Commercial -- -- 5,634 -- Commercial real estate -- -- 9,346 -- ------------------------------------------------- Total impaired loans without impairment allowance -- -- 14,980 -- ================================================= Total impaired loans and impairment allowance $17,174 $ 3,046 $50,736 $5,359 =================================================
The Company has entered into transactions with its directors, significant stockholders and their affiliates ("Related Parties"). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. All loans to Related Parties were current as of December 31, 1996. An analysis of the activity with respect to loans to Related Parties is as follows: - ------------------------------------------------------------------------------- December 31, 1994 $2,057,620 Additional loans made 206,964 Payments received (93,246) ---------- December 31, 1995 2,171,338 Additional loans made 3,625,000 Payments received (3,850,694) ---------- December 31, 1996 $1,945,644 ==========
51 40 notes to consolidated financial statements cathay bancorp, inc. and subsidiary Most of the Company's business activity is with customers located in the predominantly Asian areas of Southern and Northern California. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid-off from the operating profits of the borrowers, refinancing by another lender or through sale by the borrowers of the secured collateral. The following real estate secured loans were outstanding as of December 31, 1996 and 1995:
1996 1995 - ------------------------------------------------------------------------------------ Mortgage commercial $121,755,629 $191,192,517 Construction 33,510,438 13,606,488 Mortgage residential 284,681,699 27,437,876 Equity lines 13,878,083 12,729,041 ---------------------------- Total $453,825,849 $244,965,922 ============================
The following is a summary of non-accrual loans and troubled debt restructurings as of December 31, 1996, 1995 and 1994 and the related net interest foregone for the years then ended:
1996 1995 1994 - -------------------------------------------------------------------------------- Non-accrual loans $9,304,994 $14,012,337 $27,859,875 ==================================== Contractual interest due $1,121,136 $1,503,069 $ 2,711,747 Interest recognized 268,050 200,385 559,532 ----------------------------------- Net interest foregone $ 853,086 $1,302,684 $ 2,152,215 ====================================
1996 1995 1994 - -------------------------------------------------------------------------------- Troubled debt restructurings $3,201,462 $8,429,265 $5,257,164 ==================================== Contractual interest due $ 338,382 $ 467,496 $ 351,062 Interest recognized 310,783 352,412 318,844 ------------------------------------ Net interest foregone $ 27,599 $ 115,084 $ 32,218 ====================================
As of December 31, 1996, there was no commitment 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, 1996 and 1995 was $18,854,186 and $13,878,957, respectively. The valuation allowance was $1,568,387 and $869,262 at December 31, 1996 and 1995, respectively. The following table presents the components of other real estate owned expense for the year-ended:
1996 1995 1994 - ------------------------------------------------------------------------------- Operating expense $ 312,427 $ 923,159 $ 595,435 Provision for losses 1,501,268 874,759 1,608,557 Net loss (gain) on disposal (85,313) 78,553 (60,455) ----------------------------------- Total other real estate owned expense $1,728,382 $1,876,471 $2,143,537 ===================================
52 41 notes to consolidated financial statements cathay bancorp, inc. and subsidiary An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 - ------------------------------------------------------------------------------ Balance, beginning of year $ 869,262 $1,592,238 $ 641,516 Provision for losses 1,501,268 874,759 1,608,557 Charge-offs on disposal (802,143) (1,597,735) (657,835) ---------------------------------- Balance, end of year $1,568,387 $ 869,262 $1,592,238 ==================================
7. INVESTMENTS IN REAL ESTATE The Company's investments in real estate consist of two strip-malls, and interests in two limited partnerships in low income housing projects which qualify for Federal low income housing tax credits. The following table presents the components of investments in real estate for the year ended:
1996 1995 1994 - ------------------------------------------------------------------------------- Strip-malls $2,837,829 $2,974,457 $3,807,031 Low income housing 1,149,395 1,329,898 779,918 ----------------------------------- $3,987,224 $4,304,355 $4,586,949 ===================================
