<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 March 31, 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
---------------------------------------------------
CATHAY BANCORP, INC.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4274680
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(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
-----------------------
- ------------------------------------------------------------------------------
(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, 9,053,791 shares outstanding as of May 5,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION....................................................................................3
Item 1. Financial Statements (unaudited)............................................................3
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 ......................................................................24
PART II - OTHER INFORMATION .....................................................................................25
Item 1. Legal Proceedings..........................................................................25
Item 2. Changes in Securities and Use of Proceeds..................................................25
Item 3. Defaults upon Senior Securities............................................................25
Item 4. Submission of Matters to a Vote of Security Holders........................................25
Item 5. Other Information..........................................................................25
Item 6. Exhibits and Reports on Form 8-K...........................................................25
SIGNATURES ..................................................................................................26
</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>
Mar. 31, 2000 Dec. 31, 1999
-------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 68,868 $ 59,081
Federal funds sold and securities purchased under
agreements to resell 19,500 5,000
------------------- ------------------
Cash and cash equivalents 88,368 64,081
Securities available-for-sale (amortized cost of
$161,279 in 2000 and $162,728 in 1999) 159,258 160,991
Securities held-to-maturity (estimated fair
value of $407,578 in 2000 and $416,827 in 1999) 418,539 426,332
Loans (net of allowance for loan losses of
$20,333 in 2000 and $19,502 in 1999) 1,294,666 1,245,585
Other real estate owned, net 2,403 4,337
Investments in real estate, net 17,058 16,987
Premises and equipment, net 29,462 25,299
Customers' liability on acceptances 17,692 13,721
Accrued interest receivable 12,388 13,150
Goodwill 10,303 10,559
Other assets 13,437 14,882
------------------- ------------------
Total assets $ 2,063,574 $ 1,995,924
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 204,773 $ 195,140
Interest bearing accounts
NOW accounts 126,591 121,394
Money market deposits 112,564 97,821
Savings deposits 232,906 236,764
Time deposits under $100 367,647 362,553
Time deposits of $100 or more 727,839 708,064
------------------- ------------------
Total deposits 1,772,320 1,721,736
Securities sold under agreements to repurchase 49,353 46,990
Advances from Federal Home Loan Bank 30,000 30,000
Acceptances outstanding 17,692 13,721
Other liabilities 8,374 4,368
------------------- ------------------
Total liabilities 1,877,739 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, 9,044,685 and 9,033,583 shares issued and
outstanding in 2000 and 1999, respectively 90 90
Additional paid-in-capital 64,963 64,529
Accumulated other comprehensive loss, net (1,171) (1,006)
Retained earnings 121,953 115,496
------------------- ------------------
Total stockholders' equity 185,835 179,109
------------------- ------------------
Total liabilities and stockholders' equity $ 2,063,574 $ 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>
1st Qtr 1st Qtr
Mar, 2000 Mar, 1999
------------------ -------------------
<S> <C> <C>
INTEREST INCOME
Interest on loans $ 28,383 $ 20,635
Interest on securities available-for-sale 2,500 3,250
Interest on securities held-to-maturity 6,297 6,660
Interest on Federal funds sold and securities
purchased under agreements to resell 201 964
Interest on deposits with banks 7 5
------------------ -------------------
Total interest income 37,388 31,514
------------------ -------------------
INTEREST EXPENSE
Time deposits of $100 or more 9,180 7,739
Other deposits 5,930 5,089
Other borrowed funds 984 1,178
------------------ -------------------
Total interest expense 16,094 14,006
------------------ -------------------
Net interest income before provision for loan losses 21,294 17,508
Provision for loan losses 1,050 1,050
------------------ -------------------
Net interest income after provision for loan losses 20,244 16,458
------------------ -------------------
NON-INTEREST INCOME
Securities losses - (32)
Letter of credit commissions 524 486
Service charges 1,038 944
Other operating income 1,187 520
------------------ -------------------
Total non-interest income 2,749 1,918
------------------ -------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 5,433 4,664
Occupancy expense 780 672
Computer and equipment expense 667 621
Professional services expense 858 925
FDIC and State assessments 112 97
Marketing expense 264 313
