-----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, N4wNdmooFchuHlgUTM7J364prqgu5cU8c+tiH7G28ILPWYcKYy/4jNQJlBCfKkcq 1xtpojx2nVZXG94VDjRd9Q== 0000950150-98-001796.txt : 19981118 0000950150-98-001796.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950150-98-001796 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATHAY BANCORP INC CENTRAL INDEX KEY: 0000861842 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 954274680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18630 FILM NUMBER: 98750719 BUSINESS ADDRESS: STREET 1: 777 N BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 BUSINESS PHONE: 2136254700 MAIL ADDRESS: STREET 1: 777 NORTH BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 10-Q 1 FORM 10-Q FOR THE QUARTER ENDING SEPT 30,1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- --------------------------- Commission file number 0-18630 ---------------------------------------------------------- CATHAY BANCORP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4274680 - -------------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 North Broadway, Los Angeles, California 90012 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 625-4700 ----------------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value, 8,975,129 shares outstanding as of September 30, 1998. 2 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ...................................... 3 Item 1. Condensed Consolidated Financial Statements ........ 4-6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 9-22 PART II - OTHER INFORMATION ......................................... 23 Item 1. Legal Proceedings .................................. 23 Item 2. Changes in Securities .............................. 23 Item 3. Defaults upon Senior Securities .................... 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information .................................. 23 Item 6. Exhibits and Reports on Form 8-K ................... 23 SIGNATURES .......................................................... 24
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 4 CATHAY BANCORP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
Sept. 30, 1998 Dec. 31, 1997 -------------- ------------- ASSETS Cash and due from banks $ 69,694 $ 57,728 Federal funds sold and securities purchased under agreements to resell 80,000 67,000 ---------- ---------- Cash and cash equivalents 149,694 124,728 Securities available-for-sale (with amortized costs of $182,169 in 1998 and $215,466 in 1997) 184,698 216,158 Securities held-to-maturity (with estimated fair values of $353,487 in 1998 and $356,187 in 1997) 342,744 350,336 Loans (net of allowance for loan losses of $15,555 in 1998 and $15,379 in 1997) 954,561 846,151 Other real estate owned, net 13,373 13,269 Investments in real estate, net 1,521 1,654 Premises and equipment, net 25,534 25,202 Customers' liability on acceptance 9,533 10,296 Accrued interest receivable 10,864 12,246 Goodwill 8,759 9,530 Other assets 10,421 12,892 ---------- ---------- Total assets $1,711,702 $1,622,462 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand deposits $ 165,160 $ 175,875 Interest bearing accounts NOW accounts 110,397 111,653 Money market deposits 95,579 94,708 Savings deposits 206,833 210,291 Time deposits under $100,000 323,921 307,504 Time deposits of $100,000 or more 595,262 549,090 ---------- ---------- Total deposits 1,497,152 1,449,121 Securities sold under agreements to repurchase 21,798 23,419 Advances from Federal Home Loan Bank 20,000 -- Acceptances outstanding 9,533 10,296 Other liabilities 12,030 3,749 ---------- ---------- Total liabilities 1,560,513 1,486,585 Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized, 8,975,129 and 8,941,743 shares issued and outstanding in 1998 and 1997, respectively 90 89 Additional paid-in-capital 62,489 61,271 Accumulated other comprehensive income 1,465 370 Retained earnings 87,145 74,147 ---------- ---------- Total stockholders' equity 151,189 135,877 ---------- ---------- Total liabilities and stockholders' equity $1,711,702 $1,622,462 ========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 CATHAY BANCORP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (In thousands, except share data) (unaudited)
3rd Qtr 3rd Qtr YTD YTD Sept 1998 Sept 1997 Sept 1998 Sept 1997 ----------- ----------- ----------- ----------- INTEREST INCOME Interest and fees on loans $ 21,567 $ 18,795 $ 61,473 $ 54,689 Interest on securities available-for-sale 3,226 4,407 9,819 14,515 Interest on securities held-to-maturity 5,759 4,352 17,217 11,857 Interest on Federal funds sold and securities purchased under agreements to resell 1,257 889 2,696 1,698 Interest on deposits with banks 10 2 27 2 ----------- ----------- ----------- ----------- Total interest income 31,819 28,445 91,232 82,761 ----------- ----------- ----------- ----------- INTEREST EXPENSE Time deposits of $100,000 or more 7,792 6,945 22,770 19,441 Other deposits 6,004 5,983 17,761 17,774 Other borrowed funds 1,083 130 1,921 193 ----------- ----------- ----------- ----------- Total interest expense 14,879 13,058 42,452 37,408 ----------- ----------- ----------- ----------- Net interest income before provision for loan losses 16,940 15,387 48,780 45,353 Provision for loan losses 900 900 2,700 2,700 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 16,040 14,487 46,080 42,653 ----------- ----------- ----------- ----------- NON-INTEREST INCOME Securities gains 7 31 42 35 Letter of credit commissions 505 460 1,460 1,065 Service charges 958 907 3,010 2,571 Other operating income 602 497 1,901 1,244 ----------- ----------- ----------- ----------- Total non-interest income 2,072 1,895 6,413 4,915 ----------- ----------- ----------- ----------- NON-INTEREST EXPENSE Salaries and employee benefits 4,421 4,165 13,232 12,145 Occupancy expense 645 712 1,901 2,143 Computer and equipment expense 586 661 1,785 1,813 Professional services expense 907 746 2,564 2,324 FDIC and State assessments 97 97 297 248 Marketing expense 236 295 901 1,111 Other operating expense 788 577 2,546 2,998 ----------- ----------- ----------- ----------- Total non-interest expense 7,680 7,253 23,226 22,782 ----------- ----------- ----------- ----------- Income before income tax expense 10,432 9,129 29,267 24,786 Income tax expense 4,172 3,733 11,568 9,992 ----------- ----------- ----------- ----------- Net Income $ 6,260 $ 5,396 $ 17,699 $ 14,794 Other comprehensive income, net of tax: Unrealized holding gain arising during the period 626 979 1,082 1,249 Less: reclassification of the portion of realized loss (gain) included in net income previously included in other comprehensive income (2) 259 13 245 ----------- ----------- ----------- ----------- Total other comprehensive income, net of tax 624 1,238 1,095 1,494 ----------- ----------- ----------- ----------- Total comprehensive income $ 6,884 $ 6,634 $ 18,794 $ 16,288 =========== =========== =========== =========== NET INCOME PER COMMON SHARE Basic $ 0.70 $ 0.60 $ 1.98 $ 1.66 Diluted $ 0.70 $ 0.60 $ 1.98 $ 1.66 Basic average common shares outstanding 8,971,726 8,925,219 8,961,313 8,908,363 Diluted average common shares outstanding 8,972,378 8,925,219 8,961,450 8,925,219
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 CATHAY BANCORP, INC. & SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
