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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18630
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CATHAY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4274680
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 NORTH BROADWAY, LOS ANGELES, CALIFORNIA 90012
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 625-4700
---------------------------
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, $.01 par value, 9,033,295 shares outstanding as of
November 5, 1999.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION................................................................3
Item 1. Financial Statements (unaudited)........................................4
Notes to Condensed Consolidated Financial Statements (unaudited)........7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................................23
PART II - OTHER INFORMATION.................................................................24
Item 1. Legal Proceedings.....................................................24
Item 2. Changes in Securities and Use of Proceeds.............................24
Item 3. Defaults upon Senior Securities.......................................24
Item 4. Submission of Matters to a Vote of Security Holders...................24
Item 5. Other Information.....................................................24
Item 6. Exhibits and Reports on Form 8-K......................................24
SIGNATURES ............................................................................25
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
SEPT. 30, 1999 DEC. 31, 1998
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<S> <C> <C>
ASSETS
Cash and due from banks $ 47,101 $ 64,656
Federal funds sold and securities purchased under
agreements to resell 13,000 17,000
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Cash and cash equivalents 60,101 81,656
Securities available-for-sale (amortized cost
of $115,467 in 1999 and $237,877 in 1998) 115,282 239,928
Securities held-to-maturity (estimated fair
value of $431,694 in 1999 and $426,778 in 1998) 436,808 418,156
Loans (net of allowance for loan losses of
$18,584 in 1999 and $15,970 in 1998) 1,174,309 961,876
Other real estate owned, net 8,607 10,454
Investments in real estate, net 16,907 1,457
Premises and equipment, net 25,474 25,827
Customers' liability on acceptance 14,796 10,847
Accrued interest receivable 12,035 11,996
Goodwill 8,083 8,590
Other assets 9,995 10,111
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Total assets $ 1,882,397 $ 1,780,898
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 193,078 $ 178,068
Interest bearing accounts
NOW accounts 117,963 114,982
Money market deposits 98,181 113,869
Savings deposits 208,418 207,365
Time deposits under $100,000 336,030 326,968
Time deposits of $100,000 or more 692,778 619,150
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Total deposits 1,646,448 1,560,402
Securities sold under agreements to repurchase 9,466 16,436
Advances from Federal Home Loan Bank 30,000 30,000
Acceptances outstanding 14,796 10,847
Other liabilities 8,887 6,561
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Total liabilities 1,709,597 1,624,246
Stockholders' equity
Preferred stock, $.01 par value; 10,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, 9,022,318 and 8,988,760 shares issued and
outstanding in 1999 and 1998, respectively 90 90
Additional paid-in-capital 64,137 62,919
Accumulated other comprehensive income(loss) (107) 1,189
Retained earnings 108,680 92,454
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Total stockholders' equity 172,800 156,652
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Total liabilities and stockholders' equity $ 1,882,397 $ 1,780,898
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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CATHAY BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
3RD QTR 3RD QTR YTD YTD
SEPT. 1999 SEPT. 1998 SEPT. 1999 SEPT. 1998
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<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 24,056 $ 21,567 $ 67,134 $ 61,473
Interest on securities available-for-sale 2,460 3,226 8,268 9,819
Interest on securities held-to-maturity 6,697 5,759 20,319 17,217
Interest on Federal funds sold and securities
purchased under agreements to resell 272 1,257 1,810 2,696
Interest on deposits with banks 4 10 10 27
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Total interest income 33,489 31,819 97,541 91,232
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INTEREST EXPENSE
Time deposits of $100,000 or more 8,268 7,792 24,192 22,770
Other deposits 4,992 6,004 15,034 17,761
Other borrowed funds 834 1,083 3,152 1,921
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Total interest expense 14,094 14,879 42,378 42,452
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Net interest income before provision for loan losses 19,395 16,940 55,163 48,780
Provision for loan losses 1,050 900 3,150 2,700
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Net interest income after provision for loan losses 18,345 16,040 52,013 46,080
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NON-INTEREST INCOME
Securities gains(losses) 10 7 (3) 42
Letter of credit commissions 578 505 1,643 1,460
Service charges 905 958 2,729 3,010
Other operating income 868 548 2,091 1,661
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Total non-interest income 2,361 2,018 6,460 6,173
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NON-INTEREST EXPENSE
Salaries and employee benefits 4,673 4,421 14,021 13,232
Occupancy expense 628 645 1,905 1,901
Computer and equipment expense 647 586 1,905 1,785
Professional services expense 702 907 2,472 2,564
FDIC and State assessments 105 97 301 297
Marketing expense 211 236 779 901
Real estate operations, net (28) (59) (560) (241)
Operations of investments in real estate 94 23 (180) 19
Other operating expense 611 770 2,158 2,528
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Total non-interest expense 7,643 7,626 22,801 22,986
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Income before income tax expense 13,063 10,432 35,672 29,267
Income tax expense 5,170 4,172 14,091 11,568
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Net Income 7,893 6,260 21,581 17,699
Other comprehensive income, net of tax:
Unrealized holding gain(loss) arising during the period 225 626 (1,085) 1,082
Less: reclassification adjustment for realized
gain(loss) on securities included in net income -- 2 211 (13)
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Total other comprehensive income(loss), net of tax 225 624 (1,296) 1,095
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Total comprehensive income $ 8,118 $ 6,884 $ 20,285 $ 18,794
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Net income per common share
Basic $ 0.88 $ 0.70 $ 2.40 $ 1.98
Diluted $ 0.87 $ 0.70 $ 2.39 $ 1.98
Cash dividends paid per common share $ 0.210 $ 0.175 $ 0.595 $ 0.525
Basic average common shares outstanding 9,018,901 8,971,726 9,007,543 8,961,313
Diluted average common shares outstanding 9,026,190 8,972,378 9,013,132 8,961,450
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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CATHAY BANCORP, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
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1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 21,581 $ 17,699
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,150 2,700
Provision for losses on other real estate owned 298 175
Depreciation 1,015 924
Net gain on sales of other real estate owned (660) (201)
Gain on sale of investments in real estate (394) -
Net gain on sales of premises and equipment - (2)
(Gain) loss on sales and calls of investment securities 3 (42)
Amortization and accretion of investment
security premiums, net 661 315
Amortization of goodwill 507 771
Increase (decrease) in deferred loan fees (143) 71
(Increase) decrease in accrued interest receivable (39) 1,382
Decrease in other assets, net 116 2,471
Increase in other liabilities 2,326 8,281
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Total adjustments 6,840 16,845
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Net cash provided by operating activities 28,421 34,544
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (830,704) (554,676)
Proceeds from maturity and call of securities available-for-sale 947,035 594,980
Proceeds from sale of securities available-for-sale - 6,429
Purchase of mortgage-backed securities available-for-sale - (34,968)
