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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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------------------- to ---------------------
Commission file number 0-18630
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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, 9,021,158 shares outstanding as of August 10,
1999.
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TABLE OF CONTENTS
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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. . . . . . . . . . . . . . .25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of June 30, 1999 and December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
(unaudited) (unaudited)
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ASSETS
Cash and due from banks $ 53,184 $ 64,656
Federal funds sold and securities purchased under
agreements to resell 23,500 17,000
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Cash and cash equivalents 76,684 81,656
Securities available-for-sale (amortized cost of
$137,041 in 1999 and $237,877 in 1998) 136,469 239,928
Securities held-to-maturity (estimated fair
value of $452,181 in 1999 and $426,778 in 1998) 454,085 418,156
Loans (net of allowance for loan losses of
$17,662 in 1999 and $15,970 in 1998) 1,056,187 961,876
Other real estate owned, net 9,965 10,454
Investments in real estate, net 15,946 1,457
Premises and equipment, net 25,682 25,827
Customers' liability on acceptance 14,737 10,847
Accrued interest receivable 13,146 11,996
Goodwill 8,252 8,590
Other assets 10,256 10,111
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Total assets $ 1,821,409 $ 1,780,898
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 184,134 $ 178,068
Interest bearing accounts
NOW accounts 116,271 114,982
Money market deposits 85,866 113,869
Savings deposits 204,625 207,365
Time deposits under $100,000 332,816 326,968
Time deposits of $100,000 or more 673,777 619,150
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Total deposits 1,597,489 1,560,402
Securities sold under agreements to repurchase 7,415 16,436
Advances from Federal Home Loan Bank 30,000 30,000
Acceptances outstanding 14,737 10,847
Other liabilities 5,637 6,561
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Total liabilities 1,655,278 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, 9,010,829 and 8,988,760 shares issued and
outstanding in 1999 and 1998, respectively 90 90
Additional paid-in-capital 63,694 62,919
Accumulated other comprehensive income(loss) (332) 1,189
Retained earnings 102,679 92,454
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Total stockholders' equity 166,131 156,652
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Total liabilities and stockholders' equity $ 1,821,409 $ 1,780,898
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SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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CATHAY BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income and Comprehensive Income
For the three and six months ended June 30, 1999 and 1998
(In thousands, except share and per share data)
(unaudited)
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<CAPTION>
Three months Ended Six months Ended
June 1999 June 1998 June 1999 June 1998
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INTEREST INCOME
Interest on loans $ 22,443 $ 20,352 $ 43,078 $ 39,906
Interest on securities available-for-sale 2,558 3,395 5,808 6,593
Interest on securities held-to-maturity 6,962 5,738 13,622 11,458
Interest on Federal funds sold and securities
purchased under agreements to resell 574 737 1,538 1,439
Interest on deposits with banks 46 12 51 17
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Total interest income 32,583 30,234 64,097 59,413
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INTEREST EXPENSE
Time deposits of $100,000 or more 8,185 7,605 15,924 14,978
Other deposits 4,953 5,901 10,042 11,757
Other borrowed funds 1,185 576 2,363 838
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Total interest expense 14,323 14,082 28,329 27,573
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Net interest income before provision for loan losses 18,260 16,152 35,768 31,840
Provision for loan losses 1,050 900 2,100 1,800
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Net interest income after provision for loan losses 17,210 15,252 33,668 30,040
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NON-INTEREST INCOME
Securities gains(losses) 19 -- (13) 35
Letter of credit commissions 579 511 1,065 955
Service charges 880 1,034 1,824 2,052
Other operating income 703 608 1,223 1,113
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Total non-interest income 2,181 2,153 4,099 4,155
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NON-INTEREST EXPENSE
Salaries and employee benefits 4,684 4,447 9,348 8,811
Occupancy expense 605 603 1,277 1,256
Computer and equipment expense 637 604 1,258 1,199
Professional services expense 845 902 1,770 1,657
FDIC and State assessments 99 101 196 200
Marketing expense 255 333 568 665
Real estate operations, net (79) (327) (532) (182)
Operations of investments in real estate (305) (41) (274) (4)
Other operating expense 732 856 1,547 1,758
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Total non-interest expense 7,473 7,478 15,158 15,360
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Income before income tax expense 11,918 9,927 22,609 18,835
Income tax expense 4,733 3,906 8,921 7,396
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Net Income 7,185 6,021 13,688 11,439