(In thousands) ----------------------------- 1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 17,699 $ 14,794 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,700 2,700 Provision for losses on other real estate owned 175 410 Depreciation 924 995 Net gain on sales of other real estate owned (201) (190) Net gain on sales of investments in real estate -- (222) Net gain on sales of premises and equipment (2) -- Net gain on sales and calls of securities (42) (35) Amortization and accretion of investment security premiums, net 315 163 Amortization of goodwill 771 201 Increase in deferred loan fees, net 71 20 Decrease in accrued interest receivable, net 1,382 5,199 Decrease in other assets, net 2,471 759 Increase in other liabilities, net 8,281 1,939 --------- --------- Total adjustments 16,845 11,939 --------- --------- Net cash provided by operating activities 34,544 26,733 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale (554,676) (163,814) Proceeds from maturity and call of securities available-for-sale 594,980 203,340 Purchase of securities held-to-maturity (5,193) (13,113) Proceeds from maturity and call of securities held-to-maturity 11,345 41,187 Proceeds from sale of securities available-for-sale 6,429 92,700 Purchase of mortgage-backed securities available-for-sale (34,968) (12,444) Proceeds from repayments of mortgage-backed securities available-for-sale 21,858 4,664 Purchase of mortgage-backed securities held-to-maturity (51,304) (157,401) Repayments from mortgage-backed securities held-to-maturity 51,403 10,363 Proceeds from sale of loans -- 1,834 Purchase of loans (6,782) -- Net increase in loans (106,412) (65,627) Purchase of premises and equipment (1,256) (551) Proceeds from sale of equipment 2 -- Proceeds from sale of other real estate owned 1,935 4,113 Proceeds from sale of investment in real estate -- 2,292 Decrease in investments in real estate 133 182 --------- --------- Net cash used in investing activities (72,506) (52,275) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts, money market and savings deposits (14,558) 10,301 Net increase in time deposits 62,589 44,694 Net decrease in securities sold under agreements to repurchase (1,621) (6,899) Net increase in advances from Federal Home Loan Bank 20,000 -- Cash dividends (4,701) (4,001) Proceeds from shares issued to Dividend Reinvestment Plan 1,219 1,072 --------- --------- Net cash provided by financing activities 62,928 45,167 --------- --------- Increase in cash and cash equivalents 24,966 19,625 Cash and cash equivalents, beginning of the period 124,728 75,194 --------- --------- Cash and cash equivalents, end of the period $ 149,694 $ 94,819 --------- --------- Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 42,513 $ 36,805 Income taxes $ 11,797 $ 9,746 Non-cash investing activities: Transfers to securities available-for-sale within 90 days of maturity $ 1,340 $ 630 Net change in unrealized holding gain on securities available-for-sale, net of tax $ 1,095 $ 1,494 Transfers to other real estate owned $ 3,449 $ 2,383 --------- --------- Loans to facilitate the sale of other real estate owned $ 1,436 $ 6,841 --------- ---------
See accompanying notes to unaudited condensed consolidated financial statements. 6 7 CATHAY BANCORP, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1997. 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. SFAS No. 133 amends FASB Statement No. 52, "Foreign Currency Translation," to permit special accounting for a hedge of a foreign currency forecasted transaction with a derivative. It supersedes FASB Statements No. 80, "Accounting for Futures Contracts," No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," and No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." It amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments, to include in Statement 107 the disclosure provisions about concentrations of credit risk from Statement 105. This Statement also nullifies or modifies the consensuses reached in a number of issues addressed by the Emerging Issues Task Force. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management has not yet determined the effect of implementing this Statement. In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. This Statement shall be effective for the first fiscal quarter beginning after December 15, 1998. Management does not believe the impact of adopting this Statement will be material to the Company's financial condition or results of operations. 7 8 3. STATEMENT OF COMPREHENSIVE INCOME Effective with the quarter ended March 31, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed in equal prominence with the other financial statements and to disclose as a part of stockholders' equity "accumulated other comprehensive income". Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income generally includes net income, foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on investments in certain debt and equity securities (i.e., securities available-for-sale). 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is given based on the assumption that the reader has access to the 1997 Annual Report of Cathay Bancorp, Inc. ("Bancorp") and its subsidiary Cathay Bank ("the Bank"), together ("the Company"). RESULTS OF OPERATIONS For the third quarter of 1998, the Company reported net income of $6.3 million or $0.70 per basic and diluted common share, compared to $5.4 million or $0.60 per basic and diluted common share for the third quarter of 1997. This represents an increase of $864,000 or 16.01%. Income before income tax expense amounted to $10.4 million for the third quarter of 1998, an increase of $1.3 million or 14.27% over the $9.1 million for the same quarter a year ago. The increase was attributed primarily to a $1.6 million increase in net interest income before provision for loan losses due to continued loan growth. The annualized return on average assets ("ROA") and return on average stockholders' equity ("ROE") were 1.47% and 16.74%, respectively, for the third quarter of 1998, compared to 1.38% and 16.60%, respectively, for the third quarter of 1997. For the nine months ended September 30, 1998, the Company reported net income of $17.7 million or $1.98 per basic and diluted common share, compared to $14.8 million or $1.66 per basic and diluted common share for the same period a year ago. This represents an increase of $2.9 million or 19.64%. Income before income tax expense amounted to $29.3 million and $24.8 million, respectively, for the nine months ended September 30, 1998 and 1997. The $4.5 million or 18.08% increase resulted primarily from a $3.4 million increase in net interest income before provision for loan losses and secondarily from a $1.5 million increase in non-interest income offset by a slight increase in non-interest expense. The annualized ROA and ROE for the first nine months of 1998 were 1.42% and 16.49%, respectively, compared to 1.29% and 15.81% for the same period in 1997. NET INTEREST INCOME Net interest income before provision for loan losses totaled $48.8 million for the first nine months of 1998, compared to $45.4 million for the same period of 1997, representing an increase of $3.4 million or 7.56%. On a taxable equivalent basis, net interest income amounted to $49.7 million for the nine months ended September 30, 1998, compared to $46.2 million for the same period a year ago, an increase of $3.5 million or 7.65%. The increase in net interest income before provision for loan losses was substantially attributable to a $139.4 million growth in the average interest-earning assets, primarily in loans. Average net loans amounted to $889.1 million or 57.99% of average interest-earning assets in the first nine months of 1998, compared to $780.8 million or 56.02% of average interest-earning assets for the same period a year ago. The increase in volume contributed an additional $6.8 million to net interest