The value of the investments in the strip-malls is dependent upon real estate values, the local economies, and real estate sales activity. Management incorporates these factors in its evaluation of the fair value of the properties. The investments were written down $720,902 and $615,000 during the year ended December 31, 1995 and 1994, respectively. The Company recognized a net loss of $106,065 in 1996 from the operations of the strip-malls, and $753,833 and $683,742 in 1995 and 1994, respectively from the properties, resulting primarily from write downs. In 1993 and 1995, the Company purchased interests in limited partnerships at 49.5% and 99.0% respectively, formed for the purpose of investing in real estate projects which qualify for low income housing tax credits. The limited partnerships will generate tax credits over a weighted average remaining period of approximately ten years. See Note 8 of the notes to consolidated financial statements for income tax effects. The Company's 99.0% interest in the limited partnership purchased in 1995 was not consolidated into the Company's financial statement as of December 31, 1996 and 1995 because the amount of investment was not material to the Company's results of operations or financial condition as a whole. The Company recognized a net loss of approximately $180,503, $127,405 and $61,243 in 1996, 1995 and 1994 from the partnerships' operations. 8. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31, 1996 and 1995:
1996 1995 - -------------------------------------------------------------------------------- Land and land improvements $11,371,120 $11,367,385 Building and building improvements 13,761,925 13,761,926 Furniture, fixtures and equipment 12,189,995 10,595,231 Other 2,540,823 1,693,242 Construction in process 11,320 67,813 ------------------------ 39,875,183 37,485,597 Less: Accumulated depreciation 14,103,881 10,899,252 ------------------------ Premises and equipment, net $25,771,302 $26,586,345 ========================
53 42 notes to consolidated financial statements cathay bancorp, inc. and subsidiary The amount of depreciation included in operating expense was $1,336,363, $1,356,916 and $1,192,541 in 1996, 1995 and 1994, respectively. 9. INCOME TAXES For the years ended December 31, 1996, 1995 and 1994, the current and deferred amounts of the income tax expense are summarized as follows:
1996 1995 1994 - -------------------------------------------------------------------------------- Current Federal $6,080,034 $3,961,419 $5,928,213 State 2,242,534 1,571,755 1,994,083 ---------------------------------- 8,322,568 5,533,174 7,922,296 ================================== Deferred Federal (460,651) 116,384 (2,633,659) State (42,535) 106,004 (770,068) ---------------------------------- (503,186) 222,388 (3,403,727) ---------------------------------- Change in valuation allowance -- (131,453) (485,043) ---------------------------------- Total income tax expense $7,819,382 $5,624,109 $4,033,526 ==================================
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, 1996 and 1995 were as follows:
1996 1995 - ------------------------------------------------------------------------------------------------- Deferred tax assets Difference between provisions for loan losses for tax and financial reporting purposes $5,553,964 $5,078,372 Difference between provisions for other real estate owned for tax and financial reporting purposes 2,034,077 1,516,336 State income tax 384,966 171,930 Unrealized holding loss on securities available-for-sale 918,498 174,554 ---------------------------- Gross deferred tax assets 8,891,505 6,941,192 Valuation allowance -- -- ---------------------------- Gross deferred tax assets, net of valuation allowance 8,891,505 6,941,192 Deferred tax liabilities Use of accelerated depreciation for tax purposes (1,136,452) (1,046,397) Deferred loan fees (543,830) (33,880) FHLB stock dividend (491,430) -- Acquisition of FPSB (723,637) -- Unrealized holding gain on securities available-for-sale (140,456) (1,205,234) Other, net (222) (12,449) ---------------------------- Gross deferred tax liabilities (3,036,027) (2,297,960) ---------------------------- Net tax assets $5,855,478 $4,643,232 ============================