Other comprehensive income, net of tax:
Unrealized holding gain(loss) arising during the period (673) 552 (1,310) 456
Less: reclassification adjustment for realized
gain(loss) on securities included in net income 5 -- 211 (15)
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Total other comprehensive income(loss), net of tax (678) 552 (1,521) 471
----------------- ------------- ----------------- -----------------
Total comprehensive income $ 6,507 $ 6,573 $ 12,167 $ 11,910
================= ============= ================= =================
Net income per common share
Basic $ 0.80 $ 0.67 $ 1.52 $ 1.28
Diluted $ 0.80 $ 0.67 $ 1.52 $ 1.28
Cash dividends paid per common share $ 0.210 $ 0.175 $ 0.385 $ 0.350
Basic average common shares outstanding 9,007,496 8,962,147 9,001,770 8,956,020
Diluted average common shares outstanding 9,011,491 8,962,147 9,006,510 8,956,020
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CATHAY BANCORP, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
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<CAPTION>
(In thousands)
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,688 $ 11,439
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,100 1,800
Provision for losses on other real estate owned 77 56
Depreciation 695 610
Net gain on sales of other real estate owned (547) (199)
Net gain on sale of investments in real estate (394) (2)
(Gain) loss on sales and calls of investment securities 13 (35)
Amortization and accretion of investment
security premiums, net 440 144
Amortization of goodwill 338 602
Increase (decrease) in deferred loan fees (5) 113
Increase in accrued interest receivable (1,150) (305)
(Increase) decrease in other assets, net (145) 2,256
Increase (decrease) in other liabilities (924) 2,071
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Total adjustments 498 7,111
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Net cash provided by operating activities 14,186 18,550
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (428,625) (291,318)
Proceeds from maturity and call of securities available-for-sale 524,262 317,759
Proceeds from sale of securities available-for-sale - 6,424
Purchase of mortgage-backed securities available-for-sale - (24,581)
Proceeds from repayments of mortgage-backed securities
available-for-sale 6,515 18,634
Purchase of securities held-to-maturity (45,057) (5,193)
Proceeds from maturity and call of securities held-to-maturity 810 1,130
Purchase of mortgage-backed securities held-to-maturity (38,157) (51,305)
Proceeds from repayments of mortgage-backed securities held-to-maturity 45,808 31,196
Net increase in loans (96,857) (51,227)
Purchase of premises and equipment (550) (931)
Proceeds from sale of equipment - 2
Proceeds from sale of other real estate owned 1,410 1,801
Proceeds from sale of investments in real estate 1,026 -
Reduction (Addition) of investments in real estate (15,121) 89
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Net cash used in investing activities (44,536) (47,520)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts,
money market and savings deposits (23,388) (6,978)
Net increase in time deposits 60,475 35,645
Net decrease in securities sold under agreements to repurchase (9,021) (9,639)
Cash dividends (3,463) (3,132)
Proceeds from shares issued to Dividend Reinvestment Plan 775 818
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Net cash provided by financing activities 25,378 16,714
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Decrease in cash and cash equivalents (4,972) (12,256)
Cash and cash equivalents, beginning of the period 81,656 124,728
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Cash and cash equivalents, end of the period $ 76,684 $ 112,472
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Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 28,548 $ 27,644
Income taxes $ 6,950 $ 6,770
Non-cash investing activities:
Transfers to securities available-for-sale
within 90 days of maturity $ 426 $ 365
Net change in unrealized holding gain (loss) on securities
available-for-sale, net of tax $ (1,521) $ 471
Transfers to other real estate owned $ 776 $ 2,714
Loans to facilitate the sale of other real estate owned $ 325 $ 1,436
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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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 six months ended June 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.
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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 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 second quarter of 1999, the Company reported net income of $7.2
million or $0.80 per basic and diluted common share, compared with $6.0 million
or $0.67 per basic and diluted common share for the same quarter of 1998,
representing an increase of $1.2 million or 19.3%. Income before income tax
expense amounted to $11.9 million for the second quarter of 1999, compared with
$9.9 million for the same quarter of 1998, representing an increase of $2.0
million or 20.1%. The increase in 1999 second quarter income before income tax
expense was primarily attributable to a $2.1 million 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 1.57% and 17.77%, respectively, for the second
quarter of 1999, compared with 1.46% and 16.92%, respectively, for the same
quarter of 1998.
For the six months ended June 30, 1999, the Company reported net income of
$13.7 million or $1.52 per basic and diluted common share, compared with $11.4
million or $1.28 per basic and diluted common share for the same period of 1998.
