-----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, A4FwePbr9xjWjFWUenj5f6ITSZ3yYvu2ifal8Ok+XDP44dZpRjMLe7uTPLtcM/dN yVzz52ntL1WUDGduQr49Bg== 0000950150-98-000477.txt : 19980331 0000950150-98-000477.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950150-98-000477 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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-K SEC ACT: SEC FILE NUMBER: 000-18630 FILM NUMBER: 98579020 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-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/97 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, 1997 ------------------------------------------------------ [ ] 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. [ ] 2 The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 6, 1998 was $242,755,116 (computed on the basis of $33.625 per share, which was the last sale price of the Company's Common Stock reported by the Nasdaq National Market on March 6, 1998).* The number of shares outstanding of each of the Registrant's classes of Common Stock as of March 6, 1998: Common Stock, $.01 par value - 8,952,338 shares** DOCUMENTS INCORPORATED BY REFERENCE - - Portions of Registrant's definitive proxy materials relating to its 1998 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, 1997 (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, officers and Employee Stock Ownership Plan have been excluded. ** Includes 34,519 and 34,000 rights, respectively, to receive Common Stock that are held by former holders of Cathay Bank common stock and former holders of First Public Savings Bank common stock 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 (now named the "Department of Financial Institutions") and commenced operations as a California state-chartered bank on April 19, 1962. Cathay Bank is an insured bank under the Federal Deposit Insurance Act but, like most state-chartered banks of similar size in California, it is not a member of the Federal Reserve System. Cathay Bank's main office is located in the Chinatown area of Los Angeles, at 777 North Broadway, Los Angeles, California 90012. In addition, the Bank has 17 other branch offices located in the cities of Monterey Park, Alhambra, Hacienda Heights, Westminster, San Gabriel, Torrance, Cerritos, City of Industry, Irvine and Los Angeles in Southern California, as well as the cities of San Jose, Oakland, Cupertino, Fremont 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 letters of credit, wire transfers, spot and forward contracts, traveler's checks, safe deposit, night deposit, social security payment deposit, collection, bank-by-mail, drive-up and walk-up windows, automatic teller machine ("ATM") and other customary bank services to its customers. 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: (1) loans secured by real estate; (2) commercial loans and trade financing; and (3) installment loans to individuals for automobile, household and other consumer expenditures. SELECTED FINANCIAL DATA Information concerning changes in the 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 19 through 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 and 49 of the Annual Report to Stockholders, and is incorporated herein by reference. LOANS Distribution and maturity of loans. Information concerning loan type and mix, distribution of loans and maturity of loans is included on pages 22 and 23 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 23 through 29 and in Notes 5 and 6 to the Consolidated Financial Statements on pages 50 through 52 of the Annual Report to Stockholders and is incorporated herein by reference. DEPOSITS Information concerning types of deposit accounts and average deposits and rates is included on pages 29 and 30 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, 1997 1996 1995 1994 1993 ------------------------------------------------------------------- Return on Average Assets (net income divided by average assets) 1.29% 1.05% 1.05% 1.06% 0.91% Return on Average Equity (net income divided by average equity) 15.63 13.06 11.68 11.43 9.82 Average Equity as a Percentage of Average Assets 8.25 8.04 8.97 9.25 9.22 Dividend Payout Ratio(1) 27.65 36.14 44.12 48.78 58.82
- --------- (1) Computed by using dividends declared per common share divided by net income per common 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. 5 6 ANALYSIS OF CHANGES IN NET INTEREST INCOME An analysis of changes in net interest income due to changes in rate and volume is included on pages 14 through 16 of the Annual Report to Stockholders and is incorporated herein by reference. COMMITMENTS AND LINES OF CREDIT Information concerning the Bank's outstanding loan commitments and letters of credit is included in Note 12 to the Consolidated Financial Statements on pages 56 and 57 of the Annual Report to Stockholders and is incorporated herein by reference. 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 $3,400 at the exchange rate in effect at December 31, 1997. As of December 31, 1997, CIC owned one property with a net equity investment of $680,091. The property is an 8,200 square foot strip shopping center on a 27,000 square foot parcel of land located on Harbor Boulevard, Garden Grove, California. The Bank filed an application for consent for subsidiary to continue to engage in activity on February 4, 1994, and received approval from the FDIC on March 8, 1995 to hold the property for an additional five years. PREMISES The Bank's main corporate office and headquarters branch is located in the Chinatown district of Los Angeles. The offices are in a spacious traditional three-story structure containing 26,527 square feet and constructed of glass and concrete. The Bank owns both the building and the land upon which the building is situated. The main floor currently has 24 teller stations (including 16 regular tellers, seven commercial tellers, and one Automatic Teller Machine), four pneumatic drive-up teller stations, one walk-up teller station, a vault area and the Bank's operations area. The second floor contains executive offices and the Bank's Board Room. The third floor houses the Bank's corporate lending department. Parking for approximately 126 automobiles is provided on three lots adjacent to the Bank's building, two of which are owned by the Bank while the third lot is leased under a 55-year term with a 30-year option commencing in January 1987 at a current monthly rent of approximately $14,000. 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 and the lease for the CIC Taipei office, the Bank leases certain premises under the following lease terms and conditions: (1) total of 10,430 square feet of space for administrative offices in a building located near the Bank's main office at a monthly rent of approximately $12,200 under two separate leases for three years beginning 2/1/98; (2) 4,483 square feet of space for the Hacienda Heights office at a monthly rent of $4,842 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 6 7 consideration; (4) 5,000 square feet of space for the Oakland office at a monthly rent of $6,000 under a renewed lease beginning in September 1996 for five years; (5) 2,400 square feet of space for the Fremont office at a current monthly rent of $3,360 under a three-year lease beginning in May 1994 with two three-year options; the Bank has exercised the first option; (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 May 1988 with two five-year options; (7) 3,441 square feet of space for the Millbrae Office at a current 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 at a current monthly rent of approximately $3,400 based on the exchange rate in effect on December 31, 1997 under a renewed lease from March 1, 1998 to February 29, 2000. In October 1997, the Bank entered into a lease agreement to lease 2,535 square feet of space for the Berkeley/Richmond Branch expected to be opened in the near future. The lease calls for a term of six years at a monthly rent of $6,338. One of the leases referred to under (1) above has 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) 8,707 square feet of space for the Hill/Alpine office under a lease from February 1979 to February 1989 with three five-year options; First Public has exercised the second option to renew the lease until February 1999; the current monthly rent is $5,017; (2) 1,976 square feet of space for the Valley/Stoneman 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; and (3) 2,000 square feet of space for the Valley/Prospect 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. The Bank currently operates 18 domestic branch offices, one branch office of CIC in Taiwan, and one representative office in Hong Kong. Each branch office has loan approval rights subject to the branch manager's authorized lending limits. Activities of the CIC Taiwan office and Hong Kong representative office are limited to coordinating the transportation of documents to the Bank's main office and performing liaison services. A list of the offices of the Bank and CIC is included on page 68 of the Annual Report to Stockholders and is incorporated herein by reference. As of December 31, 1997, the Bank's investment in premises and equipment totaled $25,201,883. See also Note 8 to the Consolidated Financial Statements on page 53 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 7 8 does the Bank. In addition, other entities (both governmental and private industry) seeking to raise capital through the issuance and sale of debt and equity securities provide competition for the Bank in the acquisition of deposits. In seeking to obtain customers for loans, Cathay Bank competes primarily with other commercial and savings banks, as well as other non-bank financial intermediaries, including insurance companies, mortgage companies, credit unions, and other lending institutions. Certain legislation has served to ease regulatory restrictions on certain such institutions, thus increasing their ability to compete with banks such as Cathay Bank. To compete with other financial institutions in its primary service areas, the Bank relies principally upon local promotional activities, personal contacts by its officers, directors, employees, and stockholders, extended hours, 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. There are approximately 13 Asian-American banks and one other major financial institution in the Bank's headquarters branch area, which compete for California Asian-American customers, as well as other ethnic customers. In addition, banks from the Pacific Rim countries, such as Taiwan, Hong Kong and China continue to open branches in the Los Angeles area, thus increasing the Bank's competition. EMPLOYEES As of December 31, 1997, the Company and Cathay Bank (including CIC) employed approximately 505 persons, including 109 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 Department of Financial Institutions. The Bank's deposits are insured, up to the legal maximum, by the FDIC, and the Bank is subject to FDIC rules applicable to insured banks. Although not a member of the Federal Reserve System, the Bank is subject to certain Federal Reserve Board rules and regulations by virtue of its FDIC-insured deposits. The regulatory authorities review key operational areas of the Company and the Bank, including asset quality, capital adequacy, liquidity, and management and administrative ability. Applicable law and regulations also limit the business activities in which the Company, the Bank 8 9 and its subsidiaries may be engaged. (see, e.g. "Interstate Banking" and "Federal Limits on the Activities and Investments of State-chartered Banks" below). In addition to banking regulations, the Company is subject to periodic reporting and other requirements under the Securities Exchange Act of 1934, as amended. To the extent the information in this Section ("Regulation of the Company and the Bank") describes statutory or regulatory provisions, it is qualified in its entirety by reference to such provisions. CAPITAL REQUIREMENTS Among other matters, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required each federal banking regulatory agency to revise its risk-based capital standards and to specify levels at which regulated institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". Information concerning regulations of the risk-based capital requirements prescribed by the regulatory authorities is included on page 31 of the Annual Report to Stockholders and is incorporated herein by reference. The Board has adopted percentage minimum leverage ratios for banking organizations (including state member banks and bank holding companies). The Company is expected to maintain at least a four percent minimum leverage ratio depending on interest rate risk exposure, asset quality, liquidity, earnings, expansion plans, growth patterns and other relevant factors. The Company was well capitalized as of December 31, 1997 with a leverage ratio of 7.94%. The tables presenting the Company and the Bank's risk-based capital and leverage ratios as of December 31, 1997 are included in Note 11 to the Consolidated Financial Statements on page 55 of the Annual Report to Stockholders, which is incorporated herein by reference. FDIC IMPROVEMENT ACT OF 1991 In December 1991, the FDICIA was enacted into law. The FDICIA provides for the recapitalization of the Bank Insurance Fund and improved examinations of insured institutions. It prescribes standards for safety and soundness of all insured depository institutions; and requires each federal banking agency and the FDIC to take prompt corrective regulatory action to resolve the problems of insured depository institutions that fall below a certain capital ratio. The FDICIA also, among other things, (1) limits the percentage of interest paid on brokered deposits and limits the use of such deposits to only those institutions that are well-capitalized; (2) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (3) prohibits insured state chartered banks from engaging, as principal, in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (4) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; (5) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution, and (6) restricts capital distributions by institutions that are, or as a result of the distributions will become, undercapitalized. On December 31, 1992, the bank regulatory agencies adopted uniform regulations relating to real estate loans that require institutions to adopt written real estate policies that are consistent with regulatory guidelines. Those guidelines include maximum loan-to-value ratios for various categories of real estate loans. Institutions are permitted to make loans in excess of such ratios if 9 10 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 1997 the Company maintained its compliance with the requirements of Section 112 of FDICIA. Section 112 affects all banks of $150 million or more in assets, and reflects the government's growing concern for legislative reform to strengthen bank accounting, auditing, and internal control oversight. Essentially, it establishes standards for composition of a bank's audit committee; requires assessment of the organization's compliance with designated laws and regulations; mandates documentation and testing of the bank's internal control structure as it relates to financial reporting controls; and, compels management's positive report (attested to by the bank's independent auditors) as of the end of each fiscal year, concerning the quality, adequacy and efficiency of the bank's internal controls. FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") focused on restructuring the regulation of the savings and loan industry and its deposit insurance; and instituted a new regulatory structure for the resolution of troubled and insolvent savings associations. Nevertheless, a number of provisions (described below) also apply to commercial banks. Title II authorizes the increase of insurance premiums paid by the FDIC-insured institutions. Title VI permits the acquisition of thrifts by bank holding companies. Title IX enhances the enforcement authority of all federal banking agencies, including their authority to levy civil money penalties and penalties on criminal offenses, and it also broadens the current definition of insiders, to increase the types of persons subject to regulatory action. Title XI requires appraisals used in making credit decision be written and performed in accordance with generally accepted appraisal standards, as promulgated by the Appraisal Standards Board of the Appraisal Foundation, and should meet federal guidelines. Title XII expands the recordkeeping requirements of reporting on Home Mortgage Disclosure Act (HDMA) to cover race, income and gender; changes the current Community Reinvestment Act ("CRA") rating system to a four-tiered rating system, which includes (1) outstanding record of meeting community credit needs; (2) satisfactory record of meeting community credit needs; (3) needs to improve record of meeting community credit needs, and (4) substantial noncompliance in meeting community credit needs. It further requires that the CRA rating be publicly disclosed. The aforementioned provisions have not had a material adverse impact on the Company's consolidated financial condition or results of operations. FEDERAL LIMITS ON THE ACTIVITIES AND INVESTMENTS OF STATE-CHARTERED BANKS Federal restrictions on the direct and indirect activities and investments of state-chartered or licensed depository institutions exist if the institution either carries federal deposit insurance or is involved in activities with foreign banks. The FDIC is the regulatory agency with the authority to determine federal restrictions on all direct and indirect activities and investments. 10 11 As a general matter, subject to a number of grandfathering provisions and a few exceptions, there are three rules which limit the activities and investments of state-chartered banks: (1) a state-chartered bank may not engage as principal in any type of activity that is not permissible for a national bank, unless the FDIC determines that the activity would pose no significant risk to the affected deposit insurance fund and the institution meets its fully phased in capital requirements; (2) a state-chartered bank may not make or retain an equity investment of a type or in an amount that is not permissible for a national bank, and divestiture is required as soon as possible and within five years of FDICIA in any event; and (3) a state-chartered bank may retain an equity investment in the form of a majority-owned subsidiary engaged as principal in activities not permissible for a subsidiary of a national bank, but only if the FDIC has made the same determinations respecting risk to the insurance fund and capital compliance by the bank. As stated above (see "Cathay Investment Company" on page 6 of this report), Cathay Bank has received FDIC approval of CIC's ownership of the Garden Grove property. The Bank is in compliance with these limitations. INTERSTATE BANKING The Federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was signed into law on September 29, 1994. When fully effective, the Riegle-Neal Act will significantly relax or eliminate many restrictions on interstate banking. Effective September 29, 1995, the Riegle-Neal Act permitted a bank holding company to acquire banks in states other than its "home state", even if applicable state law would not permit that acquisition. Such acquisitions would continue to require Board approval and would remain subject to certain state laws. Effective June 1, 1997, the Riegle-Neal Act permitted interstate mergers of banks, thereby allowing a single, merged bank to operate branches in multiple states. The Riegle-Neal Act allows each state to adopt legislation to "opt-out" of these interstate merger provisions. Conversely, the Riegle-Neal Act permits states to "opt in" to the merger provisions of Act prior to their stated effective date, to permit interstate mergers in that state prior to June 1, 1997. The enactment of the California Interstate Banking and Branching Act of 1995 provides for interstate banking and branching in California. This early opt-in legislation, which became effective on October 2, 1995, requires out-of-state institutions which do not already own a California bank to acquire an existing whole five-year old bank before establishing a California branch. De novo branching is not permitted. This act revised much of the original California interstate banking law first enacted in 1986 that permitted interstate banking with other states on a reciprocal basis. Banks and bank holding companies contemplating acquisitions must comply with the competitive standards of the BHCA, the Change in Bank Control Act ("CBA") or the Bank 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 revised merger guidelines in March 1995. On the basis of the revised criteria, the Department has challenged several proposed transactions involving institutions that compete directly in the same market(s). In contrast to the Justice Department, the Federal Reserve has recently shown a greater inclination 11 12 to consider factors that contribute to the safety and soundness of the banking system, or which contribute positively to the "convenience and needs" of the affected communities. To the extent these two Federal Agencies apply different (and at times incompatible) analysis to assess the competitive effects of proposed bank and thrift mergers and acquisitions, federal antitrust objections must be considered in connection with any interstate acquisition. The Company constantly seeks to expand its market areas through acquiring other financial institutions or establishing de novo branches in or outside of California as permitted by applicable laws, whenever opportunities strike. The Riegle-Neal Act may have the effect of increasing competition by facilitating entry into the California banking market by out of state banks and bank holding companies. RECENT ACCOUNTING DEVELOPMENTS Information concerning recent accounting developments is included in Note 1 to the Consolidated Financial Statements under "Recent Accounting Pronouncements" on page 46 of the Annual Report to Stockholders and is incorporated herein by reference. FEDERAL HOME LOAN BANK The Federal Home Loan Bank System (FHL Bank System) consists of twelve district banks (FHLB) and is supervised by the Federal Housing Finance Board (FHFB). Commercial banks, credit unions, savings associations, and certain other insured depository institutions making long-term home mortgage loans are eligible to become members of the FHL Bank System. To qualify for membership, an institution not a member on January 1, 1989 must meet the qualified thrift lender test, which means, among other things, that such institution has at least ten percent of its total assets in residential mortgage loans. Any new institution formed after January 1, 1989 may become a member if it met the ten percent asset test requirement within one year after commencing operations. The Bank received FHLB membership approval in January 1993, and became a member/stockholder of the FHLB of San Francisco. By becoming a FHLB member, the Bank may have access to a source of low-cost liquidity. To access the credit services offered by the district banks, a member must also become a stockholder of the FHLB in its district. The level of stock ownership is currently governed by the Federal Home Loan Bank Act, and the amount of borrowing is defined by the amount of stock purchased. FHLB stock is purchased and redeemed at par. The Bank's investment in FHLB stock totaled 56,529 shares or $5,652,900 as of December 31, 1997. All credits extended by the district bank require full collateralization. Eligible collateral includes residential first mortgage loans on single and multi-family projects, U.S. government and agency securities, deposits in district banks, and certain other real estate related assets permitted by law. DIVIDENDS As a California corporation, Cathay Bank may not pay dividends to the Company in excess of certain statutory limits. As of December 31, 1997, the maximum dividend that Cathay Bank could have declared, subject to regulatory approval, was $29,040,000. 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. 12 13 ITEM 3. LEGAL PROCEEDINGS Management is not currently aware of any litigation that is expected to have material adverse impact on the Company's consolidated financial condition, or the results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1997. 13 14 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 6, 1998, there were approximately 1,800 holders of record of the Company's Common Stock. (c) Dividends The information in Note 11 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 37 of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the captions "Market Risk" and "Liquidity and Interest Rate Sensitivity" on pages 31 through 34 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. 14 15 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 1998 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. The following persons are the executive officers and other significant officers of the Company and/or Cathay Bank: George T.M. Ching, age 83, 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 53, 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 82, 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 44, 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 60, 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 50, 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 46, 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 17, 1997 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 time, the officer resigns or is removed or is otherwise disqualified from serving as an officer of Bancorp or Cathay Bank. 15 16 ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Information Concerning Management Compensation" and "Compensation Committee Interlocks and Insider Participation" on pages 8 through 10 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. 16 17 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, 1997 and 1996 39 Consolidated Statements of Income for each of the years in the 3-year period ended December 31, 1997 40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the 3-year period ended December 31, 1997 41 Consolidated Statements of Cash Flows for each of the years in the 3-year period ended December 31, 1997 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, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 is included in Note 15 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. 17 18 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. 18 19 22.1 Subsidiaries of the Company 27 Financial Data Schedule (b) Reports on Form 8-K There were no reportable events. 19 20 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 27, 1998 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 27, 1998 - ------------------------------------ the Board and Director Dunson K. Cheng (Principal executive officer) /s/ Anthony M. Tang Executive Vice President, March 27, 1998 - ------------------------------------ Chief Financial Officer Anthony M. Tang /Treasurer and Director (principal financial officer) (principal accounting officer) /s/ Ralph Roy Buon-Cristiani Director March 27, 1998 - ------------------------------------ Ralph Roy Buon-Cristiani /s/ Kelly L. Chan Director March 27, 1998 - ------------------------------------ Kelly L. Chan /s/ Michael M.Y. Chang Director March 27, 1998 - ------------------------------------ Michael M.Y. Chang
[SIGNATURES CONTINUED] 20 21 [SIGNATURES CONTINUED]
Signature Title Date - --------- ----- ---- /s/ George T.M. Ching Vice Chairman of the March 27, 1998 - ------------------------------------ Board and Director George T.M. Ching /s/ Wing K. Fat Director March 27, 1998 - ------------------------------------ Wing K. Fat /s/ Patrick S.D. Lee Director March 27, 1998 - ------------------------------------ Patrick S.D. Lee /s/ Chi-Hung Joseph Poon Director March 27, 1998 - ------------------------------------ Chi-Hung Joseph Poon /s/ Thomas G. Tartaglia Director March 27, 1998 - ------------------------------------ Thomas G. Tartaglia /s/ Wilbur K. Woo Secretary of the Board March 27, 1998 - ------------------------------------ and Director Wilbur K. Woo
22 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.
