-----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, Wy3QMgpkL9nxGFZIG4rUNlaT0vpAnYjgHJ6RqMhyd3YLsrEL383qAYrhJG6yIiiu ev+m4/0vQ7Jpwr8nGodGVg== 0001047469-99-012295.txt : 19990331 0001047469-99-012295.hdr.sgml : 19990331 ACCESSION NUMBER: 0001047469-99-012295 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATHAY BANCORP INC CENTRAL INDEX KEY: 0000861842 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 954274680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18630 FILM NUMBER: 99577807 BUSINESS ADDRESS: STREET 1: 777 N BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 BUSINESS PHONE: 2136254700 MAIL ADDRESS: STREET 1: 777 NORTH BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 10-K405 1 10-K 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, 1998 --------------------------------------------------- [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 0-18630 ------------------------------------------------------- CATHAY BANCORP, INC. - ----------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 95-4274680 - -------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 777 North Broadway, Los Angeles, California 90012 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 625-4700 -------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - --------------------------- ------------------------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value - ----------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 5, 1999 was $286,714,779 (computed on the basis of $39.50 per share, which was the last sale price of the Company's Common Stock reported by the Nasdaq National Market on March 5, 1999).* The number of shares outstanding of each of the Registrant's classes of Common Stock as of March 5, 1999: Common Stock, $.01 par value - 8,998,396 shares DOCUMENTS INCORPORATED BY REFERENCE - - Portions of Registrant's definitive proxy materials relating to its 1999 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, 1998 (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. 2 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 Cathay Bancorp, Inc. ("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 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, Millbrae and Richmond 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 Chinese, Vietnamese and English speaking customers. Cathay Bank conducts substantially the same business operations as a typical commercial bank, which is to accept checking, savings, and time deposits, and to make commercial, real estate, personal, home improvement, automobile and other installment and term loans. From time to time, the Bank also invest available funds in other interest earning assets, such as U.S. Treasury securities, U.S. government agencies securities, state and municipal securities, mortgage-backed securities, asset-backed securities and corporate bonds. 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. To accommodate those customers who cannot conduct banking businesses during normal banking hours, the Bank has extended its banking hours to include Saturdays for all branches and Sundays for certain branches. In addition, the operations of the drive-up and walk-up facilities are extended past normal banking hours. Since its inception, the Bank's policy has been to attract business from, and to focus its primary services for the benefit of, individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. The three general areas to which the Bank has directed its lendable assets are: (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. 4 SELECTED FINANCIAL DATA Information concerning changes in 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. 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 amortized cost and estimated fair value of the Bank's securities by contractual maturity is found in Note 4 to the Consolidated Financial Statements on pages 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 21 through 23 of the Annual Report to Stockholders and is incorporated herein by reference. NON-PERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES. Information concerning non-performing loans, allowance for loan losses, loans charged-off, loan recoveries and other real estate owned is included on pages 23 through 28 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 28 and 29 of the Annual Report to Stockholders and is incorporated herein by reference. RETURN ON EQUITY AND ASSETS Information concerning the return on assets, return on stockholders' equity, equity to assets ratio and dividend payout ratio is included on page 13 of the Annual Report to Stockholders and is incorporated herein by reference. INTEREST RATES AND DIFFERENTIALS Information concerning average interest-earning assets, average interest-bearing liabilities and the yields on the assets and liabilities is included on pages 17 and 18 of the Annual Report to Stockholders and is incorporated herein by reference. ANALYSIS OF CHANGES IN NET INTEREST INCOME An analysis of changes in net interest income due to changes in rate and volume is included on pages 14 through 16 of the Annual Report to Stockholders and is incorporated herein by reference. 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. 5 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 is located at 146 Sung Chiang Road, Sixth Floor, Suite 3, Taipei, Taiwan 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, 1998. As of December 31, 1998, CIC owned one property with a net equity investment of $641,558. 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. The property is currently in escrow and the sale is expected to close in April 1999. 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. Furthermore, the Bank owns properties located in the cities of Monterey Park, Alhambra, Westminster, San Gabriel, Torrance, Cerritos, City of Industry and Cupertino, where certain of its branch offices are located. Those properties were acquired between years 1979 and 1993. In addition to the aforementioned bank-owned properties, the parking lot lease and the lease for the CIC Taipei office, the Bank leases certain other premises. The following table depicts the location, square footage, purpose, lease term and monthly payment of each lease. 6
- ---------------------------------------------------------------------------------------------------------------------- Location Sq. ft. Purpose Lease term Monthly payment - ---------------------------------------------------------------------------------------------------------------------- 767 N. Hill Street, Los Angeles 8,912 Administrative offices 2/1/98 - 1/31/01 $8,912 (Rm 305-306, 308-309, 313-315, 320)* - ---------------------------------------------------------------------------------------------------------------------- 767 N. Hill Street, Los Angeles 1,518 Administrative offices 2/1/98 - 1/31/01 $1,800 (Rm 301-302) - ---------------------------------------------------------------------------------------------------------------------- 16025 Gale Avenue, Suite B-1, 4,483 Hacienda Heights branch 1/96 - 6/99 with two $4,842 City of Industry office 5-year options - ---------------------------------------------------------------------------------------------------------------------- 2010 Tully Road, 4,800 San Jose branch office 3/96 - 4/06 with two $8,640 San Jose 5-year options** - ---------------------------------------------------------------------------------------------------------------------- 710 Webster Street, Oakland 5,000 Oakland branch office 9/96 - 9/01 $6,000 - ---------------------------------------------------------------------------------------------------------------------- 47998 Warm Springs Blvd., 2,400 Fremont branch office 10/97 - 9/00 with $3,471 Fremont one more 3-year option - ---------------------------------------------------------------------------------------------------------------------- 15323 Culver Drive, Irvine 4,450 Irvine branch office 4/89 - 4/09 with two $6,089 5-year options - ---------------------------------------------------------------------------------------------------------------------- 1095 El Camino Real, Millbrae 3,441 Millbrae branch office 1/95 - 12/99 with $7,002 two 5-year options - ---------------------------------------------------------------------------------------------------------------------- 800 N. Hill Street, 8,707 Hill/Alpine branch office 2/99 - 2/04 $5,017 Los Angeles - ---------------------------------------------------------------------------------------------------------------------- 43 E. Valley Blvd., Alhambra 1,976 Valley/Stoneman branch 8/96 - 8/01 with $4,412 office three 5-year options - ---------------------------------------------------------------------------------------------------------------------- 3288 Pierce Street, 2,535 Berkeley/Richmond branch 10/97 - 10/03 with $6,338 Suite D-101, Richmond office two 5-year options - ---------------------------------------------------------------------------------------------------------------------- 420 W. Valley Blvd., 2,000 Previous Valley/Prospect 2/96 - 2/01 $4,193 (sublease San Gabriel branch office (subleased 4/1/99 rental income $2,500) -2/14/01) - ---------------------------------------------------------------------------------------------------------------------- Tak Shing House #103, 20 Des 580 Hong Kong representative 3/1/98 - 2/29/00 $3,200 approximately Voeux Road Central, Hong Kong office at the exchang rate in effect at 12/31/98 - ----------------------------------------------------------------------------------------------------------------------
* The lease referred to here has been entered into between the Bank and T.C. Realty, Inc., a California corporation owned by the spouse of Mr. Patrick Lee, a director of Bancorp and the Bank. Management believes that the lease is on terms at least as favorable to the Bank as would have existed in a transaction with an unrelated third party. ** Cathay Bank has a one-time right to cancel the lease after the fifth year upon the payment of $55,500 in consideration. The Bank currently operates 18 domestic branch offices (one domestic branch office is to be closed in the second quarter of 1999), 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. 7 As of December 31, 1998, the Bank's investment in premises and equipment totaled $25,826,808. See also Note 8 to the Consolidated Financial Statements on page 52 of the Annual Report to Stockholders, which is incorporated herein by reference. EXPANSION Management of the Bank continues to look for opportunities to expand the Bank's branch network by seeking new branch locations and/or by acquiring other financial institutions to diversify the customer base in order to compete for new deposits and loans, and to be able to serve the customers more effectively. COMPETITION The banking business in California, and specifically in the market areas served by Cathay Bank, is highly competitive with respect to both loans and deposits. The Bank competes for deposits principally with other commercial banks, savings and thrift institutions and other financial institutions operating in the Bank's service areas, some of which offer certain services that are not offered directly by the Bank and some of which have substantially greater financial resources than does the Bank. In addition, other entities (both governmental and private industry) seeking to raise capital through the issuance and sale of debt and equity securities provide competition for the Bank in the acquisition of deposits. In seeking to obtain customers for loans, Cathay Bank competes primarily with other commercial and savings banks, as well as other non-bank financial intermediaries, including insurance companies, mortgage companies, credit unions, and other lending institutions. Certain legislation has served to ease regulatory restrictions on certain such institutions, thus increasing their ability to compete with banks such as Cathay Bank. To compete with 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 on week days, Saturday banking, and in certain locations Sunday banking, an internet website 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 12 Asian-American banks and two other major financial institutions in the Bank's headquarters branch area, which compete for California Asian-American customers, as well as other 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, 1998, the Company and Cathay Bank (including CIC) employed approximately 501 persons, including 114 officers. None of the employees are represented by a union. Management believes that its relations with employees are excellent. EXECUTIVE OFFICERS OF THE REGISTRANT See Part III, Item 10 ("Directors and Executive Officers of the Registrant") below for information regarding the executive officers of the Company and Cathay Bank. 8 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 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 30 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, 1998 with a leverage ratio of 8.45%. The tables presenting the Company and the Bank's risk-based capital and leverage ratios as of December 31, 1998 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. 9 The FDICIA also, among other things, (1) limits the percentage of interest paid on brokered deposits and limits the use of such deposits to only those institutions that are well-capitalized; (2) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (3) prohibits insured state chartered banks from engaging, as principal, in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (4) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; (5) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution, and (6) restricts capital distributions by institutions that are, or as a result of the distributions will become, undercapitalized. On December 31, 1992, the bank regulatory agencies adopted uniform regulations relating to real estate loans that require institutions to adopt written real estate policies that are consistent with regulatory guidelines. Those guidelines include maximum loan-to-value ratios for various categories of real estate loans. Institutions are permitted to make loans in excess of such ratios if the loans are supported by other credit factors; however, loans that do not conform to the maximum loan-to-value ratios may not, in the aggregate, exceed the institution's risk-based capital and non-conforming loans secured by property other than 1-4 family residential property may not, in the aggregate, exceed 30% of risk-based capital. The FDICIA also required the regulatory agencies to establish, by the end of 1993, (a) minimum acceptable operational and managerial standards covering internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and employee compensation and (b) standards for asset quality, earnings and valuation of publicly traded shares (which must specify a maximum ratio of market value to book value for publicly traded shares). During 1998 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 10 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. 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 11 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 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 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 opportunies 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 59,913 shares or $5,991,300 as of December 31, 1998. 12 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, 1998, the maximum dividend that Cathay Bank could have declared, subject to regulatory approval, was $41,421,000. The banking regulatory agencies may prohibit a bank from paying dividends to its bank holding company if the agencies determine that such a payment would constitute an unsafe or unsound banking practice. ITEM 3. LEGAL PROCEEDINGS Management is not currently aware of any litigation that 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 1998. 13 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 1 and under the caption "Additional Information" on page 68 of the Annual Report to Stockholders is incorporated herein by reference. (b) Holders As of March 5, 1999, there were approximately 1,800 holders of record of the Company's Common Stock. (c) Dividends The information under the captions "Market for Cathay Bancorp, Inc. Stock" on page 1 and "Capital Resources" on page 30 and in Note 11 to the Consolidated Financial Statements on pages 55 and 56 of the Annual Report to Stockholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the caption "Selected Consolidated Financial Data" on page 13 of the Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 through 37 of the Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the captions "Liquidity and Market Risk" and "Interest Rate Sensitivity" on pages 31 through 33 of the Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Independent Auditors' Report and the Company's Consolidated Financial Statements and Notes thereto on pages 39 through 64 of the Annual Report to Stockholders is incorporated herein by reference. See Item 14 of this report for information concerning financial statements filed with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Election of Directors" on pages 3 through 7 of the Company's definitive Proxy Statement relating to its 1999 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 84, 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 54, 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 83, 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 45, Executive Vice President of Bancorp since 1994; Senior Executive Vice President of Cathay Bank since December 1998; Executive Vice President of Cathay Bank from 1994 to December 1998; 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. John Chen, age 65, Executive Vice President for Northern California operations of Cathay Bank since January 1998. Mr. Chen was employed by Bank of America as a Senior Vice President and District Manager from 1993 to 1996 and in various capacities from 1969 to 1993. Irwin Wong, age 51, Executive Vice President for Southern California Branch Administration of Cathay Bank since December 1998; Senior Vice President for Branch Administration of Cathay Bank from 1989 to November 1998; 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. Milly W. Joe, age 61, Senior Vice President and Cashier of Cathay Bank from 1989 to February 1999; Vice President and Cashier of Cathay Bank from 1981 to 1989; and various capacities from 1968 to 1981. Ms. Joe retired in February, 1999. Elena Chan, age 47, 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 23, 1998 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 15 time, the officer resigns or is removed or is otherwise disqualified from serving as an officer of Bancorp or Cathay Bank. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 18 of the Company's Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Information Concerning Management Compensation" and "Compensation Committee Interlocks and Insider Participation" on pages 9 through 12 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 7 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 7 and "Certain Transactions" on pages 18 and 19 of the Company's Proxy Statement is incorporated herein by reference. 16 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, 1998 and 1997 39 Consolidated Statements of Income and Comprehensive Income for each of the years in the 3-year period ended December 31, 1998 40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the 3-year period ended December 31, 1998 41 Consolidated Statements of Cash Flows for each of the years in the 3-year period ended December 31, 1998 42 Notes to Consolidated Financial Statements 43-63 Independent Auditors' Report of KPMG LLP 64
- ----------------------- *Parent-only condensed financial information of the Company as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 is included in Note 16 to the Consolidated Financial Statements on pages 61 and 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 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 Amended and Restated Cathay Bank Employee Stock Ownership Plan and Trust, each amended by the First Amendment, and Second Amendment thereto. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Amendment No.1 to Annual Report on Form 10-K/A for the year ended December 31, 1998 and incorporated herein by reference. 10.3 Dividend Reinvestment Plan of 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 Equity Incentive Plan of the Company. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.* 13.1 Certain portions of the Registrant's 1998 Annual Report to Stockholders incorporated herein by reference. 22.1 Subsidiaries of the Company 23.1 Consent of Independent Auditors 27 Financial Data Schedule * Management compensatory plan (b) Reports on Form 8-K There were no reportable events. 18 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 29, 1999 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 29, 1999 Dunson K. Cheng the Board and Director (principal executive officer) /s/ Anthony M. Tang Executive Vice President, March 29, 1999 - ------------------------------------ Chief Financial Officer Anthony M. Tang /Treasurer and Director (principal financial officer) (principal accounting officer) /s/ Ralph Roy Buon-Cristiani Director March 29, 1999 - ------------------------------------ Ralph Roy Buon-Cristiani /s/ Kelly L. Chan Director March 29, 1999 - ------------------------------------ Kelly L. Chan /s/ Michael M.Y. Chang Director March 29, 1999 - ------------------------------------ Michael M.Y. Chang [SIGNATURES CONTINUED] 19 [SIGNATURES CONTINUED] Signature Title Date - --------- ----- ---- /s/ George T.M. Ching Vice Chairman of the March 29, 1999 - ------------------------------------ Board and Director George T.M. Ching /s/ Wing K. Fat Director March 29, 1999 - ------------------------------------ Wing K. Fat /s/ Patrick S.D. Lee Director March 29, 1999 - ------------------------------------ Patrick S.D. Lee /s/ Chi-Hung Joseph Poon Director March 29, 1999 - ------------------------------------ Chi-Hung Joseph Poon /s/ Thomas G. Tartaglia Director March 29, 1999 - ------------------------------------ Thomas G. Tartaglia /s/ Wilbur K. Woo Secretary of the Board March 29, 1999 - ------------------------------------ and Director Wilbur K. Woo