This represents an increase of $2.2 million or 19.7%. The ROA and ROE were
1.53% and 17.22%, respectively, for the first six months of 1999, compared with
1.41% and 16.40%, respectively, for the same period of 1998.
NET INTEREST INCOME
For the second quarter of 1999, net interest income before provision for
loan losses totaled $18.3 million, compared with $16.2 million for the
corresponding quarter of 1998. This represents an increase of $2.1 million or
13.1%. On a taxable equivalent basis, net interest income totaled $18.7 million
in the second quarter of 1999, representing an increase of $2.2 million or 13.5%
over the net interest income of $16.5 million in the same period of 1998.
The increase of $2.1 million in net interest income before provision for
loan losses was substantially attributable to an increase of $195.1 million in
average interest-earning
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assets, from $1,529.2 million to $1,724.3 million. Approximately 76% or
$148.4 million of the increase in average interest-earning assets came from
loans (net of deferred loan fees and the allowance for loan losses).
Securities held-to-maturity increased $101.2 million. These increases were
partially offset by decreases of $48.6 million in securities
available-for-sale, $4.9 million in Federal funds sold and securities
purchased under agreements to resell, and $1.0 million in deposits with other
banks. The increase in average interest-earning assets was funded by
increases in: 1) average deposits of $125.9 million, of which $108.7 million
were interest bearing and $17.2 million were non-interest bearing; 2) other
borrowed funds (including securities sold under agreements to repurchase and
advances from Federal Home Loan Bank) of $51.7 million; and 3) cash and other
sources of approximately $17.5 million.
The increase in average loans contributed an additional $2.1 million to net
interest income, which was partially offset by a decrease of 51 basis points in
the average yield from 9.22% to 8.71%. This was primarily due to a decrease of
75 basis points in the Company's average reference lending rate from 8.75% to
8.00%, as a result of three consecutive 25 basis point rate cuts by the Federal
Reserve Board in the last two quarters of 1998. Meanwhile, yields on all other
categories of interest-earning assets decreased due to the prevailing interest
rate environment causing a 33 basis point decrease in the average yield on
overall interest-earning assets from 8.01% in the second quarter of 1998 to
7.68% in the same quarter of 1999.
During the same period, cost of funds decreased 38 basis points from 4.20%
in 1998 to 3.82% in 1999 which more than offset the decline of 33 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 57.9% in the
second quarter of 1998 to 59.9% in the same quarter of 1999. Consequently, net
interest margin (defined as taxable equivalent net interest income to average
interest-earning assets) increased 3 basis points from 4.32% in 1998 to 4.35% in
1999.
For the first six months of 1999, net interest income before provision for
loan losses amounted to $35.8 million, compared with $31.8 million a year ago.
On a taxable equivalent basis, net interest income was $36.6 million versus
$32.5 million a year ago. The primary reason for the $3.9 million increase in
year-to-date net interest income was an increase of $208.3 million in average
interest-earning assets, $119.2 million of which was contributed by loans. The
net interest margin for the first six months of 1999 was 4.31% compared with
4.35% for the same period a year ago.
NON-INTEREST INCOME
For the second quarter of 1999 and 1998, non-interest income was
approximately at the same level of $2.2 million with a slight increase in 1999.
This was due to increases totaling $182,000 in other operating income, letter of
credit commissions and securities gains, which were largely offset by a decrease
of $154,000 in service charges. The decrease in service charges was 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. The higher other operating income in 1999 was primarily
due to increased fees and charges related to wire transfers, loans, and foreign
exchange transactions.
For the six months ended June 30, 1999, non-interest income totaled $4.1
million compared with $4.2 million for the same period a year ago. The slight
decrease of $56,000 was attributable to a combination of a $228,000 decrease in
service charges plus a slight increase in securities losses, which were
substantially offset by increases totaling $220,000 in other operating income
and letter of credit commissions.
NON-INTEREST EXPENSE
Non-interest expense stayed at $7.5 million for the second quarter of 1999,
approximately the same level as the second quarter of 1998. The Company
realized $305,000 from net real estate operations income primarily due to gains
on sale of a real estate investment property in the second quarter of 1999.
This compared with net real estate operations income of $41,000 in the same
period of 1998. In
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addition, there were decreases totaling $259,000 in other operating expense,
marketing expense and professional services expense. To offset the above
were an increase of $237,000 in salaries and employee benefits, and an
increase of $248,000 in net other real estate owned (OREO) expense. The
increase in salaries and employee benefits was largely attributable to
officers' annual salary adjustments in the second quarter of 1999. The
Company realized $327,000 from net OREO income in the second quarter of 1998
mainly attributable to rental income and gains on sale of OREO properties.
