<PAGE>
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, 2000
-------------------------------------------------
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
--------------------------------------------- ---------------------
(State of other jurisdiction of incorporation (I.R.S. Employer
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
--- ---
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, 9,063,422 shares outstanding as of August 3,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <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..........26
PART II - OTHER INFORMATION ..............................................................27
Item 1. Legal Proceedings...................................................27
Item 2. Changes in Securities and Use of Proceeds...........................27
Item 3. Defaults upon Senior Securities.....................................27
Item 4. Submission of Matters to a Vote of Security Holders.................27
Item 5. Other Information...................................................28
Item 6. Exhibits and Reports on Form 8-K....................................28
SIGNATURES ...........................................................................29
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE>
CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, 2000 Dec. 31, 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 57,076 $ 59,081
Federal funds sold and securities purchased
under agreements to resell 8,000 5,000
-------------- -------------
Cash and cash equivalents 65,076 64,081
Securities available-for-sale (amortized cost
of $251,412 in 2000 and $162,728 in 1999) 249,971 160,991
Securities held-to-maturity (estimated fair
value of $362,464 in 2000 and $416,827 in 1999) 372,626 426,332
Loans (net of allowance for loan losses of
$20,907 in 2000 and $19,502 in 1999) 1,342,349 1,245,585
Other real estate owned, net 1,400 4,337
Investments in real estate, net 17,098 16,987
Premises and equipment, net 29,708 25,299
Customers' liability on acceptances 25,016 13,721
Accrued interest receivable 14,595 13,150
Goodwill 10,146 10,559
Other assets 16,168 14,882
-------------- -------------
Total assets $ 2,144,153 $ 1,995,924
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 230,156 $ 195,140
Interest bearing accounts
NOW accounts 122,678 121,394
Money market deposits 106,340 97,821
Savings deposits 235,184 236,764
Time deposits under $100 370,326 362,553
Time deposits of $100 or more 751,647 708,064
-------------- -------------
Total deposits 1,816,331 1,721,736
Federal funds purchased and securities sold under
agreements to repurchase 72,734 46,990
Advances from Federal Home Loan Bank 30,000 30,000
Acceptances outstanding 25,016 13,721
Other liabilities 6,295 4,368
-------------- -------------
Total liabilities 1,950,376 1,816,815
Stockholders' equity
Preferred stock, $.01 par value; 10,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, 9,054,782 and 9,033,583 shares issued
and outstanding in 2000 and 1999, respectively 91 90
Additional paid-in-capital 65,382 64,529
Accumulated other comprehensive loss, net (835) (1,006)
Retained earnings 129,139 115,496
-------------- --------------
Total stockholders' equity 193,777 179,109
-------------- --------------
Total liabilities and stockholders' equity $ 2,144,153 $ 1,995,924
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CATHAY BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
2nd Qtr 2nd Qtr YTD YTD
June 2000 June 1999 June 2000 June 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 30,731 $ 22,443 $ 59,114 $ 43,078
Interest on securities available-for-sale 3,399 2,558 5,899 5,808
Interest on securities held-to-maturity 5,959 6,962 12,256 13,622
Interest on Federal funds sold and securities
purchased under agreements to resell 190 574 391 1,538
Interest on deposits with banks 13 1 20 6
---------- ---------- ---------- ----------
Total interest income 40,292 32,538 77,680 64,052
---------- ---------- ---------- ----------
INTEREST EXPENSE
Time deposits of $100 or more 10,069 8,185 19,249 15,924
Other deposits 6,369 4,953 12,299 10,042
Other borrowed funds 1,423 1,140 2,407 2,318
---------- ---------- ---------- ----------
Total interest expense 17,861 14,278 33,955 28,284
---------- ---------- ---------- ----------
Net interest income before provision for loan losses 22,431 18,260 43,725 35,768
Provision for loan losses 1,050 1,050 2,100 2,100
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 21,381 17,210 41,625 33,668
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Securities gains(losses) -- 19 -- (13)
Letter of credit commissions 641 579 1,165 1,065
Service charges 1,107 880 2,145 1,824
Other operating income 1,047 703 2,234 1,223
---------- ---------- ---------- ----------
Total non-interest income 2,795 2,181 5,544 4,099
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 5,470 4,684 10,903 9,348
Occupancy expense 818 605 1,598 1,277
Computer and equipment expense 689 637 1,356 1,258
Professional services expense 782 845 1,640 1,770
FDIC and State assessments 144 99 256 196
Marketing expense 405 255 669 568
Real estate operations, net (79) (79) (41) (532)
Operations of investments in real estate 248 (305) 440 (274)
Other operating expense 819 732 1,727 1,547
---------- ---------- ---------- ----------
Total non-interest expense 9,296 7,473 18,548 15,158
---------- ---------- ---------- ----------
Income before income tax expense 14,880 11,918 28,621 22,609
Income tax expense 5,793 4,733 11,180 8,921
---------- ---------- ---------- ----------
Net Income 9,087 7,185 17,441 13,688
---------- ---------- ---------- ----------
Other comprehensive income(loss), net of tax:
Unrealized holding gain(loss) arising during the period 336 (659) 171 (1,534)
Less: reclassification adjustment for realized gain
(loss) on securities included in net income -- 19 -- (13)
---------- ---------- ---------- ----------
Total other comprehensive income(loss), net of tax 336 (678) 171 (1,521)
---------- ---------- ---------- ----------
Total comprehensive income $ 9,423 $ 6,507 $ 17,612 $ 12,167
========== ========== ========== ==========
Net income per common share
Basic $ 1.00 $ 0.80 $ 1.93 $ 1.52
Diluted $ 1.00 $ 0.80 $ 1.93 $ 1.52
Cash dividends paid per common share $ 0.210 $ 0.210 $ 0.420 $ 0.385
Basic average common shares outstanding 9,051,823 9,007,496 9,046,779 9,001,770
Diluted average common shares outstanding 9,065,163 9,011,491 9,058,288 9,006,510
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
CATHAY BANCORP, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,441 $ 13,688
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,100 2,100
Provision for losses on other real estate owned 63 77
Depreciation 649 695
Net gain on sales of other real estate owned (234) (547)
Gain on sale of investments in real estate -- (394)
Loss on sales and calls of investment securities -- 13
Amortization and accretion of investment
security premiums, net (711) 440
Amortization of goodwill 413 338
Increase (decrease) in deferred loan fees, net 268 (5)
Decrease in accrued interest receivable (1,445) (1,150)