Real estate operations, net 38 (453)
Operations of investments in real estate 192 31
Other operating expense 908 815
------------------ -------------------
Total non-interest expense 9,252 7,685
------------------ -------------------
Income before income tax expense 13,741 10,691
Income tax expense 5,387 4,188
------------------ -------------------
Net Income 8,354 6,503
------------------ -------------------
Other comprehensive income, net of tax:
Unrealized holding loss arising during the period (165) (875)
Less: reclassification adjustment for realized
loss on securities included in net income - (32)
------------------ -------------------
Total other comprehensive loss, net of tax (165) (843)
------------------ -------------------
Total comprehensive income $ 8,189 $ 5,660
================== ===================
Net income per common share
Basic $ 0.92 $ 0.72
Diluted $ 0.92 $ 0.72
Cash dividends paid per common share $ 0.210 $ 0.175
Basic average common shares outstanding 9,041,735 8,995,981
Diluted average common shares outstanding 9,051,413 9,001,465
</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>
Threen months ended March 31,
----------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,354 $ 6,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,050 1,050
Provision for losses on other real estate owned 42 68
Depreciation 318 369
Net gain on sales of other real estate owned (98) (546)
Loss on sales and calls of investment securities - 32
Amortization and accretion of investment
security premiums, net (148) 187
Amortization of goodwill 256 169
Increase in deferred loan fees, net 333 1
Decrease in accrued interest receivable 762 843
(Increase) decrease in other assets, net 1,445 (797)
Increase in other liabilities 4,006 2,628
- -----------------------------------------------------------------------------------------------------------------
Total adjustments 7,966 4,004
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,320 10,507
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (198,812) (270,341)
Proceeds from maturity and call of investment securities available-for-sale 188,134 354,586
Proceeds from sale of investment securities available-for-sale 21,562 -
Proceeds from repayments of mortgage-backed securities
available-for-sale 1,207 3,347
Purchase of investment securities held-to-maturity (11,235) (45,057)
Proceeds from maturity and call of investment securities held-to-maturity 160 300
Purchase of mortgage-backed securities held-to-maturity - (26,553)
Proceeds from repayments of mortgage-backed securities held-to-maturity 8,493 24,964
Net increase in loans (49,945) (46,384)
Purchase of premises and equipment (4,481) (377)
Proceeds from sale of other real estate owned 1,471 959
Net increase in investments in real estate (71) (14,949)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (43,517) (19,505)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts,
money market and savings deposits 25,715 (2,709)
Net increase in time deposits 24,869 31,875
Net increase (decrease) in securities sold under agreements to repurchase 2,363 (12,724)
Cash Dividends (1,897) (1,573)
Proceeds from shares issued under Dividend Reinvestment Plan 431 357
Proceeds from exercise of stock options 3 -
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 51,484 15,226
- -----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 24,287 6,228
Cash and cash equivalents, beginning of the period 64,081 81,656
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the period $ 88,368 $ 87,884
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 15,875 $ 14,059
Income taxes $ 1,124 $ 3,300
Non-cash investing activities:
Transfers to securities available-for-sale
within 90 days of maturity $ 10,254 $ 260
Net change in unrealized holding loss on securities
available-for-sale, net of tax $ (165) $ (843)
Transfers to other real estate owned $ 826 $ 995
Loans to facilitate the sale of other real estate owned $ 1,345 $ -
</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 three months ended March 31, 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 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
We reported net income of $8.4 million or $0.92 per diluted common share
for the first quarter of 2000, compared with $6.5 million or $0.72 per
diluted common share for the same quarter of 1999. Income before income tax
expense amounted to $13.7 million for the first quarter of 2000, compared
with $10.7 million for the corresponding quarter of 1999. The increase of
$3.1 million or 29% in 2000 first quarter income before income tax expense
was primarily attributable to a $3.8 million increase in net interest income
before provision for loan losses. Non-interest income increased $831,000.
Offsetting the above increases was an increase of $1.6 million in
non-interest expense.
The annualized return on average assets was 1.67% and 1.43% for the
first quarters of 2000 and 1999, respectively. The return on average
stockholders' equity was 18.66% and 16.65% for the first quarters of 2000 and
1999, respectively.
8
<PAGE>
NET INTEREST INCOME
Net interest income before provision for loan losses totaled $21.3
million for the first quarter of 2000, which represents an increase of $3.8
million or 22% over that of $17.5 million for the corresponding quarter of
1999.