Proceeds from repayments of mortgage-backed securities
available-for-sale 8,685 21,858
Purchase of securities held-to-maturity (45,057) (5,193)
Proceeds from maturity and call of securities held-to-maturity 1,310 11,345
Purchase of mortgage-backed securities held-to-maturity (38,157) (51,304)
Proceeds from repayments of mortgage-backed securities
held-to-maturity 60,922 51,403
Net increase in loans (215,029) (113,194)
Purchase of premises and equipment (662) (1,256)
Proceeds from sale of equipment - 2
Proceeds from sale of other real estate owned 1,798 1,935
Proceeds from sale of investments in real estate 1,026 -
(Increase) decrease in investments in real estate (16,082) 133
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Net cash used in investing activities (124,915) (72,506)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts,
money market and savings deposits 3,356 (14,558)
Net increase in time deposits 82,690 62,589
Net decrease in securities sold under agreements to repurchase (6,970) (1,621)
Advances from Federal Home Loan Bank - 20,000
Cash dividends (5,355) (4,701)
Proceeds from shares issued to Dividend Reinvestment Plan 1,218 1,219
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Net cash provided by financing activities 74,939 62,928
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Increase (decrease) in cash and cash equivalents (21,555) 24,966
Cash and cash equivalents, beginning of the period 81,656 124,728
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Cash and cash equivalents, end of the period $ 60,101 $ 149,694
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Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 42,520 $ 42,513
Income taxes $ 9,750 $ 11,797
Non-cash investing activities:
Transfers to securities available-for-sale
within 90 days of maturity $ 1,975 $ 1,340
Net change in unrealized holding gain (loss) on securities
available-for-sale, net of tax $ (1,296) $ 1,095
Transfers to other real estate owned $ 776 $ 3,449
Loans to facilitate the sale of other real estate owned $ 1,187 $ 1,436
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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CATHAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 1998.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was subsquently
amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of The Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133". SFAS No. 133 amends FASB Statement No. 52,
"Foreign Currency Translation", to permit special accounting for a hedge of a
foreign currency forecasted transaction with a derivative. It supersedes FASB
Statements No. 80, "Accounting for Future Contracts", No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", and No.119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments". It also amends FASB Statement No. 107, "Disclosures about Fair
Value of Financial Instruments", the disclosure provisions about concentrations
of credit risk from Statement No. 105.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivative) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. Under SFAS No. 133, an
entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk. As amended by SFAS No. 137, SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The impact of implementing SFAS No. 133 is not expected to be material to the
Company's results of operations or financial condition.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is given based on the assumption that the
reader has access to and has read the Annual Report on Form 10-K for the year
ended December 31, 1998 of Cathay Bancorp, Inc. ("Bancorp") and its
subsidiary Cathay Bank ("the Bank"), together ("the Company").
The following discussion includes forward-looking statements regarding
management's beliefs, projections and assumptions concerning future results
and events. These forward-looking statements may, but do not necessarily,
also include words such as "believes", "expects", "anticipates", "intends",
"plans", "estimates" or similar expressions. Forward-looking statements are
not guarantees. They involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, fluctuations in interest rates,
demographic changes, increases in competition, deterioration in asset or
credit quality, changes in the availability of capital, adverse regulatory
developments, changes in business strategy or development plans, general
economic or business conditions and other factors discussed in the section
entitled "Factors that May Affect Future Results" in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. 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
For the third quarter of 1999, the Company reported net income of $7.9
million or $0.87 per diluted common share, compared with net income of $6.3
million or $0.70 per diluted common share for the same quarter of 1998,
representing an increase of $1.6 million or 26.1%. Income before income tax
expense amounted to $13.1 million for the third quarter of 1999, compared
with $10.4 million for the same quarter of 1998, representing an increase of
$2.7 million or 25.2%. The increase in 1999 third quarter income before
income tax expense was primarily attributable to a $2.5 million or 14.5%
increase in net interest income before provision for loan losses.
The annualized return on average assets ("ROA") and return on average
stockholders' equity ("ROE") were 1.73% and 18.76%, respectively, for the
third quarter of 1999, compared with 1.47% and 16.74%, respectively, for the
same quarter of 1998.
For the nine months ended September 30, 1999, the Company reported net
income of $21.6 million or $2.39 per diluted common share, compared with
$17.7 million or $1.98 per diluted common share for the same period of 1998.
This represents an increase of $3.9 million or 21.9%. The ROA and ROE were
1.57% and 17.75%, respectively, for the first nine months of 1999, compared
with 1.42% and 16.49%, respectively, for the same period of 1998.
NET INTEREST INCOME
For the third quarter of 1999, net interest income before provision for
loan losses totaled $19.4 million, compared with $16.9 million for the
corresponding quarter of 1998. This represents an increase of $2.5 million or
14.5%. On a taxable equivalent basis, net interest income totaled $19.8
million in the third quarter of 1999, representing an increase of $2.5
million or 14.8% over net interest income of $17.3 million in the same period
of 1998.
The increase of $2.5 million in net interest income before provision for
loan losses in the third quarter of 1999 was substantially attributable to an
increase of $137.5 million in average interest-earning assets, from $1,592.8
million to $1,730.3 million. The increase in average interest-earning
8
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assets resulted from a $165.0 million increase in loans (net of deferred loan
fees and the allowance for loan losses) and a $86.0 million increase in
securities held-to-maturity. These increases were offset by the following
decreases: 1) $64.4 million in Federal funds sold and securities purchased
under agreements to resell; 2) $48.6 million in securities
available-for-sale; and 3) $0.5 million in deposits with other banks. The
increase in average interest-earning assets was funded primarily by increases
in average deposits and secondarily by other borrowed funds.
However, the increase in net interest income due to volume was partially
offset by a 22 basis point decline in average yield from 8.00% in the third
quarter of 1998 to 7.78% in the same quarter of 1999. Although the increase
in average loans contributed $3.6 million to interest income, $1.1 million of
which was offset by a decrease of 49 basis points in the average yield from
9.23% to 8.74%. This was primarily due to a 40 basis point drop in the
Company's average reference lending rate from 8.75% to 8.35% as a result of
the Federal Reserve Board's fiscal policies. Yields on all other categories
of interest-earning assets decreased as well due to the prevailing interest
rate environment.
During the same period, nevertheless, cost of funds decreased 50 basis
points from 4.23% in 1998 to 3.73% in 1999 which more than compensated the
decline of 22 basis points in the average yield on interest-earning assets.
In addition, average loans, which generally yield higher than other types of
interest-earning assets, increased as a percentage of average
interest-earning assets from 58.2% in the third quarter of 1998 to 63.1% in
the same quarter of 1999. Consequently, net interest margin (defined as
taxable equivalent net interest income to average interest-earning assets)
increased 24 basis points from 4.30% in 1998 to 4.54% in 1999.