20 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 Amended and Restated Cathay Bank Employee Stock Ownership Plan and Trust, each amended by the First Amendment, and Second Amendment thereto. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Amendment No.1 to Annual Report on Form 10-K/A for the year ended December 31, 1998 and incorporated herein by reference. 10.3 Dividend Reinvestment Plan of 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 Equity Incentive Plan of the Company. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.* 13.1 Certain portions of the Registrant's 1998 Annual Report to Stockholders incorporated herein by reference. 22.1 Subsidiaries of the Company 23.1 Consent of Independent Auditors 27 Financial Data Schedule
* Management compensatory plan (b) Reports on Form 8-K There were no reportable events. EX-13.1 2 EXHIBIT 13.1 EXHIBIT 13.1 FINANCIAL HIGHLIGHTS
Year ended December 31, 1998 and 1997 Increase (dollars in thousands, except per share data) 1998 1997 Amount Percentage - --------------------------------------------- ---------- ---------- ----------- ---------- FOR THE YEAR Net income $ 24,579 $ 20,108 $ 4,471 22.23% Basic net income per common share 2.74 2.26 0.48 21.24 Cash dividends paid per common share 0.700 0.625 0.075 12.00 ---------- ---------- ----------- ---------- AT YEAR-END Securities $ 658,084 $ 566,494 $ 91,590 16.17% Loans, net 961,876 846,151 115,725 13.68 Assets 1,780,898 1,622,462 158,436 9.77 Deposits 1,560,402 1,449,121 111,281 7.68 Stockholders' equity 156,652 135,877 20,775 15.29 Book value per common share 17.43 15.20 2.23 14.67% ---------- ---------- ----------- ---------- PROFITABILITY RATIOS Return on average assets 1.44% 1.29% Return on average stockholders' equity 17.00% 15.63% ---------- ---------- ----------- ---------- CAPITAL RATIOS Tier 1 capital ratio 11.44% 11.73% Total capital ratio (1) 12.68% 12.98% Leverage ratio 8.45% 7.94% ---------- ---------- ----------- ----------
(1) TOTAL CAPITAL RATIO REPRESENTS STOCKHOLDERS' EQUITY PLUS THE ALLOWANCE FOR LOAN LOSSES ALLOWABLE AS A PERCENTAGE OF RISK-WEIGHTED ASSETS. MARKET FOR CATHAY BANCORP, INC. STOCK The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market(SM) under the symbol: "CATY". During 1998, total trading volume was approximately 1,793,000, and the prices ranged from a high of $48.00 to a low of $27.00. The approximate number of stockholders at year-end 1998 was 1,800. The Company paid an aggregate per share cash dividend of $0.70 in 1998 and $0.625 in 1997. 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 --------- --------- -------- ------- 1998 First Quarter $ 39.125 $ 32.000 $ 35.750 338,373 Second Quarter 48.000 35.500 46.500 527,920 Third Quarter 46.500 27.375 36.500 601,905 Fourth Quarter 41.563 27.000 41.000 325,019 --------- --------- -------- ------- 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 --------- --------- -------- -------
(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. 1 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31, (dollars in thousands, except share and per share data) 1998 1997 1996 1995 1994 ----------- ------------ ---------- --------- ----------- INCOME STATEMENT(1) Interest income $ 123,309 $ 111,978 $ 86,098 $ 76,223 $ 61,631 Interest expense 57,225 50,874 39,209 31,282 20,033 Net interest income before ----------- ------------ ---------- --------- ----------- provision for loan losses 66,084 61,104 46,889 44,941 41,598 Provision for loan losses 3,600 3,600 3,600 7,300 7,755 ----------- ------------ ---------- --------- ----------- Net interest income after provision for loan losses 62,484 57,504 43,289 37,641 33,843 Securities gains 43 41 22 611 63 Other non-interest income 8,093 6,734 5,837 5,610 5,781 Non-interest expense 30,065 30,928 28,013 27,617 26,139 ----------- ------------ ---------- --------- ----------- Income before income tax expense 40,555 33,351 21,135 16,245 13,548 Income tax expense 15,976 13,243 7,819 5,624 4,034 ----------- ------------ ---------- --------- ----------- Net income $ 24,579 $ 20,108 $ 13,316 $ 10,621 $ 9,514 ----------- ------------ ---------- --------- ----------- ----------- ------------ ---------- --------- ----------- Net income per common share Basic $ 2.74 $ 2.26 $ 1.66 $ 1.36 $ 1.23 Diluted $ 2.74 $ 2.26 $ 1.66 $ 1.36 $ 1.23 Cash dividends paid per $ 0.700 $ 0.625 $ 0.600 $ 0.600 $ 0.600 common share WEIGHTED AVERAGE COMMON SHARES 8,967,188 8,915,936 8,017,398 7,805,339 7,724,752 ----------- ------------ ---------- --------- ----------- STATEMENT OF CONDITION Securities available-for-sale $ 239,928 $ 216,158 $ 383,391 $ 243,252 $ 75,074 Securities held-to-maturity 418,156 350,336 210,129 174,377 180,082 Net loans (2) 961,876 846,151 744,384 542,995 569,363 Total assets 1,780,898 1,622,462 1,504,329 1,087,400 941,051 Deposits 1,560,402 1,449,121 1,364,740 984,227 845,715 Securities sold under agreements to repurchase 16,436 23,419 10,000 1,500 449 Advances from Federal Home Loan Bank 30,000 -- -- -- 4,000 Other liabilities 6,561 3,749 4,490 3,490 2,290 Stockholders' equity 156,652 135,877 118,446 94,529 85,385 ----------- ------------ ---------- --------- ----------- COMMON STOCK DATA Shares of common stock outstanding 8,988,760 8,941,743 8,878,144 7,867,164 7,798,550 Book value per share $ 17.43 $ 15.20 $ 13.34 $ 12.02 $ 10.95 ----------- ------------ ---------- --------- ----------- PROFITABILITY RATIOS Return on average assets 1.44% 1.29% 1.05% 1.05% 1.06% Return on average stockholders' equity 17.00 15.63 13.06 11.68 11.43 Dividend payout ratio 25.55 27.65 36.14 44.12 48.78 Average equity to average assets ratio 8.47 8.25 8.04 8.97 9.25 Efficiency ratio 40.51 45.20 53.11 53.98 55.10 ----------- ------------ ---------- --------- -----------
(1) INCLUDES THE OPERATING RESULTS OF FIRST PUBLIC SAVINGS BANK, F.S.B. SUBSEQUENT TO THE NOVEMBER 18, 1996, ACQUISITION DATE. (2) NET LOANS REPRESENTS GROSS LOANS NET OF LOAN PARTICIPATIONS SOLD, UNAMORTIZED DEFERRED LOAN FEES AND THE ALLOWANCE FOR LOAN LOSSES. 13 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 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. (the "Bancorp") 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. In 1996, the former First Public Savings Bank, F.S.B.'s ("FPSB") results are included from the acquisition date of November 18, 1996. The following discussion, and other sections of this report, include forward-looking statements regarding management's beliefs, projections and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, also include words such as "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, fluctuations in interest rates, demographic changes, increases in competition, deterioration in asset or credit quality, changes in the availability of capital, adverse regulatory developments, changes in business strategy or development plans, general economic or business conditions and the other factors discussed in "Factors that May Affect Future Results" below. Actual results in any future period may also vary from the past results discussed herein. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak as of the date hereof. The Company has no intention and undertakes no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events. RESULTS OF OPERATIONS The Company reported net income of $24.6 million or $2.74 per basic common share for 1998, compared with $20.1 million or $2.26 per basic common share for 1997 and $13.3 million or $1.66 per basic common share for 1996. 1998 net income represents an increase of $4.5 million or 22% over 1997 attributable primarily to increases of $5.0 million in net interest income and $1.4 million in non-interest income. Efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, improved from 45.16% in 1997 to 40.51% in 1998. The return on average assets was 1.44% for 1998 and 1.29% for 1997 and the return on average stockholders' equity was 17.00% for 1998 and 15.63% for 1997. The increase of $6.8 million or 51% in 1997 net income over 1996 was primarily a result of the growth and related efficiencies from the acquisition of FPSB in November 1996, which was evidenced by a 33% increase in net interest income after provision for loan losses and a decrease in the efficiency ratio from 53.11% to 45.16%. The return on average assets was 1.29% for 1997 and 1.05% for 1996 and the return on average stockholders' equity was 15.63% for 1997 and 13.06% for 1996. NET INTEREST INCOME Net interest income before provision for loan losses totaled $66.1 million in 1998, compared with $61.1 million in 1997 and $46.9 million in 1996. On a taxable equivalent basis, net interest income totaled $67.3 million in 1998, $62.2 million in 1997 and $48.0 million in 1996. Comparing 1998 with 1997, net interest income increased $5.0 million or 8% primarily due to an increase of $159.5 million in average interest-earning assets, from $1,408.9 million to $1,568.4 million. Of the $159.5 million increase, loans (net of deferred loan fees and the allowance for loan losses) accounted for $115.5 million, Federal funds sold and securities purchased under agreements to resell accounted for $27.6 million, investment securities (including available-for-sale and held-to-maturity) and Federal Home Loan Bank (FHLB) stock accounted for $15.7 million and deposits with other banks accounted for $0.7 million. The increase in average interest earning assets was funded by: 1) an increase in average deposits of $86.2 million, of which $68.5 million were interest bearing and $17.7 million were non-interest bearing; 2) borrowed funds (including securities sold under agreements to repurchase, advances from FHLB and others) of $51.6 million, of which $44.4 million were short-term and $7.2 million were long-term; and 3) cash and other sources of $26.6 million. 14 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT The increase in average loans contributed to an additional $8.9 million in net interest income, which was partially offset by a decrease of 21 basis points in the average yield from 9.34% to 9.13%. The Federal Reserve Board made three consecutive cuts in the Federal funds rate of 25 basis points each in the last two quarters of 1998. As a result, the Company's average reference lending rate decreased nine basis points to 8.60% in 1998. In addition, the Company's average yield on loans decreased due to competitiveness in the marketplace and an increase in the residential mortgages as a percentage to the Company's total loan portfolio. Meanwhile, yields on all other categories of interest-earning assets decreased due to the prevailing interest rate environment, causing a nine basis point decrease in the average yield on overall interest-earning assets from 8.03% in 1997 to 7.94% in 1998. Conversely, cost of funds increased 11 basis points from 4.04% in 1997 to 4.15% in1998. This was primarily due to the repricing of time deposits in response to the market rate changes. Average time deposits increased $80.1 million to $900.4 million in 1998 while average other interest-bearing deposits decreased $11.7 million. Consequently, net interest margin (defined as taxable equivalent net interest income to average interest earning assets) was reduced by 12 basis points from 4.42% in 1997 to 4.30% in 1998. 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 loans accounted for $212.5 million, securities (including available-for-sale and held-to-maturity) and FHLB stock accounted for $86.6 million, and Federal funds sold and securities purchased under agreements to resell accounted for $14.1 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 in 1997 compared to 1996, which was slightly offset by a decrease of $1.1 million due to changes in rates. 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 residential real estate loans from the acquisition of FPSB in November 1996 ("the acquisition"), and to a lesser extent, the competition in the Company's marketplace. Average residential real estate 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 increased four basis points from 4.38% in 1996 to 4.42% in 1997. 15 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED CHANGES DUE TO RATE AND VOLUME(1)
1998 - 1997 1997 - 1996 Increase (Decrease) in Increase (Decrease) in Net Interest Income Due To: Net Interest Income Due To: Changes in Changes in Total Changes in Changes in Total (in thousands) Rate Volume Change Rate Volume Change ---------- --------- --------- --------- --------- --------- INTEREST EARNING ASSETS Federal funds sold and securities purchased under agreements to resell $ (29) $ 1,564 $ 1,535 $ 136 $ 796 $ 932 Securities available-for-sale (Taxable) (1,252) (2,956) (4,208) 256 170 426 Securities available-for-sale (Nontaxable) (2) (10) 25 15 (1) 11 10 Securities held-to-maturity (Taxable) (168) 4,988 4,820 385 5,821 6,206 Securities held-to-maturity (Nontaxable) (2) (129) 623 494 (91) 142 51 Deposits with other banks (11) 28 17 -- 13 13 Federal Home Loan Bank stock (218) 210 (8) 8 112 120 Loans (3) (1,700) 10,551 8,851 (1,789) 19,916 18,127 ---------- --------- --------- --------- --------- --------- Total $ (3,517) $ 15,033 $ 11,516 $ (1,096) $ 26,981 $ 25,885 ---------- --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- INTEREST BEARING LIABILITIES Savings deposits, NOW accounts and others $ (411) $ (220) $ (631) $ (213) $ 1,625 $ 1,412 Time deposits 165 4,099 4,264 382 9,528 9,910 Securities sold under agreements to repurchase (15) 2,368 2,353 2 456 458 Other borrowed funds (1) 4 3 (1) (2) (3) Advances from Federal Home Loan Bank -- 333 333 -- -- -- Mortgage indebtedness 6 23 29 (48) (64) (112) ---------- --------- --------- --------- --------- --------- Total $ (256) $ 6,607 $ 6,351 $ 122 $ 11,543 $ 11,665 ---------- --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- Change in net interest income $ (3,261) $ 8,426 $ 5,165 $ (1,218) $ 15,438 $ 14,220 ---------- --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------
(1) CHANGES IN INTEREST INCOME AND INTEREST EXPENSE ATTRIBUTABLE TO CHANGES IN BOTH RATE AND VOLUME HAVE BEEN ALLOCATED PROPORTIONATELY TO CHANGES DUE TO RATE AND CHANGES DUE TO VOLUME. (2) THE AMOUNT OF INTEREST EARNED ON CERTAIN SECURITIES OF STATES AND POLITICAL SUBDIVISIONS AND OTHER SECURITIES HELD HAVE BEEN ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS, USING EFFECTIVE FEDERAL INCOME TAX RATE OF 35%. (3) AMOUNTS ARE NET OF UNAMORTIZED DEFERRED LOAN FEES OF $3,631,000, $3,786,000 AND $3,743,000 IN 1998, 1997, AND 1996, RESPECTIVELY. INTEREST EARNING ASSET MIX
As of December 31, 1998 As of December 31, 1997 Amount Percentage Percentage Percentage Changed Changed of Total Interest of Total Interest from from (dollars in thousands) Amount Earning Assets Amount Earning Assets 1997 to 1998 1997 to 1998 ----------------------- ----------------------- ------------ ------------ TYPES OF INTEREST EARNING ASSETS Federal funds sold and securities purchased under agreements to resell $ 17,000 1.04% $ 67,000 4.52% $ (50,000) (74.63)% Securities available-for-sale 239,928 14.64 216,158 14.60 23,770 11.00 Securities held-to-maturity 418,156 25.52 350,336 23.66 67,820 19.36 Deposits with other banks 1,376 0.08 1,056 0.07 320 30.30 Loans (net of unamortized deferred loan fees and allowance for loan losses) 961,876 58.72 846,151 57.15 115,725 13.68 ----------- ------ ---------- ------ ---------- -------- Total interest earning assets $ 1,638,336 100.00% $1,480,701 100.00% $ 157,635 10.65% ----------- ------ ---------- ------ ---------- -------- ----------- ------ ---------- ------ ---------- --------
16 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
Year ended December 31, (dollars in thousands) 1998 1997 1996 ---------- ----------- ---------- INTEREST EARNING ASSETS: FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL Average outstanding $ 69,915 $ 42,260 $ 28,150 Average yield 5.65% 5.72% 5.27% Amount of interest earned $ 3,950 $ 2,415 $ 1,483 ---------- ----------- ----------- SECURITIES AVAILABLE-FOR-SALE, TAXABLE Average outstanding $ 219,556 $ 289,715 $ 291,419 Average yield 5.98% 5.99% 5.81% Amount of interest earned $ 13,135 $ 17,343 $ 16,917 ---------- ----------- ----------- SECURITIES AVAILABLE-FOR-SALE, NONTAXABLE Average outstanding $ 499 $ 169 $ 85 Average yield (2) 6.73% 11.24% 10.59% Amount of interest earned $ 34 $ 19 $ 9 ---------- ----------- ----------- SECURITIES HELD-TO-MATURITY, TAXABLE Average outstanding $ 315,257 $ 237,881 $ 153,393 Average yield 6.45% 6.52% 6.07% Amount of interest earned $ 20,340 $ 15,520 $ 9,314 ---------- ----------- ----------- SECURITIES HELD-TO-MATURITY, NONTAXABLE Average outstanding $ 48,757 $ 40,930 $ 39,020 Average yield (2) 7.92% 8.34% 8.61% Amount of interest earned $ 3,906 $ 3,412 $ 3,361 ---------- ----------- ----------- FEDERAL HOME LOAN BANK STOCK Average outstanding $ 5,841 $ 5,506 $ 3,636 Average yield 5.75% 6.24% 6.16% Amount of interest earned $ 336 $ 344 $ 224 ---------- ----------- ----------- DEPOSITS WITH OTHER BANKS Average outstanding $ 958 $ 243 $ 50 Average yield 3.44% 6.58% 6.00% Amount of interest earned $ 33 $ 16 $ 3 ---------- ----------- ----------- LOANS (1) Average outstanding $ 907,627 $ 792,176 $ 579,634 Average yield (5) 9.13% 9.34% 9.64% Amount of interest earned (5) $ 82,866 $ 74,015 $ 55,888 ---------- ----------- ----------- TOTAL INTEREST EARNING ASSETS Average outstanding $1,568,410 $ 1,408,880 $ 1,095,387 Average yield (5) 7.94% 8.03% 7.96% Amount of interest earned (5) $ 124,600 $ 113,084 $ 87,199 ---------- ----------- -----------
17 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES, CONTINUED
Year ended December 31, (dollars in thousands) 1998 1997 1996 ---------- ----------- ----------- INTEREST BEARING LIABILITIES: Savings Deposits (3) Average outstanding $ 417,105 $ 428,763 $ 348,941 Average rate paid 1.92% 2.01% 2.07% Amount of interest paid or accrued $ 8,006 $ 8,637 $ 7,225 ---------- ---------- ---------- TIME DEPOSITS Average outstanding $ 900,441 $ 820,310 $ 632,211 Average rate paid 5.11% 5.09% 5.03% Amount of interest paid or accrued $ 46,000 $ 41,736 $ 31,826 ---------- ---------- ---------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Average outstanding $ 53,104 $ 8,779 $ 502 Average rate paid 5.34% 5.51% 4.98% Amount of interest paid or accrued $ 2,836 $ 483 $ 25 ---------- ---------- ---------- OTHER BORROWED FUNDS Average outstanding $ 181 $ 82 $ 109 Average rate paid 3.87% 4.88% 6.42% Amount of interest paid or accrued $ 7 $ 4 $ 7 ---------- ---------- ---------- ADVANCES FROM FEDERAL HOME LOAN BANK Average outstanding $ 6,959 $ -- $ -- Average rate paid 4.79% -- -- Amount of interest paid or accrued $ 333 $ -- $ -- ---------- ----------- ----------- MORTGAGE INDEBTEDNESS Average outstanding $ 440 $ 190 $ 759 Average rate paid (6) 9.77% 7.37% 16.60% Amount of interest paid or accrued (6) $ 43 $ 14 $ 126 ---------- ----------- ----------- TOTAL INTEREST BEARING LIABILITIES Average outstanding $1,378,230 $ 1,258,124 $ 982,522 Average rate paid 4.15% 4.04% 3.99% Amount of interest paid or accrued $ 57,225 $ 50,874 $ 39,209 ---------- ----------- ---------- Net interest earnings (7) $ 67,375 $ 62,210 $ 47,990 Net yield on interest earnings assets (4) (7) 4.30% 4.42% 4.38% Yield spread (7) 3.79% 3.99% 3.97% ---------- ----------- ----------