income, which was partially offset by a 12 basis point decrease in the average yield on loans despite an increase of eight basis points in the Bank's average reference rate in the first nine months of 1998 over 1997. The competition in the Bank's marketplace played an important role in the decrease in the average loan yield. The taxable equivalent average yield on interest-earning assets remained approximately at the same level at 8.04% and 8.02% for the first nine months of 1998 and 1997, respectively, while cost of funds increased 20 basis points from 4.01% in 1997 to 4.21% in 1998 largely due to higher average rates on time deposits from 5.06% to 5.15% coupled with higher average rates on securities sold under agreement to repurchase from 5.37% to 5.52%. Consequently, net interest margin, defined as taxable equivalent net interest income to average earning assets, declined nine basis points from 4.43% to 4.34% between the first nine months of 1997 and 1998. For the third quarter of 1998, net interest income before provision for loan losses totaled $16.9 million, compared to $15.4 million for the same quarter of 1997. This represents an increase of $1.5 million or 10.09%. On a taxable equivalent basis, net interest income increased $1.6 million or 10.19% to $17.3 million for the third quarter of 1998, compared to $15.7 million for the same quarter of 1997. 9 10 An increase of $163.1 million in average interest-earning assets, $126.9 million of which came from average net loans, essentially accounted for the increase in the quarterly net interest income. The taxable equivalent average yield on interest-earning assets increased three basis points in the third quarter of 1998 to 8.00% compared to 7.97% for the same quarter a year ago. Meanwhile, the cost of funds advanced 13 basis points from 4.10% a year ago to 4.23% for the third quarter of 1998 causing net interest margin to decrease five basis points from 4.35% to 4.30% between the third quarter of 1997 and 1998. NON-INTEREST INCOME For the first nine months of 1998, non-interest income amounted to $6.4 million, compared to $4.9 million for the same period a year ago. This represents an increase of $1.5 million or 30.48%. The increase in 1998 non-interest income resulted from: 1) an increase in service charges of $439,000 due to fee increases; 2) an increase in letter of credit commissions of $395,000 due to increased transaction volume; 3) net income of $241,000 from other real estate owned ("OREO"); 4) an increase of $172,000 of rebate income earned in outsourcing the issuing and processing of cashier's checks and money orders; and 5) higher fees of $120,000 related to loan documentation and other charges. On a quarterly basis, non-interest income totaled $2.1 million and $1.9 million for the third quarter of 1998 and 1997, respectively. The slight increase of $177,000 or 9.34% was attributable significantly to the same factors discussed above. NON-INTEREST EXPENSE Non-interest expense totaled $23.2 million for the first nine months of 1998, representing a slight increase of $444,000 or 1.95% over the $22.8 million for the same period of 1997. The only notable increases in the year-to-date non-interest expense were salaries and employee benefits ("salary expense") and professional services expense. The $1.1 million or 8.95% increase in salary expense from $12.1 million to $13.2 million was primarily due to added personnel to support the Berkeley/Richmond Branch opened in April 1998 as well as new officers for northern California branches and secondarily due to annual salary increases. As for the professional services expense, the increase of $240,000 or 10.33% was essentially from legal fees related to litigation which arose during the normal course of business. The Company had a net income of $241,000 from OREO which was included in other operating income. The efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, improved from 45.32% for the nine months ended September 30, 1997 to 42.08% for the same period in 1998. Quarterly, non-interest expense totaled $7.7 million and $7.3 million for the third quarter of 1998 and 1997, respectively. In addition to increases in salary expense and professional services expense which were due to approximately the same reasons as explained above, other operating expense for the third quarter of 1998 increased as well compared to the same quarter a year ago. This was mainly attributable to a $222,000 gain on sale of a real estate investment property in the third quarter of 1997. The efficiency ratio for the third quarter of 1998 was further reduced to 40.40% from 41.97% a year ago. FINANCIAL CONDITION The Company grew moderately during the first nine months of 1998 and the third quarter had the highest growth rate. As of September 30, 1998, total assets increased $89.2 million or 5.50% to $1,711.7 million; loans, net of deferred loan fees, grew $108.6 million or 12.60% to $970.1 million; deposits increased $48.0 million or 3.31% to $1,497.2 million; and stockholders' equity increased $15.3 million or 11.27% to $151.2 million, compared to December 31, 1997. The Company obtained an advance of $20.0 million from Federal Home Loan Bank in the third quarter of 1998 to fund loan program and investments due to its lower interest rate. 10 11 EARNING ASSET MIX Total earning assets amounted to $1,578.0 million at September 30, 1998, compared with $1,495.9 million at year-end 1997, representing an increase of $82.2 million or 5.49%. The increase came primarily from an increase of $108.6 million in loans, net of deferred loan fees, while investment securities (including available-for-sale and held-to-maturity) decreased $39.1 million. Average interest-earning assets amounted to $1,608.2 million for the third quarter of 1998 compared to $1,444.2 million for the same period in 1997, an increase of $164.0 million or 11.36%. The year-to-date average interest-earning assets for 1998 totaled $1,549.0 million versus $1,407.9 million for the same period a year ago, representing an increase of $141.1 million or 10.02%. As a result of continued loan demand in 1998, average loans continued to increase as a percentage of total interest-earning assets from 56.47% for the nine months ended September 30, 1997 to 58.43% for the same period in 1998, while investment securities (including available-for-sale and held-to-maturity) decreased from 40.68% to 37.54% at the same time. The change in the earning asset mix from securities to loans is generally favorable to net interest income. The tables below depict the changes in the earning asset mix as of the dates and for the periods indicated:
(Dollars in thousands) TYPES OF EARNING ASSETS: As of 9/30/98 As of 12/31/97 ------------------------------ ------------------------------ Amount Percent Amount Percent ---------- ---------- ---------- ---------- Federal funds sold and securities purchased under agreements to resell $ 80,000 5.07% $ 67,000 4.48% Securities available-for-sale 184,698 11.70 216,158 14.45 Securities held-to-maturity 342,744 21.72 350,336 23.42 Loans (net of deferred loan fees) 970,116 61.48 861,530 57.59 Deposits with banks 489 0.03 855 0.06 ---------- ---------- ---------- ---------- Total earning assets $1,578,047 100.00% $1,495,879 100.00% ========== ========== ========== ==========
AVERAGE EARNING ASSETS: 3rd Qtr, 1998 3rd Qtr, 1997 ------------------------------ ------------------------------ Amount Percent Amount Percent ---------- ---------- ---------- ---------- Federal funds sold and securities purchased under agreement to resell $ 85,685 5.33% $ 60,787 4.21% Securities available-for-sale 218,235 13.57 274,814 19.03 Securities held-to-maturity 360,618 22.42 293,710 20.34 Loans (net of deferred loan fees) 942,656 58.62 814,916 56.42 Deposits with banks 962 0.06 -0- 0.00 ---------- ---------- ---------- ---------- Total earning assets $1,608,156 100.00% $1,444,227 100.00% ========== ========== ========== ==========