Increase in other assets, net (1,286) (145)
Increase (decrease) in other liabilities 1,927 (924)
--------- ---------
Total adjustments 1,744 498
--------- ---------
Net cash provided by operating activities 19,185 14,186
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (432,552) (428,625)
Proceeds from maturity and call of investment securities available-for-sale 374,236 524,262
Proceeds from sale of investment securities available-for-sale 23,007 --
Proceeds from repayments of mortgage-backed securities
available-for-sale 2,504 6,515
Purchase of investment securities held-to-maturity (21,498) (45,057)
Proceeds from maturity and call of investment securities held-to-maturity 474 810
Purchase of mortgage-backed securities held-to-maturity -- (38,157)
Proceeds from repayments of mortgage-backed securities held-to-maturity 19,437 45,808
Proceeds from sale of loans
Net increase in loans (98,613) (96,857)
Purchase of premises and equipment (5,058) (550)
Proceeds from sale of other real estate owned 2,589 1,410
Proceeds from sale of investments in real estate -- 1,026
Net increase in investments in real estate (111) (15,121)
--------- ---------
Net cash used in investing activities (135,585) (44,536)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts,
money market and savings deposits 43,239 (23,388)
Net increase in time deposits 51,356 60,475
Net increase (decrease) in Federal funds purchased and 25,744 (9,021)
securities sold under agreements to repurchase
Cash dividends (3,797) (3,463)
Proceeds from shares issued under Dividend Reinvestment Plan 828 775
Proceeds from exercise of stock options 25 --
--------- ---------
Net cash provided by financing activities 117,395 25,378
--------- ---------
Increase in cash and cash equivalents 995 (4,972)
Cash and cash equivalents, beginning of the period 64,081 81,656
--------- ---------
Cash and cash equivalents, end of the period $ 65,076 $ 76,684
--------- ---------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 33,559 $ 28,548
Income taxes $ 11,944 $ 6,950
Non-cash investing activities:
Transfers to securities available-for-sale
within 90 days of maturity $ 55,075 $ 426
Net change in unrealized holding gain (loss) on securities
available-for-sale, net of tax $ 171 $ (1,521)
Transfers to other real estate owned $ 826 $ 776
Loans to facilitate the sale of other real estate owned $ 1,345 $ 325
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
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, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. 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, 1999.
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 subsequently
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 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. Under SFAS No. 133, an
entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk. 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
<PAGE>
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, 1999 of Cathay Bancorp, Inc. ("Bancorp") and its subsidiary Cathay
Bank ("the Bank"), together ("the Company" or "we").
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, adverse developments or conditions related
to or arising from expansion into new market areas, fluctuations in interest
rates, demographic changes, increases in competition, deterioration in asset or
credit quality, changes in the availability of capital, adverse regulatory
developments, changes in business strategy or development plans, general
economic or business conditions and other factors discussed in the section
entitled "Factors that May Affect Future Results" in our Annual Report on Form
10-K for the year ended December 31, 1999. 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. We have no
intention and undertake 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
We reported net income of $9.1 million or $1.00 per diluted common share
for the second quarter of 2000, compared with $7.2 million or $0.80 per diluted
common share for the same quarter of 1999. Income before income tax expense
increased $3.0 million to $14.9 million for the second quarter of 2000, from
$11.9 million for the corresponding quarter of 1999. The 25% increase in 2000
second quarter income before income tax expense was primarily attributable to a
$4.2 million increase in net interest income before provision for loan losses.
Non-interest income grew by $614,000. Partially offsetting the above increases
was a $1.8 million increase in non-interest expense.
The annualized return on average assets and return on average stockholders'
equity for the second quarter of 2000 and 1999 are presented below:
<TABLE>
<CAPTION>
2ND QTR, 2000 2ND QTR, 1999
------------- -------------
<S> <C> <C>
Return on average assets 1.74% 1.57%
Return on average stockholders' equity 19.60% 17.77%
</TABLE>
8
<PAGE>
For the six months ended June 30, 2000, we reported net income of $17.4
million or $1.93 per diluted common share, compared with $13.7 million or $1.52
per diluted common share for the same period of 1999. Income before income tax
expense grew by $6.0 million or 27% to $28.6 million in the first six months of
2000 from the same period a year ago. The increase was resulted from a
combination of: 1) a $8.0 million growth in net interest income before provision
for loan losses; 2) a $1.4 million growth in non-interest income; and 3) a $3.4
million increase in non-interest expense.
The annualized return on average assets and return on average stockholders'
equity for the first six months of 2000 and 1999 are presented below:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Return on average assets 1.70% 1.53%
Return on average stockholders' equity 19.14% 17.22%
</TABLE>
NET INTEREST INCOME
2ND QUARTER
Net interest income before provision for loan losses totaled $22.4 million
for the second quarter of 2000, which represents an increase of $4.2 million or
23% over that of $18.3 million for the corresponding quarter of 1999. On a
taxable equivalent basis, net interest income totaled $22.9 million for the
second quarter of 2000, which represents an increase of $4.2 million or 22% over
that of $18.7 million for the same period of 1999.
The increase in net interest income in the second quarter of 2000 is
discussed below:
INTEREST INCOME
- Interest income increased $7.8 million or 24% to $40.3 million primarily
due to an increase of $8.3 million from interest income on loans.
- The $8.3 million increase in interest income on loans was attributable to
the following:
1. An increase of $283.5 million or 27% in average net loans from
$1,033.3 million to $1,316.8 million which added $6.7 million to
interest income. The increase in average loans were funded by growth in
deposits, proceeds from matured securities, repurchase agreements, and
cash.
2. An increase of 68 basis points in average loan yield from 8.71% to
9.39%, which added $1.6 million to interest income. The increase in
average loan yield was mainly a result of six consecutive interest rate
increases by the Federal Reserve Board during the past 12 months, which
lead to a 150 basis point increase in our average reference rate from
8.00% to 9.50%.