(1) NONACCRUAL LOANS ARE INCLUDED IN THE AVERAGE BALANCES. (2) THE AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS FOR CERTAIN SECURITIES OF STATES AND POLITICAL SUBDIVISIONS AND OTHER SECURITIES HELD USING AN EFFECTIVE FEDERAL INCOME TAX RATE OF 35%. (3) SAVINGS DEPOSITS INCLUDE NOW ACCOUNTS AND MONEY MARKET ACCOUNTS. (4) CALCULATED BY DIVIDING NET INTEREST EARNINGS BY AVERAGE OUTSTANDING INTEREST EARNING ASSETS. (5) YIELDS AND AMOUNTS OF INTEREST EARNED INCLUDE LOAN FEES. (6) YIELD AND AMOUNT OF INTEREST PAID OR ACCRUED INCLUDE INTEREST PAID ON SENIOR DEBTS OF OTHER REAL ESTATE OWNED, EITHER TO BRING THE LOANS CURRENT OR TO PAY OFF THE LOANS WHEN THE COMPANY OBTAINED TITLE TO THE PROPERTIES AND THEREAFTER. (7) NET INTEREST EARNINGS, NET YIELD ON EARNING ASSETS AND YIELD SPREAD HAVE BEEN ADJUSTED TO A FULLY TAXABLE EQUIVALENT BASIS USING AN EFFECTIVE FEDERAL INCOME TAX RATE OF 35%. 18 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NON-INTEREST INCOME Non-interest income totaled $8.1 million in 1998, representing an increase of $1.4 million or 20% over the $6.8 million in 1997. Factors contributing to the increase in 1998 non-interest income included: 1) an increase of $441,000 in letter of credit commissions due to increased transaction volume; 2) an increase of $424,000 in service charges to deposit accounts due to fee increases; 3) an increase of $166,000 of rebate income earned in outsourcing the issuing and processing of cashier's checks and money orders; and 4) higher income from documentation and charges related to loans, wire transfers, foreign exchange transactions, safe deposit boxes and miscellaneous items totaling approximately $342,000. 1997 non-interest income of $6.8 million represented an increase of $916,000 or 16% over the $5.9 million in 1996. This was due primarily to: 1) an increase of $549,000 in service charges resulting substantially from the addition of FPSB's transaction accounts through the acquisition; 2) an increase of $159,000 of rebate income earned in outsourcing the issuing and processing of cashier's checks and money orders; 3) an increase of $122,000 in wire transfer fees; and 4) an increase in fee income from documentation and charges related to loans and safe deposit boxes. NON-INTEREST EXPENSE Non-interest expense decreased slightly from $30.9 million in 1997 to $30.0 million in 1998. The decrease of $863,000 or 3% resulted primarily from a decrease in net OREO expense by $1.6 million and occupancy expense by $385,000, which was partially offset by an increase of $1.0 million in salaries and employee benefits. Additional personnel to support the Berkeley/Richmond Branch opened in April 1998, as well as new officers for northern California branches and overall annual salary increases contributed to the increase in salaries and employee benefits expense. Conversely, the closures of the Rowland Heights branch and two FPSB's corporate offices in December, June and November 1997, respectively, helped to reduce the 1998 occupancy expense. The Company had net income of $1.1 million from OREO in 1998 compared with net OREO expense of $503,000 in 1997. The efficiency ratio improved from 45.16% in 1997 to 40.51% in 1998. The 1997 non-interest expense of $30.9 million represented an increase of $2.9 million or 10.4% over the $28.0 million for 1996. The higher non-interest expense in 1997 was primarily attributable 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 paid in December 1997. In addition, there was a total increase of approximately $1.3 million in occupancy, equipment and other operating expenses, all of which were directly associated with the acquisition as well. The $1.2 million decrease in net OREO expense in 1997 reflected a decrease in the number of OREO properties due to the continued recovery of the California real estate market. The efficiency ratio decreased to 45.16% in 1997 from 53.11% in 1996. FINANCIAL CONDITION The Company continued to maintain steady growth in 1998. At December 31, 1998, total assets increased $158.4 million or 10% to $1,780.9 million; loans, net of deferred loan fees, increased $116.3 million or 14% to $977.8 million; securities (including securities available-for-sale and held-to-maturity) were up $91.6 million or 16% to $658.1 million; deposits grew $111.3 million or 8% to $1,560.4 million; and stockholders' equity increased $20.8 million or 15% to $156.7 million. SECURITIES The Company's investment policy states that those securities for which 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. Those securities which could be sold in response to changes in interest rates, changes in prepayment risk, increases in loan demand, the need to increase regulatory capital, general liquidity needs, or other similar factors will be classified as securities available-for-sale, and carried at estimated fair value, with unrealized gains or losses, net of tax, reflected in stockholders' equity. In addition, to further improve liquidity, it is the Bank's policy to transfer securities held-to-maturity to the available-for-sale category when securities are within 90 days of maturity. As of December 31, 1998, unrealized holding gains on securities available-for-sale were $2,051,000 compared to $692,000 as of December 31, 1997. These unrealized gains, net of tax effect were included in the Company's stockholders' equity for the years reported. The unrealized holding gains, net of tax, were $1,189,000 and $370,000 at year-end 1998 and 1997, respectively. 19 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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, (in thousands) 1998 1997 1996 ------------- ----------- ----------- SECURITIES AVAILABLE-FOR-SALE: U.S. Treasury securities $ 2,014 $ 37,971 $ 121,769 U.S. government agencies 103,020 113,306 228,377 State and municipal securities 22,317 -- 50 Mortgage-backed securities 18,266 22,982 17,932 Collateralized mortgage obligations 14,159 6,386 4,950 Asset-backed securities 8,220 19,889 4,998 Federal Home Loan Bank stock 5,991 5,653 5,315 Commercial paper 29,945 9,971 -- Corporate bonds 35,996 -- -- ------------- ----------- ----------- Total $ 239,928 $ 216,158 $ 383,391 ------------- ----------- ----------- ------------- ----------- ----------- SECURITIES HELD-TO-MATURITY: U.S. Treasury securities $ 26,026 $ 26,054 $ 26,081 U.S. government agencies 54,426 39,374 66,900 State and municipal securities 61,495 44,497 40,393 Mortgage-backed securities 146,018 140,338 63,109 Collateralized mortgage obligations 83,535 90,234 -- Asset-backed securities -- 923 3,545 Corporate bonds 46,656 8,916 10,101 ------------- ----------- ----------- Total $ 418,156 $ 350,336 $ 210,129 ------------- ----------- ----------- ------------- ----------- -----------
Management constantly seeks to balance the risks and returns on its portfolio of securities within the Company's investment guidelines. During 1998, the Company increased its holdings of corporate bonds, commercial paper and state and municipal securities, while it decreased the holdings of U.S. Treasury securities. 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, 1998 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 $ 2,014 $ -- $ -- $ -- $ 2,014 U.S. government agencies 82,678 20,342 -- -- 103,020 State and municipal securities 20,000 -- 2,317 -- 22,317 Mortgage-backed securities(2) -- 3,335 3,651 11,280 18,266 Collateralized mortgage obligations(2) -- 1,145 5,253 7,761 14,159 Asset-backed securities(2) -- 8,220 -- -- 8,220 Federal Home Loan Bank stock 5,991 -- -- -- 5,991 Commercial paper 29,945 -- -- -- 29,945 Corporate bonds -- 31,146 4,850 -- 35,996 ------------ ----------- ----------- ----------- ------------ Total $ 140,628 $ 64,188 $ 16,071 $ 19,041 $ 239,928 ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- ------------ WEIGHTED AVERAGE YIELD: U.S. Treasury securities 5.73% --% --% --% 5.73% U.S. government agencies 5.97 5.88 -- -- 5.95 State and municipal securities 5.91 -- 7.23 -- 6.03 Mortgage-backed securities(2) -- 6.01 6.47 7.23 6.85 Collateralized mortgage obligations(2) -- 5.70 6.24 6.30 6.23 Asset-backed securities(2) -- 6.29 -- -- 6.29 Federal Home Loan Bank stock 5.76 -- -- -- 5.76 Commercial paper 6.39 -- -- -- 6.39 Corporate bonds -- 5.56 7.19 -- 5.78 ------------ ----------- ----------- ----------- ------------ Total 6.04% 5.78% 6.71% 6.84% 6.08% ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- ------------
(1) AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS. (2) SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS. 20 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
AS OF DECEMBER 31, 1998 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 $ 1,013 $ 25,013 $ -- $ -- $ 26,026 U.S. government agencies -- 54,426 -- -- 54,426 State and municipal securities 973 9,265 22,665 28,592 61,495 Mortgage-backed securities (2) -- 10,313 30,989 104,716 146,018 Collateralized mortgage obligations (2) -- 3,999 41,506 38,030 83,535 Corporate bonds -- 27,866 18,790 -- 46,656 ------------ ----------- ----------- --------- ---------- Total $ 1,986 $ 130,882 $ 113,950 $ 171,338 $ 418,156 ------------ ----------- ----------- --------- ---------- ------------ ----------- ----------- --------- ---------- WEIGHTED AVERAGE YIELD: U.S. Treasury securities 5.80% 6.08% --% --% 6.30% U.S. government agencies -- 5.91 -- -- 5.91 State and municipal securities(1) 7.59 8.31 8.33 7.03 7.71 Mortgage-backed securities(2) -- 6.17 6.38 6.42 6.39 Collateralized mortgage obligations(2) -- 6.31 6.85 6.72 6.77 Corporate bonds -- 6.20 5.68 -- 6.00 ------------ ----------- ----------- --------- ---------- Total 6.67% 6.25% 6.83% 6.59% 6.55% ------------ ----------- ----------- --------- ---------- ------------ ----------- ----------- --------- ----------
(1) AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS. (2) SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS. LOANS Gross loans increased $116.2 million or 13%, from $865.3 million at year-end 1997 to $981.5 million at year-end 1998. Commercial real estate loans, commercial loans and residential real estate loans, which added $52.9 million, $32.3 million and $26.8 million, respectively, accounted for most of the increase. Commercial real estate loans are secured primarily by first deeds of trust on retail shops and shopping centers, as well as office buildings, multiple-unit apartments, hotels, motels, and warehouses. The Company's underwriting policy for commercial real estate loans generally requires that the loan-to-value ratio at the time of origination not exceed 70% of the appraised value of the property. 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 markets its commercial lending primarily to small-to-medium businesses and professionals for their working capital needs. Increases in commercial real estate and commercial loans in 1998 reflected the improved market conditions for these types of loans. Increases in residential real estate loans were a result of the low prevailing interest rates which brought refinancing activities, as well as new purchases during 1998. 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, borrower 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 its loans. 21 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Although the Asian economic crisis persisted in 1998 and still exists currently, management believes the Company's financial condition and results of operations were not adversely impacted due to the fact that most of the Company's trade financing customers engage in import businesses. These customers have actually benefited from the devaluation of foreign currencies to a certain degree. However, it is unpredictable how the Asian economy will perform in the future. If the crisis persists or worsens, the Company may be exposed to economic and transfer risk, and its financial condition or results of operations may be negatively impacted. (See "Factors That May Affect Future Results" below.) Presently management does not consider the Company's loan portfolio to have direct exposure to transfer risk. 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, 1998 are presented below (see also Note 5 of the notes to consolidated financial statements): LOAN TYPE AND MIX
Amount outstanding as of December 31, (in thousands) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- TYPE OF LOANS: Commercial loans $ 370,539 $ 338,285 $ 283,894 $ 292,612 $ 324,189 Real estate mortgage loan 540,766 458,417 420,315 231,360 215,945 Real estate construction loans 40,738 41,736 33,510 13,606 14,090 Installment loans 29,165 26,611 23,551 19,748 18,170 Other loans 269 267 385 533 11,707 - ---------------------------------------------------------------------------------------------------------------- Total loans 981,477 865,316 761,655 557,859 584,101 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Less Unamortized deferred loan fees (3,631) (3,786) (3,742) (2,122) (2,467) Allowance for loan losses (15,970) (15,379) (13,529) (12,742) (12,271) - ---------------------------------------------------------------------------------------------------------------- Net loans $ 961,876 $ 846,151 $ 744,384 $ 542,995 $ 569,363 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
CHANGES IN LOAN PORTFOLIO COMPOSITION
As of December 31, 1998 As of December 31, 1997 Percentage Percentage Percentage of Total of Total Increase (dollars in thousands) Amount Loans Amount Loans (Decrease) - ---------------------------------------------------------------------------------------------------------------- TYPE OF LOANS: Commercial loans $ 370,539 38.52% $ 338,285 39.98% 9.53% Real estate mortgage loans 540,766 56.22 458,417 54.18 17.96 Real estate construction loans 40,738 4.24 41,736 4.93 (2.39) Installment loans 29,165 3.03 26,611 3.15 9.60 Other loans 269 0.03 267 0.03 0.75 Unamortized deferred loan fees (3,631) (0.38) (3,786) (0.45) (4.09) Allowance for loan losses (15,970) (1.66) (15,379) (1.82) 3.84 - ----------------------------------------------------------------------------------------------------------------- Net loans $ 961,876 100.00% $ 846,151 100.00% 13.68% - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
22 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MATURITY OF LOANS(2): CONTRACTUAL MATURITY OF LOAN PORTFOLIO(1)
(in thousands) Within One Year One to Five Years Over Five Years Total - ---------------------------------------------------------------------------------------------------------------- COMMERCIAL LOANS Floating rate $ 244,739 $ 41,644 $ 13,469 $ 299,852 Fixed rate 49,985 11,754 8,457 70,196 REAL ESTATE MORTGAGE LOANS Floating rate 37,861 108,075 137,057 282,993 Fixed rate 5,089 33,576 216,394 255,059 REAL ESTATE CONSTRUCTION LOANS Floating rate 26,501 13,811 -- 40,312 INSTALLMENT LOANS Floating rate 34 -- -- 34 Fixed rate 7,703 21,427 -- 29,130 OTHER LOANS Floating rate 253 -- -- 253 Fixed rate -- -- 17 17 - ----------------------------------------------------------------------------------------------------------------- Total loans $ 372,165 $ 230,287 $ 375,394 $ 977,846 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Floating rate $ 309,388 $ 163,530 $ 150,526 $ 623,444 Fixed rate 62,777 66,757 224,868 354,402 - ----------------------------------------------------------------------------------------------------------------- Total loans $ 372,165 $ 230,287 $ 375,394 $ 977,846 Allowance for loan losses (15,970) - ----------------------------------------------------------------------------------------------------------------- Net loans $ 961,876 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
(1) IN THE NORMAL COURSE OF BUSINESS, LOANS ARE RENEWED, EXTENDED OR PREPAID FROM TIME TO TIME; THEREFORE, THE ABOVE SHOULD NOT BE VIEWED AS AN INDICATION OF FUTURE CASH FLOWS. (2) LOANS ARE NET OF UNAMORTIZED DEFERRED LOAN FEES. LOAN PORTFOLIO RISK ELEMENTS NON-PERFORMING ASSETS Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business, management becomes aware of loans that may not be repaid under the contractual requirements of their loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on nonaccrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. The Company's policy is to place loans on nonaccrual status if either interest or principal or both is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on nonaccrual status, any interest previously accrued, but not yet collected, is generally reversed against current period 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, nonaccrual loans, and OREO. Total non-performing assets decreased $4.3 million or 13% to $28.2 million at year-end 1998, compared with $32.5 million at year-end 1997. The decrease was primarily due to reductions of $3.8 million in nonaccrual loans and $2.8 million in OREO offset by an increase of $2.3 million in accruing loans past due 90 days. The nonaccrual coverage ratio, which is the allowance for loan losses to non-performing loans, increased to 89.86% at year-end 1998 from 79.85% at year-end 1997. As a percentage of gross loans plus OREO, non-performing assets decreased to 2.85% at year-end 1998, compared with 3.70% at year-end 1997. 23 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED The following table presents the breakdown of total nonaccrual, past due and restructured loans for the past five years: NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
December 31, (dollars in thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $ 4,683 $ 2,373 $ 2,050 $ 1,344 $ 4,104 Nonaccrual loans 13,090 16,886 9,305 14,012 27,860 - ----------------------------------------------------------------------------------------------------------------- Total non-performing loans 17,773 19,259 11,355 15,356 31,964 - ----------------------------------------------------------------------------------------------------------------- Real estate acquired in foreclosure 10,454 13,269 18,854 13,879 6,798 - ----------------------------------------------------------------------------------------------------------------- Total non-performing assets $ 28,227 $ 32,528 $ 30,209 $ 29,235 $ 38,762 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Troubled debt restructurings(1) $ 4,642 $ 4,874 $ 3,201 $ 8,429 $ 5,257 Non-performing assets as a percentage of gross loans and other real estate owned at year-end 2.85% 3.70% 3.87% 5.11% 6.56% Allowance for loan losses as a percentage of non-performing loans 89.86% 79.85% 119.15% 82.98% 38.39% - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
(1) TROUBLED DEBT RESTRUCTURINGS ARE ACCRUING INTEREST AT THEIR RESTRUCTURED TERMS. The effect of nonaccrual loans and troubled debt restructurings on interest income for the years 1998, 1997, 1996, 1995 and 1994 is presented below:
(in thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- NONACCRUAL LOANS Contractual interest due $ 1,395 $ 1,845 $ 1,121 $ 1,503 $ 2,712 Interest recognized 112 471 268 200 560 - ----------------------------------------------------------------------------------------------------------------- Net interest foregone $ 1,283 $ 1,374 $ 853 $ 1,303 $ 2,152 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- TROUBLED DEBT RESTRUCTURINGS Contractual interest due $ 421 $ 406 $ 339 $ 467 $ 351 Interest recognized 412 387 311 352 319 - ----------------------------------------------------------------------------------------------------------------- Net interest foregone $ 9 $ 19 $ 28 $ 115 $ 32 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
The balance of $13.1 million in nonaccrual loans at year-end 1998 consisted mainly of $7.4 million in commercial real estate loans and $4.5 million in commercial loans. A majority of these nonaccrual loans are secured by real estate properties. The following tables present the type of collateral properties securing the loans and the type of businesses the borrowers engaged in under commercial real estate and commercial nonaccrual loan categories as of the dates indicated:
December 31, 1998 December 31, 1997 Nonaccrual Loan Secured by Nonaccrual Loan Secured by Real Estate Property Real Estate Property Commercial Commercial (In thousands) Real Estate Commercial Real Estate Commercial - ------------------------------------------------------------------------------------------------------------------ TYPE OF PROPERTY: Single/multi-family residence $ 348 $ 1,052 $ 593 $ 311 Commercial 5,533 2,613 8,471 5,095 Motel 1,501 30 1,350 -- Others -- 93 214 73 - ------------------------------------------------------------------------------------------------------------------ TOTAL $ 7,382 $ 3,788 $ 10,628 $ 5,479 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
24 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT
December 31, 1998 December 31, 1997 Nonaccrual Loan Balance Nonaccrual Loan Balance Commercial Commercial (in thousands) Real Estate Commercial Real Estate Commercial - ------------------------------------------------------------------------------------------------------------------ TYPE OF BUSINESS: Real estate development $ 451 $ 187 $ -- $ 134 Real estate management 3,903 35 6,303 36 Wholesale 209 1,021 430 2,994 Retail -- 38 -- -- Food/Restaurant -- 1,008 -- 1,190 Import -- 918 752 4 Motel 1,315 -- 1,350 -- Investments 375 -- 1,194 -- Industrial -- 310 214 263 Clothing 348 161 385 441 Others 781 806 -- 454 - ------------------------------------------------------------------------------------------------------------------ TOTAL $ 7,382 $ 4,484 $ 10,628 $ 5,516 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
TROUBLED DEBT RESTRUCTURINGS A troubled debt restructuring is a formal restructure of a loan when the lender, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date. The Company's troubled debt restructurings decreased slightly to $4.6 million at year-end 1998, compared with $4.9 million at year-end 1997. All of the troubled debt restructurings at year-end 1998 were commercial real estate loans and were accruing interest under their revised terms. IMPAIRED LOANS A loan is considered impaired when based on current circumstances and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. 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 or adjusting valuation allowance with a corresponding charge to the provision for loan losses. As of December 31, 1998, the Company had identified impaired loans with a recorded investment of $21.9 million. For 1998, the average balance of impaired loans was $21.7 million. During 1998, interest collected on impaired loans totaled $2.1 million. LOAN CONCENTRATION There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of December 31, 1998. 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. 25 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ALLOWANCE FOR LOAN LOSSES The allowance for loan losses increased slightly to $16.0 million or 1.63% of gross loans at year-end 1998, compared with $15.4 million or 1.78% of total loans at year-end 1997. The provision for loan losses totalled $3.6 million in 1998 and 1997, respectively. The Bank recorded net charge-offs of $3.0 million in 1998 up from $1.7 million in 1997. Total charge-offs of $3.5 million in 1998 included $2.4 million in commercial loans, $873,000 in real estate loans, $244,000 in installment loans and $8,000 in 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) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 15,379 $ 13,529 $ 12,742 $ 12,271 $ 7,173 Allowance from acquisition -- -- 1,644 -- -- Provision for loan losses 3,600 3,600 3,600 7,300 7,755 Loans charged-off (3,519) (2,139) (5,388) (7,018) (4,419) Recoveries of charged-off loans 510 389 931 189 1,762 - ----------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 15,970 $ 15,379 $ 13,529 $ 12,742 $ 12,271 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Average loans outstanding during year ended $ 907,639 $ 792,176 $ 579,634 $ 549,660 $ 572,244 Ratio of net charge-offs to average loans outstanding during the year 0.33% 0.22% 0.77% 1.24% 0.46% Provision for loan losses to average loans outstanding during the year 0.40% 0.45% 0.62% 1.33% 1.36% Allowance to non-performing loans at year-end 89.86% 79.85% 119.15% 82.98% 38.39% Allowance to total loans at year-end 1.63% 1.78% 1.78% 2.28% 2.10% - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
