-----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, DPRxJVZXh69m5f7gV00WMp43NvvEwG1/2k+Sh7rIBBopLQH6Hyckd28fbQKPIlbX 3DV02JbSyrmGkFZ2nuTUvA== 0000912057-00-014448.txt : 20000411 0000912057-00-014448.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014448 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: 583294 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-K405 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, 1999 ----------------------------------------------------- [ ] 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 3, 2000 was $306,968,592 (computed on the basis of $42.00 per share, which was the last sale price of the Company's Common Stock reported by the Nasdaq National Market on March 3, 2000).* The number of shares outstanding of each of the Registrant's classes of Common Stock as of March 3, 2000: Common Stock, $.01 par value - 9,044,624 shares DOCUMENTS INCORPORATED BY REFERENCE - - Portions of Registrant's definitive proxy materials relating to its 2000 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, 1999 (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. The 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. The Company's sole current business activity is to hold all of the outstanding 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 December 10, 1999, Cathay Bank assumed approximately $80.6 million of the deposits of, and purchased approximately $84.1 million of the assets of, New York-based Golden City Commercial Bank. Please see Note 2 to the Consolidated Financial Statements on page 46 of the Annual Report to Stockholders which is incorporated herein by reference. 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. 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 3 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 11 branch offices located in the cities of Monterey Park, Alhambra, City of Industry, Westminster, San Gabriel, Torrance, Cerritos, Irvine and Diamond Bar in Southern California, six branch offices located in the cities of San Jose, Oakland, Cupertino, Fremont, Millbrae and Richmond in Northern California, two branch offices located in the cities of Flushing and New York in the State of New York and one loan production office in Houston, Texas. 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 invests 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. The Bank's services also include 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 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. Beginning in 1999, the Bank launched a program under the name of Cathay Global Investment Services to allow its customers to purchase mutual funds, annuities, equities, bonds and short-term money market instruments offered through BISYS Brokerage Services, Inc. Since its inception, the Bank's policy has been to attract business from, and to focus its primary services for the benefit of, individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. The three general areas to which the Bank has directed its lendable assets are: (1) loans secured by real estate; (2) commercial loans and trade financing; and (3) installment loans to individuals for automobile, household and other consumer expenditures. SELECTED FINANCIAL DATA Information concerning changes in the Company's financial condition and results of operations is included under the caption "Selected Consolidated Financial Data" on page 13 of the Annual Report to Stockholders and is incorporated herein by reference. 4 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 47 through 49 of the Annual Report to Stockholders, and is incorporated herein by reference. LOANS DISTRIBUTION AND MATURITY OF LOANS. Information concerning loan type and mix, distribution of loans and maturity of loans is included on pages 22 and 23 of the Annual Report to Stockholders and is incorporated herein by reference. 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 24 through 29 and in Notes 5 and 6 to the Consolidated Financial Statements on pages 49 through 51 of the Annual Report to Stockholders and is incorporated herein by reference. DEPOSITS Information concerning types of deposit accounts and average deposits and rates is included on pages 29 through 31 of the Annual Report to Stockholders and is incorporated herein by reference. RETURN ON EQUITY AND ASSETS Information concerning the return on average assets, return on average stockholders' equity, average 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, and consists of 1,806 square feet. The lease was renewed for three years from October 5, 1999 to October 4, 2002 for a monthly rent of approximately $3,500 based on the exchange rate in effect at December 31, 1999. CIC sold its property located in Garden Grove, California in April, 1999 for $1.05 million with a net gain of $394,000. As of December 31, 1999, CIC did not own any properties. 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 accomodates a platform area for consumer loans and certain business and commercial real estate loans, a new account area, 24 teller stations (including 16 regular tellers, seven commercial tellers, and one ATM), four pneumatic drive-up teller stations, one walk-up teller station, the branch's operations area and a vault 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 $15,000. 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.
- ------------------------------------------------------------------------------------------------------------------------ Location Sq. ft. Purpose Lease term Monthly payment - ------------------------------------------------------------------------------------------------------------------------ 767 N. Hill Street 8,912 Administrative offices 2/98 - 1/01 $8,912 Los Angeles, CA (Rm 305-306, 308-309, 313-315,320)* - ------------------------------------------------------------------------------------------------------------------------ 767 N. Hill Street 1,800 Administrative offices 2/98 - 1/01 $1,800 Los Angeles, CA (Rm 301-302) - ------------------------------------------------------------------------------------------------------------------------ 16025 E. Gale Avenue 4,483 Hacienda Heights branch 7/99 - 6/04 with one $5,229 Suite B-1 office more 5-year option City of Industry, CA - ------------------------------------------------------------------------------------------------------------------------ 2010 Tully Road 4,800 San Jose branch office 3/96 - 4/06 with two $8,640 San Jose, CA 5-year options** - ------------------------------------------------------------------------------------------------------------------------ 710 Webster Street Oakland, CA 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 one $3,613 Fremont, CA more 3-year option - ------------------------------------------------------------------------------------------------------------------------
6
- ------------------------------------------------------------------------------------------------------------------------ Location Sq. ft. Purpose Lease term Monthly payment - ------------------------------------------------------------------------------------------------------------------------ 15323 Culver Drive 4,450 Irvine branch office 4/89 - 4/09 with two $6,089 Irvine, CA 5-year options - ------------------------------------------------------------------------------------------------------------------------ 1095 El Camino Real 3,441 Millbrae branch office 1/00 - 12/04 with one $7,337 Millbrae, CA more 5-year option - ------------------------------------------------------------------------------------------------------------------------ 800 N. Hill Street 8,707 Administrative offices 2/99 - 2/04 $5,105 Los Angeles, CA - ------------------------------------------------------------------------------------------------------------------------ 43 E. Valley Blvd. 1,976 Valley/Stoneman branch 8/96 - 8/01 with three $4,412 Alhambra, CA office 5-year options - ------------------------------------------------------------------------------------------------------------------------ 3288 Pierce Street 2,535 Berkeley/Richmond branch 10/97 - 10/03 with two $6,591 Suite D-101 office 5-year options Richmond, CA - ------------------------------------------------------------------------------------------------------------------------ 420 W. Valley Blvd. 2,000 Previous Valley/Prospect 2/96 - 2/01 (subleased $4,193 (sublease San Gabriel, CA branch office 4/1/99 -2/14/01) rental income $2,500) - ------------------------------------------------------------------------------------------------------------------------ 1195 S. Diamond Bar Blvd. 2,500 Diamond Bar branch office 9/99 - 9/07 $5,875 Diamond Bar, CA - ------------------------------------------------------------------------------------------------------------------------ 45 E. Broadway 6,450 New York Chinatown branch 1/97 - 12/06 $25,500 New York, NY office - ------------------------------------------------------------------------------------------------------------------------ 10375 Richmond Avenue 1,797 Houston loan production 5/99 - 4/02 $3,414 Suite 1600 office Houston, TX - ------------------------------------------------------------------------------------------------------------------------ Room 902-3, 9/F 700 Hong Kong representative 1/00 - 1/03 with one $2,000 approximately Printing House office 2-year option based on the exchange 6 Duddell Street, Central rate in effect at Hong Kong 3/24/00 - ------------------------------------------------------------------------------------------------------------------------
* 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 20 domestic branch offices, one loan production office in Houston, Texas, 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. The Houston loan production office currently does not have loan approval rights. All loans made at the Houston loan production office must be approved by the Loan Committee of the Bank's Board of Directors. Activities of the CIC Taiwan office and Hong Kong representative office are limited to coordinating the transportation of documents to the Bank's main office and performing liaison services. A list of the offices of the Bank and CIC is included on page 68 of the Annual Report to Stockholders and is incorporated herein by reference. As of December 31, 1999, the Bank's investment in premises and equipment totaled $25,298,666. See also Note 8 to the Consolidated Financial Statements on page 52 of the Annual Report to Stockholders, which is incorporated herein by reference. On March 17, 2000, the Bank received title to the property which housed the Bank's Flushing branch office at a foreclosure sale. The Bank's investment in the Flushing property totaled approximately $4.2 million. 7 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 most of Cathay Bank's branch offices, is highly competitive. The Bank competes for deposits and loans with other commercial banks, savings and thrift institutions, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies and other financial and non-financial institutions and entities. In addition, the Bank also competes with other entities (both governmental and private industry) that are seeking to raise capital through the issuance and sale of debt and equity securities. Many of these institutions and entities offer services that are not offered directly by the Bank and have substantially greater financial resources than does the Bank. The direction of federal legislation in recent years seems to favor increased competition between different types of financial institutions and to foster new entrants into the financial services market. Competitive conditions are expected to continue to intensify as legislation is enacted which has the effect of dissolving historical barriers that limit participation in certain markets, increasing the cost of doing business for banks, or affecting the competitive balance between banks and other financial and non-financial institutions and entities. Technological factors, such as on-line banking and brokerage services, and economic factors can also be expected to have an ongoing impact on increasingly competitive conditions. 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 correspondent 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 11 Asian-American banks and one other major financial institution in the Bank's headquarters branch area, which compete for California Asian-American customers, as well as other ethnic customers. In addition, banks from the Pacific Rim countries, such as Taiwan, Hong Kong and China continue to open branches in the Los Angeles area, thus increasing the Bank's competition. EMPLOYEES As of December 31, 1999, the Company and Cathay Bank (including CIC) employed approximately 547 persons, including 127 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. REGULATORY ENVIRONMENT The banking and financial services industry is heavily regulated. Regulations, statutes and policies affecting the industry are frequently under review by Congress and state legislatures, and by the federal and state agencies charged with supervisory and examination authority over banking institutions. Changes in the banking and financial services industry can be expected to occur in the future. Some of the changes may create opportunities for the Company and the Bank to compete in financial markets with less regulation. However, these changes also may create new competitors in geographic and product markets which have historically been limited by law to bank institutions, such as the Bank. Changes in the regulation, statutes or policies that impact the Company and the Bank cannot necessarily be predicted and may have a material adverse effect on their business and earnings. The operations of bank holding companies and their subsidiaries are affected by the credit and monetary policies of the Federal Reserve Bank (the "FRB"). An important function of the FRB is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the FRB to implement its objectives are open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets, and the level of inflation. The credit and monetary policies of the FRB will continue to have a significant effect on the Bank and on the Company. 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 9 standards and to specify levels at which regulated institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". Information concerning regulations of the risk-based capital requirements prescribed by the regulatory authorities is included on page 31 of the Annual Report to Stockholders and is incorporated herein by reference. The Board has adopted percentage minimum leverage ratios for banking organizations (including state member banks and bank holding companies). The Company is expected to maintain at least a four percent minimum leverage ratio depending on interest rate risk exposure, asset quality, liquidity, earnings, expansion plans, growth patterns and other relevant factors. The Company was well capitalized as of December 31, 1999 with a leverage ratio of 8.93%. The tables presenting the Company and the Bank's risk-based capital and leverage ratios as of December 31, 1999 are included in Note 11 to the Consolidated Financial Statements on page 55 of the Annual Report to Stockholders, which is incorporated herein by reference. FDIC IMPROVEMENT ACT OF 1991 In December 1991, the FDICIA was enacted into law. The FDICIA provides for the recapitalization of the Bank Insurance Fund and improved examinations of insured institutions. It prescribes standards for safety and soundness of all insured depository institutions and requires each federal banking agency and the FDIC to take prompt corrective regulatory action to resolve the problems of insured depository institutions that fall below a certain capital ratio. The FDICIA also, among other things, (1) limits the percentage of interest paid on brokered deposits and limits the use of such deposits to only those institutions that are well-capitalized; (2) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (3) prohibits insured state chartered banks from engaging, as principal, in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (4) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; (5) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution, and (6) restricts capital distributions by institutions that are, or as a result of the distributions will become, undercapitalized. On December 31, 1992, the bank regulatory agencies adopted uniform regulations relating to real estate loans that require institutions to adopt written real estate policies that are consistent with regulatory guidelines. Those guidelines include maximum loan-to-value ratios for various categories of real estate loans. Institutions are permitted to make loans in excess of such ratios if 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 1999 the Company maintained its compliance with the requirements of Section 112 of FDICIA. Section 112 affects all banks having $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 10 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 authorized the increase of insurance premiums paid by FDIC-insured institutions. Title VI permitted the acquisition of thrifts by bank holding companies. Title IX enhanced the enforcement authority of all federal banking agencies, including their authority to levy civil money penalties and penalties on criminal offenses, and it also broadened the definition of insiders, to increase the types of persons subject to regulatory action. Title XI required appraisals used in making credit decision to be written and performed in accordance with generally accepted appraisal standards, as promulgated by the Appraisal Standards Board of the Appraisal Foundation, and to meet federal guidelines. Title XII expanded the recordkeeping requirements of reporting under the Home Mortgage Disclosure Act ("HDMA") to cover race, income and gender; changed the Community Reinvestment Act ("CRA") rating system to a four-tiered rating system, which includes (1) outstanding record of meeting community credit needs; (2) satisfactory record of meeting community credit needs; (3) needs to improve record of meeting community credit needs, and (4) substantial noncompliance in meeting community credit needs. It further required 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), CIC has sold the Garden Grove property. The Bank is in compliance with these limitations. 11 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. The Riegle-Neal Act significantly relaxed or eliminated 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 allowed each state to adopt legislation to "opt-out" of these interstate merger provisions. Conversely, the Riegle-Neal Act permitted 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 provided for interstate banking and branching in California. This early opt-in legislation, which became effective on October 2, 1995, required out-of-state institutions which did not already own a California bank to acquire an existing whole five-year old bank before establishing a California branch. De novo branching is not permitted. This act revised much of the original California interstate banking law first enacted in 1986 that permitted interstate banking with other states on a reciprocal basis. Banks and bank holding companies contemplating acquisitions must comply with the competitive standards of the BHCA, the Change in Bank Control Act ("CBA") or the Bank Merger Act ("BMA"), as applicable. The crucial test under each Act is whether the proposed acquisition will "result in a monopoly" or will "substantially" lessen competition in the relevant geographic market. Both the BHCA and the BMA preclude granting regulatory approval for any transaction that will "result in" a monopoly or 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 suitable opportunities present themselves. 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. 12 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 68,507 shares or $6,850,700 as of December 31, 1999. 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, 1999, the maximum dividend that Cathay Bank could have declared, subject to regulatory approval, was $55,892,000. 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. FINANCIAL SERVICES MODERNIZATION LEGISLATION On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Modernization Act"). The Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricts the affiliation of Federal Reserve member banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged' in specified securities activities. In addition, the Modernization Act also expressly preempts any state law restricting the establishment of financial affiliations, primarily related to insurance. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a "Financial Holding Company". "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities of a nature incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. 13 In order for the Company to take advantage of the ability provided by the Modernization Act to affiliate with other financial service providers, it would have to become a "Financial Holding Company." To do so, the Company would have to file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because its insured depository institution subsidiary (the Bank) is well-capitalized and well-managed. In addition, the Federal Reserve must also determine that Cathay Bank, as the insured depository institution subsidiary, has at least a "satisfactory" rating under the Community Reinvestment Act. The Company has not sought to become a Financial Holding Company. The Company will continue to monitor its strategic business plan to determine whether, based on market conditions and other factors, the Company wishes to take steps to use any of the expanded powers provided in the Modernization Act. The Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Modernization Act to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be well-capitalized, and the Bank would be subject to the same capital deduction, risk management and affiliate transaction rules as are applicable to national banks. Under the Modernization Act, securities firms and insurance companies that elect to become Financial Holding Companies may acquire banks and other financial institutions. To the extent that the Modernization Act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Modernization Act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Bank. The Modernization Act also provides consumers with new protections against the transfer and use of their nonpublic personal information by financial institutions. For example, customers of financial institutions gain new rights to "opt out" of having their personal financial information shared with unaffiliated third parties, subject to certain exceptions. These federal privacy protections do not prohibit state governments from imposing more protective rules, and a variety of such bills are currently pending in the California state legislature. Effective January 1, 1999, the FDIC's rules limiting the non-agency activities of state-chartered insured banks and their subsidiaries to those activities permissable to national banks were revised and liberalized, and these rules will likely undergo additional changes under the Modernization Act. Such non-agency activities, including real estate investment and securities activities, are and will continue to be subject to a variety of general and specific safety and soundness restrictions. The precise impact of the Modernization Act on the Company and the Bank will not be fully known until the last of the Modernization Act's phased effective dates occurs on November 12, 2004 and until regulatory agencies complete the promulgation of administrative regulations implementing many portions of the Act. The Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision issued a joint notice of proposed rulemaking on February 22, 2000 relating to proposed privacy rules under the Modernization Act. It can be expected that state regulatory authorities and/or legislatures may act in response to the Modernization Act. 14 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 1999. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The information under the caption "Market for Cathay Bancorp, Inc. Stock"on page 38 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 3, 2000, 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 38 and "Capital Resources" on page 31 and in Note 11 to the Consolidated Financial Statements on pages 54 through 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 34 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. 16 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 2000 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. The term of office of each officer is from the time of appointment until the next annual organizational meeting of the Board of Directors of Bancorp or Cathay Bank (or action in lieu of a meeting) and until the appointment of his or her successor unless, before that time, the officer resigns or is removed or is otherwise disqualified from serving as an officer of Bancorp or Cathay Bank. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 19 of the Company's Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Compensation of Directors", "Information Concerning Management Compensation" and "Compensation Committee Interlocks and Insider Participation" on pages 9 through 13 of the Company's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The information under the captions "Principal Holders of Securities" on page 3 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 19 and 20 of the Company's Proxy Statement is incorporated herein by reference. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Documents Filed as Part of this Report (a)(1) Financial Statements Financial Statements of Cathay Bancorp, Inc. and Subsidiary*
Page No. in Annual Report ------------- Consolidated Statements of Condition as of December 31, 1999 and 1998 39 Consolidated Statements of Income and Comprehensive Income for each of the years in the 3-year period ended December 31, 1999 40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the 3-year period ended December 31, 1999 41 Consolidated Statements of Cash Flows for each of the years in the 3-year period ended December 31, 1999 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, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 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. 18 4.1 Shareholders Rights Plan. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10.1 Form of Indemnity Agreements between the Company and its directors and certain officers. Previously filed with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.2 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 1999 Annual Report to Stockholders being 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. 19 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, 2000 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, 2000 - ------------------------------------ the Board and Director Dunson K. Cheng (principal executive officer) /s/ Anthony M. Tang Executive Vice President, March 29, 2000 - ------------------------------------ Chief Financial Officer/ Anthony M. Tang Treasurer and Director (principal financial officer) (principal accounting officer) /s/ Ralph Roy Buon-Cristiani Director March 29, 2000 - ------------------------------------ Ralph Roy Buon-Cristiani /s/ Kelly L. Chan Director March 29, 2000 - ------------------------------------ Kelly L. Chan /s/ Michael M.Y. Chang Director March 29, 2000 - ------------------------------------ Michael M.Y. Chang
[SIGNATURES CONTINUED] 20 [SIGNATURES CONTINUED]
Signature Title Date - --------- ----- ---- /s/ George T.M. Ching Vice Chairman of the March 29, 2000 - ------------------------------------ Board and Director George T.M. Ching /s/ Wing K. Fat Director March 29, 2000 - ------------------------------------ Wing K. Fat /s/ Patrick S.D. Lee Director March 29, 2000 - ------------------------------------ Patrick S.D. Lee /s/ Chi-Hung Joseph Poon Director March 29, 2000 - ------------------------------------ Chi-Hung Joseph Poon /s/ Thomas G. Tartaglia Director March 29, 2000 - ------------------------------------ Thomas G. Tartaglia /s/ Wilbur K. Woo Secretary of the Board March 29, 2000 - ------------------------------------ and Director Wilbur K. Woo
21 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 1999 Annual Report to Stockholders being 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
SELECTED CONSOLIDATED FINANCIAL DATA (dollars in thousands, except Year ended December 31, share and per share data) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Income Statement(1) Interest income $ 133,046 $ 123,309 $ 111,978 $ 86,098 $ 76,223 Interest expense 57,408 57,225 50,874 39,209 31,282 - ------------------------------------------------------------------------------------------------------------ Net interest income before provision for loan losses 75,638 66,084 61,104 46,889 44,941 Provision for loan losses 4,200 3,600 3,600 3,600 7,300 - ------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 71,438 62,484 57,504 43,289 37,641 Securities gains (losses) (3) 43 41 22 611 Other non-interest income 8,858 8,093 6,734 5,837 5,610 Non-interest expense 30,282 30,065 30,928 28,013 27,617 - ------------------------------------------------------------------------------------------------------------ Income before income tax expense 50,011 40,555 33,351 21,135 16,245 Income tax expense 19,720 15,976 13,243 7,819 5,624 - ------------------------------------------------------------------------------------------------------------ Net income $ 30,291 $ 24,579 $ 20,108 $ 13,316 $ 10,621 - ------------------------------------------------------------------------------------------------------------ Net income per common share Basic $ 3.36 $ 2.74 $ 2.26 $ 1.66 $ 1.36 Diluted $ 3.36 $ 2.74 $ 2.26 $ 1.66 $ 1.36 Cash dividends paid per common share $ 0.805 $ 0.700 $ 0.625 $ 0.600 $ 0.600 Weighted average common shares Basic 9,013,428 8,967,188 8,915,936 8,017,398 7,805,339 Diluted 9,017,760 8,968,393 8,915,936 8,017,398 7,805,339 - ------------------------------------------------------------------------------------------------------------ Statement of Condition Securities available-for-sale $ 160,991 $ 239,928 $ 216,158 $ 383,391 $ 243,252 Securities held-to-maturity 426,332 418,156 350,336 210,129 174,377 Net loans(2) 1,245,585 961,876 846,151 744,384 542,995 Total assets 1,995,924 1,780,898 1,622,462 1,504,329 1,087,400 Deposits 1,721,736 1,560,402 1,449,121 1,364,740 984,227 Securities sold under agreements to repurchase 46,990 16,436 23,419 10,000 1,500 Advances from Federal Home Loan Bank 30,000 30,000 -- -- -- Stockholders' equity 179,109 156,652 135,877 118,446 94,529 - ------------------------------------------------------------------------------------------------------------ Common Stock Data Shares of common stock outstanding 9,033,583 8,988,760 8,941,743 8,878,144 7,867,164 Book value per share $ 19.83 $ 17.43 $ 15.20 $ 13.34 $ 12.02 - ------------------------------------------------------------------------------------------------------------ Profitability Ratios Return on average assets 1.63% 1.44% 1.29% 1.05% 1.05% Return on average stockholders' equity 18.31 17.00 15.63 13.06 11.68 Dividend payout ratio 23.95 25.55 27.65 36.14 44.12 Average equity to average assets ratio 8.89 8.47 8.25 8.04 8.97 Efficiency ratio 35.84 40.51 45.20 53.11 53.98 - ------------------------------------------------------------------------------------------------------------
1 INCLUDES THE OPERATING RESULTS OF FIRST PUBLIC SAVINGS BANK, F.S.B. SUBSEQUENT TO THE NOVEMBER 18, 1996, ITS ACQUISITION DATE, AND THE SELECTED ASSETS AND ASSUMED DEPOSITS AND LIABILITIES OF GOLDEN CITY COMMERCIAL BANK SUBSEQUENT TO DECEMBER 10, 1999, THEIR ACQUISITION DATE. 2 NET LOANS REPRESENTS GROSS LOANS NET OF LOAN PARTICIPATIONS SOLD, UNAMORTIZED DEFERRED LOAN FEES AND THE ALLOWANCE FOR LOAN LOSSES. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition of Cathay Bancorp, Inc. ("Bancorp") and its subsidiary Cathay Bank (the "Bank" and together the "Company") and their consolidated results of operations. It should be read in conjunction with the audited consolidated financial statements and footnotes appearing elsewhere in this report. The 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, 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, adverse developments or conditions related to or arising from expansion into new market areas, 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" later in this report. 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 $30.3 million or $3.36 per diluted common share for 1999 as compared with net income of $24.6 million or $2.74 per diluted common share for 1998 and $20.1 million or $2.26 per diluted common share for 1997. Pre-tax income increased 23% in 1999 to $50.0 million. The increase was primarily attributable to a $9.6 million growth in net interest income, which resulted primarily from an increase of $10.9 million in interest and fees on loans. In addition, the efficiency ratio improved from 40.51% in 1998 to 35.84% in 1999. Return on average assets ("ROA") and return on average stockholders' equity ("ROE") were 1.63% and 18.31%, respectively, for 1999 versus 1.44% and 17.00%, respectively, for 1998. 1998 pre-tax income represents an increase of 22% over 1997, attributable primarily to a $5.0 million increase in net interest income and a $1.4 million increase in non-interest income, while the efficiency ratio improved from 45.20% in 1997 to 40.51% in 1998. The ROA was 1.44% for 1998 and 1.29% for 1997 and the ROE was 17.00% for 1998 and 15.63% for 1997. NET INTEREST INCOME Net interest income before provision for loan losses amounted to $75.6 million in 1999, representing an increase of $9.5 million or 14% over net interest income of $66.1 million for 1998. On a taxable equivalent basis, net interest income totaled $77.3 million in 1999 versus $67.4 million in 1998. The primary reason for the increase in 1999 net interest income was an increase of $190.9 million in average interest-earning assets, $181.0 million of which was contributed by loan growth. The increase in average interest-earning assets was funded primarily by increases in average deposits and by other borrowed funds, proceeds from maturities of securities and cash. The increase in average net loans from $907.6 million in 1998 to $1,088.6 million in 1999 added $10.9 million to net interest income. The increase resulted from an increase of $15.8 million in interest income, due to increases in average volume, which was partially offset by a decrease of $4.9 million in interest income, due to decreases in average yield. The average yield on loans decreased 52 basis points from 9.13% in 1998 to 8.61% in 1999, primarily due to a 36 basis points drop in the Company's average reference lending rate from 8.60% to 8.24%. Contributing to lower average loan yield in 1999 was increased competition in the Company's marketplace. Yields on other categories of interest-earning assets decreased as well due to the prevailing interest rate environment. As a result, the taxable equivalent average yield on interest-earning assets decreased 28 basis points to 7.66% in 1999 from 7.94% in 1998. -14- However, average cost of funds decreased 35 basis points from 4.15% in 1998 to 3.80% in 1999 which compensated for the decrease in the average yield on interest-earning assets. The decrease in average cost of funds was substantially attributable to a decline of 37 basis points in the average cost of deposits from 4.10% in 1998 to 3.73% in 1999. In addition, average net loans, which generally yield higher than other types of interest-earning assets, increased as a percentage of average interest-earning assets from 57.9% in 1998 to 61.9% in 1999. Consequently, net interest margin (defined as taxable equivalent net interest income to average interest-earning assets) increased 9 basis points from 4.30% in 1998 to 4.39% in 1999. 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, net loans 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, held-to-maturity and Federal Home Loan Bank stock) accounted for $15.7 million and deposits with other banks accounted for $0.7 million. The increases in average interest-earning assets were funded by: 1) an increase in average deposits of $86.2 million of which $68.5 million were interest bearing and $17.8 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 $21.6 million. The increase in average loans in 1998 contributed to an additional $8.9 million in net interest income, which however, 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% in 1998. 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 was reduced by 12 basis points from 4.42% in 1997 to 4.30% in 1998. -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED CHANGES DUE TO RATE AND VOLUME(1)
1999 - 1998 1998 - 1997 Increase (Decrease) in Net Interest Income Due to:Increase (Decrease) in 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 Asset Federal funds sold and securities purchased under agreements to resell $ (442) $ (1,627) $ (2,069) $ (29) $ 1,564 $ 1,535 Securities available-for-sale (Taxable) (1,430) (1,503) (2,933) (1,252) (2,956) (4,208) Securities available-for-sale (Nontaxable)(2) 5 (12) (7) (10) 25 15 Securities held-to-maturity (Taxable) (948) 3,947 2,999 (168) 4,988 4,820 Securities held-to-maturity (Nontaxable)(2) (193) 1,423 1,230 (129) 623 494 Deposits with other banks (8) (12) (20) (11) 28 17 Federal Home Loan Bank stock (749) 744 (5) (218) 210 (8) Loans(3) (4,918) 15,832 10,914 (1,700) 10,551 8,851 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ (8,683) $ 18,792 $ 10,109 $ (3,517) $ 15,033 $ 11,516 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Bearing Liabilities Savings deposits, NOW accounts and others $ (1,934) $ 140 $ (1,794) $ (411) $ (220) $ (631) Time deposits (2,563) 3,513 950 165 4,099 4,264 Securities sold under agreements to repurchase (193) 123 (70) (15) 2,368 2,353 Other borrowed funds 11 (16) (5) (1) 4 3 Advances from Federal Home Loan Bank 4 1,117 1,121 -- 333 333 Mortgage indebtedness 27 (46) (19) 6 23 29 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ (4,648) $ 4,831 $ 183 $ (256) $ 6,607 $ 6,351 - ------------------------------------------------------------------------------------------------------------------------------------ Changes in net interest income $ (4,035) $ 13,961 $ 9,926 $ (3,261) $ 8,426 $ 5,165 - ------------------------------------------------------------------------------------------------------------------------------------
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 $3,593,000, $3,631,000 AND $3,786,000 IN 1999, 1998, AND 1997, RESPECTIVELY. INTEREST EARNING ASSET MIX
As of December 31, 1999 As of December 31, 1998 Amount Percentage Percentage Percentage Changed Changed of Total Interest of Total Interest from from (dollars in thousands) Amount Earning Assets Amount Earning Assets 1998 to 1999 1998 to 1999 - ------------------------------------------------------------------------------------------------------------------------ Types of Interest Earning Assets Federal funds sold and securities purchased under agreements to resell $ 5,000 0.27% $ 17,000 1.04% (12,000) (70.59)% Securities available-for-sale 160,991 8.76 239,928 14.64 (78,937) (32.90) Securities held-to-maturity 426,332 23.19 418,156 25.52 8,176 1.96 Deposits with other banks 568 0.03 1,376 0.08 (808) (58.72) Loans (net of unamortized deferred loan fees and allowance for loan losses) 1,245,585 67.75 961,876 58.72 283,709 29.50 - ------------------------------------------------------------------------------------------------------------------------ Total interest earning assets $1,838,476 100.00% $1,638,336 100.00% 200,140 12.22% - ------------------------------------------------------------------------------------------------------------------------
-16- The following table sets forth information concerning average interest earning assets, average interest bearing liabilities, and the yields on those assets and liabilities. Average outstanding amounts included in the table are daily averages. INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