54 43 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 1995 are primarily the result of adjustments to conform to the tax returns as filed. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Bank will realize all benefits related to these deductible temporary difference. Included in other assets in the statements of conditions, net deferred tax assets were $5,855,478 and $4,643,232 as of December 31, 1996 and 1995, respectively. Other assets as of December 31, 1996 and 1995 include current net income taxes receivable of $603,184 and $2,194,524, respectively. Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years indicated as follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Tax provision at Federal statutory rate $ 7,397,367 35.00% $ 5,685,662 35.00% $ 4,741,634 35.00% State income taxes 1,429,999 6.77 1,090,543 6.71 795,610 5.87 Interest on obligations of state and political subdivisions, which are exempt from Federal taxation (709,350) (3.35) (832,437) (5.12) (844,152) (6.23) Low income housing tax credits (319,183) (1.51) (223,833) (1.38) (174,171) (1.29) Valuation allowance -- -- (131,453) (0.81) (485,043) (3.58) Other, net 20,549 0.09 35,627 0.22 (352) -- ----------------------------------------------------------------------------------- Total income tax expense $ 7,819,382 37.00% $ 5,624,109 34.62% $ 4,033,526 29.77% ===================================================================================
10. STOCKHOLDERS' EQUITY As a bank holding company, Bancorp's ability to pay dividends will depend upon the dividends it receives from the Bank and on the income which it may generate from any other activities in which Bancorp may engage, either directly or through other subsidiaries. Currently, since Bancorp does not have any other significant business activities outside the Bank's and CIC's operations, its ability to pay dividends will depend solely on dividends received from the Bank. Under California State banking law, the Bank may not pay a cash dividend which exceeds the lesser of the Bank's retained earnings or its net income for the last three fiscal years, less any cash distributions made during that period. The amount of retained earnings available for cash dividends as of December 31, 1996 is restricted to approximately $19,362,000 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. 55 44 notes to consolidated financial statements cathay bancorp, inc. and subsidiary The Federal Deposit Insurance Corporation established five capital ratio categories: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically capitalized". 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, 1996, 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, 1996 are presented in the tables below:
COMPANY BANK AS OF 12/31/1996 AS OF 12/31/1996 (Dollars in thousands) BALANCE PERCENT BALANCE PERCENT - --------------------------------------------------------------------------------------------- Tier 1 Capital (to risk-weighted assets) $ 109,608* 12.72% $ 107,387* 12.46% Tier 1 Capital minimum requirement 34,485 4.00 34,485 4.00 ------------------------------------------------------ Excess $ 75,123 8.72% $ 72,902 8.46% ====================================================== total Capital (to risk-weighted assets) $ 120,417* 13.97% $ 118,196* 13.71% Total Capital minimum requirement 68,969 8.00 68,969 8.00 ------------------------------------------------------ Excess $ 51,448 5.97% $ 49,227 5.71% ====================================================== Risk-weighted assets $ 861,993 $861,993 Tier 1 Capital (to average assets) - Leverage ratio $ 109,608* 8.17% $ 107,386* 8.01% Minimum leverage requirement 53,657 4.00 53,657 4.00 ------------------------------------------------------ Excess $ 55,951 4.17% $ 53,729 4.01% ====================================================== Total average assets $1,341,415 $ 1,341,414
* Excluding the unrealized holding losses on securities available-for-sale of $1,059,000, and goodwill of $9,897,000. 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, 1996. 11. COMMITMENTS AND CONTINGENCIES The Company is involved in various litigation concerning transactions entered into during the normal course of business. Management, after consultation with legal counsel, does not believe that the resolution of such litigation will have a material effect upon its financial condition. In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments included commitments to extend credit in the form of loans or through commercial and standby letters of credit. Those instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying consolidated statements of condition. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. 56 45 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: - --------------------------------------------------------------------------------- Commitments to extend credit $308,229,000 Standby letters of credit 12,675,000 Other letters of credit 19,823,000 ------------ Total $340,727,000 ============