On a taxable equivalent basis, net interest income totaled $21.7 million
for the first quarter of 2000, which also represents an increase of $3.8
million or 21% over that of $17.9 million for the same period of 1999.
The increase in net interest income in the first quarter of 2000 is
discussed below:
INTEREST INCOME
- - Interest income increased $5.9 million or 19% to $37.4 million mainly due
to an increase of $7.7 million from interest on loans. To offset this
increase were decreases of $750,000 in interest on securities
available-for-sale, $363,000 in interest on securities held-to-maturity and
$763,000 in interest on Federal funds sold.
- - An increase of $299.9 million or 31% in average net loans from $964.2
million to $1,264.1 million contributed $6.6 million to interest income.
The increase in average loans were funded by growth in deposits, primarily
time deposit, and proceeds from matured securities.
- - An increase of 35 basis points in average loan yield from 8.68% to 9.03%
contributed $1.1 million to interest income. The increase in average loan
yield was mainly a result of five consecutive interest rate increases by
the Federal Reserve Board during the past three quarters, which lead to a
94 basis point increase in our average reference rate from 8.00% to 8.94%.
- - A change in the mix of interest earning assets. Due to strong loan demand
in the first quarter of 2000, average loans, which yield higher than other
types of investments, increased as a percentage of total interest earning
assets from 56.1% to 67.9%.
- - Consequently, average taxable equivalent yield on interest earning assets
increased 64 basis points from 7.53% to 8.17%.
INTEREST EXPENSE
- - Interest expense increased $2.1 million or 15% to $16.1 million primarily
attributable to an increase of $1.4 million in interest expense on time
deposits over $100,000 and an increase of $841,000 in interest expense on
other interest bearing deposits due to growth in average volume as well as
rate increases on time deposits.
- - Average time deposits grew $124.1 million or 13% to $1,082.9 million, of
which, $90.0 million or 73% were from time deposits over $100,000.
- - Average cost of funds increased 20 basis points from 3.82% to 4.02%
resulting largely from a 19 basis point increase in the cost of time
deposits from 4.77% to 4.96%.
- - The magnitude of the increase in the cost of funds was much less than that
of the return on interest earning assets due to the lagging effect on time
deposits from interest rate increases in the past three quarters and the
Bank being asset sensitive in the short term.
9
<PAGE>
NET INTEREST MARGIN
- - As a result, net interest margin, defined as taxable equivalent net
interest income to average interest earning assets, increased 46 basis
points from 4.23% to 4.69%.
NON-INTEREST INCOME
Non-interest income increased $831,000 or 43% to $2.7 million for the
first quarter of 2000, compared with $1.9 million for the same quarter of
1999. In addition to higher service charges and letter of credit commissions,
a notable portion of the increase came from the following items:
- Wire transfer fees, due to increased transaction volume arising largely
from New York branches
- Fees and charges related to loans
- Safe deposit box income
- Fee income from financial guarantees
NON-INTEREST EXPENSE
Non-interest expense amounted to $9.3 million for the first quarter of
2000 as compared to $7.7 million for the same quarter of 1999. The $1.6
million or 20% increase was substantially attributable to the purchase of
certain assets and the assumption of certain deposits and other liabilities
of Golden City Commercial Bank ("Golden City") in December 1999 and the
opening of a new branch in Diamond Bar in January 2000. The more significant
items are discussed below:
- - An increase of $769,000 in salaries and employee benefits. The payroll
expense for Golden City acounted for the majority of the salary increase.
- - An increase of $491,000 in net real estate operations expense. We recorded
a net other real estate owned ("OREO") expense of $38,000 in the first
quarter of 2000 while we realized a net OREO income of $453,000 in the
first quarter of 1999. The net OREO income in 1999 was primarily from a
$546,000 net gain on disposal.
- - An increase of $161,000 in net operations in investments in real estate
expense as a result of operating losses on the low income housing projects.
- - An increase of $108,000 in occupancy expense primarily due to the rent
expense of Golden City.
Despite the foregoing, our efficiency ratio improved from 39.56% in the
first quarter of 1999 to 38.48% in the first quarter of 2000.