23 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 1997 Annual Report to Stockholders incorporated herein by reference. 22.1 Subsidiaries of the Company 27 Financial Data Schedule
EX-13.1 2 CERTAIN PORTIONS OF THE 1997 ANNUAL REPORT 1 EXHIBIT ___ CATHAY BANCORP, INC. AND SUBSIDIARY 1997 ANNUAL REPORT SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31, (dollars in thousands except share, per share data) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Income Statement(4) Interest income $ 111,978 $ 86,098 $ 76,223 $ 61,631 $ 55,573 Interest expense 50,874 39,209 31,282 20,033 18,652 ---------------------------------------------------------------------- Net interest income before provision for loan losses 61,104 46,889 44,941 41,598 36,921 Provision for loan losses 3,600 3,600 7,300 7,755 5,332 ---------------------------------------------------------------------- Net interest income after provision for loan losses 57,504 43,289 37,641 33,843 31,589 Securities gains 41 22 611 63 444 Other non-interest income 6,734 5,837 5,610 5,781 5,508 Non-interest expense 30,928 28,013 27,617 26,139 25,305 ---------------------------------------------------------------------- Income before income tax expense 33,351 21,135 16,245 13,548 12,236 Income tax expense 13,243 7,819 5,624 4,034 4,448 ---------------------------------------------------------------------- Net income $ 20,108 $ 13,316 $ 10,621 $ 9,514 $ 7,788 ====================================================================== Basic net income per common share(3) $ 2.26 $ 1.66 $ 1.36 $ 1.23 $ 1.02 Cash dividends paid per share $ 0.625 $ 0.60 $ 0.60 $ 0.60 $ 0.60 Weighted average common shares(3) 8,915,936 8,017,398 7,805,339 7,724,752 7,670,454 ---------------------------------------------------------------------- Statement of Condition Securities available-for-sale $ 216,158 $ 383,391 $ 243,252 $ 75,074 $ 45,870 Securities held-to-maturity 350,336 210,129 174,377 180,082 144,352 Total net loans(1) 846,151 744,384 542,995 569,363 579,646 Total assets 1,622,462 1,504,329 1,087,400 941,051 877,540 Deposits 1,449,121 1,364,740 984,227 845,715 790,414 Other liabilities 37,464 21,143 8,644 9,951 6,601 Stockholders' equity 135,877 118,446 94,529 85,385 80,525 ---------------------------------------------------------------------- Common Stock Data Shares of common stock outstanding(3) 8,941,743 8,878,144 7,867,164 7,798,550 7,714,603 Book value per share(2) $ 15.20 $ 13.34 $ 12.02 $ 10.95 $ 10.44 ---------------------------------------------------------------------- Profitability Ratios Return on average assets 1.29% 1.05% 1.05% 1.06% 0.91% Return on average stockholders' equity 15.63 13.06 11.68 11.43 9.82 Dividend payout ratio 27.65 36.14 44.12 48.78 58.82 Average equity to average assets ratio 8.25 8.04 8.97 9.25 9.22 ----------------------------------------------------------------------
(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. (3) Shares outstanding, weighted average shares and earnings per share have been retroactively adjusted for stock splits. (4) Includes the operating results of FPSB subsequent to the November 18, 1996, acquisition date. [LINE GRAPH OF TOTAL ASSETS]
Total Assets (in million) 1993................ $ 878 1994................ $ 941 1995................ $1,087 1996................ $1,504 1997................ $1,622
[LINE GRAPH OF INCOME BEFORE INCOME TAX EXPENSE]
Income Before Income Tax Expense (in million) 1993................ $12,236 1994................ $13,548 1995................ $16,245 1996................ $21,135 1997................ $33,351
13. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition of Cathay Bancorp, Inc. and its subsidiary Cathay Bank ("the Bank" and together "the Company") and their consolidated results of operations. It should be read in conjunction with the audited consolidated financial statements and footnotes appearing elsewhere in this report. The 1997 results of operations include the results of the former First Public Savings Bank, F.S.B. ("FPSB") for the entire year. In 1996, FPSB's results are included from the acquisition date of November 18, 1996. 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 $20.1 million or $2.26 per common share for year 1997 compared with $13.3 million or $1.66 per common share for year 1996 and $10.6 million or $1.36 per common share for year 1995, representing an increase of $6.8 million or 51.0% for 1997 and $2.7 million or 25.4% for 1996. In addition to the FPSB acquisition discussed above, the increase in 1997 net income was primarily due to an increase of $14.2 million or 32.8% in net interest income after provision for loan losses. The efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, improved from 53.1% to 45.6%. The increase in 1996 net 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. The return on average assets was 1.29% for 1997, compared with 1.05% for both 1996 and 1995, while the return on average stockholders' equity advanced from 11.68% in 1995 to 13.06% in 1996 and to 15.63% in 1997. NET INTEREST INCOME Net interest income before provision for loan losses reached $61.1 million in 1997, compared with $46.9 million in 1996 and $44.9 million in 1995. This represents an increase of $14.2 million or 30.3% in 1997 and $2.0 million or 4.5% in 1996. On a taxable equivalent basis, net interest income totaled $62.2 million, $48.0 million and $46.2 million in 1997, 1996 and 1995, respectively, representing an increase of $14.2 million or 29.6% in 1997 and $1.8 million or 3.9% in 1996. Comparing 1997 with 1996, the increase in net interest income was substantially attributable to a $313.5 million growth in average earning assets, of which, average loans accounted for $212.5 million, average securities (including available-for-sale and held-to-maturity) accounted for $86.6 million, and Federal funds sold and deposits with other banks accounted for $14.4 million. The increase in average earning assets was primarily funded by time deposits and, secondarily by other interest-bearing deposits and demand deposits. The increase in volume provided an additional $27.0 million to interest income, which was slightly offset by a decrease of $1.1 million due to changes in rate. The significant increase in average loans contributed $19.9 million to interest income, however, $1.8 million of which was offset due to a 30 basis point drop in yield. The average yield on loans was 9.34% for 1997, compared with 9.64% for 1996 despite a 15 basis point increase in the Bank's average reference rate. This was primarily due to substantial increases in average real estate mortgage loans from the acquisition of FPSB in November 1996 ("the acquisition"), and to a lesser extent, the keen competition in the Company's marketplace. Average real estate mortgage loans comprised approximately 16.6% of total loans in 1997 as compared with 7.5% in 1996. The average taxable equivalent yield on securities and Federal funds sold improved 26 basis points and 45 basis points from 6.12% and 5.27% to 6.38% and 5.72%, respectively, while cost of funds advanced five basis points from 3.99% in 1996 to 4.04% in 1997. As a result of the above, net interest margin, defined as taxable equivalent net interest income to average earning assets, increased 4 basis points from 4.38% in 1996 to 4.42% in 1997. 14. 3 Comparing 1996 with 1995, the increase in net interest income was primarily attributable to an increase of $211.1 million or 23.9% in average earning assets from $884.3 million to $1,095.4 million. A majority of the increase came from securities available-for-sale of $202.7 million offset by a decrease of $26.4 million in securities held-to-maturity, while average loans and Federal funds sold grew by $30.0 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 on a smaller scale, by non-interest bearing deposits. The volume increase provided additional $13.2 million to net interest income, which however, was partially offset by a decline of $3.5 million due to changes in rate. The average taxable equivalent yield on earning assets decreased 80 basis points from 8.76% in 1995 to 7.96% in 1996. 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. 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 available-for-sale and held-to-maturity) increased from 35.1% in 1995 to 44.5% in 1996. Cost of funds remained stable at 3.99% and 4.00% in 1996 and 1995, respectively. Consequently, the net interest margin dropped 85 basis points from 5.23% in 1995 to 4.38% in 1996. 15. 4 CHANGES DUE TO RATE AND VOLUME(1)
1997 - 1996 1996 - 1995 Amount Increase (Decrease) Due to: Amount 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 $ 136 $ 796 $ 932 $ (102) $ 214 $ 112 purchased under agreement to resell Securities available-for-sale (Taxable) 256 170 426 161 11,657 11,818 Securities available-for-sale (Nontaxable)(3) (1) 11 10 1 (7) (6) Securities held-to-maturity (Taxable) 385 5,821 6,206 665 (1,514) (849) Securities held-to-maturity (Nontaxable)(3) (91) 142 51 (390) (140) (530) Deposits with other banks -- 13 13 -- 3 3 Federal Home Loan Bank stock 8 112 120 75 8 83 Loans(2) (1,789) 19,916 18,127 (3,900) 2,963 (937) ----------------------------------------------------------------------------------- Total $ (1,096) $ 26,981 $ 25,885 $ (3,490) $ 13,184 $ 9,694 =================================================================================== Interest Expense Savings deposits, NOW accounts and others $ (213) $ 1,625 $ 1,412 $ (300) $ 425 $ 125 Time deposits 382 9,528 9,910 (1,258) 9,006 7,748 Securities sold under agreements to repurchase 2 456 458 (4) (9) (13) Other borrowed funds (1) (2) (3) 2 (20) (18) Mortgage indebtedness (48) (64) (112) 47 38 85 ----------------------------------------------------------------------------------- Total $ 122 $ 11,543 $ 11,665 $ (1,513) $ 9,440 $ 7,927 =================================================================================== Increase in net interest income $ (1,218) $ 15,438 $ 14,220 $ (1,977) $ 3,744 $ 1,767 ===================================================================================
(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 $3,786,000, $3,743,000 and $2,122,000 in 1997, 1996, and 1995, 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 an effective Federal income tax rate of 35%. EARNING ASSET MIX
As of December 31, 1997 As of December 31, 1996 Amount Percent Changed Changed Percent of Total Percent of Total from from (dollars in thousands) Amount Earning Assets Amount Earning Assets 1996 to 1997 1996 to 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Types Of Earning Assets Federal funds sold and securities $ 67,000 4.53% $ 28,000 2.05% $ 39,000 139.29% purchased under agreement to resell Securities available-for-sale 216,158 14.61 383,391 28.07 (167,233) (43.62) Securities held-to-maturity 350,336 23.68 210,129 15.38 140,207 66.72 Loans (net of unamortized deferred loan fees and allowance for loan losses) 846,151 57.18 744,384 54.50 101,767 13.67 ----------------------------------------------------------------------------------------------- Total earning assets $1,479,645 100.00% $1,365,904 100.00% $ 113,741 8.33% ===============================================================================================
16 5 The following table sets forth information concerning average interest earning assets, average interest bearing liabilities and the yields on those assets and liabilities. Average outstanding amounts included in the table are daily averages. INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
Year ended December 31, (dollars in thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Interest Earning Assets: Federal Funds Sold and Securities Purchased Under Agreement to Resell Average outstanding $ 42,260 $ 28,150 $ 23,630 $ 18,416 $ 15,257 Average yield 5.72% 5.27% 5.80% 4.30% 3.00% Amount of interest earned $ 2,415 $ 1,483 $ 1,371 $ 791 $ 457 ------------------------------------------------------------------------------ Securities Available-for-Sale, Taxable Average outstanding $ 289,715 $ 291,419 $ 88,623 $ 50,876 $ 39,967 Average yield 5.99% 5.81% 5.75% 4.93% 4.23% Amount of interest earned $ 17,343 $ 16,917 $ 5,099 $ 2,509 $ 1,689 ------------------------------------------------------------------------------ Securities Available-for-Sale, Nontaxable Average outstanding $ 169 $ 85 $ 155 $ 767 $ 322 Average yield(2) 11.24% 10.59% 9.68% 9.39% 11.49% Amount of interest earned $ 19 $ 9 $ 15 $ 72 $ 37 ------------------------------------------------------------------------------ Securities Held-to-Maturity, Taxable Average outstanding $ 237,881 $ 153,393 $ 178,300 $ 116,523 $ 66,396 Average yield 6.52% 6.07% 5.68% 4.71% 5.46% Amount of interest earned $ 15,520 $ 9,314 $ 10,127 $ 5,491 $ 3,628 ------------------------------------------------------------------------------ Securities Held-to-Maturity, Nontaxable Average outstanding $ 40,930 $ 39,020 $ 40,527 $ 36,488 $ 32,084 Average yield(2) 8.34% 8.61% 9.60% 10.40% 11.15% Amount of interest earned $ 3,412 $ 3,361 $ 3,891 $ 3,793 $ 3,578 ------------------------------------------------------------------------------ Auction Preferred Stock Average outstanding -- -- -- $ 1,411 $ 4,965 Average yield(2) -- -- -- 4.18% 3.75% Amount of interest earned -- -- -- $ 59 $ 186 ------------------------------------------------------------------------------ Federal Home Loan Bank Stock Average outstanding $ 5,506 $ 3,636 $ 2,851 $ 2,654 $ 1,945 Average yield 6.24% 6.16% 4.95% 5.16% 3.75% Amount of interest earned $ 344 $ 224 $ 141 $ 137 $ 73 ------------------------------------------------------------------------------ Deposits with Other Banks Average outstanding $ 243 $ 50 $ 575 -- -- Average yield 6.58% 6.00% 6.26% -- -- Amount of interest earned $ 16 $ 3 $ 36 -- -- ------------------------------------------------------------------------------ Loans(1) Average outstanding $ 792,176 $ 579,634 $ 549,660 $ 572,244 $ 591,726 Average yield(5) 9.34% 9.64% 10.34% 8.75% 7.98% Amount of interest earned(5) $ 74,015 $ 55,888 $ 56,825 $ 50,095 $ 47,198 ------------------------------------------------------------------------------ Total Interest Earning Assets Average outstanding $1,408,880 $1,095,387 $ 884,321 $ 799,379 $ 752,662 Average yield(5) 8.03% 7.96% 8.76% 7.87% 7.55% Amount of interest earned(5) $ 113,084 $ 87,199 $ 77,505 $ 62,947 $ 56,846 ------------------------------------------------------------------------------
17. 6 INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES (continued)
Year ended December 31, (dollars in thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities: Savings Deposits(3) Average outstanding $ 428,763 $ 348,941 $ 328,923 $ 357,293 $ 342,347 Average rate paid 2.01% 2.07% 2.16% 2.09% 2.25% Amount of interest paid or accrued $ 8,637 $ 7,225 $ 7,100 $ 7,463 $ 7,708 ------------------------------------------------------------------------------ Time Deposits Average outstanding $ 820,310 $ 632,211 $ 450,834 $ 342,037 $ 325,443 Average rate paid 5.09% 5.03% 5.34% 3.66 3.30% Amount of interest paid or accrued $ 41,736 $ 31,826 $ 24,078 $ 12,506 $ 10,748 ------------------------------------------------------------------------------ Securities Sold Under Agreements to Repurchase Average outstanding $ 8,779 $ 502 $ 695 $ 960 $ 2,180 Average rate paid 5.51% 4.98% 5.47% 3.54% 2.61% Amount of interest paid or accrued $ 483 $ 25 $ 38 $ 34 $ 57 ------------------------------------------------------------------------------ Other Borrowed Funds Average outstanding $ 82 $ 109 $ 444 $ 107 -- Average rate paid 4.88% 6.42% 5.63% 5.61% -- Amount of interest paid or accrued $ 4 $ 7 $ 25 $ 6 -- ------------------------------------------------------------------------------ Mortgage Indebtedness Average outstanding $ 190 $ 759 $ 455 $ 240 $ 530 Average rate paid(6) 7.37% 16.60% 9.01% 10.00% 26.23% Amount of interest paid or accrued(6) $ 14 $ 126 $ 41 $ 24 $ 139 ------------------------------------------------------------------------------ Total Interest Bearing Liabilities Average outstanding $1,258,124 $ 982,522 $ 781,351 $ 700,637 $ 670,500 Average rate paid 4.04% 3.99% 4.00% 2.86% 2.78% Amount of interest paid or accrued $ 50,874 $ 39,209 $ 31,282 $ 20,033 $ 18,652 ------------------------------------------------------------------------------ Net interest earnings(7) $ 62,210 $ 47,990 $ 46,223 $ 42,914 $ 38,194 Net yield on interest earnings assets(4),(7) 4.42% 4.38% 5.23% 5.37% 5.07% Yield spread(7) 3.99% 3.97% 4.76% 5.01% 4.77% ------------------------------------------------------------------------------
