-----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, ISOVya2F9zjwEtfKGavdBMHPvhJlh5o2w0Bk1w6tz+w6vLE0qO+CL1qvM2dJVlZq Nw/W93LJ0ssl77xeT0bpYw== 0000950150-98-001387.txt : 19980817 0000950150-98-001387.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950150-98-001387 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 000-18630 FILM NUMBER: 98688616 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-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 -------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number 0-18630 --------------------------------------------------- CATHAY BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 95-4274680 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 North Broadway, Los Angeles, California 90012 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 625-4700 --------------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value, 8,965,315 shares outstanding as of June 30, 1998. 2 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION .................................................................................... 3 Item 1. Financial Statements .............................................................................. 4-6 Notes to Condensed Consolidated Financial Statements .............................................. 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................... 9-19 PART II - OTHER INFORMATION ....................................................................................... 20-21 Item 1. Legal Proceedings ................................................................................. 20-21 Item 2. Changes in Securities ............................................................................. 20-21 Item 3. Defaults upon Senior Securities ................................................................... 20-21 Item 4. Submission of Matters to a Vote of Security Holders ............................................... 20-21 Item 5. Other Information ................................................................................. 20-21 Item 6. Exhibits and Reports on Form 8-K .................................................................. 20-21 SIGNATURES......................................................................................................... 22
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 4 CATHAY BANCORP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION As of June 30, 1998 and December 31, 1997 (in thousands, except for per share data)
June 30, 1998 Dec. 31, 1997 (unaudited) (unaudited) ------------- ------------- ASSETS Cash and due from banks $ 60,472 $ 57,728 Federal funds sold and securities purchased under agreement to resell 52,000 67,000 ------------- ------------- Cash and cash equivalents 112,472 124,728 Securities available-for-sale (with amortized costs of $188,530 in 1998 and $215,466 in 1997) 189,981 216,158 Securities held-to-maturity (with estimated fair values of $380,447 in 1998 and $356,187 in 1997) 374,129 350,336 Loans (net of allowance for loan losses of $16,514 in 1998 and $15,379 in 1997) 894,187 846,151 Other real estate owned, net 12,889 13,269 Investments in real estate, net 1,565 1,654 Premises and equipment, net 25,523 25,202 Customers' liability on acceptance 13,796 10,296 Accrued interest receivable 12,551 12,246 Goodwill 8,928 9,530 Other assets 10,636 12,892 ------------- ------------- Total assets $ 1,656,657 $ 1,622,462 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand deposits $ 171,082 $ 175,875 Interest bearing accounts NOW accounts 113,349 111,653 Money market deposits 95,636 94,708 Savings deposits 205,482 210,291 Time deposits under $100,000 320,133 307,504 Time deposits of $100,000 or more 572,106 549,090 ------------- ------------- Total deposits 1,477,788 1,449,121 Securities sold under agreements to repurchase 13,780 23,419 Acceptances outstanding 13,796 10,296 Other liabilities 5,820 3,749 ------------- ------------- Total liabilities 1,511,184 1,486,585 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, 8,965,315 and 8,941,743 shares issued and outstanding in 1998 and 1997, respectively 90 89 Additional paid-in-capital 62,089 61,271 Accumulated other comprehensive income 841 370 Retained earnings 82,453 74,147 ------------- ------------- Total stockholders' equity 145,473 135,877 ------------- ------------- Total liabilities and stockholders' equity $ 1,656,657 $ 1,622,462 ============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 CATHAY BANCORP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (In thousands, except for per share data) (unaudited)
2nd Qtr 2nd Qtr YTD YTD June 1998 June 1997 June 1998 June 1997 ----------- ----------- ----------- ----------- INTEREST INCOME Interest and fees on loans $ 20,352 $ 18,435 $ 39,906 $ 35,894 Interest on securities available-for-sale 3,395 4,666 6,593 10,108 Interest on securities held-to-maturity 5,738 4,266 11,458 7,505 Interest on Federal funds sold and securities purchased under agreement to resell 737 233 1,439 809 Interest on deposits with banks 12 -- 17 -- ----------- ----------- ----------- ----------- Total interest income 30,234 27,600 59,413 54,316 ----------- ----------- ----------- ----------- INTEREST EXPENSE Time deposits of $100,000 or more 7,605 6,517 14,978 12,496 Other deposits 5,901 5,788 11,757 11,791 Other borrowed funds 576 40 838 63 ----------- ----------- ----------- ----------- Total interest expense 14,082 12,345 27,573 24,350 ----------- ----------- ----------- ----------- Net interest income before provision for loan losses 16,152 15,255 31,840 29,966 Provision for loan losses 900 900 1,800 1,800 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 15,252 14,355 30,040 28,166 ----------- ----------- ----------- ----------- NON-INTEREST INCOME Securities gains -- -- 35 4 Letter of credit commissions 511 396 955 605 Service charges 1,034 848 2,052 1,664 Other operating income 794 386 1,299 747 ----------- ----------- ----------- ----------- Total non-interest income 2,339 1,630 4,341 3,020 ----------- ----------- ----------- ----------- NON-INTEREST EXPENSE Salaries and employee benefits 4,447 4,029 8,811 7,980 Occupancy expense 603 753 1,256 1,431 Computer and equipment expense 604 552 1,199 1,152 Professional services expense 902 841 1,657 1,578 FDIC and State assessments 101 96 200 151 Marketing expense 333 405 665 816 Net other real