FINANCIAL CONDITION OVERVIEW
We continued our steady growth during the first quarter of 2000. The
following are the major balance sheet items which are discussed in detail later
in this report:
- - Total assets increased 3% to $2,063.6 million from $1,995.9 million at
year-end 1999.
10
<PAGE>
- - Total net loans grew 4% to $1,294.7 million from $1,245.6
million at year-end 1999.
- - Securities available-for-sale decreased 1% to $159.3
million from $161.0 million at year-end 1999.
- - Securities held-to-maturity decreased 2% to $418.5 million from
$426.3 million at year-end 1999.
- - Total deposits increased 3% to $1,772.3 million from $1,721.7 million at
year-end 1999.
- - Stockholders' equity rose 4% to $185.8 million from $179.1 million at
year-end 1999.
INTEREST EARNING ASSET MIX
The tables below present the components of the interest earning asset as of
the dates and for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
TYPES OF INTEREST EARNING ASSETS: As of 3/31/00 As of 12/31/99
---------------------------- -------------------------
Amount Percentage Amount Percentage
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 19,500 1.0% $ 5,000 0.3%
Securities available-for-sale 159,258 8.4 160,991 8.8
Securities held-to-maturity 418,539 22.1 426,332 23.2
Loans, net of deferred loan fees 1,314,999 69.5 1,265,087 68.8
Allowance for loan losses (20,333) (1.1) (19,502) (1.1)
------------- ------- ------------- ------
Loans, net 1,294,666 68.4 1,245,585 67.7
Deposits with banks 1,370 0.1 568 -0-
------------- --------- ------------- ------
Total interest earning assets $1,893,333 100.0% $1,838,476 100.0%
========== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
AVERAGE INTEREST EARNING ASSETS: 1st Qtr, 2000 1st Qtr, 1999
---------------------------- ----------------------------
Amount Percentage Amount Percentage
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 13,995 0.7% $ 77,267 4.5%
Securities available-for-sale 160,036 8.6 231,078 13.5
Securities held-to-maturity 422,184 22.7 445,364 25.9
Loans, net of deferred loan fees 1,283,935 69.0 980,700 57.1
Allowance for loan losses (19,809) (1.1) (16,523) (1.0)
------------- ------- ------------- ------
Loans, net 1,264,126 67.9 964,177 56.1
Deposits with banks 1,053 0.1 565 -0-
------------- ------- ------------- ------
Total interest earning assets $1,861,394 100.0% $1,718,451 100.0%
========== ====== ========== ======
</TABLE>
From the tables above, we can see that:
- - Loan demand remained strong during the first quarter of 2000.
- - Total decrease of $94.2 million in average securities in the first quarter
of 2000 was due to proceeds from some matured or called securities not
being reinvested to meet strong loan demand.
- - Average net loans accounted for 67.9% of total interest earning assets in
the first quarter of 2000 as compared to 56.1% for the same quarter of 1999
while securities decreased from
11
<PAGE>
39.4% to 31.3%. The change in the interest earning asset mix from
securities to loans was favorable to our net interest margin as mentioned
previously.
SECURITIES
As of March 31, 2000, unrealized holding losses on securities
available-for-sale were $2.0 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 $1.2 million as of March 31, 2000 and $1.0 million at year-end 1999.
The unrealized holding losses resulted mainly from the increasing interest rate
environment.