(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 an effective Federal income tax rate of 35%. (3) Savings deposits include NOW accounts and money market accounts. (4) Calculated by dividing Net Interest Earnings by Average Outstanding Interest Earning Assets. (5) Yields and amounts of interest earned include loan fees. 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. (7) Net interest earnings, net yield on earnings assets and yield spread have been adjusted to a fully taxable equivalent basis using an effective Federal income tax rate of 35%. 18. 7 NON-INTEREST INCOME Non-interest income totaled $6.8 million in 1997, compared with $5.9 million in 1996 and $6.2 million in 1995. This represents an increase of $916,000 or 15.6% in 1997 and a decline of $362,000 or 5.8% in 1996. The increase in the 1997 non-interest income was due to 1) higher service charges of $549,000 resulting primarily from the addition of FPSB's transaction accounts through the acquisition; 2) an increase of $159,000 in other miscellaneous income largely relating to income earned in outsourcing the issuing and processing of money orders; 3) higher income of $122,000 for wire transfer fees; and 4) increases in other operating income, such as documentation fees, other fees and charges on loans and safe deposit box income. Comparing 1996 with 1995, the lower non-interest income in 1996 was mainly due to decreases of $589,000 in securities gains and $127,000 in service charges, which were offset by increases of $236,000 in letter of credit commissions and $119,000 in other operating income. NON-INTEREST EXPENSE Non-interest expense amounted to $30.9 million in 1997, representing an increase of $2.9 million or 10.4% over the $28.0 million in 1996, which was $396,000 or 1.4% over the $27.6 million in 1995. The higher non-interest expense in 1997 was primarily attributed to a $3.0 million increase in salaries and employee benefits mainly due to added personnel from the acquisition as well as higher cash bonuses in December 1997. In addition, there was a total increase of $1.3 million in the occupancy, equipment and other operating expenses, all of which were directly associated with the acquisition as well. However, net other real estate owned ("OREO") expense declined $1.2 million as the California real estate market recovered gradually while FDIC assessment and professional services expense were both reduced moderately. The efficiency ratio improved from 53.11% in 1996 to 45.56% in 1997. Comparing 1996 with 1995, the slightly higher non-interest expense was a result of increased salaries and employee benefits expense of $1.1 million partially due to added personnel from the acquisition plus higher cash bonuses in December 1996, and higher professional services expense of $637,000 primarily attributable to legal fees, facility management fees and fees related to the collection of loans. An offset to the above increases in 1996 non-interest expense was a decrease of $700,000 in the F.D.I.C. assessment and a reduction of $594,000 in expense related to the operations of real estate investments ("REI") due to a provision for REI losses of $721,000 in 1995. The efficiency ratio for 1996 was 53.11% compared slightly favorably with 53.98% for 1995. FINANCIAL CONDITION The Company maintained a healthy growth in 1997. Total assets increased $118.1 million or 7.9% from $1,504.3 million at year-end 1996 to $1,622.4 million at year-end 1997; loans, net of deferred loan fees, increased $103.6 million or 13.7% from $757.9 million to $861.5 million; securities (including available-for-sale and held-to-maturity) declined $27.0 million or 4.5% from $593.5 million to $566.5 million; Federal funds sold was up $39.0 million or 139.3% from $28.0 million to $67.0 million; deposits grew $84.4 million or 6.2% from $1,364.7 million to $1,449.1 million; and stockholders' equity advanced $17.5 million or 14.8% from $118.4 million to $135.9 million. 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 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, to further improve the Bank's liquidity, it is the policy to transfer securities held-to-maturity to the available-for-sale category when securities have 90 days or less to maturity. 19. 8 The Company experienced a gradual shift in its earning assets from securities to loans in 1997 due to stronger loan demand. Loans, net of deferred loan fees, composed 57.63% of earning assets at year-end 1997, compared with 54.94% at year-end 1996 while securities accounted for 37.89% of earning assets at year-end 1997, compared with 43.03% at year-end 1996. This shift in earning assets is generally favorable to the net interest margin since loans usually yield a higher rate. 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) 1997 1996 1995 - ------------------------------------------------------------------------------- Securities available-for-sale: U.S. Treasury securities $ 37,971 $121,769 $110,386 U.S. government agencies 113,306 228,377 129,847 State and municipal securities -- 50 95 Mortgage-backed securities 22,982 17,932 -- Collateralized mortgage obligations 6,386 4,950 -- Asset-backed securities 19,889 4,998 -- Federal Home Loan Bank stock 5,653 5,315 2,924 Commercial paper 9,971 -- -- ------------------------------------ Total $216,158 $383,391 $243,252 ==================================== Securities held-to-maturity: U.S. Treasury securities $ 26,054 $ 26,081 $ 50,062 U.S. government agencies 39,374 66,900 69,428 State and municipal securities 44,497 40,393 39,620 Mortgage-backed securities 140,338 63,109 266 Collateralized mortgage obligations 90,234 -- -- Asset-backed securities 923 3,545 -- Other securities 8,916 10,101 15,001 ------------------------------------ Total $350,336 $210,129 $174,377 ====================================
The average yield on taxable securities available-for-sale and held-to-maturity were 5.99% and 6.52%, respectively, in 1997, which compared favorably with the 5.81% and 6.07%, respectively, in 1996. The taxable equivalent yield on the non-taxable state and municipal securities held-to-maturity decreased 27 basis points from 8.61% in 1996 to 8.34% in 1997. This is mainly due to the yields of securities acquired at the prevailing market rate in 1997 are lower than the yields of those state and municipal securities that matured or were called during the year. 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, 1997 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 $ 35,953 $ 2,018 $ -- $ -- $ 37,971 U.S. government agencies 20,046 93,260 -- -- 113,306 Mortgage-backed securities(2) -- 5,064 1,519 16,399 22,982 Collateralized mortgage obligations(2) -- 2,733 1,103 2,550 6,386 Asset-backed securities(2) -- 19,889 -- -- 19,889 Federal Home Loan Bank stock 5,653 -- -- -- 5,653 Commercial paper 9,971 -- -- -- 9,971 ------------------------------------------------------------------------------- Total $ 71,623 $ 122,964 $ 2,622 $ 18,949 $ 216,158 =============================================================================== Weighted Average Yield: U.S. Treasury securities 5.53% 6.38% --% --% 5.58% U.S. government agencies 6.09 6.82 -- -- 6.69 Mortgage-backed securities(2) -- 6.00 6.00 7.26 6.91 Collateralized mortgage obligations(2) -- 6.50 5.50 6.00 6.13 Asset-backed securities(2) -- 6.14 -- -- 6.14 Federal Home Loan Bank stock 6.24 -- -- -- 6.24 Commercial paper 6.60 -- -- -- 6.60 ------------------------------------------------------------------------------- Total 5.89% 6.66% 5.79% 7.08% 6.43% ===============================================================================
SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
As of December 31, 1997 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 $ -- $ 26,054 $ -- $ -- $ 26,054 U.S. government agencies -- 39,374 -- -- 39,374 State and municipal securities 1,341 9,179 18,060 15,917 44,497 Mortgage-backed securities(2) -- 15,174 23,465 101,699 140,338 Collateralized mortgage obligations(2) -- 3,911 25,624 60,699 90,234 Asset-backed securities(2) -- -- -- 923 923 Corporate bond -- 8,916 -- -- 8,916 -------------------------------------------------------------------------------- Total $ 1,341 $ 102,608 $ 67,149 $ 179,238 $ 350,336 ================================================================================ Weighted Average Yield: U.S. Treasury securities --% 6.42% --% --% 6.42% U.S. government agencies -- 6.41 -- -- 6.41 State and municipal securities(1) 10.05 8.08 8.54 7.93 8.27 Mortgage-backed securities(2) -- 6.14 6.50 6.77 6.65 Collateralized mortgage obligations(2) -- 6.50 7.08 6.85 6.90 Asset-backed securities(2) -- -- -- 6.09 6.09 Corporate bond -- 6.72 -- -- 6.72 -------------------------------------------------------------------------------- Total 10.05% 6.55% 7.27% 6.90% 6.88% ================================================================================
(1) Average yield has been adjusted to a fully-taxable equivalent basis. (2) Securities reflect stated maturities and not anticipated prepayments. 21. 10 LOANS Total gross loans amounted to $865.3 million at year-end 1997, compared with $761.7 million at year-end 1996, representing an increase of $103.6 million or 13.6%. Commercial loans, reversing their decreasing trend in 1996, increased $54.4 million or 19.2% to $338.3 million during 1997. 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. Commercial real estate loans, residential real estate loans and equity lines rose $18.4 million, $15.2 million and $4.5 million, respectively to $303.7 million, $137.0 million and $17.7 million, respectively at year-end 1997. Commercial real estate loans are secured by first deeds of trust primarily on retail shops and shopping centers, and secondarily on 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 notably as well, from $33.5 million at year-end 1996 to $41.7 million at year-end 1997, an increase of $8.2 million or 24.5%. Installment loans, which consisted primarily of automobile financing, showed a moderate increase of $3.0 million from $23.6 million to $26.6 million. The Company's Board of Directors establishes the basic lending policy for the Bank. Each loan is generally considered in terms of, among other things, character, repayment ability, financial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower's business or project, and prevailing economic trends and conditions. In addition, the Company's lending policy requires an independent appraisal on real estate property in accordance with Regulatory guidelines. Although a majority of the Company's loan portfolio, including commercial loans, is secured by real estate to some extent, management believes that the Company's underwriting guidelines, including collateral requirements, and underlying values of real estate in the Company's primary marketplace have provided the Company with adequate protection against reasonably expected losses on non-performing loans. The classification of loans by type as of December 31 for each of the past five years, as well as the changes in loan portfolio composition for the past two years and the contractual maturity of the loan portfolio as of December 31, 1997 are presented below (see also Note 5 of the Notes to the Consolidated Financial Statements): LOAN TYPE AND MIX
Amount Outstanding as of December 31, (dollars in thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Type of Loans: Commercial loans $ 338,285 $ 283,894 $ 292,612 $ 324,189 $ 336,438 Real estate mortgage loans 458,417 420,315 231,360 215,945 190,510 Real estate construction loans 41,736 33,510 13,606 14,090 31,505 Installment loans 26,611 23,551 19,748 18,170 17,982 Other loans 267 385 533 11,707 12,824 ------------------------------------------------------------------------- Total loans 865,316 761,655 557,859 584,101 589,259 ------------------------------------------------------------------------- Less Unamortized deferred loan fees (3,786) (3,742) (2,122) (2,467) (2,440) Allowance for loan losses (15,379) (13,529) (12,742) (12,271) (7,173) ------------------------------------------------------------------------- Total net loans $ 846,151 $ 744,384 $ 542,995 $ 569,363 $ 579,646 -------------------------------------------------------------------------
22. 11 CHANGES IN LOAN PORTFOLIO COMPOSITION
As of December 31, 1997 As of December 31, 1996 Percentage Percentage Percentage of Total of Total Increase (dollars in thousands) Amount Loans Amount Loans (Decrease) - --------------------------------------------------------------------------------------------------------- Type of Loans: Commercial loans $ 338,285 39.98% $ 283,894 38.14% 19.16% Real estate mortgage loans 458,417 54.18 420,315 56.47 9.07 Real estate construction loans 41,736 4.93 33,510 4.50 24.55 Installment loans 26,611 3.15 23,551 3.16 12.99 Other loans 267 0.03 385 0.05 (30.65) Unamortized deferred loan fees (3,786) (0.45) (3,742) (0.50) 1.18 Allowance for loan losses (15,379) (1.82) (13,529) (1.82) 13.67 -------------------------------------------------------------------- Total net loans $ 846,151 100.00% $ 744,384 100.00% 13.67% --------------------------------------------------------------------
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 $ 213,765 $ 48,208 $ 8,264 $ 270,237 Fixed rate 53,561 6,006 7,911 67,478 Real Estate Mortgage Loans Floating rate 28,013 111,817 141,526 281,356 Fixed rate 5,234 12,848 156,169 174,251 Real Estate Construction Loans Floating rate 23,277 3,973 -- 27,250 Fixed rate 14,080 -- -- 14,080 Installment Loans Floating rate -- -- 37 37 Fixed rate 4,667 21,907 -- 26,574 Other Loans Floating rate 227 -- -- 227 Fixed rate -- -- 40 40 --------------------------------------------------------------- Total loans(2) $ 342,824 $ 204,759 $ 313,947 $ 861,530 =============================================================== Floating rate $ 265,282 $ 163,998 $ 149,827 $ 579,107 Fixed rate 77,542 40,761 164,120 282,423 --------------------------------------------------------------- Total loans(2) $ 342,824 $ 204,759 $ 313,947 $ 861,530 Allowance for loan losses (15,379) --------- Total net loans $ 846,151 =========
(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 23. 12 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 and still accruing interest, non-accrual loans, and OREO. Non-performing assets totaled $32.5 million at year-end 1997 compared with $30.2 million at year-end 1996. The increase of $2.3 million in non-performing assets was primarily due to an increase of $7.6 million in non-accrual loans offset by a reduction of $5.6 million in OREO. The non-performing loan coverage ratio, which is the allowance for loan losses to non-performing loans, was 79.85% at year-end, 1997 compared with 119.15% at year-end 1996. The decrease in the non-accrual coverage ratio was primarily attributable to an increase of $7.9 million in non-performing loans which include non-accrual loans and loans past due 90 days or more and still accruing interest combined with a $1.9 million increase in the allowance for loan losses. Although the coverage ratio declined considerably, management does not expect substantial losses from the non-performing loans since most of these loans are well collateralized. The increase in non-accrual loans was primarily due to two commercial real estate loans and one commercial loan totaling $6.9 million, all of which are secured by the first trust deeds on the respective properties. Nevertheless, non-performing assets decreased as a percentage of total loans plus OREO from 3.87% at year-end 1996 to 3.70% at year-end 1997. 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) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Past due 90 days or more $ 2,373 $ 2,050 $ 1,344 $ 4,104 $ 3,529 Non-accrual 16,886 9,305 14,012 27,860 25,917 --------------------------------------------------------------- Total non-performing loans 19,259 11,355 15,356 31,964 29,446 =============================================================== Real estate acquired in foreclosure or in-substance foreclosure 13,269 18,854 13,879 6,798 6,212 --------------------------------------------------------------- Total non-performing assets $32,528 $30,209 $29,235 $38,762 $35,658 =============================================================== Accruing troubled debt restructurings $ 4,874 $ 3,201 $ 8,429 $ 5,257 $ 5,214 Non-performing assets as a percentage of total loans and other real estate owned at year-end 3.70% 3.87% 5.11% 6.56% 5.99% Allowance for loan losses as a percentage of non-performing loans 79.85% 119.15% 82.98% 38.39% 24.36% ===============================================================
24. 13 The effect of non-accrual loans and troubled debt restructurings on interest income for the years 1997, 1996, 1995, 1994, and 1993 is presented below:
(dollars in thousands) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------- Non-Accrual Loans Contractual interest due $1,845 $1,121 $1,503 $2,712 $1,902 Interest recognized 471 268 200 560 735 ------------------------------------------------------- Net interest foregone $1,374 $ 853 $1,303 $2,152 $1,167 ======================================================= (dollars in thousands) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------- Troubled Debt Restructurings Contractual interest due $ 406 $ 339 $ 467 $ 351 $ 495 Interest recognized 387 311 352 319 346 ------------------------------------------------------- Net interest foregone $ 19 $ 28 $ 115 $ 32 $ 149 =======================================================
The balance of $16.9 million in non-accrual loans at year-end 1997 consisted mainly of $10.6 million in commercial real estate loans and $5.5 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:
1997 1996 Loan Balance Loan Balance Commercial Commercial (dollars in thousands) Real Estate Commercial Real Estate Commercial - ------------------------------------------------------------------------------------------------------ Type of Property: Single/multi-family residence $ 593 $ 311 $ 583 $ 1,707 Commercial 8,471 5,095 226 3,302 Motel 1,350 -- 1,350 511 Marina -- -- 769 -- Others 214 73 -- 399 Unsecured -- 37 -- 84 --------------------------------------------------------------- $ 10,628 $ 5,516 $ 2,928 $ 6,003 =============================================================== Type of Business: Real estate development $ -- $ 134 $ 995 $ 562 Real estate management 6,303 36 -- -- Wholesale 430 2,994 -- 780 Food/Restaurant -- 1,190 -- 1,327 Import 752 4 -- 305 Motel 1,350 -- 1,933 511 Investments 1,194 -- -- -- Industrial 214 263 -- 6 Clothing 385 441 -- 1,139 Others -- 454 -- 1,373 --------------------------------------------------------------- $ 10,628 $ 5,516 $ 2,928 $ 6,003 ===============================================================