Year ended December 31, (dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Interest Earning Assets: Federal Funds Sold and Securities Purchased Under Agreements to Resell Average outstanding $ 38,013 $ 69,915 $ 42,260 Average yield 4.95% 5.65% 5.72% Amount of interest earned $ 1,881 $ 3,950 $ 2,415 - ------------------------------------------------------------------------------------------------------------- Securities Available-for-Sale, Taxable Average outstanding $ 178,188 $ 219,556 $ 289,715 Average yield 5.73% 5.98% 5.99% Amount of interest earned $ 10,202 $ 13,135 $ 17,343 - ------------------------------------------------------------------------------------------------------------- Securities Available-for-Sale, Nontaxable Average outstanding $ 345 $ 499 $ 169 Average yield(2) 7.83% 6.73% 11.24% Amount of interest earned $ 27 $ 34 $ 19 - ------------------------------------------------------------------------------------------------------------- Securities Held-to-Maturity, Taxable Average outstanding $ 378,753 $ 315,257 $ 237,881 Average yield 6.16% 6.45% 6.52% Amount of interest earned $ 23,339 $ 20,340 $ 15,520 - ------------------------------------------------------------------------------------------------------------- Securities Held-to-Maturity, Nontaxable Average outstanding $ 68,702 $ 48,757 $ 40,930 Average yield(2) 7.48% 7.92% 8.34% Amount of interest earned $ 5,136 $ 3,906 $ 3,412 - ------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank Stock Average outstanding $ 6,309 $ 5,841 $ 5,506 Average yield 5.25% 5.75% 6.24% Amount of interest earned $ 331 $ 336 $ 344 - ------------------------------------------------------------------------------------------------------------- Deposits with Other Banks Average outstanding $ 459 $ 958 $ 243 Average yield 2.83% 3.44% 6.58% Amount of interest earned $ 13 $ 33 $ 16 - ------------------------------------------------------------------------------------------------------------- Loans(1) Average outstanding $1,088,578 $ 907,627 $ 792,176 Average yield(5) 8.61% 9.13% 9.34% Amount of interest earned(5) $ 93,780 $ 82,866 $ 74,015 - ------------------------------------------------------------------------------------------------------------- Total Interest Earning Assets Average outstanding $1,759,347 $1,568,410 $1,408,880 Average yield(5) 7.66% 7.94% 8.03% Amount of interest earned(5) $ 134,709 $ 124,600 $ 113,084 - -------------------------------------------------------------------------------------------------------------
-17- 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) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities: Savings Deposits(3) Average outstanding $ 424,500 $ 417,105 $ 428,763 Average rate paid 1.46% 1.92% 2.01% Amount of interest paid or accrued $ 6,212 $ 8,006 $ 8,637 - -------------------------------------------------------------------------------------------------------------- Time Deposits Average outstanding $1,001,878 $ 900,441 $ 820,310 Average rate paid 4.69% 5.11% 5.09% Amount of interest paid or accrued $ 46,950 $ 46,000 $ 41,736 - -------------------------------------------------------------------------------------------------------------- Securities Sold Under Agreements to Repurchase Average outstanding $ 55,486 $ 53,104 $ 8,779 Average rate paid 4.99% 5.34% 5.51% Amount of interest paid or accrued $ 2,766 $ 2,836 $ 483 - -------------------------------------------------------------------------------------------------------------- Other Borrowed Funds Average outstanding $ 33 $ 181 $ 82 Average rate paid 6.06% 3.87% 4.88% Amount of interest paid or accrued $ 2 $ 7 $ 4 - -------------------------------------------------------------------------------------------------------------- Advances from Federal Home Loan Bank Average outstanding $ 30,000 $ 6,959 $ -- Average rate paid 4.85% 4.79% -- Amount of interest paid or accrued $ 1,454 $ 333 $ -- - -------------------------------------------------------------------------------------------------------------- Mortgage Indebtedness Average outstanding $ 183 $ 440 $ 190 Average rate paid(6) 13.11% 9.77% 7.37% Amount of interest paid or accrued(6) $ 24 $ 43 $ 14 - -------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities Average outstanding $1,512,080 $1,378,230 $1,258,124 Average rate paid 3.80% 4.15% 4.04% Amount of interest paid or accrued $ 57,408 $ 57,225 $ 50,874 - -------------------------------------------------------------------------------------------------------------- Net interest earnings(7) $ 77,301 $ 67,375 $ 62,210 Net yield on interest earnings assets(4),(7) 4.39% 4.30% 4.42% Yield spread(7) 3.86% 3.79% 3.99% - --------------------------------------------------------------------------------------------------------------
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- NON-INTEREST INCOME Non-interest income totaled $8.9 million in 1999, $8.1 million in 1998 and $6.8 million in 1997. The increase of $719,000 or 9% from 1998 to 1999 was primarily from an increase in letter of credit commissions due to increases in transaction volume, fees and charges related to loans, wire transfer fees and other miscellaneous income. Partially offsetting these increases were decreases in service charges due to the Bank's outsourcing of its merchant bank card portfolio in the third quarter of 1998. As a result, the Bank received only a percentage of the income from the portfolio rather than receiving the full income and incurring the related expenses. Non-interest income increased $1.4 million or 20% from 1997 to 1998. The contributing factors to the increase were an increase in letter of credit commissions due to increase in transaction volume, higher service charges due to fee increases, rebate income earned in outsourcing the issuing and processing of cashier's checks and money orders and higher income from miscellaneous items, such as documentation and charges related to loans, wire transfer, foreign exchange and safe deposit boxes. NON-INTEREST EXPENSE Non-interest expense totaled $30.3 million in 1999, $30.1 million in 1998 and $30.9 million in 1997. From 1998 to 1999, non-interest expense increased $217,000 or 0.7%. An increase of $1.1 million in salaries and employee benefits resulting primarily from higher year-end bonus expense and overall annual salary increases was largely offset by decreases of $572,000 in other operating expense and an increase of $291,000 in net OREO income. The decrease in other operating expense was primarily due to the Bank's outsourcing of its merchant bank card portfolio in the third quarter of 1998 as explained previously. The Company realized a total of $1.5 million in income from gains on sale of OREO properties leading to a net OREO income of $1.4 million in 1999, as compared with $1.1 million of net OREO income in 1998. The efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, improved 12% from 40.51% in 1998 to 35.84% in 1999. From 1997 to 1998, non-interest expense decreased $863,000 or 3% primarily attributable to a decrease of $1.6 million in OREO expense and a decrease of $385,000 in occupancy expense. The Company had a net OREO income of $1.1 million in 1998 as compared with a net OREO expense of $503,000 in 1997. The closures of the Rowland Heights branch and two corporate offices of First Public Savings Bank, F.S.B. in December, June and November 1997, respectively, helped to reduce the 1998 occupancy expense. To partially offset the above decreases in non-interest expense was an increase of $1.0 million in salaries and employee benefits. Added 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. The efficiency ratio improved 10% from 45.20% in 1997 to 40.51% in 1998. FINANCIAL CONDITION OVERVIEW The Company maintained steady growth throughout 1999. Furthermore, on December 10, 1999, the Company substantially completed the purchase of certain assets and assumption of certain deposits and liabilities of Golden City Commercial Bank ("Golden City"). Total deposits assumed were approximately $80.6 million and total assets purchased were approximately $84.1 million. Comparing December 31, 1999 and 1998, total assets increased 12% to $1,995.9 million; net loans grew by 29% to $1,245.6 million; securities available-for-sale decreased 33% to $161.0 million while securities held-to-maturity increased slightly to $426.3 million. Total deposits increased 10% to $1,721.7 million and stockholders' equity increased 14% to $179.1 million. SECURITIES The Company's investment policy states that those securities 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 -19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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 the Bank's liquidity, it is the Bank's policy to transfer securities held-to-maturity to the available-for-sale category when securities become 90 days or less to maturity. Securities available-for-sale decreased $78.9 million or 33% to $161.0 million at year-end 1999 from $239.9 million at year-end 1998. This was mainly attributable to proceeds from matured securities not being reinvested but used to meet the strong loan demand. Securities held-to-maturity increased slightly from $418.2 million at year-end 1998 to $426.3 million at year-end 1999. As of December 31, 1999, unrealized holding losses on securities available-for-sale were $1.7 million compared with unrealized holding gains of $2.1 million as of December 31, 1998. These unrealized holding losses or gains, net of tax effect, were included in the Company's stockholders' equity for the years reported. The unrealized holding losses, net of tax, were $1.0 million as of December 31, 1999 while the unrealized holding gains, net of tax, were $1.2 million as of December 31, 1998. The unrealized holding losses at year-end 1999 resulted mainly from increasing interest rates toward the latter half of 1999. 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) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Securities Available-for-Sale: U.S. Treasury securities $ 25 $ 2,014 $ 37,971 U.S. government agencies 40,218 103,020 113,306 State and municipal securities 540 22,317 -- Mortgage-backed securities 14,634 18,266 22,982 Collateralized mortgage obligations 7,823 14,159 6,386 Asset-backed securities 16,448 8,220 19,889 Federal Home Loan Bank stock 6,851 5,991 5,653 Commercial paper 40,076 29,945 9,971 Corporate bonds 34,376 35,996 -- - ------------------------------------------------------------------------------------------------------------- Total $ 160,991 $ 239,928 $ 216,158 - ------------------------------------------------------------------------------------------------------------- Securities Held-to-Maturity: U.S. Treasury securities $ 24,998 $ 26,026 $ 26,054 U.S. government agencies 64,373 54,426 39,374 State and municipal securities 68,834 61,495 44,497 Mortgage-backed securities 133,282 146,018 140,338 Collateralized mortgage obligations 63,397 83,535 90,234 Asset-backed securities 19,999 -- 923 Corporate bonds 51,449 46,656 8,916 - ------------------------------------------------------------------------------------------------------------- Total $ 426,332 $ 418,156 $ 350,336 - -------------------------------------------------------------------------------------------------------------
Management constantly seeks to balance the risks and returns on its portfolio within the Company's investment guidelines. Consequently, during 1999, the Company increased its holdings of asset-backed securities and corporate bonds . -20- 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, 1999 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 $ 25 $ -- $ -- $ -- $ 25 U.S. government agencies 20,020 20,198 -- -- 40,218 State and municipal securities 540 -- -- -- 540 Mortgage-backed securities(2) -- 3,007 2,894 8,732 14,633 Collateralized mortgage obligations(2) 174 -- 3,345 4,305 7,824 Asset-backed securities(2) -- 6,860 9,588 -- 16,448 Federal Home Loan Bank stock 6,851 -- -- -- 6,851 Commercial paper 40,076 -- -- -- 40,076 Corporate bonds -- 29,756 4,620 -- 34,376 - ------------------------------------------------------------------------------------------------------------- Total $ 67,686 $ 59,821 $ 20,447 $ 13,037 $ 160,991 - ------------------------------------------------------------------------------------------------------------- Weighted Average Yield: U.S. Treasury securities 4.99% -- --% --% 4.99% U.S. government agencies 5.88 5.92 -- -- 5.90 States and municipal securities(1) 7.78 -- -- -- 7.78 Mortgage-backed securities(2) -- 5.92 6.57 7.33 6.89 Collateralized mortgage obligations(2) 4.20 -- 6.18 6.27 6.18 Asset-backed securities(2) -- 5.78 5.71 -- 5.74 Federal Home Loan Bank stock 5.42 -- -- -- 5.42 Commercial paper 7.46 -- -- -- 7.46 Corporate bonds -- 5.56 7.19 -- 5.78 - ------------------------------------------------------------------------------------------------------------- Total 6.78% 5.73% 6.23% 6.98% 6.33% - -------------------------------------------------------------------------------------------------------------
1 AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS. 2 SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS. SECURITIES HELD-TO-MATURITY PORTFOLIO MATURITY DISTRIBUTION AND YIELD ANALYSIS:
As of December 31, 1999 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 $ 24,998 $ -- $ -- $ -- $ 24,998 U.S. government agencies 29,317 35,056 -- -- 64,373 State and municipal securities 1,122 9,722 23,930 34,060 68,834 Mortgage-backed securities(2) 3,465 14,638 38,004 77,175 133,282 Collateralized mortgage obligations(2) -- -- 49,801 13,596 63,397 Asset-backed securities(2) -- 19,999 -- -- 19,999 Corporate bonds -- 46,410 5,039 -- 51,449 - -------------------------------------------------------------------------------------------------------------- Total $ 58,902 $ 125,825 $ 116,774 $ 124,831 $ 426,332 - -------------------------------------------------------------------------------------------------------------- Weighted Average Yield: U.S. Treasury securities 6.32% --% --% --% 6.32% U.S. government agencies 6.25 5.52 -- -- 5.86 State and municipal securities(1) 7.17 8.49 8.04 6.74 7.45 Mortgage-backed securities(2) 5.96 6.20 6.14 6.38 6.28 Collateralized mortgage obligations(2) -- -- 6.60 6.30 6.54 Asset-backed securities(2) -- 5.61 -- -- 5.61 Corporate bonds -- 6.00 7.38 -- 6.14 - -------------------------------------------------------------------------------------------------------------- Total 6.28% 6.02% 6.78% 6.47% 6.40% - --------------------------------------------------------------------------------------------------------------
1 AVERAGE YIELD HAS BEEN ADJUSTED TO A FULLY-TAXABLE EQUIVALENT BASIS. 2 SECURITIES REFLECT STATED MATURITIES AND NOT ANTICIPATED PREPAYMENTS. -21- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED LOANS Gross loans grew by $287.2 million or 29% from $981.5 million at year-end 1998 to $1,268.7 million at year-end 1999 while net loans increased $283.7 million or 29% to $1,245.6 million. Of the increase, $221 million was from commercial real estate loans. This was the result of the continued growth in the California economy, which led to a strong real estate market and, hence, demand. In addition, the Company purchased 23 seasoned commercial real estate loans with floating rates totaling $68 million from a major bank in the third quarter of 1999. All of the properties securing these loans are located in California. The Houston loan production office, which opened for business in March 1999, contributed over $20 million to the growth in commercial real estate loans. Total loans acquired from Golden City approximated $31.2 million at year-end 1999, a majority of which were for mixed use of commercial and residential real estate. Commercial real estate loans are typically secured by first deeds of trust on the respective commercial properties, including primarily retail shops and shopping centers, as well as office buildings, multiple-unit apartments, warehouses, hotels and motels. 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 percent of the appraised value of the property, and that there be an adequate debt coverage ratio. Other notable increases were commercial loans, residential real estate loans, and real estate construction loans, which added $24.6 million, $23.4 million and $21.8 million, respectively from year-end 1998 to year-end 1999. Commercial loans totaled $395.1 million at year-end 1999 compared with $370.5 million at year-end 1998. These 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 primarily markets its commercial lending to small-to-medium businesses and professionals for their working capital needs. Residential real estate loans totaled $207.6 million and $184.2 million at year-end 1999 and 1998, respectively. These loans included home equity lines of $26.4 million and $20.4 million, respectively, at year-end 1999 and 1998. The growth in residential real estate loans has slowed down as the interest rates moved higher toward the latter half of 1999, which discouraged refinancing and new purchase activities. Real estate construction loans totaled $62.5 million at year-end 1999 compared with $40.7 million at year-end 1998. The growth in construction loans was directly affected by the strong local economy and real estate market in California. The Company makes construction loans on a selective basis to those projects with good locations developed by experienced and financially strong borrowers. The projects, which include commercial retail centers, office buildings, warehouses and single family residences, are all located in California as of December 31, 1999. Total construction loan commitments outstanding were approximately $49.0 million at year-end 1999. The Company's Board of Directors establishes the basic lending policy for the Bank. Each loan is generally considered in terms of, among other things, character, repayment ability, financial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower's business or project, and prevailing economic trends and conditions. In addition, the Company's lending policy requires an independent appraisal on real estate property in accordance with regulatory guidelines. Although a majority of the Company's loan portfolio, including commercial loans, is secured by real estate to some extent, management believes that the Company's underwriting guidelines, including collateral requirements, and underlying values of real estate in the Company's primary marketplace have provided the Company with adequate protection against reasonably expected losses on non-performing loans. The classification of loans by type as of December 31 for each of the past five years, as well as the changes in loan portfolio composition for the past two years and the contractual maturity of the loan portfolio as of December 31, 1999 are presented below: -22- LOAN TYPE AND MIX
Amount outstanding as of December 31, (in thousands) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Type of Loans: Commercial loans $ 395,138 $ 370,539 $ 338,285 $ 283,894 $ 292,612 Real estate mortgage loans 785,109 540,766 458,417 420,315 231,360 Real estate construction loans 62,516 40,738 41,736 33,510 13,606 Installment loans 25,498 29,165 26,611 23,551 19,748 Other loans 419 269 267 385 533 - -------------------------------------------------------------------------------------------------------------- Gross loans 1,268,680 981,477 865,316 761,655 557,859 - -------------------------------------------------------------------------------------------------------------- Less Unamortized deferred loan fees (3,593) (3,631) (3,786) (3,742) (2,122) Allowance for loan losses (19,502) (15,970) (15,379) (13,529) (12,742) - -------------------------------------------------------------------------------------------------------------- Net loans $ 1,245,585 $ 961,876 $ 846,151 $ 744,384 $ 542,995 - --------------------------------------------------------------------------------------------------------------
CHANGES IN LOAN PORTFOLIO COMPOSITION
As of December 31, 1999 As of December 31, 1998 Percentage Percentage Percentage of Total of Total Increase (dollars in thousands) Amount Loans Amount Loans (Decrease) - -------------------------------------------------------------------------------------------------------------- Type of Loans: Commercial loans $ 395,138 31.72% $ 370,539 38.52% 6.64% Real estate mortgage loans 785,109 63.03 540,766 56.22 45.18 Real estate construction loans 62,516 5.02 40,738 4.24 53.46 Installment loans 25,498 2.05 29,165 3.03 (12.57) Other loans 419 0.03 269 0.03 55.76 Unamortized deferred loan fees (3,593) (0.29) (3,631) (0.38) (1.05) Allowance for loan losses (19,502) (1.56) (15,970) (1.66) 22.12 - -------------------------------------------------------------------------------------------------------------- Net loans $1,245,585 100.00% $ 961,876 100.00% 29.50% - --------------------------------------------------------------------------------------------------------------
CONTRACTUAL MATURITY OF LOAN PORTFOLIO(1)(2)