For the nine months ended September 30, 1999, net interest income before
provision for loan losses amounted to $55.2 million, compared with $48.8
million a year ago. On a taxable equivalent basis, net interest income was
$56.4 million versus $49.7 million a year ago. The primary reason for the
$6.4 million increase in year-to-date net interest income was an increase of
$210.6 million in average interest-earning assets, $160.6 million of which
was contributed by loans. The net interest margin for the first nine months
of 1999 was 4.33% which was comparable to 4.34% for the same period a year
ago.
NON-INTEREST INCOME
For the third quarter of 1999, non-interest income totaled $2.4 million,
representing an increase of $343,000 or 17.0% over $2.0 million for the same
quarter in 1998. This was primarily due to an increase of $320,000 in other
operating income as a result of higher fees and charges on loans, other
miscellaneous income and wire transfer fees.
For the nine months ended September 30, 1999, non-interest income
totaled $6.5 million compared with $6.2 million for the same period a year
ago. The increase of $287,000 was attributable to a combination of the
following: 1) an increase of $430,000 in other operating income due to
substantially the same factors as discussed in the previous paragraph; 2) an
increase of $183,000 in letter of credit commissions due to increased
transactions; 3) a decrease of $281,000 in service charges primarily due to
the Bank's outsourcing of its merchant bank card portfolio in the third
quarter of 1998, as a result of which the Bank received only a percentage of
the income from the portfolio rather than receiving the full income and
incurring the related expenses; and 4) a decrease of $45,000 in securities
gains.
NON-INTEREST EXPENSE
For both the third quarters of 1999 and 1998, non-interest expense was
approximately at $7.6 million. Salaries and employee benefits increased
$252,000 in the third quarter of 1999 mainly attributable to higher accrual
of cash bonuses along with higher salary expenses from new employees. There
were also a total increase of $171,000 in expenses related to operations of
investments in real estate, computer and equipment expense, other real estate
owned (OREO) expense and FDIC and State assessments. To offset the above were
decreases of $205,000 in professional and services expense resulting
primarily from lower legal fees and $159,000 in other operating expense
largely due
9
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to lower miscellaneous expense. The efficiency ratio continued to improve
from 40.23% in the third quarter of 1998 to 35.13% in the third quarter of
1999.
For the nine months ended September 30, 1999, non-interest expense
decreased $185,000 to $22.8 million from $23.0 million in the same period of
1998. The decrease was caused by a combination of the following: 1) a
decrease of $370,000 in other operating expense primarily due to the Bank's
outsourcing of its merchant bank card portfolio in the third quarter of 1998
as explained previously; 2) an increase of $319,000 in net OREO income. The
Company realized a total of $660,000 in income from gains on sale of OREO
properties in the first nine months of 1999 leading to a net OREO income of
$560,000 for the period. This compared with $241,000 of net OREO income in
the same period in 1998; 3) a decline of $199,000 in real estate operations,
net, resulting largely from gains on sale of a real estate investment
property in the second quarter of 1999; 4) a decrease of $122,000 in
marketing expense; and 5) a decrease of $92,000 in professional and services
expense.
Offsetting the decreases in year-to-date non-interest expense were
salaries and employee benefits which rose $789,000 primarily due to higher
accrual of cash bonuses along with officers' annual salary adjustments in the
second quarter of 1999 as well as higher salary expense from new employees.
Additionally, furniture and fixture expense and computer center expense
increased slightly. The efficiency ratios for the first nine months of 1999
and 1998 were 37.00% and 41.83%, respectively.
FINANCIAL CONDITION OVERVIEW
The Company maintained steady growth in the first nine months of 1999.
During the period, total assets increased $101.5 million or 5.7% to $1,882.4
million. Net loans grew $212.4 million or 22.1% to $1,174.3 million primarily
due to strong loan demand during the period. In addition, the Company
purchased 23 seasoned commercial real estate loans totaling $68 million from
a major bank in the third quarter of 1999. Securities available-for-sale
decreased $124.6 million or 52.0% to $115.3 million while securities
held-to-maturity increased slightly to $436.8 million. The overall decrease
of $106.0 million in securities was a result of strong loan demand which
outpaced an increase of $86.0 million or 5.5% in deposits to $1,646.4
million. Stockholders' equity rose $16.1 million or 10.3% to $172.8 million.
INTEREST EARNING ASSET MIX
Total interest earning assets increased $101.3 million or 6.2% to
$1,739.6 million at September 30, 1999 from $1,638.3 million at year-end
1998. During the first nine months of 1999, the Bank continued to experience
a shift in the interest-earning assets from securities to loans as a result
of continued strong loan demand. As a percentage of total interest earning
assets, net loans accounted for 67.5% at September 30, 1999 compared with
58.7% at year-end 1998; conversely, investment securities decreased from
40.2% to 31.7% during the same period. This change in the interest earning
asset mix from securities to loans is favorable to net interest income since
loans generally yield higher than securities.
SECURITIES
Securities available-for-sale decreased $124.6 million or 52.0% from
$239.9 million to $115.3 million while securities held-to-maturity increased
$18.6 million or 4.5% from $418.2 million to $436.8 million during the first
nine months of 1999. The overall decrease of $106.0 million or 16.1% in
investment securities was primarily attributable to the excellent loan demand
that the Company experienced during the period.
As of September 30, 1999, unrealized holding losses on securities
available-for-sale were $185,000 compared with unrealized holding gains of
$2,051,000 as of December 31, 1998. These unrealized losses or gains, net of
tax effect, were included in the Company's stockholders' equity for the
periods reported. The unrealized holding losses, net of tax, were $107,000 as
of September 30, 1999 compared with the unrealized holding gains, net of tax
of $1,189,000 as of year-end 1998. The
10
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unrealized holding losses resulted mainly from the increasing interest rate
environment in the third quarter of 1999.