The $8.5 million balance in non-accrual commercial real estate loans at year-end 1997 includes seven credits, six of which (totaling $8.2 million) were secured by the first trust deeds on the respective commercial properties. The $1.4 million motel loan represents one credit secured by the first trust deed on the respective motel located in Southern California. 25. 14 Under the non-accrual commercial loan category as of year-end 1997, the $5.1 million balance consisted of 13 credits with a majority of the loan amounts less than $300,000. The collateral on these credits include primarily first trust deeds and secondarily second and third trust deeds on commercial buildings and warehouses. Although the non-performing coverage ratio declined considerably, management does not expect substantial losses from the non-accrual loans since a majority of these loans are adequately secured. Troubled debt restructurings totaled $4.9 million at year-end 1997, compared with $3.2 million at year-end 1996. $2.5 million of the troubled debt restructurings were commercial real estate loans while $2.4 million were commercial loans. With the exception of two commercial loans in the amount of $1.8 million, which were 11 and 16 days past due, respectively, all other restructured loans totaling $3.1 million were current under their revised terms as of December 31, 1997. As of December 31, 1997, the Company had identified impaired loans with a recorded investment of $21.9 million. An allowance of $4.0 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 1997, the average balance of impaired loans was $23.2 million. During 1997, interest collected on impaired loans totaled $1.6 million. There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of December 31, 1997. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the matters discussed in this Section. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $15.4 million at year-end 1997, representing an increase of $1.9 million or 14.1% over the $13.5 million at year-end 1996. Management provided $3.6 million to the provision for loan losses in 1997 and 1996, respectively. The Bank recorded net charge-offs of $1.7 million in 1997, compared with $4.4 million in 1996. Total charge-offs of $2.1 million in 1997 included $1.4 million in commercial loans, $574,000 in real estate loans, and $178,000 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) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 13,529 $ 12,742 $ 12,271 $ 7,173 $ 6,429 Allowance from acquisition -- 1,644 -- -- -- Provision for loan losses 3,600 3,600 7,300 7,755 5,332 Loans charged-off (2,139) (5,388) (7,018) (4,419) (4,688) Recoveries of charged-off loans 389 931 189 1,762 100 ----------------------------------------------------------------------------- Balance at end of year $ 15,379 $ 13,529 $ 12,742 $ 12,271 $ 7,173 ============================================================================= Average loans outstanding during year ended $ 792,176 $ 579,634 $ 549,660 $ 572,244 $ 591,726 Ratio of net charge-offs to average loans outstanding during the year 0.22% 0.77% 1.24% 0.46% 0.78% Provision for loan losses to average loans outstanding during the year 0.45% 0.62% 1.33% 1.36% 0.90% Allowance to non-performing loans at year-end 79.85% 119.15% 82.98% 38.39% 24.36% Allowance to total loans at year-end 1.78% 1.78% 2.28% 2.10% 1.22% =============================================================================
26. 15 LOANS CHARGED-OFF BY LOAN TYPE
Year ended December 31, (dollars in thousands) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Commercial loan $1,387 $4,010 $3,895 $2,300 $3,449 Percentage of total commercial loans(1) 0.41% 1.33% 1.33% 0.71% 1.03% ---------------------------------------------------------- Real estate loan $ 574 $1,177 $2,885 $1,678 $ 508 Percentage of total real estate loans(1) 0.11% 1.18% 1.18% 0.73% 0.23% ---------------------------------------------------------- Installment and other loan $ 178 $ 201 $ 238 $ 441 $ 731 Percentage of total installment and other loans(1) 0.66% 1.17% 1.17% 1.48% 2.37% ---------------------------------------------------------- Total loans charged-off $2,139 $5,388 $7,018 $4,419 $4,688 ==========================================================
(1) Percentages were calculated based on year-end balances. RECOVERIES BY LOAN TYPE
Year ended December 31, (dollars in thousands) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------- Commercial loan $ 218 $ 640 $ 110 $ 1,151 $ 61 Real estate loan 111 205 17 501 1 Installment and other loan 60 86 62 110 38 ---------------------------------------------------- Total $ 389 $ 931 $ 189 $ 1,762 $ 100 ====================================================
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 applying Statements of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) and No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" (SFAS 118), 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 27. 16 management's knowledge of the quality of the portfolio. The following table presents a breakdown of impaired loans and the SFAS 114 impairment allowance related to impaired loans as of the dates indicated:
As of December 31, 1997 As of December 31, 1996 SFAS No. 114 SFAS No. 114 Recorded Impairment Recorded Impairment (dollars in thousands) Investment Allowance Investment Allowance - ----------------------------------------------------------------------------------------------- Impaired Loans Loans with impairment allowance Commercial $ 7,784 $ 1,499 $ 6,861 $ 1,398 Commercial real estate 14,027 2,396 10,313 1,648 Others 95 95 -- -- ---------------------------------------------------------- Total impaired loans with impairment allowance $ 21,906 $ 3,990 $ 17,174 $ 3,046 ----------------------------------------------------------
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 of December 31, 1997 1996 1995 Percent of Percent of Percent of loans in each loans in each loans in each category to category to category to Amount total loans(1) Amount total loans(1) Amount total loans(1) - ---------------------------------------------------------------------------------------------------------------------- Type of loans: Commercial loans $ 7,480 39.20% $ 6,190 37.27% $ 6,338 52.45% Real estate mortgage loans 6,988 52.88 6,942 55.19 6,084 41.47 Real estate construction loans 401 4.80 294 4.40 136 2.44 Installment loans 356 3.09 72 3.09 81 3.54 Other loans 154 0.03 31 0.05 103 0.10 Unallocated -- N/A -- N/A -- N/A -------------------------------------------------------------------------------------------- Total $15,379 100.00% $13,529 100.00% $12,742 100.00% ============================================================================================
1994 1993 Percent of Percent of loans in each loans in each category to category to Amount total loans(1) Amount total loans(1) - ------------------------------------------------------------------------------------- Type of loans: Commercial loans $ 5,658 55.76% $ 2,383 58.61% Real estate mortgage loans 5,754 36.68 3,891 31.68 Real estate construction loans 225 2.41 276 5.47 Installment loans 336 3.13 137 3.67 Other loans 186 2.02 100 0.57 Unallocated 112 N/A 386 N/A ---------------------------------------------------------- Total $12,271 100.00% $ 7,173 100.00% ==========================================================
(1) Total loans means 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, 1997 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 matters discussed in this Section. OTHER REAL ESTATE OWNED The Company's OREO properties, net of valuation allowance, were carried at $13.3 million at year-end 1997, compared with those carried at $18.9 million at year-end 1996. During 1997, the Company acquired 12 properties totaling $6.1 million through foreclosures and disposed 17 properties totaling $11.7 million at a net gain of $174,000. The Company's OREO properties at year-end 1997 include different types of residential properties, commercial buildings, warehouses and land. All properties 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 in the current 28. 17 period. During 1997, management provided approximately $476,000 to the provision for OREO losses based on new listing prices or new appraisals received bringing the valuation allowance to $1.1 million at year-end 1997, while $1.5 million were provided to the provision for OREO losses in 1996 with a balance of $1.6 million in the valuation allowance at year-end 1996. Although the California real estate market continued to show improvements in 1997, the future performance of the market is unpredictable, therefore, additional provision for OREO losses may be made and additional losses on sales of these properties may be incurred in the future. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the matters discussed in this Section. The following table shows the OREO expense by type for years 1997, 1996 and 1995:
(dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Operating expense $ 201 $ 312 $ 923 Provision for losses 476 1,501 875 Net (gain) loss on disposal (174) (85) 79 ------------------------------- Total $ 503 $ 1,728 $ 1,877 ===============================
INVESTMENTS IN REAL ESTATE At year-end 1997, the Company's investments in real estate consisted of one strip-mall, a 49.5% interest in an apartment purchased in 1993, and a 99% interest in another apartment purchased in 1995. Both of the apartments qualify for Federal low income housing tax credits. The aggregate estimated fair value of the investments in real estate was $1.7 million and $4.0 million as of December 31, 1997 and 1996, respectively. The Company sold one strip-mall at a gain of $222,000 and realized a net gain of $170,000 from the operations of the strip-malls in 1997. DEPOSITS Total deposits reached $1,449.1 million at year-end 1997, compared with $1,364.7 million at year-end 1996, representing an increase of $84.4 million or 6.2%. With the interest rate spread widening between time deposits and other interest-bearing deposits, the Company experienced some shift of deposits from savings (including NOW accounts and money market accounts) to time deposits, especially time deposits over $100,000 ("Jumbo CD's") during 1997. Time deposits increased $65.3 million or 8.3% from $791.3 million to $856.6 million at year-end 1997, $60.8 million of which were from Jumbo CD's. Savings deposits decreased $21.4 million or 4.9% from $438.1 million to $416.7 million at year-end 1997. However, demand deposits grew quite significantly from $135.4 million to $175.9 million at year-end 1997, an increase of $40.5 million or 29.9%. The higher demand deposits helped the Bank's service charge income in 1997. There were no brokered deposits at year-end 1997. As a result of the above, the ratio of core deposits (defined as all deposits excluding Jumbo CD's and brokered deposits) to total deposits declined slightly from 64.22% at year-end 1996 to 62.11% at year-end 1997. 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. The Bank's Jumbo CD's are considered 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 3,434 individual accounts owned by 2,409 individual depositors as of February 23, 1998 (the balance of the accounts averaged approximately $164,000); 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. 29. 18 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, 1997 1996 1995 (dollars in thousands) Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------------ Demand $ 175,875 12.1% $ 135,345 9.9% $ 117,974 12.0% NOW accounts 111,653 7.7 118,498 8.7 88,917 9.0 Money market accounts 94,708 6.6 95,158 7.0 102,167 10.4 Savings deposits 210,291 14.5 224,443 16.4 134,045 13.6 Time deposits under $100,000 307,504 21.2 302,981 22.2 156,928 15.9 Time deposits over $100,000 549,090 37.9 488,315 35.8 384,196 39.1 ----------------------------------------------------------------------------------------- Total deposits $1,449,121 100.0% $1,364,740 100.0% $ 984,227 100.0% =========================================================================================
TIME DEPOSITS OF $100,000 OR MORE BY MATURITY
(dollars in thousands) Year ended December 31, 1997 - ---------------------------------------------------------------------------- Less than three months $ 241,027 Three to six months 141,169 Six to twelve months 155,561 Over one year 11,333 ----------- Total $ 549,090 ===========
MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR FOR EACH OF THE FIVE YEARS AFTER DECEMBER 31, 1998
(dollars in thousands) Year ended December 31, 1997 - ---------------------------------------------------------------------------- 1999 $ 22,168 2000 4,647 2001 267 2002 228 2003 35 ----------- Total $ 27,345 ===========
AVERAGE DEPOSITS & RATES
1997 1996 1995 1994 1993 (dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate - ----------------------------------------------------------------------------------------------------------------------------- Demand $ 148,907 --% $ 121,952 --% $ 114,435 --% $ 108,528 --% $ 97,209 --% NOW accounts 114,453 1.5 96,759 1.5 85,413 1.7 80,935 1.6 68,167 1.6 Money market accounts 97,470 2.3 100,898 2.3 106,760 2.4 130,664 2.3 135,769 2.4 Savings deposits 216,840 2.2 151,284 2.3 136,750 2.3 145,694 2.2 138,411 2.4 Time deposits 820,310 5.1 632,211 5.0 450,834 5.4 342,037 3.7 325,443 3.3 --------------------------------------------------------------------------------------------------- Total deposits $1,397,980 3.6% $1,103,104 3.5% $ 894,192 3.5% $ 807,858 2.5% $ 764,999 2.4% ===================================================================================================
30. 19 CAPITAL RESOURCES The Company's primary capital source has historically been retained earnings and to a lesser extent, the issuance of additional common stock through its Dividend Reinvestment Plan and the ESOP. Total stockholders' equity amounted to $135.9 million or 8.37% of total assets at year-end 1997, compared with $118.4 million or 7.87% of total assets at year-end 1996. The increase of $17.5 million or 14.8% was due to net income of $20.1 million plus $1.5 million from issuance of additional common shares through Dividend Reinvestment Plan and a positive net change in the securities valuation allowance, net of tax, of $1.4 million, offset by dividends paid in the amount of $5.6 million. The Company declared a cash dividend of $0.15 per share in January, April and July, 1997, on 8,878,144, 8,895,878 and 8,914,260 shares outstanding, respectively. In October 1997, the Company increased its cash dividend by $.025 or 16.7% to $.175 per common share on 8,929,508 shares outstanding bringing total cash dividends paid in 1997 to $5.6 million. Management is committed to retain the Company's capital at a level sufficient to support future growth, to protect depositors and stockholders, and to comply with various regulatory requirements. The primary measure of capital adequacy is based on the ratio of risk-based capital to risk weighted assets. The risk-based capital ratio is strongly impacted by the management of the securities portfolio since the U.S. Treasury securities are assigned a zero risk weighting, and other instruments in which the company has often placed a significant amount of funds which include U.S. Agency securities, State and Municipal securities, Federal funds sold, and bankers' acceptances, have a 20% risk weighting. Loans are generally risk-weighted at 100% with the exceptions of loans secured by time certificates of deposits which are 20% risk-weighted and loans secured by 1-4 family and multi-family residential properties which are 50% risk-weighted. Management is constantly trying to maximize the yields on earning assets and as a result of a substantial growth in loans and a decrease in U.S. Treasury securities, the Company's risk-based capital ratio decreased from 13.97% at year-end 1996 to 12.98% at year-end 1997. A table illustrating the Company and the Bank's capital and leverage ratios at year-end 1997 is included in Note 11 to consolidated financial statements. Those ratios not only exceeded the regulatory minimum requirements but also placed 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%. MARKET RISK Market risks are the risks that apply to the Company by nature of its activities and the economic environment. The principal market risk to the Company is the interest rate risk inherent in its lending, investing and deposit taking activities, due to the fact that interest earning assets and interest bearing liabilities of the Company do not change at the same speed, to the same extent, or on the same basis. The Company actively monitors the impact of the fluctuations in interest rates on its net interest income using risk management tools. Because of the limitation inherent in any individual risk management tool, the Company uses both 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 Company's Interest Rate Sensitivity Analysis (as described in "Liquidity and Interest Rate Sensitivity") measures the Company's exposure to differential changes in interest rates between assets and liabilities. However, an interest rate sensitivity analysis can only show the mismatches in the maturities and repricing opportunities of assets and liabilities and has limited usefulness in measuring or managing interest rate risks related to timing differences in the repricing of assets and liabilities or the basis risk which is the differences in the behavior of the lending and funding rates. To quantify the extent of these risks, the Company uses a simulation model to take basis risk into account and project future earnings or market values under alternative interest rate scenarios. The simulation measures the volatility of net interest income and net portfolio value under immediate rising or falling interest rate scenarios in 100 basis point increments. Net portfolio value is defined as net present value of assets and liabilities. The Company establishes a tolerance level in its policy to define and limit interest income 31. 20 volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the tolerance level is met or exceeded, the Company then seeks corrective action after considering among other things market conditions, customer reaction and the estimated impact on profitability. The following table presents the estimated impacts of immediate changes in interest rates at the specified levels at December 31, 1997:
Changes in Interest Rates Percentage Change in: (in basis points) Net Interest Income(1) Net Portfolio Value(2) - ------------------------------------------------------------------------------------- +200 15.33% (12.28)% +100 8.56% (5.52)% - - 100 (5.20)% 3.16% - - 200 (11.86)% 6.95%
(1) The percentage change represents net interest income for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios. (2) The percentage change represents net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in various rate scenarios. The Company seeks to manage and control its interest rate risk to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset-liability composition to obtain the maximum spread. The Company is concentrating its efforts in increasing its yield-cost spread through growth opportunities and competitive pricing. 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 following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at December 31, 1997. For assets, expected maturities are based on contractual maturity. For liabilities, the Company uses its historical experience and decay factors to estimate the deposit runoffs of its interest bearing transactional deposits. The Company uses certain assumptions to estimate fair values and expected maturities. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used.