- A change in the mix of interest earning assets. Due to continued strong
loan demand in the second quarter of 2000, average loans, which yield
higher than other types of investments, increased as a percentage of total
interest earning assets from 59.9% to 67.7%. Conversely, average securities
decreased from 37.4% to 31.6% and average Federal funds sold decreased from
2.7% to 0.6%.
9
<PAGE>
- Consequently, the average taxable equivalent yield on interest earning
assets increased 75 basis points from 7.67% to 8.42%.
INTEREST EXPENSE
- Interest expense increased $3.6 million or 25% to $17.9 million, which was
primarily attributable to an increase of $3.3 million in interest expense
on interest bearing deposits.
- Average time deposits grew by $119.5 million or 12% to $1,113.8 million, of
which, $83.9 million or 70% were from time deposits over $100,000.
1. The increase in average time deposits contributed an additional $1.5
million to interest expense
2. The increase of 56 basis points in average rate on time deposits from
4.70% to 5.26% contributed an additional $1.4 million to interest
expense
- Average cost of funds increased 48 basis points from 3.81% to 4.29%.
- Due to the Bank being asset sensitive in the short term and the lagging
effect on time deposits from interest rate increases, the magnitude of the
increase in the cost of funds was less than that of the return on interest
earning assets.
NET INTEREST MARGIN
- As a result of the facts noted above, net interest margin, defined as
taxable equivalent net interest income to average interest earning assets,
increased 38 basis points from 4.35% to 4.73%.
YEAR-TO-DATE
For the six months ended June 30, 2000, net interest income before
provision for loan losses amounted to $43.7 million, compared with $35.8 million
for the same period in 1999. On a taxable equivalent basis, net interest income
before provision for loan losses amounted to $44.6 million for the six months
ended June 30, 2000, compared with $36.6 million for the same period a year ago.
The following points summarize the factors impacting the increase in the
year-to-date net interest income:
- Average net loans grew by $301.7 million to $1,290.5 million for the first
six months of 2000. This increase due to volume contributed an additional
$14.1 million to interest income.
- Average yield on loans climbed 42 basis points from 8.79% to 9.21%. This
increase in average loan yield contributed an additional $1.9 million to
interest income.
- The return on average interest earning assets increased 66 basis points
from 7.64% to 8.30%.
- Average time deposits rose $121.7 million to $1,098.3 million. This
increase in volume added another $3.0 million to interest expense.
- Average cost on time deposits went up 38 basis points from 4.74% to 5.12%,
which added another $2.0 million to interest expense.
- Cost of funds advanced 35 basis points from 3.81% to 4.16%.
- Net interest margin increased 40 basis points from 4.31% for the first six
months of 1999 to 4.71% for the same period of 2000.
10
<PAGE>
NON-INTEREST INCOME
2ND QUARTER
Non-interest income increased $614,000 or 28% to $2.8 million for the
second quarter of 2000, compared with $2.2 million for the same quarter of 1999.
A notable portion of the increase was due to the following items:
- Wire transfer fees, due to increased transaction volume arising primarily
from New York branches
- Safe deposit box income
- Fee income from Cathay Global Investment Services' alternative investment
program
YEAR-TO-DATE
Non-interest income totaled $5.5 million for the first six months of 2000,
which represents a $1.4 million or 35% increase over the $4.1 million for the
same period of 1999. In addition to the items mentioned in the previous
paragraph, fees and charges related to loan and fee income from financial
guarantees contributed to the increase in the year-to-date non-interest income.
NON-INTEREST EXPENSE
2ND QUARTER
Non-interest expense amounted to $9.3 million for the second quarter of
2000 as compared to $7.5 million for the same quarter of 1999. The $1.8 million
or 24% increase was substantially attributable to the new operations of the two
New York branches and the Diamond Bar branch. The more significant items are
discussed below:
- An increase of $786,000 in salaries and employee benefits. The payroll
expense for New York branches accounted for the majority of the salary
increase. Moreover, the Bank's officers received an annual salary
adjustment in April.
- An increase of $553,000 in operations of investments in real estate. The
Bank recorded an expense of $248,000 in operations of investments in real
estate related to low income housing in the second quarter of 2000 while a
negative expense of $305,000 was booked in the same quarter of 1999 because
of a $394,000 gain on sale of a real estate investment property.
- An increase of $213,000 in occupancy expense resulting mostly from the rent
expense of the New York branches.
- An increase of $150,000 in marketing expense primarily due to the grand
openings of the Diamond Bar and the New York branches and the related
promotions.
The efficiency ratio was slightly higher at 36.85% for the second quarter
of 2000 as compared to 36.56% for the same quarter of 1999.
YEAR-TO-DATE
Non-interest expense for the six months ended June 30, 2000 was $18.5
million, compared with $15.1 million for the same period in 1999. In addition to
higher expenses of $1.6 million in
11
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salaries and employee benefits, $714,000 in operations of investments in real
estate, $321,000 in occupancy expense and $101,000 in marketing expense for
the same reasons as explained previously, the following items also
contributed to the $3.4 million or 22% increase in the year-to date
non-interest expense:
- An increase of $491,000 in net other real estate owned ("OREO") expense.
This was resulted from a decrease of $313,000 in net gains on sales of OREO
and a decrease of $182,000 in OREO rental income.
- An increase of $180,000 in other operating expense largely from higher
amortization of goodwill coupled with higher contributions.
The efficiency ratio for the six months ended June 30, 2000 improved to
37.65% as compared to 38.02% for the same period a year ago.
FINANCIAL CONDITION OVERVIEW
We continued our steady growth during the first six months of 2000. The
following are the major balance sheet items which are discussed in detail later
in this report:
- Total assets increased 7% to $2,144.2 million from $1,995.9 million at
year-end 1999.
- Total net loans grew by 8% to $1,342.3 million from $1,245.6 million at
year-end 1999.
- Securities available-for-sale increased 55% to $250.0 million from $161.0
million at year-end 1999.
- Securities held-to-maturity decreased 13% to $372.6 million from $426.3
million at year-end 1999.