The following tables summarize the composition and maturity distribution of
the investment portfolio as of the dates indicated:
<TABLE>
<CAPTION>
(In thousands)
SECURITIES AVAILABLE-FOR-SALE: As of 9/30/99
- ----------------------------- ----------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,001 $ 1 $-0- $ 1,002
U.S. government agencies 30,056 69 -0- 30,125
State and municipal securities 545 1 -0- 546
Mortgage-backed securities 23,065 12 221 22,856
Assets-backed securities 18,901 6 244 18,663
Federal Home Loan Bank stock 6,766 -0- -0- 6,766
Corporate bonds 35,133 525 334 35,324
-------- ---- ---- ---------
Total $115,467 $614 $799 $115,282
======== ==== ==== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
SECURITIES AVAILABLE-FOR-SALE: As of 12/31/98
- ----------------------------- ----------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
---------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,005 $ 9 $-0- $ 2,014
U.S. government agencies 102,524 496 -0- 103,020
State and municipal securities 21,974 343 -0- 22,317
Mortgage-backed securities 31,754 676 5 32,425
Assets-backed securities 8,264 8 52 8,220
Federal Home Loan Bank stock 5,991 -0- -0- 5,991
Commercial paper 29,950 -0- 5 29,945
Corporate bonds 35,415 630 49 35,996
-------- ------ ---- --------
Total $237,877 $2,162 $111 $239,928
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
SECURITIES HELD-TO-MATURITY: As of 9/30/99
- ----------------------------- ----------------------------------------------------------------------
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses fair value
-------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 25,003 $ 204 $ -0- $ 25,207
U.S. government agencies 64,387 181 1,024 63,544
State and municipal securities 69,255 1,545 1,626 69,174
Mortgage-backed securities 206,650 267 3,056 203,861
Assets-backed securities 19,998 -0- 245 19,753
Corporate bonds 51,515 34 1,394 50,155
-------- ------ ------ --------
Total $436,808 $2,231 $7,345 $431,694
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
As of 12/31/98
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
-------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 26,026 $ 578 $-0- $ 26,604
U.S. government agencies 54,426 819 -0- 55,245
State and municipal securities 61,495 3,144 32 64,607
Mortgage-backed securities 229,553 3,552 323 232,782
Corporate bonds 46,656 884 -0- 47,540
-------- ------ ---- --------
Total $418,156 $8,977 $355 $426,778
======== ====== ==== ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (In thousands)
As of 9/30/99
----------------------------------------------------------------------------
After 1 But After 5 But
SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total
- ----------------------------- ----------- ------------ ------------ ---------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 1,002 $ -0- $ -0- $ -0- $ 1,002
U.S. government agencies 30,125 -0- -0- -0- 30,125
State and municipal securities 546 -0- -0- -0- 546
Mortgage-backed securities* 414 3,220 5,641 13,581 22,856
Assets-backed securities* -0- 8,913 9,750 -0- 18,663
Federal Home Loan Bank stock 6,766 -0- -0- -0- 6,766
Corporate bonds -0- 30,729 4,595 -0- 35,324
------- ------- ------- ------- --------
Total $38,853 $42,862 $19,986 $13,581 $115,282
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
As of 9/30/99
----------------------------------------------------------------------------
After 1 But After 5 But
SECURITIES HELD-TO-MATURITY: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total
- --------------------------- ----------- ------------ ------------ ---------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $25,003 $ -0- $ -0- $ -0- $ 25,003
U.S. government agencies 29,326 35,061 -0- -0- 64,387
State and municipal securities 1,315 9,145 23,798 34,997 69,255
Mortgage-backed securities* -0- 19,943 78,852 107,855 206,650
Assets-backed securities* -0- 19,998 -0- -0- 19,998
Corporate bonds -0- 46,476 5,039 -0- 51,515
------- -------- -------- -------- --------
Total $55,644 $130,623 $107,689 $142,852 $436,808
======= ======== ======== ======== ========
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
LOANS
The Bank experienced good loan growth in the first nine months of 1999.
Total gross loans increased $214.9 million or 21.9% to $1,196.4 million at
September 30, 1999, from $981.5 million at year-end 1998. Commercial real estate
loans, which increased by $142.4 million, accounted for most of the growth.
Commercial loans and residential real estate loans grew by $46.8 million and
$21.3 million, respectively.
During the third quarter of 1999, total gross loans gained $118.9 million,
of which, $83.6 million came from commercial real estate loans. The Company
purchased 23 seasoned commercial real estate loans with floating rates totaling
$68 million from a major bank. All of the commercial properties securing these
loans are located in California. Additionally, the favorable economic conditions
and strong real estate market in the Company's marketplace increased the demand
for the commercial real estate loans. These loans are primarily secured by the
first deeds of trust of the respective commercial properties, including shopping
centers, retail shops, office buildings, multiple-unit apartments, hotels,
motels and warehouses. The Company's underwriting policy for commercial real
estate loans generally requires that the loan-to-ratio at the time of
origination not exceed 70% of the appraised value of the property. Commercial
loans increased $28.0 million and residential real estate loans rose $6.0
million. The growth of residential real estate loans slowed down mainly
attributable to increased interest rates. The following table sets forth the
classification of loans by type and mix as of the dates indicated:
12
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
TYPES OF LOANS: AS OF 9/30/99 AS OF 12/31/98
- --------------- ------------------------------ ---------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Commercial loans $ 417,341 35.5% $370,539 38.5%
Commercial real estate loans 498,999 42.5 356,608 37.1
Residential real estate loans 205,504 17.5 184,158 19.2
Real estate construction loans 47,403 4.1 40,738 4.2
Installment loans 26,817 2.3 29,165 3.0
Other loans 317 0.0 269 0.1
------------- ------------
Total loans - gross 1,196,381 981,477
Allowance for loan losses (18,584) (1.6) (15,970) (1.7)
Unamortized deferred loan fees (3,488) (0.3) (3,631) (0.4)
-------------- ------------ ------------ -----------
Total loans - net $1,174,309 100.0% $961,876 100.0%
============== =========== ============ ===========
</TABLE>
Recently, there have been signs of improvement in Asian economic
conditions. Management continues to believe that the Company's financial
condition and results of operations have not been adversely impacted by the
Asian economy and does not consider the Company's loan portfolio to have
direct exposure to transfer risk.
RISK ELEMENTS OF THE LOAN PORTFOLIO
NON-PERFORMING ASSETS
Non-performing assets include loans past due 90 days or more and still
accruing interest ("loans past due 90 days"), non-accrual loans, and OREO.
The Company's non-performing assets increased $493,000 to $28.7 million as of
September 30, 1999, compared with $28.2 million at year-end 1998. The slight
increase resulted from increases of $1.8 million in loans past due 90 days
and $522,000 in non-accrual loans which were offset by a reduction of $1.8
million in OREO. Included in loans past due 90 days were four credits
totaling $4.6 million which were in escrow due to technical problems at the
end of the third quarter of 1999. Of which, $4.2 million were assumed by a
different entity and $401,000 were paid off on October 4, 1999. As a
percentage of total loans plus OREO, non-performing assets decreased to 2.38%
at September 30, 1999 compared with 2.85% at year-end 1998.