This compared with net OREO income of $79,000 in the second quarter of 1999.
The efficiency ratio continued to improve from 40.85% in the second quarter
of 1998 to 36.56% in the second quarter of 1999.
For the six months ended June 30, 1999, non-interest expense totaled $15.2
million compared with $15.4 million for the same period in 1998. The decrease
of $202,000 was caused by declines of $350,000 in real estate operations, net,
$270,000 in operations of investments in real estate, $211,000 in other
operating expense and $97,000 in marketing expense, which were partially offset
by increases of $537,000 in salaries and employee benefits, $113,000 in
professional services expense and slight increases in occupancy and equipment
expenses. The Company realized $547,000 in income from gains on sale of OREO
properties in the first quarter of 1999 leading to a net OREO income of $532,000
for the first half of 1999. Salaries and employee benefits increased primarily
due to officers' annual salary adjustments mentioned above along with higher
accrual of cash bonuses. The efficiency ratios for the first six months of 1999
and 1998 were 38.02% and 42.67%, respectively.
FINANCIAL CONDITION OVERVIEW
The Company maintained moderate growth during the first six months of 1999.
From year-end 1998 to June 30, 1999, total assets increased $40.5 million or
2.3% to $1,821.4 million; loans grew $94.3 million or 9.8% to $1,056.2 million;
securities available-for-sale decreased $103.5 million or 43.1% to $136.5
million while securities held-to-maturity increased $35.9 million or 8.6% to
$454.1 million; investments in real estate increased $14.5 million to $15.9
million; deposits increased $37.1 million or 2.4% to $1,597.5 million; and
stockholders' equity increased $9.5 million or 6.1% to $166.1 million.
INTEREST EARNING ASSET MIX
Total interest earning assets increased $32.5 million to $1,670.8
million at June 30, 1999, compared with $1,638.3 million at year-end 1998.
During the first six months of 1999, the Bank experienced a shift in the
interest-earning assets from securities to loans as a result of continued
good loan demand. As a percentage of total interest earning assets, loans
increased from 58.7% at year-end 1998 to 63.2% at June 30, 1999; conversely,
investment securities decreased from 40.2% to 35.4% during the same period.
This change in the interest earning asset mix from securities to loans is
generally favorable to net interest income.
SECURITIES
Securities available-for-sale decreased $103.4 million from $239.9 million
to $136.5 million and securities held-to-maturity increased $35.9 million from
$418.2 million to $454.1 million during the first six months of 1999. The
overall decrease of $67.5 million or 10.3% in investment securities was
primarily attributable to the excellent loan demand that the Company experienced
during the period.
As of June 30, 1999, unrealized holding losses on securities
available-for-sale were $572,000 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 $332,000
as of June 30, 1999 compared with the unrealized holding gains, net of tax of
$1,189,000 as of year-end 1998. The unrealized holding losses resulted
mainly from the increasing interest rate environment towards the end of the
second quarter of 1999.
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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 6/30/99
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Amortized Gross Gross Fair
Cost Unrealized Gains Unrealized Losses Value
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<S> <C> <C> <C> <C>
U.S. Treasury securities $ -0- $ -0- $ -0- $ -0-
U.S. government agencies 50,160 178 -0- 50,338
State and municipal securities 302 19 -0- 321
Mortgage-backed securities 25,234 129 100 25,263
Assets-backed securities 19,965 -0- 466 19,499
Federal Home Loan Bank stock 6,152 -0- -0- 6,152
Corporate bonds 35,228 155 487 34,896
--------- ------- ------- ---------
Total $137,041 $ 481 $1,053 $136,469
======== ======= ====== ========
(In thousands)
SECURITIES AVAILABLE-FOR-SALE: As of 12/31/98
----------------------------------------------------------------------
Amortized Gross Gross Fair
Cost Unrealized Gains Unrealized Losses Value
----------- ---------------- ----------------- -------------
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
======== ====== ======= ========
(In thousands)
SECURITIES HELD-TO-MATURITY: As of 6/30/99
--------------------------------------------------------------------
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- -----------
U.S. Treasury securities $ 26,012 $ 245 $ -0- $ 26,257
U.S. government agencies 64,400 203 979 63,624
State and municipal securities 70,292 2,056 919 71,429
Mortgage-backed securities 221,808 529 1,799 220,538