estate owned expense -- 220 -- 446 Other operating expense 674 1,005 1,758 1,975 ----------- ----------- ----------- ----------- Total non-interest expense 7,664 7,901 15,546 15,529 ----------- ----------- ----------- ----------- Income before income tax expense 9,927 8,084 18,835 15,657 Income tax expense 3,906 3,205 7,396 6,259 ----------- ----------- ----------- ----------- Net Income $ 6,021 $ 4,879 $ 11,439 $ 9,398 Other comprehensive income, net of tax: Unrealized holding gain arising during the period 552 1,424 456 270 Less: reclassification of the portion of realized 'loss(gain) included in net income previously included in other comprehensive gain -- 22 (15) 14 ----------- ----------- ----------- ----------- Total other comprehensive gain, net of tax 552 1,402 471 256 ----------- ----------- ----------- ----------- Total comprehensive income $ 6,573 $ 6,281 $ 11,910 $ 9,654 =========== =========== =========== =========== BASIC NET INCOME PER COMMON SHARE, based on the weighted average number of common shares outstanding during the periods: $ 0.67 $ 0.55 1.28 1.06 Weighted average number of common shares outstanding 8,962,147 8,908,789 8,956,020 8,899,796
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 CATHAY BANCORP, INC. & SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(In thousands) ---------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 11,439 $ 9,398 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,800 1,800 Provision for losses on other real estate owned 56 275 Depreciation 610 676 Net (gain) loss on sale of other real estate owned (199) 48 Net gain on sales of premises and equipment (2) -- Net gain on sales and calls of securities (35) (4) Amortization and accretion of investment security premiums, net 144 312 Amortization of goodwill 602 106 Increase in deferred loan fees, net 113 28 (Increase) decrease in accrued interest receivable, net (305) 311 (Increase) decrease in other assets, net 2,256 (1,716) Increase in other liabilities, net 2,071 304 - ------------------------------------------------------------------------------------------------------------- Total adjustments 7,111 2,140 - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 18,550 11,538 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale (291,318) (25,006) Proceeds from maturity and call of securities available-for-sale 317,759 81,839 Purchase of securities held-to-maturity (5,193) (10,239) Proceeds from maturity and call of securities held-to-maturity 1,130 9,747 Proceeds from sale of securities available-for-sale 6,424 -- Purchase of mortgage-backed securities available-for-sale (24,581) -- Proceeds from repayments of mortgage-backed securities available-for-sale 18,634 2,985 Purchase of mortgage-backed securities held-to-maturity (51,305) (60,592) Repayments from mortgage-backed securities held-to-maturity 31,196 4,995 Proceeds from sale of loans -- 1,834 Purchase of loans (6,782) -- Net increase in loans (44,445) (30,203) Purchase of premises and equipment (931) (350) Proceeds from sale of equipment 2 -- Proceeds from sale of other real estate owned 1,801 3,233 Decrease in investments in real estate 89 137 - ------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (47,520) (21,620) - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts, money market and savings deposits (6,978) 6,819 Net increase in time deposits 35,645 20,115 Net decrease in securities sold under agreements to repurchase (9,639) (7,078) Cash dividends (3,132) (2,666) Proceeds from shares issued to Dividend Reinvestment Plan 818 709 - ------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 16,714 17,899 - ------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (12,256) 7,817 Cash and cash equivalents, beginning of the period 124,728 75,194 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of the period $ 112,472 $ 83,011 - ------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 27,644 $ 23,949 Income taxes $ 6,770 $ 6,316 Non-cash investing activities: Transfers to securities available-for-sale $ 365 $ 630 within 90 days of maturity Net change in unrealized holding gain on securities available-for-sale, net of tax $ 471 $ 256 Transfers to other real estate owned $ 2,714 $ 1,742 Loans to facilitate the sale of other real estate owned $ 1,436 $ 6,650 - -------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements. 6 7 CATHAY BANCORP, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1997. 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards to report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim reports to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statement for periods beginning after December 15, 1997, with comparative information for earlier years to be restated. The Company has concluded it is in one segment-banking. Accordingly, the adoption of SFAS No. 131 did not have material effect on the consolidated financial statements or disclosures. In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure About Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the disclosure requirement for pension and other postretirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate analysis; and eliminates certain disclosure required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination of Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pension" which are no longer useful. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997, with comparative information for earlier years to be restated. The impact on the Company of adopting SFAS No. 132 is not expected to be material. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods 7 8 must be consistent with the entity's approach to managing risk. SFAS No. 133 amends FASB Statement No. 52, "Foreign Currency Translation," to permit special accounting for a hedge of a foreign currency forecasted transaction with a derivative. It supersedes FASB Statements No. 80, "Accounting for Futures Contracts," No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," and No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." It amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments, to include in Statement 107 the disclosure provisions about concentrations of credit risk from Statement 105. This Statement also nullifies or modifies the consensuses reached in a number of issues addressed by the Emerging Issues Task Force. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management has not determined the effect of implementing this Statement. 3. STATEMENT OF COMPREHENSIVE INCOME Effective with the quarter ended March 31, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed in equal prominence with the other financial statements and to disclose as a part of shareholders' equity accumulated comprehensive income. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income generally includes net income, foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on investments in certain debt and equity securities (i.e., securities available-for-sale). 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is given based on the assumption that the reader has access to the 1997 Annual Report of Cathay Bancorp, Inc. ("Bancorp") and its subsidiary Cathay Bank ("the Bank"), together ("the Company"). RESULTS OF OPERATIONS For the second quarter of 1998, the Company reported net income of $6.0 million or $0.67 per common share, compared to $4.9 million or $0.55 per common share for the second quarter of 1997, representing an increase of $1.1 million or 23.4%. Income before income tax expense amounted to $9.9 million for the second quarter of 1998, an increase of $1.8 million or 22.8% over the $8.1 million for the same quarter a year ago. The increase was attributed to a $897,000 increase in net interest income before provision for loan losses and a $709,000 increase in non-interest income while non-interest expense decreased $237,000. The annualized return on average assets ("ROA") and return on average stockholders' equity ("ROE") were 1.46% and 16.92%, respectively, for the second quarter of 1998, compared to 1.29% and 15.85%, respectively, for the second quarter of 1997. For the six month ended June 30, 1998, the Company reported net income of $11.4 million or $1.28 per common share, compared to $9.4 million or $1.06 per common share for the same period a year ago. This represents an increase of $2.0 million or 21.7%. Income before income tax expense amounted to $18.8 million and $15.6 million, respectively, for the six months ended June 30, 1998 and 1997. The $3.2 million or 20.3% increase came from a $1.9 million increase in net interest income before provision for loan losses and a $1.3 million increase in non-interest income. The annualized ROA and ROE for the first six months of 1998 were 1.41% and 16.40%, respectively, compared to 1.25% and 15.50% for the same period in 1997. NET INTEREST INCOME Net interest income before provision for loan losses totaled $31.8 million for the first six months of 1998, which represents an increase of $1.9 million or 6.3% over the $29.9 million for the same period of 1997. On a taxable equivalent basis, net interest income rose $1.9 million as well or 6.2% to $32.4 million for the first six months of 1998, compared to $30.5 million for the same period a year ago. The increase in net interest income before provision for loan losses was substantially attributable to a $127.4 million growth in the average interest-earning assets, primarily in loans. Average net loans amounted to $869.6 million and accounted for 57.9% of average interest-earning assets in the first six months of 1998, compared to $770.8 million or 56.0% of average interest-earning assets for the same period a year ago. The increase in average loans was primarily funded by time deposits. The increase in volume contributed an additional $4.0 million to net interest income, which was slightly offset by a 14 basis point decrease in the average yield on loans despite a 12 basis point increase in the Bank's reference rate in the first six months of 1998. The keen competition in the Bank's marketplace played an important role in the decrease in the average loan yield. The taxable equivalent average yield on earning assets remained approximately at the same level at 8.06% and 8.05% for the first six months of 1998 and 1997, respectively, while cost of funds increased 23 basis points from 3.96% in 1997 to 4.19% in 1998 largely due to higher average rates on time deposits from 5.01% to 5.16% coupled with higher average rates on securities sold under agreement to repurchase. Consequently, net interest margin, defined as taxable equivalent net interest income to average earning assets, declined 12 basis points from 4.48% to 4.36% between the first six months of 1997 and 1998. For the second quarter of 1998, net interest income before provision for loan losses totaled $16.2 million, compared to $15.3 million for the same quarter of 1997. This represents an increase of $897,000 or 5.9%. On a taxable equivalent basis, net interest income was up $940,000 or 6.1% to $16.4 million for the second quarter of 1998, compared to $15.5 million for the same quarter of 1997. 9 10 An increase of $152.4 million in average earning assets essentially accounted for the increase in the quarterly net interest income. The taxable equivalent average yield on earning assets decreased 11 basis points in the second quarter of 1998 to 8.01% compared to 8.12% for the same quarter a year ago, primarily resulting from a decrease of 17 basis points in average loan yield. Meanwhile, cost of funds advanced 20 basis points from 4.00% a year ago to 4.20% for the second quarter of 1998. Therefore, net interest margin decreased 20 basis points from 4.52% to 4.32% between the second quarter of 1997 and 1998. NON-INTEREST INCOME For the first six months of 1998, non-interest income amounted to $4.3 million, compared to $3.0 million for the same period a year ago. This represents an increase of $1.3 million or 43.7%. The increase in 1998 non-interest income resulted from: 1) higher service charges due to fee increases; 2) higher letter of credit commissions due to increased transaction volume; 3) income from other real estate owned ("OREO") and real estate investment; 4) income earned in outsourcing the issuing and processing of cashier's checks and money orders; and 5) higher fees related to loan documentation and other charges. On a quarterly basis, non-interest income totaled $2.3 million and $1.6 million for the second quarter of 1998 and 1997, respectively. The increase of $709,000 or 43.5% was attributable significantly to the same factors discussed above. The following tables illustrate the components of non-interest income, as well as the amount and percentage changes for the periods indicated:
(Dollars in thousands) ------------------------------------------------------------- Six Months Ended ----------------------------- Increase Percent Non-interest income: 06/30/98 06/30/97 (Decrease) Change ------------- ------------- ------------- ------------- Securities Gains $ 35 $ 4 $ 31 775.0% Letter of credit commissions 955 605 350 57.9 Service charges 2,052 1,664 388 23.3 Other operating income 1,299 747 552 73.9 ------------- ------------- ------------- Total non-interest income $ 4,341 $ 3,020 $ 1,321 43.7% ============= ============= =============
2nd Qtr 2nd Qtr. Increase Percent Non-interest income: 1998 1997 (Decrease) Change ------------- ------------- ------------- ------------- Letter of credit commissions $ 511 $ 396 $ 115 29.0% Service charges 1,034 848 186 21.9 Other operating income 794 386 408 105.7 ------------- ------------- ------------- Total non-interest income $ 2,339 $ 1,630 $ 709 43.5% ============= ============= =============
NON-INTEREST EXPENSE Non-interest expense totaled $15.5 million for the first six months of 1998, approximately the same as that for the same period of 1997. The more notable items in non-interest expense were: (1) salaries and employee benefits which increased $831,000 or 10.4% due to added personnel to support the newly opened Berkeley/Richmond Branch as well as new officers for northern California branches plus annual salary increases; (2) a $446,000 decrease in OREO expense; and (3) a $124,000 decrease in real estate investment expense which is included in other operating expense. The efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, was 42.97% for the six months ended June 30, 1998 compared to 47.08% for the same period in 1997. 10 11 Quarterly, non-interest expense totaled $7.7 million and $7.9 million for the second quarter of 1998 and 1997, respectively. The lower quarterly non-interest expense in 1998 was attributable to decreases in OREO expense, occupancy expense and marketing expense offset by increases in salaries and employee benefits, professional services expense and computer and equipment expense. The efficiency ratios for the second quarter of 1998 and 1997 were 41.45% and 46.79%, respectively. The following tables present the components of the non-interest expense with the amount and percentage changes for the periods indicated:
(Dollars in thousands) ----------------------------------------------------------------- Six Months Ended ------------------------------ Increase Percent Non-interest expense: 06/30/98 06/30/97 (Decrease) Change ------------- ------------- ------------- ------------- Salaries and employee benefits $ 8,811 $ 7,980 $ 831 10.4% Occupancy expense 1,256 1,431 (175) (12.2) Computer and equipment expense 1,199 1,152 47 4.1 Professional services expense 1,657 1,578 79 5.0 FDIC and State assessments 200 151 49 32.5 Marketing expense 665 816 (151) (18.5) Net other real estate owned expense -0- 446 (446) (100.0) Other operating expense 1,758 1,975 (217) (11.0) ------------- ------------- ------------- Total non-interest expense $ 15,546 $ 15,529 $ 17 0.1% ============= ============= =============
2nd Qtr 2nd Qtr. Increase Percent Non-interest expense: 1998 1997 (Decrease) Change ------------- ------------- ------------- ------------- Salaries and employee benefits $ 4,447 $ 4,029 $ 418 10.4% Occupancy expense 603 753 (150) (19.9) Computer and equipment expense 604 552 52 9.4 Professional services expense 902 841 61 7.3 FDIC and State assessments 101 96 5 5.2 Marketing expense 333 405 (72) (17.8) Net other real estate owned expense -0- 220 (220) (100.0) Other operating expense 674 1,005 (331) (32.9) ------------- ------------- ------------- Total non-interest expense $ 7,664 $ 7,901 $ (237) (3.0)% ============= ============= =============
FINANCIAL CONDITION The Company experienced moderate growth during the first six months of 1998. As of June 30, 1998, total assets increased $34.2 million to $1,656.7 million; loans, net of deferred loan fees, grew $49.2 million to $910.7 million; investment securities (including available-for-sale and held-to-maturity) decreased $2.4 million to $564.1 million; deposits grew $28.7 million to $1,477.8 million; and stockholders' equity increased $9.6 million to $145.5 million, compared to December 31, 1997. EARNING ASSET MIX Total earning assets amounted to $1,528.2 million at June 30, 1998, compared with $1,495.9 million at year-end 1997, representing an increase of $32.3 million or 2.2%. The increase was primarily due to a $49.2 million increase in loans, net of deferred fees, offset by a $15.0 million decrease in securities purchased under agreement to resell and a slight decrease in investment securities (including available-for-sale and held-to-maturity). On an average basis, interest-earning assets amounted to $1,502.7 million for the first 11 12 six months of 1998 compared to $1,375.3 million for the same period in 1997, an increase of $127.4 million. As a result of continued loan demand in the first six months of 1998, average net loans continued to increase as a percentage of total interest-earning assets from 56.0% for the first six months of 1997 to 57.9% for the same period of 1998, while investment securities (including available-for-sale and held-to-maturity) decreased from 41.8% for the first six months of 1997 to 38.8% for the same period of 1998. The change in the earning asset mix from securities to loans is generally favorable to net interest income. The table below shows the changes in the earning asset mix as of the dates indicated:
(Dollars in thousands) --------------------------------------------------------------------- As of 06/30/98 As of 12/31/97 --------------------------------- --------------------------------- Types of earning assets: Amount Percent Amount Percent ------------- ------------- ------------- ------------- Federal funds sold and securities purchased under agreement to resell $ 52,000 3.4% $ 67,000 4.5% Securities available-for-sale 189,981 12.4 216,158 14.4 Securities held-to-maturity 374,129 24.5 350,336 23.4 Loans (net of deferred fees) 910,701 59.6 861,530 57.6 Deposits with banks 1,344 0.1 855 0.1 ------------- ------------- ------------- ------------- Total earning assets $ 1,528,155 100.0% $ 1,495,879 100.0% ============= ============= ============= =============