The following table presents the breakdown of non-performing assets by
categories as of the dates indicated:
<TABLE>
<CAPTION>
(In thousands)
NON-PERFORMING ASSETS: AS OF 9/30/99 AS OF 12/31/98
------------- --------------
<S> <C> <C>
Accruing loans past due 90 days or more $ 6,501 $ 4,683
Non-accrual loans 13,612 13,090
-------- --------
Total non-performing loans 20,113 17,773
Real estate acquired in foreclosure 8,607 10,454
-------- --------
Total non-performing assets $28,720 $28,227
======= =======
Accruing troubled debt restructurings 4,606 4,642
Non-performing assets as a percentage of total loans plus OREO 2.38% 2.85%
</TABLE>
The non-accrual loans of $13.6 million at September 30, 1999 consisted
mainly of $7.0 million in commercial loans and $5.9 million in commercial
real estate loans. The following tables present the type of properties
securing the loans and the type of businesses the borrowers engaged in under
commercial real estate and commercial non-accrual loan categories as of the
dates indicated:
13
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
9/30/99 12/31/98
----------------------------- ----------------------------
NON-ACCRUAL LOAN BALANCE
----------------------------------------------------------------
COMMERCIAL COMMERCIAL
Type of property: REAL ESTATE COMMERCIAL REAL ESTATE COMMERCIAL
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Single/multi-family residence $ 519 $ 1,021 $ 348 $ 1,052
Commercial 5,149 5,377 5,533 2,613
Motel -0- 30 1,501 30
Land 186 -0- -0- -0-
UCC -0- 145 -0- -0-
TCD -0- -0- -0- 696
Others -0- -0- -0- 93
Unsecured -0- 463 -0- -0-
---------- --------- ---------- ----------
Total $ 5,854 $ 7,036 $ 7,382 $ 4,484
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
9/30/99 12/31/98
----------------------------- ----------------------------
NON-ACCRUAL LOAN BALANCE
----------------------------------------------------------------
COMMERCIAL COMMERCIAL
Type of business: REAL ESTATE COMMERCIAL REAL ESTATE COMMERCIAL
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate development $ 186 $ 362 $ 451 $ 187
Real estate management 4,395 -0- 3,903 35
Wholesale 209 1,012 209 1,021
Retail -0- 2 -0- 38
Food/Restaurant -0- 962 -0- 1,008
Import 289 3,175 -0- 918
Motel 431 -0- 1,315 -0-
Investments 344 -0- 375 -0-
Industrial -0- 285 -0- 310
Clothing -0- -0- 348 161
Trading -0- 460 -0- -0-
Others -0- 778 781 806
---------- --------- --------- ---------
Total $ 5,854 $ 7,036 $ 7,382 $ 4,484
========== ========= ========= =========
</TABLE>
From the tables above, under the September 30, 1999 commercial real
estate loan category, the balance of $5.1 million in commercial loans
represents five credits, 94% of which were secured by first trust deeds on
commercial buildings and warehouses.
Under the September 30, 1999 commercial loan category, the balance of
$5.4 million was comprised of 17 credits, a majority of which are less than
$200,000 each. The collateral on these credits include first, second and
third trust deeds on commercial buildings and warehouses.
Troubled debt restructurings stayed approximately the same at $4.6
million as of September 30, 1999 and at year-end 1998. Of the $4.6 million
restructured loans, $1.9 million were current under their revised terms and
$2.7 million were past due 30 to 89 days.
On September 30, 1999, the company had $25.2 million of loans, which
were considered impaired including $14.4 million of commercial loans and
$10.7 million of commercial real estate loans, compared to $22.0 million of
impaired loans at December 31, 1998.
14
<PAGE>
There were no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of September 30, 1999.
OTHER REAL ESTATE OWNED
The Company's OREO, net of a valuation allowance of $715,000, was
carried at $8.6 million as of September 30, 1999, compared with OREO, net of
a valuation allowance of $494,000, being carried at $10.5 million at year-end
1998.
During the nine month period ended September 30, 1999, the Company
acquired two properties in the amount of $1.1 million and disposed of 15
properties totaling $2.4 million with a net gain of $660,000. As of September
30, 1999 the Company owned 11 OREO properties, which include land, commercial
buildings and condominiums, all of which are located in Southern California.
The Company maintains a valuation allowance for OREO properties in order
to reduce the carrying value of OREO to the estimated fair value of the
properties. Periodic evaluation is performed on each property and a
corresponding adjustment is made to the valuation allowance, if necessary.
Any decline in value is recognized by a corresponding increase to the
valuation allowance in the current period. Management provided approximately
$298,000 to the provision for OREO losses in the first nine months of 1999.
The Company recognized net income of $560,000 from operating its OREO
properties. In addition to the $660,000 net gains on sales of OREO
properties, the Company received $430,000 in rental income. These amounts
were partially offset by operating expenses of $232,000 and the provision for
OREO losses of $298,000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $18.6 million or 1.55% of
total loans as of September 30, 1999, compared with $16.0 million or 1.63% of
total loans at year-end 1998.
The Company's provision for loan losses was $3.2 million in the first
nine months of 1999, compared with $2.7 million for the same period of 1998.
Management believes the increase was prudent to cover additional inherent
risk from the overall increase of the Company's loan portfolio and from the
increases in commercial real estate loans and commercial loans. The
charge-offs of $1.7 million in the first nine months of 1999 were primarily
commercial and commercial real estate loans and the recoveries of $1.2
million were basically from commercial loans. The following table presents
information relating to the allowance for loan losses for the periods
indicated:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES: (In thousands)
NINE MONTHS ENDED YEAR ENDED
9/30/99 12/31/98
----------------- ----------
<S> <C> <C>
Balance at beginning of period $15,970 $15,379
Provision for loan losses 3,150 3,600
Loans charged-off (1,704) (3,519)
Recoveries of charged-off loans 1,168 510
-------- ---------
Balance at end of period $18,584 $15,970
======= =======
Average loans outstanding during the period $1,049,635 $907,639
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.07% 0.33%
Provision for loan losses to average loans
outstanding during the period (annualized) 0.40% 0.40%
Allowance to non-performing loans at period-end 92.40% 89.86%
Allowance to total loans at period-end 1.55% 1.63%
</TABLE>
15
<PAGE>
In determing the allowance for loan losses, management continues to
assess the risks inherent in the loan portfolio, the possible impact of known
and potential problem loans, and other factors such as collateral value,
portfolio composition, loan concentration, financial strength of borrower,
and trends in local economic conditions.
The 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 been incorporated into
the determination of the level of allowance. This monitoring system and
allowance methodology include 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.
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 level as of September 30, 1999 to be
adequate to absorb estimable and probable losses identified through its
analysis.
INVESTMENTS IN REAL ESTATE
At the end of the first quarter of 1999, the Company invested $15
million for an approximate 40% limited partnership interest in a partnership
that was formed to invest in multi-family housing in California that will
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% interest in a California limited partnership as a limited
partner. The purpose of the partnership is to construct and operate a housing
project consisting of 102 residential units for seniors. The total investment
for the Bank is approximately $5.3 million. During the second quarter of
1999, the Bank made its initial contribution for $265,000 upon execution of
the agreement. In September 1999, the Bank made its first contribution of
$1.1 million.
OTHER INFORMATION
The Bank established another 100% owned subsidiary, Cathay Holding
Corporation ("CHC"), a California corporation, during the second quarter of
1999. The business activities of CHC consist solely of the operations of its
wholly-owned subsidiary, Cathay Realty Corporation ("CRC"), a real estate
investment trust ("REIT") as defined under Sections 856-859 of the Internal
Revenue Code of 1986 as amended. CRC was incorporated in Texas during the
second quarter of 1999. The Bank contributes qualifying assets (comprised of
participation interests in real estate loans and real estate related
securities) to CHC in exchange for its common stock.