- Total deposits increased 5% to $1,816.3 million from $1,721.7 million at
year-end 1999.
- Stockholders' equity rose 8% to $193.8 million from $179.1 million at
year-end 1999.
INTEREST EARNING ASSET MIX
The tables below present the components of interest earning assets as of
the dates and for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
INTEREST EARNING ASSETS: AS OF 6/30/00 AS OF 12/31/99
----------------------------- -----------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 8,000 0.4% $ 5,000 0.3%
Securities available-for-sale 249,971 12.6 160,991 8.8
Securities held-to-maturity 372,626 18.9 426,332 23.2
Loans, net of deferred loan fees 1,363,256 69.1 1,265,087 68.8
Allowance for loan losses (20,907) (1.1) (19,502) (1.1)
------------ ------------ ------------ ------------
Loans, net 1,342,349 68.0 1,245,585 67.7
Deposits with banks 1,269 0.1 568 -0-
------------ ------------ ------------ ------------
Total interest earning assets $ 1,974,215 100.0% $ 1,838,476 100.0%
============ ============ ============ ============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
AVERAGE INTEREST EARNING ASSETS: 2ND QTR, 2000 2ND QTR, 1999
----------------------------- -----------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 12,181 0.6% $ 45,621 2.7%
Securities available-for-sale 214,206 11.0 179,702 10.4
Securities held-to-maturity 400,081 20.6 465,445 27.0
Loans, net of deferred loan fees 1,337,472 68.8 1,050,368 60.9
Allowance for loan losses (20,679) (1.1) (17,080) (1.0)
------------ ------------ ------------ ------------
Loans, net 1,316,793 67.7 1,033,288 59.9
Deposits with banks 1,322 0.1 279 -0-
------------ ------------ ------------ ------------
Total interest earning assets $ 1,944,583 100.0% $ 1,724,335 100.0%
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
AVERAGE INTEREST EARNING ASSETS: JUNE 30, 2000 JUNE 30, 1999
----------------------------- -----------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 13,088 0.7% $ 61,356 3.6%
Securities available-for-sale 187,150 9.8 205,273 12.0
Securities held-to-maturity 411,133 21.6 455,434 26.6
Loans, net of deferred loan fees 1,310,703 68.9 1,005,602 58.8
Allowance for loan losses (20,244) (1.1) (16,803) (1.0)
------------ ------------ ------------ ------------
Loans, net 1,290,459 67.8 988,799 57.8
Deposits with banks 1,194 0.1 421 -0-
------------ ------------ ------------ ------------
Total interest earning assets $ 1,903,024 100.0% $ 1,711,283 100.0%
============ ============ ============ ============
</TABLE>
From the tables above, we can see that:
- Loan demand continued to be strong during the first two quarters of 2000.
- The decrease in average securities as a whole in the second quarter as well
as the first six months of 2000 was due to proceeds from some matured or
called securities not being reinvested to meet strong loan demand.
- As a percentage of total interest earning assets, average net loans
increased from 59.9% in the second quarter of 1999 to 67.7% in the second
quarter of 2000. In the meantime all other types of interest earning assets
decreased from 40.1% to 32.2%. The change in the interest earning asset mix
from other types of investments to loans was favorable to our net interest
margin as can be evidenced by improved net interest margin.
SECURITIES
As of June 30, 2000, unrealized holding losses on securities
available-for-sale were $1.4 million compared with $1.7 million at year-end
1999. These unrealized losses, net of tax effect, were included in the Company's
stockholders' equity for the periods reported. The unrealized losses, net of
tax, were $835,000 at June 30, 2000 and $1.0 million at year-end 1999. The
unrealized holding losses resulted mainly from the increasing interest rate
environment.
13
<PAGE>
The average taxable equivalent yield on securities rose 20 basis points to
6.40% in the second quarter of 2000, compared to 6.20% for the same quarter in
1999 as some matured securities were replaced at higher prevailing interest
rates.
The following tables summarize the composition and maturity distribution of
the investment portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AS OF 6/30/00 (IN THOUSANDS)
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE: COST GAINS LOSSES VALUE
---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
FAIR VALUE
U.S. Treasury securities $ 14,997 $ -0- $ -0- $ 14,997
U.S. government agencies 79,844 263 21 80,086
State and municipal securities 525 -0- -0- 525
Mortgage-backed securities 12,660 -0- 215 12,445
Collateralized mortgage obligations 6,682 -0- 145 6,537
Assets-backed securities 13,454 -0- 534 12,920
Federal Home Loan Bank Stock 5,418 -0- -0- 5,418
Commercial paper 49,872 -0- 10 49,862
Corporate bonds 59,664 126 934 58,856
Equity securities 8,296 29 -0- 8,325
-------- --------- -------- --------
Total $251,412 $ 418 $ 1,859 $249,971
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF 12/31/99 (IN THOUSANDS)
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE: COST GAINS LOSSES VALUE
---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 25 $ -0- $ -0- $ 25
U.S. government agencies 40,553 3 338 40,218
State and municipal securities 540 -0- -0- 540
Mortgage-backed securities 14,813 1 181 14,633
Collateralized mortgage obligations 7,945 -0- 121 7,824
Assets-backed securities 16,867 -0- 419 16,448
Federal Home Loan Bank stock 6,851 -0- -0- 6,851
Commercial paper 40,100 -0- 24 40,076
Corporate bonds 35,034 13 671 34,376
-------- --------- -------- --------
Total $162,728 $ 17 $ 1,754 $160,991
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF 6/30/00 (IN THOUSANDS)