Assets-backed securities 19,998 -0- 234 19,764
Corporate bonds 51,575 116 1,122 50,569
--------- ------- ------- ---------
Total $454,085 $3,149 $5,053 $452,181
======== ====== ====== ========
(In thousands)
As of 12/31/98
------------------------------------------------------------------
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
---------- ---------------- ----------------- -----------
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 6/30/99
---------------------------------------------------------------------------
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. government agencies $ 35,277 $ 15,061 $ -0- $ -0- $ 50,338
State and municipal securities 165 -0- 156 -0- 321
Mortgage-backed securities* 694 3,628 6,229 14,712 25,263
Assets-backed securities* -0- 9,899 9,600 -0- 19,499
Federal Home Loan Bank stock 6,152 -0- -0- -0- 6,152
Corporate bonds -0- 30,311 4,585 -0- 34,896
------------ --------- ---------- ------------ ---------
Total $ 42,288 $ 58,899 $ 20,570 $ 14,712 $136,469
========= ======== ========= ========= ========
(In thousands)
As of 6/30/99
-----------------------------------------------------------------------------
After 1 But After 5 But
SECURITIES HELD-TO-MATURITY: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total
- --------------------------- ----------- ------------ ------------ ---------- -----
U.S. Treasury securities $ 11,026 $ 14,986 $ -0- $ -0- $ 26,012
U.S. government agencies -0- 64,400 -0- -0- 64,400
State and municipal securities 1,336 9,444 22,935 36,577 70,292
Mortgage-backed securities* 164 22,050 72,917 126,677 221,808
Assets-backed securities* -0- 19,998 -0- -0- 19,998
Corporate bonds -0- 27,880 23,695 -0- 51,575
------------ --------- --------- ------------ ---------
Total $ 12,526 $158,758 $119,547 $163,254 $454,085
========= ======== ======== ======== ========
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
LOANS
The Bank continued to experience excellent loan demand in the first half of
1999. Total gross loans increased $96.0 million or 9.8% to $1,077.5 million as
of June 30, 1999, from $981.5 million at year-end 1998. Commercial real estate
loans, commercial loans and residential real estate loans, which added $58.8
million, $18.8 million and $13.1 million, respectively, continued to account for
most of the increase.
During the second quarter of 1999, total gross loans grew by $50.8 million,
of which, $38.0 million came from commercial real estate loans. 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. The following table sets forth the classification of loans by
type and mix as of the dates indicated:
-12-
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
TYPES OF LOANS: As of 6/30/99 As of 12/31/98
---------------------- -------------------------
Amount Percentage Amount Percentage
------ ---------- ------- ----------
<S> <C> <C> <C> <C>
Commercial loans $ 389,318 36.9% $370,539 38.5%
Commercial real estate loans 415,422 39.3 356,608 37.1
Residential real estate loans 199,549 18.9 184,158 19.2
Real estate construction loans 45,495 4.3 40,738 4.2
Installment loans 27,488 2.6 29,165 3.0
Other loans 203 0.0 269 0.1
-------------- -----------
Total loans - Gross 1,077,475 981,477
Allowance for loan losses (17,662) (1.7) (15,970) (1.7)
Unamortized deferred loan fees (3,626) (0.3) (3,631) (0.4)
-------------- --------- ----------- ---------
Total loans - Net $1,056,187 100.0% $961,876 100.0%
========== ====== ======== ======
</TABLE>
Recently, there have been signs of improvements in Asian economic
conditions. Management continues to believe that the Company's financial
condition and results of operations have not been adversely impacted 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, non-accrual loans, and OREO. The Company's non-performing
assets decreased $4.1 million or 14.5% to $24.1 million as of June 30, 1999,
compared with $28.2 million at year-end 1998. The decrease resulted from
reductions of $2.6 million in non-accrual loans, $1.0 million in loans past due
90 days or more and still accruing interest and $0.5 million in OREO. As a
percentage of total loans plus OREO, non-performing assets decreased to 2.22% at
June 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>
(Dollars in thousands)
NON-PERFORMING ASSETS: As of 6/30/99 As of 12/31/98
--------------- ---------------
<S> <C> <C>
Accruing loans past due 90 days or more $ 3,661 $ 4,683
Non-accrual loans 10,512 13,090
-------- --------
Total non-performing loans 14,173 17,773
Real estate acquired in foreclosure 9,965 10,454
-------- --------
Total non-performing assets $24,138 $28,227
======= =======
Accruing troubled debt restructurings 4,617 4,642
Non-performing assets as a percentage of total loans plus OREO 2.22% 2.85%