The authorized stock of CRC consists of common stock, authorized and
issued, and non-voting, non-cumulative and non-convertible preferred stock,
authorized but not yet issued. The REIT received from CHC real estate related
loans and/or participation interests therein and interests in mortgage-backed
and mortgage related securities in exchange for its common stock. The Bank
plans to also acquire all of the shares of the REIT's preferred stock.
The business activities of the REIT consist of the acquisition and
holding of long-term real estate related assets, including participation
interests in residential mortgage loans and possibly commercial real estate
loans, mortgage-backed and mortgage-related securities. CRC will acquire
additional real
16
<PAGE>
estate related assets from the Bank from time to time as the Bank's Board
approves to sell. CRC intends to distribute 100% of its taxable income to its
shareholders annually.
DEPOSITS
Total deposits grew $86.0 million or 5.5% from $1,560.4 million at
year-end 1998 to $1,646.4 million at September 30, 1999. As interest rate
spread widened between time deposits over $100,000 ("Jumbo CD's") and other
interest-bearing deposits, Jumbo CD's continued to grow faster than other
types of deposits. Jumbo CD's increased $73.6 million during the first nine
months of 1999 while core deposits, defined as total deposits minus Jumbo
CD's and brokered deposits, only added $12.4 million. The ratio of core
deposits to total deposits decreased from 60.32% at year-end 1998 to 57.92%
at September 30, 1999. However, 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 November 4, 1999, the balance of the new tiered money market
account totaled $1.7 million. The Company had no brokered deposits as of
September 30, 1999.
Average total deposits grew $152.7 million or 10.4% from $1,467.4
million to $1,620.1 million comparing the first nine months of 1998 and 1999.
Average Jumbo CD's grew $86.2 million and average core deposits grew $66.5
million with the most increase in average demand deposits of $45.3 million.
Quarterly, average total deposits increased $130.2 million from $1,488.0
million to $1,618.2 million between the third quarter of 1998 and 1999.
Approximately 78% of the quarterly increase in average deposits came from
Jumbo CD's which added $101.8 million.
Although the Bank's Jumbo CD portfolio continues to grow faster than
other types of deposits, management considers the Bank's Jumbo CD's generally
less volatile primarily due to the following reasons: 1) approximately 50% of
the Bank's Jumbo CD's have stayed with the Bank for more than two years; 2)
the Jumbo CD portfolio continued to be diversified with 3,977 individual
accounts averaging approximately $168,000 per account owned by 2,765
individual depositors as of July 9, 1999; and 3) this phenomenon of having a
relatively higher percentage of Jumbo CD's to total deposits exists in most
of the Asian American banks in the Company's market due to the fact that the
customers in this market tend to have a higher savings rate.
Management continues to monitor the Jumbo CD portfolio to identify any
changes in the deposit behavior in the market and of the patrons the Bank is
servicing. To discourage the growth in Jumbo CD's, management has continued
to make efforts in the following areas: 1) to offer non-competitive interest
rates paid on Jumbo CD's; 2) to promote transaction-based products; and 3) to
seek to diversify the customer base by branch expansion and/or acquisition as
opportunities arise.
The following tables display the deposit mix as of the dates and for the
periods indicated:
<TABLE>
<CAPTION>
(In thousands)
AS OF 9/30/99 AS OF 12/31/98
----------------------------- ---------------------------
TYPES OF DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Demand $ 193,078 11.7% $ 178,068 11.4%
NOW accounts 117,963 7.2 114,982 7.4
Money market accounts 98,181 6.0 113,869 7.3
Savings deposits 208,418 12.6 207,365 13.3
Time deposits under $100,000 336,030 20.4 326,968 20.9
Time deposits of $100,000 or more 692,778 42.1 619,150 39.7
----------- -------- ----------- ---------
Total deposits $1,646,448 100.0% $1,560,402 100.0%
=========== ======== =========== =========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
3RD QTR, 1999 3RD QTR, 1998
----------------------------- ---------------------------
AVERAGE DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Demand $ 186,470 11.5% $ 168,997 11.4%
NOW accounts 117,386 7.2 111,879 7.5
Money market accounts 91,885 5.7 96,754 6.5
Savings deposits 205,202 12.7 206,018 13.9
Time deposits under $100,000 334,401 20.7 323,341 21.7
Time deposits of $100,000 or more 682,829 42.2 580,995 39.0
----------- -------- ----------- ---------
Total deposits $1,618,173 100.0% $1,487,984 100.0%
=========== ======== =========== =========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
YTD 9/30/99 YTD 9/30/98
----------------------------- ---------------------------
AVERAGE DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Demand $ 209,621 12.9% $ 164,362 11.2%
NOW accounts 115,947 7.2 112,017 7.6
Money market accounts 98,700 6.1 95,762 6.6
Savings deposits 205,538 12.7 205,421 14.0
Time deposits under $100,000 334,219 20.6 320,002 21.8
Time deposits of $100,000 or more 656,094 40.5 569,856 38.8
----------- -------- ------------------------
Total deposits $1,620,119 100.0% $1,467,420 100.0%
=========== ======== =========== =========
</TABLE>
CAPITAL RESOURCES
Stockholders' equity amounted to $172.8 million or 9.18% of total assets
as of September 30, 1999, compared with $156.7 million or 8.80% of total
assets at year-end 1998. The increase of $16.1 million or 10.3% in
stockholders' equity was primarily from an addition of $21.6 million from net
income less dividends paid of $5.4 million, and $1.2 million from issuance of
additional common shares through the Dividend Reinvestment Plan. These
amounts were partially offset by an increase of $1.3 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, including the $1.9 million paid in October
1999, amounted to $7.3 million.
Management seeks to retain the Company's capital at a level sufficient
to support future growth, protect depositors and stockholders, and comply
with various regulatory requirements.
Despite slight decreases in the tier 1 and total capital ratios, the
Company and the Bank's regulatory capital continued to well exceed the
regulatory minimum requirements on September 30, 1999. The decrease in
capital ratios was primarily attributable to increases in loans, which were
100% risk-weighted. The capital ratios of the Bank place it in the "well
capitalized" category which is defined as institutions with total risk-based
ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal
to or greater than 6.0% and Tier 1 leverage capital ratio equal to or greater
than 5.0%.