-------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
SECURITIES HELD-TO-MATURITY: VALUE GAINS LOSSES VALUE
---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 54,666 $ 1 $ 1,522 $ 53,145
State and municipal securities 69,780 671 2,048 68,403
Mortgage-backed securities 121,118 -0- 3,637 117,481
Collateralized mortgage obligations 56,051 2 950 55,103
Assets-backed securities 19,692 -0- 233 19,459
Corporate bonds 51,319 -0- 2,446 48,873
-------- -------- -------- --------
Total $372,626 $ 674 $ 10,836 $362,464
======== ======== ======== ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AS OF 12/31/99 (IN THOUSANDS)
-------------------------------------------------------------------
Carrying Gross Gross Estimated
SECURITIES HELD-TO-MATURITY: Value Unrealized Gains Unrealized Losses Fair Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 24,998 $ 114 $ -0- $ 25,112
U.S. government agencies 64,373 79 1,274 63,178
State and municipal securities 68,834 375 3,193 66,016
Mortgage-backed securities 133,282 53 2,809 130,526
Collateralized mortgage obligations 63,397 3 791 62,609
Assets-backed securities 19,999 -0- 209 19,790
Corporate bonds 51,449 37 1,890 49,596
--------- -------- -------- ----------
Total $426,332 $ 661 $10,166 $416,827
======== ====== ======= ========
</TABLE>
SECURITIES PORTFOLIO MATURITY DISTRIBUTION:
<TABLE>
<CAPTION>
AS OF 6/30/00 (IN THOUSANDS)
--------------------------------------------------------------------------
1 Year After 1 But After 5 But Over
SECURITIES AVAILABLE-FOR-SALE: or Less Within 5 Years Within 10 Years 10 Years Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 14,997 $ -0- $ -0- $ -0- $ 14,997
U.S. government agencies 44,281 16,723 19,082 -0- 80,086
State and municipal securities 525 -0- -0- -0- 525
Mortgage-backed securities* 1,874 626 1,822 8,123 12,445
Collateralized mortgage obligations* -0- -0- 2,953 3,584 6,537
Assets-backed securities* -0- 3,452 9,468 -0- 12,920
Federal Home Loan Bank stock 5,418 -0- -0- -0- 5,418
Commercial paper 49,862 -0- -0- -0- 49,862
Corporate bonds 11,400 38,035 9,421 -0- 58,856
Equity securities 8,325 -0- -0- -0- 8,325
---------- ----------- ----------- ----------- -----------
Total $136,682 $58,836 $42,746 $11,707 $249,971
======== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF 6/30/00 (IN THOUSANDS)
------------------------------------------------------------------------
1 Year After 1 But After 5 But Over
SECURITIES HELD-TO-MATURITY: or Less Within 5 Years Within 10 Years 10 Years Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government agencies $ -0- $ 54,666 $ -0- $ -0- $ 54,666
State and municipal securities 2,177 8,923 23,819 34,861 69,780
Mortgage-backed securities* 3,925 10,651 34,669 71,873 121,118
Collateralized mortgage obligations* -0- -0- 44,481 11,570 56,051
Assets-backed securities* -0- 19,692 -0- -0- 19,692
Corporate bonds -0- 46,282 5,037 -0- 51,319
----------- ---------- ----------- ------------- ----------
Total $ 6,102 $140,214 $108,006 $118,304 $372,626
======== ======== ======== ======== ========
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
15
<PAGE>
LOANS
Our loan demand remained strong in the first two quarters of 2000. Total
gross loans grew by $98.4 million or 8% to $1,367.1 million at June 30, 2000,
compared with $1,268.7 million at year-end 1999.
The growth was primarily attributable to commercial mortgage loans and
secondarily, real estate construction loans. The continued growth in the
California economy and favorable economic conditions in the Houston area, have
led to strong real estate markets and demand in these types of loans. Management
believes this trend will continue in the California market, although the demand
in the Houston market has slowed down recently. Total construction loan
commitment outstanding was approximately $67.8 million as of June 30, 2000.
The following table sets forth the classification of loans by type and mix
as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
As of 6/30/00 As of 12/31/99
------------------------- -----------------------
TYPES OF LOANS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Commercial loans $ 404,780 30.2% $ 395,138 31.7%
Residential mortgage loans 213,377 15.9 207,568 16.7
Commercial mortgage loans 628,362 46.8 577,541 46.4
Real estate construction loans 92,962 6.9 62,516 5.0
Installment loans 27,326 2.1 25,498 2.1
Other loans 317 0.0 419 0.0
------------- -------------
Total loans - Gross 1,367,124 1,268,680
Allowance for loan losses (20,907) (1.6) (19,502) (1.6)
Unamortized deferred loan fees (3,868) (0.3) (3,593) (0.3)
-------------- -------- --------------- ------
Total loans - Net $1,342,349 100.0% $1,245,585 100.0%
========== ====== ========== ======
</TABLE>
RISK ELEMENTS OF THE LOAN PORTFOLIO
NON-PERFORMING ASSETS
Non-performing assets include loans past due 90 days or more and still
accruing interest, nonaccrual loans, and OREO.
Our non-performing assets decreased $5.6 million or 26% to $16.2 million at
June 30, 2000 as compared to $21.8 million at year-end 1999. OREO was reduced by
$2.9 million, nonaccrual loans decreased $1.9 million and loans past due 90 days
or more and still accruing interest fell $738,000 during the first six months of
2000. As a percentage of gross loans plus OREO, our non-performing assets
decreased to 1.18% at June 30, 2000 from 1.71% at year-end 1999.
16
<PAGE>
The non-performing loan coverage ratio, defined as the allowance for loan
losses to non-performing loans, increased to 141.26% at June 30, 2000, which was
considerably higher than that of 111.95% at year-end 1999. This was primarily
due to the reduction of $2.6 million in the non-performing loans.