AVERAGE EARNING ASSETS: YTD 9/30/98 YTD 9/30/97 ------------------------------ ------------------------------ Amount Percent Amount Percent ---------- ---------- ---------- ---------- Federal funds sold and securities purchased under agreement to resell $ 61,704 3.98% $ 40,183 2.85% Securities available-for-sale 221,469 14.30 317,659 22.56 Securities held-to-maturity 360,012 23.24 255,031 18.12 Loans (net of deferred loan fees) 904,996 58.43 795,000 56.47 Deposits with banks 819 0.05 -0- 0.00 ---------- ---------- ---------- ---------- Total earning assets $1,549,000 100.00% $1,407,873 100.00% ========== ========== ========== ==========
SECURITIES As of September 30, 1998 securities available-for-sale and held-to-maturity decreased $31.5 million and $7.6 million to $184.7 million and $342.7 million, respectively, compared to $216.2 million and $350.3 million, respectively at year-end 1997. Combined together, investment securities at September 11 12 30, 1998 represented a decrease of $39.1 million or 6.89% from the year-end levels. This was primarily attributable to increasing loan demand that the Company experienced during the first nine months of 1998, particularly in the third quarter. The following tables summarize the composition and maturity distribution of the investment portfolio as of the dates indicated:
(Dollars in thousands) SECURITIES AVAILABLE-FOR-SALE: As of 9/30/98 --------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized Losses Fair Value -------- ---------------- ----------------- ---------- U.S. Treasury securities $ 3,007 $ 17 $ -0- $ 3,024 U.S. government agencies 72,741 781 -0- 73,522 State and municipal securities 8,950 356 -0- 9,306 Mortgage-backed securities 35,396 950 2 36,344 Assets-backed securities 10,166 40 -0- 10,206 Federal Home Loan Bank stock 5,904 -0- -0- 5,904 Commercial paper 10,497 -0- -0- 10,497 Corporate bonds 35,508 387 -0- 35,895 -------- -------- -------- -------- Total $182,169 $ 2,531 $ 2 $184,698 ======== ======== ======== ========
As of 12/31/97 ---------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized Losses Fair Value -------- ---------------- ----------------- ---------- U.S. Treasury securities $ 38,020 $ 11 $ 60 $ 37,971 U.S. government agencies 113,255 97 46 113,306 Mortgage-backed securities 28,689 685 6 29,368 Assets-backed securities 19,878 11 -0- 19,889 Federal Home Loan Bank stock 5,653 -0- -0- 5,653 Commercial paper 9,971 -0- -0- 9,971 -------- -------- -------- -------- Total $215,466 $ 804 $ 112 $216,158 ======== ======== ======== ========
(Dollars in thousands) SECURITIES HELD-TO-MATURITY: As of 9/30/98 --------------------------------------------------------------- Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value -------- ---------------- ----------------- ---------- U.S. Treasury securities $ 26,033 $ 782 $-0- $ 26,815 U.S. government agencies 29,355 836 -0- 30,191 State and municipal securities 47,914 3,115 2 51,027 Mortgage-backed securities 230,512 5,622 31 236,103 Corporate bonds 8,930 421 -0- 9,351 -------- -------- -------- -------- Total $342,744 $ 10,776 $ 33 $353,487 ======== ======== ======== ========
As of 12/31/97 --------------------------------------------------------------- Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value -------- ---------------- ----------------- ---------- U.S. Treasury securities $ 26,054 $ 354 $-0- $ 26,408 U.S. government agencies 39,374 291 -0- 39,665 State and municipal securities 44,497 2,264 -0- 46,761 Mortgage-backed securities 230,573 2,762 35 233,300 Assets-backed securities 922 -0- 6 916 Corporate bonds 8,916 221 -0- 9,137 --------- --------- --------- --------- Total $ 350,336 $ 5,892 $ 41 $ 356,187 ========= ========= ========= =========
12 13
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (Dollars in thousands) As of September 30, 1998 Maturity Schedule ---------------------------------------------------------------------------------------- After 1 But After 5 But SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10 Yrs Over 10 Yrs Total ------------- ------------- -------------- -------------- ------------- U.S. Treasury securities $ 3,024 $-0- $-0- $-0- $ 3,024 U.S. government agencies 32,638 40,884 -0- -0- 73,522 State and municipal securities 6,976 -0- 2,330 -0- 9,306 Mortgage-backed securities* -0- 5,017 7,189 24,138 36,344 Assets-backed securities* -0- 10,206 -0- -0- 10,206 Federal Home Loan Bank stock 5,904 -0- -0- -0- 5,904 Commercial paper 10,497 -0- -0- -0- 10,497 Corporate bonds -0- 30,972 4,923 -0- 35,895 ------------- ------------- -------------- -------------- ------------- Total $ 59,039 $ 87,079 $ 14,442 $ 24,138 $ 184,698 ============= ============= ============== ============== ============= SECURITIES HELD-TO-MATURITY: U.S. Treasury securities $ -0- $ 26,033 $ -0- $ -0- $ 26,033 U.S. government agencies -0- 29,355 -0- -0- 29,355 State and municipal securities 427 9,934 22,073 15,480 47,914 Mortgage-backed securities* -0- 13,438 69,355 147,719 230,512 Corporate bonds -0- 8,930 -0- -0- 8,930 ------------- ------------- ------------- ------------- ------------- Total $ 427 $ 87,690 $ 91,428 $ 163,199 $ 342,744 ============= ============= ============= ============= =============
* The mortgage-backed securities and assets-backed securities reflect stated maturities and do not consider anticipated prepayments. LOANS The Bank experienced high loan demand in the first nine months of 1998. Total gross loans increased $108.7 million or 12.56% to $974.0 million as of September 30, 1998, from $865.3 million at year-end 1997. Excluding the $18.1 million investments in banker's acceptances which were included in commercial loans at year-end 1997, total commercial loans increased $61.8 million or 19.30% to $382.0 million at September 30, 1998. Real estate mortgage loans consisted primarily of commercial real estate loans and residential real estate loans, which increased $28.6 million or 9.43% and $23.8 million or 17.41%, respectively, to $332.3 million and $160.8 million, respectively, during the first three quarters of 1998. The increase in residential real estate loans was highly attributable to prevailing low interest rates which increased new home purchases and refinancing activities. Construction loans showed a noticeable increase as well from $41.7 million at year-end 1997 to $49.0 million as of September 30, 1998. The following table sets forth the classification of loans by type and mix as of the dates indicated:
(Dollars in thousands) TYPES OF LOANS: As of 9/30/98 As of 12/31/97 --------------------------- --------------------------- Amount Percent Amount Percent ---------- ---------- ---------- ---------- Commercial loans $ 381,976 40.02% $ 338,285 39.98% Real estate mortgage loans 513,488 53.79 458,417 54.18 Real estate construction loans 49,027 5.14 41,736 4.93 Installment loans 28,961 3.03 26,611 3.14 Other loans 522 0.05 267 0.03 ---------- ---------- Total loans - Gross 973,974 865,316 Allowance for loan losses (15,555) (1.63) (15,379) (1.82) Unamortized deferred loan fees (3,858) (0.40) (3,786) (0.44) ---------- ---------- ---------- ---------- Total loans - Net $ 954,561 100.00% $ 846,151 100.00% ========== ========== ========== ==========