The following tables present the Company and the Bank's capital and
leverage ratios as of September 30, 1999 and December 31, 1998:
18
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
COMPANY
---------------------------------------------------------
AS OF 9/30/99 AS OF 12/31/98
-------------------------- -------------------------
BALANCE PERCENTAGE BALANCE PERCENTAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 164,824(1) 11.06% $ 146,874(2) 11.44%
Tier 1 capital minimum requirement 59,637 4.00 51,372 4.00
---------- ----- ---------- -----
Excess $ 105,187 7.06% $ 95,502 7.44%
========== ===== ========== =====
Total capital (to risk-weighted assets) $ 183,408(1) 12.30% $ 162,844(2) 12.68%
Total capital minimum requirement 119,274 8.00 102,744 8.00
---------- ----- ---------- -----
Excess $ 64,134 4.30% $ 60,100 4.68%
========== ===== ========== =====
Risk-weighted assets $1,490,930 $1,284,296
Tier 1 capital (to average assets)
- Leverage ratio $ 164,824(1) 9.13% $ 146,874(2) 8.45%
Minimum leverage requirement 72,254 4.00 69,508 4.00
---------- ----- ---------- -----
Excess $ 92,570 5.13% $ 77,366 4.45%
========== ===== ========== =====
Total average assets $1,806,342 $1,737,710
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
BANK
---------------------------------------------------------
AS OF 9/30/99 AS OF 12/31/98
-------------------------- -------------------------
BALANCE PERCENTAGE BALANCE PERCENTAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 158,706(1) 10.65% $ 141,834(2) 11.04%
Tier 1 capital minimum requirement 59,636 4.00 51,372 4.00
----------- ----- ---------- -----
Excess $ 99,070 6.65% $ 90,462 7.04%
=========== ===== ========== =====
Total capital (to risk-weighted assets) $ 177,290(1) 11.89% $ 157,804(2) 12.29%
Total capital minimum requirement 119,272 8.00 102,744 8.00
----------- ----- ---------- -----
Excess $ 58,018 3.89% $ 55,060 4.29%
=========== ===== ========== =====
Risk-weighted assets $1,490,901 $1,284,296
Tier 1 capital (to average assets)
- Leverage ratio $ 158,706(1) 8.79% $ 141,834(2) 8.16%
Minimum leverage requirement 72,253 4.00 69,508 4.00
----------- ----- ---------- -----
Excess $ 86,453 4.79% $ 72,326 4.16%
=========== ===== ========== =====
Total average assets $1,806,337 $1,737,709
</TABLE>
1 Excluding the unrealized holding losses on securities available-for-sale of
$107,000, and goodwill of $8,083,000.
2 Excluding the unrealized holding gains on securities available-for-sale of
$1,189,000, and goodwill of $8,590,000.
LIQUIDITY AND MARKET RISK
LIQUIDITY
The Company's principal 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. The Company's liquidity ratio (defined as net cash,
short-term and marketable securities to net deposits and short-term
liabilities) decreased from 46.04% at year-end 1998 to 35.69% at September
30, 1999 primarily due to decreases in securities maturing within one year
and other marketable securities.
19
<PAGE>
To supplement its liquidity needs, the Bank maintains a total credit
line of $45 million for Federal funds with three correspondent banks, a repo
line of $110 million with three brokerage firms and a retail certificate of
deposit line of five percent of total deposits with another brokerage firm.
The Bank is also a shareholder of Federal Home Loan Bank (FHLB) which enables
the Bank to have access to lower cost FHLB financing when necessary. The Bank
obtained non-callable advances from FHLB totaling $30 million in the third
quarter of 1998 at fixed interest rates. In connection with the Company's
preparation of Year 2000 readiness, the Company obtained an additional $20
million Year 2000 liquidity commitment from FHLB in July 1999.
The Company had significant portion of its time deposits maturing within
one year or less as of September 30, 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 the outflow will be minimal and can be
replenished through its normal growth in deposits.
Management believes all the above-mentioned sources will provide
adequate liquidity to the Company to meet its daily operating needs.
Bancorp, on the other hand, obtains funding for its activities only
through dividend income contributed by the Bank and proceeds from investments
in the Dividend Reinvestment Plan. Dividends paid to Bancorp by the Bank are
subject to regulatory limitations. Since the business activities of Bancorp
consist primarily of the operation of the Bank, and no other operating
business activities are proposed for Bancorp in the near future, management
believes Bancorp's liquidity generated from its prevailing sources are
sufficient to meet its operational needs.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The principal market risk to the Company is the interest rate risk
inherent in its lending, investing and deposit taking activities, due to the
fact that interest-earning assets and interest-bearing liabilities of the
Company do not change at the same speed, to the same extent, or on the same
basis.
The Company actively monitors and manages its interest rate risk through
analyzing the repricing characteristics of its loans, securities, and
deposits on an on-going basis. The primary objective is to minimize the
adverse effects of changes in interest rates on its earnings, and ultimately
the underlying market value of equity, while structuring the Company's
asset-liability composition to obtain the maximum spread. Management uses
certain basic measurement tools in conjunction with established risk limits
to regulate its interest rate exposure. Because of the limitation inherent in
any individual risk management tool, the Company uses both an interest rate
sensitivity analysis and a simulation model to measure and quantify the
impact to the Company's profitability or the market value of its assets and
liabilities.
The interest rate sensitivity analysis measures the Company's exposure
to differential changes in interest rates between assets and liabilities.
This analysis details the expected maturity and repricing opportunities
mismatch or sensitivity gap between interest-earning assets and
interest-bearing liabilities over a specified timeframe. A positive gap
exists when rate sensitive assets which reprice over a given time period
exceed rate sensitive liabilities. During periods of increasing interest
rates, net interest margin may be enhanced with a positive gap. A negative
gap exists when rate sensitive liabilities which reprice over a given time
period exceed rate sensitive assets. During periods of increasing interest
rates, net interest margin may be impaired with a negative gap. As of
September 30, 1999, the Company was asset sensitive with a cumulative gap
ratio of a positive 17.18% within three months, and liability sensitive with
a cumulative gap ratio of a negative 10.71% within one year. This compared
with a positive 15.61% within three months, and a negative 11.48% within one
year at year-end 1998.
20
<PAGE>
Since interest rate sensitivity analysis does not measure the timing
differences in the repricing of asset and liabilities, the Company uses a
simulation model to quantify the extent of the differences in the behavior of
the lending and funding rates, so as to project future earnings or market
values under alternative interest scenarios.
The simulation measures the volatility of net interest income and net
portfolio value (defined as net present value of assets and liabilities)
under immediate rising or falling interest rate scenarios in 100 basis point
increments. The Company establishes a tolerance level in its policy to define
and limit interest income volatility to a change of plus or minus 30% when
the hypothetical rate change is plus or minus 200 basis points. When the
tolerance level is met or exceeded, the Company then seeks corrective action
after considering, among other things, market conditions, customer reaction
and the estimated impact on profitability. As of September 30, 1999, the
Company's interest income volatility was within the Company's established
tolerance level.
To manage and control its interest rate risk, the Company concentrates
its efforts on seeking to increase its yield-cost spread through growth and
competitive pricing. The Company is not utilizing hedging instruments
currently to maintain and/or augment its spread, as management believes that
it is not cost-effective at this time. The composition of the Company's
financial instruments that are sensitive to changes in interest rates have
not significantly changed since December 31, 1998.