The average taxable equivalent yield on securities rose 19 basis points to
6.36% in the first quarter of 2000, compared to 6.17% 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 3/31/00 (In thousands)
--------------------------------------------------------------------
Amortized Gross Gross
SECURITIES AVAILABLE-FOR-SALE: Cost Unrealized Gains Unrealized Losses Fair Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 10,001 $ 3 $ -0- $ 10,004
U.S. government agencies 20,012 -0- 63 19,949
State and municipal securities 250 -0- -0- 250
Mortgage-backed securities 13,361 -0- 275 13,086
Collateralized mortgage obligations 7,277 -0- 161 7,116
Assets-backed securities 15,100 -0- 522 14,578
Federal Home Loan Bank Stock 6,483 -0- -0- 6,483
Commercial paper 51,759 -0- 9 51,750
Corporate bonds 34,936 -0- 994 33,942
Equity securities 2,100 -0- -0- 2,100
----------- -------- -------- -----------
Total $161,279 $ 3 $2,024 $159,258
======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
As of 12/31/99 (In thousands)
--------------------------------------------------------------------
Amortized Gross Gross
SECURITIES AVAILABLE-FOR-SALE: Cost Unrealized Gains Unrealized Losses Fair 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>
12
<PAGE>
<TABLE>
<CAPTION>
As of 3/31/00 (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 $ 14,994 $ 11 $ -0- $ 15,005
U.S. government agencies 74,354 -0- 1,681 72,673
State and municipal securities 69,659 658 2,185 68,132
Mortgage-backed securities 127,629 -0- 4,169 123,460
Collateralized mortgage obligations 60,518 -0- 1,099 59,419
Assets-backed securities 19,999 -0- 289 19,710
Corporate bonds 51,386 -0- 2,207 49,179
--------- -------- --------- ---------
Total $418,539 $ 669 $11,630 $407,578
======== ====== ======= ========
</TABLE>
<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 3/31/00 (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 $ 10,004 $ -0- $ -0- $ -0- $ 10,004
U.S. government agencies 19,949 -0- -0- -0- 19,949
State and municipal securities 250 -0- -0- -0- 250
Mortgage-backed securities* -0- 2,775 1,914 8,397 13,086
Collateralized mortgage obligations* -0- -0- 3,138 3,978 7,116
Assets-backed securities* -0- 5,082 9,496 -0- 14,578
Federal Home Loan Bank stock 6,483 -0- -0- -0- 6,483
Commercial paper 51,750 -0- -0- -0- 51,750
Corporate bonds -0- 29,403 4,539 -0- 33,942
Equity securities 2,100 -0- -0- -0- 2,100
--------- ----------- ----------- ----------- -----------
Total $90,536 $37,260 $19,087 $12,375 $159,258
======= ======= ======= ======= ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
As of 3/31/00 (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. Treasury securities $14,994 $ -0- $ -0- $ -0- $ 14,994
U.S. government agencies 29,308 45,046 -0- -0- 74,354
State and municipal securities 2,142 8,750 23,622 35,145 69,659
Mortgage-backed securities* 4,874 11,818 36,338 74,599 127,629
Collateralized mortgage obligations* -0- -0- 47,653 12,865 60,518
Assets-backed securities* -0- 19,999 -0- -0- 19,999
Corporate bonds -0- 46,348 5,038 -0- 51,386
----------- ---------- ----------- ------------- ----------
Total $51,318 $131,961 $112,651 $122,609 $418,539
======= ======== ======== ======== ========
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
LOANS
We continued to experience strong loan demand in the first quarter of 2000.
Total gross loans increased $50.2 million or 4% to $1,318.9 million as of March
31, 2000, from $1,268.7 million at year-end 1999.
The growth of $50.2 million in gross loans was attributable to commercial
mortgage loans and real estate construction loans. The continued growth in the
California economy and favorable economic conditions in other regions where we
have presence, have led to strong real estate markets and demand in these types
of loans. Total construction loan commitment outstanding approximated $34.3
million as of March 31, 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 3/31/00 As of 12/31/99
------------------------ ----------------------------
TYPES OF LOANS: Amount Percentage Amount Percentage
--------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Commercial loans $ 388,461 30.0% $ 395,138 31.7%
Residential mortgage loans 211,163 16.3 207,568 16.7
Commercial mortgage loans 603,968 46.7 577,541 46.4
Real estate construction loans 87,202 6.7 62,516 5.0
Installment loans 27,667 2.1 25,498 2.1
Other loans 464 0.1 419 0.0
------------- -------------
Total loans - Gross 1,318,925 1,268,680
Allowance for loan losses (20,333) (1.6) (19,502) (1.6)
Unamortized deferred loan fees (3,926) (0.3) (3,593) (0.3)
-------------- -------- --------------- ------
Total loans - Net $1,294,666 100.0% $1,245,585 100.0%
========== ====== ========== ======
</TABLE>
14
<PAGE>
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 slightly to $21.6 million at March 31,
2000, compared to $21.8 million at year-end 1999. OREO was reduced by $1.9
million during the first quarter of 2000 while nonaccrual loans increased $1.8
million. As a percentage of gross loans plus OREO, our non-performing assets
decreased to 1.64% at March 31, 2000 from 1.71% at year-end 1999.