13 14 On an average basis, total gross loans net of deferred loan fees amounted to $905.0 million for the nine months ended September 30, 1998, compared to $795.0 million for the same period a year ago, an increase of $110.0 million or 13.84%. For the third quarter, average gross loans net of deferred loan fees totaled $942.7 million in 1998, compared to $814.9 million in 1997, an increase of $127.8 million or 15.68%. RISK ELEMENTS OF THE LOAN PORTFOLIO NON-PERFORMING ASSETS Non-performing assets, which include loans past due 90 days or more and still accruing interest ("loans past due 90 days"), non-accrual loans, and OREO, totaled $33.9 million or 3.43% of total loans plus OREO as of September 30, 1998, compared to $32.5 million or 3.70% of total loans plus OREO at year-end 1997. The slight increase of $1.4 million or 4.18% was primarily from a $4.8 million increase in loans past due 90 days offset by a $3.6 million decrease in non-accrual loans. However, the loans representing the increase in loans past due 90 days were secured by certificates of deposits and the interest on those loans have been brought to less than 90 days past due as of November 12, 1998. The non-performing loan coverage ratio, defined as the allowance for loan losses to non-performing loans, decreased slightly from 79.85% at year-end 1997 to 75.82% as of September 30, 1998, primarily due to a $1.3 million increase in non-performing loans. The following table presents the breakdown of non-performing assets by categories as of the dates indicated:
(Dollars in thousands) As of As of As of As of 9/30/98 6/30/98 3/31/98 12/31/97 ------- ------- ------- ------- Loans past due 90 days or more and still accruing interest $ 7,189 $ 2,242 $ 1,463 $ 2,373 Non-accrual loans 13,327 15,740 16,971 16,886 ------- ------- ------- ------- Total non-performing loans 20,516 17,982 18,434 19,259 Real estate acquired in foreclosure 13,373 12,889 13,481 13,269 ------- ------- ------- ------- Total non-performing assets $33,889 $30,871 $31,915 $32,528 ======= ======= ======= ======= Accruing troubled debt restructurings 4,658 4,369 4,379 4,874 Non-performing assets as a percentage of period-end total loans plus OREO 3.43% 3.33% 3.50% 3.70%
The non-accrual loans of $13.3 million as of September 30, 1998 consisted mainly of $7.5 million in commercial real estate loans and $4.8 million in commercial loans. The following tables present the type of collaterals securing the loans and the type of businesses the borrowers engaged in under commercial real estate and commercial non-accrual loan categories as of the dates indicated:
(Dollars in thousands) 9/30/98 12/31/97 ------------------------ ------------------------- Non-accrual Loan Balance ----------------------------------------------------- Commercial Commercial TYPES OF COLLATERALS: Real Estate Commercial Real Estate Commercial ----------- ---------- ----------- ---------- Single/multi-family residence $ 353 $ 1,055 $ 593 $ 311 Commercial real estate 5,603 3,063 8,471 5,095 Motel 1,598 30 1,350 -0- UCC -0- 564 -0- -0- Others -0- 50 214 110 ------- ------- ------- ------- Total $ 7,554 $ 4,762 $10,628 $ 5,516 ======= ======= ======= =======
14 15
(Dollars in thousands) 9/30/98 12/31/97 ------------------------ ------------------------- Non-accrual Loan Balance ----------------------------------------------------- Commercial Commercial TYPES OF BUSINESSES: Real Estate Commercial Real Estate Commercial ----------- ---------- ----------- ---------- Real estate development $ 283 $ 198 $ -0- $ 134 Real estate management 4,008 36 6,303 36 Wholesale/Retail/Trading 429 2,074 430 2,994 Food/Restaurant -0- 1,075 -0- 1,190 Import -0- 643 752 4 Motel 1,315 -0- 1,350 -0- Investments 386 -0- 1,194 -0- Industrial -0- 320 214 263 Clothing 353 153 385 441 Others 780 263 -0- 454 ------- ------- ------- ------- Total $ 7,554 $ 4,762 $10,628 $ 5,516 ======= ======= ======= =======
As shown in the above tables under the commercial real estate loan category as of September 30, 1998, the $5.6 million balance in loans secured by commercial real estate represents four credits, all of which were secured by first trust deeds on commercial buildings. The $1.6 million balance in loans secured by motels represents two credits secured by first trust deeds on the respective motels located in California. Under the commercial loan category as of September 30, 1998, the $3.1 million balance in loans secured by commercial real estate consisted of 12 credits. The collateral on these credits include primarily first trust deeds and secondarily second and third trust deeds on commercial buildings and warehouses. Troubled debt restructurings were $4.7 million as of September 30, 1998, slightly less than the $4.9 million at year-end 1997. All of these restructured loans were current under their revised terms as of September 30, 1998. There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of September 30, 1998. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $15.6 million or 1.60% of total loans as of September 30, 1998, compared to $15.4 million or 1.78% of total loans at year-end 1997. The following table presents information relating to the allowance for loan losses for the periods indicated:
(Dollars in thousands) YTD YTD ALLOWANCE FOR LOAN LOSSES: 9/30/98 12/31/97 --------- --------- Balance at beginning of period $ 15,379 $ 13,529 Provision for loan losses 2,700 3,600 Loans charged-off (2,904) (2,139) Recoveries of charged-off loans 380 389 --------- --------- Balance at end of period $ 15,555 $ 15,379 ========= ========= Average loans outstanding during the period $ 889,065 $ 792,176 Ratio of net charge-offs to average loans outstanding during the period (annualized) 0.38% 0.22% Provision for loan losses to average loans outstanding during the period (annualized) 0.41% 0.45% Allowance to non-performing loans at period-end 75.82% 79.85% Allowance to total loans at period-end 1.60% 1.78%
15 16 In determing the allowance for loan losses, management continues to assess the risks inherent in the loan portfolio, the possible impact of known and potential problem loans, and other factors such as collateral value, portfolio composition, loan concentration, financial strength of borrower, and trends in local economic conditions. The Bank's allowance for loan losses consists of a specific allowance and a general allowance. The specific allowance is further broken down to provide for impaired loans and the remaining internally classified loans. Management allocates a specific allowance to those remaining internally classified loans which do not require impairment allowance, based on the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral and general economic conditions. The general allowance is determined by an assessment of the overall quality of the unclassified portion of the loan portfolio as a whole, and by loan type. Management maintained the percentage assigned to the general allowance based on charge-off history and management's knowledge of the quality of the portfolio. The following table presents a breakdown of impaired loans and the impairment allowance related to impaired loans:
(Dollars in thousands) As of 9/30/98 As of 12/31/97 ----------------------- ------------------------ SFAS No. 114 SFAS No. 114 Recorded Impairment Recorded Impairment IMPAIRED LOANS WITH IMPAIRMENT ALLOWANCE: Investment Allowance Investment Allowance ---------- --------- ---------- --------- Commercial $ 8,273 $ 1,152 $ 7,784 $ 1,499 Commercial real estate 13,011 2,051 14,027 2,396 Other 59 59 95 95 ------- ------- ------- ------- Total impaired loans with impairment allowance $21,343 $ 3,262 $21,906 $ 3,990 ======= ======= ======= =======