Average Expected Maturity Date at December 31, 1997 Interest (dollars in thousands) Rate 1998 1999 2000 2001 2002 Thereafter Total Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ Interest-Sensitive Assets: Federal funds sold and securities purchased under agreement to resell 7.06% $ 67,000 $ -- $ -- $ -- $ -- $ -- $ 67,000 $ 67,000 Mortgage-backed securities 6.75% -- -- 14,312 11,974 124 232,852 259,262 262,668 Investment securities 6.29% 67,344 47,376 108,988 18,133 24,147 34,899 300,887 304,024 Federal Home Loan Bank stock 6.03% 5,653 -- -- -- -- -- 5,653 5,653 Loans Commercial 9.12% 259,641 19,261 15,041 9,778 10,033 16,167 329,921 336,821 Real estate mortgage 8.91% 26,269 27,250 24,767 22,787 50,311 297,355 448,739 454,925 Real estate construction 9.00% 36,956 35 3,938 -- -- -- 40,929 41,438 Installment & others 8.63% 4,579 3,078 6,921 7,618 4,289 77 26,562 26,927 Interest-Sensitive Liabilities: Other interest bearing deposits 2.04% 75,956 69,748 46,498 48,373 32,249 143,828 416,652 416,738 Time deposits 5.20% 829,111 22,168 4,647 267 79 322 856,594 860,173 Securities sold under agreement to repurchase 7.03% 23,419 -- -- -- -- -- 23,419 23,419
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, and to take advantage of investment opportunities as they are presented in the marketplace. 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 45.59% at year-end 1997, compared to 46.46% at year-end 1996. The Bank maintains, to supplement its primary sources of liquidity, a total credit line of $45 million for Federal funds with three correspondent banks, a repo line of $30 million with a brokerage firm and a total retail certificate of deposit (CD) line of approximately $212 million with three other 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. The Company had, at year-end 1997, a significant portion of its time deposit portfolio maturing in one year or less. Management anticipates that there may be some outflow of these deposits upon maturity, due to the current competitive rate environment. However, based on its historical runoff experience, the Company expects these outflows will be minimal and can be replenished through its normal growth in deposits. Management believes all the sources discussed above will provide adequate liquidity for the Company to meet its normal operating needs. Bancorp, on the other hand, obtains funding for its activities only through dividend income contributed by the Bank and proceeds from investments in the Dividend Reinvestment Plan. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. Since the business activities of Bancorp consist primarily of the 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. The Company actively monitors the impact of changes in interest rates on its net interest income due to mismatching of its interst earning assets and interest bearing liabilities. The Company estimates the impact of the mismatch by examining the extent of the sensitivity of such assets and liabilities and by monitoring the level of the Company's interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that time period. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liablilities and may enhance net interest margin during periods of increasing interest rates, while a negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets and may impair net interest margin during periods of increasing interest rates. 33. 22 The following table sets forth the maturity and rate sensitivity of the Company's interest earning assets and interest bearing liabilities as of December 31, 1997. The Company's exposure as reflected in the table, represents the estimated difference between the amount of interest earning assets and interest bearing liabilities repricing during future periods based on certain assumptions. The interest rate sensitivity of the Company assets and liabilities presented in the table may vary if different assumptions were used or if actual experience differs from the assumptions used. As of December 31, 1997, the Company was asset sensitive with a cumulative gap ratio of a positive 17.28% within three months, and liability sensitive with a cumulative gap ratio of a negative 10.49% within a 1-year period. INTEREST RATE SENSITIVITY
December 31, 1997 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 - ------------------------------------------------------------------------------------------------------------------------------------ Earning Assets: Cash and due from banks $ -- $ -- $ -- $ -- $ 57,728 $ 57,728 Federal funds sold and securities purchased under agreement to resell 67,000 -- -- -- -- 67,000 Securities available-for-sale 32,627 38,995 122,965 21,571 -- 216,158 Securities held-to-maturity -- 1,340 102,609 246,387 -- 350,336 Loans: Commercial loans 291,174 27,601 6,037 7,955 -- 332,767 Real estate mortgage loans 276,278 967 12,949 156,975 -- 447,169 Real estate construction loans 41,736 -- -- -- -- 41,736 Installment loans 2,305 2,395 21,798 -- -- 26,498 Other loans 222 -- -- 40 -- 262 ---------------------------------------------------------------------------------------- Total loans(1) 611,715 30,963 40,784 164,970 -- 848,432 ======================================================================================== Non-earning assets -- -- -- -- 82,808 82,808 ---------------------------------------------------------------------------------------- Total assets $ 711,342 $ 71,298 $ 266,358 $ 432,928 $ 140,536 $1,622,462 ======================================================================================== Source of Funds for Assets: Deposits: Demand $ -- $ -- $ -- $ -- $ 175,875 $ 175,875 Money market and NOW(2) 9,064 33,018 102,452 61,827 -- 206,361 Savings(2) 14,581 43,565 101,530 50,615 -- 210,291 TCD's under $100,000 142,931 148,423 16,115 35 -- 307,504 TCD's $100,000 and over 241,027 296,730 11,333 -- -- 549,090 ---------------------------------------------------------------------------------------- Total deposits 407,603 521,736 231,430 112,477 175,875 1,449,121 ======================================================================================== Securities sold under agreements to repurchase 23,419 -- -- -- -- 23,419 Other liabilities -- -- -- -- 14,045 14,045 Stockholders' equity -- -- -- -- 135,877 135,877 ---------------------------------------------------------------------------------------- Total liabilities & stockholders' equity $ 431,022 $ 521,736 $ 231,430 $ 112,477 $ 325,797 $1,622,462 ======================================================================================== Interest sensitivity gap $ 280,320 $ (450,438) $ 34,928 $ 320,451 $ (185,261) $ -- ---------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $ 280,320 $ (170,118) $ (135,190) $ 185,261 $ -- $ -- ---------------------------------------------------------------------------------------- Gap ratio (% of total assets) 17.28% (27.76)% 2.15% 19.75% (11.42)% -- ---------------------------------------------------------------------------------------- Cumulative gap ratio 17.28% (10.49)% (8.33)% 11.42% -- -- ----------------------------------------------------------------------------------------
(1) Loans are before unamortized deferred loan fees and allowance for loan losses. Non-accrual loans are included in non-earning assets. Adjustable loans are included in the "0 to 90 days" category, as they are subject to an interest adjustment depending upon terms of the loans. (2) The Company's own historical experience and decay factors are used to estimate the money market and NOW, and savings deposit runoff. 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 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, governmental 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 California economic indicators continued to show improvements in 1997, management cannot foresee the future performance of the regional real estate market. Worsening of the regional economic 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. 35. 24 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 may have an 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. During 1997 and presently there are adverse economic conditions in the Asia Pacific region. The impact of these adverse economic conditions may increase the Company's exposure to economic and transfer risk. Transfer risk may increase because of an entity's incapacity to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may impact the recoverability of investments with or loans to entities unable to obtain the necessary foreign exchange. In addition, these adverse economic conditions may continue to negatively impact asset values and the profitability and liquidity of companies operating in this region. It is the opinion of management that the Company will not be adversely impacted by these factors. Management does not consider its loan portfolio to have direct exposure to transfer risk. The circumstances in Asia may also have an impact on the deposit customers of the Company, resulting in outflows of deposits. Management of the Company does not expect such potential outflows to significantly impact the financial condition or operating results of the Company based on its current customers' profiles. However, no assurance can be given as to the level of deposit outflows if the economic conditions in Asia continue or worsen, then there may be an adverse effect on the deposit amounts. YEAR 2000 The "Year 2000" problem is the result of computer programs being written using two digits to identify a year in the date field, rather than four digits to define the applicable year. Consequently, any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. That inability, if not addressed, could cause systems to fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations worldwide. This century date change problem creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on financial transactions. Such failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business, to process customer transactions or provide customer services. The Company established a task force to address the Year 2000 issues relating to its business, its operations (including operating sytems) and its relationships with customers, suppliers, and other constituents. First, management initiated a company-wide program to identify and prioritize all the mission critical systems that may be affected by the "Year 2000" issue. Next, the task force developed a remediation program to modify or replace these systems. During the year, the Company obtained assurance from its vendor that the software operating its core computer system is Year 2000 ready, and that this capability will be tested by a third party in 1998. The Company is also coordinating with other entities, including suppliers, customers, creditors, borrowers, and financial service organizations, to ensure that their systems will also be Year 2000 ready. 36. 25 The Company reviews the costs and the progress of its remediation program to ensure that unforeseen problems and uncertainties associated with Year 2000 consequences are resolved in a timely manner. The Company estimates the costs to modify or convert its remaining systems, including costs incurred in 1997, range approximately between $500,000 to $1,000,000. No assurance can be given that the ultimate costs to prepare the Company to be Year 2000 ready will not exceed the Company's current estimate. There can also be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's operations. The Company is expanding its contingency plan to address the failure of third party systems to be Year 2000 ready. See also Note 1 of the Notes to Consolidated Financial Statements. MARKET FOR CATHAY BANCORP, INC. STOCK The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol: "CATY". During 1997, total trading volume was approximately 1,211,000, and the prices ranged from a high of $37.375 to a low of $19.25. The approximate number of stockholders at year-end 1997 was 1,800. The Company paid an aggregate per share cash dividend of $0.625 in 1997 and $0.60 in 1996. 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 - ----------------------------------------------------------------------------------------- 1997 First Quarter $ 21.750 $ 19.250 $ 21.500 258,334 Second Quarter 25.000 20.750 24.750 236,313 Third Quarter 33.000 24.000 31.750 373,211 Fourth Quarter 37.375 30.500 36.500 343,347 ---------------------------------------------------- 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 ----------------------------------------------------
(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 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, 1997 1996 1995 (dollars in thousands) Amount %1 Amount %1 Amount %1 - ------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 59,297 3.80% $ 39,407 3.11% $ 52,592 5.18% Federal funds sold and securities purchased under agreement to resell 35,000 2.25 36,050 2.84 17,875 1.76 Securities available-for-sale, taxable 281,938 18.08 320,533 25.28 116,042 11.44 Securities available-for-sale, nontaxable 158 0.01 89 0.01 149 0.01 Securities held-to- maturity, taxable 256,310 16.44 151,534 11.95 171,287 16.88 Securities held-to- maturity, nontaxable 41,831 2.68 39,208 3.09 40,245 3.97 Total net loans(2) 802,577 51.48 605,000 47.71 547,948 54.01 Premises and equipment, net 25,380 1.63 26,059 2.06 26,854 2.65 Other assets 56,582 3.63 50,129 3.95 41,488 4.10 --------------------------------------------------------------------------------------- Total assets $1,559,073 100.00% $1,268,009 100.00% $1,014,480 100.00% ======================================================================================= Liabilities Demand deposits $ 156,072 10.01% $ 124,051 9.78% $ 116,476 11.48% Savings deposits(3) 426,244 27.34 363,410 28.66 328,473 32.38 Time deposits 826,520 53.01 665,725 52.51 470,222 46.35 --------------------------------------------------------------------------------------- Total deposits 1,408,836 90.36 1,153,186 90.95 915,171 90.21 ======================================================================================= Other borrowings 7,916 0.51 2,700 0.21 800 0.08 Mortgage indebtedness 190 0.01 655 0.05 540 0.05 Other liabilities 13,469 0.87 9,515 0.75 6,997 0.69 --------------------------------------------------------------------------------------- Total liabilities 1,430,411 91.75 1,166,056 91.96 923,508 91.03 ======================================================================================= Stockholders' Equity Common stock and additional paid-in-capital 60,795 3.90 47,194 3.72 41,767 4.12 Retained earnings 67,867 4.35 54,759 4.32 49,205 4.85 --------------------------------------------------------------------------------------- Total stockholders' equity 128,662 8.25 101,953 8.04 90,972 8.97 ======================================================================================= Total liabilities and stockholders' equity $1,559,073 100.00% $1,268,009 100.00% $1,014,480 100.00% =======================================================================================
1994 1993 (dollars in thousands) Amount %1 Amount %1 - ----------------------------------------------------------------------------------- Assets Cash and due from banks $ 38,213 4.25% $ 40,180 4.67% Federal funds sold and securities purchased under agreement to resell 12,550 1.39 18,250 2.12 Securities available-for-sale, taxable 59,776 6.64 39,601 4.61 Securities available-for-sale, nontaxable 701 0.08 634 0.07 Securities held-to- maturity, taxable 123,147 13.69 76,821 8.94 Securities held-to- maturity, nontaxable 38,494 4.28 38,102 4.43 Total net loans(2) 570,040 63.35 591,686 68.82 Premises and equipment, net 26,430 2.94 25,838 3.01 Other assets 30,500 3.38 28,660 3.33 ------------------------------------------------------ Total assets $ 899,851 100.00% $ 859,772 100.00% ====================================================== Liabilities Demand deposits $ 108,250 12.03% $ 102,189 11.89% Savings deposits(3) 354,159 39.36 344,382 40.05 Time deposits 347,437 38.61 325,254 37.83 ------------------------------------------------------ Total deposits 809,846 90.00 771,825 89.77 ====================================================== Other borrowings 1,400 0.15 1,750 0.20 Mortgage indebtedness 250 0.03 25 0.01 Other liabilities 5,097 0.57 6,882 0.80 ------------------------------------------------------ Total liabilities 816,593 90.75 780,482 90.78 ====================================================== Stockholders' Equity Common stock and additional paid-in-capital 40,896 4.54 39,658 4.61 Retained earnings 42,362 4.71 39,632 4.61 ------------------------------------------------------ Total stockholders' equity 83,258 9.25 79,290 9.22 ====================================================== Total liabilities and stockholders' equity $ 899,851 100.00% $ 859,772 100.00% ======================================================
(1) Percentage of categories under Assets, Liabilities and Stockholders' Equity are shown as a percentage of average assets. (2) Total net loans means total loans net of loan participations sold, unamortized deferred loan fees and allowance for loan losses. (3) Savings deposits include NOW, money market and savings accounts. 38. 27 CONSOLIDATED STATEMENTS OF CONDITION