The non-performing loan coverage ratio, defined as the allowance for loan
losses to non-performing loans, was 105.83% at March 31, 2000, slightly lower
than that of 111.95% at year-end 1999. This was primarily due to the $1.8
million increase in the nonaccrual loans.
The following table presents the breakdown of non-performing assets by
categories as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
3/31/00 12/31/99
------- --------
<S> <C> <C>
Accruing loans past due 90 days or more $ 3,730 $ 3,724
Nonaccrual loans 15,483 13,696
-------- --------
Total non-performing loans 19,213 17,420
Real estate acquired in foreclosure 2,403 4,337
--------- ---------
Total non-performing assets $21,616 $21,757
======= =======
Accruing troubled debt restructurings 4,574 4,581
Non-performing assets as a percentage of gross loans plus OREO 1.64% 1.71%
Allowance for loan losses as a percentage
of non-performing loans 105.83% 111.95%
</TABLE>
NONACCRUAL LOANS
The nonaccrual loans of $15.5 million at March 31, 2000 consisted mainly of
$8.8 million in commercial mortgage loans and $6.1 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:
15
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
3/31/00 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 $ 740 $ 504 $ 1,014 $ 628
Commercial 3,931 5,234 4,971 5,425
Land 4,089 30 -0- -0-
Others -0- 53 186 307
Unsecured -0- 318 -0- 392
----------- ----------- ---------- ----------
Total $ 8,760 $ 6,139 $ 6,171 $ 6,752
=========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
3/31/00 12/31/99
Nonaccrual Loan Balance
---------------------------------------------------------
Commercial Commercial
TYPE OF BUSINESS: Mortgage Commercial Mortgage Commercial
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Real estate development $ 4,089 $ 223 $ 354 $ 347
Real estate management 3,607 50 4,366 100
Wholesale -0- 864 -0- 896
Food/Restaurant -0- 1,017 -0- 889
Import 332 3,132 621 3,307
Motel 408 -0- 425 -0-
Investments 324 -0- 334 -0-
Industrial -0- 260 -0- 270
Others -0- 593 71 943
--------- --------- ----------- ----------
Total $ 8,760 $ 6,139 $ 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.
- - The balance of $4.1 million consisted of two credits secured by first
trust deeds on land.
COMMERCIAL NONACCRUAL LOANS
- - The balance of $5.2 million consisted of eight credits secured by first,
second and third trust deeds on commercial buildings and warehouses.
TROUBLED DEBT RESTRUCTURINGS
Troubled debt restructurings stayed approximately the same at $4.6 million
as of March 31, 2000 and at year-end 1999. All of the troubled debt
restructurings at March 31, 2000 were commercial mortgage loans and were
accruing interest under their revised terms.
16
<PAGE>
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, 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.
We identified impaired loans with a recorded investment of $28.4 million at
March 31, 2000.
LOAN CONCENTRATION
There were no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of March 31, 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
three months ended year ended
3/31/00 12/31/99
------------------ ---------------
<S> <C> <C>
Balance at beginning of period $19,502 $15,970
Provision for loan losses 1,050 4,200
Loans charged-off (236) (1,731)
Recoveries of charged-off loans 17 1,063
------- -------
Balance at end of period $20,333 $19,502
======= =======
Average net loans outstanding during the period $1,264,126 $1,088,578
Ratio of net charge-offs to average net loans
outstanding during the period (annualized) 0.07% 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 105.83% 111.95%
Allowance to gross loans at period-end 1.54% 1.54%
</TABLE>
17
<PAGE>
The $236,000 charged-off loans in the first quarter of 2000 comprised
commercial mortgage loans, installment loans, commercial loans and equity lines.
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.
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
allocated general allowances as of the dates indicated:
<TABLE>
<CAPTION>
As of 3/31/00 (In thousands)
--------------------------------------------
Allocated
Recorded General Net
Investment Allowance Balance
---------- ---------- ---------
<S> <C> <C> <C>
Commercial $12,086 $1,723 $10,363
Commercial mortgage 16,010 2,726 13,284
Other 198 198 -0-
--------- -------- ----------
Total $28,294 $4,647 $23,647
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
As of 12/31/99 (In thousands)
--------------------------------------------
Allocated
Recorded General 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 March 31, 2000 to be adequate to absorb estimated probable
future losses identified through its analysis.