(in thousands) Within One Year One to Five Years Over Five Years Total - ---------------------------------------------------------------------------------------------------------------- Commercial Loans Floating rate $ 266,081 $ 43,255 $ 23,726 $ 333,062 Fixed rate 43,681 9,599 8,283 61,563 Real Estate Mortgage Loans Floating rate 36,695 166,309 269,867 472,871 Fixed rate 19,575 41,773 248,163 309,511 Real Estate Construction Loans Floating rate 51,213 10,950 -- 62,163 Installment Loans Floating rate -- 32 -- 32 Fixed rate 5,929 19,537 -- 25,466 Other Loans Floating rate 322 -- -- 322 Fixed rate 89 -- 8 97 - ---------------------------------------------------------------------------------------------------------------- Total loans $ 423,585 $ 291,455 $ 550,047 $ 1,265,087 - ---------------------------------------------------------------------------------------------------------------- Floating rate $ 354,311 $ 220,546 $ 293,593 $ 868,450 Fixed rate 69,274 70,909 256,454 396,637 - ---------------------------------------------------------------------------------------------------------------- Total loans $ 423,585 $ 291,455 $ 550,047 $ 1,265,087 Allowance for loan losses (19,502) - ---------------------------------------------------------------------------------------------------------------- Net loans $ 1,245,585 - ----------------------------------------------------------------------------------------------------------------
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. -23- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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 borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under close supervision with consideration given to placing the loans 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 a 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 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. Total non-performing assets, which include loans past due 90 days or more and still accruing interest, nonaccrual loans, and OREO, decreased $6.5 million or 23% from $28.2 million at year-end 1998 to $21.8 million at year-end 1999. The decrease was primarily due to reductions of $6.1 million in OREO and $959,000 in loans past due 90 days or more and still accruing interest, which were offset by an increase of $606,000 in nonaccrual loans. As a percentage of total loans plus OREO, non-performing assets declined from 2.85% at year-end 1998 to 1.71% at year-end 1999. The nonaccrual coverage ratio, which is the allowance for loan losses to non-performing loans, increased to 111.95% at year-end 1999 from 89.86% at year-end 1998. 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) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $ 3,724 $ 4,683 $ 2,373 $ 2,050 $ 1,344 Nonaccrual loans 13,696 13,090 16,886 9,305 14,012 - ------------------------------------------------------------------------------------------------------------- Total non-performing loans 17,420 17,773 19,259 11,355 15,356 - ------------------------------------------------------------------------------------------------------------- Real estate acquired in foreclosure 4,337 10,454 13,269 18,854 13,879 - ------------------------------------------------------------------------------------------------------------- Total non-performing assets $ 21,757 $ 28,227 $ 32,528 $ 30,209 $ 29,235 - ------------------------------------------------------------------------------------------------------------- Troubled debt restructurings(1) $ 4,581 $ 4,642 $ 4,874 $ 3,201 $ 8,429 Non-performing assets as a percentage of gross loans and other real estate owned at year-end 1.71% 2.85% 3.70% 3.87% 5.11% Allowance for loan losses as a percentage of non-performing loans 111.95% 89.86% 79.85% 119.15% 82.98% - -------------------------------------------------------------------------------------------------------------
1 TROUBLED DEBT RESTRUCTURINGS ARE ACCRUING INTEREST AT THEIR RESTRUCTURED TERMS. -24- The effect of nonaccrual loans and troubled debt restructurings on interest income for the years 1999, 1998, 1997, 1996 and 1995 is presented below:
(in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Nonaccrual Loans Contractual interest due $ 1,396 $ 1,395 $ 1,845 $ 1,121 $ 1,503 Interest recognized 234 112 471 268 200 - ------------------------------------------------------------------------------------------------------------- Net interest foregone $ 1,162 $ 1,283 $ 1,374 $ 853 $ 1,303 - ------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Troubled Debt Restructurings Contractual interest due $ 429 $ 421 $ 406 $ 339 $ 467 Interest recognized 414 412 387 311 352 - ------------------------------------------------------------------------------------------------------------- Net interest foregone $ 15 $ 9 $ 19 $ 28 $ 115 - -------------------------------------------------------------------------------------------------------------
NONACCRUAL LOANS Nonaccrual loans were $13.7 million and $13.1 million at year-end 1999 and 1998, respectively. They consisted mainly of $6.2 million in commercial real estate loans and $6.8 million in commercial loans at year-end 1999, and $7.4 million in commercial real estate loans and $4.5 million in commercial loans at year-end 1998. The following tables present the type of properties securing the loans and the type of businesses the borrowers engaged in under commercial real estate and commercial nonaccrual loan categories as of the dates indicated:
December 31, 1999 December 31, 1998 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 $ 1,014 $ 628 $ 348 $ 1,052 Commercial 4,971 5,425 5,533 2,613 Motel -- -- 1,501 30 TCD -- -- -- 696 Others 186 307 -- 93 Unsecured -- 392 -- -- - ---------------------------------------------------------------------------------------------------------------------- Total $ 6,171 $ 6,752 $ 7,382 $ 4,484 - ---------------------------------------------------------------------------------------------------------------------- December 31, 1999 December 31, 1998 Nonaccrual Loan Balance Nonaccrual Loan Balance Commercial Commercial (in thousands) Real Estate Commercial Real Estate Commercial - ---------------------------------------------------------------------------------------------------------------------- Type of business: Real estate development $ 354 $ 347 $ 451 $ 187 Real estate management 4,366 100 3,903 35 Wholesale -- 896 209 1,021 Retail -- -- -- 38 Food/Restaurant -- 889 -- 1,008 Import 621 3,307 -- 918 Motel 425 -- 1,315 -- Investments 334 -- 375 -- Industrial -- 270 -- 310 Clothing -- -- 348 161 Others 71 943 781 806 - ---------------------------------------------------------------------------------------------------------------------- Total $ 6,171 $ 6,752 $ 7,382 $ 4,484 - ----------------------------------------------------------------------------------------------------------------------
-25- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED The previous tables show a $5.0 million balance in nonaccrual commercial real estate loans at year-end 1999. These loans include five credits, all of which were secured by the first trust deeds on the respective commercial properties. The balance of $5.4 million in nonaccrual commercial loans at year-end 1999 represents 18 credits, the collateral of which includes first, second and third trust deeds on commercial buildings and warehouses. 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. At December 31, 1999, the Company's troubled debt restructurings decreased slightly in comparison to year-end 1998. Troubled debt restructurings were at $4.6 million at year-end 1999, all of which 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 an existing valuation allowance with a corresponding charge to the provision for loan losses. At December 31, 1999, the Company had identified impaired loans with a recorded investment of $26.3 million. For 1999, the average balance of impaired loans was $26.7 million and interest collected on impaired loans totaled $2.0 million in 1999. LOAN CONCENTRATION There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of December 31, 1999. 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. -26- ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $19.5 million or 1.54% of gross loans at year-end 1999, up $3.5 million or 22% from $16.0 million or 1.63% of gross loans at year-end 1998. Management provided $4.2 million and $3.6 million to the provision for loan losses in 1999 and 1998, respectively. The Bank recorded net charge-offs of $668,000 in 1999 down from $3.0 million in 1998. Total loans charged off in 1999 were $1.7 million, including $1.1 million in commercial loans, $388,000 in commercial real estate loans and $227,000 in installment loans. In view of the significant growth in loans and our strategic out-of-state expansion, management felt it was prudent to increase the provision to loan losses, even though the charge-offs in 1999 were less than 1998. 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) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 15,970 $ 15,379 $ 13,528 $ 12,742 $ 12,271 Allowance from acquisition -- -- -- 1,644 -- Provision for loan losses 4,200 3,600 3,600 3,600 7,300 Loans charged-off (1,731) (3,519) (2,139) (5,388) (7,018) Recoveries of charged-off loans 1,063 510 390 930 189 - -------------------------------------------------------------------------------------------------------------- Balance at end of year $ 19,502 $ 15,970 $ 15,379 $ 13,528 $ 12,742 - -------------------------------------------------------------------------------------------------------------- Average loans outstanding during the year $1,088,578 $ 907,639 $ 792,176 $ 579,634 $ 549,660 Ratio of net charge-offs to average loans outstanding during the year 0.06% 0.33% 0.22% 0.77% 1.24% Provision for loan losses to average loans outstanding during the year 0.39% 0.40% 0.45% 0.62% 1.33% Allowance to non-performing loans at year-end 111.95% 89.86% 79.85% 119.15% 82.98% Allowance to gross loans at year-end 1.54% 1.63% 1.78% 1.78% 2.28% - -------------------------------------------------------------------------------------------------------------- LOANS CHARGED-OFF BY LOAN TYPE[1] Year ended December 31, (dollars in thousands) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Commercial loans $ 1,116 $ 2,394 $ 1,387 $ 4,010 $ 3,895 Percentage of total commercial loans[1] 0.28% 0.65% 0.41% 1.41% 1.33% - -------------------------------------------------------------------------------------------------------------- Real estate loans $ 388 $ 873 $ 574 $ 1,177 $ 2,885 Percentage of total real estate loans1 0.05% 0.15% 0.11% 0.26% 1.18% - -------------------------------------------------------------------------------------------------------------- Installment and other loans $ 227 $ 252 $ 178 $ 201 $ 238 Percentage of total installment and other loans[1] 0.88% 0.86% 0.66% 0.84% 1.17% - -------------------------------------------------------------------------------------------------------------- Total loans charged-off $ 1,731 $ 3,519 $ 2,139 $ 5,388 $ 7,018 - -------------------------------------------------------------------------------------------------------------- 1 PERCENTAGES WERE CALCULATED BASED ON YEAR-END BALANCES. RECOVERIES BY LOAN TYPE Year ended December 31, (in thousands) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Commercial loans $ 761 $ 188 $ 219 $ 640 $ 110 Real estate loans 181 280 111 205 17 Installment and other loans 121 42 60 85 62 - -------------------------------------------------------------------------------------------------------------- Total $ 1,063 $ 510 $ 390 $ 930 $ 189 - --------------------------------------------------------------------------------------------------------------
The Company has established a monitoring system for its loans in order to identify impaired loans, and potential problem loans and to permit periodic evaluation of impairment and the adequacy of the allowance for loan losses in a timely manner. The monitoring system and methodology have evolved over a period of years, and loan classifications have -27- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED been incorporated into the determination of the level of allowance. This monitoring system and allowance methodology includes a loan-by-loan analysis for significant classified loans as well as loss factors for the balance of the portfolio that are based on historical loss trend analysis relative to the Company's unclassified portfolio and other factors such as current portfolio delinquency and trends, and other inherent risk factors such as economic conditions, concentrations in the portfolio risk levels of particular loan categories, internal loan review and management oversight. 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 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 1999 (in thousands) Investment Allowance Allowance Balance - ------------------------------------------------------------------------------------------------------------- Commercial $ 12,686 $ -- $ 1,831 $ 10,855 Commercial real estate 13,412 -- 1,912 11,500 Other 181 -- 181 -- - ------------------------------------------------------------------------------------------------------------- Total $ 26,279 $ -- $ 3,924 $ 22,355 - ------------------------------------------------------------------------------------------------------------- 1998 (in thousands) - ------------------------------------------------------------------------------------------------------------- Commercial $ 9,379 $ -- $ 1,566 $ 7,813 Commercial real estate 12,515 58 1,769 10,688 Other 55 -- 55 -- - ------------------------------------------------------------------------------------------------------------- Total $ 21,949 $ 58 $ 3,390 $ 18,501 - -------------------------------------------------------------------------------------------------------------
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 the charge-offs will occur, or if they do occur, that they will be in the proportion indicated in the following table:
As of December 31, 1999 1998 1997 1996 1995 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 (dollars in to average to average to average to average to average thousands) Amount gross loans Amount gross loans Amount gross loans Amount gross loans Amount gross loans - ---------------------------------------------------------------------------------------------------------------------------------- Type of Loans: Commercial loans $ 8,546 35.06% $ 7,468 38.58% $ 7,480 39.20% $ 6,190 37.27% $ 6,338 52.45% Real estate mortgage loans 9,927 58.10 7,768 53.62 6,988 52.88 6,941 55.19 6,084 41.47 Real estate construction loans 440 4.30 313 4.77 401 4.80 294 4.40 136 2.44 Installment loans 464 2.46 414 2.98 356 3.09 72 3.09 81 3.54 Other loans 125 0.08 7 0.05 154 0.03 31 0.05 103 0.10 - ---------------------------------------------------------------------------------------------------------------------------------- Total $19,502 100.00% $15,970 100.00% $15,379 100.00% $13,528 100.00% $12,742% 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, 1999 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. -28- OTHER REAL ESTATE OWNED The Company's OREO, net of a valuation allowance of $614,000, was carried at $4.3 million at year-end 1999, compared with OREO, net of a valuation allowance of $494,000, being carried at $10.5 million at year-end 1998. During 1999, the Company acquired three properties in the amount of $1.3 million and disposed of 19 properties totaling $7.2 million with a net gain of $1.5 million. At year-end 1999, the Company owned eight OREO properties, which included land and commercial and industrial buildings, 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 valuation allowance in the current period. Management provided approximately $339,000 to the provision for OREO losses in 1999. The Company recognized net income of $1.4 million from operating its OREO properties in 1999. In addition to the $1.5 million net gains on sales of OREO properties, the Company received $575,000 in rental income. These amounts were partially offset by operating expenses of $369,000 and the provision for OREO losses of $339,000. Although the California real estate market showed strong improvements in 1999, the future performance of the market is unpredictable. 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 1999, 1998 and 1997:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Operating expense (income) $ (206) $ (321) $ 201 Provision for losses 339 195 476 Net gain on disposal (1,549) (999) (174) - ------------------------------------------------------------------------------------------------------------- Total $ (1,416) $ (1,125) $ 503 - -------------------------------------------------------------------------------------------------------------
INVESTMENTS IN REAL ESTATE Investments in real estate amounted to $17.0 million at year-end 1999, up significantly from $1.5 million at year-end 1998. The Company invested $15.0 million in a California tax credit fund at the end of the first quarter of 1999, which represented an approximately 36% limited partnership interest in the fund. The partnership was formed to invest in multi-family housing in California that is expected to qualify for Federal and/or State low income housing tax credits. During the second quarter of 1999, the Company entered into an agreement to purchase a 99.9% limited partnership interest in a California limited partnership. The purpose of the partnership is to construct and operate a housing project consisting of 102 residential units for seniors. During the second quarter of 1999, the Bank made its initial contribution for $265,000 upon execution of the agreement, and in September 1999, the Bank made its first contribution of $1.1 million. The total investment for the Bank is expected to be approximately $5.3 million. DEPOSITS Total deposits increased $161.3 million or 10% from $1,560.4 million at year-end 1998 to $1,721.7 million at year-end 1999. In addition to the growth in deposits in California, the Company assumed approximately $80.6 million in deposits as part of the Golden City transaction on December 10, 1999. Total deposits assumed from Golden City approximated $75.0 million at year-end 1999. As interest rate spreads widened between time deposits over $100,000 ("Jumbo CDs") and other interest-bearing deposits, Jumbo CDs continued to grow faster than other types of deposits. During 1999, Jumbo CDs increased $88.9 million or 14%. Core deposits, defined as total deposits minus Jumbo CDs and brokered deposits, grew $72.4 million or 8%, largely as a result of the deposits assumed from Golden City. The ratio of core deposits to total deposits decreased slightly from 60.32% at year-end 1998 to 58.87% at year-end 1999. The Bank introduced a new tiered money market account in October 1999 which is expected to help the growth of money market deposits. As of December 31, 1999, the balance of the new tiered money market account totaled $2.3 million. The Company had no brokered deposits as of December 31, 1999. -29- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Average total deposits grew $111.2 million or 7% from $1,484.2 million in 1998 to $1,595.4 million in 1999. Average Jumbo CDs increased $86.5 million while average core deposits increased $24.7 million. Although the Bank's Jumbo CD portfolio continues to grow faster than other types of deposits, management considers the Bank's Jumbo CDs generally less volatile primarily due to the following reasons: 1) approximately 50% of the Bank's Jumbo CDs have stayed with the Bank for more than two years; 2) the Jumbo CD portfolio continued to be diversified with 4,141 individual accounts averaging approximately $168,000 per account owned by 2,917 individual depositors as of January 20, 2000; and 3) this phenomenon of having a relatively higher percentage of Jumbo CDs to total deposits exists in most of the Asian American banks in the Company's California market due to the fact that the customers in this market tend to have a higher savings rate. 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 CDs, management has continued to make efforts in the following areas: 1) to offer non-competitive interest rates paid on Jumbo CDs; 2) to promote transaction-based products; and 3) to seek to diversify the customer base by branch expansion and/or acquisition as suitable opportunities arise. In addition to the Golden City transaction in December 1999, the Company opened a branch in Diamond Bar, California on January 22, 2000. 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, 1999 and average deposits and rates. DEPOSIT MIX
Year ended December 31, 1999 1998 1997 (dollars in thousands) Amount Percentage Amount Percentage Amount Percentage - -------------------------------------------------------------------------------------------------------------- Demand $ 195,140 11.33% $ 178,068 11.41% $ 175,875 12.14% NOW accounts 121,394 7.05 114,982 7.37 111,653 7.70 Money market accounts 97,821 5.68 113,869 7.30 94,708 6.54 Savings deposits 236,764 13.75 207,365 13.29 210,291 14.51 Time deposits under $100 362,553 21.06 326,968 20.95 307,504 21.22 Time deposits of $100 or more 708,064 41.13 619,150 39.68 549,090 37.89 - -------------------------------------------------------------------------------------------------------------- Total $1,721,736 100.00% $1,560,402 100.00% $1,449,121 100.00% - --------------------------------------------------------------------------------------------------------------