LOANS CHARGED-OFF BY LOAN TYPE(1)
Year ended December 31, (dollars in thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Commercial loan $ 2,394 $ 1,387 $ 4,010 $ 3,895 $ 2,300 Percentage of total commercial loans 0.65% 0.41% 1.33% 1.33% 0.71% - ----------------------------------------------------------------------------------------------------------------------------- Real estate loan $ 873 $ 574 $ 1,177 $ 2,885 $ 1,678 Percentage of total real estate loans 0.15% 0.11% 1.18% 1.18% 0.73% - ----------------------------------------------------------------------------------------------------------------------------- Installment and other loan $ 252 $ 178 $ 201 $ 238 $ 441 Percentage of total installment and other loans 0.85% 0.66% 1.17% 1.17% 1.48% - ----------------------------------------------------------------------------------------------------------------------------- Total loans charged-off $ 3,519 $ 2,139 $ 5,388 $ 7,018 $ 4,419 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
(1) PERCENTAGES WERE CALCULATED BASED ON YEAR-END BALANCES. RECOVERIES BY LOAN TYPE
Year ended December 31, (in thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Commercial loan $ 188 $ 218 $ 640 $ 110 $ 1,151 Real estate loan 279 111 205 17 501 Installment and other loan 42 60 86 62 110 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 509 $ 389 $ 931 $ 189 $ 1,762 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
In determining the allowance for loan losses, management assesses 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, borrower financial strength, and trends in local economic conditions. The Company's allowance for loan losses consists of specific allowances and a general allowance. For impaired loans, the Company provides specific allowances based on an evaluation of impairment and allocates a portion of the general allowance to each impaired loan based on a loss percentage assigned. The percentage assigned depends on a number of factors including the current financial condition of the borrowers and guarantors, the prevailing value of 26 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT the underlying collateral, charge-off history, management's knowledge of the portfolio and general economic conditions. The remainder of the general allowance is determined by an assessment of the overall quality of the non-impaired portion of the loan portfolio. The following table presents a breakdown of impaired loans and the related specific allowances and allocated general allowance as of the dates indicated:
Allocated Recorded Specific General Net 1998 ( in thousands) Investment Allowance Allowance Balance - ----------------------------------------------------------------------------------------------------- Commercial $ 9,379 $ -- $ 1,565 $ 7,814 Commercial real estate 12,515 58 1,769 10,688 Other 55 -- 55 -- - ----------------------------------------------------------------------------------------------------- Total $ 21,949 $ 58 $ 3,389 $ 18,502 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- 1997 ( in thousands) - ----------------------------------------------------------------------------------------------------- Commercial $ 7,784 $ 445 $ 1,055 $ 6,284 Commercial real estate 14,027 460 1,935 11,631 Other 95 -- 95 -- - ----------------------------------------------------------------------------------------------------- Total $ 21,906 $ 905 $ 3,085 $ 17,915 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
The Company allocates the allowance for loan losses to the major loan categories as set forth in the following table. These allocations are estimates based on historical loss experience and management's judgment. The allocation of the allowance for loan losses is not necessarily an indication that 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, 1998 1997 1996 1995 1994 Percentage of Percentage of Percentage of Percentage of Percentage of loans in each loans in each loans in each loans in each loans in each category category category category category to average to average to average to average to average (dollars in thousands) Amount gross loans Amount gross loans Amount gross loans Amount gross loans Amount gross loans - --------------------------------------------------------------------------------------------------------------------------------- TYPE OF LOANS: Commercial loans $ 7,468 38.58% $ 7,480 39.20% $ 6,190 37.27% $ 6,338 52.45% $ 5,658 55.76% Real estate mortgage loans 7,768 53.62 6,988 52.88 6,942 55.19 6,084 41.47 5,754 36.68 Real estate construction loans 313 4.77 401 4.80 294 4.40 136 2.44 225 2.41 Installment loans 414 2.98 356 3.09 72 3.09 81 3.54 336 3.13 Other loans 7 0.05 154 0.03 31 0.05 103 0.10 186 2.02 Unallocated -- N/A -- N/A -- N/A -- N/A 112 N/A - --------------------------------------------------------------------------------------------------------------------------------- Total $ 15,970 100.00% $ 15,379 100.00% $ 13,529 100.00% $ 12,742 100.00% $ 12,271 100.00% - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
Based on the Company's evaluation process and the methodology to determine the level of the allowance for loan losses mentioned previously, management believes the allowance for loan losses to be adequate as of December 31, 1998 to absorb estimated probable future losses identified through its analysis. See "Factors That May Affect Future Results" below for a discussion of some of the factors that may affect the matters discussed in this Section. OTHER REAL ESTATE OWNED The Company's OREO, net of a valuation allowance of $494,000, was carried at $10.5 million at year-end 1998, compared with OREO, net of a valuation allowance of $1.1 million, being carried at $13.3 million at year-end 1997. This represents a decrease of $2.8 million or 21%. 27 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED In 1998, the Company acquired ten properties totaling $4.3 million and disposed of 17 properties totaling $7.7 million with a net gain of $1.0 million. As of December 31, 1998, the Company had 17 OREO properties which included commercial buildings, warehouses, land, single family residences and condominiums, all of which are located in Southern California. The Company maintains a valuation allowance for OREO properties in order to reduce the carrying value of OREO to the estimated fair value of the properties. Periodic evaluation is performed on each property and a corresponding adjustment is made to the valuation allowance, if necessary. Any decline in value is recognized by a corresponding increase to the OREO valuation allowance in the current period. During 1998, management provided $195,000 to the provision for OREO losses, bringing the valuation allowance to $494,000 at year-end 1998. In 1998, the Bank recognized net income of $1.1 million from operating its OREO properties. In addition to the $1.0 million net gain on sales of OREO properties, the Bank received rental income of $748,000. Such amount was offset by operating expenses of $426,000 and the provision for OREO losses of $195,000. Although the California real estate market continued to show improvement in 1998, 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 (income) by type for years 1998, 1997 and 1996:
(in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating expense (income) $ (321) $ 201 $ 312 Provision for losses 195 476 1,501 Net gain on disposal (999) (174) (85) - ----------------------------------------------------------------------------- Total $ (1,125) $ 503 $ 1,728 - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
INVESTMENTS IN REAL ESTATE As of December 31, 1998, 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 $1.5 million and $1.7 million as of December 31, 1998 and 1997, respectively. Another strip mall was owned and sold in 1997 at a gain of $222,000. The Company realized net gains of $95,000, and $170,000 from the operations of the strip-malls in 1998 and 1997, respectively. DEPOSITS Total deposits increased $111.3 million or 8% from $1,449.1 million at year-end 1997 to $1,560.4 million at year-end 1998. Approximately 63% of the increase was from time deposits over $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 60.32% at year-end 1998. The Company had no brokered deposits as of December 31, 1998. Average total deposits were up $75.4 million or 5% from $1,408.8 million for 1997 to $1,484.2 million. Average Jumbo CD's increased $66.3 million or 13%. Average core deposits increased $24.3 million or 3%. Although average demand deposits increased $22.3 million or 15%, the increase was offset by decreases in interest bearing checking and savings accounts. This was largely attributable to the low prevailing interest rates paid on those interest-bearing checking and savings accounts as a result of the Federal Reserve Board's three consecutive cuts in the Federal funds rate in the last two quarters of 1998. Although the Bank's Jumbo CD portfolio continues to grow faster than other types of deposits, management considers the Bank's Jumbo CD's generally less volatile primarily due to the following reasons: 1) approximately 50% 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 3,781 individual accounts averaging approximately $165,000 per account owned by 2,671 individual depositors as of January 29, 1999; and 3) this phenomenon of having a relatively higher percentage of Jumbo CD's to total deposits exists in most of the Asian American banks in the Company's market due to the fact that the customers in this market tend to have a higher savings rate. 28 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT Management continues to monitor the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the patrons the Bank is servicing. To discourage the 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 promote transactional-based products; and 3) to diversify the customer base by branch expansion and/or acquisition as opportunities arise. The following tables display the deposit mix for the past three years, time deposits of $100,000 or more by maturity, time deposits with remaining term of more than one year at December 31, 1998 and average deposits and rates. DEPOSIT MIX
Year ended December 31, 1998 1997 1996 (dollars in thousands) Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------------ Demand $ 178,068 11.4% $ 175,875 12.1% $ 135,345 9.9% NOW accounts 114,982 7.4 111,653 7.7 118,498 8.7 Money market accounts 113,869 7.3 94,708 6.6 95,158 7.0 Savings deposits 207,365 13.3 210,291 14.5 224,443 16.4 Time deposits under $100,000 326,968 20.9 307,504 21.2 302,981 22.2 Time deposits of $100,000 or more 619,150 39.7 549,090 37.9 488,315 35.8 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 1,560,402 100.0% $1,449,121 100.0% $1,364,740 100.0% - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
TIME DEPOSITS OF $100,000 OR MORE BY MATURITY
(in thousands) At December 31, 1998 - ---------------------------------------------------------------------------------------------- Less than three months $ 277,524 Three to six months 183,228 Six to twelve months 152,715 Over one year 5,683 - ---------------------------------------------------------------------------------------------- Total $ 619,150 - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR AT DECEMBER 31, 1998 FOR EACH OF THE FIVE YEARS FOLLOWING DECEMBER 31, 1998
(in thousands) - ----------------------------------------------------------------------------------- 2000 $ 19,235 2001 6,194 2002 204 2003 120 2004 15 - ----------------------------------------------------------------------------------- Total $ 25,768 - ----------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------
AVERAGE DEPOSITS AND RATES
1998 1997 1996 1995 1994 (dollars in thousands) Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage - -------------------------------------------------------------------------------------------------------------------------------- Demand $ 166,657 --% $ 148,907 --% $ 121,952 --% $114,435 --% $108,528 --% NOW accounts 111,900 1.4 114,453 1.5 96,759 1.5 85,413 1.7 80,935 1.6 Money market accounts 99,833 2.1 97,470 2.3 100,898 2.3 106,760 2.4 130,664 2.3 Savings deposits 205,372 2.1 216,840 2.2 151,284 2.3 136,750 2.3 145,694 2.2 Time deposits 900,441 5.1 820,310 5.1 632,211 5.0 450,834 5.4 342,037 3.7 - -------------------------------------------------------------------------------------------------------------------------------- Total $1,484,203 3.6% $1,397,980 3.6% $1,103,104 3.5% $894,192 3.5% $807,858 2.5% - -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
29 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED CAPITAL RESOURCES The Company obtains capital primarily from retained earnings and to a lesser extent, the issuance of additional common stock through its Dividend Reinvestment Plan. At year-end 1998, stockholders' equity amounted to $156.7 million or 8.80% of total assets, compared with $135.9 million or 8.37% of total assets at year-end 1997. The increase of $20.8 million or 15% in stockholders' equity was primarily due to an addition of $24.6 million from net income less cash dividends paid of $6.3 million, $1.7 million from issuance of additional common shares through the Dividend Reinvestment Plan and an increase of $819,000 in the net unrealized holding gains on securities available-for-sale, net of tax. 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 amounted to $6.3 million. On February 19, 1998, the Company's Board of Directors adopted an Equity Incentive Plan (the "Plan") which was approved by stockholders at the 1998 Annual Meeting of Stockholders. The Plan currently expires on February 18, 2008. On September 17, 1998, the Company granted options to purchase a total of 45,000 shares of its common stock, with an exercise price of $33.00 per share, to ten eligible bank officers and nine non-employee directors. Management seeks to retain the Company's capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements. The 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 type of the securities in the Company's portfolio. U.S. Treasury securities are assigned a zero risk weighting, while other instruments, in which the Company has often placed a significant amount of funds including 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 exception 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 constantly seeks to maximize the yields on earning assets and as a result of continued growth in loans and a decrease in U.S. Treasury securities, the Company's total risk-based capital ratio decreased from 12.98% at year-end 1997 to 12.68% at year-end 1998. A table illustrating the Company and the Bank's capital and leverage ratios at year-end 1998 and 1997 is included in Note 11 to the consolidated financial statements. The Company's Total risk-based, Tier 1 risk-based and Tier 1 leverage capital ratios of 12.68%, 11.44% and 8.45%, respectively, at year-end 1998 not only exceeded the regulatory minimum requirements, but also placed 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%. 30 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT LIQUIDITY AND MARKET RISK LIQUIDITY 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 primary sources of liquidity are 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 (FHLB). At year-end 1998, the Company's liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) increased slightly to 46.04%, compared with 45.59% at year-end 1997. To supplement its liquidity needs, the Company maintains a total credit line of $45 million for Federal funds with three correspondent banks, a repo line of $110 million with three brokerage firms and a retail certificate of deposit line of approximately $100 million with another brokerage firm. The Bank is also a shareholder of the FHLB which enables the Bank to access lower cost FHLB financing when necessary. The Bank obtained advances from the FHLB totaling $30 million in the third quarter of 1998. These advances are at fixed interest rates and are non-callable. The Company had significant portion of its time deposit portfolio at year-end 1998 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 above-mentioned sources provide adequate liquidity to 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 operation 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. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. 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 its interest rate risk through analyzing the repricing characteristics of its loans, securities, and deposits on an on-going basis. The Company seeks 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 evaluate its interest rate exposure. Because of the limitations 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 and 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 time frame. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates, net interest margin may be enhanced with a positive gap. A negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of decreasing interest rates, net interest margin may be impaired with a negative gap. 31 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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, 1998. 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's assets and liabilities presented in the table may vary if different assumptions are used or if actual experience differs from the assumptions used. As of December 31, 1998, the Company was asset sensitive with a cumulative gap ratio of a positive 15.61% within three months, and liability sensitive with a cumulative gap ratio of a negative 11.48% within a 1-year period, compared with a positive 17.28% within three months, and a negative 10.49% within a 1-year period at year-end 1997. INTEREST RATE SENSITIVITY
December 31, 1998 Interest Rate Sensitivity Period 0 to 90 91 to 365 1 Year to Over Non-interest (dollars in Thousands) Days Days 5 Years 5 Years Bearing Total - -------------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Cash and due from banks $ -- $ -- $ -- $ -- $ 64,656 $ 64,656 Federal funds sold and securities purchased under agreements to resell 17,000 -- -- -- -- 17,000 Securities available-for-sale 105,919 34,709 64,188 35,112 -- 239,928 Securities held-to-maturity -- 1,986 130,883 285,287 -- 418,156 Loans: Commercial loans 314,090 31,675 11,785 8,504 -- 366,054 Real estate mortgage loans 279,468 2,370 33,307 217,080 -- 532,225 Real estate construction loans 40,738 -- -- -- -- 40,738 Installment loans 3,089 4,646 21,378 -- -- 29,113 Other loans 241 -- -- -- 16 257 - -------------------------------------------------------------------------------------------------------------------------- Total loans(1) 637,626 38,691 66,470 225,584 16 968,387 - -------------------------------------------------------------------------------------------------------------------------- Non-interest earning assets -- -- -- -- 72,771 72,771 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 760,545 $ 75,386 $ 261,541 $ 545,983 $ 137,443 $1,780,898 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES: Deposits: Demand $ -- $ -- $ -- $ -- $ 178,068 $ 178,068 Money market and NOW(2) 10,018 36,507 113,427 68,899 -- 228,851 Savings 14,370 42,842 100,220 49,933 -- 207,365 TCD's under $100,000 164,275 142,534 19,747 324 88 326,968 TCD's $100,000 and over 277,524 335,943 5,683 -- -- 619,150 - -------------------------------------------------------------------------------------------------------------------------- Total deposits $ 466,187 $ 557,826 $ 239,077 $ 119,156 $ 178,156 $1,560,402 - -------------------------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 16,436 -- -- -- -- 16,436 Advances from Federal Home Loan Bank -- -- 30,000 -- -- 30,000 Non-interest bearing liabilities -- -- -- -- 17,408 17,408 Stockholders' equity -- -- -- -- 156,652 156,652 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities & stockholders' equity $ 482,623 $ 557,826 $ 269,077 $ 119,156 $ 352,216 $1,780,898 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ 277,922 $(482,440) $ (7,536) $ 426,827 $(214,773) $ -- - -------------------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $ 277,922 $(204,518) $ (212,054) $ 214,773 $ -- $ -- - -------------------------------------------------------------------------------------------------------------------------- Gap ratio (% of total assets) 15.61% (27.09)% (0.42)% 23.97% (12.06)% -- - -------------------------------------------------------------------------------------------------------------------------- Cumulative gap ratio 15.61% (11.48)% (11.91)% 12.06% -- -- - --------------------------------------------------------------------------------------------------------------------------
1 LOANS ARE GROSS OF UNAMORTIZED DEFERRED LOAN FEES AND THE ALLOWANCE FOR LOAN LOSSES. NONACCRUAL LOANS ARE INCLUDED IN NON-EARNING ASSETS. ADJUSTABLE LOANS ARE INCLUDED IN THE "0 TO 90 DAYS" CATEGORY, AS THEY ARE SUBJECT TO AN INTEREST ADJUSTMENT DEPENDING UPON TERMS OF THE LOANS. 2 THE COMPANY'S OWN HISTORICAL EXPERIENCE AND DECAY FACTORS ARE USED TO ESTIMATE THE MONEY MARKET AND NOW, AND SAVINGS DEPOSIT RUNOFF. 32 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT Since interest rate sensitivity analysis does not measure the timing differences in the repricing of assets and liabilities, the Company uses a simulation model to quantify the extent of the differences in the behavior of the lending, investing and funding rates, to project impact to future earnings and market values under alternative interest 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 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 impact of immediate changes in interest rates at the specified levels at December 31, 1998. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used.