18
<PAGE>
OTHER REAL ESTATE OWNED
Our OREO, net of a valuation allowance of $386,000, was carried at $2.4
million as of March 31, 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 quarter of 2000, we acquired three properties in the
amount of $615,000 and disposed of three properties totaling $3.0 million with a
net gain of $98,000. At March 31, 2000, there were eight outstanding OREO
properties, which included land, commercial buildings, a condominium, a single
family residence 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 $42,000 to the provision for OREO losses in
the first quarter of 2000.
INVESTMENTS IN REAL ESTATE
Investments in real estate were approximately the same at $17.0 million at
March 31, 2000 and at year-end 1999. Our investments in real estate at March 31,
2000 comprised 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 3/31/00 12/31/99
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Las Brisas 49.50% 12/93 $ 179 $ 209
Los Robles 99.00% 08/95 419 431
California tax credit fund 36.00% 03/99 14,692 14,841
Wilshire Courtyard 99.90% 05/99 1,768 1,506
--------- ---------
$17,058 $16,987
======= =======
</TABLE>
DEPOSITS
Total deposits increased $50.6 million to $1,772.3 million at March 31,
2000 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. Total deposits from our two New York
branches were maintained at $75.7 million, slightly higher than those at
year-end 1999.
The following tables display the deposit mix as of the dates and for the
periods indicated:
19
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
As of 3/31/00 As of 12/31/99
----------------------------------------------------------
TYPES OF DEPOSITS: Amount Percentage Amount Percentage
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Demand $ 204,773 11.6% $ 195,140 11.3%
NOW accounts 126,591 7.1 121,394 7.0
Money market accounts 112,564 6.4 97,821 5.7
Savings deposits 232,906 13.1 236,764 13.8
Time deposits under $100 367,647 20.7 362,553 21.1
Time deposits of $100 or more 727,839 41.1 708,064 41.1
----------- --------- ----------- --------
Total deposits $1,772,320 100.0% $1,721,736 100.0%
========== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
1st Qtr, 2000 1st Qtr, 1999
---------------------------- ----------------------------
AVERAGE DEPOSITS: Amount Percentage Amount Percentage
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Demand $ 201,184 11.6% $ 179,305 11.4%
NOW accounts 122,431 7.0 114,331 7.3
Money market accounts 99,829 5.8 111,218 7.1
Savings deposits 229,978 13.2 204,381 13.0
Time deposits under $100 367,308 21.2 333,162 21.3
Time deposits of $100 or more 715,631 41.2 625,643 39.9
----------- --------- ----------- --------
Total deposits $1,736,361 100.0% $1,568,040 100.0%
========== ====== ========== ======
</TABLE>
From the above tables, we can see that:
- - Core deposits grew $30.8 million during the first quarter of 2000.
Contributing to the growth of core deposits were:
1. an increase of $14.7 million in money market accounts primarily from
a $15.0 million growth in the new tiered money market accounts
2. an increase of $9.6 million in demand deposits
3. an increase of $5.2 million in NOW accounts
4. an increase of $5.1 million in time deposits under $100,000
5. a decrease of $3.8 million in savings deposits
- - Jumbo CD's added $19.8 million in the first quarter of 2000.
- - Average core deposits went up $78.3 million in the first quarter of 2000
while average Jumbo CD's rose $90.0 million.
As interest rate spreads widened between Jumbo CD's and other types of
interest-bearing deposits under the prevailing interest rate environment, our
Jumbo CD portfolio continues to grow faster than other types of deposits.
However, management considers our Jumbo CD's generally less volatile primarily
due to the following reasons:
20
<PAGE>
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 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 promote transaction-based products, such as the tiered money market
accounts;
3) to seek to diversify the customer base by branch expansion and/or
acquisition as opportunities arise.
CAPITAL RESOURCES
Stockholders' equity amounted to $185.8 million or 9.01% of total assets as
of March 31, 2000, compared with $179.1 million or 8.97% of total assets at
year-end 1999. The increase of $6.7 million in stockholders' equity was
primarily from:
- - an addition of $8.4 million from net income, less dividends paid of $1.9
million
- - $434,000 from issuance of additional common shares through the Dividend
Reinvestment Plan and proceeds from exercise of stock options
- - an increase of $165,000 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 2000 on
9,033,583 shares outstanding and in April 2000 on 9,044,685 shares outstanding.