As of December 31, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 57,727,974 $ 47,193,911 Federal funds sold and securities purchased under agreement to resell 67,000,000 28,000,000 ------------------------------------ Cash and cash equivalents 124,727,974 75,193,911 Securities available-for-sale (with amortized costs of $215,465,568 in 1997 and $385,228,392 in 1996) 216,157,845 383,391,003 Securities held-to-maturity (with estimated fair values of $356,187,000 in 1997 and $212,002,000 in 1996) 350,336,415 210,128,511 Loans (net of allowance for loan losses of $15,379,408 in 1997 and $13,528,568 in 1996) 846,151,425 744,383,939 Other real estate owned, net 13,269,382 18,854,186 Investments in real estate, net 1,653,722 3,987,224 Premises and equipment, net 25,201,883 25,771,302 Customers' liability on acceptance 10,295,812 6,653,156 Accrued interest receivable 12,246,270 15,007,454 Goodwill 9,529,827 9,897,449 Other assets 12,891,013 11,061,271 ------------------------------------ Total assets $ 1,622,461,568 $ 1,504,329,406 ==================================== Liabilities and Stockholders' Equity Deposits Non-interest bearing demand deposits $ 175,875,463 $ 135,345,436 Interest bearing accounts NOW accounts 111,652,490 118,497,560 Money market deposits 94,708,279 95,158,361 Savings deposits 210,290,931 224,442,618 Time deposits under $100,000 307,503,579 302,980,795 Time deposits of $100,000 or more 549,090,061 488,314,939 ------------------------------------ Total deposits 1,449,120,803 1,364,739,709 ------------------------------------ Securities sold under agreements to repurchase 23,418,942 10,000,000 Acceptances outstanding 10,295,812 6,653,156 Other liabilities 3,749,470 4,490,536 ------------------------------------ Total liabilities 1,486,585,027 1,385,883,401 ------------------------------------ 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, 8,941,743 and 8,878,144 shares issued and outstanding in 1997 and 1996, respectively 89,417 88,781 Additional paid-in-capital 61,270,739 59,811,940 Unrealized holding gain (loss) on securities available-for-sale, net of tax 369,922 (1,059,347) Retained earnings 74,146,463 59,604,631 ------------------------------------ Total stockholders' equity 135,876,541 118,446,005 ------------------------------------ Total liabilities and stockholders' equity $ 1,622,461,568 $ 1,504,329,406 ====================================
See accompanying notes to consolidated financial statements. 39. 28 CONSOLIDATED STATEMENTS OF INCOME
For the Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Interest Income Interest and fees on loans $ 74,015,063 $ 55,887,756 $ 56,825,101 Interest on securities available-for-sale 17,700,422 17,146,782 5,249,753 Interest on securities held-to-maturity 17,831,320 11,578,557 12,740,884 Interest on Federal funds sold and securities purchased under agreement to resell 2,415,226 1,482,592 1,371,334 Interest on deposits with banks 16,402 3,289 35,875 ------------------------------------------------ Total interest income 111,978,433 86,098,976 76,222,947 ------------------------------------------------ Interest Expense Time deposits of $100,000 or more 26,633,484 22,576,698 17,594,425 Other deposits 23,738,144 16,474,889 13,582,511 Other borrowed funds 502,413 157,829 104,379 ------------------------------------------------ Total interest expense 50,874,041 39,209,416 31,281,315 ------------------------------------------------ Net interest income before provision for loan losses 61,104,392 46,889,560 44,941,632 Provision for loan losses 3,600,000 3,600,000 7,300,402 ------------------------------------------------ Net interest income after provision for loan losses 57,504,392 43,289,560 37,641,230 ------------------------------------------------ Non-Interest Income Securities gains 40,913 21,862 610,847 Letter of credit commissions 1,502,961 1,508,407 1,272,867 Service charges 3,490,801 2,942,170 3,069,213 Other operating income 1,739,847 1,386,589 1,267,949 ------------------------------------------------ Total non-interest income 6,774,522 5,859,028 6,220,876 ------------------------------------------------ Non-Interest Expense Salaries and employee benefits 17,008,737 13,996,253 12,911,639 Occupancy expense 2,931,290 2,320,718 2,272,137 Computer and equipment expense 2,364,675 2,001,985 2,139,756 Professional services expense 3,059,906 3,153,993 2,517,141 FDIC and State assessments 356,537 454,850 1,154,808 Marketing expense 1,200,198 1,163,455 982,232 Net other real estate owned expense 503,104 1,728,382 1,876,471 Other operating expense 3,503,788 3,193,619 3,763,174 ------------------------------------------------ Total non-interest expense 30,928,235 28,013,255 27,617,358 ------------------------------------------------ Income before income tax expense 33,350,679 21,135,333 16,244,748 ------------------------------------------------ Income tax expense 13,242,941 7,819,382 5,624,109 ------------------------------------------------ Net Income $ 20,107,738 $ 13,315,951 $ 10,620,639 ================================================ Basic net income per common share $ 2.26 $ 1.66 $ 1.36 ------------------------------------------------ Weighted average common shares outstanding 8,915,936 8,017,398 7,805,339 ------------------------------------------------
See accompanying notes to consolidated financial statements. 40. 29 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Unearned For the year ended December 31, Number Paid-in- ESOP 1997, 1996 and 1995 of Shares Amount Capital Shares - --------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 7,798,550 $ 77,986 $ 41,158,925 $ (421,786) ===================================================================== Issuances of common stock - Dividend Reinvestment Plan 68,614 686 854,762 -- Cash dividends of $.60 per share -- -- -- -- Allocation of unearned ESOP shares -- -- -- 421,786 Dividend on unallocated ESOP shares -- -- -- -- Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- -- Net income for the year -- -- -- -- --------------------------------------------------------------------- Balance at December 31, 1995 7,867,164 78,672 42,013,687 -- ===================================================================== Issuances of common stock - Dividend Reinvestment Plan 105,245 1,052 1,693,718 -- Issuance of stock for the acquisition of First Public Savings Bank, F.S.B 905,735 9,057 16,104,535 -- Cash dividends of $.60 per share -- -- -- -- Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- -- Net income for the year -- -- -- -- --------------------------------------------------------------------- Balance at December 31, 1996 8,878,144 88,781 59,811,940 -- ===================================================================== Issuances of common stock - Dividend Reinvestment Plan 63,599 636 1,458,799 -- Cash dividends of $.625 per share -- -- -- -- Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- -- Net income for the year -- -- -- -- --------------------------------------------------------------------- Balance at December 31, 1997 8,941,743 $ 89,417 $ 61,270,739 $ -- =====================================================================
Unrealized Holding Gain (Loss) on Securities Total For the year ended December 31, Available- Retained Stockholders' 1997, 1996 and 1995 for-Sale Earnings Equity - ----------------------------------------------------------------------------------------------- Balance at December 31, 1994 $ (546,635) $ 45,116,556 $ 85,385,046 ===================================================== Issuances of common stock - Dividend Reinvestment Plan -- -- 855,448 Cash dividends of $.60 per share -- (4,694,445) (4,694,445) Allocation of unearned ESOP shares -- -- 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 1,949,962 -- 1,949,962 Net income for the year -- 10,620,639 10,620,639 ----------------------------------------------------- Balance at December 31, 1995 1,403,327 51,033,127 94,528,813 ===================================================== Issuances of common stock - Dividend Reinvestment Plan -- -- 1,694,770 Issuance of stock for the acquisition of First Public Savings Bank, F.S.B -- -- 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 (1,059,347) 59,604,631 118,446,005 ===================================================== Issuances of common stock - Dividend Reinvestment Plan -- -- 1,459,435 Cash dividends of $.625 per share -- (5,565,906) (5,565,906) Change in unrealized holding gain (loss) on securities available-for-sale, net of tax 1,429,269 -- 1,429,269 Net income for the year -- 20,107,738 20,107,738 ----------------------------------------------------- Balance at December 31, 1997 $ 369,922 $ 74,146,463 $ 135,876,541 =====================================================
See accompanying notes to consolidated financial statements. 41. 30 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net Income $ 20,107,738 $ 13,315,951 $ 10,620,639 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,600,000 3,600,000 7,300,402 Provision for losses on other real estate owned 475,796 1,501,268 874,759 Provision for losses on investments in real estate -- -- 720,902 Provision (benefit) for deferred taxes (493,366) (503,186) 222,388 Depreciation 1,335,400 1,336,363 1,356,916 Net (gain) loss on sale of other real estate owned (173,961) (85,313) 78,553 Gain on sale of investments in real estate (222,310) -- -- Premises and equipment disposal (gain) loss (1,650) 1,595 1,203 Net gain on sales and calls of securities (40,913) (21,862) (610,847) Amortization and accretion of investment security premiums, net 63,310 734,931 97,026 Amortization of goodwill 684,579 83,172 -- Increase (decrease) in deferred loan fees, net 43,208 247,476 (345,719) (Increase) decrease in accrued interest receivable, net 2,761,184 (1,107,418) (4,011,816) (Increase) decrease in other assets, net (2,436,773) 19,583,814 (499,847) Increase (decrease) in other liabilities, net (741,066) (3,130,696) 1,177,459 ----------------------------------------------------- Total adjustments 4,853,438 22,240,144 6,361,379 ----------------------------------------------------- Net cash provided by operating activities 24,961,176 35,556,095 16,982,018 ----------------------------------------------------- Cash Flows From Investing Activities Purchase of securities available-for-sale (217,418,506) (90,261,346) (128,043,049) Proceeds from maturity and call of securities available-for-sale 300,394,371 58,609,947 68,492,524 Proceeds from sale of securities available-for-sale 92,705,983 989,297 30,388,281 Purchase of mortgage-backed securities available-for-sale (12,442,974) (18,874,200) -- Proceeds from repayments and sale of mortgage-backed securities available-for-sale 6,799,700 24,213,775 -- Purchase of securities held-to-maturity (15,345,814) (24,796,858) (149,158,643) Proceeds from maturity and call of securities held-to-maturity 41,931,722 26,365,854 19,779,542 Purchase of mortgage-backed securities held-to-maturity (186,620,681) (65,925,846) -- Repayments from mortgage-backed securities held-to-maturity 19,211,765 3,105,726 37,896 Proceeds from sale of loans 4,827,657 -- -- Purchase of loans (975,045) -- -- Net (increase) decrease in loans (108,326,821) (68,372,708) 6,030,865 Purchase of premises and equipment (765,981) (530,193) (1,065,696) Proceeds from sale of equipment 1,650 7,278 6,394 Proceeds from sale of other real estate owned 4,346,484 5,283,597 5,347,860 Proceeds from sale of investments in real estate 2,292,468 -- -- Net (increase) decrease in investments in real estate 263,344 317,131 (438,308) Payment for purchase of FPSB, net of cash acquired -- (1,906,354) -- ----------------------------------------------------- Net cash used in investing activities (69,120,678) (151,774,900) (148,622,334) ----------------------------------------------------- Cash Flows From Financing Activities Net increase (decrease) in demand deposits, NOW accounts, money market and savings deposits 19,083,188 25,763,682 (25,820,764) Net increase in time deposits 65,297,906 103,873,201 164,332,791 Increase in securities sold under agreements to repurchase 13,418,942 8,500,000 1,500,000 Decrease in borrowing from Federal Home Loan Bank -- -- (4,000,000) Payments to decrease direct loan to ESOP -- -- (447,481) Cash dividends (5,565,906) (4,744,447) (4,704,068) Decrease in unearned ESOP shares -- -- 421,786 Proceeds from shares issued to Dividend Reinvestment Plan 1,459,435 1,694,770 855,448 ----------------------------------------------------- Net cash provided by financing activities 93,693,565 135,087,206 132,137,712 ----------------------------------------------------- Increase in cash and cash equivalents 49,534,063 18,868,401 497,396 ----------------------------------------------------- Cash and cash equivalents, beginning of the year 75,193,911 56,325,510 55,828,114 ----------------------------------------------------- Cash and cash equivalents, end of the year $ 124,727,974 $ 75,193,911 $ 56,325,510 ----------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 50,183,513 $ 39,123,990 $ 30,818,671 Income taxes $ 13,736,000 $ 5,540,000 $ 7,223,000 Non-cash investing activities: Transfer to securities available-for-sale $ 629,894 $ 30,362,405 $ 135,236,133 Transfer to securities held-to-maturity $ -- $ 3,733,023 $ -- Net change in unrealized gain (loss) on securities available-for-sale, net of tax $ 1,429,269 $ (2,462,674) $ 1,949,962 Transfers to other real estate owned $ 6,012,016 $ 13,329,482 $ 19,952,054 Loans to facilitate the sale of other real estate owned $ 6,948,500 $ 3,524,000 $ 6,570,000 The Company acquired all the outstanding stock of FPSB for $31.6 million in 1996 ($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 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 the 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 applies Statement of Financial Accounting Standards (SFAS) No. 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. 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. Premium and discounts are amortized or accreted as adjustment of yield on a level-yield basis. The cost basis of an individual security is written down, if the decline in its fair value below the amortized cost basis is other than temporary. The write-down is accounted for as a realized loss, and is included in earnings. The new cost basis is not changed for subsequent recoveries in fair value. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for both categories of securities are included in earnings. 43. 32 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 applies the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Under SFAS No. 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 in 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 No. 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 a balance in excess of $750,000, 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. LETTER OF CREDIT FEES Issuance and commitment fees received for the issuance of commercial or standby letters of credit are recognized over the term of the instruments. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed on the straight-line method based on the following estimated useful lives of the assets:
Type Estimated Useful Life - ------------------------------------------------------------------------------------------------------- Buildings 15 to 45 years Building improvements 5 to 20 years Furniture, fixtures and equipment 3 to 25 years Leasehold improvements Over the shorter of useful lives or the terms of the lease
Improvements are capitalized and amortized to occupancy expense over the shorter of the estimated useful life of the improvement or the term of the lease. 44. 33 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 are amortized on a straight-line basis over the expected periods to be benefited generally 15 years. The Company applies the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Live Assets to be Disposed Of." 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, 1997 and 1996, the Company had not entered into any types of hedging transactions, or invested in, or issued any derivative financial instruments such as futures, forwards, swaps, or option contracts, or other financial instruments with similar characteristics 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." 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 applies Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." 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. A valuation allowance is established, when necessary, to reduce the deferred tax assets to the amount that is more likely than not to be realized. NET INCOME PER COMMON SHARE The Company applies the provisions of the Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" issued by the Financial Accounting Standards Board (FASB) as of December 31, 1997. Earnings per share (EPS) are computed on a basic and diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings of the Company. 45. 34 The Company presents only the basic EPS on its statement of income since the Company does not have any securities or contracts to issue common stock which if exercised or converted into common stock or resulted in the issuance of common stock for each of the years in the three-year period ending December 31, 1997. The weighted-average shares were 8,915,936, 8,017,398 and 7,805,339 for 1997, 1996 and 1995, respectively. ESOP shares committed to be released in 1995 are considered as outstanding for 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 1997 presentation. YEAR 2000 The "Year 2000" problem is the result of computer programs being written using two digits to identify a year in the date field, rather than four digits to define the applicable year. Consequently, any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. In 1997, the Company established a program to address the Year 2000 issues. The Company is funding these costs through operating cash flows and is expensing the costs as incurred. The amount expensed in 1997 was immaterial to the Company's results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The impact on the Company of adopting SFAS No. 130 is not expected to be material to the Company's existing disclosure. In June 1997, the FASB issued 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 will have no 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. 46. 35 2. Acquisition On November 18, 1996, the Bank acquired all the outstanding stock of First Public Savings Bank, F.S.B. ("FPSB") for $31.6 million ($15.5 million in cash and $16.1 million in Bancorp's stock) in a transaction that has been accounted for as a purchase. Immediately prior to the close, FPSB had total assets, loans, securities, cash, other assets and deposits of $276 million, $144 million, $94 million, $14 million, $24 million, and $251 million respectively. Immediately upon acquisition FPSB was merged into the Bank. As a result of the adjustment of FPSB's assets and liabilities to fair value immediately prior to the closing of the merger, the Company recorded goodwill of approximately $10 million. 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.