The following table presents the breakdown of non-performing assets by
categories as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
6/30/00 12/31/99
-------- --------
<S> <C> <C>
Accruing loans past due 90 days or more $ 2,986 $ 3,724
Nonaccrual loans 11,814 13,696
-------- --------
Total non-performing loans 14,800 17,420
Real estate acquired in foreclosure 1,400 4,337
-------- --------
Total non-performing assets $16,200 $21,757
======== ========
Accruing troubled debt restructurings 4,559 4,581
Non-performing assets as a percentage of gross loans plus OREO 1.18% 1.71%
Allowance for loan losses as a percentage of non-performing loans 141.26% 111.95%
</TABLE>
NONACCRUAL LOANS
The nonaccrual loans of $11.8 million at June 30, 2000 consisted mainly of
$8.0 million in commercial mortgage loans and $3.2 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 mortgage and
commercial nonaccrual loan categories as of the dates indicated:
<TABLE>
<CAPTION>
(In thousands)
6/30/00 12/31/99
----------------------------------------------------------
Nonaccrual Loan Secured by Real Estate Property
----------------------------------------------------------
Commercial Commercial
TYPE OF PROPERTY: Mortgage Commercial Mortgage Commercial
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Single/multi-family residence $ 1,073 $ 496 $ 1,014 $ 628
Commercial 3,921 1,892 4,971 5,425
Land 2,989 30 -0- -0-
Others -0- 430 186 307
Unsecured -0- 317 -0- 392
----------- ----------- ---------- ----------
Total $ 7,983 $ 3,165 $ 6,171 $ 6,752
=========== =========== ========== ==========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
6/30/00 12/31/99
Nonaccrual Loan Balance
---------------------------------------------------------
Commercial Commercial
TYPE OF BUSINESS: Mortgage Commercial Mortgage Commercial
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate development $ 2,989 $ 112 $ 354 $ 347
Real estate management 3,607 50 4,366 100
Wholesale/retail -0- 1,272 -0- 896
Food/Restaurant -0- 879 -0- 889
Import 332 -0- 621 3,307
Motel 391 -0- 425 -0-
Investments 314 -0- 334 -0-
Manufacturing -0- 250 -0- 270
Others 350 602 71 943
--------- --------- ----------- ----------
Total $ 7,983 $ 3,165 $ 6,171 $ 6,752
========= ========= =========== ==========
</TABLE>
COMMERCIAL MORTGAGE NONACCRUAL LOANS
- The balance of $3.9 million consisted of two credits secured by first trust
deeds on commercial properties, one of which in the amount of $3.6 million
was transferred to OREO in July 2000.
- The balance of $3.0 million consisted of two credits secured by first trust
deeds on land.
COMMERCIAL NONACCRUAL LOANS
- The balance of $1.9 million consisted of five credits secured primarily by
first trust deeds on commercial buildings and warehouses.
TROUBLED DEBT RESTRUCTURINGS
Troubled debt restructurings stayed approximately the same at $4.6 million
as of June 30, 2000 and at year-end 1999. All of the troubled debt
restructurings at June 30, 2000 were commercial mortgage loans and were accruing
interest under their revised terms.
IMPAIRED LOANS
A loan is considered impaired when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement based on current circumstances and events.
We consider all loans classified and restructured in our evaluation of loan
impairment. The classified loans are stratified by size, and loans less than our
defined selection criteria are treated as a homogenous portfolio. If loans
meeting the defined criteria are not collateral dependent, we measure the
impairment based on the present value of the expected future cash flows
discounted at the loan's effective interest rate. If loans meeting the defined
criteria are collateral dependent,
18
<PAGE>
we measure the impairment by using the loan's observable market price or the
fair value of the collateral. If the measurement of the impaired loan is less
than the recorded amount of the loan, we then recognize an impairment by
creating or adjusting an existing valuation allowance with a corresponding
charge to the provision for loan losses.
As of June 30, 2000 we identified impaired loans with a recorded investment
of $25.1 million.
LOAN CONCENTRATION
We experienced no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of June 30, 2000.
ALLOWANCE FOR LOAN LOSSES
The following table presents information relating to the allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
For the For the
six months ended year ended
6/30/00 12/31/99
---------------- -----------
<S> <C> <C>
Balance at beginning of period $19,502 $15,970
Provision for loan losses 2,100 4,200
Loans charged-off (767) (1,731)
Recoveries of charged-off loans 72 1,063
---------------- -----------
Balance at end of period $20,907 $19,502
================ ===========
Average net loans outstanding during the period $1,290,459 $1,088,578
Ratio of net charge-offs to average net loans
outstanding during the period (annualized) 0.11% 0.06%
Provision for loan losses to average net loans
outstanding during the period (annualized) 0.33% 0.39%
Allowance to non-performing loans at period-end 141.26% 111.95%
Allowance to gross loans at period-end 1.53% 1.54%
</TABLE>
- The $767,000 charged-off loans in the first six months of 2000 comprised
primarily construction loans, and secondarily commercial loans, installment
loans and equity lines.
- The $72,000 recoveries were from installment loans and commercial loans.
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.
19
<PAGE>
Our allowance for loan losses consists of the following:
- Specific allowances: For impaired loans, we provide specific allowances
based on an evaluation of impairment and allocate a portion of the general
allowance to each impaired loan based on a loss percentage assigned. The
percentage assigned depends on a number of factors including the current
financial condition of the borrowers and guarantors, the prevailing value
of the underlying collateral, charge-off history, management's knowledge of
the portfolio and general economic conditions.
- General allowance: The remainder of the general allowance is determined by
an assessment of the overall quality of the non-impaired portion of the
loan portfolio.
The following tables present a breakdown of impaired loans and the related
allowances as of the dates indicated:
<TABLE>
<CAPTION>
AS OF 6/30/00 (IN THOUSANDS)
------------------------------------------
RECORDED NET
INVESTMENT ALLOWANCE BALANCE
------------------------------------------
<S> <C> <C> <C>
Commercial $ 10,038 $ 1,370 $ 8,668
Commercial mortgage 14,918 2,138 12,780
Other 183 183 -0-
-------- ------- --------
Total $ 25,139 $ 3,691 $ 21,448
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF 12/31/99 (IN THOUSANDS)
-------------------------------------------
RECORDED NET
INVESTMENT ALLOWANCE BALANCE
-------------------------------------------
<S> <C> <C> <C>
Commercial $ 12,686 $ 1,831 $ 10,855
Commercial mortgage 13,412 1,912 11,500
Other 181 181 -0-
-------- -------- --------
Total $ 26,279 $ 3,924 $ 22,355
======== ======== ========
</TABLE>
Based on our evaluation process and the methodology to determine the
level of the allowance for loan losses mentioned previously, management
believes the allowance level at June 30, 2000 to be adequate to absorb
estimated probable future losses identified through its analysis.