Changes in Interest Rates Percentage Change in: (in basis points) Net Interest Income(1) Net Portfolio Value(2) - ------------------------------------------------------------------------------------------- +200 13.62% (33.88)% +100 7.35% (17.36)% - -100 (6.03)% 15.79% - -200 (12.26)% 30.31% - -------------------------------------------------------------------------------------------
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. To manage and control its interest rate risk, the Company concentrates its efforts on seeking to increase its yield-cost spread through growth and competitive pricing. The Company 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, 1998. For assets, expected maturities, projected repayments and prepayments of principal are based on contractual maturity. For liabilities, the Company uses its historical experience and decay factors to estimate the 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, 1998 Interest (dollars in thousands) Rate 1999 2000 2001 2002 - ------------------------------------------------------------------------------------------------------- INTEREST-SENSITIVE ASSETS: Federal funds sold and securities purchased under agreements to resell 5.35% $ 17,000 $ -- $ -- $ -- Mortgage-backed securities and collateralized mortgage obligations 6.53% -- 7,748 8,293 97 Investment securities 5.88% 136,411 76,378 19,549 37,988 Federal Home Loan Bank stock 5.76% 5,991 -- -- -- Loans Commercial 7.84% 289,924 11,291 16,473 9,787 Real estate mortgage 8.33% 42,242 18,417 23,595 44,025 Real estate construction 8.78% 26,065 13,584 -- -- Installment & others 8.41% 7,860 3,740 6,397 7,304 INTEREST-SENSITIVE LIABILITIES: Other interest bearing deposits 1.46% 104,043 67,134 66,776 39,601 Time deposits 4.92% 920,277 19,235 6,194 204 Securities sold under agreement to repurchase 4.53% 16,436 -- -- -- Advances from Federal Home Loan Bank 4.84% -- 20,000 -- -- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit N/A 351,961 9,003 4,039 2,000 Commercial letters of credit N/A 29,029 -- -- -- Standby letters of credit N/A 9,855 207 50 -- Bill of lading guarantee N/A 11,517 -- -- -- - -------------------------------------------------------------------------------------------------------
Expected Maturity Date at December 31, 1998 (dollars in thousands) 2003 Thereafter Total Fair Value - ----------------------------------------------------------------------------------------------------- INTEREST-SENSITIVE ASSETS: Federal funds sold and securities purchased under agreements to resell $ -- $ -- $ 17,000 $ 17,000 Mortgage-backed securities and collateralized mortgage obligations 2,621 242,548 261,307 265,207 Investment securities 41,747 76,662 388,735 395,508 Federal Home Loan Bank stock -- -- 5,991 5,991 Loans Commercial 14,976 21,567 364,018 369,379 Real estate mortgage 53,297 347,678 529,254 542,143 Real estate construction -- -- 39,649 40,399 Installment & others 3,637 17 28,955 29,465 INTEREST-SENSITIVE LIABILITIES: Other interest bearing deposits 40,199 118,463 436,216 436,285 Time deposits 120 88 946,118 950,628 Securities sold under agreement to repurchase -- -- 16,436 16,436 Advances from Federal Home Loan Bank 10,000 -- 30,000 30,000 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit -- 22,301 389,304 (336) Commercial letters of credit -- -- 29,029 (174) Standby letters of credit -- -- 10,112 (87) Bill of lading guarantee -- -- 11,517 (50)
33 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED YEAR 2000 READINESS DISCLOSURES -- THE COMPANY'S STATE OF READINESS The "Year 2000" (Y2K) problem is the result of computer programs being written using two digits rather than four to identify a year in the date field. Consequently, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This issue, if not properly addressed, could cause systems to fail or create erroneous results by or at the Year 2000. Y2K issues impact both the Company's information technology ("IT") systems, such as its computer hardware and software, and its non-IT systems, such as its utilities, telephones, elevators, automated teller machines, copiers, fax machines, security systems and emergency communications. Y2K issues may also affect the Company's vendors, suppliers and customers. PROGRESS SCHEDULE The Company established a Y2K Committee (the "Committee") in 1997, made up of representatives from key sectors of the Company. The Committee is assigned the responsibility of identifying, assessing and designing an action plan to mitigate the risks that the Company may encounter relative to the Y2K problem. The actions undertaken by the Committee to date include formulating and initiating a company-wide program to identify and prioritize all the mission critical systems (defined as systems to be vital to the successful continuance of a core business activity) that may be affected by the Y2K issue; and developing and implementing a comprehensive remediation program to provide that the Company's IT and non-IT systems are Y2K compliant. The progress of the Company's Y2K efforts is discussed below. AWARENESS: During the awareness phase, the Company sought to educate its employees and directors about the material Y2K issues facing the Company and its vendors and customers. This phase was completed by December 31, 1997. ASSESSMENT: During the assessment phase, the Company inventoried its mission critical IT and non-IT systems, and identified third-party vendors and service providers whose failures to adequately address Y2K issues would likely affect the financial condition or operations of the Company. This phase was completed by June 30, 1998. RENOVATION: During the renovation phase, which is being conducted concurrent with the validation and implementation phases discussed below, the Company is implementing hardware and software upgrades of its material IT systems and seeking vendor certifications of Y2K readiness of the Company's material existing systems and upgrades. This phase was substantially completed by December 31, 1998, and is expected to be finished by June 30, 1999. VALIDATION: This phase consists of the testing of the Company's IT and non-IT systems, and the testing of third-party vendors and service providers for Y2K readiness. The Company has completed the testing of its core computer systems. Testing of its other mission-critical IT systems is expected to be completed by March 31, 1999. The Company has received written assurances from its utilities and telephone suppliers that the non-IT services or systems provided by such suppliers will be Y2K compliant in time for the turn of the century. The Company has also obtained Y2K compliance certifications from its other material non-IT systems providers. As a part of the validation phase, the Company also seeks to evaluate its major borrowers' Y2K readiness. Such evaluation began in June 1998, is in its final stage and is expected to be completed by June 30, 1999. IMPLEMENTATION: This phase began shortly after the validation phase. The Company is progressing through the implementation phase by determining the necessary remedial actions and establishing timelines for alternative actions with respect to third-party vendors, service providers or borrowers who are not yet Y2K compliant. The Company believes its material operations will be Y2K compliant by June 30, 1999. COSTS TO ADDRESS THE COMPANY'S Y2K ISSUES The total cost of the Company's plan to address these Y2K issues, including estimates of personnel costs and hardware and software upgrades, is currently estimated to be $750,000. Hardware and software upgrades will be depreciated over their useful lives in accordance with the Company's policy. All other costs, including human resources, system testings, consulting services, training and any other contingency expenses will be expensed as incurred. The Company is funding these costs through operating cash flows, and does not expect such costs to have a material adverse effect on the Company's financial condition or results of operation. The amount expensed as of February 28, 1999 was approximately $450,000. 34 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT THE RISKS TO THE COMPANY OF THE YEAR 2000 ISSUE The Company relies on its core computer system for its information technology needs, as it supports virtually all of the Company's deposits, loan and accounting processing. A failure of the core computer system to be Y2K compliant could cause substantial disruption to the Company's operations, including the ability to conduct its business, to process transactions and to provide customer services, and could have a material adverse financial impact on the Company. Essential third-party services upon which the Company depends, including telecommunications and electrical power, could be interrupted if such third-party servicers are not Y2K compliant. As a result, the Company would be unable to operate normally which could have a material adverse financial impact on the Company. Borrowers may be unable to repay their loans and comply with other loan covenants, if their businesses or operations are disrupted. Such failures could impair the credit quality of the Company's loan portfolio and adversely affect the amount and timing of the recognition of the anticipated revenue related to these loans. The inability of the Company's correspondent banks, such as the Federal Reserve Bank, to provide currency or related services, could materially impair the Company's liquidity, and therefore, affect the Company's ability to fund loans and meet deposit withdrawals. Liquidity may also be adversely affected if the Company experiences an increase in the outflow of deposits due to depositors who may be concerned about the possibility of computer failure. Notwithstanding the Company's effort to address the Y2K problem, 1) the Company's remediation efforts may not effectively address all Y2K issues or achieve complete Y2K compliance; 2) the ultimate time and cost to prepare the Company for Y2K compliance may substantially exceed the Company's current estimates; 3) the systems of borrowers or other companies upon which the Company's operations rely may not be timely converted; and 4) depositors concerned about the possibility of computer failure may seek to withdraw their funds from the Company. In any such event, the Company's financial condition, results of operations and liquidity could be materially and adversely affected. CONTINGENCY PLAN As a precautionary measure, the Company has also formed a Y2K contingency team to address key functions of the Company and to determine alternate resources and procedures should the normal business operations fail. The Company cannot, at this time, determine whether the consequences of any Y2K failure will have a material impact on the Company's operations, liquidity or financial condition. The contingency plan covers critical dates in 1999 and 2000. The contingency procedures will be tested and will continue to be revised based upon the test results. The final plan is expected to be in place by June 30, 1999. FACTORS THAT MAY AFFECT FUTURE RESULTS THE ALLOWANCE FOR LOAN LOSSES IS AN ESTIMATE OF FUTURE LOAN LOSSES. ACTUAL LOAN LOSSES IN EXCESS OF THE ESTIMATE COULD ADVERSELY AFFECT THE COMPANY'S NET INCOME AND CAPITAL. The allowance for loan losses is based on management's estimate of the probable future losses from its loan portfolio. If actual losses exceed the estimate, the excess losses could adversely affect the Company's net income and capital. Such excess could also lead to larger allowances for loan losses in future periods, which could in turn adversely affect net income and capital. Management believes that the allowance for loan losses at December 31, 1998, is adequate to cover estimable and probable losses from its loan portfolio as of that date. If economic conditions differ substantially from the assumptions used in the estimate or adverse developments arise with respect to the Company's loans, future losses may occur, and increases in the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company's allowance. These agencies may require the Company to establish additional valuation allowances based on their judgement of the information available at the time of their examinations. No assurance can be given that the Company will not sustain loan losses in excess of present or future levels of the allowance for loan losses. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS. The interest rate risk inherent in the Company's lending, investing and deposit taking activities is a significant market risk to the Company and its business. Income associated with interest earning assets and costs associated with interest bearing liabilities may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in interest rates, events over which the Company has no control, may have an adverse affect on net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can 35 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED significantly affect the Company's assets and liabilities. Increases in interest rates may adversely affect the ability of the Company's floating rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-offs. Generally, the interest rates on 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. Even assets and liabilities with similar maturities or periods of repricing may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. Certain assets, such as fixed and adjustable rate mortgage loans, have features which limit change in interest rates on a short-term basis and over the life of the asset. The Company seeks to minimize the adverse effects of changes in interest rates by structuring the Company's asset-liability composition to obtain the maximum spread. The Company uses interest rate sensitivity analysis and a simulation model to assist it in estimating the optimal asset-liability composition. However, such management tools have inherent limitations that impair their effectiveness. There can be no assurance that the Company will be successful in minimizing the adverse effects of changes in interest rates. See also, "Loan Portfolio Risk Elements" and "Liquidity and Market Risk - Market Risk" above. INFLATION MAY ADVERSELY AFFECT THE COMPANY'S FINANCIAL PERFORMANCE. The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles. Generally accepted accounting principles 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 the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the 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. POOR ECONOMIC CONDITIONS IN CALIFORNIA COULD CAUSE THE COMPANY TO INCUR LOSSES. The Company's banking operations are concentrated primarily in Southern and Northern California. Adverse economic conditions in California could impair borrowers' ability to service their loans, decrease the level and duration of deposits by customers, and erode the value of loan collateral. These events could increase the amount of the Company's non-performing assets 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. Real estate securing the Company's lending activity is also principally located in Southern and Northern California. The value of such collateral depends upon conditions in the relevant real estate markets. These include general or local economic conditions and neighborhood characteristics, real estate tax rates, the cost of operating the properties, governmental regulations and fiscal policies, acts of nature including earthquakes and flood (which may result in uninsured losses), and other factors beyond the control of the Company. Although California economic indicators continued to show improvement in 1998, management cannot predict the future economic performance of the region. The current economic crisis in Asia and the unstable economic conditions in Latin America may also negatively impact economic conditions in California, which could adversely affect the Company's business and results of operations. THE RISKS INHERENT IN CONSTRUCTION LENDING MAY ADVERSELY AFFECT THE COMPANY'S NET INCOME. The risks inherent in construction lending may adversely affect the Company's net income. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loan secured by such properties also involve additional risk because such properties have no operating history. In these loans, loan funds are advanced upon the security of the project under construction, which is of uncertain value prior to completion of construction, and the operating cash flow to be generated by the completed 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 consideration can affect the borrowers' ability to repay their obligations to the Company and the value of the Company's security interest in collateral. 36 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT THE COMPANY'S USE OF APPRAISALS IN DECIDING WHETHER TO MAKE A LOAN ON OR SECURED BY REAL PROPERTY DOES NOT INSURE THE VALUE OF THE REAL PROPERTY COLLATERAL. The Company, in considering whether to make a loan on or secured by real property, generally requires an appraisal of such property. However, the appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, the Company may not realize an amount equal to the indebtedness secured by the property. THE COMPANY FACES SUBSTANTIAL COMPETITION FROM LARGER COMPETITORS. The Company faces substantial competition for deposits and loans throughout its market area from the major banks and financial institutions that dominate the commercial banking industry. This may cause the Company's cost of funds to exceed that of its competitors. It may also result in the Company making less desirable loans. Such banks and financial institutions have greater resources than the Company, including the ability to finance advertising campaigns and allocate their investment assets to regions of higher yield and demand. By virtue of their larger capital bases, such institutions have substantially greater lending limits than 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. ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS. The Company is governed by significant federal and state regulation and supervision, which is primarily for the benefit and protection of the Company's customers and not for the benefit of its stockholders. In the past, the Company's business has been materially affected by such regulation and supervision. This trend is likely to continue in the future. Laws, regulations or policies currently affecting the Company may change at any time. Regulatory authorities may also change their interpretation of existing laws and regulations. Such changes may, among other things, increase the cost of doing business, limit permissible activities or affect the competitive balance between banks and other financial institutions. It is impossible to predict the competitive impact that any such changes would have on commercial banking in general or on the business of the Company in particular. POOR ECONOMIC CONDITIONS IN ASIA COULD CAUSE THE COMPANY TO INCUR LOSSES. Continuing or worsening adverse economic conditions in Asia could increase the Company's exposure to economic and transfer risk, and could result in an outflow of deposits by the Company's Asian-American customers. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of investments with or loans made to such entities. Adverse economic conditions may also continue to negatively impact asset values and the profitability and liquidity of companies operating in this region. Management does not believe that the Company will be directly affected by such transfer risk, as a majority of its trade finance customers are importers. Based on its current customer profiles, the Company also does not anticipate significant deposit outflows. However, no assurance can be given that the Company's past experience will continue, especially if conditions in Asia or other parts of the world continue to worsen. THE Y2K PROBLEM COULD DISRUPT THE COMPANY'S BUSINESS. The Y2K problem results from an inability of certain computer systems to accurately recognize dates on and after the year 2000. The Y2K problem could disrupt the Company's business if the Company fails to achieve Y2K readiness or if the Company's vendors or customers fail to achieve Y2K readiness. See "Year 2000 Readiness Disclosures - The Company's State of Readiness" above. STATUTORY RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS FROM THE BANK MAY ADVERSELY IMPACT THE COMPANY. A substantial portion of the Company's cash flow comes from dividends that the Bank pays to it. Various statutory provisions restrict the amount of dividends that the Bank can pay without regulatory approval. In addition, if the Bank were to liquidate, the Bank's creditors would be entitled to receive distributions from the assets of the Bank to satisfy their claims against the Bank before the Company, as a holder of an equity interest in the Bank, would be entitled to receive any of the assets of the Bank. 37 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CONDITION