Total cash dividends paid in 2000, including the $1.9 million paid in April,
amounted to $3.8 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 despite slight decreases in the ratios at March
31, 2000. In addition, 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 March 31, 2000 and December 31, 1999:
21
<PAGE>
<TABLE>
<CAPTION>
Company (Dollars in thousands)
--------------------------------------------------------------
As of 3/31/00 As of 12/31/99
--------------------------- -------------------------------
Balance Percentage Balance Percentage
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $176,703(1) 10.48% $169,556(2) 10.50%
Tier 1 capital minimum requirement 67,474 4.00 64,588 4.00
---------- ---------- ---------- ----------
Excess $109,229 6.48% $104,968 6.50%
======== ======== ======== ========
Total capital (to risk-weighted assets) $197,036(1) 11.68% $189,058(2) 11.71%
Total capital minimum requirement 134,947 8.00 129,176 8.00
--------- ---------- --------- ----------
Excess $ 62,089 3.68% $ 59,882 3.71%
========= ======== ========= ========
Risk-weighted assets $1,686,841 $1,614,695
Tier 1 capital (to average assets)
- Leverage ratio $176,703(1) 8.82% $169,556(2) 8.93%
Minimum leverage requirement 80,187 4.00 75,974 4.00
---------- ---------- ---------- ----------
Excess $ 96,516 4.82% $ 93,582 4.93%
========= ======== ========= ========
Total average assets $2,004,665 $1,899,358
</TABLE>
<TABLE>
<CAPTION>
Bank (Dollars in thousands)
----------------------------------------------------------------
As of 3/31/00 As of 12/31/99
---------------------------- ---------------------------------
Balance Percentage Balance Percentage
---------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $169,839(1) 10.07% $163,093(2) 10.10%
Tier 1 capital minimum requirement 67,473 4.00 64,588 4.00
---------- ---------- ---------- ----------
Excess $102,366 6.07% $ 98,505 6.10%
======== ======== ========= ========
Total capital (to risk-weighted assets) $190,172(1) 11.27% $182,595(2) 11.31%
Total capital minimum requirement 134,947 8.00 129,176 8.00
--------- ---------- --------- ----------
Excess $ 55,225 3.27% $ 53,419 3.31%
========= ======== ========= ========
Risk-weighted assets $1,686,832 $1,614,695
Tier 1 capital (to average assets)
- Leverage ratio $169,839(1) 8.47% $163,093(2) 8.59%
Minimum leverage requirement 80,186 4.00 75,974 4.00
---------- ---------- ---------- ----------
Excess $ 89,653 4.47% $ 87,119 4.59%
========= ======== ========= ========
Total average assets $2,004,653 $1,899,356
</TABLE>
(1) Excluding the unrealized holding losses on securities available-for-sale of
$1,171,000, and goodwill of $10,303,000.
(2) Excluding the unrealized holding losses on securities available-for-sale of
$1,006,000, and goodwill of $10,559,000.
22
<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 March 31, 2000, our liquidity ratio (defined as net cash, short-term and
marketable securities to net deposits and short-term liabilities) decreased
slightly to 33.62%, 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 March 31, 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
23
<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 March 31, 2000, the Company was asset sensitive with a cumulative gap
ratio of a positive 18.99% within three months, and liability sensitive with a
cumulative gap ratio of a negative 7.40% 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 March 31, 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 23 and 24.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, including its wholly-owned subsidiary, Cathay Bank, has been a
party to ordinary routine litigation incidental to various aspects of its
operations.
Management is not currently aware of any other litigation that is expected
to have material adverse impact on the Company's consolidated financial
condition, or the results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 2000, there were no reportable events.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
27 Financial Data Schedule
Form 8-K:
None
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: May 12, 2000 By /s/ DUNSON K. CHENG
------------ ----------------------
Dunson K. Cheng
Chairman and President
Date: May 12, 2000 By /s/ ANTHONY M. TANG
------------ ----------------------
Anthony M. Tang
Chief Financial Officer
26
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