</TABLE>
The non-accrual loans of $10.5 million at June 30, 1999 consisted mainly of
$5.9 million in commercial real estate loans and $3.9 million in commercial
loans. The following tables present the type of properties securing the loans
and the type of businesses the borrowers engaged in under commercial real estate
and commercial non-accrual loan categories as of the dates indicated:
-13-
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
6/30/99 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 $ 454 $ 841 $ 348 $ 1,052
Commercial 5,253 1,576 5,533 2,613
Motel 186 30 1,501 30
UCC -0- 666 -0- -0-
TCD -0- -0- -0- 696
Others -0- -0- -0- 93
Unsecured -0- 739 -0- -0-
---------- --------- ---------- ----------
Total $ 5,893 $ 3,852 $ 7,382 $ 4,484
======== ======== ======== ========
(in thousands)
6/30/99 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 $ 147 $ 451 $ 187
Real estate management 3,671 -0- 3,903 35
Wholesale 209 650 209 1,021
Retail -0- -0- -0- 38
Food/Restaurant -0- 934 -0- 1,008
Import 289 175 -0- 918
Motel 453 -0- 1,315 -0-
Investments 355 -0- 375 -0-
Industrial -0- 854 -0- 310
Clothing -0- -0- 348 161
Trading -0- 490 -0- -0-
Others 730 602 781 806
--------- --------- --------- ---------
Total $ 5,893 $ 3,852 $ 7,382 $ 4,484
======== ======== ======== ========
</TABLE>
From the tables above, under the June 30, 1999 commercial real estate loan
category, the balance of $5.3 million in commercial loans represents five
credits, 95% of which were secured by first trust deeds on commercial buildings
and warehouses.
Under the June 30, 1999 commercial loan category, the balance of $1.6
million was comprised of 16 credits, a majority of which are less than $200,000
each. The collateral on these credits include primarily first trust deeds, as
well as second and third trust deeds on commercial buildings and warehouses.
Troubled debt restructurings stayed approximately the same at $4.6 million
as of June 30, 1999 and at year-end 1998. All of these restructured loans were
current under their revised terms as of June 30, 1999.
On June 30, 1999, the company had $26.8 million of loans, which were
considered impaired including $14.8 million of commercial loans and $11.9
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 June 30, 1999.
OTHER REAL ESTATE OWNED
The Company's OREO, net of a valuation allowance of $494,000, was carried
at $10.0 million as of June 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 first half of 1999, the Company acquired two properties in the
amount of $1.1 million and disposed of twelve properties totaling $1.6 million
with a net gain of $547,000. As of June 30, 1999 the Company owned 13 OREO
properties, which include land, commercial buildings, a motel 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 $77,000 to the provision for OREO
losses in the first half of 1999.
The Company recognized net income of $532,000 from operating its OREO
properties. In addition to the $547,000 net gains on sales of OREO properties,
the Company received $220,000 in rental income. These amounts were partially
offset by operating expenses of $158,000 and the provision for OREO losses of
$77,000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $17.7 million or 1.64% of total
loans as of June 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 $2.1 million in the first six
months of 1999, compared with $1.8 million for the same period of 1998.
Management believes the increase was prudent to cover additional inherent risk
from the growth of the Company's loan portfolio. The charge-offs of $1.1
million in the first half of 1999 were basically related to commercial and
commercial real estate loans and the recoveries of $0.7 million were largely
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: (Dollars in thousands)
Six months ended Year ended
6/30/99 12/31/98
----------------- ---------------
<S> <C> <C>
Balance at beginning of period $15,970 $15,379
Provision for loan losses 2,100 3,600
Loans charged-off (1,117) (3,519)
Recoveries of charged-off loans 709 510
--------- ---------
Balance at end of period $17,662 $15,970
======= =======
Average loans outstanding during the period $1,005,602 $907,639
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.08% 0.33%
Provision for loan losses to average loans
outstanding during the period (annualized) 0.42% 0.40%
Allowance to non-performing loans at period-end 124.62% 89.86%
Allowance to total loans at period-end 1.64% 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 June 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 first contribution for $265,000 upon execution of the
agreement.
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 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.