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, 1996, the Company does not have fixed-rate or variable-rate commitments with characteristics similar to options, which provide the holder, for a premium paid at inception to the Company, the benefits of favorable movements in the price of an underlying asset or index with limited or no exposure to losses from unfavorable price movements. Letters of credit 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, 1996, the Company had available credit lines with other financial institutions in the amount of $255,000,000. 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 $907,081, $1,433,861 and $1,271,201 for 1996, 1995 and 1994, respectively. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 1996:
(Dollars in thousands) COMMITMENTS - ------------------------------------------------------------------------------ Year ended December 31, 1997 $ 1,015 1998 857 1999 835 2000 703 2001 617 Thereafter 8,240 --------- Total minimum lease payments $ 12,267 =========
Rental income was $368,062, $482,037 and $544,323 for 1996, 1995 and 1994, respectively. The following table shows future rental payments to be received under operating leases with terms in excess
(Dollars in thousands) Commitments - ------------------------------------------------------------------------------------ Year ended December 31, 1997 $ 254 1998 65 1999 43 2000 43 2001 25 Thereafter -- ----- Total minimum lease payments to be received $ 430 =====
57 46 notes to consolidated financial statements cathay bancorp, inc. and subsidiary 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments. CASH AND SHORT-TERM INSTRUMENTS For cash and short-term instruments, the carrying amount was assumed to be a reasonable estimate of fair value. INVESTMENT SECURITIES For securities (which include securities available-for-sale and securities held-to-maturity), fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. LOANS Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. Fair value for non-performing real estate loans was based on recent external appraisals of the underlying collateral of the loan. If appraisals were not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates were judgementally determined using available market information and specific borrower information. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits was assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL GUARANTEES WRITTEN The fair value of commitments was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates were based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 58 47 FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 (Dollars in thousands) CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE - ------------------------------------------------------------------------------------ Financial Assets Cash and due from banks $ 47,194 $ 47,194 $ 55,126 $ 55,126 Federal funds sold and securities purchased under agreement to resell 28,000 28,000 1,200 1,200 Securities available-for-sale 383,391 383,391 243,252 243,252 Securities held-to-maturity 210,129 212,002 174,377 179,259 Loans, net 744,384 753,601 542,995 555,408 ------------------------------------------------------------------ Financial Liabilities Deposits $1,364,740 $1,367,217 $984,227 $987,833 Other borrowings 10,000 10,000 1,500 1,500 Mortgage indebtedness 773 773 763 763 ==================================================================
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995 (Dollars in thousands) CONTRACT AMOUNT CARRYING AMOUNT FAIR VALUE CONTRACT AMOUNT CARRYING AMOUNT FAIR VALUE - -------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit $268,247 $ 147 (317) $184,101 $ 68 $ (221) Commercial letters of credit 19,824 -- (138) 23,127 -- (152) Standby letters of credit 12,675 -- (60) 11,429 -- (33) Bill of lading guarantee 6,653 -- (41) 3,675 -- (16) ---------------------------------------------------------------------------------------