Based on the Company's evaluation process and the methodology to determine the level of the allowance for loan losses, management believes the allowance level as of September 30, 1998 to be adequate to absorb the estimated known and inherent risks identified through its analysis. OTHER REAL ESTATE OWNED The Company's OREO properties, net of valuation allowance, were carried at $13.4 million as of September 30, 1998, approximately at the same level as those carried at $13.3 million at year-end 1997. During the first nine months of 1998, the Company acquired nine properties totaling $3.4 million and disposed of nine properties totaling $3.8 million with a net gain of $201,000. Subsequent to September 30, 1998, five more properties totaling $2.3 million have been disposed of. The Bank has 23 OREO properties at September 30, 1998 which include commercial buildings, warehouses, land, single family residences, apartments and condominiums, all of which are located in Southern California. The Bank continues to maintain a valuation allowance for the OREO properties in order to record estimated fair value of the properties. Periodic evaluation is performed on each property and corresponding adjustment is made to the valuation allowance. Any decline in value is recognized as non-interest expense under the provision for OREO losses in the current period and any balance in the valuation allowance is reversed when the respective property is sold. During the first nine months of 1998, management provided approximately $175,000 to the provision for OREO losses based on new listing prices or new appraisals received bringing the valuation allowance to $632,000 as of September 30, 1998. For the nine months ended September 30, 1998, the Bank recognized net income from its OREO properties totaling $241,000 which is included in the other operating income in the accompanying condensed consolidated financial statements. DEPOSITS Total deposits increased $48.1 million or 3.31% from $1,449.1 million at year-end 1997 to $1,497.2 million at September 30, 1998. Approximately 96% of the increase was from time deposits over 16 17 $100,000 ("Jumbo CD's"). Consequently, the ratio of core deposits (defined as all deposits excluding Jumbo CD's and brokered deposits) to total deposits continued to decline from 62.11% at year-end 1997 to 60.24% at September 30, 1998. There were no brokered deposits as of September 30, 1998. Average total deposits were up $87.6 million or 6.26% from $1,400.3 million for the third quarter of 1997 to $1,487.9 million for the same quarter of 1998. The average deposits grew $83.9 million or 6.06% from $1,383.6 million for the nine months ended September 30, 1997 to $1,467.4 million for the same period in 1998. Management continues to monitor the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the patrons the Bank is servicing. Although the Bank's Jumbo CD portfolio kept growing, management considers the Bank's Jumbo CD's generally less volatile since 1) a majority of the Bank's Jumbo CD's have stayed with the Bank for more than two years; 2) the Jumbo CD portfolio continued to be diversified with 3,510 individual accounts averaging approximately $165,000 per account owned by 2,516 individual depositors as of July 23, 1998; 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. To discourage the growth in Jumbo CD's, management has continued to make efforts in the following areas: 1) to offer non-competitive interest rates paid on Jumbo CD's; 2) to develop new transaction-based products and to promote such products to attract depositors; and 3) to diversify the customer base by branch expansion and/or acquisition as opportunities arise. The following table illustrates the deposit mix as of the dates and for the periods indicated:
(Dollars in thousands) As of 9/30/98 As of 12/31/97 --------------------------- --------------------------- TYPES OF DEPOSITS: Amount Percent Amount Percent ---------- ---------- ---------- ---------- Demand $ 165,160 11.03% $ 175,875 12.14% NOW accounts 110,397 7.37 111,653 7.70 Money market accounts 95,579 6.38 94,708 6.54 Savings deposits 206,833 13.82 210,291 14.51 Time deposits under $100,000 323,921 21.64 307,504 21.22 Time deposits of $100,000 or more 595,262 39.76 549,090 37.89 ---------- ---------- ---------- ---------- Total deposits $1,497,152 100.00% $1,449,121 100.00% ========== ========== ========== ==========
3rd Qtr, 1998 3rd Qtr, 1997 --------------------------- --------------------------- AVERAGE DEPOSITS: Amount Percent Amount Percent ---------- ---------- ---------- ---------- Demand $ 168,997 11.36% $ 145,543 10.39% NOW accounts 111,879 7.52 114,065 8.15 Money market accounts 96,754 6.50 100,836 7.20 Savings deposits 206,018 13.85 213,925 15.28 Time deposits under $100,000 323,340 21.73 307,139 21.93 Time deposits of $100,000 or more 580,996 39.05 518,838 37.05 ---------- ---------- ---------- ---------- Total deposits $1,487,984 100.00% $1,400,346 100.00% ========== ========== ========== ==========
YTD 9/30/98 YTD 9/30/97 --------------------------- --------------------------- AVERAGE DEPOSITS: Amount Percent Amount Percent ---------- ---------- ---------- ---------- Demand $ 164,362 11.20% $ 140,194 10.13% NOW accounts 112,017 7.63 114,721 8.29 Money market accounts 95,762 6.53 98,077 7.09 Savings deposits 205,421 14.00 218,258 15.78 Time deposits under $100,000 320,003 21.81 307,497 22.23 Time deposits of $100,000 or more 569,855 38.83 504,807 36.49 ---------- ---------- ---------- ---------- Total deposits $1,467,420 100.00% $1,383,554 100.00% ========== ========== ========== ==========
17 18 CAPITAL RESOURCES On February 19, 1998 the Company's Board of Directors adopted an "Equity Incentive Plan" ("the Plan") which was approved by stockholders at the April 20, 1998 Annual Meeting of Stockholders. The Plan will expire on February 18, 2008. On September 17, 1998, the Company granted 45,000 shares of common stock options with an exercise price of $33.00 per share to ten eligible senior officers and nine outside directors. Stockholders' equity amounted to $151.2 million or 8.83% of total assets as of September 30, 1998, compared to $135.9 million or 8.37% of total assets at year-end 1997. The increase of $15.3 million or 11.3% in stockholders' equity was primarily due to an addition of $17.7 million from year-to-date net income, $1.2 million from issuance of additional common shares through Dividend Reinvestment Plan and an increase of $1.1 million in the net unrealized holding gains on securities available-for-sale, net of tax, which were partially offset by dividends paid in the amount of $4.7 million. The Company declared a cash dividend of $0.175 per common share in January, April, July and October of 1998, respectively, on 8,941,743, 8,953,307, 8,965,315 and 8,975,129 shares outstanding, respectively. Total cash dividends paid in 1998, including the $1.6 million paid in October 1998, amounted to $6.3 million. Management is committed to retain the Company's capital at a level sufficient to support future growth, to protect depositors, to absorb any unanticipated losses and to comply with various regulatory requirements. The following tables present the Company and the Bank's capital and leverage ratios as of September 30, 1998 and December 31, 1997. Despite slight decreases in Tier 1 and Total capital ratios comparing September 30, 1998 to December 31, 1997, the Bank's regulatory capital continued to be well above the regulatory minimum requirements. In addition, the capital ratios of the Bank place it in the "well capitalized" category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio equal to or greater than 5.0%.