Year ended December 31, (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 ====================== Basic net income per common share $ 1.67 $ 1.60 ======================
The unaudited pro forma combined basic net income per common share were calculated based on the pro forma combined net income and the actual average common shares assumed to be outstanding during the years presented. 3. Cash and 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 1997 and 1996 were $14,060,000 and $11,159,000, respectively. 47. 36 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, 1997 and 1996 respectively:
Gross Gross Amortized Unrealized Unrealized Fair 1997 Cost Gains Losses Value - ------------------------------------------------------------------------------------------- U.S. Treasury securities $ 38,020,254 $ 11,152 $ 60,146 $ 37,971,260 U.S. government agencies 113,254,847 97,099 46,386 113,305,560 Mortgage-backed securities 22,304,922 680,211 3,129 22,982,004 Collaterized mortgage obligations 6,383,688 4,782 2,542 6,385,928 Asset-backed securities 19,878,290 11,303 -- 19,889,593 Federal Home Loan Bank stock 5,652,900 -- -- 5,652,900 Commercial paper 9,970,667 -- 67 9,970,600 ------------------------------------------------------ Total $ 215,465,568 $ 804,547 $ 112,270 $216,157,845 ======================================================
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 18,108,640 1,504 178,264 17,931,880 Collateralized mortgage obligations 4,944,533 5,712 -- 4,950,245 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 ======================================================
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, 1997, 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) $ 71,655,718 $ 71,622,840 Due after one year through five years 115,121,240 115,167,073 Mortgage-backed securities 28,688,610 29,367,932 ---------------------------- Total $215,465,568 $216,157,845 ============================
(1) Equity securities are reported in this category. Proceeds from sales and repayments of securities available-for-sale during 1997 and 1996 were $99,505,683 and $25,203,072, respectively. Proceeds from maturities and calls of securities available-for-sale during 1997 and 1996 were $300,394,371 and $58,609,947, respectively. Gross realized gains of $303,504 and $416,344 were realized for 1997 and 1995, respectively. No gain was realized in 1996. Gross realized losses of $268,255 were realized for 1997. No losses were realized for 1996 and 1995. 48. 37 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, 1997 and 1996:
Gross Gross Estimated Carrying Unrealized Unrealized Fair 1997 Value Gains Losses Value - -------------------------------------------------------------------------------------------- U.S. Treasury securities $ 26,054,385 $ 353,615 $ -- $ 26,408,000 U.S. government agencies 39,373,671 291,329 -- 39,665,000 State and municipal securities 44,496,557 2,264,443 -- 46,761,000 Mortgage-backed securities 140,338,342 1,539,166 28,508 141,849,000 Collateralized mortgage obligations 90,234,450 1,223,161 6,611 91,451,000 Asset-backed securities 922,754 -- 6,754 916,000 Corporate bond 8,916,256 220,744 -- 9,137,000 ------------------------------------------------------- Total $ 350,336,415 $ 5,892,458 $ 41,873 $356,187,000 =======================================================
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 ===========================================================
The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed securities, at December 31, 1997, 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 $ 1,340,546 $ 1,367,000 Due after one year through five years 83,523,619 84,696,000 Due after five years through ten years 18,059,943 19,119,000 Due after ten years 16,839,514 17,704,000 Mortgage-backed securities 230,572,793 233,301,000 ---------------------------- Total $350,336,415 $356,187,000 ============================
Proceeds from the maturity and call of securities held-to-maturity during 1997 and 1996 were $41,931,722 and $26,365,854, respectively. Gross realized gains of $5,664, $21,862 and $194,503 were realized for 1997, 1996 and 1995, respectively. No losses were realized for 1997, 1996 and 1995. Securities having a carrying value of $24,606,816 and $30,577,856 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits, treasury tax and loan, and securities sold under agreements to repurchase. 49. 38 5. Loans The components of loans in the consolidated statements of condition as of December 31, 1997 and 1996 were as follows:
1997 1996 - ----------------------------------------------------------------------------------------- Commercial loans $338,285,520 $283,893,881 Real estate mortgage loans 458,417,697 420,315,411 Real estate construction loans 41,735,722 33,510,438 Installment loans 26,610,915 23,550,608 Other loans 267,153 385,135 ---------------------------- 865,317,007 761,655,473 ---------------------------- Less Unamortized deferred loan fees 3,786,174 3,742,966 Allowance for loan losses 15,379,408 13,528,568 ---------------------------- Total $846,151,425 $744,383,939 ============================
The Company sells participations in certain residential mortgage loans to buyers in the secondary market. These participations cover substantially all of the loan balances and are sold without recourse. As of December 31, 1997, the Company had $15,105,374 of these loans in its servicing portfolio. There were no loans held for sale as of December 31, 1997 and 1996. Approximately $3,425,000 and $4,260,000 of residential mortgage loans were pledged to secure a line of credit with the Federal Home Loan Bank as of December 31, 1997 and December 31, 1996, respectively. An analysis of the activity in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------ Balance, beginning of year $13,528,568 $12,742,427 $12,270,918 Allowance acquired from merger -- 1,644,171 -- Loans charged-off (2,138,803) (5,388,389) (7,017,666) Recoveries on loans previously charged-off 389,643 930,359 188,773 Provision for loan losses 3,600,000 3,600,000 7,300,402 -------------------------------------------- Balance, end of year $15,379,408 $13,528,568 $12,742,427 ============================================
At December 31, 1997 and 1996, the Company had identified impaired loans with a net recorded investment of $21,905,856 and $17,173,964, respectively. An allowance of $3,991,224 and $3,046,106, 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 1997 and 1996, respectively. For the years 1997 and 1996, the average balances of impaired loans were $23,171,000 and $27,782,000, and interest collected on impaired loans totaled $1,564,000 and $1,220,000, respectively. The following table is a breakdown of impaired loans and the SFAS No. 114 impairment allowance related to impaired loans:
As of December 31, 1997 As of December 31, 1996 SFAS No. 114 SFAS No. 114 Recorded Impairment Recorded Impairment Investment Allowance Investment Allowance - ---------------------------------------------------------------------------------------------- Impaired loans: Loans with impairment allowance Commercial $ 7,783,610 $ 1,499,320 $ 6,861,285 $ 1,397,619 Commercial real estate 14,027,194 2,395,852 10,312,679 1,648,487 Other 95,052 95,052 -- -- --------------------------------------------------------- Total impaired loans with impairment allowance $ 21,905,856 $ 3,990,224 $ 17,173,964 $ 3,046,106 =========================================================
50. 39 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, 1997. An analysis of the activity with respect to loans to Related Parties is as follows: - ----------------------------------------------------------------------------- December 31, 1995 $ 2,171,338 Additional loans made 3,625,000 Payments received (3,850,694) ----------- December 31, 1996 1,945,644 Additional loans made 5,523,396 Payments received (160,721) ----------- December 31, 1997 $ 7,308,319 ===========
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, 1997 and 1996:
1997 1996 - ----------------------------------------------------------------------------------------- Mortgage commercial $137,003,972 $121,755,629 Construction 41,735,722 33,510,438 Mortgage residential 303,725,974 284,681,699 Equity lines 17,687,751 13,878,083 ---------------------------- Total $500,153,419 $453,825,849 ============================
The following is a summary of non-accrual loans and troubled debt restructurings as of December 31, 1997, 1996 and 1995 and the related net interest foregone for the years then ended:
1997 1996 1995 - ----------------------------------------------------------------------------------------- Non-accrual loans $16,886,460 $ 9,304,994 $14,012,337 =========================================== Contractual interest due $ 1,845,513 $ 1,121,136 $ 1,503,069 Interest recognized 471,398 268,050 200,385 ------------------------------------------- Net interest foregone $ 1,374,115 $ 853,086 $ 1,302,684 ===========================================
1997 1996 1995 - ----------------------------------------------------------------------------------------- Troubled debt restructurings $ 4,874,277 $ 3,201,462 $ 8,429,265 =========================================== Contractual interest due $ 406,015 $ 338,382 $ 467,496 Interest recognized 387,420 310,783 352,412 ------------------------------------------- Net interest foregone $ 18,595 $ 27,599 $ 115,084 ===========================================
As of December 31, 1997, there was no commitment to lend additional funds to those borrowers whose loans have been restructured. 51. 40 6. Other Real Estate Owned The balance of other real estate owned at December 31, 1997 and 1996 was $13,269,382 and $18,854,186, respectively. The valuation allowance was $1,081,370 and $1,568,387 at December 31, 1997 and 1996, respectively. The following table presents the components of other real estate owned expense for the year-ended:
1997 1996 1995 - ----------------------------------------------------------------------------------------- Operating expense $ 201,269 $ 312,427 $ 923,159 Provision for losses 475,796 1,501,268 874,759 Net (gain) loss on disposal (173,961) (85,313) 78,553 ------------------------------------------- Total other real estate owned expense $ 503,104 $ 1,728,382 $ 1,876,471 ===========================================
An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 1997, 1996, and 1995 is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------ Balance, beginning of year $ 1,568,387 $ 869,262 $ 1,592,238 Provision for losses 475,796 1,501,268 874,759 Charge-offs on disposal (962,813) (802,143) (1,597,735) ------------------------------------------- Balance, end of year $ 1,081,370 $ 1,568,387 $ 869,262 ===========================================
7. Investments in Real Estate The Company's investments in real estate consist of a strip-mall, and interests in two limited partnerships in low income housing projects which qualify for Federal low income housing tax credits. The following table presents the components of investments in real estate for the year ended:
1997 1996 - ----------------------------------------------------------------------------- Strip-mall $ 680,091 $ 2,837,829 Low income housing 973,631 1,149,395 --------------------------- $ 1,653,722 $ 3,987,224 ===========================
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 investment was written down $720,902 during the year ended December 31, 1995. The Company sold one of the strip malls in 1997, recognizing a gain of $222,310. For the year 1997, the Company recognized a net gain of $170,021 from the operations, and a net loss of $106,065 and $753,833 in 1996 and 1995, respectively from the properties, resulting primarily from write downs. The Company has interests in two limited partnerships at 49.5% and 99.0% respectively, formed for the purpose of investing in real estate projects which qualify for low income housing tax credits. The limited partnerships will generate tax credits over a weighted average remaining period of approximately ten years. See Note 9 of the notes to consolidated financial statements for income tax effects. The Company's 99.0% interest in the limited partnership was not consolidated as of December 31, 1997 and 1996 because the amount of investment was not material to the Company's results of operations or financial condition. The Company recognized a net loss of approximately $144,000, $181,000 and $127,000 in 1997, 1996 and 1995 from the partnerships' operations. 52. 41 8. Premises and Equipment Premises and equipment consisted of the following at December 31, 1997 and 1996:
1997 1996 - ----------------------------------------------------------------------------------------- Land and land improvements $11,371,120 $11,371,120 Building and building improvements 13,775,815 13,761,925 Furniture, fixtures and equipment 11,037,154 12,189,995 Other 1,808,329 2,540,823 Construction in process 480,485 11,320 --------------------------- 38,472,903 39,875,183 Less: Accumulated depreciation 13,271,020 14,103,881 --------------------------- Premises and equipment, net $25,201,883 $25,771,302 ===========================
The amount of depreciation included in non-interest expense was $1,335,400, $1,336,363 and $1,356,916 in 1997, 1996 and 1995, respectively. 9. Securities Sold under Agreements to Repurchase The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities. These borrowings generally mature in less than 30 days. The table below provides comparative data for securities sold under agreements to repurchase.