TIME DEPOSITS OF $100,000 OR MORE BY MATURITY
(in thousands) At December 31, 1999 - ------------------------------------------------------------------------------------------------------------ Less than three months $ 352,755 Three to six months 192,051 Six to twelve months 159,526 Over one year 3,732 - ------------------------------------------------------------------------------------------------------------ Total $ 708,064 - ------------------------------------------------------------------------------------------------------------ MATURITIES OF TIME DEPOSITS WITH A REMAINING TERM OF MORE THAN ONE YEAR AT DECEMBER 31, 1999 FOR EACH OF THE FIVE YEARS FOLLOWING DECEMBER 31, 1999 (in thousands) - ------------------------------------------------------------------------------------------------------------ 2001 $ 17,330 2002 4,117 2003 188 2004 200 2005 16 - ------------------------------------------------------------------------------------------------------------ Total $ 21,851 - ------------------------------------------------------------------------------------------------------------
-30- AVERAGE DEPOSITS AND RATES
(dollars 1999 1998 1997 1996 1995 in thousands) Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage - ---------------------------------------------------------------------------------------------------------------------------- Demand $ 169,013 --% $ 166,657 --% $ 148,907 --% $ 121,952 --% $ 114,435 --% NOW accounts 117,374 1.22 111,900 1.42 114,453 1.47 96,759 1.50 85,413 1.70 Money market accounts 99,628 1.59 99,833 2.11 97,470 2.26 100,898 2.30 106,760 2.36 Savings deposits 207,498 1.54 205,372 2.10 216,840 2.19 151,284 2.31 136,750 2.31 Time deposits 1,001,878 4.69 900,441 5.11 820,310 5.09 632,211 5.00 450,834 5.36 - ---------------------------------------------------------------------------------------------------------------------------- Total $1,595,391 3.33% $1,484,203 3.64% $1,397,980 3.60% $1,103,104 3.50% $ 894,192 3.50% - ----------------------------------------------------------------------------------------------------------------------------
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. Stockholders' equity increased $22.4 million to $179.1 million or 8.97% of total assets at year-end 1999, compared with $156.7 million or 8.80% of total assets at year-end 1998. The increase was primarily due to an addition of $30.3 million from net income less cash dividends paid of $7.2 million and $1.6 million from issuance of additional common shares through Dividend Reinvestment Plan, which were partially offset by an increase of $2.2 million in the net unrealized holding losses on securities available-for-sale, net of tax. The Company declared a cash dividend of $0.175 per common share in January 1999 on 8,988,760 shares outstanding and a cash dividend of $0.21 per common share in April, July and October 1999, respectively, on 8,998,412 shares, 9,010,829 shares and 9,022,318 shares outstanding, respectively. Total cash dividends paid in 1999, amounted to $7.2 million. Management seeks to retain the Company's capital at a level sufficient to support future growth, to protect depositors, to absorb any anticipated losses and to comply with various regulatory requirements. The primary measure of capital adequacy is based on the ratio of risk-based capital to risk weighted assets. The Company's Total, Tier 1 and Tier 1 leverage ratios were 11.71%, 10.50% and 8.93%, respectively, as of December 31, 1999, compared with 12.68%,11.44% and 8.45%, respectively, at year-end 1998. The decreases in the Total and Tier 1 capital ratios at year-end 1999 were primarily attributable to the substantial increase in loans, which were 100% risk-weighted. Nevertheless, the Company's capital ratios at year-end 1999 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%. A table illustrating the Company and the Bank's capital and leverage ratios at year-end 1999 and 1998 is included in Note 11 to consolidated financial statements. 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"). Due to significant decreases in short-term and marketable assets and increases in deposits and securities sold under agreements to repurchase, the Company's liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) decreased to 33.91% at year-end 1999, compared with 46.04% at year-end 1998. -31- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED To supplement its liquidity needs, the Bank maintains a total credit line of $47 million for Federal funds with two correspondent banks, a repo line of $110 million with three brokerage firms and a retail certificate of deposit line of five percent of total deposits with another brokerage firm. The Bank is also a shareholder of the FHLB, which enables the Bank to have access to lower cost FHLB financing when necessary. The Bank obtained non-callable advances from FHLB totaling $30 million in the third quarter of 1998 at fixed interest rates. The Company had a significant portion of its time deposits maturing within one year or less at year-end 1999. Management anticipates that there may be some outflow of these deposits upon maturity, due to the keen competition in the Company's marketplace. 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 operation needs in the foreseeable future. Bancorp, on the other hand, obtains funding for its activities only through dividend income contributed by the Bank and proceeds from investments in the Dividend Reinvestment Plan. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. Since the business activities of Bancorp consist primarily of the operations of the Bank, and no other operating business activities are proposed for Bancorp in the near future, management believes Bancorp's liquidity generated from its prevailing sources are sufficient to meet its operational needs. 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 the 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 and manages its interest rate risk through analyzing the repricing characteristics of its loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse effects of changes in interest rates on its earnings and ultimately the underlying market value of equity while structuring the Company's asset-liability composition to obtain the maximum spread. Management uses certain basic measurement tools in conjunction with established risk limits to regulate its interest rate exposure. Because of the 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 or the market value of its assets and liabilities. The interest rate sensitivity analysis measures the Company's exposure to differentials in interest rates between assets and liabilities. This analysis details the expected maturity and repricing opportunities mismatch or sensitivity gap between interest-earning assets and interest-bearing liabilities over a specified timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates, net interest margin may be enhanced with a positive gap. Contrarily, a negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of increasing interest rates, net interest margin may be impaired with a negative gap. The following table shows the maturity and rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1999. 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 seen from the table, the Company was asset sensitive with a cumulative gap ratio of a positive 16.25% within three months, and liability sensitive with a cumulative gap ratio of a negative 9.78% within one year at year-end 1999, compared with a positive 15.61% within three months, and a negative 11.48% within one year at year-end 1998. -32- INTEREST RATE SENSITIVITY
December 31, 1999 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 Earnings Assets: Cash and due from banks $ -- $ -- $ -- $ -- $ 59,081 $ 59,081 Federal funds sold and securities purchased under agreements to resell 5,000 -- -- -- -- 5,000 Securities available-for-sale 47,492 20,194 59,822 33,483 -- 160,991 Securities held-to-maturity -- 58,902 125,825 241,605 -- 426,332 Loans: Commercial loans 342,677 27,838 9,669 8,347 -- 388,531 Real estate mortgage loans 467,955 19,510 41,918 248,909 -- 778,292 Real estate construction loans 62,516 -- -- -- -- 62,516 Installment loans 2,830 3,123 19,274 -- -- 25,227 Other loans 321 88 9 -- -- 418 - ------------------------------------------------------------------------------------------------------------- Total loans(1) 876,299 50,559 70,870 257,256 -- $1,254,984 - ------------------------------------------------------------------------------------------------------------- Non-interest earning assets -- -- -- -- 89,536 89,536 - ------------------------------------------------------------------------------------------------------------- Total assets $ 928,791 $ 129,655 $ 256,517 $ 532,344 $ 148,617 $1,995,924 - ------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities: Deposits: Demand $ -- $ -- $ -- $ -- $ 195,140 $ 195,140 Money market and NOW(2) 16,346 44,224 93,080 65,565 -- 219,215 Savings 17,693 61,342 102,412 55,317 -- 236,764 TCD's under $100 170,702 171,977 19,790 84 -- 362,553 TCD's $100 and over 352,755 351,577 3,732 -- -- 708,064 - ------------------------------------------------------------------------------------------------------------- Total deposits $ 557,496 $ 629,120 $ 219,014 $ 120,966 $ 195,140 $1,721,736 - ------------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 46,990 -- -- -- -- 46,990 Advances from Federal Home Loan Bank -- 20,000 10,000 -- -- 30,000 Non-interest bearing liabilities -- -- -- -- 18,089 18,089 Stockholders' equity -- -- -- -- 179,109 179,109 - ------------------------------------------------------------------------------------------------------------- Total liabilities & stockholders' equity $ 604,486 $ 649,120 $ 229,014 $ 120,966 $ 392,338 $1,995,924 - ------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ 324,305 $ (519,465) $ 27,503 $ 411,378 $(243,721) $ -- - ------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $ 324,305 $ (195,160) $ (167,657) $ 243,721 $ -- $ -- - ------------------------------------------------------------------------------------------------------------- Gap ratio (% of total assets) 16.25% (26.03) 1.38% 20.61% (12.21)% -- - ------------------------------------------------------------------------------------------------------------- Cumulative gap ratio 16.25% (9.78)% (8.40)% 12.21% -- -- - -------------------------------------------------------------------------------------------------------------
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. 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, the 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 -33- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED level is met or exceeded, the Company then seeks corrective action after considering, among other things, market conditions, customer reaction and the estimated impact on profitability. The following table presents the estimated impacts of immediate changes in interest rates at the specified levels at December 31, 1999. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used.
December 31, 1999 December 31, 1998 Changes in Interest Rates Percentage Change in: Percentage Change in: (in basis points) Net Interest Income(1) Net Portfolio Value(2) Net Interest Income(1) Net Portfolio Value(2) - ------------------------------------------------------------------------------------------------------------------------------------ +200 15.60% (31.22)% 13.62% (33.88)% +100 8.35% (16.13)% 7.35% (17.36)% -100 (6.83)% 16.19% (6.03)% 15.79% -200 (13.97)% 29.10% (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 increasing its yield-cost spread through growth opportunities 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, 1999. For assets, expected maturities are based on contractual maturity. For liabilities, the Company uses its historical experience and decay factors to estimate the deposit runoffs of its interest bearing transactional deposits. The Company uses certain assumptions to estimate fair values and expected maturities. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used.
Average Expected Maturity Date at December 31, 1999 Interest (dollars in thousands) Rate 2000 2001 2002 2003 2004 Thereafter Total Fair Value - ---------------------------------------------------------------------------------------------------------------------------------- Interest-Sensitive Assets: Federal funds sold and securities purchased under agreements to resell 4.30% $ 5,000 $ -- $ -- $ -- $ -- $ -- $ 5,000 $ 5,000 Mortgage-backed securities and collateralized mortgage obligations 6.10% 3,639 5,585 70 -- 12,011 198,131 219,436 215,592 Investment securities 6.13% 116,123 24,589 31,330 73,334 39,748 77,649 362,773 355,375 Federal Home Loan Bank stock 5.50% 6,851 -- -- -- -- -- 6,851 6,851 Loans Commercial 8.90% 304,997 10,269 10,558 11,476 19,736 31,515 388,551 380,466 Real estate mortgage 8.64% 55,404 29,746 58,972 43,700 72,451 510,040 770,313 754,727 Real estate construction 9.21% 50,425 10,778 -- -- -- -- 61,203 59,717 Installment & others 8.54% 6,242 3,578 5,920 6,982 2,788 8 25,518 24,426 Interest-Sensitive Liabilities: Other interest bearing deposits 1.46% 139,605 69,953 54,919 39,815 30,805 120,882 455,979 456,049 Time deposits 4.74% 1,047,000 19,012 4,117 202 200 86 1,070,617 1,059,076 Securities sold under agreement to repurchase 5.80% 46,990 -- -- -- -- -- 46,990 47,649 Advances from Federal Home Loan Bank 4.84% 20,000 -- -- 10,000 -- -- 30,000 29,305 Off-Balance Sheet Financial Instruments: Commitments to extend credit N/A 516,814 27,842 2,003 -- 4,967 29,101 580,727 (328) Standby letters of credit N/A 11,660 88 -- -- -- -- 11,748 (64) Other letters of credit N/A 31,866 -- -- -- -- -- 31,866 (193) Financial guarantee N/A 20,000 -- -- -- -- -- 20,000 35 Bill of lading guarantee N/A 13,924 -- -- -- -- -- 13,924 (69) - ----------------------------------------------------------------------------------------------------------------------------------
-34- YEAR 2000 The concern over the Year 2000 ("Y2K") issue resulted from computer programs being written using two digits rather than four digits to identify a year in the date field. Throughout much of the world, there was concern that this issue could cause computer systems to fail or create erroneous results at the Year 2000. Beginning in 1997, the Company took various steps to mitigate the potential impact of a Y2K problem. In general, these actions were designed to identify, assess and design an action plan to mitigate the risks that the Company might encounter relative to the Y2K problem. The total cost of the Company's plan to address Y2K issues was approximately $668,000. Hardware and software upgrades will be depreciated over their useful lives in accordance with the Company's policy. All other costs were expensed as incurred. The total amount expensed related to the Y2K issue was $423,000 in 1999, $223,000 in 1998 and $22,000 in 1997. Since the end of 1999, the Company has not experienced problems relating to the Y2K issue that have had a material adverse impact on the Company's financial condition, results of operations or liquidity. The Company does not believe at this time that any potential problems relative to the Y2K issue will have a materially adverse impact on the Company in the future. However, no assurance can be given that this will be the case. 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, 1999 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 cost 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 effect on net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can 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. -35- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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 cost. 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. AS THE COMPANY EXPANDS ITS BUSINESS OUTSIDE OF ITS CALIFORNIA MARKETS, THE COMPANY WILL ENCOUNTER RISKS THAT COULD ADVERSELY AFFECT IT. The Company primarily operates in California markets with a concentration of Chinese American individuals and businesses; however, one of its strategies is to expand beyond California into other domestic markets that have concentrations of Chinese American individuals and businesses. The Company has begun this expansion with the opening of its Houston loan production office and the acquisition of certain assets and the assumption of certain deposits and other liabilities of Golden City. In the course of this expansion, the Company will encounter significant risks and uncertainties that could have a material adverse effect on its operations. These risks and uncertainties include increased operational difficulties arising from, among other things, its ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas and to anticipate events or differences in markets in which it has no current experience. To the extent that the Company expands through acquisitions, such acquisitions may also adversely harm its business, if the Company fails to adequately address the financial and operational risks associated with such acquisitions. For example, risks can include difficulties in assimilating the operations, technology and personnel of the acquired company; diversion of management's attention from other business concerns; inability to maintain uniform standards, controls, procedures and policies; potentially dilutive issuances of equity securities; incurrence of additional debt and contingent liabilities; use of cash resources; large write-offs; and amortization expenses related to goodwill and other intangible assets. POOR ECONOMIC CONDITIONS IN CALIFORNIA AND OTHER REGIONS WHERE THE BANK HAS OPERATIONS COULD CAUSE THE COMPANY TO INCUR LOSSES. The Company's banking operations are concentrated primarily in Southern and Northern California, and to a much lesser extent in Houston, Texas and New York City. Adverse economic conditions in these regions 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, and to a much lesser extent, in Houston, Texas and New York City. 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, floods and hurricanes (which may result in uninsured losses), and other factors beyond the control of the Company. Although the economy continued to grow in 1999 leading to a relatively strong real estate market in the markets in which the Company operates, management cannot predict the future economic performances of these regions and there can be no assurance that favorable conditions will continue. 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 -36- during construction; and lack of permanent take-out financing. Loans 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. 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 areas 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. While the Asian economy continued to show growth in 1999, it is difficult to predict the behavior of the Asian economy in the future. U.S. fiscal policy and an unfavorable global economic condition may adversely impact the Asian economy. If the Asian economic conditions should deteriorate, the Company could be exposed to economic and transfer risk, and could experience 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 negatively impact asset values and the profitability and liquidity of companies operating in this region. 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- 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 1999, total trading volume was approximately 1,557,000 and the prices ranged from a high of $43.00 to a low of $32.50. The approximate number of stockholders at year-end 1999 was 1,800. The Company paid an aggregate per share cash dividend of $0.805 in 1999 and $0.70 in 1998. 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 - --------------------------------------------------------------------------------------------------------------------- 1999 First Quarter $ 41.000 $ 33.250 $ 37.625 305,330 Second Quarter 43.000 32.500 42.500 416,760 Third Quarter 42.938 34.688 35.688 516,312 Fourth Quarter 42.000 35.000 41.000 318,483 - --------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------
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. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY The following table shows the daily average balances of the Company's assets, liabilities, and stockholders' equity for 1999 and 1998. The average balances of the Company's assets, liabilities, and stockholders' equity for 1997 is based on quarterly averages.