(Dollars in thousands) COMPANY -------------------------------------------------------------------- As of 9/30/1998 As of 12/31/1997 ------------------------------ ------------------------------ Balance Percent Balance Percent ------------- ------------- ------------- ------------- Tier 1 capital (to risk-weighted assets) $ 140,965(1) 11.37% $ 125,977(2) 11.73% Tier 1 capital minimum requirement 49,581 4.00 42,957 4.00 ------------- ------------- ------------- ------------- Excess $ 91,384 7.37% $ 83,020 7.73% ============= ============= ============= ============= Total capital (to risk-weighted assets) $ 156,460(1) 12.62% $ 139,425(2) 12.98% Total capital minimum requirement 99,162 8.00 85,913 8.00 ------------- ------------- ------------- ------------- Excess $ 57,298 4.62% $ 53,512 4.98% ============= ============= ============= ============= Risk-weighted assets $ 1,239,521 $ 1,073,918 Tier 1 capital (to average assets) - Leverage ratio $ 140,965(1) 8.41% $ 125,977(2) 7.94% Minimum leverage requirement 67,017 4.00 63,484 4.00 ------------- ------------- ------------- ------------- Excess $ 73,948 4.41% $ 62,493 3.94% ============= ============= ============= ============= Total average assets $ 1,675,421 $ 1,587,099
18 19
BANK -------------------------------------------------------------------- As of 9/30/1998 As of 12/31/1997 ------------------------------ ------------------------------ Balance Percent Balance Percent ------------- ------------- ------------- ------------- Tier 1 capital (to risk-weighted assets) $ 136,323(1) 11.00% $ 122,431(2) 11.40% Tier 1 capital minimum requirement 49,581 4.00 42,957 4.00 ------------- ------------- ------------- ------------- Excess $ 86,742 7.00% $ 79,474 7.40% ============= ============= ============= ============= Total capital (to risk-weighted assets) $ 151,818(1) 12.25% $ 135,879(2) 12.65% Total capital minimum requirement 99,161 8.00 85,913 8.00 ------------- ------------- ------------- ------------- Excess $ 52,656 4.25% $ 49,966 4.65% ============= ============= ============= ============= Risk-weighted assets $ 1,239,518 $ 1,073,915 Tier 1 capital (to average assets) - Leverage ratio $ 136,323(1) 8.14% $ 122,431(2) 7.71% Minimum leverage requirement 67,017 4.00 63,484 4.00 ------------- ------------- ------------- ------------- Excess $ 69,306 4.14% $ 58,947 3.71% ============= ============= ============= ============= Total average assets $ 1,675,416 $ 1,587,096
(1) Excluding the unrealized holding gains/losses on securities available-for-sale of $1,465,000, and goodwill of $8,759,000. (2) Excluding the unrealized holding gains on securities available-for-sale of $370,000, and goodwill of $9,530,000. ASSET/LIABILITY MANAGEMENT AND MARKET RISK The Company manages its assets and liabilities to maximize its net interest income through growth opportunities and competitive pricing, while striving to minimize its market risk and to maintain adequate liquidity to meet the maturing financial obligations and customer credit needs. The Company can but is not utilizing hedging instruments currently to maintain and/or augment its spread, as management believes that it is not cost-effective at this time. The Company manages various market risks in the ordinary course of business. The principal market risk to the Company is the interest rate risk inherent in its lending, investing and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities of the Company do not change at the same speed, to the same extent, or on the same basis. The composition of the Company's financial instruments that are sensitive to changes in interest rates have not significantly changed since December 31, 1997. The Company actively monitors and manages its interest rate risk through analyzing the repricing characteristics of its loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse effects of changes in interest rates on its earnings and ultimately the underlying market value of equity while structuring the Company's asset-liability composition to obtain the maximum spread. Management uses certain basic measurement tools in conjunction with established risk limits to regulate its interest rate exposure. Because of the limitation inherent in any individual risk management tool, the Company uses both an interest rate sensitivity analysis and a simulation model to measure and quantify the impact to the Company's profitability or the market value of its assets and liabilities. The interest rate sensitivity analysis measures the Company's exposure to differential changes in interest rates between assets and liabilities. This analysis details the expected maturity and repricing opportunities mismatch or sensitivity gap between interest-earning assets and interest-bearing liabilities over a specified timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates environment, net interest margin may be enhanced with a positive gap. Contrarily, a negative gap exists when rate 19 20 sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of increasing interest rates, net interest margin may be impaired. As of September 30, 1998, the Company was asset sensitive with a cumulative gap ratio of a positive 19.23% within three months, and liability sensitive with a cumulative gap ratio of a negative 11.10% within a 1-year period, compared to a positive 17.28% within three months, and a negative 10.49% within a 1-year period as of December 31, 1997. Since interest rate sensitivity analysis does not measure the timing differences in the repricing of asset and liabilities, the Company uses a simulation model to quantify the extent of the differences in the behavior of the lending and funding rates, so as to project future earnings or market values under alternative interest scenarios. The simulation measures the volatility of net interest income and market value of equity under immediate rising or falling interest rate scenarios in 25 to 100 basis point increments. The Company establishes a tolerance level in its policy to define and limit interest income volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the tolerance level is met or exceeded, the Company then seeks corrective action after considering, among other things, market conditions, customer reaction and the estimated impact on profitability. As of September 30, 1998, the Company's interest income volatility was within the Company's established tolerance level. The Company's principal sources of liquidity have been growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans and advances from Federal Home Loan Bank. The Company's liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) decreased slightly to 43.29% as of September 30, 1998, compared to 45.59% at year-end 1997. To supplement its liquidity needs, the Bank maintains a total credit line of $40 million for Federal funds with two correspondent banks, a repo line of $100 million with a brokerage firm and a total retail certificate of deposit line of approximately $175 million with two brokerage firms. The Bank is also a shareholder of Federal Home Loan Bank (FHLB) which enables the Bank to have access to lower cost FHLB financing when necessary. The Bank started to make advances from FHLB in the third quarter which amounted to $20 million as of September 30, 1998. Management believes all the above-mentioned sources will provide adequate liquidity to the Company to meet its daily operating needs. YEAR 2000 READINESS DISCLOSURES The Company's State of Readiness 1. Progress Schedule