December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------- Average amount outstanding1 $ 8,861,458 $ 611,749 $ 1,138,630 Highest month-end balances2 23,418,942 10,000,000 3,500,000 Year-end balance 23,418,942 10,000,000 1,500,000 Rate at year-end 7.03% 6.83% 5.13%
1 Average balances were computed using daily averages. 2 Highest month-end balances were at December 1997, December 1996, and August 1995. 10. Income Taxes For the years ended December 31, 1997, 1996 and 1995, the current and deferred amounts of the income tax expense are summarized as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------- Current Federal $ 10,280,310 $ 6,080,034 $ 3,961,419 State 3,455,997 2,242,534 1,571,755 -------------------------------------------------- 13,736,307 8,322,568 5,533,174 ================================================== Deferred Federal (478,483) (460,651) 116,384 State (14,883) (42,535) 106,004 -------------------------------------------------- (493,366) (503,186) 222,388 ================================================== Change in valuation allowance -- -- (131,453) -------------------------------------------------- Total income tax expense $ 13,242,941 $ 7,819,382 $ 5,624,109 ==================================================
53. 42 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, 1997 and 1996 were as fololows:
1997 1996 - --------------------------------------------------------------------------------------------------- Deferred tax assets Difference between provisions for loan losses for tax and financial reporting purposes $ 6,419,983 $ 5,350,461 Difference between provisions for other real estate owned for tax and financial reporting purposes 1,058,223 2,169,603 State income tax 891,637 384,966 Unrealized holding losses on securities available for sale, net -- 778,042 Other, net 107,920 17,018 ------------------------------ Gross deferred tax assets 8,477,763 8,700,090 ------------------------------ Deferred tax liabilities Use of accelerated depreciation for tax purposes (1,154,886) (1,104,765) Deferred loan fees (400,025) (406,012) FHLB stock dividend (649,018) (491,430) Acquisition of FPSB (584,264) (723,637) Unrealized holding gain on securities available for sale, net (322,355) -- ------------------------------ Gross deferred tax liabilities (3,110,548) (2,725,844) ------------------------------ Net tax assets $ 5,367,215 $ 5,974,246 ------------------------------
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 1996 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 condition, at December 31, 1997 and 1996 were net deferred tax assets of $5,367,215 and $5,974,246, respectively. Other assets as of December 31, 1996 include current net income tax receivable of $340,419. Other liabilities as of December 31, 1997 include current income tax payable of $190,767. Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years indicated as follows:
1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Tax provision at Federal statutory rate $ 11,672,737 35.00% $ 7,397,367 35.00% $ 5,685,662 35.00% State income taxes 2,236,724 6.71 1,429,999 6.77 1,090,543 6.71 Interest on obligations of state and political subdivisions, which are exempt from Federal taxation (722,348) (2.17) (709,350) (3.35) (832,437) (5.12) Low income housing tax credits (319,183) (0.96) (319,183) (1.51) (223,833) (1.38) Non-deductible expense- Amortization of goodwill 239,603 0.72 28,760 0.14 -- -- Valuation allowance -- -- -- -- (131,453) (0.81) Other, net 135,408 0.41 (8,211) (0.05) 35,627 0.22 ------------ ----- ------------ ----- ------------ ----- Total income tax expense $ 13,242,941 39.71% $ 7,819,382 37.00% $ 5,624,109 34.62% ------------ ----- ------------ ----- ------------ -----
54 43 11. 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, 1997 is restricted to approximately $29,040,000 under this regulation. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. The Federal Deposit Insurance Corporation established five capital ratio categories: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized." A well capitalized institution must have a Tier 1 capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. At December 31, 1997, 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, 1997 and 1996 are presented in the tables below:
Company Bank As of December 31, 1997 As of December 31, 1997 Balance Percent Balance Percent -------------- ----- -------------- ----- Tier I Capital (to risk- weighted assets) $ 125,976,792(1) 11.73% $ 122,431,400(1) 11.40% Tier I Capital minimum requirement 42,956,701 4.00 42,956,587 4.00 -------------- ----- -------------- ----- Excess $ 83,020,091 7.73% $ 79,474,813 7.40% -------------- ----- -------------- ----- Total Capital (to risk-weighted assets) $ 139,424,917(1) 12.98% $ 135,879,487(1) 12.65% Total Capital minimum requirement 85,913,402 8.00 85,913,174 8.00 -------------- ----- -------------- ----- Excess $ 53,511,515 4.98% $ 49,966,313 4.65% -------------- ----- -------------- ----- Risk-weighted assets $1,073,917,525 $1,073,914,670 Tier I Capital (to average assets) - Leverage ratio $ 125,976,792(1) 7.94% $ 122,431,400(1) 7.71% Minimum leverage requirement 63,483,951 4.00 63,483,844 4.00 -------------- ----- -------------- ----- Excess $ 62,492,841 3.94% $ 58,947,556 3.71% -------------- ----- -------------- ----- Total average assets $1,587,098,783(3) $1,587,096,105(3)
Company Bank As of December 31, 1996 As of December 31, 1996 Balance Percent Balance Percent -------------- ----- -------------- ----- Tier I Capital (to risk- weighted assets) $ 109,607,902(2) 12.72% $ 107,386,397(2) 12.46% Tier I Capital minimum requirement 34,479,798 4.00 34,479,798 4.00 -------------- ----- -------------- ----- Excess $ 75,128,104 8.72% $ 72,906,599 8.46% -------------- ----- -------------- ----- Total Capital (to risk-weighted assets) $ 120,416,815(2) 13.97% $ 118,195,309(2) 13.71% Total Capital minimum requirement 68,959,596 8.00 68,959,596 8.00 -------------- ----- -------------- ----- Excess $ 51,457,219 5.97% $ 49,235,713 5.71% -------------- ----- -------------- ----- Risk-weighted assets $ 861,994,951 $ 861,994,945 Tier I Capital (to average assets) - Leverage ratio $ 109,607,902(2) 8.17% $ 107,386,397(2) 8.01% Minimum leverage requirement 53,656,584 4.00 53,656,560 4.00 -------------- ----- -------------- ----- Excess $ 55,951,318 4.17% $ 53,729,837 4.01% -------------- ----- -------------- ----- Total average assets $1,341,414,610(3) $1,341,413,989(3)
(1) Excluding the unrealized holding gains on securities available-for-sale of $369,922 and goodwill of $9,529,827. (2) Excluding the unrealized holding losses on securities available-for-sale of $1,059,347 and goodwill of $9,897,449. (3) Average assets represent average balance for the fourth quarter of 1997 and 1996, respectively. 55 44 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, 1997. 12. 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. 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 $ 344,798,000 Standby letters of credit 11,498,000 Other letters of credit 30,612,000 Bill of lading guarantee 10,402,000 ------------- Total $ 397,310,000 =============
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, 1997, the Company does not have fixed-rate or variable-rate commitments with characteristics similar to options, which provide the holder, for a premium paid at inception to the Company, the benefits of favorable movements in the price of an underlying asset or index with limited or no exposure to losses from unfavorable price movements. Letters of credit and bill of lading guarantee are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in making loans to customers. As of December 31, 1997, the Company had available credit lines with other financial institutions in the amount of $287,000,000. 56 45 The Company is obligated under a number of operating leases for premises and equipment with terms ranging from 1 to 55 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. Rental expense was $1,792,633, $1,328,502 and $1,433,861 for 1997, 1996 and 1995, respectively. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 1997:
(dollars in thousands) Commitments - ----------------------------------------------------------------------------------------- Year ended December 31, 1998 $ 1,660 1999 1,488 2000 1,332 2001 581 2002 507 Thereafter 8,299 ----------- Total minimum lease payments $ 13,867 ===========
Rental income was $436,892, $504,689 and $482,037 for 1997, 1996 and 1995, respectively. The following table shows future rental payments to be received under operating leases with terms in excess of one year as of December 31, 1997:
(dollars in thousands) Commitments - ----------------------------------------------------------------------------------------- Year ended December 31, 1998 $ 386 1999 148 2000 98 2001 75 2002 15 ----------- Total minimum lease payments to be received $ 722 ===========
During 1997 and presently there are adverse economic conditions in the Asia Pacific region. The impact of these adverse economic conditions may increase the Company's exposure to economic and transfer risk. Transfer risk may increase because of an entity's incapacity to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may impact the recoverability of investments with or loans to entities unable to obtain the necessary foreign exchange. In addition, these adverse economic conditions may continue to negatively impact asset values and the profitability and liquidity of companies operating in this region. It is the opinion of management that the Company will not be adversely impacted by these factors. Management does not consider its loan portfolio to have direct exposure to transfer risk. The circumstances in Asia may also have an impact on the deposit customers of the Company, resulting in outflows of deposits. Management of the Company does not expect such potential outflows to significantly impact the financial condition or operating results of the Company based on its current customers' profiles. 57 46 13. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments. CASH AND SHORT-TERM INSTRUMENTS For cash and short-term instruments, the carrying amount was assumed to be a reasonable estimate of fair value. INVESTMENT SECURITIES For securities (which include securities available-for-sale and securities held-to-maturity), fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. LOANS Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. Fair value for non-performing real estate loans was based on recent external appraisals of the underlying collateral of the loan. If appraisals were not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates were judgementally determined using available market information and specific borrower information. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits was assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities. OTHER BORROWINGS This category includes Federal funds purhased and securities sold under repurchase agreements, and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL GUARANTEES WRITTEN The fair value of commitments was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates were based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 58 47 FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1997 As of December 31, 1996 (dollars in thousands) Carrying Amount Fair Value Carrying Amount Fair Value - ----------------------------------------------------------------------------------------------------------- Financial Assets Cash and due from banks $ 57,728 $ 57,728 $ 47,194 $ 47,194 Federal funds sold and securities purchased under agreement to resell 67,000 67,000 28,000 28,000 Securities available-for-sale 216,158 216,158 383,391 383,391 Securities held-to-maturity 350,336 356,187 210,129 212,002 Loans, net 846,151 860,111 744,384 753,601 ------------------------------------------------------------- Financial Liabilities Deposits $1,449,121 $1,452,787 $1,364,740 $1,367,217 Securities sold under agreements to repurchase 23,419 23,419 10,000 10,000 Mortgage indebtedness -- -- 773 773 -------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As of December 31, 1997 As of December 31, 1996 (dollars in thousands) Contract Amount Fair Value Contract Amount Fair Value - ----------------------------------------------------------------------------------------- Commitments to extend credit $344,798 $ (417) $268,247 $ (317) Commercial letters of credit 30,612 (202) 19,824 (138) Standby letters of credit 11,498 (69) 12,675 (60) Bill of lading guarantee 10,402 (25) 6,653 (41) ------------------------------------------------------
14. Employee Benefit Plans 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 1997, 1996 and 1995, the ESOP purchased 38,491, 45,959, and 0 shares, respectively, of the Company's stock at an aggregate cost of $878,620, $754,269 and $0, respectively. The shares purchased in 1997 included 21,200 shares bought on the open market and 17,291 shares bought through the Dividend Reinvestment Plan. The shares purchased in 1996 included 31,224 shares of newly issued shares and 14,735 shares bought through the Dividend Reinvestment Plan. The Company contributed $453,000, $515,850 and $490,400 to the trust in 1997, 1996 and 1995, respectively, which was charged to salaries and related benefits in the accompanying consolidated statements of income. In 1997, distribution of benefits to participants totaled 14,410 shares. As of December 31, 1997, the ESOP owned 554,881 shares or 6.21% of the Company's outstanding common stock. 59 48 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. ESOP shares committed to be released are considered outstanding for basic earnings per common share (EPS) purposes. CATHAY BANCORP, INC. 401(K) PLAN In 1997, the Board approved the Cathay Bancorp, Inc. 401(k) Profit Sharing Plan, which began on March 1, 1997. Salaried employees who have completed one year of service and have attained the age of 21 are eligible to participate. Enrollment dates are on January 1st and July 1st of each year. Participants may contribute up to 15% of their compensation for the year but not to exceed the dollar limit set by the Internal Revenue Service (IRS). Participants may change their contribution election on the enrollment dates. The Company matches 50% of the participants' contribution up to 4% of their compensation. The vesting schedule for matching contribution is 0% for less than two years of service, 25% after two years of service and from then on, at an increment of 25% each year until 100% vested after five years of service. In 1997, the Company's contribution amounted to $138,000. The Plan allows participants to withdraw all or part of their vested amount in the plan due to certain financial hardship as designated by the IRS. Participants may also borrow up to 50% of the vested amount, up to a maximum of $50,000. The minimum loan amount is $1,000. 15. Condensed Financial Information of Cathay Bancorp, Inc. The condensed financial information of Cathay Bancorp, Inc. as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 were as follows: STATEMENTS OF CONDITION
Year ended December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 3,613,233 $ 2,272,875 Investment in subsidiary - Cathay Bank 132,331,149 116,224,500 Other 2,855 6 --------------------------------- Total assets $ 135,947,237 $ 118,497,381 ================================= LIABILITIES Accrued expenses $ 70,696 $ 51,376 --------------------------------- Total liabilities 70,696 51,376 ================================= STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized, 8,941,738 and 8,878,144 shares issued and outstanding in 1997 and 1996, respectively 89,417 88,781 Additional paid-in-capital 61,270,739 59,811,940 Unrealized holding gain (loss) on securities available-for-sale, net of tax 369,922 (1,059,347) Retained earnings 74,146,463 59,604,631 --------------------------------- Total stockholders' equity 135,876,541 118,446,005 ================================= Total liabilities and stockholders' equity $ 135,947,237 $ 118,497,381 =================================
60 49 STATEMENTS OF INCOME
Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Cash dividends from Cathay Bank $ 5,565,906 $ 4,744,447 $ 4,694,445 Amortization of organizational costs and other expenses (233,385) (217,766) (300,794) ---------------------------------------------------- Income before income tax expense 5,332,521 4,526,681 4,393,651 Income tax benefit 97,837 92,213 86,445 ---------------------------------------------------- Income before undistributed earnings of subsidiary 5,430,358 4,618,894 4,480,096 ---------------------------------------------------- Equity in undistributed earnings of subsidiary 14,677,380 8,697,057 6,140,543 ---------------------------------------------------- Net income $ 20,107,738 $ 13,315,951 $ 10,620,639 ----------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 20,107,738 $ 13,315,951 $ 10,620,639 Equity in undistributed earnings of subsidiary (14,677,380) (8,697,057) (6,140,543) Amortization of organizational costs -- 786 91,755 Other, net 16,471 135,924 252,113 ---------------------------------------------------- Net cash provided by operating activities 5,446,829 4,755,604 4,823,964 ---------------------------------------------------- Cash Flows From Investing Activities Capital contribution to Cathay Bank -- -- (580,000) ---------------------------------------------------- Net cash used in investing activities -- -- (580,000) ---------------------------------------------------- Cash Flows From Financing Activities Payments to decrease direct loan to ESOP -- -- (447,481) Proceeds from issuance of common stock 1,459,435 1,694,770 855,448 Cash dividends (5,565,906) (4,744,447) (4,704,068) Decrease in unearned ESOP shares -- -- 421,786 ---------------------------------------------------- Net cash used in financing activities (4,106,471) (3,049,677) (3,874,315) ---------------------------------------------------- Increase in cash and cash equivalents 1,340,358 1,705,927 369,649 Cash and cash equivalents, beginning of year 2,272,875 566,948 197,299 ---------------------------------------------------- Cash and cash equivalents, end of year $ 3,613,233 $ 2,272,875 $ 566,948 ---------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes $ 150,471 $ 150,000 $ 150,000 Non-cash investing activities: Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax $ 1,429,269 $ (2,462,674) $ 1,949,962 Issuance of common stock for the acquisition of FPSB $ -- $ 16,113,592 $ --
61 50 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. 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. 16. 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 63,599, 105,245 and 68,614 and $1,459,435, $1,694,770 and $855,448 for 1997, 1996 and 1995, respectively. 17. Quarterly Results of Operations (Unaudited) The following table sets forth selected unaudited quarterly financial data. Summary of Operations
1997 1996 (dollars in thousands Fourth Third Second First Fourth Third Second First except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------ Interest income $29,217 $28,445 $27,600 $26,716 $24,109 $21,362 $20,791 $19,836 Interest expense 13,466 13,058 12,345 12,005 10,966 9,622 9,513 9,108 ------------------------------------------------------------------------------------ Net interest income 15,751 15,387 15,255 14,711 13,143 11,740 11,278 10,728 Provision for loan losses 900 900 900 900 900 900 900 900 ------------------------------------------------------------------------------------ Net interest income after provision for loan losses 14,851 14,487 14,355 13,811 12,243 10,840 10,378 9,828 Non-interest income 1,860 1,895 1,630 1,390 1,658 1,535 1,339 1,328 Non-interest expense 8,146 7,253 7,901 7,628 8,472 5,957 7,023 6,562 ------------------------------------------------------------------------------------ Income before income tax expense 8,565 9,129 8,084 7,573 5,429 6,418 4,694 4,594 Income tax expense 3,251 3,733 3,205 3,054 1,827 2,688 1,598 1,706 ------------------------------------------------------------------------------------ Net income $ 5,314 $ 5,396 $ 4,879 $ 4,519 $ 3,602 $ 3,730 $ 3,096 $ 2,888 ------------------------------------------------------------------------------------ Basic net income per common share $ 0.59 $ 0.60 $ 0.55 $ 0.51 $ 0.43 $ 0.47 $ 0.39 $ 0.37 ------------------------------------------------------------------------------------
62 51 Independent Auditors' Report The Stockholders and the Board of Directors of Cathay Bancorp, Inc.: We have audited the accompanying consolidated statements of condition of Cathay Bancorp, Inc. and subsidiary (the Company) as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California January 16, 1998 63 52 Corporate, Branch and Overseas Offices 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 Claudia My Lu Vice President and Manager MONTEREY PARK 250 South Atlantic Boulevard Monterey Park, CA 91754 Tel: (626) 281-8808 Fax: (626) 281-2956 Frank Chen Regional Vice President and Manager ALHAMBRA 601 North Atlantic Boulevard Alhambra, CA 91801 Tel: (626) 284-6556 Fax: (626) 282-3496 Christina Tsui Assistant Vice President and Manager HACIENDA HEIGHTS 16025 East Gale Avenue City of Industry, CA 91745 Tel: (626) 333-8533 Fax: (626) 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: (626) 573-1000 Fax: (626) 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 Edward Wong Vice President and Manager CERRITOS 11355 South Street Cerritos, CA 90701 Tel: (562) 860-7300 Fax: (562) 860-2296 Henry Yoh Manager CITY OF INDUSTRY 1250 South Fullerton Road City of Industry, CA 91748 Tel: (626) 810-1088 Fax: (626) 810-2188 Shu Lee Regional Vice President and Manager CUPERTINO 10480 South De Anza Boulevard Cupertino, CA 95014 Tel: (408) 255-8300 Fax: (408) 255-8373 David Lin Assistant Vice President and Manager FREMONT 47998 Warm Springs Boulevard Fremont, CA 94539 Tel: (510) 770-5151 Fax: (510) 770-5150 Tony Wen 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: (650) 652-0188 Fax: (650) 652-0180 Stanley Wong Vice President and Manager HILL-ALPINE 800 North Hill Street Los Angeles, CA 90012 Tel: (213) 346-3700 Fax: (213) 346-3746 Claudia My Lu Vice President and Manager VALLEY-STONEMAN 43 East Valley Boulevard Alhambra, CA 91801 Tel: (626) 576-7600 Fax: (626) 576-5831 Mimy Luc Manager VALLEY-PROSPECT 420 West Valley Boulevard San Gabriel, CA 91776 Tel: (626) 300-0668 Fax: (626) 300-0117 Jennifer Mak Assistant Vice President and Manager BERKELEY-RICHMOND OFFICE 3254 Pierce Street Richmond, CA 94804 Tel: (510) 526-8898 Fax: (510) 526-0639 Pansy Lock Assistant 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. Sixth Floor, Suite 3 146 Sung Chiang Road Taipei, Taiwan, R.O.C. Tel: (886) (2) 2537-5057 Fax: (886) (2) 2537-5059 Li Sung Representative and Manager Additional Information: MARKET MAKERS The following firms make a market in Cathay Bancorp, Inc. stock: Herzog, Heine, Geduld, Inc. Wedbush Morgan Securities Inc. Hoefer & Arnett, Inc. Sutro & Co., Inc. REGISTRAR AND TRANSFER AGENT American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Tel: (800) 937-5449 CATHAY SERVICE HOTLINE (800) 9 CATHAY / 922-8429 Service available 24 hours throughout California. Cathay Bank Web site www.cathaybank.com 68. EX-22.1 3 SUBSIDIARIES OF THE COMPANY 1 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(3) EXHIBITS 22.1 Subsidiaries of the Company CATHAY BANK CATHAY INVESTMENT COMPANY a California Corporation a California Corporation 100% owned 100% owned by Cathay Bank
Exhibit 22.1 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 56,873 855 67,000 0 216,158 350,336 356,187 861,531 15,379 1,622,462 1,449,121 23,419 14,045 0 0 0 89 135,788 1,622,462 74,015 35,548 2,415 111,978 50,372 50,874 61,104 3,600 41 30,928 33,351 33,351 0 0 20,108 2.26 2.26 4.42 16,886 2,373 4,874 5,310 13,529 2,139 389 15,379 15,379 0 0
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