<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 September 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
CATHAY BANCORP, INC.
------------------------------------------------------------------------------
(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
------------------------------------------------------------------------------
(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 X
--- ---
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, 9,074,168 shares outstanding as of November
10, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION .................................................................................3
Item 1. Financial Statements (unaudited) .....................................................4
Notes to Condensed Consolidated Financial Statements (unaudited) ...........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...........................................8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .....................................................................29
PART II - OTHER INFORMATION .................................................................................29
Item 1. Legal Proceedings...........................................................................29
Item 2. Changes in Securities and Use of Proceeds .................................................29
Item 3. Defaults upon Senior Securities ..........................................................29
Item 4. Submission of Matters to a Vote of Security Holders ......................................29
Item 5. Other Information .......................................................................29
Item 6. Exhibits and Reports on Form 8-K .........................................................29
SIGNATURES ...................................................................................................30
</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>
Sept. 30, 2000 Dec. 31, 1999
---------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 53,521 $ 59,081
Federal funds sold and securities purchased under
agreements to resell -- 5,000
---------------------- ---------------------
Cash and cash equivalents 53,521 64,081
Securities available-for-sale (amortized cost of
$219,832 in 2000 and $162,728 in 1999) 220,092 160,991
Securities held-to-maturity (estimated fair
value of $401,044 in 2000 and $416,827 in 1999) 406,912 426,332
Loans (net of allowance for loan losses of
$21,574 in 2000 and $19,502 in 1999) 1,406,919 1,245,585
Other real estate owned, net 5,098 4,337
Investments in real estate, net 17,383 16,987
Premises and equipment, net 29,626 25,299
Customers' liability on acceptances 21,529 13,721
Accrued interest receivable 15,065 13,150
Goodwill 9,895 10,559
Other assets 16,184 14,882
---------------------- ---------------------
Total assets $ 2,202,224 $ 1,995,924
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 215,460 $ 195,140
Interest bearing accounts
NOW accounts 123,532 121,394
Money market deposits 120,939 97,821
Savings deposits 227,079 236,764
Time deposits under $100 375,674 362,553
Time deposits of $100 or more 746,865 708,064
---------------------- ---------------------
Total deposits 1,809,549 1,721,736
Federal funds purchased and securities sold
under agreements to repurchase 139,465 46,990
Advances from Federal Home Loan Bank 10,000 30,000
Acceptances outstanding 21,529 13,721
Other liabilities 16,962 4,368
---------------------- ---------------------
Total liabilities 1,997,505 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, 9,063,810 and 9,033,583 shares issued and
outstanding in 2000 and 1999, respectively 91 90
Additional paid-in-capital 65,787 64,529
Accumulated other comprehensive income (loss), net 151 (1,006)
Retained earnings 138,690 115,496
---------------------- ---------------------
Total stockholders' equity 204,719 179,109
---------------------- ---------------------
Total liabilities and stockholders' equity $ 2,202,224 $ 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>
3rd Qtr 3rd Qtr YTD YTD
Sept. 2000 Sept. 1999 Sept. 2000 Sept. 1999
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 33,008 $ 24,056 $ 92,122 $ 67,134
Interest on securities available-for-sale 4,238 2,460 10,137 8,268
Interest on securities held-to-maturity 5,621 6,697 17,877 20,319
Interest on Federal funds sold and securities
purchased under agreements to resell 160 272 551 1,810
Interest on deposits with banks 12 4 32 10
-------- ----------- ---------- --------
Total interest income 43,039 33,489 120,719 97,541
--------- ----------- ---------- --------
INTEREST EXPENSE
Time deposits of $100 or more 10,760 8,268 30,009 24,192
Other deposits 6,958 4,992 19,257 15,034
Other borrowed funds 1,839 834 4,246 3,152
-------- ---------- --------- --------
Total interest expense 19,557 14,094 53,512 42,378
-------- ---------- --------- --------
Net interest income before provision for loan losses 23,482 19,395 67,207 55,163
Provision for loan losses 1,050 1,050 3,150 3,150
-------- ---------- --------- --------
Net interest income after provision for loan losses 22,432 18,345 64,057 52,013
-------- ---------- --------- --------
NON-INTEREST INCOME
Securities gains (losses) - 10 - (3)
Letter of credit commissions 627 578 1,792 1,643