As of December 31, 1998 1997 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 64,655,921 $ 57,727,974 Federal funds sold and securities purchased under agreements to resell 17,000,000 67,000,000 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 81,655,921 124,727,974 Securities available-for-sale (amortized cost of $237,877,049 in 1998 and $215,465,568 in 1997) 239,927,818 216,157,845 Securities held-to-maturity (estimated fair value of $426,778,000 in 1998 and $356,187,000 in 1997) 418,156,587 350,336,415 Loans (net of allowance for loan losses of $15,970,034 in 1998 and $15,379,408 in 1997) 961,875,850 846,151,425 Other real estate owned, net 10,454,005 13,269,382 Investments in real estate, net 1,457,051 1,653,722 Premises and equipment, net 25,826,808 25,201,883 Customers' liability on acceptance 10,847,075 10,295,812 Accrued interest receivable 11,995,728 12,246,270 Goodwill 8,589,702 9,529,827 Other assets 10,111,791 12,891,013 - -------------------------------------------------------------------------------------------------------------- Total assets $ 1,780,898,336 $ 1,622,461,568 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand deposits $ 178,067,712 $ 175,875,463 Interest bearing accounts NOW accounts 114,981,640 111,652,490 Money market deposits 113,868,789 94,708,279 Savings deposits 207,365,550 210,290,931 Time deposits under $100,000 326,967,670 307,503,579 Time deposits of $100,000 or more 619,150,214 549,090,061 - -------------------------------------------------------------------------------------------------------------- Total deposits 1,560,401,575 1,449,120,803 - -------------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 16,436,039 23,418,942 Advances from Federal Home Loan Bank 30,000,000 -- Acceptances outstanding 10,847,075 10,295,812 Other liabilities 6,561,428 3,749,470 - -------------------------------------------------------------------------------------------------------------- Total liabilities 1,624,246,117 1,486,585,027 - -------------------------------------------------------------------------------------------------------------- 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, 8,988,760 and 8,941,743 shares issued and outstanding in 1998 and 1997, respectively 89,888 89,417 Additional paid-in-capital 62,919,694 61,270,739 Accumulated other comprehensive income 1,188,502 369,922 Retained earnings 92,454,135 74,146,463 - -------------------------------------------------------------------------------------------------------------- Total stockholders' equity 156,652,219 135,876,541 - -------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,780,898,336 $ 1,622,461,568 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 39 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on loans $ 82,865,886 $ 74,015,063 $ 55,887,756 Interest on securities available-for-sale 13,493,891 17,700,422 17,146,782 Interest on securities held-to-maturity 22,966,538 17,831,320 11,578,557 Interest on Federal funds sold and securities purchased under agreements to resell 3,949,645 2,415,226 1,482,592 Interest on deposits with banks 32,805 16,402 3,289 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 123,308,765 111,978,433 86,098,976 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Time deposits of $100,000 or more 30,690,733 26,633,484 22,576,698 Other deposits 23,315,890 23,738,144 16,474,889 Other borrowed funds 3,218,319 502,413 157,829 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 57,224,942 50,874,041 39,209,416 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income before provision for loan losses 66,083,823 61,104,392 46,889,560 Provision for loan losses 3,600,000 3,600,000 3,600,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 62,483,823 57,504,392 43,289,560 - ---------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Securities Gains 43,048 40,913 21,862 Letter of credit commissions 1,944,259 1,502,961 1,508,407 Service charges 3,914,599 3,490,801 2,942,170 Other operating income 2,233,773 1,739,847 1,386,589 - ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest income 8,135,679 6,774,522 5,859,028 - ---------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 18,024,104 17,008,737 13,996,253 Occupancy expense 2,546,172 2,931,290 2,320,718 Computer and equipment expense 2,411,572 2,364,675 2,001,985 Professional services expense 3,233,988 3,059,906 3,153,993 FDIC and State assessments 393,309 356,537 454,850 Marketing expense 1,027,729 1,200,198 1,163,455 Real estate operations, net (1,125,105) 503,104 1,728,382 Other operating expense 3,553,189 3,503,788 3,193,619 - ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 30,064,958 30,928,235 28,013,255 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 40,554,544 33,350,679 21,135,333 - ---------------------------------------------------------------------------------------------------------------------------------- Income tax expense 15,975,661 13,242,941 7,819,382 - ---------------------------------------------------------------------------------------------------------------------------------- Net income 24,578,883 20,107,738 13,315,951 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding loss (gain) arising during the year 810,412 1,174,644 (2,507,793) Less: reclassification adjustment for realized gain (loss) on securities included in net income (8,168) (254,625) (45,119) - ---------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income, net of tax 818,580 1,429,269 (2,462,674) - ---------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income $ 25,397,463 $ 21,537,007 $ 10,853,277 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Net income per common share Basic $ 2.74 $ 2.26 $ 1.66 Diluted $ 2.74 $ 2.26 $ 1.66 - ---------------------------------------------------------------------------------------------------------------------------------- Basic average common shares outstanding 8,967,188 8,915,936 8,017,398 Diluted average common shares outstanding 8,968,393 8,915,936 8,017,398 - ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 40 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Accumulated Additional Other Total For the years ended December 31, Number Paid-in- Comprehensive Retained Stockholders' 1998, 1997 and 1996 of Shares Amount Capital Income Earnings Equity - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 7,867,164 $ 78,672 $ 42,013,687 $ 1,403,327 $ 51,033,127 $ 94,528,813 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Issuances of common stock -- Dividend Reinvestment Plan 105,245 1,052 1,693,718 -- -- 1,694,770 Issuance of stock for the acquisition of First Public Savings Bank, F.S.B. 905,735 9,057 16,104,535 -- -- 16,113,592 Cash dividends of $.60 per share -- -- -- -- (4,744,447) (4,744,447) Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- (2,462,674) -- (2,462,674) Net income -- -- -- -- 13,315,951 13,315,951 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 8,878,144 88,781 59,811,940 (1,059,347) 59,604,631 118,446,005 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Issuances of common stock -- Dividend Reinvestment Plan 63,599 636 1,458,799 -- -- 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 -- -- -- -- 20,107,738 20,107,738 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 8,941,743 $ 89,417 $ 61,270,739 $ 369,922 $ 74,146,463 $ 135,876,541 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Issuances of common stock -- Dividend Reinvestment Plan 47,017 471 1,648,955 -- -- 1,649,426 Cash dividends of $.70 per share -- -- -- -- (6,271,211) (6,271,211) Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- 818,580 -- 818,580 Net income -- -- -- -- 24,578,883 24,578,883 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 8,988,760 $ 89,888 $ 62,919,694 $ 1,188,502 $ 92,454,135 $ 156,652,219 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 41 CATHAY BANCORP INC. AND SUBSIDIARIES 1998 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 24,578,883 $ 20,107,738 $ 13,315,951 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,600,000 3,600,000 3,600,000 Provision for losses on other real estate owned 195,560 475,796 1,501,268 Benefit for deferred taxes (10,460) (493,366) (503,186) Depreciation 1,241,354 1,335,400 1,336,363 Net gain on sale of other real estate owned (999,145) (173,961) (85,313) Gain on sale of investments in real estate -- (222,310) -- Gain (loss) on disposal of premises and equipment (2,225) (1,650) 1,595 Net gain on sales and calls of securities (43,048) (40,913) (21,862) Amortization and accretion of investment security premiums, net 285,705 63,310 734,931 Amortization of goodwill 940,125 684,579 83,172 Increase (decrease) in deferred loan fees, net (154,858) 43,208 247,476 (Increase) decrease in accrued interest receivable 250,542 2,761,184 (1,107,418) (Increase) decrease in other assets, net 3,443,262 (2,436,773) 19,583,814 Increase (decrease) in other liabilities 2,158,378 (741,066) (3,130,696) - ------------------------------------------------------------------------------------------------------------------------ Total adjustments 10,905,190 4,853,438 22,240,144 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 35,484,073 24,961,176 35,556,095 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities available-for-sale (1,025,244,049) (217,418,506) (90,261,346) Proceeds from maturity and call of investment securities available-for-sale 1,006,489,646 300,394,371 58,609,947 Proceeds from sale of investment securities available-for-sale 6,429,518 92,705,983 989,297 Purchase of mortgage-backed securities available-for-sale (34,968,026) (12,442,974) (18,874,200) Proceeds from repayments and sale of mortgage-backed securities available-for-sale 25,492,037 6,799,700 24,213,775 Purchase of investment securities held-to-maturity (82,268,138) (15,345,814) (24,796,858) Proceeds from maturity and call of investment securities held-to-maturity 12,024,824 41,931,722 26,365,854 Purchase of mortgage-backed securities held-to-maturity (73,786,854) (186,620,681) (65,925,846) Proceeds from repayment of mortgage-backed securities held-to-maturity 74,816,820 19,211,765 3,105,726 Proceeds from sale of loans -- 4,827,657 -- Purchase of loans (6,782,068) (975,045) -- Net increase in loans (113,238,614) (108,326,821) (68,372,708) Purchase of premises and equipment (1,866,279) (765,981) (530,193) Proceeds from sale of equipment 2,225 1,650 7,278 Proceeds from sale of other real estate owned 4,470,077 4,346,484 5,283,597 Proceeds from sale of investments in real estate -- 2,292,468 -- Net decrease in investments in real estate 196,671 263,344 317,131 Payment for purchase of FPSB -- -- (1,906,354) - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (208,232,210) (69,120,678) (151,774,900) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, money market and savings deposits 21,756,528 19,083,188 25,763,682 Net increase in time deposits 89,524,244 65,297,906 103,873,201 Net increase (decrease) in securities sold under agreements to repurchase (6,982,903) 13,418,942 8,500,000 Increase in borrowing from Federal Home Loan Bank 30,000,000 -- -- Cash dividends (6,271,211) (5,565,906) (4,744,447) Proceeds from shares issued to Dividend Reinvestment Plan 1,649,426 1,459,435 1,694,770 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 129,676,084 93,693,565 135,087,206 - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents (43,072,053) 49,534,063 18,868,401 Cash and cash equivalents, beginning of the year 124,727,974 75,193,911 56,325,510 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of the year $ 81,655,921 $ 124,727,974 $ 75,193,911 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Supplemental Disclosure of Cash Flow Information Cash paid during the year for: Interest $ 57,231,606 $ 50,183,513 $ 39,123,990 Income taxes $ 15,413,002 $ 13,736,000 $ 5,540,000 Non-cash investing activities: Transfer to securities available-for-sale within 90 days of maturity $ 1,339,932 $ 629,894 $ 30,362,405 Transfer to securities held-to-maturity $ -- $ -- $ 3,733,023 Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax $ 818,580 $ 1,429,269 $ (2,462,674) Transfers to other real estate owned $ 4,333,865 $ 6,012,016 $ 13,329,482 Loans to facilitate the sale of other real estate owned $ 3,482,750 $ 6,948,500 $ 3,524,000 - ------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 42 CATHAY BANCORP INC. AND SUBSIDIARIES 1998 ANNUAL REPORT 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. 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. Certain reclassifications have been made to the prior years' financial statements to conform with the 1998 presentation. The following are descriptions of the more significant of these policies. ORGANIZATION AND BACKGROUND 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 at Bancorp. Bancorp may, from time to time, explore various acquisition possibilities. Bancorp currently does not employ any persons other than its management, which includes the President and the Chief Financial Officer, and does not own or lease any real or personal property. Bancorp uses the employees, premises, equipment and furniture of the Bank without the payment of any service or rental fees to the Bank. It is expected that for the near future the primary business of the Bancorp will be the ongoing business of the Bank. The Bank is a commercial bank, servicing primarily the individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. Its operations include the acceptance of checking, savings, and time deposits, and the making of commercial, real estate and consumer loans. The Bank also offers trade financing, letter of credit, wire transfer, spot and forward contracts, and other customary banking services to its customers. SECURITIES Securities are classified as held-to-maturity when management has the ability and intent to hold these securities until maturity. Securities are classified as available-for-sale when management intends to hold the securities for an indefinite period of time, or when the securities may be utilized for tactical asset/liability purposes, and may be sold from time to time to manage interest rate exposure and resultant prepayment risk and liquidity needs. Securities purchased are designated as held-to-maturity or available-for-sale at the time of acquisition. Securities held-to-maturity are stated at cost, adjusted for the amortization of premiums and the accretion of discounts on a level-yield basis. The carrying value of these assets is not adjusted for temporary declines in fair value since the Company has the positive intent and ability to hold them to maturity. Securities available-for-sale are carried at fair value, and any unrealized holding gains or losses are excluded from earnings and reported as a separate component of stockholders' equity, net of tax, in accumulated other comprehensive income until realized. Realized gains or losses are determined on the specific identification method. Premium and discounts are amortized or accreted as adjustment of yield on a level-yield basis. The cost basis of an individual security is written down, if the decline in its fair value below the amortized cost basis is other than temporary. The write-down is accounted for as a realized loss, and is included in earnings. The new cost basis is not changed for subsequent recoveries in fair value. INTEREST INCOME ON LOANS Loans are carried at amounts advanced, less principal payments collected and net deferred loan fees. Interest is accrued and earned daily on an actual or 360-day basis. Interest accruals on business loans and non-residential real estate loans are generally discontinued whenever the payment of interest or principal is 90 days or more past due. Such loans are placed on nonaccrual status, unless the loan is well secured, and there is a high probability of recovery in full, as determined by management. When loans are placed on a nonaccrual status, previously accrued but unpaid interest is reversed and charged against current period income, and interest is subsequently recognized only to the extent cash is received. Interest collected on nonaccrual loans is applied to the outstanding principal balance unless the loan is returned to accrual status. In order to be returned to accrual status, all past due 43 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED payments must be received and the loan must be paying in accordance with its payment terms. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. If a loan is placed on nonaccrual status, the amortization of the loan fees and the accretion of discounts discontinue until such time when the loan is reverted back to accruing status. ALLOWANCE FOR LOAN LOSSES Management believes the allowance for loan losses is being maintained at a level considered adequate to provide for estimable and probable losses. Additions to the allowance for loan losses are made monthly by charges to operating expense in the form of a provision for loan losses. All loans judged to be uncollectible are charged against the allowance while any recoveries are credited to the allowance. Management monitors changing economic conditions, the loan mix by category, the industry segregation and geographic distribution of the portfolio and the type of borrowers in determining the adequacy of the allowance for loan losses. Management also closely reviews its past, present and expected overall net loan losses in comparison to the existing level of the allowance. In addition, the Bank's regulators, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additions to its allowance for loan losses based on their judgements of the information available to them at the time of their examination. IMPAIRED LOANS A loan is considered impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e. both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral- dependent loan. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to the provision for loan losses. The Bank stratifies its loan portfolio by size and treats smaller performing loans with an outstanding balance less than the Bank's defined criteria as a homogenous portfolio. For loans with a balance in excess of $750,000, the Bank conducts a periodic review of each loan in order to test for impairment. The Bank recognizes interest income on impaired loans based on its existing method of recognizing interest income on nonaccrual loans. LETTER OF CREDIT FEES Issuance and commitment fees received for the issuance of commercial or standby letters of credit are recognized over the term of the instruments. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed on the straight-line method based on the following estimated useful lives of the assets:
Type Estimated Useful Life - ---------------------------------------------------------------------------------------------------- Buildings 15 to 45 years Building improvements 5 to 20 years Furniture, fixtures and equipment 3 to 25 years Leasehold improvements Over the shorter of useful lives or the terms of the lease - ----------------------------------------------------------------------------------------------------
Improvements are capitalized and amortized to occupancy expense over the shorter of the estimated useful life of the improvement or the term of the lease. OTHER REAL ESTATE OWNED Real estate acquired in the settlement of loans is carried at the estimated fair value, less estimated costs to sell. Specific valuation allowances on other real estate owned are recorded through charges to operations to recognize declines in fair value subsequent to foreclosure. INVESTMENTS IN REAL ESTATE Real estate acquired for sale or development is stated at the lower of cost or net realizable 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. 44 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 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 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. INCOME TAXES The provision for income taxes is based on income reported for financial statement purposes and differs from the amount of taxes currently payable, since certain income and expense items are reported for financial statement purposes in different periods than those for tax reporting purposes. The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is established, when necessary, to reduce the deferred tax assets to the amount that is more likely than not to be realized. FOREIGN EXCHANGE OPERATIONS The Company engages in foreign exchange transactions on behalf of its customers. Stated trading limits are maintained and monitored to ensure efficient operations. The majority of all transactions are settled on a cash and carry basis to minimize settlement risk to the Company. The Company requires cash collateral or an approved line of credit on all forward transactions. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement of Financial Accounting Standards (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 items, minimum pension liability adjustments, and unrealized gains and losses on investments in securities available-for-sale. The Company reports and displays comprehensive income and its components in its consolidated statements of income and comprehensive income. All periods presented have been restated to reflect the new disclosure standard. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. NET INCOME PER COMMON SHARE Earnings per share (EPS) are computed on a basic and diluted basis. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings of the Company. All periods presented have been restated to reflect the new disclosures. STOCK BASED COMPENSATION The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the intrinsic value method, to account for stock based compensation. In accordance with Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), the Company includes pro forma disclosures reflecting the impact of the fair value method on net income and income per share as if SFAS No. 123 had been adopted for purposes of preparing its basic financial statements for stock options granted. 45 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. SEGMENTS INFORMATION AND DISCLOSURES On January 1, 1998, the Company adopted 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 stockholders. 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 concluded it is in one segment-banking. Accordingly, the adoption of SFAS No. 131 did not have material effect on the consolidated financial statements or disclosures. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 Future 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 also amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," the disclosure provisions about concentrations of credit risk from Statement No. 105. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivative) 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 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The impact of implementing SFAS No. 133 is not expected to be material to the Company's results of operations or financial condition. 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 investment. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. The impact on the Company of adopting SFAS No. 134 is not expected to be material to its results of operations or financial condition. 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 closing of the merger, the Company recorded goodwill of approximately $10 million. 46 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT The following table presents an unaudited pro forma combined summary of operations of the Company and FPSB for the year ended December 31, 1996. The unaudited pro forma combined summary of operations is presented as if the merger had been effective January 1, 1996. 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, 1996 (dollars in thousands, except per share data) (Unaudited) - ------------------------------------------------------------------------------ Interest income $104,921 Interest expense 48,064 - ------------------------------------------------------------------------------ Net interest income before provision for loan losses 56,857 Provision for loan losses 3,789 - ------------------------------------------------------------------------------ Net interest income after provision for loan losses 53,068 Non-interest income 6,090 Non-interest expense 34,241 - ------------------------------------------------------------------------------ Income before income tax expense 24,917 Income tax expense 9,986 - ------------------------------------------------------------------------------ Net income $ 14,931 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Basic and diluted net income per common share $ 1.67 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
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 CASH EQUIVALENTS The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserve balances required for 1998 and 1997 were $11,130,000 and $14,060,000, respectively. Securities purchased under agreements to resell are collateralized by Collateralized Mortgage Obligations securities at December 31, 1998 and 1997. These agreements generally mature in one business day. The counterparties to these agreements are nationally recognized investment banking firms that meet credit requirements of the Company and with whom a master repurchase agreement has been duly executed. The following table sets forth information with respect to securities purchased under resale agreements.