OTHER REAL ESTATE OWNED
Our OREO, net of a valuation allowance of $193,000, was carried at $1.4
million as of June 30, 2000 in comparison to OREO, net of a valuation
allowance of $614,000, being carried at $4.3 million at year-end 1999.
During the first six months of 2000, we acquired three properties in the
amount of $825,000 and disposed of six properties totaling $4.2 million with
a net gain of $234,000. There were five
20
<PAGE>
outstanding OREO properties as of June 30, 2000, which included land,
commercial buildings, and a warehouse. All of them are located in Southern
California.
We maintain a valuation allowance for OREO properties to reduce the
carrying value of OREO to the estimated fair value of the properties. We
perform periodic evaluations on each property and make corresponding
adjustments 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 $63,000 to the provision
for OREO losses in the first six months of 2000.
INVESTMENTS IN REAL ESTATE
Our investments in real estate increased $111,000 to $17.1 million at June
30, 2000 from year-end 1999. They are consisted of investments in four limited
partnerships formed for the purpose of investing in low income housing projects,
which qualify for Federal low income housing tax credits.
The following table summarizes the composition of our investments in real
estate as of the dates indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF ACQUISITION
(DOLLARS IN THOUSANDS) OWNERSHIP DATE 6/30/00 12/31/99
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Las Brisas 49.50% 12/93 $ 149 $ 209
Los Robles 99.00% 08/95 407 431
California tax credit fund 36.00% 03/99 14,485 14,841
Wilshire Courtyard 99.90% 05/99 2,057 1,506
-------- --------
$ 17,098 $ 16,987
======== ========
</TABLE>
DEPOSITS
During the first six months of 2000, total deposits grew by $94.6
million or 5% to $1,816.3 million from $1,721.7 million at year-end 1999. The
majority of the increase came from core deposits, defined as total deposits
minus time deposits of $100,000 or more ("Jumbo CD's") and brokered deposits.
The following tables display the deposit mix as of the dates and for the
periods indicated:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------------------------------------
AS OF 6/30/00 AS OF 12/31/99
--------------------------- --------------------------
TYPES OF DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Demand $ 230,156 12.7% $ 195,140 11.3%
NOW accounts 122,678 6.7 121,394 7.0
Money market accounts 106,340 5.8 97,821 5.7
Savings deposits 235,184 13.0 236,764 13.8
Time deposits under $100 370,326 20.4 362,553 21.1
Time deposits of $100 or more 751,647 41.4 708,064 41.1
----------- --------- ----------- --------
Total deposits $ 1,816,331 100.0% $ 1,721,736 100.0%
=========== ========= =========== ========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
2ND QTR, 2000 2ND QTR, 1999
-------------------------- -------------------------
AVERAGE DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Demand $ 205,278 11.5% $ 180,073 11.3%
NOW accounts 122,021 6.9 116,091 7.3
Money market accounts 108,172 6.1 93,212 5.9
Savings deposits 230,141 12.9 207,109 13.0
Time deposits under $100 370,636 20.8 335,080 21.1
Time deposits of $100 or more 743,121 41.8 659,181 41.4
----------- -------- ----------- --------
Total deposits $ 1,779,369 100.0% $ 1,590,746 100.0%
=========== ======== =========== ========
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
6/30/00 6/30/99
-------------------------- -------------------------
AVERAGE DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Demand $ 204,547 11.6% $ 183,470 11.6%
NOW accounts 122,227 6.9 115,216 7.3
Money market accounts 104,000 5.9 102,165 6.4
Savings deposits 229,559 13.1 205,740 13.0
Time deposits under $100 368,969 21.0 334,126 21.1
Time deposits of $100 or more 729,376 41.5 642,505 40.6
----------- --------- ----------- --------
Total deposits $1,758,678 100.0% $1,583,222 100.0%
=========== ======== =========== ========
</TABLE>
From the above tables, we can see that:
- Core deposits increased $51.0 million during the first six months of 2000.
Contributing to the growth of core deposits was primarily demand deposits.
Demand deposits went up $35.0 million during the period as a result of a
promotion in the second quarter.
- As a single deposit type, jumbo CD's still accounted for the most increase
which added $43.6 million in the first six months of 2000.
- Between the second quarters of 2000 and 1999, average core deposits
increased $104.7 million while average Jumbo CD's rose $83.9 million.
As interest rate spreads continued to widen between Jumbo CD's and other
types of interest-bearing deposits under the prevailing interest rate
environment, our Jumbo CD portfolio maintained its faster growth than other
types of deposits. Nevertheless, management considers our 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;
22
<PAGE>
2) the Jumbo CD portfolio continued to be diversified with 4,141 individual
accounts averaging approximately $168,000 per account owned by 2,917
individual depositors as of January 20, 2000;
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 our California
market due to the fact that the customers in this market tend to have a
higher savings rate.
Management continues to monitor the Jumbo CD portfolio to identify any
changes in the deposit behavior in the market and of the patrons the Bank is
servicing. To discourage the growth in Jumbo 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 offer new transaction-based products, such as the tiered money market
accounts;
3) to promote transaction-based products from time to time, such as
demand deposits;
4) to seek to diversify the customer base by branch expansion and/or acquisition
as opportunities arise.
CAPITAL RESOURCES
Stockholders' equity amounted to $193.8 million or 9.04% of total assets
as of June 30, 2000, compared with $179.1 million or 8.97% of total assets at
year-end 1999. The increase of $14.7 million in stockholders' equity was
primarily from:
- an addition of $17.4 million from net income, less dividends paid of $3.8
million.
- $854,000 from issuance of additional common shares through the Dividend
Reinvestment Plan and proceeds from exercise of stock options
- a decrease of $171,000 in the net unrealized holding losses on securities
available-for-sale, net of tax.
We declared a cash dividend of $0.21 per common share in January, April
and July 2000 on 9,033,583, 9,044,685 and 9,063,422 shares outstanding,
respectively. Total cash dividends paid in 2000, including the $1.9 million
paid in July, amounted to $5.7 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.