13. EMPLOYEE STOCK OWNERSHIP PLAN In January 1985, the Board of Directors approved an Employee Stock Ownership Plan (ESOP). Under the ESOP, the Company makes annual contributions to a trust in the form of either cash or common stock of the Company for the benefit of eligible employees. Employees are eligible to participate in the ESOP Plan after completing two years of service for salaried full-time employees or 1,000 hours for each of two consecutive years for salaried part-time employees. The amount of the annual contribution is discretionary except that it must be sufficient to enable the trust to meet its current obligations. The Company also pays for the administration of this plan and of the trust. During 1996, 1995 and 1994, the ESOP purchased 45,959, 0 and 109,452 shares, respectively, of the Company's stock at an aggregate cost of $754,269, $0 and $ 1,439,509, respectively. The shares purchased in 1996 included 31,224 shares of newly issued shares and 14,735 shares bought through the dividend reinvestment plan. The shares purchased in 1994 were bought through the dividend reinvestment plan and a private transaction. The Company contributed $515,850, $490,400 and $450,000 to the trust in 1996, 1995 and 1994, respectively, which were charged to salaries and related benefits in the accompanying consolidated statements of income. In 1996, distribution of benefits to participants totaled 12,087 shares. As of December 31, 1996, the ESOP owned 530,800 shares or 5.98% of the Company's outstanding common stock. In 1994, the plan acquired 100,000 shares of the Company's stock through a private transaction, and financed a portion (71,483 shares) of the purchase with a $940,000 direct loan at a market rate with another financial institution. The loan was guaranteed by the Company and was collateralized by the shares acquired. Repayment was in monthly installments, with final payment due on July 1, 1997. The loan was structured to be repaid with dividends paid by the Company on the ESOP shares and the annual contribution from the Company. The loan to the ESOP was paid in full in 1995. 59 48 notes to consolidated financial statements cathay bancorp, inc. and subsidiary In 1994, the shares collateralizing the loan are treated as suspense shares, and are legally released as the debt is repaid. Leveraged ESOP shares are considered unearned initially. Shares are committed to be released to compensate employees directly, to settle the Company's liabilities for other employee benefits, and to replace dividends on allocated shares that are used for debt service. Unearned ESOP shares are credited as shares are committed to be released based on the cost of the shares to the ESOP. The difference between the fair value of shares committed to be released and the cost of those shares to the ESOP is charged or credited to additional paid-in-capital. The released shares are allocated to the participant accounts for services rendered in the current accounting period as of the end of the ESOP's fiscal year. Shares committed to be released, allocated, and in suspense were 39,408, 39,408 and 32,075, respectively as of December 31, 1994. The fair value of the unearned ESOP shares was $421,786 as of December 31, 1994. Unearned ESOP shares totalling 32,075 as of December 31, 1994 were allocated to the participant accounts for services rendered in the year ended December 31, 1995. Dividends on ESOP shares allocated to participants but used for debt service are allocated shares with a fair value no less than the amount of the dividends used for debt service. Only dividends on allocated shares are charged to retained earnings. Dividends on unallocated shares was $9,623 in 1994. These dividends were allocated during the year ended December 31, 1995. The Company considers shares committed to be released ratably during the current accounting period as the participants perform services, and, accordingly computed compensation cost using an average fair value of the shares. The compensation cost for 1995 and 1994 were $400,617 and $490,630, respectively, based on an average per share price of $13.09 and $12.75 for 1995 and 1994, respectively. ESOP shares committed to be released are considered outstanding for earnings per share (EPS) purposes. 14. CONDENSED FINANCIAL INFORMATION OF CATHAY BANCORP, INC. The condensed financial information of Cathay Bancorp, Inc. as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 were as follows: STATEMENTS OF CONDITION
December 31, Assets 1996 1995 - ---------------------------------------------------------------------------------------------------- Cash $ 2,272,875 $ 566,948 Investment in subsidiary - Cathay Bank 116,224,500 93,876,525 Organizational costs, net -- 786 Other 6 155,250 ----------------------------------- Total assets $ 118,497,381 $94,599,509 =================================== Liabilities Accrued expenses $ 51,376 $ 70,696 ----------------------------------- Total liabilities 51,376 70,696 ----------------------------------- Stockholders' equity Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized, 8,878,144 and 7,867,164 shares issued and outstanding in 1996 and 1995, respectively 88,781 78,672 Additional paid-in-capital 59,811,940 42,013,687 Unrealized holding gain (loss) on securities available-for-sale, net of tax (1,059,347) 1,403,327 Retained earnings 59,604,631 51,033,127 ----------------------------------- Total stockholders' equity 118,446,005 94,528,813 ----------------------------------- Total liabilities and stockholders' equity $ 118,497,381 $94,599,509 ===================================