1998 1997 - ------------------------------------------------------------------------------ Balance, December 31 $ 17,000,000 $67,000,000 Weighted average interest rate, December 31 5.35% 7.06% Average amount outstanding during the year $ 69,915,475 $42,260,112 Weighted average interest rate for the year 5.65% 5.72% Maximum amount outstanding at any month end $105,000,000 $88,475,516 - ------------------------------------------------------------------------------
For those securities obtained under the resale agreements, the collateral is either held by a third party custodian or by the counterparty and segregated under written agreements that recognize the Company's interest in the securities. Interest income associated with securities purchased under resale agreements totaled $4.0 million, $2.4 million and $1.5 million, respectively, for 1998, 1997 and 1996. 47 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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, 1998 and 1997:
Gross Gross Amortized Unrealized Unrealized Fair 1998 Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 2,004,345 $ 9,255 $ -- $ 2,013,600 U.S. government agencies 102,523,865 495,624 -- 103,019,489 State and municipal securities 21,974,147 342,989 -- 22,317,136 Mortgage-backed securities 17,682,988 587,769 5,165 18,265,592 Collateralized mortgage obligations 14,071,085 88,282 -- 14,159,367 Asset-backed securities 8,264,563 7,914 52,503 8,219,974 Federal Home Loan Bank stock 5,991,300 -- -- 5,991,300 Commercial paper 29,949,840 -- 4,840 29,945,000 Corporate bonds 35,414,916 630,415 48,971 35,996,360 - --------------------------------------------------------------------------------------------------------- Total $237,877,049 $2,162,248 $111,479 $239,927,818 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- 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 Collateralized 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 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
The amortized cost and fair value of securities available-for-sale except for mortgage-backed securities and collateralized mortgage obligations at December 31, 1998, 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 1997 Cost Value - --------------------------------------------------------------------------------------------------------- Due in one year or less(1) $140,416,052 $140,628,389 Due after one year through five years 59,092,747 59,707,274 Due after five years through ten years 6,614,177 7,167,196 Mortgage-backed securities and collateralized mortgage obligations 31,754,073 32,424,959 - --------------------------------------------------------------------------------------------------------- Total $237,877,049 $239,927,818 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
(1) EQUITY SECURITIES ARE REPORTED IN THIS CATEGORY. Proceeds from sales and repayments of securities available-for-sale during 1998 and 1997 were $31,921,555 and $99,505,683, respectively. Proceeds from maturities and calls of securities available-for-sale during 1998 and 1997 were $1,006,489,646 and $300,394,371, respectively. Gross realized gains of $58,780 and $303,504 were realized for 1998 and 1997, respectively. No gains were realized in 1996. Gross realized losses of $18,561 and $268,255 were realized for 1998 and 1997, respectively. No losses were realized for 1996. 48 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 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, 1998 and 1997:
Gross Gross Estimated Carrying Unrealized Unrealized Fair 1998 Value Gains Losses Value - --------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 26,026,308 $ 577,692 $ -- $ 26,604,000 U.S. government agencies 54,426,068 818,932 -- 55,245,000 State and municipal securities 61,494,654 3,144,484 32,138 64,607,000 Mortgage-backed securities 146,018,736 2,351,559 317,295 148,053,000 Collateralized Mortgage Obligations 83,534,779 1,200,181 5,960 84,729,000 Corporate bonds 46,656,042 883,958 -- 47,540,000 - --------------------------------------------------------------------------------------------------------- Total $418,156,587 $8,976,806 $355,393 $426,778,000 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
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 bonds 8,916,256 220,744 -- 9,137,000 - --------------------------------------------------------------------------------------------------------- Total $350,336,415 $5,892,458 $ 41,873 $356,187,000 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 1998, 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 $ 1,986,304 $ 2,009,000 Due after one year through five years 116,569,468 118,974,000 Due after five years through ten years 41,455,234 43,485,000 Due after ten years 28,592,066 29,528,000 Mortgage-backed securities and collateralized mortgage obligations 229,553,515 232,782,000 - --------------------------------------------------------------------------------------------------------- Total $418,156,587 $426,778,000 - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
Proceeds from the maturity and call of securities held-to-maturity during 1998 and 1997 were $12,024,824 and $41,931,722, respectively. Gross realized gains of $2,829, $5,664 and $21,862 were realized for 1998, 1997 and 1996, respectively. No losses were realized for 1998, 1997 and 1996. Securities having a carrying value of $46,806,222 and $24,606,816 at December 31, 1998 and 1997, respectively, were pledged to secure public deposits, treasury tax and loan, securities sold under agreements to repurchase and a line of credit with the Federal Home Loan Bank. 49 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5 - LOANS 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 components of loans in the consolidated statements of condition as of December 31, 1998 and 1997 were as follows:
1998 1997 - --------------------------------------------------------------------------- Commercial loans $370,539,071 $338,285,520 Residential mortgage loans 163,756,611 137,003,972 Commercial mortgage loans 356,607,886 303,725,974 Equity lines 20,401,541 17,687,751 Real estate construction loans 40,738,133 41,735,722 Installment loans 29,164,465 26,610,915 Other loans 269,493 267,153 - --------------------------------------------------------------------------- 981,477,200 865,317,007 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Less Unamortized deferred loan fees 3,631,316 3,786,174 Allowance for loan losses 15,970,034 15,379,408 - --------------------------------------------------------------------------- Total $961,875,850 $846,151,425 - --------------------------------------------------------------------------- - ---------------------------------------------------------------------------
The Company previously sold participations in certain residential mortgage loans to buyers in the secondary market. These participations covered substantially all of the loan balances and were sold without recourse. No such sales have been made since 1993. As of December 31, 1998, the Company had $9,937,316 of these loans in its servicing portfolio. There were no loans held for sale as of December 31, 1998 and 1997. Approximately $87,324,000 and $3,425,000 residential mortgage loans were pledged to secure a line of credit with the Federal Home Loan Bank as of December 31, 1998 and December 31, 1997, respectively. An analysis of the activity in the allowance for loan losses for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $15,379,408 $13,528,568 $12,742,427 Allowance acquired from merger -- -- 1,644,171 Loans charged-off (3,518,890) (2,138,803) (5,388,389) Recoveries on loans previously charged-off 509,516 389,643 930,359 Provision for loan losses 3,600,000 3,600,000 3,600,000 - ------------------------------------------------------------------------------------------------------------------- Balance, end of year $15,970,034 $15,379,408 $13,528,568 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Company had identified impaired loans with a recorded investment of approximately $21,949,000 and $21,906,000, respectively. For the year 1998 and 1997, the average balances of impaired loans were $21,713,000 and $23,171,000, and interest collected on impaired loans totaled $2,080,000 and $1,564,000, respectively. The Bank recognizes interest income on impaired loans based on its existing method of recognizing interest income on nonaccrual loans. The following table is a breakdown of impaired loans and the related specific allowance and allocated general allowance:
Allocated Recorded Specific General Net 1998 Investment Allowance Allowance Balance - ------------------------------------------------------------------------------------------------------------------- Commercial $ 9,378,807 $ -- $1,565,389 $ 7,813,418 Commercial real estate 12,515,142 58,316 1,768,524 10,688,302 Other 54,629 -- 54,629 -- - ------------------------------------------------------------------------------------------------------------------- Total $21,948,578 $ 58,316 $3,388,542 $18,501,720 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- 1997 - ------------------------------------------------------------------------------------------------------------------- Commercial $ 7,783,610 $444,766 $1,054,554 $ 6,284,290 Commercial real estate 14,027,194 460,909 1,934,943 11,631,342 Other 95,052 -- 95,052 -- - ------------------------------------------------------------------------------------------------------------------- Total $21,905,856 $905,675 $3,084,549 $17,915,632 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
50 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 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, 1998. An analysis of the activity with respect to loans to Related Parties is as follows:
- --------------------------------------------------------------------- Balance at December 31, 1996 $ 1,945,644 Additional loans made 5,523,396 Payments received (160,721) - --------------------------------------------------------------------- Balance at December 31, 1997 7,308,319 Additional loans made 18,626,870 Payments received (10,031,398) - --------------------------------------------------------------------- Balance at December 31, 1998 $ 15,903,791 - --------------------------------------------------------------------- - ---------------------------------------------------------------------
The following is a summary of nonaccrual loans and troubled debt restructurings as of December 31, 1998, 1997 and 1996 and the related net interest foregone for the years then ended:
1998 1997 1996 - ---------------------------------------------------------------------------------- Nonaccrual loans $13,089,808 $16,886,460 $9,304,994 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Contractual interest due $ 1,395,212 $ 1,845,513 $1,121,136 Interest recognized 112,641 471,398 268,050 - ---------------------------------------------------------------------------------- Net interest foregone $ 1,282,571 $ 1,374,115 $ 853,086 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------- Troubled debt restructurings $4,642,886 $ 4,874,277 $3,201,462 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Contractual interest due $ 420,823 $ 406,015 $ 338,382 Interest recognized 411,588 387,420 310,783 - ---------------------------------------------------------------------------------- Net interest foregone $ 9,235 $ 18,595 $ 27,599 - ---------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------
As of December 31, 1998, there were no commitments to lend additional funds to those borrowers whose loans have been restructured. 6 - OTHER REAL ESTATE OWNED The balance of other real estate owned at December 31, 1998 and 1997 was $10,454,005 and $13,269,382, respectively. The valuation allowance was $494,027 and $1,081,370 at December 31, 1998 and 1997, respectively. The following table presents the components of other real estate owned expense (income) for the year-ended:
1998 1997 1996 - --------------------------------------------------------------------------------- Operating expense (income) $ (321,520) $ 201,269 $ 312,427 Provision for losses 195,560 475,796 1,501,268 Net gain on disposal (999,145) (173,961) (85,313) - --------------------------------------------------------------------------------- Real estate operations, net $(1,125,105) $ 503,104 $1,728,382 - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
51 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996 - -------------------------------------------------------------------------------- Balance, beginning of year $1,081,370 $1,568,387 $ 869,262 Provision for losses 195,560 475,796 1,501,268 Charge-offs on disposal (782,903) (962,813) (802,143) - -------------------------------------------------------------------------------- Balance, end of year $ 494,027 $1,081,370 $1,568,387 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
7 - INVESTMENTS IN REAL ESTATE As of December 31, 1998, 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 at December 31:
1998 1997 - -------------------------------------------------------------------------------- Strip-malls $ 641,558 $ 680,091 Low income housing 815,493 973,631 - -------------------------------------------------------------------------------- $1,457,051 $1,653,722 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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 Company sold another strip mall in 1997, recognizing a gain of $222,310. The Company recognized net gains of $95,060 and $170,021 from the operations of the properties, respectively, in 1998 and 1997, and a net loss of $106,065 in 1996 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 six years. See Note 10 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, 1998 and 1997 because the Company did not have ability to exercise significant influence over the operation of the partnership. The Company recognized a net loss of approximately $158,000, $176,000 and $181,000 in 1998, 1997 and 1996, respectively, from the partnerships' operations. 8 - PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31, 1998 and 1997:
1998 1997 - --------------------------------------------------------------------------------- Land and land improvements $11,483,793 $11,371,120 Building and building improvements 13,779,697 13,775,815 Furniture, fixtures and equipment 12,057,782 11,037,154 Other 2,169,974 1,808,329 Construction in process 837,796 480,485 - --------------------------------------------------------------------------------- 40,329,042 38,472,903 Less: Accumulated depreciation 14,502,234 13,271,020 - --------------------------------------------------------------------------------- Premises and equipment, net $25,826,808 $25,201,883 - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
The amount of depreciation included in operating expense was $1,241,354, $1,335,400 and $1,336,363 in 1998, 1997 and 1996, respectively. 52 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 9 - BORROWINGS SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The underlying collateral pledged for the repurchase agreements consists of U.S. government agency 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, 1998 1997 1996 - ------------------------------------------------------------------------------------- Average amount outstanding(1) $ 53,284,503 $ 8,861,458 $ 611,749 Highest month-end balances(2) 55,184,962 23,418,942 10,000,000 Year end balance 16,436,039 23,418,942 10,000,000 Rate at year-end 4.53% 7.03% 6.83% - -------------------------------------------------------------------------------------
(1) AVERAGE BALANCES WERE COMPUTED USING DAILY AVERAGES. (2) HIGHEST MONTH-END BALANCES WERE AT NOVEMBER 1998, DECEMBER 1997 AND DECEMBER 1996, RESPECTIVELY. ADVANCES FROM THE FEDERAL HOME LOAN BANK During the third quarter of 1998, the Bank obtained advances from the FHLB, totaling $30,000,000. These advances bear an average interest rate of 4.84% and are non-callable. 10 - INCOME TAXES For the years ended December 31, 1998, 1997 and 1996, the current and deferred amounts of the income tax expense are summarized as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------- CURRENT Federal $ 11,696,795 $ 10,280,310 $ 6,080,034 State 4,289,326 3,455,997 2,242,534 - ------------------------------------------------------------------------------------- 15,986,121 13,736,307 8,322,568 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- DEFERRED Federal (105,480) (478,483) (460,651) State 95,020 (14,883) (42,535) - ------------------------------------------------------------------------------------- (10,460) (493,366) (503,186) - ------------------------------------------------------------------------------------- Total income tax expense $ 15,975,661 $ 13,242,941 $ 7,819,382 - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
53 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities give rise to deferred taxes. Deferred tax assets and liabilities for the years ended December 31, 1998 and 1997 were as follows:
1998 1997 - ---------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Difference between provisions for loan losses for tax and financial reporting purposes $ 6,916,944 $ 6,324,398 Difference between provisions for other real estate owned losses for tax and financial reporting purposes 788,985 1,058,223 State income tax 1,320,988 891,637 - ---------------------------------------------------------------------------------------------------------------- Gross deferred tax assets 9,026,917 8,274,258 - ---------------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Use of accelerated depreciation for tax purposes (1,131,216) (1,127,316) Deferred loan fees (269,739) (275,717) FHLB stock dividend (936,091) (648,948) Acquisition of FPSB (485,154) (584,264) Unrealized holding gain on securities available-for-sale, net (862,266) (322,355) Other, net (1,055,357) (478,193) - ---------------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities (4,739,823) (3,436,793) - ---------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 4,287,094 $ 4,837,465 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
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 1997 are primarily the result of adjustments to conform to the tax returns as filed. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Bank will realize all benefits related to these deductible temporary differences. Included in other assets in the statements of condition, at December 31, 1998 and 1997 were net deferred tax assets of $4,287,094 and $4,837,465, respectively. Other assets as of December 31, 1997 included a current income tax receivable of $374,029. Other liabilities as of December 31, 1998 include a current income tax payable of $199,090. Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years indicated as follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Tax provision at Federal statutory rate $ 14,194,090 35.00% $ 11,672,737 35.00% $ 7,397,367 35.00% State income taxes, net of Federal income tax benefit 2,849,825 7.03 2,236,724 6.71 1,429,999 6.77 Interest on obligations of state and political subdivisions, which are exempt from Federal taxation (927,316) (2.29) (722,348) (2.17) (709,350) (3.35) Low income housing tax credits (319,183) (0.79) (319,183) (0.96) (319,183) (1.51) Non-deductible expense -- Amortization of goodwill 239,323 0.59 239,603 0.72 28,760 0.14 Other, net (61,078) (0.15) 135,408 0.41 (8,211) (0.05) - ---------------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 15,975,661 39.39% $ 13,242,941 39.71% $ 7,819,382 37.00% - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
54 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 11 - STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE As a bank holding company, Bancorp's ability to pay dividends will depend upon the dividends it receives from the Bank and on the income which it may generate from any other activities in which Bancorp may engage, either directly or through other subsidiaries. Currently, since Bancorp does not have any other significant business activities outside the Bank's and CIC's operations, its ability to pay dividends will depend solely on dividends received from the Bank. Under California State banking law, the Bank may not pay a cash dividend, without regulatory approval, which exceeds the lesser of the Bank's retained earnings or its net income for the last three fiscal years, less any cash distributions made during that period. The amount of retained earnings available for cash dividends as of December 31, 1998 is restricted to approximately $41,421,000 under this regulation. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary --actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. The Federal Deposit Insurance Corporation has established five capital ratio categories: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized." A well capitalized institution must have a Tier 1 capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. At December 31, 1998, 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, 1998 and 1997 are presented in the tables below:
Company Bank Company Bank As of December 31, 1998 As of December 31, 1998 As of December 31, 1997 As of December 31, 1997 Balance Percentage Balance Percentage Balance Percentage Balance Percentage - ------------------------------------------------------------------------------------------------------------------------------------ Tier I Capital (to risk- weighted assets) $ 146,874,015 (1) 11.44% $ 141,834,342 (1) 11.04% $ 125,976,792 (2) 11.73% $ 122,431,400 (2) 11.40% Tier I Capital minimum requirement 51,371,838 4.00 51,371,838 4.00 42,956,701 4.00 42,956,587 4.00 - ----------------------------------------------------------------------------------------------------------------------------------- Excess $ 95,502,177 7.44% $ 90,462,504 7.04% $ 83,020,091 7.73% $ 79,474,813 7.40% - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Total Capital (to risk- weighted assets) $ 162,844,048 (1) 12.68% $ 157,804,375 (1) 12.29% $ 139,424,917 (2) 12.98% $ 135,879,487 (2) 12.65% Total Capital minimum requirement 102,743,677 8.00 102,743,677 8.00 85,913,402 8.00 85,913,174 8.00 - ----------------------------------------------------------------------------------------------------------------------------------- Excess $ 60,100,371 4.68% $ 55,060,698 4.29% $ 53,511,515 4.98% $ 49,966,313 4.65% - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Risk-weighted Assets $1,284,295,962 $1,284,295,962 $1,073,917,525 $1,073,914,670 Tier I Capital (to average assets) -- Leverage ratio $ 146,874,015 (1) 8.45% $ 141,834,341 (1) 8.16% $ 125,976,792 (2) 7.94% $ 122,431,400 (2) 7.71% Minimum leverage requirement 69,508,412 4.00 69,508,348 4.00 63,483,951 4.00 63,483,844 4.00 - ----------------------------------------------------------------------------------------------------------------------------------- Excess $ 77,365,603 4.45% $ 72,325,993 4.16% $ 62,492,841 3.94% $ 58,947,556 3.71% - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Total average assets $1,737,710,294 (3) $1,737,708,705 (3) $1,587,098,783 (3) $1,587,096,105 (3) - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
(1) EXCLUDING THE UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE-FOR-SALE OF $1,188,502 AND GOODWILL OF $8,589,702. (2) EXCLUDING THE UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE-FOR-SALE OF $369,922 AND GOODWILL OF $9,529,827. (3) AVERAGE ASSETS REPRESENT AVERAGE BALANCES FOR THE FOURTH QUARTER OF 1998 AND 1997, RESPECTIVELY. 55 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Board of Directors of Bancorp is authorized to issue preferred stock in one or more series and to fix the voting powers, designations, preferences or other rights of the shares of each such class or series and the qualifications, limitations and restrictions thereon. Any preferred stock issued by Bancorp may rank prior to Bancorp common stock as to dividend rights, liquidation preferences, or both, may have full or limited voting rights, and may be convertible into shares of Bancorp common stock. No preferred stock has been issued as of December 31, 1998. The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years indicated.