The Company and the Bank's regulatory capital continued to well exceed
the regulatory minimum requirements at June 30, 2000. 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, 2000 and December 31, 1999:
23
<PAGE>
<TABLE>
<CAPTION>
COMPANY (DOLLARS IN THOUSANDS)
---------------------------------------------------------------
AS OF 6/30/00 AS OF 12/31/99
--------------------------- -----------------------------
BALANCE PERCENTAGE BALANCE PERCENTAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 184,467(1) 10.55% $ 169,556(2) 10.50%
Tier 1 capital minimum requirement 69,950 4.00 64,588 4.00
---------- ---------- ---------- ----------
Excess $ 114,517 6.55% $ 104,968 6.50%
========== ========== ========== ==========
Total capital (to risk-weighted assets) $ 205,374(1) 11.74% $ 189,058(2) 11.71%
Total capital minimum requirement 139,900 8.00 129,176 8.00
---------- ---------- ---------- ----------
Excess $ 65,474 3.74% $ 59,882 3.71%
========== ========== ========== ==========
Risk-weighted assets $1,748,756 $1,614,695
Tier 1 capital (to average assets)
- Leverage ratio $ 184,467(1) 8.81% $ 169,556(2) 8.93%
Minimum leverage requirement 83,730 4.00 75,974 4.00
---------- ---------- ---------- ----------
Excess $ 100,737 4.81% $ 93,582 4.93%
========== ========== ========== ==========
Total average assets $2,093,249 $1,899,358
</TABLE>
<TABLE>
<CAPTION>
BANK (DOLLARS IN THOUSANDS)
---------------------------------------------------------------
AS OF 6/30/00 AS OF 12/31/99
---------------------------- --------------------------
BALANCE PERCENTAGE BALANCE PERCENTAGE
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $ 177,239(1) 10.14% $ 163,093(2) 10.10%
Tier 1 capital minimum requirement 69,924 4.00 64,588 4.00
---------- ----------- ---------- ----------
Excess $ 107,315 6.14% $ 98,505 6.10%
========== =========== ========== ==========
Total capital (to risk-weighted assets) $ 198,146(1) 11.34% $ 182,595(2) 11.31%
Total capital minimum requirement 139,848 8.00 129,176 8.00
---------- ----------- ---------- ----------
Excess $ 58,298 3.34% $ 53,419 3.31%
========== =========== ========== ==========
Risk-weighted assets $1,748,100 $1,614,695
Tier 1 capital (to average assets)
- Leverage ratio $ 177,239(1) 8.49% $ 163,093(2) 8.59%
Minimum leverage requirement 83,515 4.00 75,974 4.00
---------- ----------- ---------- ----------
Excess $ 93,724 4.49% $ 87,119 4.59%
========== =========== ========== ==========
Total average assets $2,087,875 $1,899,356
</TABLE>
1 Excluding the unrealized holding losses on securities available-for-sale of
$835,000, and goodwill of $10,146,000.
2 Excluding the unrealized holding losses on securities available-for-sale of
$1,006,000, and goodwill of $10,559,000.
24
<PAGE>
LIQUIDITY AND MARKET RISK
LIQUIDITY
Our 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
("FHLB"). As of June 30, 2000, our liquidity ratio (defined as net cash,
short-term and marketable securities to net deposits and short-term
liabilities) decreased slightly to 32.64%, compared with 33.91% at year-end
1999.
To supplement its liquidity needs, the Bank maintains a total credit
line of $52 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 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.
We had significant portion of our time deposits maturing within one year
or less as of June 30, 2000. 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 our historical runoff experience, we
expect the outflow will be minimal and can be replenished through our 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 primarily
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. The business activities of Bancorp consist
primarily of the operation of the Bank with limited activities in other
investments. 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.
We actively monitor and manage our interest rate risk through analyzing
the repricing characteristics of our loans, securities, and deposits on an
on-going basis. The primary objective is to minimize the adverse effects of
changes in interest rates on our 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
25
<PAGE>
inherent in any individual risk management tool, we use 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, 2000, the Company was asset sensitive with a cumulative
gap ratio of a positive 19.61% within three months, and liability sensitive
with a cumulative gap ratio of a negative 7.44% within one year. This
compared with a positive 16.25% within three months, and a negative 9.78%
within one year at year-end 1999.
Since interest rate sensitivity analysis does not measure the timing
differences in the repricing of asset and liabilities, we use 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, we then seek corrective action after
considering, among other things, market conditions, customer reaction and the
estimated impact on profitability.
To manage and control our interest rate risk, we concentrate our efforts
on seeking to increase our yield-cost spread through growth and competitive
pricing. Management will use hedging instruments when deemed prudent to
maintain and/or increase our spread. The hedging activities as of June 30,
2000 were immaterial. The composition of the Company's financial instruments
that are sensitive to changes in interest rates have not significantly
changed since December 31, 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 25 and 26.
26
<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 17, 2000. At the
2000 Annual Meeting, the stockholders approved to elect the following four
Class I directors to serve until the 2003 annual meeting of stockholders:
Michael M.Y. Chang
Patrick S.D. Lee
Anthony M. Tang
Thomas G. Tartaglia
The number of votes cast for or withheld, with respect to the election
of each Class I Director was as follows:
<TABLE>
<CAPTION>
BROKER
FOR WITHHELD AGAINST NON-VOTE
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Michael M.Y. Chang 6,553,968 282,942 -0- -0-
Patrick S.D. Lee 6,570,432 266,478 -0- -0-
Anthony M. Tang 6,570,432 266,478 -0- -0-
Thomas G. Tartaglia 6,570,267 266,643 -0- -0-
</TABLE>
27
<PAGE>
Other directors whose terms of office continued after the meeting:
TERM ENDING IN 2001 (CLASS II) TERM ENDING IN 2002 (CLASS III)
------------------------------ -------------------------------
Ralph Roy Buon-Cristiani George T.M. Ching
Kelly L. Chan Wing K. Fat
Dunson K. Cheng Wilbur K. Woo
Chi-Hung Joseph Poon
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
27 Financial Data Schedule
Form 8-K:
None
28
<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 9, 2000 By /s/ DUNSON K. CHENG
----------------------
Dunson K. Cheng
Chairman and President
Date: August 9, 2000 By /s/ ANTHONY M. TANG
----------------------
Anthony M. Tang
Chief Financial Officer
29