60 49 STATEMENTS OF INCOME
Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Cash dividends from Cathay Bank $ 4,744,447 $ 4,694,445 $ 4,649,251 Amortization of organizational costs and other expenses (217,766) (300,794) (400,629) ------------------------------------------------- Income before income tax expense 4,526,681 4,393,651 4,248,622 Income tax benefit 92,213 86,445 -- ------------------------------------------------- Income before undistributed earnings of subsidiary 4,618,894 4,480,096 4,248,622 ------------------------------------------------- Equity in undistributed earnings of subsidiary 8,697,057 6,140,543 5,265,377 ================================================= Net income $ 13,315,951 $ 10,620,639 $ 9,513,999 =================================================
STATEMENTS OF CASH FLOWS
Year ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 13,315,951 $ 10,620,639 $ 9,513,999 Equity in undistributed earnings of subsidiary (8,697,057) (6,140,543) (5,265,377) Amortization of organizational costs 786 91,755 117,252 Other, net 135,924 252,113 (103) ================================================= Net cash provided by operating activities 4,755,604 4,823,964 4,365,771 ================================================= Cash Flows From Investing Activities Capital contribution to Cathay Bank -- (580,000) (950,000) ------------------------------------------------- Net cash used in investing activities -- (580,000) (950,000) ------------------------------------------------- Cash Flows From Financing Activities Proceeds from direct loan to ESOP -- -- 940,000 Payments to decrease direct loan to ESOP -- (447,481) (492,519) Proceeds from issuance of common stock 1,694,770 855,448 1,044,989 Cash dividends (4,744,447) (4,704,068) (4,639,628) Decrease (increase) in unearned ESOP shares -- 421,786 (421,786) ------------------------------------------------- Net cash used in financing activities (3,049,677) (3,874,315) (3,568,944) ------------------------------------------------- Increase (decrease) in cash and cash equivalents 1,705,927 369,649 (153,173) Cash and cash equivalents, beginning of year 566,948 197,299 350,472 ------------------------------------------------- Cash and cash equivalents, end of year $ 2,272,875 $ 566,948 $ 197,299 ================================================= Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes $ 150,000 $ 150,000 $ 150,020 Non-cash investing activities: Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax $ (2,462,674) $ 1,949,962 $ (637,294) Issuance of common stock for the acquisition of FPSB $ 16,113,592 $ -- $ --
Bancorp guaranteed a direct loan to the Employee Stock Ownership Plan for the purchase of the Company's shares in 1994. The loan was paid in full in 1995. 61 50 Bancorp was formed by exchanging all the outstanding shares of the Bank's common stock for newly issued shares of Bancorp's common stock. Bancorp has accounted for its interest in the Bank as a reorganization of an entity under common control and has reflected its equity in the net earnings of the Bank as if it had been reorganized as of January 1, 1990. There was no change in stockholders' equity as a result of this transaction. 15. 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 105,245, 68,614 and 83,947 and $1,694,770, $855,448 and $1,044,989 for 1996, 1995 and 1994, respectively. 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth selected unaudited quarterly financial data. Summary of Operations
1996 1995 (Dollars in thousands except FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST per share data) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER - ---------------------------------------------------------------------------------------------------------------------------------- Interest income $24,109 $21,362 $20,791 $19,836 $20,536 $19,192 $18,590 $17,905 Interest expense 10,966 9,622 9,513 9,108 8,985 8,224 7,496 6,577 ------------------------------------------------------------------------------------------------ Net interest income 13,143 11,740 11,278 10,728 11,551 10,968 11,094 11,328 Provision for loan losses 900 900 900 900 2,650 1,650 1,350 1,650 ------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 12,243 10,840 10,378 9,828 8,901 9,318 9,744 9,678 Non-interest income 