Year ended December 31, 1999 1998 1997 (dollars in thousands) Amount % 1 Amount % 1 Amount % 1 - ------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 50,969 2.74% $ 58,892 3.45% $ 59,297 3.80% Federal funds sold and securities purchased under agreements to resell 38,013 2.04 69,915 4.09 35,000 2.25 Securities available-for-sale, taxable 184,497 9.91 225,397 13.20 281,938 18.08 Securities available-for-sale, nontaxable 345 0.02 499 0.03 158 0.01 Securities held-to-maturity, taxable 378,753 20.35 315,257 18.46 256,310 16.44 Securities held-to-maturity, nontaxable 68,702 3.69 48,757 2.85 41,831 2.68 Total net loans(2) 1,088,578 58.48 907,627 53.15 802,577 51.48 Premises and equipment, net 25,668 1.38 25,571 1.50 25,380 1.63 Other assets 25,799 1.39 55,888 3.27 56,582 3.63 - ------------------------------------------------------------------------------------------------------------------------- Total assets $1,861,324 100.00% $1,707,803 100.00% $ 1,559,073 100.00% - ------------------------------------------------------------------------------------------------------------------------- Liabilities Demand deposits $ 169,013 9.08% $ 166,657 9.76% $ 156,072 10.01% Savings deposits(3) 424,500 22.81 417,105 24.42 426,244 27.34 Time deposits 1,001,878 53.82 900,441 52.73 826,520 53.01 - ------------------------------------------------------------------------------------------------------------------------- Total deposits 1,595,391 85.71 1,484,203 86.91 1,408,836 90.36 - ------------------------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 55,519 2.98 53,285 3.12 7,916 0.51 Advances from Federal Home Loan Bank 30,000 1.61 6,959 0.40 -- -- Mortgage indebtedness 183 0.01 440 0.03 190 0.01 Other liabilities 14,770 0.80 18,304 1.07 13,469 0.87 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,695,863 91.11 1,563,191 91.53 1,430,411 91.75 - ------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock and additional paid-in-capital 63,897 3.43 62,259 3.65 60,795 3.90 Retained earnings 101,564 5.46 82,353 4.82 67,867 4.35 - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 165,461 8.89 144,612 8.47 128,662 8.25 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,861,324 100.00% $1,707,803 100.00% $ 1,559,073 100.00% - -------------------------------------------------------------------------------------------------------------------------
1 PERCENTAGE OF CATEGORIES UNDER ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY ARE SHOWN AS A PERCENTAGE OF AVERAGE ASSETS. 2 TOTAL NET LOANS MEANS GROSS LOANS NET OF LOAN PARTICIPATIONS SOLD, UNAMORTIZED DEFERRED LOAN FEES AND ALLOWANCE FOR LOAN LOSSES. 3 SAVINGS DEPOSITS INCLUDE NOW, MONEY MARKET AND SAVINGS ACCOUNTS. -38- CONSOLIDATED STATEMENTS OF CONDITION
AS OF DECEMBER 31, (in thousands, except share and per share data) 1999 1998 - ----------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 59,081 $ 64,656 Federal funds sold and securities purchased under agreements to resell 5,000 17,000 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 64,081 81,656 Securities available-for-sale (amortized cost of $162,728 in 1999 and $237,877 in 1998) 160,991 239,928 Securities held-to-maturity (estimated fair value of $416,827 in 1999 and $426,778 in 1998) 426,332 418,156 Loans (net of allowance for loan losses of $19,502 in 1999 and $15,970 in 1998) 1,245,585 961,876 Other real estate owned, net 4,337 10,454 Investments in real estate, net 16,987 1,457 Premises and equipment, net 25,299 25,826 Customers' liability on acceptances 13,721 10,847 Accrued interest receivable 13,150 11,996 Goodwill 10,559 8,590 Other assets 14,882 10,112 - ----------------------------------------------------------------------------------------------------------------- Total assets $ 1,995,924 $ 1,780,898 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand deposits $ 195,140 $ 178,068 Interest bearing accounts NOW accounts 121,394 114,982 Money market deposits 97,821 113,869 Savings deposits 236,764 207,365 Time deposits under $100 362,553 326,968 Time deposits of $100 or more 708,064 619,150 - ----------------------------------------------------------------------------------------------------------------- Total deposits 1,721,736 1,560,402 - ----------------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase 46,990 16,436 Advances from Federal Home Loan Bank 30,000 30,000 Acceptances outstanding 13,721 10,847 Other liabilities 4,368 6,561 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 1,816,815 1,624,246 Stockholders' equity Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued -- -- Common stock, $0.01 par value; 25,000,000 shares authorized, 9,033,583 and 8,988,760 shares issued and outstanding in 1999 and 1998, respectively 90 90 Additional paid-in-capital 64,529 62,920 Accumulated other comprehensive income (loss), net (1,006) 1,189 Retained earnings 115,496 92,453 - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 179,109 156,652 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,995,924 $ 1,780,898 - -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -39- CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31, (in thousands, except share and per share data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Interest Income Interest on loans $ 93,780 $ 82,866 $ 74,015 Interest on securities available-for-sale 10,551 13,494 17,701 Interest on securities held-to-maturity 26,821 22,966 17,831 Interest on Federal funds sold and securities purchased under agreements to resell 1,881 3,950 2,415 Interest on deposits with banks 13 33 16 - ------------------------------------------------------------------------------------------------------------------------ Total interest income 133,046 123,309 111,978 - ------------------------------------------------------------------------------------------------------------------------ Interest Expense Time deposits of $100 or more 32,724 30,691 26,634 Other deposits 20,438 23,316 23,738 Other borrowed funds 4,246 3,218 502 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense 57,408 57,225 50,874 - ------------------------------------------------------------------------------------------------------------------------ Net interest income before provision for loan losses 75,638 66,084 61,104 Provision for loan losses 4,200 3,600 3,600 - ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 71,438 62,484 57,504 - ------------------------------------------------------------------------------------------------------------------------ Non-Interest Income Securities gains (losses) (3) 43 41 Letter of credit commissions 2,179 1,944 1,503 Service charges 3,635 3,915 3,491 Other operating income 3,044 2,234 1,740 - ------------------------------------------------------------------------------------------------------------------------ Total non-interest income 8,855 8,136 6,775 - ------------------------------------------------------------------------------------------------------------------------ Non-Interest Expense Salaries and employee benefits 19,150 18,024 17,009 Occupancy expense 2,521 2,546 2,931 Computer and equipment expense 2,573 2,412 2,365 Professional services expense 3,165 3,234 3,060 FDIC and State assessments 409 393 356 Marketing expense 1,036 1,028 1,200 Real estate operations, net (1,416) (1,125) 503 Other operating expense 2,844 3,553 3,504 - ------------------------------------------------------------------------------------------------------------------------ Total non-interest expense 30,282 30,065 30,928 - ------------------------------------------------------------------------------------------------------------------------ Income before income tax expense 50,011 40,555 33,351 Income tax expense 19,720 15,976 13,243 - ------------------------------------------------------------------------------------------------------------------------ Net income 30,291 24,579 20,108 - ------------------------------------------------------------------------------------------------------------------------ Other comprehensive income, net of tax: Unrealized holding gain (loss) arising during the year (2,229) 859 1,465 Less: reclassification adjustment for realized gain (loss) on securities included in net income (34) 40 36 - ------------------------------------------------------------------------------------------------------------------------ Total other comprehensive income (loss), net of tax (2,195) 819 1,429 - ------------------------------------------------------------------------------------------------------------------------ Total comprehensive income $ 28,096 $ 25,398 $ 21,537 - ------------------------------------------------------------------------------------------------------------------------ Net income per common share Basic $ 3.36 $ 2.74 $ 2.26 Diluted $ 3.36 $ 2.74 $ 2.26 - ------------------------------------------------------------------------------------------------------------------------ Basic average common shares outstanding 9,013,428 8,967,188 8,915,936 Diluted average common shares outstanding 9,017,760 8,968,393 8,915,936 - ------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -40- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Accumulated Year ended December 31, Additional Other Total 1999, 1998 and 1997 Number Paid-in- Comprehensive Retained Stockholders' (in thousands, except share and per share amounts) of Shares Amount Capital Income (Loss) Earnings Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 8,878,144 $ 89 $ 59,812 $ (1,059) $ 59,604 $ 118,446 - ---------------------------------------------------------------------------------------------------------------------------------- Issuances of common stock -- Dividend Reinvestment Plan 63,599 -- 1,460 -- -- 1,460 Cash dividends of $.625 per share -- -- -- -- (5,566) (5,566) Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- 1,429 -- 1,429 Net income -- -- -- -- 20,108 20,108 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 8,941,743 89 61,272 370 74,146 135,877 - ---------------------------------------------------------------------------------------------------------------------------------- Issuances of common stock -- Dividend Reinvestment Plan 47,017 1 1,648 -- -- 1,649 Cash dividends of $.70 per share -- -- -- -- (6,272) (6,272) Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- 819 -- 819 Net income -- -- -- -- 24,579 24,579 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 8,988,760 90 62,920 1,189 92,453 156,652 - ---------------------------------------------------------------------------------------------------------------------------------- Issuances of common stock -- Dividend Reinvestment Plan 44,523 -- 1,600 -- -- 1,600 Stock options exercised 300 -- 9 -- -- 9 Cash dividends of $0.805 per share -- -- -- -- (7,248) (7,248) Change in unrealized holding gain (loss) on securities available-for-sale, net of tax -- -- -- (2,195) -- (2,195) Net income -- -- -- -- 30,291 30,291 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 9,033,583 $ 90 $ 64,529 $ (1,006) $115,496 $ 179,109 - ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -41- CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 30,291 $ 24,579 $ 20,108 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,200 3,600 3,600 Provision for losses on other real estate owned 339 195 476 Deferred tax benefit (2,291) (10) (493) Depreciation 1,331 1,241 1,335 Net gain on sale of other real estate owned (1,549) (999) (174) Gain on sale of investments in real estate (394) -- (222) Gain on disposal of premises and equipment -- (2) (2) (Gain) Loss on sales and calls of securities 3 (43) (41) Amortization of investment security premiums, net 557 286 63 Amortization of goodwill 681 940 685 Increase (decrease) in deferred loan fees, net (38) (155) 43 (Increase) decrease in accrued interest receivable (1,154) 251 2,761 (Increase) decrease in other assets, net (2,480) 3,443 (2,437) Increase (decrease) in other liabilities (2,193) 2,158 (741) - ---------------------------------------------------------------------------------------------------------------------------------- Total adjustments (2,988) 10,905 4,853 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 27,303 35,484 24,961 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities available-for-sale (1,090,732) (1,025,244) (217,418) Proceeds from maturity and call of investment securities available-for-sale 1,160,919 1,006,491 300,394 Proceeds from sale of investment securities available-for-sale -- 6,429 92,706 Purchase of mortgage-backed securities available-for-sale (911) (34,968) (12,443) Proceeds from repayments and sale of mortgage-backed securities available-for-sale 9,906 25,492 6,800 Purchase of investment securities held-to-maturity (45,255) (82,268) (15,346) Proceeds from maturity and call of investment securities held-to-maturity 1,385 12,025 41,932 Purchase of mortgage-backed securities held-to-maturity (38,157) (73,787) (186,621) Proceeds from repayment of mortgage-backed securities held-to-maturity 70,851 74,817 19,212 Net increase in loans (282,413) (120,021) (104,474) Purchase of premises and equipment (803) (1,866) (766) Proceeds from sale of equipment -- 2 2 Proceeds from sale of other real estate owned 4,730 4,470 4,346 Proceeds from sale of investments in real estate 1,026 -- 2,292 Net (increase) decrease in investments in real estate (16,162) 197 263 Cash paid for the acquisition of Golden City (5,511) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (231,127) (208,231) (69,121) - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, money market and savings deposits 36,835 21,757 19,083 Net increase in time deposits 124,499 89,524 65,298 Net increase (decrease) in securities sold under agreements to repurchase 30,554 (6,983) 13,419 Increase in borrowing from Federal Home Loan Bank -- 30,000 -- Cash dividends (7,248) (6,272) (5,566) Proceeds from shares issued under Dividend Reinvestment Plan 1,600 1,649 1,460 Proceeds from exercise of stock options 9 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 186,249 129,675 93,694 - ---------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (17,575) (43,072) 49,534 Cash and cash equivalents, beginning of the year 81,656 124,728 75,194 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of the year $ 64,081 $ 81,656 $ 124,728 - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 56,857 $ 57,232 $ 50,184 Income taxes $ 20,350 $ 15,413 $ 13,736 Non-cash investing activities: Transfer to investment securities available-for-sale within 90 days of maturity $ 2,515 $ 1,340 $ 630 Transfers to other real estate owned $ 886 $ 4,334 $ 6,012 Loans to facilitate the sale of other real estate owned $ 3,483 $ 3,483 $ 6,949 Acquisition: The Company purchased certain assets and assumed certain deposits and liabilities of Golden City for $5,511. In conjunction with the acquisition, liabilities were assumed as follows. See Note 2. Fair value of assets acquired$ 86,779 Cash paid (5,511) - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities assumed $ 81,268 - ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -42- 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 1999 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 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 -43- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 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 is discontinued 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 initially recorded at fair value and subsequently is carried at the lower of cost or 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. -44- INVESTMENTS IN REAL ESTATE At December 31, 1999, the Company is a limited partner in four different partnerships that invest in low income housing projects that qualify for Federal income tax credits. As further discussed in Note 7, the significant partnership interests are accounted for utilizing the equity method of accounting. Those limited partnership interests which are considered immaterial are accounted for 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. GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired and the related acquisition costs, is amortized on a straight-line basis over the expected periods to be benefited (generally 15 years). The 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 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. Comprehensive income is a financial reporting concept and does not affect the Company's financial position or results of operations. NET INCOME PER COMMON SHARE Earnings per share ("EPS") is computed on a basic and diluted basis. Basis 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. STOCK BASED COMPENSATION The Company applies the intrinsic value method to account for stock based compensation reflecting the impact of the fair value of options granted on net income and income per share. 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. -45- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED SEGMENTS INFORMATION AND DISCLOSURES Generally accepted accounting principles establish 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. The Company has concluded that it has one segment. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. As amended by SFAS No.137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.133," SFAS No.133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management is in the process of determining what effect, if any, adoption will have on the Company's financial statements. 2 - ACQUISITION On December 10, 1999, the Bank entered into a Purchase and Assumption Agreement ("P&A Agreement") with the Federal Deposit Insurance Corporation ("FDIC"), as the Receiver of Golden City to purchase certain assets and to assume certain deposits and other liabilities of Golden City as of close of business on December 10, 1999 for $5.5 million in cash. The loans, securities, cash, Federal funds sold and deposits assumed by the Bank as of the closing on December 10, 1999 were $31.2 million, $22.1 million, $8.4 million, $22.0 million, and $80.6 million, respectively. Immediately upon acquisition, the branch operations of Golden City were merged into the Bank, and the two branches of Golden City were made branches of the Bank. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of Golden City subsequent to the closing on December 10, 1999 have been included in the Company's consolidated financial statements. The excess of the purchase price over the fair value of the net identifiable assets acquired totaled approximately $2.65 million has been recorded as goodwill to be amortized over 15 years. The P&A Agreement allows the Bank to put back certain assets and contracts to the FDIC based on a six-month settlement schedule set by the FDIC. Upon completion of the settlement period, goodwill will be adjusted in accordance with the settlement schedule, if necessary. The following table presents an unaudited pro forma combined summary of operations of the Company and Golden City for the year ended December 31, 1999 and 1998, respectively. The unaudited pro forma combined summary of operations is presented as if the merger had been effective January 1, 1999 and 1998, respectively. This information combines the historical results of the Company and Golden City 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 Golden City. 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.
(Unaudited) Year ended December 31, (in thousands, except per share data) 1999 1998 - ----------------------------------------------------------------------------------------------- Net interest income before provision for loan losses $ 75,865 $ 69,275 - ----------------------------------------------------------------------------------------------- Net income $ 30,040 $ 24,249 - ----------------------------------------------------------------------------------------------- Basic and diluted net income per common share $ 3.33 $ 2.70 - -----------------------------------------------------------------------------------------------
-46- 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 1999 and 1998 were $2,788,000 and $11,130,000, respectively. Securities purchased under agreements to resell are collateralized by U.S. government agencies and Collateralized Mortgage Obligations securities at December 31, 1999 and 1998, respectively. 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.
(dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------- Balance, December 31 $ 3,000 $ 17,000 Weighted average interest rate, December 31 4.50% 5.35% Average amount outstanding during the year $ 36,741 $ 69,915 Weighted average interest rate for the year 5.06% 5.65% Maximum amount outstanding at any month end $ 80,000 $ 105,000 - -----------------------------------------------------------------------------------------------
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 $1.9 million, $4.0 million and $2.4 million, respectively, for 1999, 1998 and 1997. 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, 1999 and 1998:
Gross Gross Amortized Unrealized Unrealized Fair 1999 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 25 $ -- $ -- $ 25 U.S. government agencies 40,553 3 338 40,218 State and municipal securities 540 -- -- 540 Mortgage-backed securities 14,813 1 181 14,633 Collateralized mortgage obligations 7,945 -- 121 7,824 Asset-backed securities 16,867 -- 419 16,448 Federal Home Loan Bank stock 6,851 -- -- 6,851 Commercial paper 40,100 -- 24 40,076 Corporate bonds 35,034 13 671 34,376 - ---------------------------------------------------------------------------------------------------------------- Total $ 162,728 $ 17 $ 1,754 $ 160,991 - ----------------------------------------------------------------------------------------------------------------
-47- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Gross Gross Amortized Unrealized Unrealized Fair 1998 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 2,005 $ 9 $ -- $ 2,014 U.S. government agencies 102,524 496 -- 103,020 State and municipal securities 21,974 343 -- 22,317 Mortgage-backed securities 17,683 588 5 18,266 Collateralized mortgage obligations 14,071 88 -- 14,159 Asset-backed securities 8,264 8 52 8,220 Federal Home Loan Bank stock 5,991 -- -- 5,991 Commercial paper 29,950 -- 5 29,945 Corporate bonds 35,415 630 49 35,996 - ---------------------------------------------------------------------------------------------------------------- Total $ 237,877 $ 2,162 $ 111 $ 239,928 - ----------------------------------------------------------------------------------------------------------------
The amortized cost and fair value of securities available-for-sale except for mortgage-backed securities and collaterallized mortgage obligations at December 31, 1999, 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 (in thousands) Cost Value - --------------------------------------------------------------------------------------------------------------- Due in one year or less (1) $ 67,536 $ 67,512 Due after one year through five years 57,814 56,813 Due after five years through ten years 14,620 14,209 Mortgage-backed securities and collateralized mortgage obligations 22,758 22,457 - --------------------------------------------------------------------------------------------------------------- Total $ 162,728 $ 160,991 - ---------------------------------------------------------------------------------------------------------------
(1) EQUITY SECURITIES ARE REPORTED IN THIS CATEGORY. Proceeds from sales and repayments of securities available-for-sale during 1999 and 1998 were $9,906,000 and $31,921,000, respectively. Proceeds from maturities and calls of securities available-for-sale during 1999 and 1998 were $1,160,919,000 and $1,006,490,000, respectively. There were no gains realized in 1999. Gross realized gains of $59,000 and $304,000 were realized for 1998 and 1997, respectively. Gross realized losses of $34,000, $19,000 and $268,000 were realized for 1999, 1998 and 1997, respectively. 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, 1999 and 1998:
Gross Gross Estimated Carrying Unrealized Unrealized Fair 1999 (in thousands) Value Gains Losses Value - ----------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 24,998 $ 114 $ -- $ 25,112 U.S. government agencies 64,373 79 1,274 63,178 State and municipal securities 68,834 375 3,193 66,016 Mortgage-backed securities 133,282 53 2,809 130,526 Collateralized mortgage obligations 63,397 3 791 62,609 Asset-backed securities 19,999 -- 209 19,790 Corporate bonds 51,449 37 1,890 49,596 - ----------------------------------------------------------------------------------------------------------------- Total $ 426,332 $ 661 $ 10,166 $ 416,827 - -----------------------------------------------------------------------------------------------------------------
-48-
Gross Gross Estimated Carrying Unrealized Unrealized Fair 1998 (in thousands) Value Gains Losses Value - ----------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 26,026 $ 578 $ -- $ 26,604 U.S. government agencies 54,426 819 -- 55,245 State and municipal securities 61,495 3,144 32 64,607 Mortgage-backed securities 146,019 2,351 317 148,053 Collateralized mortgage obligations 83,534 1,201 6 84,729 Corporate bonds 46,656 884 -- 47,540 - ----------------------------------------------------------------------------------------------------------------- Total $ 418,156 $ 8,977 $ 355 $ 426,778 - -----------------------------------------------------------------------------------------------------------------
The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 1999, 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 (in thousands) Value Value - ----------------------------------------------------------------------------------------------------------------- Due in one year or less $ 55,437 $ 55,631 Due after one year through five years 111,187 107,936 Due after five years through ten years 28,969 28,931 Due after ten years 34,060 31,194 Mortgage-backed securities and collateralized mortgage obligations 196,679 193,135 - ----------------------------------------------------------------------------------------------------------------- Total $ 426,332 $ 416,827 - -----------------------------------------------------------------------------------------------------------------
Proceeds from the maturity and call of securities held-to-maturity during 1999 and 1998 were $1,385,000 and $12,025,000, respectively. Gross realized gains of $31,000 , $3,000 and $6,000 were realized for 1999, 1998 and 1997, respectively. No losses were realized for 1999, 1998 and 1997. Securities having a carrying value of $128,904,000 and $46,806,000 at December 31, 1999 and 1998, 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. 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, 1999 and 1998 were as follows:
(in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------- Commercial loans $ 395,138 $ 370,539 Residential mortgage loans 181,131 163,756 Commercial mortgage loans 577,541 356,608 Equity lines 26,437 20,402 Real estate construction loans 62,516 40,738 Installment loans 25,498 29,165 Other loans 419 269 - ------------------------------------------------------------------------------------------------------------- 1,268,680 981,477 - ------------------------------------------------------------------------------------------------------------- Less Unamortized deferred loan fees 3,593 3,631 Allowance for loan losses 19,502 15,970 - ------------------------------------------------------------------------------------------------------------- Total $ 1,245,585 $ 961,876 - -------------------------------------------------------------------------------------------------------------
-49- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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, 1999, the Company had $7,252,000 of these loans in its servicing portfolio. There were no loans held for sale as of December 31, 1999 and 1998. Approximately $88,763,000 and $87,324,000 in residential mortgage loans were pledged to secure a line of credit with the Federal Home Loan Bank as of December 31, 1999 and December 31, 1998, respectively. An analysis of the activity in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 is as follows:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 15,970 $ 15,379 $ 13,528 Loans charged-off (1,731) (3,519) (2,139) Recoveries on loans previously charged-off 1,063 510 390 Provision for loan losses 4,200 3,600 3,600 - ------------------------------------------------------------------------------------------------------------- Balance, end of year $ 19,502 $ 15,970 $ 15,379 - -------------------------------------------------------------------------------------------------------------
At December 31, 1999 and 1998, the Company had identified impaired loans with a recorded investment of approximately $26,279,000, $21,949,000 and $23,171,000, respectively. For 1999, 1998 and 1997, the average balances of impaired loans were $26,707,000, $21,713,000 and $23,171,000 and interest collected on impaired loans totaled $2,047,000, $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:
Recorded Impairment Net 1999 (in thousands) Investment Allowance Balance - ------------------------------------------------------------------------------------------------------------ Commercial $ 12,686 $ 1,831 $ 10,855 Commercial real estate 13,412 1,912 11,500 Other 181 181 -- - ------------------------------------------------------------------------------------------------------------ Total $ 26,279 $ 3,924 $ 22,355 - ------------------------------------------------------------------------------------------------------------ Recorded Impairment Net 1998 (in thousands) Investment Allowance Balance - ------------------------------------------------------------------------------------------------------------ Commercial $ 9,379 $ 1,566 $ 7,813 Commercial real estate 12,515 1,827 10,688 Other 55 55 -- - ------------------------------------------------------------------------------------------------------------ Total $ 21,949 $ 3,448 $ 18,501 - ------------------------------------------------------------------------------------------------------------
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, 1999. An analysis of the activity with respect to loans to Related Parties is as follows:
(in thousands) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $ 7,308 - ------------------------------------------------------------------------------------------------------------- Additional loans made 18,627 Payments received (10,031) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 15,904 Additional loans made 918 Payments received (4,710) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $ 12,112 - -------------------------------------------------------------------------------------------------------------
-50- The following is a summary of nonaccrual loans and troubled debt restructurings as of December 31, 1999, 1998 and 1997 and the related net interest foregone for the years then ended:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Nonaccrual loans $ 13,696 $ 13,090 $ 16,886 Contractual interest due $ 1,396 $ 1,395 $ 1,845 Interest recognized 234 112 471 - ------------------------------------------------------------------------------------------------------------ Net interest foregone $ 1,162 $ 1,283 $ 1,374 - ------------------------------------------------------------------------------------------------------------ (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Troubled debt restructurings $ 4,581 $ 4,642 $ 4,874 - ------------------------------------------------------------------------------------------------------------ Contractual interest due $ 429 $ 421 $ 406 Interest recognized 414 412 387 - ------------------------------------------------------------------------------------------------------------ Net interest foregone $ 15 $ 9 $ 19 - ------------------------------------------------------------------------------------------------------------
As of December 31, 1999, 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, 1999 and 1998 was $4,337,000 and $10,454,000, respectively. The valuation allowance was $614,000 and $494,000 at December 31, 1999 and 1998, respectively. The following table presents the components of other real estate owned expense (income) for the year-ended:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Operating expense (income) $ (206) $ (321) $ 201 Provision for losses 339 195 476 Net gain on disposal (1,549) (999) (174) - ------------------------------------------------------------------------------------------------------------- Real estate operations, net $ (1,416) $ (1,125) $ 503 - -------------------------------------------------------------------------------------------------------------
An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 1999, 1998, and 1997 is as follows:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 494 $ 1,081 $ 1,568 Provision for losses 339 195 476 Charge-offs on disposal (219) (782) (963) - ------------------------------------------------------------------------------------------------------------- Balance, end of year $ 614 $ 494 $ 1,081
7 - INVESTMENTS IN REAL ESTATE The Company's investments in real estate were $16,987,000 and $1,457,000, as of December 31, 1999 and 1998, respectively. In 1999, the Company sold a strip mall and invested in a California tax credit fund and a senior housing project. At December 31, 1999 all four investments are limited partnerships formed for the purpose of investing in low income housing projects and qualify for Federal low income housing tax credits. The limited partnerships are -51- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED expected to generate tax credits over a weighted average remaining period of approximately seven years. See Note 10 of the notes to consolidated financial statements for income tax effects. The following table presents the details of the four projects as of December 31, 1999 and 1998:
Percentage of Acquisition December 31 (dollars in thousands) Ownership Date 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Las Brisas 49.50 % Dec 1993 $ 209 $ 338 Los Robles 99.00 % Aug 1995 431 478 California tax credit fund 36.00 % Mar 1999 14,841 -- Wilshire Courtyard 99.90 % May 1999 1,506 -- ----------------------- $ 16,987 $ 816 -----------------------
In addition to the limited partnerships detailed above, the Company has investment in a strip mall that totaled $641,000 at December 31, 1998. The Company's 99.00% and 99.90% limited partnership interest in the Los Robles and Wilshire Courtyard limited partnerships were not consolidated as of December 31, 1999 and 1998 because the Company did not have ability to exercise significant influence over the operation of the partnerships. The Company's investment in Wilshire Courtyard and the California tax credit fund is accounted for utilizing the equity method of accounting. Las Brisas and Los Robles are accounted for utilizing the cost method. The difference between the cost and equity methods for the Las Brisas and the Los Robles investments is immaterial. The Company recognized a net loss of approximately $334,000, $158,000 and $176,000 in 1999, 1998 and 1997, respectively, from the partnerships' operations. In 1999, the Company recognized a gain of $394,000 from the sale of the strip mall, and a net gain of $409,000, $95,000, and $170,000, for 1999, 1998 and 1997, respectively from real estate operations. 8 - PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31, 1999 and 1998:
(in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------ Land and land improvements $ 11,495 $ 11,484 Building and building improvements 13,623 13,779 Furniture, fixtures and equipment 13,155 12,058 Other 2,193 2,170 Construction in process 292 837 - ------------------------------------------------------------------------------------------------------------ 40,758 40,328 Less: Accumulated depreciation 15,459 14,502 - ------------------------------------------------------------------------------------------------------------ Premises and equipment, net $ 25,299 $ 25,826 - ------------------------------------------------------------------------------------------------------------
The amount of depreciation included in operating expense was $1,331,000, $1,241,000 and $1,335,000 in 1999, 1998 and 1997, respectively. 9 - BORROWINGS SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. The underlying collateral pledged for the repurchase agreements consists of U.S. government agency securities with a carrying value of $47,085,000 and a fair value of $46,771,000. These borrowings generally mature in less than 30 days. The table below provides comparative data for securities sold under agreements to repurchase. -52-
December 31, (dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Average amount outstanding (1) $ 55,519 $ 53,285 $ 8,861 Highest month-end balances (2) 79,185 55,185 23,419 Year end balance 46,990 16,436 23,419 Rate at year-end 5.80% 4.53% 7.03% Weighted average interest rate for the year 5.73% 5.98% 5.99% - --------------------------------------------------------------------------------------------------------------------
(1) AVERAGE BALANCES WERE COMPUTED USING DAILY AVERAGES. (2) HIGHEST MONTH-END BALANCES WERE AT FEBRUARY 1999, NOVEMBER 1998 AND DECEMBER 1997, RESPECTIVELY. ADVANCES FROM THE FEDERAL HOME LOAN BANK. During the third quarter of 1998, the Bank obtained advances from the FHLB for $20,000,000 to mature in September 1999 and $10,000,000 to mature in October 2003. These advances bear an average interest rate of 4.84% and are non-callable. 10 - INCOME TAXES For the years ended December 31, 1999, 1998 and 1997, the current and deferred amounts of the income tax expense are summarized as follows:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Current Federal $ 15,377 $ 11,697 $ 10,280 State 5,815 4,289 3,456 - ------------------------------------------------------------------------------------------------------------- 21,192 15,986 13,736 - ------------------------------------------------------------------------------------------------------------- Deferred Federal (1,159) (105) (478) State (313) 95 (15) - ------------------------------------------------------------------------------------------------------------- (1,472) (10) (493) - ------------------------------------------------------------------------------------------------------------- Total income tax expense $ 19,720 $ 15,976 $ 13,243 - -------------------------------------------------------------------------------------------------------------
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, 1999 and 1998 were as follows:
(in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------- Deferred Tax Assets Difference between provisions for loan losses for tax and financial reporting purposes $ 8,563 $ 6,767 Difference between provisions for other real estate owned losses for tax and financial reporting purposes 549 789 State income tax 1,855 1,321 Unrealized holding loss on securities available-for-sale, net 731 -- - ------------------------------------------------------------------------------------------------------------- Gross deferred tax assets 11,698 8,877 - ------------------------------------------------------------------------------------------------------------- Deferred Tax Liabilities Use of accelerated depreciation for tax purposes (1,148) (1,134) Deferred loan fees (45) (145) FHLB stock dividend (1,088) (936) Acquisition of FPSB (485) (485) Unrealized holding gain on securities available-for-sale, net -- (862) Other, net (1,672) (1,120) - ------------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities (4,438) (4,682) - ------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 7,260 $ 4,195 - -------------------------------------------------------------------------------------------------------------
-53- NOTES TO CONSOLIATED FINANCIAL STATEMENTS, CONTINUED 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 1998 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, 1999 and 1998 were net deferred tax assets of $7,260,000 and $4,195,000, respectively. Other assets as of December 31, 1999 and 1998 included a current income tax receivable of $1,447,000 and $1,040,000, respectively. Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years indicated as follows:
(dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Tax provision at Federal statutory rate $17,504 35.00% $ 14,194 35.00% $ 11,673 35.00% State income taxes, net of Federal income tax benefit 3,576 7.15 2,850 7.03 2,237 6.71 Interest on obligations of state and political subdivisions, which are exempt from Federal taxation (1,081) (2.16) (927) (2.29) (722) (2.17) Low income housing tax credits (319) (0.64) (319) (0.79) (319) (0.96) Non-deductible expense -- Amortization of goodwill 240 0.48 239 0.59 239 0.72 Other, net (200) (0.40) (61) (0.15) 135 0.41 - ---------------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 19,720 39.43% $ 15,976 39.39% $ 13,243 39.71% - ----------------------------------------------------------------------------------------------------------------------------
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, 1999 is restricted to approximately $55,892,000 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. -54- 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, 1999, 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, 1999 and 1998 are presented in the tables below:
Company Bank Company Bank As of December 31, 1999 As of December 31, 1999 As of December 31, 1998 As of December 31, 1998 (dollars in thousands) Balance Percentage Balance Percentage Balance Percentage Balance Percentage - ----------------------------------------------------------------------------------------------------------------------------------- Tier I Capital (to risk- weighted assets) $ 169,556(1) 10.50% $ 163,093(1) 10.10% $ 146,873(2) 11.44% $ 141,835(2) 11.04% Tier I Capital minimum requirement 64,588 4.00 64,588 4.00 51,372 4.00 51,372 4.00 - ----------------------------------------------------------------------------------------------------------------------------------- Excess $ 104,968 6.50% $ 98,505 6.10% $95,501 7.44% $ 90,463 7.04% Total Capital (to risk- weighted assets) $ 189,058(1) 11.71% $ 182,595(1) 11.31% $ 162,844(2) 12.68% $ 157,805(2) 12.29% Total Capital minimum requirement 129,176 8.00 129,176 8.00 102,744 8.00 102,744 8.00 - ----------------------------------------------------------------------------------------------------------------------------------- Excess $ 59,882 3.71% $ 53,419 3.31% $ 60,100 4.68% $ 55,061 4.29% - ----------------------------------------------------------------------------------------------------------------------------------- Risk-weighted assets $ 1,614,695 $ 1,614,695 $ 1,284,296 $1,284,296 Tier I Capital (to average assets) -- Leverage ratio $ 169,556(1) 8.93% $ 163,093(1) 8.59% $ 146,873(2) 8.45% $ 141,835(2) 8.16% Minimum leverage requirement 75,974 4.00 75,974 4.00 69,508 4.00 69,508 4.00 - ----------------------------------------------------------------------------------------------------------------------------------- Excess $ 93,582 4.93% $ 87,119 4.59% $ 77,365 4.45% $ 72,327 4.16% - ----------------------------------------------------------------------------------------------------------------------------------- Total average assets $ 1,899,358(3) $ 1,899,356(3) $ 1,737,710(3) $1,737,709(3) - -----------------------------------------------------------------------------------------------------------------------------------
(1) EXCLUDING THE UNREALIZED HOLDING LOSSES ON SECURITIES AVAILABLE-FOR-SALE OF $1,006,000 AND GOODWILL OF $10,559,000. (2) EXCLUDING THE UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE-FOR-SALE OF $1,189,000 AND GOODWILL OF $8,590,000. (3) AVERAGE ASSETS REPRESENT AVERAGE BALANCES FOR THE FOURTH QUARTER OF 1999 AND 1998, RESPECTIVELY. 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, 1999 -55- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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, 1999 December 31, 1998 Per Per (in thousands, except share Income Shares Share Income Shares Share and per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------------------------------------------------- Net income $ 30,291 $ 24,579 - -------------------------------------------------------------------------------------------------------------------------- Basic EPS Income available to stockholders $ 30,291 9,013,428 $ 3.36 $ 24,579 8,967,188 $ 2.74 Effect of Dilutive Stock Options 4,332 1,205 Diluted EPS Income available to common stockholders plus assumed conversions $ 30,291 9,017,760 $ 3.36 $ 24,579 8,968,393 $ 2.74 - --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 Per (in thousands, except share Income Shares Share and per share data) (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------- Net income $ 20,108 - ------------------------------------------------------------------------------- Basic EPS Income available to stockholders $ 20,108 8,915,936 $ 2.26 Effect of Dilutive Stock Options -- Diluted EPS Income available to common stockholders plus assumed conversions $ 20,108 8,915,936 $ 2.26 - -------------------------------------------------------------------------------
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 financial guarantees, 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:
(in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------ Commitments to extend credit $ 580,727 $ 389,304 Standby letters of credit 11,748 10,112 Other letters of credit 31,866 29,029 Financial guarantee 20,000 -- Bill of lading guarantee 13,924 11,517 - ------------------------------------------------------------------------------------------------------------ Total $ 658,265 $ 439,962 - ------------------------------------------------------------------------------------------------------------
-56- 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, 1999, 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. The financial guarantee represents a conditional commitment issued by the Company to guarantee the credit performance on $20 million of corporate debt. The Company's exposure to credit risk from this financial guarantee is essentially the same as if the Company was the owner of the corporate debt. At December 31, 1999, the corporate debt was current under its contractual term and the rating on the debt was BBB+ by Standard & Poors and Baa3 by Moodys. 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, 1999, the Company had available credit lines with other financial institutions in the amount of $230,000,000. 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 $1,823,000, $1,751,000 and $1,793,000 for 1999, 1998 and 1997, respectively. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 1999:
(in thousands) Commitments - ---------------------------------------------------------------------------------------------- Year ended December 31, 2000 $ 1,774 2001 1,453 2002 1,303 2003 1,173 2004 969 Thereafter 10,260 - ---------------------------------------------------------------------------------------------- Total minimum lease payments $ 16,932 - ----------------------------------------------------------------------------------------------
Rental income was $443,000, $455,000 and $437,000 for 1999, 1998 and 1997, 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, 1999:
(in thousands) Commitments - ---------------------------------------------------------------------------------------------- Year ended December 31, 2000 $ 371 2001 340 2002 306 2003 239 2004 140 Thereafter -- - ---------------------------------------------------------------------------------------------- Total minimum lease payments to be received $ 1,396 - ----------------------------------------------------------------------------------------------
-57- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates were based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. -58- FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1999 As of December 31, 1998 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value - ------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks $ 59,081 $ 59,081 $ 64,656 $ 64,656 Federal funds sold and securities purchased under agreements to resell 5,000 5,000 17,000 17,000 Securities available-for-sale 160,991 160,991 239,928 239,928 Securities held-to-maturity 426,332 416,827 418,156 426,778 Loans, net 1,245,585 1,219,336 961,876 981,386 - ------------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES Deposits $ 1,721,736 $ 1,515,125 $ 1,560,402 $ 1,564,981 Securities sold under agreements to repurchase 46,990 47,649 16,436 16,436 Advances from Federal Home Loan Bank 30,000 29,305 30,000 30,000 - -------------------------------------------------------------------------------------------------------------
As of December 31, 1999 As of December 31, 1998 (in thousands) Notional Amount Fair Value Notional Amount Fair Value - ------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL STATEMENTS Commitments to extend credit $ 580,727 $ (328) $ 389,304 $ (336) Standby letters of credit 11,748 (64) 10,112 (87) Other letters of credit 31,866 (193) 29,029 (174) Financial guarantee 20,000 35 -- -- Bill of lading guarantee 13,924 (69) 11,517 (50) - -------------------------------------------------------------------------------------------------------------
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 1999, 1998 and 1997, the ESOP purchased 33,163, 23,669 and 38,491 shares, respectively, of the Company's stock at an aggregate cost of $1,162,829, $821,021 and $878,620, respectively. The shares purchased in 1999 included 20,160 shares bought on the open market and 13,003 shares bought through the Dividend Reinvestment Plan. 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 Company contributed $537,200, $486,120 and $453,000 to the trust in 1999, 1998 and 1997, respectively, which was charged to salaries and employee benefits in the accompanying consolidated statements of income and comprehensive income. In 1999, distribution of benefits to participants totaled 23,299 shares. As of December 31, 1999, the ESOP owned 571,650 shares or 6.33% of the Company's outstanding common stock. 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. -59- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 1999, the Company's contribution amounted to $186,736, $178,150 and $138,000 in 1999, 1998 and 1997, respectively. 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 In 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 in February 2008. In September 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 - ------------------------------------------------------------------------------------------------------------ Granted -- -- Exercised (300) 33 Forfeited -- -- Expired -- -- Cancelled -- -- Balance, December 31, 1999 44,700 $ 33 - ------------------------------------------------------------------------------------------------------------
At December 31, 1999 and 1998, 9,000 and none of the options were exercisable, respectively. The Company applies Accounting Principles Board Option 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 1999 or 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 34.1% -60- based on daily market prices for the preceding four-year period, (iii) an expected dividend yield of 2.1% per share per annum, and (iv) a risk-free interest rate of 6.3%. The fair value of the options was calculated to be $9.98 per share at the date of grant. 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 1999 and 1998 would have been reduced to the pro forma amounts indicated below.