Service charges 1,146 905 3,291 2,729
Other operating income 973 868 3,207 2,091
-------- ---------- --------- --------
Total non-interest income 2,746 2,361 8,290 6,460
-------- ---------- --------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 5,449 4,673 16,352 14,021
Occupancy expense 759 628 2,357 1,905
Computer and equipment expense 666 647 2,022 1,905
Professional services expense 969 702 2,609 2,472
FDIC and State assessments 88 105 344 301
Marketing expense 255 211 924 779
Real estate operations, net 81 (28) 40 (560)
Operations of investments in real estate 296 94 736 (180)
Other operating expense 930 611 2,657 2,158
-------- ---------- --------- --------
Total non-interest expense 9,493 7,643 28,041 22,801
-------- ---------- --------- --------
Income before income tax expense 15,685 13,063 44,306 35,672
Income tax expense 4,233 5,170 15,413 14,091
-------- ---------- --------- --------
Net income 11,452 7,893 28,893 21,581
-------- ---------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during the
period 986 231 1,157 (1,298)
Less: reclassification adjustment for realized
gains (losses) on securities included in net income - 6 - (2)
-------- ---------- --------- ---------
Total other comprehensive income (loss), net of tax 986 225 1,157 (1,296)
-------- ---------- --------- ---------
Total comprehensive income $ 12,438 $ 8,118 $ 30,050 $ 20,285
======== ========== ========= =========
Net income per common share
Basic $ 1.26 $ 0.88 $ 3.19 $ 2.40
Diluted $ 1.26 $ 0.87 $ 3.19 $ 2.39
Cash dividends paid per common share $ 0.210 $ 0.210 $ 0.630 $ 0.595
Basic average common shares outstanding 9,061,535 9,018,901 9,051,734 9,007,543
Diluted average common shares outstanding 9,081,702 9,026,190 9,066,127 9,013,132
</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>
Nine months ended September 30,
---------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 28,893 $ 21,581
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,150 3,150
Provision for losses on other real estate owned 71 298
Depreciation 1,008 1,015
Net gain on sales of other real estate owned (238) (660)
Gain on sales of investments in real estate - (394)
Loss on sales and calls of investment securities - 3
Amortization and accretion of investment
security premiums, net (1,024) 661
Net decrease in goodwill 664 507
Increase (decrease) in deferred loan fees, net 608 (143)
Increase in accrued interest receivable (1,915) (39)
(Increase) decrease in other assets, net (1,302) 116
Increase in other liabilities 2,604 2,326
---------------------------------------------------------------------------------------------------------------------------
Total adjustments 3,626 6,840
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,519 28,421
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available-for-sale (591,782) (830,704)
Proceeds from maturities and calls of investment securities available-for-sale 566,546 947,035
Proceeds from sale of investment securities available-for-sale 21,443 -
Proceeds from repayments of mortgage-backed securities
available-for-sale 4,564 8,685
Purchases of investment securities held-to-maturity (32,240) (45,057)
Proceeds from maturities and calls of investment securities held-to-maturity 3,680 1,310
Purchases of mortgage-backed securities held-to-maturity (29,604) (38,157)
Proceeds from repayments of mortgage-backed securities held-to-maturity 29,883 60,922
Net increase in loans (168,376) (215,029)
Purchases of premises and equipment (5,335) (662)
Proceeds from sale of other real estate owned 2,690 1,798
Proceeds from sale of investments in real estate - 1,026
Net increase in investments in real estate (396) (16,082)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (198,927) (124,915)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market and savings deposits 35,891 3,356
Net increase in time deposits 51,922 82,690
Net increase (decrease) in Federal funds purchased and
securities sold under agreements to repurchase 92,475 (6,970)
Decrease in advances from Federal Home Loan Bank (20,000) -
Cash dividends (5,698) (5,355)
Proceeds from shares issued under Dividend Reinvestment Plan 1,229 1,218
Proceeds from exercise of stock options 29 -
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 155,848 74,939
---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (10,560) (21,555)
Cash and cash equivalents, beginning of the period 64,081 81,656
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the period $ 53,521 $ 60,101
---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 52,960 $ 42,520
Income taxes $ 13,292 $ 9,750
Non-cash investing activities:
Purchase of securities not yet settled $ 9,990 $ -
Transfers to securities available-for-sale
within 90 days of maturity $ 57,389 $ 1,975
Net change in unrealized holding gains (losses) on securities
available-for-sale, net of tax $ 1,157 $ (1,296)
Transfers to other real estate owned $ 4,799 $ 776
Loans to facilitate the sale of other real estate owned $ 1,515 $ 1,187
---------------------------------------------------------------------------------------------------------------------------
</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 nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending 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.