1,658 1,535 1,339 1,328 1,876 1,320 1,413 1,612 Non-interest expense 8,472 5,957 7,023 6,562 7,449 6,383 7,011 6,774 ------------------------------------------------------------------------------------------------ Income before income tax expense 5,429 6,418 4,694 4,594 3,328 4,255 4,146 4,516 Income tax expense 1,827 2,688 1,598 1,706 721 1,593 1,538 1,772 Net income $ 3,602 $ 3,730 $ 3,096 $ 2,888 $ 2,607 $ 2,662 $ 2,608 $ 2,744 ------------------------------------------------------------------------------------------------ Net income per share $ 0.43 $ 0.47 $ 0.39 $ 0.37 $ 0.33 $ 0.34 $ 0.34 $ 0.35 ================================================================================================
62 51 independent auditors' report cathay bancorp, inc. and subsidiary 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, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cathay Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California January 30, 1997 63 52 corporate, branch and overseas offices cathay bancorp, inc. and subsidiary Corporate Office: 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 Branch and Overseas Offices: LOS ANGELES 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 MONTEREY PARK 250 South Atlantic Boulevard Monterey Park, CA 91754 Tel: (818) 281-8808 Fax: (818) 281-2956 Frank Chen Vice President and Manager ALHAMBRA 601 North Atlantic Boulevard Alhambra, CA 91801 Tel: (818) 284-6556 Fax: (818) 282-3496 Christina Tsui Manager HACIENDA HEIGHTS 16025 East Gale Avenue City of Industry, CA 91745 Tel: (818) 333-8533 Fax: (818) 336-4227 Jack Sun Assistant Vice President and Manager WESTMINSTER 9121 Bolsa Avenue Westminster, CA 92683 Tel: (714) 890-7118 Fax: (714) 898-9267 Kenneth Chan Assistant Vice President and Manager SAN JOSE 2010 Tully Road San Jose, CA 95122 Tel: (408) 238-8880 Fax: (408) 238-2302 Edward Wong Vice President and Manager SAN GABRIEL 825 East Valley Boulevard San Gabriel, CA 91776 Tel: (818) 573-1000 Fax: (818) 573-0983 Daniel Liu Vice President and Manager TORRANCE 23228 Hawthorne Boulevard Torrance, CA 90505 Tel: (310) 791-8700 Fax: (310) 791-1862 Phoebe Yu Assistant Vice President and Manager OAKLAND 710 Webster Street Oakland, CA 94607 Tel: (510) 208-3700 Fax: (510) 208-3727 Grace Yuen Vice President and Manager CERRITOS 11355 South Street Cerritos, CA 90701 Tel: (310) 860-7300 Fax: (310) 860-2296 Kenneth Chan Assistant Vice President and Manager CITY OF INDUSTRY 1250 South Fullerton Road City of Industry, CA 91748 Tel: (818) 810-1088 Fax: (818) 810-2188 Shu Lee Vice President and Manager CUPERTINO 10480 South De Anza Boulevard Cupertino, CA 95014 Tel: (408) 255-8300 Fax: (408) 255-8373 Robert Yuen Vice President and Manager FREMONT 47998 Warm Springs Boulevard Fremont, CA 94539 Tel: (510) 770-5151 Fax: (510) 770-5150 Edward Wong Vice President and Manager IRVINE 15323 Culver Drive Irvine, CA 92714 Tel: (714) 559-7500 Fax: (714) 559-7508 Linda Kuo Assistant Vice President and Manager MILLBRAE Millbrae Plaza 1095 El Camino Real Millbrae, CA 94030 Tel: (415) 652-0188 Fax: (415) 652-0180 Stanley Wong Vice President and Manager HILL-ALPINE 800 North Hill Street Los Angeles, CA 90012 Tel: (213) 680-3596 Fax: (213) 628-1019 My Lu Vice President and Manager VALLEY-STONEMAN 43 East Valley Boulevard Alhambra, CA 91801 Tel: (818) 576-7600 Fax: (818) 576-5831 Mimy Luc Manager VALLEY-PROSPECT 420 West Valley Boulevard San Gabriel, CA 91776 Tel: (818) 300-0668 Fax: (818) 300-0117 Jennifer Mak Assistant Vice President and Manager ROWLAND HEIGHTS 18320 Colima Road Rowland Heights, CA 91748 Tel: (818) 810-8866 Fax: (818) 810-0297 Shu Lee Vice President and Manager HONG KONG Tak Shing House #103 20 Des Voeux Road Central Hong Kong Tel: (852) 2522-0071 Fax: (852) 2810-1652 Paul Y. Li Representative CATHAY INVESTMENT COMPANY 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 George T.M. Ching President TAIWAN C.I.C. Fourth Floor 136 Sung Chiang Road Taipei, Taiwan, R.O.C. Tel: (886) (2) 537-5057 Fax: (886) (2) 537-5059 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. 68 EX-22.1 3 SUBSIDIARIES OF THE COMPANY 1 22.1 Subsidiaries of the Company CATHAY BANK CATHAY INVESTMENT COMPANY a California Corporation a California Corporation 100% owned 100% owned by Cathay Bank Exhibit 22.1 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 47,194 0 28,000 0 383,391 210,129 212,002 757,913 13,529 1,504,329 1,364,740 10,000 11,144 0 0 0 89 118,357 1,504,329 55,888 28,729 1,482 86,099 39,052 39,209 46,890 3,600 22 28,013 21,135 21,135 0 0 13,316 1.66 1.66 4.38 9,305 2,050 3,201 8,017 12,742 5,388 931 13,529 13,529 0 0
-----END PRIVACY-ENHANCED MESSAGE-----