YEAR 2000 READINESS DISCLOSURES
THE COMPANY'S STATE OF READINESS
The "Year 2000" ("Y2K") problem is the result of computer programs being
written using two digits rather than four to identify a year in the date
field. Consequently, computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
issue, if not properly addressed, could cause systems to fail or create
erroneous results by or at the Year 2000.
Y2K issues impact both the Company's information technology ("IT")
systems, such as its computer hardware and software, and its non-IT systems,
such as its utilities, telephones, elevators, automated teller machines,
copiers, fax machines, security systems and emergency communications. Y2K
issues may also affect the Company's vendors, suppliers and customers.
The Company established a Y2K Committee (the "Committee") in 1997. The
Committee is made up of representatives from key sectors of the Company and
is assigned the responsibility of identifying, assessing and designing an
action plan to mitigate the risks that the Company may encounter relative to
the Y2K problem. The actions undertaken by the Committee to date include
formulating and initiating a company-wide program to identify and prioritize
all the mission critical systems (defined as systems to be vital to the
successful continuance of a core business activity) that may be affected by
the Y2K issue and developing and implementing a comprehensive remediation
program to provide that the Company's IT and non-IT systems are Y2K compliant
in time.
PROGRESS SCHEDULE
The progress of the Company's Y2K efforts is discussed below:
1. AWARENESS: During the awareness phase, the Company sought to educate
its employees and directors about the material Y2K issues facing the
Company and its vendors and customers. This phase was completed by
December 31, 1997.
2. ASSESSMENT: During the assessment phase, the Company inventoried its
mission critical IT and non-IT systems, and identified third-party
vendors and service providers whose failures to adequately address Y2K
issues would likely affect the financial condition or operations of the
Company. This phase was completed by June 30, 1998.
21
<PAGE>
3. RENOVATION: During the renovation phase, which was conducted concurrent
with the validation and implementation phases discussed below, the
Company implemented hardware and software upgrades of its material IT
systems and requested vendor certifications of Y2K readiness of the
Company's material existing systems and upgrades. This phase was
completed by May 31, 1999.
4. VALIDATION: This phase consists of the testing of the Company's IT and
non-IT systems, and the testing of third-party vendors and service
providers for Y2K readiness. The Company has completed the testing of
its core computer systems. Testing of its other mission-critical IT
systems has also been completed as of July 30, 1999.
The Company has received written assurances from its utilities and
telephone suppliers that the non-IT services or systems provided by
such suppliers should be Y2K compliant in time. The Company has also
obtained Y2K compliance certifications from its other material non-IT
system providers.
As a part of the validation phase, the Company also seeks to evaluate
its major borrowers' and depositors' Y2K readiness. Such evaluation
began in June 1998, and continues to be updated as borrowers and
depositors progress towards Y2K readiness.
5. IMPLEMENTATION: This phase began shortly after the validation phase.
The Company is progressing through the implementation phase by
determining the necessary remedial actions and establishing timelines
for alternative actions with respect to third-party vendors, service
providers or borrowers who are not yet Y2K compliant. The Company
believes its material operations are Y2K compliant as of September 30,
1999.
COSTS TO ADDRESS THE COMPANY'S Y2K ISSUES
The total cost of the Company's plan to address the Y2K issues is
currently estimated to be $750,000 which includes allocated human resource
expense and hardware and software upgrades. Hardware and software upgrades
will be depreciated over their useful lives in accordance with the Company's
policy. All other costs, including human resources, system testings,
consulting services, training and any other contingency expenses will be
expensed as incurred. The Company is funding these costs through operating
cash flows, and does not expect such costs to have a material adverse effect
on the Company's financial condition or results of operations. The amount
expensed as of October 20, 1999 was approximately $664,000.
THE RISKS TO THE COMPANY OF THE Y2K ISSUES
The Company relies on its core computer system for its information
technology needs, as it supports virtually all of the Company's deposits,
loans and accounting processing. A failure of the core computer system to be
Y2K compliant could cause substantial disruption to the Company's operations,
including the ability to conduct its business, to process transactions and to
provide customer services, and could have a material adverse financial impact
on the Company.
Essential third-party services upon which the Company depends, including
telecommunications and electrical power, could be interrupted if such
third-party servicers are not Y2K compliant. As a result, the Company would
be unable to operate normally which could have a material adverse financial
impact on the Company.
Borrowers may be unable to repay their loans and comply with other loan
covenants, if their businesses or operations are disrupted. Such failures
could impair the credit quality of the Company's loan portfolio and adversely
affect the amount and timing of the recognition of the anticipated revenue
related to these loans.
22
<PAGE>
The inability of the Company's correspondent banks, such as the Federal
Reserve Bank, to provide currency or related services, could materially
impair the Company's liquidity, and therefore, affect the Company's ability
to fund loans and meet deposit withdrawals. Liquidity may also be adversely
affected if the Company experiences an increase in the outflow of deposits
due to depositors who may be concerned about the possibility of computer
failure.
Despite the Company's effort to address the Y2K problem, (1) the
Company's remediation efforts may not effectively address all Y2K issues or
achieve complete Y2K compliance; (2) the ultimate time and cost to prepare
the Company for Y2K compliance may substantially exceed the Company's current
estimates; (3) the systems of borrowers or other companies upon which the
company's operations rely may not be timely converted; and (4) depositors
concerned about the possibility of computer failure may seek to withdraw
their funds from the Company. In any such event, the Company's financial
condition, results of operations and liquidity could be materially and
adversely affected.
THE COMPANY'S CONTINGENCY PLANS
As a precautionary measure, the Company has formed a Y2K contingency
team to address key functions of the Company and to determine alternate
resources and procedures should the normal business operations fail. The
Company cannot, at this time, determine whether the consequences of any Y2K
failure will have a material impact on the Company's operations, liquidity or
financial condition. The contingency plan covers critical dates in 1999 and
2000. The contingency procedures have been tested and will continue to be
revised based upon the test results. These procedures have been validated by
the Company's Internal Audit Department, reviewed by senior management and
presented to the Board of Directors. The contingency plan has met the
expected timeline for completion of June 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning market risk, see "Liquidity and Market Risk
- -Market Risk" in Management's Discussion and Analysis of Financial Condition
and Results of Operations above on pages 20 and 21.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, including its wholly-owned subsidiary, Cathay Bank, has
been a party to ordinary routine litigation incidental to various aspects of
its operations.
Management is not currently aware of any other litigation that is
expected to have material adverse impact on the Company's consolidated
financial condition, or the results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the third quarter of 1999, there were no reportable events.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
27 Financial Data Schedule
Form 8-K:
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cathay Bancorp, Inc.
------------------------------
(Registrant)
Date: November 10, 1999 By /s/ DUNSON K. CHENG
---------------------- ------------------------------
Dunson K. Cheng
Chairman and President
Date: November 10, 1999 By /s/ ANTHONY M. TANG
---------------------- ------------------------------
Anthony M. Tang
Chief Financial Officer
25
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