SECURITIES As of June 30, 1998 securities available-for-sale decreased $26.2 million to $190.0 million while securities held-to-maturity increased $23.8 million to $374.1 million from the year-end 1997 levels. Combined together, investment securities at June 30, 1998 decreased $2.4 million to $564.1 million from $566.5 million at year-end 1997. The slight decrease in investment securities was primarily attributable to increasing loan demand that the Company experienced during the first six months of 1998. The following tables summarize the composition and maturity distribution of the investment portfolio as of the dates indicated:
(Dollars in thousands) SECURITIES AVAILABLE-FOR-SALE: As of 06/30/98 ----------------------------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized Losses Fair Value -------------------- -------------------- -------------------- -------------------- U.S. Treasury securities $ 20,008 $ 7 $ 22 $ 19,993 U.S. government agencies 107,908 479 -0- 108,387 State and municipal securities 9,130 100 -0- 9,230 Mortgage-backed securities 28,241 771 25 28,987 Assets-backed securities 12,782 46 -0- 12,828 Federal Home Loan Bank stock 5,819 -0- -0- 5,819 Other securities 4,642 95 -0- 4,737 -------------------- -------------------- -------------------- -------------------- Total $ 188,530 $ 1,498 $ 47 $ 189,981 ==================== ==================== ==================== ====================
As of 12/31/97 ----------------------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized Losses Fair Value -------------------- -------------------- -------------------- -------------------- U.S. Treasury securities $ 38,020 $ 11 $ 60 $ 37,971 U.S. government agencies 113,255 97 46 113,306 Mortgage-backed securities 28,689 685 6 29,368 Assets-backed securities 19,878 11 -0- 19,889 Federal Home Loan Bank stock 5,653 -0- -0- 5,653 Commercial paper 9,971 -0- -0- 9,971 -------------------- -------------------- -------------------- -------------------- Total $ 215,466 $ 804 $ 112 $ 216,158 ==================== ==================== ==================== ====================
12 13
(Dollars in thousands) SECURITIES HELD-TO-MATURITY: As of 06/30/98 ----------------------------------------------------------------------------------------- Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value -------------------- -------------------- -------------------- -------------------- U.S. Treasury securities $ 26,041 $ 396 $ -0- $ 26,437 U.S. government agencies 39,360 387 -0- 39,747 State and municipal securities 49,107 1,994 20 51,081 Mortgage-backed securities 250,696 3,316 27 253,985 Other securities 8,925 272 -0- 9,197 -------------------- -------------------- -------------------- -------------------- Total $ 374,129 $ 6,365 $ 47 $ 380,447 ==================== ==================== ==================== ====================
As of 12/31/97 ----------------------------------------------------------------------------------------- Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value -------------------- -------------------- -------------------- -------------------- U.S. Treasury securities $ 26,054 $ 354 $ -0- $ 26,408 U.S. government agencies 39,374 291 -0- 39,665 State and municipal securities 44,497 2,264 -0- 46,761 Mortgage-backed securities 230,573 2,762 35 233,300 Assets-backed securities 922 -0- 6 916 Other securities 8,916 221 -0- 9,137 -------------------- -------------------- -------------------- -------------------- Total $ 350,336 $ 5,892 $ 41 $ 356,187 ==================== ==================== ==================== ====================
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (Dollars in thousands) As of June 30, 1998 Maturity Schedule ------------------------------------------------------------------------------------ After 1 But After 5 But SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total ------------ ------------ ------------ ------------ ------------ U.S. Treasury securities $ 19,993 $ -0- $ -0- $ -0- $ 19,993 U.S. government agencies 32,058 76,329 -0- -0- 108,387 State and municipal securities 6,136 -0- 3,094 -0- 9,230 Mortgage-backed securities* -0- 5,939 5,913 17,135 28,987 Assets-backed securities* -0- 12,828 -0- -0- 12,828 Federal Home Loan Bank stock 5,819 -0- -0- -0- 5,819 Other securities -0- -0- 4,737 -0- 4,737 ------------ ------------ ------------ ------------ ------------ Total $ 64,006 $ 95,096 $ 13,744 $ 17,135 $ 189,981 ============ ============ ============ ============ ============ SECURITIES HELD-TO-MATURITY: U.S. Treasury securities $ -0- $ 26,041 $ -0- $ -0- $ 26,041 U.S. government agencies -0- 39,360 -0- -0- 39,360 State and municipal securities 1,236 9,553 21,321 16,997 49,107 Mortgage-backed securities* -0- 15,540 67,207 167,949 250,696 Corporate bonds -0- 8,925 -0- -0- 8,925 ------------ ------------ ------------ ------------ ------------ Total $ 1,236 $ 99,419 $ 88,528 $ 184,946 $ 374,129 ============ ============ ============ ============ ============
* The mortgage-backed securities and assets-backed securities reflect stated maturities and not anticipated prepayments. 13 14 LOANS The Bank continued to experience satisfying loan demand in the first six months of 1998. Total gross loans increased $49.3 million or 5.7% to $914.6 million as of June 30, 1998, from $865.3 million at year-end 1997. Excluding the $18.1 million investments in banker's acceptances which were included in commercial loans at year-end 1997, total commercial loans increased $27.3 million or 8.5% to $347.5 million at June 30, 1998. Real estate mortgage loans consisted primarily of real estate commercial loans and real estate residential loans, which increased $23.0 million or 7.6% and $15.7 million or 11.5%, respectively, to $326.7 million and $152.7 million, respectively, during the first six months of 1998. The increase in real estate residential loans was highly attributable to low interest rates which brought up new purchases and refinancing activities. The following table sets forth the classification of loans by type and mix as of the dates indicated:
(Dollars in thousands) -------------------------------------------------------------------------- As of 06/30/98 As of 12/31/97 --------------------------------- --------------------------------- Types of loans: Amount Percent Amount Percent ------------- ------------- ------------- ------------- Commercial loans $ 347,490 38.9% $ 338,285 40.0% Real estate mortgage loans 498,358 55.7 458,417 54.2 Real estate construction loans 40,773 4.6 41,736 4.9 Installment loans 28,076 3.1 26,611 3.1 Other loans (96) (0.0) 267 0.1 ------------- ------------- ------------- ------------- Total loans - Gross 914,601 865,316 Allowance for loan losses (16,514) (1.9) (15,379) (1.8) Unamortized deferred loan fees (3,900) (0.4) (3,786) (0.5) ------------- ------------- ------------- ------------- Total loans - Net $ 894,187 100.0% $ 846,151 100.0% ============= ============= ============= =============
RISK ELEMENTS OF THE LOAN PORTFOLIO NON-PERFORMING ASSETS Non-performing assets were reduced by $1.6 million or 5.1% from $32.5 million or 3.7% of total loans plus OREO at year-end 1997 to $30.9 million or 3.3% of total loans plus OREO as of June 30, 1998. Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. The decrease resulted primarily from a reduction of $1.1 million in non-accrual loans. The non-performing loan coverage ratio, defined as the allowance for loan losses to non-performing loans, increased from 79.85% at year-end 1997 to 91.84% as of June 30, 1998, due to the combination of a $1.1 million net increase in the allowance for loans losses and a $1.3 million decrease in non-performing loans. The following table presents the breakdown of non-performing assets by categories as of the dates indicated:
(Dollars in thousands) ------------------------------------------------------------------- As of As of As of As of Non-Performing Assets: 06/30/98 03/31/98 12/31/97 09/30/97 ------------- ------------- ------------- ------------- Loans past due 90 days or more and still accruing interest $ 2,242 $ 1,463 $ 2,373 $ 3,516 Non-accrual loans 15,740 16,971 16,886 16,841 ------------- ------------- ------------- ------------- Total non-performing loans 17,982 18,434 19,259 20,357 Real estate acquired in foreclosure 12,889 13,481 13,269 10,063 ------------- ------------- ------------- ------------- Total non-performing assets $ 30,871 $ 31,915 $ 32,528 $ 30,420 ============= ============= ============= ============= Accruing troubled debt restructurings 4,369 4,379 4,874 2,911 Non-performing assets as a percentage of period-end total loans plus OREO 3.33% 3.50% 3.70% 3.63%
14 15 The non-accrual loans of $15.7 million as of June 30, 1998 consisted mainly of $8.7 million in commercial real estate loans and $6.4 million in commercial loans. The following tables present the type of properties securing the loans and the type of businesses the borrowers engaged in under commercial real estate and commercial non-accrual loan categories as of the dates indicated:
(Dollars in thousands) --------------------------------------------------------------- 06/30/98 12/31/97 ----------------------------- ----------------------------- Non-accrual Loan Balance --------------------------------------------------------------- Commercial Commercial Type of property: Real Estate Commercial Real Estate Commercial ------------ ------------ ------------ ------------ Single/multi-family residence $ 914 $ 374 $ 593 $ 311 Commercial 5,966 3,968 8,471 5,095 Motel 1,602 -0- 1,350 -0- UCC -0- 2,007 -0- -0- Others 184 16 214 110 ------------ ------------ ------------ ------------ Total $ 8,666 $ 6,365 $ 10,628 $ 5,516 ============ ============ ============ ============ Type of business: Real estate development $ 554 $ 122 $ -0- $ 134 Real estate management 4,112 35 6,303 36 Wholesale 678 1,964 430 2,994 Food/Restaurant -0- 1,093 -0- 1,190 Import -0- 2,155 752 4 Motel 1,602 -0- 1,350 -0- Investments 396 -0- 1,194 -0- Industrial 183 209 214 263 Clothing 361 162 385 441 Others 780 625 -0- 454 ------------ ------------ ------------ ------------ Total $ 8,666 $ 6,365 $ 10,628 $ 5,516 ============ ============ ============ ============
As shown in the above tables under the commercial real estate loan category as of June 30, 1998, the $6.0 million balance in commercial loans represents five credits, all of which were secured by first trust deeds on commercial buildings and warehouses. The $1.6 million balance in motel loans represents two credits secured by first trust deeds on the respective motels located in Southern California. Under the commercial loan category as of June 30, 1998, the $4.0 million balance consisted of 14 credits. The collateral on these credits include primarily first trust deeds and secondarily second and third trust deeds on commercial buildings and warehouses. The $2.0 million balance secured by UCC comprised of five credits. Troubled debt restructurings were $4.4 million as of June 30, 1998, compared to $4.9 million at year-end 1997, representing a decrease of $505,000 or 10.4%. All of these restructured loans were current under their revised terms as of June 30, 1998. There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of June 30, 1998. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $16.5 million or 1.81% of total loans as of June 30, 1998, compared to $15.4 million or 1.78% of total loans at year-end 1997. The following table presents information relating to the allowance for loan losses for the periods indicated: 15 16
(Dollars in thousands) ---------------------------------- YTD YTD Allowance for loan losses: 06/30/98 12/31/97 ------------- ------------- Balance at beginning of period $ 15,379 $ 13,529 Provision for loan losses 1,800 3,600 Loans charged-off (1,003) (2,139) Recoveries of charged-off loans 338 389 ------------- ------------- Balance at end of period $ 16,514 $ 15,379 ============= ============= Average loans outstanding during the period $ 869,633 $ 792,176 Ratio of net charge-offs to average loans outstanding during the period (annualized) 0.15% 0.22% Provision for loan losses to average loans outstanding during the period (annualized) 0.42% 0.45% Allowance to non-performing loans at period-end 91.84% 79.85% Allowance to total loans at period-end 1.81% 1.78%
In determining the allowance for loan losses, management continues to assess the risks inherent in the loan portfolio, the possible impact of known and potential problem loans, and other factors such as collateral value, portfolio composition, loan concentration, financial strength of borrower, and trends in local economic conditions. The Bank's allowance for loan losses consists of a specific allowance and a general allowance. The specific allowance is further broken down to provide for impaired loans and the remaining internally classified loans. Management allocates a specific allowance to those remaining internally classified loans which do not require impairment allowance, based on the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral and 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 portfolio. The following table presents a breakdown of impaired loans and the impairment allowance related to impaired loans:
(Dollars in thousands) ---------------------------------------------------------------- As of June 30, 1998 As of December 31, 1997 ------------------------------ ------------------------------ SFAS No. 114 SFAS No. 114 Recorded Impairment Recorded Impairment Impaired loans with impairment allowance: Investment Allowance Investment Allowance ------------- ------------- ------------- ------------- Commercial $ 8,084 $ 1,828 $ 7,784 $ 1,499 Commercial real estate 13,285 2,318 14,027 2,396 Other 47 47 95 95 ------------- ------------- ------------- ------------- Total impaired loans with impairment allowance $ 21,416 $ 4,193 $ 21,906 $ 3,990 ============= ============= ============= =============
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 as of June 30, 1998 to be adequate to absorb the estimated known and inherent risks identified through its analysis. OTHER REAL ESTATE OWNED The Company's OREO properties, net of valuation allowance, were carried at $12.9 million as of June 30, 1998, compared to those carried at $13.3 million at year-end 1997. During the first six months of 1998, the Company acquired four properties totaling $2.7 million and disposed nine properties totaling $3.4 million with a net gain of $199,000. As of June 30, 1998, the Bank's OREO 16 17 properties include commercial buildings, warehouses, land, single family residences and apartments, all of which are located in Southern California. The Bank continues to maintain a valuation allowance for the OREO properties in order to record estimated fair value of the properties. Periodic evaluation is performed on each property and corresponding adjustment is made to the valuation allowance. Any decline in value is recognized as non-interest expense under the provision for OREO losses in the current period and any balance in the valuation allowance is reversed when the respective property is sold. During the first six months of 1998, management provided approximately $56,000 to the provision for OREO losses based on new listing prices or new appraisals received bringing the valuation allowance to $726,000 as of June 30, 1998. Year to date 1998, the Bank had a net income from its OREO properties totaling $182,000 which is included in the other operating income in the accompanying condensed consolidated financial statements. DEPOSITS Total deposits increased moderately to $1,477.8 million at June 30, 1998, compared to $1,449.1 million at year-end 1997. Of the $28.7 million or 2.0% increase in deposits, $23.0 million came from time deposits over $100,000 ("Jumbo CD's"). This continued growth in Jumbo CD's was primarily a result of the widened interest rate spread between time deposits and other interest-bearing deposits. Consequently, the ratio of core deposits (defined as all deposits excluding Jumbo CD's and brokered deposits) to total deposits continued to decline from 62.11% at year-end 1997 to 61.29% at June 30, 1998. There were no brokered deposits as of June 30, 1998. Management continues to monitor the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the patrons the Bank is servicing. Although the Bank's Jumbo CD portfolio kept growing, management considers the Bank's Jumbo CD's generally less volatile since 1) a majority of the Bank'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 3,512 individual accounts owned by 2,518 individual depositors as of July 23, 1998. The balance of the accounts averaged approximately $165,000; and 3) this phenomenon of having relatively higher percentage of Jumbo CD's exists in most of the Asian American banks in the Company's market which is dictated by the fact that the customers in this market tend to have a higher savings rate. However, management has constantly made efforts to discourage the continued growth in Jumbo CD's, such as to diversify the customer base by branch expansion and acquisition, to offer non-competitive interest rates paid on Jumbo CD's and to develop new transaction-based products to attract depositors. The following table illustrates the deposit mix as of the dates indicated:
(Dollars in thousands) --------------------------------------------------------------------- As of 06/30/98 As of 12/31/97 --------------------------------- --------------------------------- Types of deposits: Amount Percent Amount Percent ------------- ------------- ------------- ------------- Demand $ 171,082 11.6% $ 175,875 12.1% NOW accounts 113,349 7.7 111,653 7.7 Money market accounts 95,636 6.5 94,708 6.6 Savings deposits 205,482 13.9 210,291 14.5 Time deposits under $100,000 320,133 21.6 307,504 21.2 Time deposits of $100,000 or more 572,106 38.7 549,090 37.9 ------------- ------------- ------------- ------------- Total deposits $ 1,477,788 100.0% $ 1,449,121 100.0% ============= ============= ============= =============
CAPITAL RESOURCES Stockholders' equity amounted to $145.5 million or 8.78% of total assets as of June 30, 1998, compared to $135.9 million or 8.37% of total assets at year-end 1997. The $9.6 million or 7.1% increase in stockholders' equity was primarily due to an addition of $11.4 million from year-to-date net income, $819,000 from issuance of additional common shares through Dividend Reinvestment Plan and 17 18 an increase of $471,000 in the unrealized holding gains on securities available-for-sale, net of tax, which were partially offset by dividends paid in the amount of $3.1 million. The Company declared a cash dividend of $0.175 per common share in January, April and July of 1998, respectively, on 8,941,743, 8,953,307 and 8,965,315 shares outstanding, respectively. Total cash dividends paid in 1998, including the $1.6 million paid in July 1998, amounted to $4.7 million. 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. As presented in the following tables, the Company and the Bank's capital and leverage ratios as of June 30, 1998 continued to be well above the regulatory minimum requirements. The capital ratios of the Bank place it in the "well capitalized" category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio equal to or greater than 5.0%.