(in thousands, except per share data) 1999 1998 - ------------------------------------------------------------------------------------------------------------ Net income As reported $ 30,291 24,579 Pro forma 30,237 24,564 Basic net income per share As reported 3.36 2.74 Pro forma 3.35 2.74 Diluted net income per share As reported 3.36 2.74 Pro forma 3.35 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. The condensed financial information of Cathay Bancorp, Inc. as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 were as follows: STATEMENTS OF CONDITION
Year ended December 31, (in thousands, except share and per share data) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Assets Cash $ 6,504 $ 5,080 Investment in subsidiary-- Cathay Bank 172,646 151,613 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 179,150 $ 156,693 - -------------------------------------------------------------------------------------------------------------------- Liabilities Accrued expenses $ 41 $ 41 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 41 41 - -------------------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $0.01par value; 10,000,000 shares authorized, none issued -- -- Common stock, $0.01par value; 25,000,000 shares authorized, 9,033,583 and 8,988,760 shares issued and outstanding in 1999 and 1998, respectively 90 90 Additional paid-in-capital 64,529 62,920 Accumulated other comprehensive income (1,006) 1,189 Retained earnings 115,496 92,453 - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 179,109 156,652 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 179,150 $ 156,693 - --------------------------------------------------------------------------------------------------------------------
-61- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31, (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Cash dividends from Cathay Bank $ 7,248 $ 6,272 $ 5,566 Amortization of organizational costs and other expenses (321) (268) (233) - ------------------------------------------------------------------------------------------------------------- Income before income tax expense 6,927 6,004 5,333 Income tax benefit 136 113 98 - ------------------------------------------------------------------------------------------------------------- Income before undistributed earnings of subsidiary 7,063 6,117 5,431 - ------------------------------------------------------------------------------------------------------------- Equity in undistributed earnings of subsidiary 23,228 18,462 14,677 - ------------------------------------------------------------------------------------------------------------- Net income 30,291 24,579 20,108 - ------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gain (loss) arising during the year (2,229) 859 1,465 Less: reclassification adjustment for realized gain (loss) on securities included in net income (34) 40 36 - ------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss), net of tax (2,195) 819 1,429 - ------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 28,096 $ 25,398 $ 21,537 - -------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended December 31, (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 30,291 $ 24,579 $ 20,108 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (23,228) (18,462) (14,677) Increase (decrease) in accrued expenses -- (30) 19 Other -- 3 (3) - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 7,063 6,090 5,447 - ------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Proceeds from issuance of common stock 1,609 1,649 1,460 Cash dividends (7,248) (6,272) (5,566) - ------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (5,639) (4,623) (4,106) - ------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 1,424 1,467 1,341 Cash and cash equivalents, beginning of year 5,080 3,613 2,272 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 6,504 $ 5,080 $ 3,613 Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes $ 150 $ 150 $ 150 Non-cash investing activities: Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax $ (2,195) $ 819 $ 1,429 - -------------------------------------------------------------------------------------------------------------
-62- 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 44,523, 47,017 and 63,599 and $1,600,173, $1,649,426 and $1,459,435 for 1999, 1998 and 1997, respectively. 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth selected unaudited quarterly financial data.
Summary of Operations 1999 1998 Fourth Third Second First Fourth Third Second First (in thousands, except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------- Interest income $ 35,460 $ 33,489 $ 32,583 $ 31,514 $ 32,077 $ 31,819 $ 30,234 $ 29,179 Interest expense 14,985 14,094 14,323 14,006 14,773 14,879 14,082 13,491 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 20,475 19,395 18,260 17,508 17,304 16,940 16,152 15,688 Provision for loan losses 1,050 1,050 1,050 1,050 900 900 900 900 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 19,425 18,345 17,210 16,458 16,404 16,040 15,252 14,788 Non-interest income 2,395 2,361 2,181 1,918 1,963 2,018 2,153 2,002 Non-interest expense 7,481 7,643 7,473 7,685 7,079 7,626 7,478 7,882 - -------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 14,339 13,063 11,918 10,691 11,288 10,432 9,927 8,908 Income tax expense 5,629 5,170 4,733 4,188 4,408 4,172 3,906 3,490 - -------------------------------------------------------------------------------------------------------------------------- Net income 8,710 7,893 7,185 6,503 6,880 6,260 6,021 5,418 - -------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gain (loss) arising during the year (899) 223 (678) (875) (276) 626 552 (46) Less: reclassification adjustment for realized gain (loss) on securities included in net income -- (2) -- (32) -- 5 -- 35 - -------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income, net of tax (899) 225 (678) (843) (276) 624 552 (81) - -------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 7,811 $ 8,118 $ 6,507 $ 5,660 $ 6,604 $ 6,884 $ 6,573 $ 5,337 - -------------------------------------------------------------------------------------------------------------------------- Basic net income per common share $ 0.96 $ 0.88 $ 0.80 $ 0.72 $ 0.77 $ 0.70 $ 0.67 $ 0.61 Diluted net income per common share $ 0.96 $ 0.87 $ 0.80 $ 0.72 $ 0.77 $ 0.70 $ 0.67 $ 0.61 - --------------------------------------------------------------------------------------------------------------------------
-63- 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Los Angeles, California January 14, 2000 -64- OFFICES CORPORATE OFFICE: SAN GABRIEL MILLBRAE OVERSEAS OFFICE: 825 East Valley Boulevard Millbrae Plaza 777 North Broadway San Gabriel, CA 91776 1095 El Camino Real HONG KONG Los Angeles, CA 90012 Tel: (626) 573-1000 Millbrae, CA 94030 Room 902-3, 9/F Tel: (213) 625-4700 Fax: (626) 573-0983 Tel: (650) 652-0188 Printing House Fax: (213) 625-1368 Jack Sun Fax: (650) 652-0180 6 Duddell Street VICE PRESIDENT AND MANAGER Stanley Wong Central, Hong Kong Branch Offices: VICE PRESIDENT AND MANAGER Tel: (852) 2522-0071 TORRANCE Fax: (852) 2810-1652 CALIFORNIA 23228 Hawthorne Boulevard VALLEY-STONEMAN Matthew Chui Torrance, CA 90505 43 East Valley Boulevard REPRESENTATIVE Los Angeles Tel: (310) 791-8700 Alhambra, CA 91801 777 North Broadway Fax: (310) 791-1862 Tel: (626) 576-7600 SUBSIDIARY: Los Angeles, CA 90012 Allen Lin Fax: (626) 576-5831 Tel: (213) 625-4700 ASSISTANT VICE PRESIDENT AND Mimy Luc CATHAY INVESTMENT COMPANY Fax: (213) 625-1368 MANAGER MANAGER 777 North Broadway Claudia My Lu Los Angeles, CA 90012 VICE PRESIDENT AND MANAGER OAKLAND BERKELEY-RICHMOND Tel: (213) 625-4700 710 Webster Street 3288 Pierce Street Fax: (213) 625-1368 MONTEREY PARK Oakland, CA 94607 Richmond, CA 94804 George T.M. Ching 250 South Atlantic Boulevard Tel: (510) 208-3700 Tel: (510) 526-8898 PRESIDENT Monterey Park, CA 91754 Fax: (510) 208-3727 Fax: (510) 526-0639 Tel: (626) 281-8808 Sumiko Wu TAIWAN C.I.C. Fax: (626) 281-2956 CERRITOS ASSISTANT VICE PRESIDENT AND Sixth Floor, Suite 3 Frank Chen 11355 South Street ASSISTANT MANAGER 146 Sung Chiang Road REGIONAL VICE PRESIDENT AND Cerritos, CA 90701 Taipei, Taiwan, R.O.C. MANAGER Tel: (562) 860-7300 DIAMOND BAR Tel: (886) (2) 2537-5057 Fax: (562) 860-2296 1195 South Diamond Bar Boulevard Fax: (886) (2) 2537-5059 ALHAMBRA Henry Yoh Diamond Bar, CA 91765 Li Sung 601 North Atlantic Boulevard ASSISTANT VICE PRESIDENT AND Tel: (909) 860-8299 REPRESENTATIVE AND MANAGER Alhambra, CA 91801 MANAGER Fax: (909) 861-0920 Tel: (626) 284-6556 Shu Lee ADDITIONAL INFORMATION: Fax: (626) 282-3496 CITY OF INDUSTRY REGIONAL VICE PRESIDENT AND Frank Chen 1250 South Fullerton Road MANAGER MARKET MAKERS REGIONAL VICE PRESIDENT AND City of Industry, CA 91748 THE FOLLOWING FIRMS MAKE A MARKET MANAGER Tel: (626) 810-1088 NEW YORK IN CATHAY BANCORP, INC. STOCK: Fax: (626) 810-2188 Herzog, Heine, Geduld, Inc. HACIENDA HEIGHTS Shu Lee FLUSHING Wedbush Morgan Securities Inc. 16025 East Gale Avenue REGIONAL VICE PRESIDENT AND 40-14/16 Main Street Hoefer & Arnett, Inc. City of Industry, CA 91745 MANAGER Flushing, NY 11354 Tel: (626) 333-8533 Tel: (718) 886-5225 REGISTRAR AND TRANSFER AGENT Fax: (626) 336-4227 CUPERTINO Fax: (718) 886-0220 American Stock Transfer and Shu Lee 10480 South De Anza Betty Chou Trust Company REGIONAL VICE PRESIDENT AND Boulevard ASSISTANT VICE PRESIDENT AND MANAGER 40 Wall Street MANAGER Cupertino, CA 95014 New York, NY 10005 Tel: (408) 255-8300 New York Chinatown Tel: (800) 937-5449 WESTMINSTER Fax: (408) 255-8373 45 East Broadway 9121 Bolsa Avenue David Lin New York, NY 10002 CATHAY SERVICE HOTLINE Westminster, CA 92683 VICE PRESIDENT AND MANAGER Tel: (212) 732-0200 (800) 9 CATHAY / 922-8429 Tel: (714) 890-7118 Fax: (212) 732-7389 SERVICE AVAILABLE 24 HOURS Fax: (714) 898-9267 FREMONT Louisa Ting THROUGHOUT CALIFORNIA. Kenneth Chan 47998 Warm Springs Boulevard VICE PRESIDENT AND MANAGER ASSISTANT VICE PRESIDENT AND Fremont, CA 94539 CATHAY BANK WEB SITE MANAGER Tel: (510) 770-5151 LOAN PRODUCTION OFFICE: www.cathaybank.com Fax: (510) 770-5150 SAN JOSE Tony Wen HOUSTON 2010 Tully Road VICE PRESIDENT AND MANAGER 10375 Richmond Avenue #1600 San Jose, CA 95122 Houston, TX 77042 Tel: (408) 238-8880 IRVINE Tel: (713) 278-9599 Fax: (408) 238-2302 15323 Culver Drive Fax: (713) 278-9699 Edward Wong Irvine, CA 92714 Herbert Ng VICE PRESIDENT AND MANAGER Tel: (949) 559-7500 VICE PRESIDENT AND MANAGER Fax: (949) 559-7508 Linda Kuo VICE PRESIDENT AND MANAGER
-68- EX-22.1 3 EXHIBIT 22.1 Exhibit 22.1 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(3) EXHIBITS Subsidiaries of the Company CATHAY BANK CATHAY INVESTMENT COMPANY a California Corporation a California Corporation 100% owned 100% owned by Cathay Bank EX-23.1 4 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Cathay Bancorp, Inc.: We consent to the incorporation by reference in the registration statement (No. 033-33767) on Form S-3 and the registration statement (No. 333-87225) on Form S-8 of our report dated January 14, 2000, relating to the consolidated statements of condition of Cathay Bancorp, Inc. as of December 31, 1999 and 1998, 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, 1999, which report appears in the December 31, 1999, annual report on Form 10-K of Cathay Bancorp, Inc. KPMG LLP Los Angeles, California March 22, 2000 EX-27 5 EXHIBIT 27
9 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 58,513 568 5,000 0 160,991 426,332 416,827 1,265,087 19,502 1,995,924 1,721,736 46,990 18,089 30,000 0 0 90 179,019 1,995,924 93,780 37,385 1,881 133,046 53,162 57,408 75,638 4,200 (3) 30,282 50,011 50,011 0 0 30,291 3.36 3.36 4.39 13,696 3,724 4,581 14,703 15,970 1,731 1,063 19,502 19,502 0 0
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