-16-
<PAGE>
DEPOSITS
Total deposits increased $37.1 million or 2.4% from $1,560.4 million at
year-end 1998 to $1,597.5 million at June 30, 1999. Time deposits over $100,000
("Jumbo CD's") increased $54.6 million while core deposits, defined as total
deposits minus Jumbo CD's and brokered deposits, decreased $17.5 million. The
decrease in core deposits resulted from decreases of $28.0 million in money
market deposits and $2.7 million in savings deposits which were offset by
increases of $6.1 million in demand deposits, $5.8 million in time deposits
under $100,000 and $1.3 million in NOW accounts. The sharp decrease in money
market deposits was primarily attributable to the average low interest rate
which declined 69 basis points from 2.30% to 1.61% comparing the first six
months of 1998 and 1999. Consequently the ratio of core deposits to total
deposits decreased from 60.32% at year-end 1998 to 57.82% at June 30, 1999. The
Company had no brokered deposits as of June 30, 1999.
Average total deposits grew $126.3 million or 8.7% to $1,583.2 million
comparing the first six months of 1998 and 1999. Of the $126.3 million, average
Jumbo CD's accounted for $78.3 million or 13.9% and average core deposits
accounted for $47.9 million or 5.4% with the most increase in average demand
deposits of $21.5 million or 13.3%.
Quarterly, average total deposits increased $125.9 million or 8.6% to
$1,590.7 million in the second quarter of 1999, compared with $1,464.8 million
in the same quarter of 1998. Approximately 70% of the quarterly increase in
average deposits came from Jumbo CD's which added $88.2 million or 15.5%.
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>
(Dollars in thousands)
As of 6/30/99 As of 12/31/98
----------------------------- ---------------------------
TYPES OF DEPOSITS: Amount Percentage Amount Percentage
------------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Demand $ 184,134 11.5% $ 178,068 11.4%
NOW accounts 116,271 7.3 114,982 7.4
Money market accounts 85,866 5.4 113,869 7.3
Savings deposits 204,625 12.8 207,365 13.3
Time deposits under $100,000 332,816 20.8 326,968 20.9
Time deposits of $100,000 or more 673,777 42.2 619,150 39.7
----------- -------- ----------- ---------
Total deposits $1,597,489 100.0% $1,560,402 100.0%
========== ====== ========== ======
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
2nd Qtr, 1999 2nd Qtr, 1998
----------------------------- ---------------------------
AVERAGE DEPOSITS: Amount Percentage Amount Percentage
---------------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Demand $ 180,073 11.3% $ 162,812 11.1%
NOW accounts 116,091 7.3 112,035 7.7
Money market accounts 93,212 5.9 95,162 6.5
Savings deposits 207,109 13.0 204,012 13.9
Time deposits under $100,000 335,080 21.1 319,843 21.8
Time deposits of $100,000 or more 659,181 41.4 570,936 39.0
----------- -------- ------------------------
Total deposits $1,590,746 100.0% $1,464,800 100.0%
========== ====== ========== ======
(Dollars in thousands)
YTD 6/30/99 YTD 6/30/98
-----------------------------------------------------------
AVERAGE DEPOSITS: Amount Percentage Amount Percentage
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Demand $ 183,470 11.6% $ 162,006 11.1%
NOW accounts 115,216 7.3 112,086 7.7
Money market accounts 102,165 6.4 95,258 6.5
Savings deposits 205,740 13.0 205,118 14.1
Time deposits under $100,000 334,126 21.1 318,306 21.9
Time deposits of $100,000 or more 642,505 40.6 564,194 38.7
----------- -------- ------------------------
Total deposits $1,583,222 100.0% $1,456,968 100.0%
========== ====== ========== ======
</TABLE>
CAPITAL RESOURCES
Stockholders' equity amounted to $166.1 million or 9.12% of total assets
as of June 30, 1999, compared with $156.7 million or 8.80% of total assets at
year-end 1998. The increase of $9.5 million or 6.1% in stockholders' equity
was primarily from an addition of $13.7 million from net income less
dividends paid of $3.5 million, and $775,000 from issuance of additional
common shares through the Dividend Reinvestment Plan. These amounts were
partially offset by an increase of $1.5 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 and July 1999, respectively, on 8,998,412 shares and
9,010,829 shares outstanding, respectively. Total cash dividends paid in
1999, including the $1.9 million paid in July 1999, amounted to $5.4 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 June 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 June 30, 1999 and December 31, 1998:
-18-
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
COMPANY
--------------------------------------------------------------
As of 6/30/99 As of 12/31/98
--------------------------- -----------------------------
Balance Percentage Balance Percentage
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 158,211(1) 11.36% $ 146,874(2) 11.44%