(Dollars in thousands) ------------------------------------------------------------------------------- Company Bank As of 06/30/1998 As of 06/30/1998 ---------------------------------- ---------------------------------- Balance Percent Balance Percent ------------- ------------- ------------- ------------- Tier 1 capital (to risk-weighted assets) $ 135,705* 11.69% $ 131,434* 11.33% Tier 1 capital minimum requirement 46,415 4.00 46,415 4.00 ------------- ------------- ------------- ------------- Excess $ 89,290 7.69% $ 85,019 7.33% ============= ============= ============= ============= Total capital (to risk-weighted assets) $ 150,235* 12.95% $ 145,963* 12.58% Total capital minimum requirement 92,830 8.00 92,830 8.00 ------------- ------------- ------------- ------------- Excess $ 57,405 4.95% $ 53,133 4.58% ============= ============= ============= ============= Risk-weighted assets $ 1,160,380 $ 1,160,374 Tier 1 capital (to average assets) - Leverage ratio $ 135,705* 8.27% $ 131,434* 8.01% Minimum leverage requirement 65,628 4.00 65,628 4.00 ------------- ------------- ------------- ------------- Excess $ 70,077 4.27% $ 65,806 4.01% ============= ============= ============= ============= Total average assets $ 1,640,699 $ 1,640,691
* Excluding the unrealized holding gains on securities available-for-sale of $841,000, and goodwill of $8,928,000. ASSET/LIABILITY MANAGEMENT AND MARKET RISK The Company manages its assets and liabilities to maximize its net interest income through growth opportunities and competitive pricing, while striving to minimize its market risk and to maintain adequate liquidity to meet the maturing financial obligations and customer credit needs. The Company can but is not utilizing hedging instruments currently to maintain and/or augment its spread, as management believes that it is not cost-effective at this time. The Company manages various market risks in the ordinary course of business. The principal market risk to the Company is the interest rate risk inherent in its lending, investing and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities of the Company do not change at the same speed, to the same extent, or on the same basis. 18 19 The Company actively monitors and manages its interest rate risk through analyzing the repricing characteristics of its loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse effects of changes in interest rates on its earnings and ultimately the underlying market value of equity while structuring the Company's asset-liability composition to obtain the maximum spread. Management uses certain basic measurement tools in conjunction with established risk limits to regulate its interest rate exposure. Because of the limitation inherent in any individual risk management tool, the Company uses both an interest rate sensitivity analysis and a simulation model to measure and quantify the impact to the Company's profitability or the market value of its assets and liabilities. The interest rate sensitivity analysis measures the Company's exposure to differential changes in interest rates between assets and liabilities. This analysis details the expected maturity and repricing opportunities mismatch or sensitivity gap between interest-earning assets and interest-bearing liabilities over a specified timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates environment, net interest margin may be enhanced with a positive gap. Contrarily, a negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of increasing interest rate environment, net interest margin may be impaired. As of June 30, 1998, the Company was asset sensitive with a cumulative gap ratio of a positive 10.05% within three months, and liability sensitive with a cumulative gap ratio of a negative 18.58% within a 1-year period, compared to a positive 17.28% within three months, and a negative 10.49% within a 1-year period as of December 31, 1997. Since interest rate sensitivity analysis does not measure the timing differences in the repricing of asset and liabilities, the Company uses a simulation model to quantify the extent of the differences in the behavior of the lending and funding rates, so as to project future earnings or market values under alternative interest scenarios. The simulation measures the volatility of net interest income and market value of equity under immediate rising or falling interest rate scenarios in 100 basis point increments. The Company establishes a tolerance level in its policy to define and limit interest income volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the tolerance level is met or exceeded, the Company then seeks corrective action after considering, among other things, market conditions, customer reaction and the estimated impact on profitability. As of June 30, 1998, the Company's interest income volatility was within the Company's established tolerance level. The Company derives liquidity primarily from various types of deposits. The Company's principal sources of liquidity have been growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, and repayments from securities and loans. The Company's liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) stood at 44.40% as of June 30, 1998, compared to 45.59% at year-end 1997. The Bank maintains a total credit line of $40 million for Federal funds with two correspondent banks, a repo line of $100 million with a brokerage firm and a total retail certificate of deposit line of approximately $174 million with two brokerage firms. Moreover, the Bank is a shareholder of Federal Home Loan Bank (FHLB) which enables the Bank to have access to lower cost FHLB financing when and if necessary. Management believes all the above-mentioned sources will provide adequate liquidity to the Company to meet its daily operating needs. 19 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company, including its wholly-owned subsidiary, Cathay Bank, has been a party to ordinary routine litigation incidental to various aspects of its operations. Management is not currently aware of any other litigation that will have material adverse impact on the Company's consolidated financial condition, or the results of operations. ITEM 2. CHANGES IN SECURITIES There have been no changes in securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of stockholders was held on April 20, 1998. At the 1998 Annual Meeting, the stockholders approved the following proposals: PROPOSAL I: ELECTION OF DIRECTORS The following directors (Class II) were elected to serve until 2001: Ralph Roy Buon-Cristiani Kelly L. Chan Dunson K. Cheng Chi-Hung Joseph Poon The number of votes cast for or withheld, with respect to the election of each Class II Director was as follows:
BROKER FOR WITHHELD AGAINST NON-VOTE --- -------- ------- -------- Ralph Roy Buon-Cristiani 6,747,345 56,176 -0- -0- Kelly L. Chan 6,766,809 32,066 -0- -0- Dunson K. Cheng 6,766,422 32,553 -0- -0- Chi-Hung Joseph Poon 6,766,909 32,553 -0- -0-
Other directors whose terms of office continued after the meeting:
Term Ending in 1999 (Class III) Term Ending in 2000 (Class I) ------------------------------- ----------------------------- George T.M. Ching Michael M.Y. Chang Wing K. Fat Patrick S.D. Lee Wilbur K. Woo Anthony M. Tang Thomas G. Tartaglia
PROPOSAL II: EQUITY INCENTIVE PLAN The number of votes cast for, against or abstain, with respect to the Equity Incentive Plan was as follows:
BROKER FOR AGAINST ABSTAIN NON-VOTE --- ------- ------- -------- 5,174,307 465,983 258,092 -0-
20 21 ITEM 5. OTHER INFORMATION There were no reportable events. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit: 27 Financial Data Schedule 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Cathay Bancorp, Inc. (Registrant) Date: August 13, 1998 DUNSON K. CHENG --------------- --------------- Dunson K. Cheng Chairman and President Date: August 13, 1998 ANTHONY M. TANG --------------- --------------- Anthony M. Tang Chief Financial Officer 22 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 59,128 1,344 52,000 0 189,981 374,129 380,447 910,701 16,514 1,656,657 1,477,788 13,780 19,616 0 0 0 90 145,383 1,656,657 39,906 18,068 1,439 59,413 26,735 27,573 31,840 1,800 35 15,546 18,835 18,835 0 0 11,439 1.28 1.28 4.36 15,740 2,242 4,369 4,905 15,379 1,003 338 16,514 16,514 0 0
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