Year Ended Year Ended December 31, 1998 December 31, 1997 Per Per Income Shares Share Income Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------- Net income $24,578,883 $20,107,738 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Basic EPS Income available to stockholders $24,578,883 8,967,188 $2.74 $20,107,738 8,915,936 $2.26 Effect of Dilutive Stock Options 1,205 -- -- Diluted EPS Income available to common stockholders plus assumed conversions $24,578,883 8,968,393 $2.74 $20,107,738 8,915,936 $2.26 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 Per Income Shares Share (Numerator) (Denominator) Amount - ------------------------------------------------------------------------- Net income $13,315,951 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Basic EPS Income available to stockholders $13,315,951 8,017,398 $1.66 Effect of Dilutive Stock Options Diluted EPS Income available to common stockholders plus assumed conversions $13,315,951 8,017,398 $1.66 - ------------------------------------------------------------------------- - -------------------------------------------------------------------------
12 - COMMITMENTS AND CONTINGENCIES LITIGATION The Company is involved in various litigation concerning transactions entered into during the normal course of business. Management, after consultation with legal counsel, does not believe that the resolution of such litigation will have a material effect upon its financial condition or results of operations. LENDING In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments included commitments to extend credit in the form of loans or through commercial 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:
1998 1997 - -------------------------------------------------------------------------------- Commitments to extend credit $ 389,304,000 $ 344,798,000 Standby letters of credit 10,112,000 11,498,000 Other letters of credit 29,029,000 30,612,000 Bill of lading guarantee 11,517,000 10,402,000 - -------------------------------------------------------------------------------- Total $ 439,962,000 $ 397,310,000 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
56 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 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, 1998, 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, 1998, the Company had available credit lines with other financial institutions in the amount of $145,000,000. LEASES The Company is obligated under a number of operating leases for premises and equipment with terms ranging from 1 to 55 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. Rental expense was $1,750,592, $1,792,633 and $1,328,502 for 1998, 1997 and 1996, respectively. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 1998:
(in thousands) Commitments - -------------------------------------------------------------------------------- Year ended December 31, 1999 $ 1,879 2000 1,704 2001 1,350 2002 669 2003 614 Thereafter 9,553 - ------------------------------------------------------------------------------- Total minimum lease payments $ 15,769 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Rental income was $455,209, $436,892 and $504,689 for 1998, 1997 and 1996, 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, 1998:
(in thousands) Commitments - ------------------------------------------------------------------------------- Year ended December 31, 1999 $ 407 2000 342 2001 298 2002 257 2003 166 Thereafter 337 - -------------------------------------------------------------------------------- Total minimum lease payments to be received $ 1,807 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR 2000 (UNAUDITED) The "Year 2000" problem is the result of computer programs recognizing a date using "00" as the year 1900 rather than the year 2000, due to computer programs being written using two digits rather than four for the date field. The failure to correct the Y2K problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could lead to material and adverse effects on the Company's operations, liquidity and financial condition. 57 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company began its Y2K efforts in 1997 and continued in 1998, in accordance with its remediation program. The program adopted by the Company was designed to bring its information technology and non-information technology systems into Y2K compliance, and also to determine whether the Company's material third-party suppliers, service providers and borrowers will be Y2K ready at the turn of the century. The remediation program divided the Company's Y2K efforts into five phases - awareness, assessment, renovation, validation and implementation. The awareness and assessment phases were completed in 1998. The Company is currently in the renovation, validation and implementation phases. The Company expects these remaining three phases to be completed by June 30, 1999. Due to the general uncertainty inherent in the Y2K problem, the Company's remediation efforts may not effectively address all the Y2K issues or achieve Y2K compliance, partly due to the uncertainty of the Y2K readiness of third-party suppliers and customers. The Company cannot, at this time, determine whether the consequences of any Y2K failures will have a material impact on the Company's operations, liquidity or financial condition. The Company is in the process of establishing contingency procedures for the key functions of the Company, in the event that any of its information technology or non-information technology should fail at the turn of the century. 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 purchased and securities sold under repurchase agreements, and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. ADVANCES FROM FEDERAL HOME LOAN BANK The fair value of the advances is estimated by discounting the projected cash flows using the U.S. Treasury curve adjusted to approximate current entry-value interest rates applicable and similar obligations issued by the Bank. 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. 58 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 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. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1998 As of December 31, 1997 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value - -------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks $ 64,656 $ 64,656 $ 57,728 $ 57,728 Federal funds sold and securities purchased under agreements to resell 17,000 17,000 67,000 67,000 Securities available-for-sale 239,928 239,928 216,158 216,158 Securities held-to-maturity 418,156 426,778 350,336 356,187 Loans, net 961,876 981,386 846,151 860,111 - -------------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES Deposits $ 1,560,402 $ 1,564,981 $ 1,449,121 $ 1,452,787 Securities sold under agreements to repurchase 16,436 16,436 23,419 23,419 Advances from Federal Home Loan Bank 30,000 30,000 -- -- - -------------------------------------------------------------------------------------------------------------- As of December 31, 1998 As of December 31, 1997 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value - -------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL STATEMENTS Commitments to extend credit $ 389,304 $ (336) $ 344,798 $ (417) Standby letters of credit 10,112 (87) 11,498 (69) Other letters of credit 29,029 (174) 30,612 (202) Bill of lading guarantee 11,517 (50) 10,402 (25) - --------------------------------------------------------------------------------------------------------------
14 - EMPLOYEE BENEFIT PLANS EMPLOYEE STOCK OWNERSHIP PLAN Under the Company's 1985 Employee Stock Ownership Plan ("ESOP"), the Company makes annual contributions to a trust in the form of either cash or common stock of the Company for the benefit of eligible employees. Employees are eligible to participate in the ESOP Plan after completing two years of service for salaried full-time employees or 1,000 hours for each of two consecutive years for salaried part-time employees. The amount of the annual contribution is discretionary except that it must be sufficient to enable the trust to meet its current obligations. The Company also pays for the administration of this plan and of the trust. During 1998, 1997 and 1996, the ESOP purchased 23,669, 38,491 and 45,959 shares, respectively, of the Company's stock at an aggregate cost of $821,021, $878,620 and $754,269, respectively. The shares purchased in 1998 included 11,000 shares bought on the open market and 12,669 shares bought through the Dividend Reinvestment Plan. The 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 $486,120, $453,000 and $515,850 to the trust in 1998, 1997 and 1996, respectively, which was charged to salaries and employee benefits in the accompanying consolidated statements of income and comprehensive income. In 1998, distribution of benefits to participants totaled 16,764 shares. As of December 31, 1998, the ESOP owned 561,786 shares or 6.25% of the Company's outstanding common stock. 59 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 the matching contribution is 0% for less than two years of service, 25% after two years of service and from then on, at an increment of 25% each year until 100% vested after five years of service. In 1998, the Company's contribution amounted to $178,510. The Plan allows participants to withdraw all or part of their vested amount in the plan due to certain financial hardship as designated by the IRS. Participants may also borrow up to 50% of the vested amount, up to a maximum of $50,000. The minimum loan amount is $1,000. 15 - EQUITY INCENTIVE PLAN On February 19, 1998, the Board adopted the Cathay Bancorp, Inc. Equity Incentive Plan. Under the Equity Incentive Plan, directors and eligible employees may be granted incentive or nonstatutory stock options, or awarded restricted stock, for up to 1,075,000 shares of the Company's common stock. The Equity Incentive Plan currently terminates on February 18, 2008. On September 17, 1998, the Company granted nonstatutory stock options to purchase a total of 45,000 shares of the Company's common stock to selected bank officers and non-employee directors, with an exercise price per share equal to the fair market value of a share of the Company's common stock on the date of grant. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events). If such options expire or terminate without having been exercised, any unpurchased shares will again be available for future grants or awards.
Weighted-Average Shares Exercise Price - ------------------------------------------------------------------------------- Balance, December 31, 1997 -- -- Granted 45,000 $ 33 Exercised -- -- Forfeited -- -- Expired -- -- Cancelled -- -- - ------------------------------------------------------------------------------- Balance, December 31, 1998 45,000 $ 33 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
At December 31, 1998 there were no options exercisable. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its Plan. Accordingly, no compensation cost has been recognized for its stock option plans in the consolidated financial statements for 1998. The Company estimates the fair value of options granted during 1998 using the Black-Scholes option-pricing model with following assumptions: (i) an expected life of the option of 4 years, (ii) a stock price volatility of 33.5% based on daily market prices for the preceding four-year period, (iii) an expected dividend yield of 1.9% per share per annum, and (iv) a risk-free interest rate of 4.5%. The fair value of the options is calculated to be $9.21 per share at the date of grant. 60 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT If the compensation cost for the Company's stock option plan had been determined with the fair value at the grant dates, computed using the assumptions above, for awards under the Plan consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share for 1998 would have been reduced to the pro forma amounts indicated below.
(dollars in thousands, except per share data) 1998 - ------------------------------------------------------------------------------- Net income As reported $ 24,579 Pro forma 24,564 Basic net income per share As reported 2.74 Pro forma 2.74 Diluted net income per share As reported 2.74 Pro forma 2.74 - -------------------------------------------------------------------------------
The pro forma amounts shown may not be representative of the effects on reported net income for future periods. 16 - CONDENSED FINANCIAL INFORMATION OF CATHAY BANCORP, INC. (UNAUDITED) The condensed financial information of Cathay Bancorp, Inc. as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 were as follows: STATEMENTS OF CONDITION
Year ended December 31 1998 1997 - ---------------------------------------------------------------------------------------------- ASSETS Cash $ 5,080,369 $ 3,613,233 Investment in subsidiary -- Cathay Bank 151,612,546 132,331,149 Other -- 2,855 - ---------------------------------------------------------------------------------------------- Total assets $ 156,692,915 $ 135,947,237 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- LIABILITIES Accrued expenses $ 40,696 $ 70,696 - ---------------------------------------------------------------------------------------------- Total liabilities 40,696 70,696 - ---------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized, 8,988,760 and 8,941,738 shares issued and outstanding in 1998 and 1997, respectively 89,888 89,417 Additional paid-in-capital 62,919,694 61,270,739 Accumulated other comprehensive income 1,188,502 369,922 Retained earnings 92,454,135 74,146,463 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 156,652,219 135,876,541 - ---------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 156,692,915 $ 135,947,237 - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
61 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Cash dividends from Cathay Bank $ 6,271,211 $ 5,565,906 $ 4,744,447 Amortization of organizational costs and other expenses (267,702) (233,385) (217,766) - ------------------------------------------------------------------------------------------------------------------------ Income before income tax expense 6,003,509 5,332,521 4,526,681 Income tax benefit 112,558 97,837 92,213 - ------------------------------------------------------------------------------------------------------------------------ Income before undistributed earnings of subsidiary 6,116,067 5,430,358 4,618,894 - ------------------------------------------------------------------------------------------------------------------------ Equity in undistributed earnings of subsidiary 18,462,816 14,677,380 8,697,057 - ------------------------------------------------------------------------------------------------------------------------ Net income 24,578,883 20,107,738 13,315,951 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Other comprehensive income, net of tax: Unrealized holding loss (gain) arising during the year 810,412 1,174,644 (2,507,793) Less: reclassification adjustment for realized gain (loss) on securities included in net income (8,168) (254,625) (45,119) Total comprehensive income, net of tax 818,580 1,429,269 (2,462,674) Total comprehensive income $ 25,397,463 $ 21,537,007 $ 10,853,277 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 24,578,883 $ 20,107,738 $ 13,315,951 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (18,462,816) (14,677,380) (8,697,057) Amortization of organizational costs -- -- 786 Increase (decrease) in accrued expenses (30,000) 19,320 (19,320) Other 2,854 (2,849) 155,244 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 6,088,921 5,446,829 4,755,604 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 1,649,426 1,459,435 1,694,770 Cash dividends (6,271,211) (5,565,906) (4,744,447) - ------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (4,621,785) (4,106,471) (3,049,677) - ------------------------------------------------------------------------------------------------------------------------ Increase in cash and cash equivalents 1,467,136 1,340,358 1,705,927 Cash and cash equivalents, beginning of year 3,613,233 2,272,875 566,948 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 5,080,369 $ 3,613,233 $ 2,272,875 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes $ 150,000 $ 150,471 $ 150,000 Non-cash investing activities: Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax $ 818,580 $ 1,429,269 $ (2,462,674) - ------------------------------------------------------------------------------------------------------------------------
62 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 17 - DIVIDEND REINVESTMENT PLAN The Company has a dividend reinvestment plan which allows for participants' reinvestment of cash dividends and certain additional optional investments in the Company's common stock. Shares issued under the plan and consideration received were 47,017, 63,599 and 105,245 and $1,649,426, $1,459,435 and $1,694,770 for 1998, 1997 and 1996, respectively. 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth selected unaudited quarterly financial data.
Summary of Operations 1998 Fourth Third Second First (in thousands, except per share data) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- Interest income $ 32,077 $ 31,819 $ 30,234 $ 29,179 Interest expense 14,773 14,879 14,082 13,491 - -------------------------------------------------------------------------------------- Net interest income 17,304 16,940 16,152 15,688 Provision for loan losses 900 900 900 900 - -------------------------------------------------------------------------------------- Net interest income after provision for loan losses 16,404 16,040 15,252 14,788 Non-interest income 1,964 2,072 2,339 2,002 Non-interest expense 7,080 7,680 7,664 7,882 - -------------------------------------------------------------------------------------- Income before income tax expense 11,288 10,432 9,927 8,908 Income tax expense 4,408 4,172 3,906 3,490 - -------------------------------------------------------------------------------------- Net income 6,880 6,260 6,021 5,418 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding loss (gain) arising during the year (272) 626 552 (96) Less: reclassification adjustment for realized gain (loss) on securities included in net income 4 2 -- (15) - -------------------------------------------------------------------------------------- Total other comprehensive income, net of tax (276) 624 552 (81) - -------------------------------------------------------------------------------------- Total comprehensive income $ 6,604 $ 6,884 $ 6,573 $ 5,337 - -------------------------------------------------------------------------------------- Basic net income per common share $ 0.77 $ 0.70 $ 0.67 $ 0.61 Diluted net income per common share $ 0.77 $ 0.70 $ 0.67 $ 0.61 - --------------------------------------------------------------------------------------
Summary of Operations 1997 Fourth Third Second First (in thousands, except per share data) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- Interest income $ 29,217 $ 28,445 $ 27,600 $ 26,716 Interest expense 13,466 13,058 12,345 12,005 - -------------------------------------------------------------------------------------- Net interest income 15,751 15,387 15,255 14,711 Provision for loan losses 900 900 900 900 - -------------------------------------------------------------------------------------- Net interest income after provision for loan losses 14,851 14,487 14,355 13,811 Non-interest income 1,860 1,895 1,630 1,390 Non-interest expense 8,146 7,253 7,901 7,628 - -------------------------------------------------------------------------------------- Income before income tax expense 8,565 9,129 8,084 7,573 Income tax expense 3,251 3,733 3,205 3,054 - -------------------------------------------------------------------------------------- Net income 5,314 5,396 4,879 4,519 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding loss (gain) arising during the year (74) 979 1,424 (1,154) Less: reclassification adjustment for realized gain (loss) on securities included in net income (9) (259) 22 (8) - -------------------------------------------------------------------------------------- Total other comprehensive income, net of tax (65) 1,238 1,402 (1,146) - -------------------------------------------------------------------------------------- Total comprehensive income $ 5,249 $ 6,634 $ 6,281 $ 3,373 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Basic net income per common share $ 0.59 $ 0.60 $ 0.55 $ 0.51 Diluted net income per common share $ 0.59 $ 0.60 $ 0.55 $ 0.51 - --------------------------------------------------------------------------------------
63 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT 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, 1998 and 1997, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California January 15, 1999 64 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT CORPORATE, BRANCH AND OVERSEAS OFFICES CORPORATE OFFICE: TORRANCE VALLEY-STONEMAN 23228 Hawthorne Boulevard 43 East Valley Boulevard 777 North Broadway Torrance, CA 90505 Alhambra, CA 91801 Los Angeles, CA 90012 Tel: (310) 791-8700 Tel: (626) 576-7600 Tel: (213) 625-4700 Fax: (310) 791-1862 Tel: (626) 576-7600 Fax: (213) 625-1368 Phoebe Yu Mimy Luc ASSISTANT VICE PRESIDENT AND MANAGER MANAGER OAKLAND BERKELEY-RICHMOND BRANCH AND OVERSEAS OFFICES: 710 Webster Street 3288 Pierce Street Oakland, CA 94607 Richmond, CA 94804 LOS ANGELES Tel: (510) 208-3700 Tel: (510) 526-8898 777 North Broadway Fax: (510) 208-3727 Fax: (510) 526-0639 Los Angeles, CA 90012 Thomas Chow Thomas Chow Tel: (213) 625-4700 VICE PRESIDENT AND MANAGER VICE PRESIDENT AND MANAGER Fax: (213) 625-1368 Claudia My Lu VICE PRESIDENT AND MANAGER CERRITOS HONG KONG 11355 South Street Tak Shing House #103 MONTEREY PARK Cerritos, CA 90701 20 Des Voeux Road Central 250 South Atlantic Boulevard Tel: (562) 860-7300 Hong Kong Monterey Park, CA 91754 Fax: (562) 860-2296 Tel: (852) 2522-0071 Tel: (626) 281-8808 Henry Yoh Fax: (852) 2810-1652 Fax: (626) 281-2956 MANAGER Matthew Chui Frank Chen REPRESENTATIVE REGIONAL VICE PRESIDENT AND MANAGER CITY OF INDUSTRY 1250 South Fullerton Road CATHAY INVESTMENT COMPANY ALHAMBRA City of Industry, CA 91748 777 North Broadway 601 North Atlantic Boulevard Tel: (626) 810-1088 Los Angeles, CA 90012 Alhambra, CA 91801 Fax: (626) 810-2188 Tel: (213) 625-4700 Tel: (626) 284-6556 Shu Lee Fax: (213) 625-1368 Fax: (626) 282-3496 REGIONAL VICE PRESIDENT AND MANAGER George T.M. Ching Christina Tsui PRESIDENT ASSISTANT VICE PRESIDENT AND MANAGER CUPERTINO 10480 South De Anza Boulevard TAIWAN C.I.C. HACIENDA HEIGHTS Cupertino, CA 95014 Sixth Floor, Suite 3 16025 East Gale Avenue Tel: (408) 255-8300 146 Sung Chiang Road City of Industry, CA 91745 Fax: (408) 255-8373 Taipei, Taiwan, R.O.C. Tel: (626) 333-8533 David Lin Tel: (886) (2) 2537-5057 Fax: (626) 336-4227 ASSISTANT VICE PRESIDENT AND MANAGER Fax: (886) (2) 2537-5059 Jack Sun Li Sung VICE PRESIDENT AND MANAGER FREMONT REPRESENTATIVE AND MANAGER 47998 Warm Springs Boulevard WESTMINSTER Fremont, CA 94539 ADDITIONAL INFORMATION: 9121 Bolsa Avenue Tel: (510) 770-5151 Westminster, CA 92683 Fax: (510) 770-5150 MARKET MAKERS Tel: (714) 890-7118 Tony Wen THE FOLLOWING FIRMS MAKE A MARKET Fax: (714) 898-9267 VICE PRESIDENT AND MANAGER IN CATHAY BANCORP, INC. STOCK: Kenneth Chan ASSISTANT VICE PRESIDENT AND MANAGER IRVINE Herzog, Heine, Geduld, Inc. 15323 Culver Drive Wedbush Morgan Securities Inc. SAN JOSE Irvine, CA 92714 Hoefer & Arnett, Inc. 2010 Tully Road Tel: (949) 559-7500 San Jose, CA 95122 Fax: (949) 559-7508 REGISTRAR AND TRANSFER AGENT Tel: (408) 238-8880 Linda Kuo American Stock Transfer and Trust Fax: (408) 238-2302 ASSISTANT VICE PRESIDENT AND MANAGER Company Edward Wong 40 Wall Street VICE PRESIDENT AND MANAGER MILLBRAE New York, NY 10005 Millbrae Plaza Tel: (800) 937-5449 SAN GABRIEL 1095 El Camino Real 825 East Valley Boulevard Millbrae, CA 94030 CATHAY SERVICE HOTLINE San Gabriel, CA 91776 Tel: (650) 652-0188 (800) 9 CATHAY / 922-8429 Tel: (626) 573-1000 Fax: (650) 652-0180 SERVICE AVAILABLE 24 HOURS THROUGHOUT CALIFORNIA. Fax: (626) 573-0983 Stanley Wong Daniel Liu VICE PRESIDENT AND MANAGER CATHAY BANK WEB SITE VICE PRESIDENT AND MANAGER www.cathaybank.com
68 CATHAY BANCORP INC. AND SUBSIDIARY 1998 ANNUAL REPORT EX-22.1 3 EXHIBIT 22.1 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-23.1 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Cathay Bancorp, Inc.: We consent to incorporation by reference in the registration statement (No. 033-33767) on Form S-3 of Cathay Bancorp, Inc. of our report dated January 15, 1999 relating to the consolidated statements of condition of Cathay Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Cathay Bancorp, Inc. KPMG LLP Los Angeles, California March 26, 1999 Exhibit 23.1 EX-27 5 EXHIBIT 27
9 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 63,280 1,376 17,000 0 239,928 418,156 426,778 977,846 15,970 1,780,898 1,560,402 16,436 17,408 30,000 0 0 90 156,562 1,780,898 82,866 36,493 3,950 123,309 54,007 57,225 66,084 3,600 43 30,065 40,555 40,555 0 0 24,579 2.74 2.74 4.30 13,090 4,683 4,642 7,377 15,379 3,519 510 15,970 15,970 0 0
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