Tier 1 capital minimum requirement 55,702 4.00 51,372 4.00
---------- ---------- ----------- ----------
Excess $ 102,509 7.36% $ 95,502 7.44%
========== ========== ========== ==========
Total capital (to risk-weighted assets) $ 175,621(1) 12.61% $ 162,844(2) 12.68%
Total capital minimum requirement 111,404 8.00 102,744 8.00
---------- ---------- ---------- ----------
Excess $ 64,217 4.61% $ 60,100 4.68%
========== ========== ========== ==========
Risk-weighted assets $1,392,554 $1,284,296
Tier 1 capital (to average assets)
- Leverage ratio $ 158,211(1) 8.67% $ 146,874(2) 8.45%
Minimum leverage requirement 73,022 4.00 69,508 4.00
---------- ---------- ---------- ----------
Excess $ 85,189 4.67% $ 77,366 4.45%
========== ========== ========== ==========
Total average assets $1,825,556 $1,737,710
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
BANK
-------------------------------------------------------------
As of 6/30/99 As of 12/31/98
---------------------------- -----------------------------
Balance Percentage Balance Percentage
----------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 152,499(1) 10.95% $ 141,834(2) 11.04%
Tier 1 capital minimum requirement 55,702 4.00 51,372 4.00
---------- ---------- ----------- ----------
Excess $ 96,797 6.95% $ 90,462 7.04%
========== ========== ========== ==========
Total capital (to risk-weighted assets) $ 169,909(1) 12.20% $ 157,804(2) 12.29%
Total capital minimum requirement 111,404 8.00 102,744 8.00
---------- ---------- ---------- ----------
Excess $ 58,505 4.20% $ 55,060 4.29%
========== ========== ========== ==========
Risk-weighted assets $1,392,548 $1,284,296
Tier 1 capital (to average assets)
- Leverage ratio $ 152,499(1) 8.35% $ 141,834(2) 8.16%
Minimum leverage requirement 73,059 4.00 69,508 4.00
---------- ---------- ---------- ----------
Excess $ 79,440 4.35% $ 72,326 4.16%
========== ========== ========== ==========
Total average assets $1,826,468 $1,737,709
</TABLE>
1 Excluding the unrealized holding losses on securities available-for-sale of
$332,000, and goodwill of $8,252,000.
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
moderately from 46.04% at year-end 1998 to 40.16% at June 30, 1999.
-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 approximately $100 million 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 June 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 June
30, 1999, the Company was asset sensitive with a cumulative gap ratio of a
positive 11.55% within three months, and liability sensitive with a
cumulative gap ratio of a negative 15.29% within a 1-year period. This
compared with a positive 15.61% within three months, and a negative 11.48%
within a 1-year period as of 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 June 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 June 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 August
10, 1999 was approximately $633,000.
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, which met the expected timeline for completion
on June 30, 1999, has also been reviewed and deemed satisfactory by the
Company's regulatory agencies.
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
The Annual Meeting of stockholders was held on April 19, 1999. At the 1999
Annual Meeting, the stockholders approved to elect the following three Class III
directors to serve until the 2002 annual meeting of stockholders:
George T.M. Ching
Wing K. Fat
Wilbur K. Woo
The number of votes cast for or withheld, with respect to the
election of each Class III Director was as follows:
<TABLE>
<CAPTION>
BROKER
FOR WITHHELD AGAINST NON-VOTE
---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
George T.M. Ching 6,673,659 161,185 -0- -0-
Wing K. Fat 6,681,935 152,909 -0- -0-
Wilbur K. Woo 6,677,680 157,164 -0- -0-
</TABLE>
Other directors whose terms of office continued after the
meeting:
<TABLE>
<CAPTION>
Term Ending in 2000 (Class I) Term Ending in 2001 (Class II)
----------------------------- ------------------------------
<S> <C>
Michael M.Y. Chang Ralph Roy Buon-Cristiani
Patrick S.D. Lee Kelly L. Chan
Anthony M. Tang Dunson K. Cheng
Thomas G. Tartaglia Chi-Hung Joseph Poon
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
-24-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
27 Financial Data Schedule
Form 8-K:
None
-25-
<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: August 13, 1999 By /s/ DUNSON K. CHENG
----------------------
Dunson K. Cheng
Chairman and President
Date: August 13, 1999 by /s/ ANTHONY M. TANG
----------------------
Anthony M. Tang
Chief Financial Officer
-26-
<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> JAN-01-1999
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0
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