- ------------------------ ---------------------- ----------------------- ----------------------- ---------------------- Phase I Phase II Phase III Phase IV Phase V Awareness Assessment Renovation Testing/Validation Implementation - ------------------------ ---------------------- ----------------------- ----------------------- ---------------------- Completed by 12/31/97 - Completed by 6/30/98 Underway Underway - the Underway on schedule - on schedule simultaneously with majority of the simultaneously with the Testing and testing on mission the Renovation, Validation phase and critical systems is Testing and is scheduled for scheduled for Validation phases and completion by 12/31/98 completion by 12/31/98 is scheduled for completion by 12/31/98 - ------------------------ ---------------------- ----------------------- ----------------------- ----------------------
20 21 2. Status of Efforts During the Assessment Phase, the Bank determined its mission critical systems for the Year 2000 ("Y2K") project. The FDIC defines "mission critical" systems to be "vital to the successful continuance of a core business activity". The mission critical systems are as follows: - IBM mainframe ES9221-191; - Kirchman D-3000; - Olivetti Aladdin teller system; - S.W.I.F.T. Pan America wire transfer; - FRB Fedline, Midanet, etc.; - Zions Bank's TPG Procomm Plus and Sendero investment tracking systems; and - CFI Deposit Pro and Laser Pro processing systems. Each of these systems has been evaluated for Y2K readiness. The necessary software upgrades have been ordered and installed as they have become available from the vendors. As the upgrades are completed, the systems will then be tested for Y2K readiness in the Bank working environment. In addition to the above information technology systems, the Company has also identified the material non information technology systems' Y2K compliant issues, such as utilities, telephone, elevator, fax and copier, etc. With the exception of utilities and telephone systems, all other material non information technology systems are Y2K compliant. The utilities and telephone companies have also assured the Company in writing that they will be Y2K ready in time. 3. Results of Testing The status of testing the mission critical systems is as follows: - IBM mainframe: Y2K update received in 1/98 and is installed; one additional upgrade is due to be installed by 12/31/98; testing to be done by IBM by 12/31/98 - Kirchman D-3000: Y2K certified by vendor; testing results received in 6/98; Bank officers reviewed test results in 8/98; interface testing scheduled for 12/31/98 - Olivetti Aladdin: Upgrade installed; preliminary tests completed, but more testing is required by 12/31/98 - S.W.I.F.T. wire: Y2K certified by vendor; upgraded PC operating system; now testing upgrade S.W.I.F.T. software per S.W.I.F.T. testing protocols to be completed by 12/31/98 - FRB Fedline, etc.: FRB upgrades installed; upgraded PC operating system; testing successful; will test subsequent upgrades as they are issued by FRB - Zions Bank programs: Y2K certified by vendor; Zions Bank is on schedule for its Y2K readiness by 12/31/98 - CFI processing systems: Laser Pro - Upgrade is Y2K certified; will upgrade PCs and install upgrade by 3/31/99; Deposit Pro - Y2K certified, no upgrade is needed 4. Results of Y2K Borrower Review Process The Borrower Review Process began in 6/98 to determine the Y2K readiness of the Bank's major borrowers. A Y2K questionnaire has been mailed to each borrower with total commitments of 21 22 $1,000,000 or more. A loan officer was scheduled to contact each borrower during the past quarter of 1998 and to complete a Y2K risk evaluation based upon the questionnaire and interview. The Costs to Address the Company's Y2K Issues The total cost of the Company's plan to address the Y2K issues is currently estimated to be $750,000 which includes allocated human resource expense, hardware replacements, software upgrades and testing, coordinating, training and other miscellaneous expenses. Any allocated human resource costs have been and will continue to be expensed as incurred. These estimated Y2K compliant costs are expected to be funded through the Company's operating cash flow. As of November 12, 1998, the costs incurred related to Y2K issues are estimated to be $150,000. However, there is no assurance that the actual costs to address the Y2K issues will not exceed the Company's current estimate. It is not expected that these costs will have a material adverse effect on the Company's financial condition or results of operations. The Risks of the Company's Year 2000 Issues The Company reviews the costs and the progress of its remediation program to ensure that unforeseen problems and uncertainties associated with Y2K consequences are resolved in a timely manner. Although the Company believes it has addressed all aspects of the Y2K issues, there can be no assurance that the systems of other companies on which the Company's systems rely or the systems of the Company's borrowers also will be timely converted. Any such failure to convert by another company may result in the Company's inability to operate properly and to produce accurate customer statements causing the loss of customers, therefore, may have an adverse effect on the Company's financial condition or results of operations. The Company's Contingency Plans A Year 2000 contingency team is working to provide detailed answers to internal contingency plan questionnaires. 98% of the backup procedures have been identified for the mission critical systems and processes. The backup procedures are scheduled for testing by year end. The plan is on schedule to be finalized in the first quarter of 1999. The final contingency plan will cover contingencies for December 31, 1999 and for January 1, 2000. 22 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company, including its wholly-owned subsidiary, Cathay Bank, has been a party to ordinary routine litigation incidental to various aspects of its operations. Management is not currently aware of any other litigation that will have material adverse impact on the Company's consolidated financial condition, or the results of operations. ITEM 2. CHANGES IN SECURITIES There have been no changes in securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no reportable events. ITEM 5. OTHER INFORMATION There were no reportable events. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit: 27 Financial Data Schedule 23 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Cathay Bancorp, Inc. (Registrant) Date: November 12, 1998 DUNSON K. CHENG ----------------- --------------- Dunson K. Cheng Chairman and President Date: November 12, 1998 ANTHONY M. TANG ----------------- --------------- Anthony M. Tang Chief Financial Officer 24 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 69,205 489 80,000 0 184,698 342,744 353,487 970,116 15,555 1,711,702 1,497,152 21,798 21,563 20,000 90 0 0 151,099 1,711,702 61,473 27,063 2,696 91,232 40,531 42,452 48,780 2,700 42 23,226 29,267 29,267 0 0 17,699 1.98 1.98 4.34 13,327 7,189 4,658 7,245 15,379 2,904 380 15,555 15,555 0 0
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