In June 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" was issued and amended SFAS No. 133. The impact of
implementing these statements are not expected to be material to the Company's
results of operations or financial condition.
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" as a
replacement of SFAS No. 125 effective for disclosures in financial statements
issued subsequent to December 15, 2000, and for
7
<PAGE>
transactions entered after March 31, 2001. Management does not expect the
adoption of SFAS No. 140 to have a material impact on the financial
statements.
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,
including plans regarding the registered investment company, 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 $11.5 million or $1.26 per diluted common share
for the third quarter of 2000, compared with $7.9 million or $0.87 per diluted
common share for the same quarter of 1999. The $3.6 million or 45% increase in
2000 third quarter net income was primarily attributable to the following:
- a $4.1 million or 21% increase in net interest income before provision for
loan losses
- a $385,000 or 16% increase in non-interest income
- a $1.9 million or 24% increase in non-interest expense
- a $937,000 or 18% decrease in income tax expense
The annualized return on average assets and return on average stockholders'
equity for the third quarter of 2000 and 1999 are presented below:
8
<PAGE>
<TABLE>
<CAPTION>
3RD QTR, 2000 3RD QTR, 1999
------------- -------------
<S> <C> <C>
Return on average assets 2.10% 1.73%
Return on average stockholders' equity 23.37% 18.76%
</TABLE>
For the nine months ended September 30, 2000, we reported net income of
$28.9 million or $3.19 per diluted common share, compared with $21.6 million or
$2.39 per diluted common share for the same period of 1999. The increase in
year-to-date net income of $7.3 million or 34% was resulted from:
- a $12.0 million or 22% growth in net interest income before provision for
loan losses
- a $1.8 million or 28% growth in non-interest income
- a $5.2 million or 23% increase in non-interest expense
- a $1.3 million or 9% increase in income tax expense
The annualized return on average assets and return on average stockholders'
equity for the first nine months of 2000 and 1999 are presented below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Return on average assets 1.84% 1.57%
Return on average stockholders' equity 20.61% 17.75%
</TABLE>
NET INTEREST INCOME
3RD QUARTER
Net interest income before provision for loan losses for the third quarter
of 2000 and 1999 are summarized below:
<TABLE>
<CAPTION>
(In thousands)
3RD QTR, 2000 3RD QTR, 1999
------------- -------------
<S> <C> <C>
Net interest income before provision for loan losses $23,482 $19,395
Net interest income before provision for loan losses,
tax equivalent $23,935 $19,818
</TABLE>
The increase in net interest income in the third quarter of 2000 is
discussed below:
INTEREST INCOME
- Interest income increased $9.6 million or 29% to $43.0 million primarily
due to an increase of $9.0 million from interest income on loans to $33.0
million.
- The $9.0 million increase in interest income on loans was attributable to
the following:
1. Increase in volume: an increase of $266.5 million or 24% in average net
loans from $1,092.3 million in the third quarter of 1999 to $1,358.8
million in the third quarter of 2000 contributed an additional $6.9
million to interest income. The increase in average
9
<PAGE>
loans were funded primarily by growth in deposits, and secondarily
Federal funds purchased and securities sold under agreements to
repurchase, proceeds from matured securities and cash.
2. Increase in rate: an increase of 92 basis points in average loan yield
from 8.74% to 9.66% added $2.1 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 from the third
quarter of 1999 to the second quarter of 2000, which led to a 140
basis point increase in our average reference rate from 8.35% to
9.75%. A majority of the Bank's loans reprice immediately.
- A change in the mix of interest earning assets: as loan demand remained
strong in the third quarter of 2000, average net loans, which yield higher
than other types of investments, rose from 63.1% to 67.8% as a percentage
of total interest earning assets. Conversely, average securities altogether
declined from 35.6% to 31.6% and average Federal funds sold decreased from
1.2% to 0.5%.
- Consequently, the average taxable equivalent yield on interest earning
assets increased 85 basis points from 7.78% to 8.63%.
INTEREST EXPENSE
- Interest expense increased $5.5 million or 39% to $19.6 million, which was
primarily attributable to an increase of $4.5 million in interest expense
on interest bearing deposits.
- Average time deposits grew $105.7 million or 10% to $1,122.9 million, of
which, $62.6 million were from time deposits over $100,000.
1. The increase in average time deposits contributed an additional $1.3
million to interest expense.
2. The increase of 98 basis points in average rate on time deposits from
4.58% to 5.56% contributed an additional $2.7 million to interest
expense. The lagging effect of time deposits due to the 50 basis point
rate hike in May 2000 by the Federal Reserve Board manifested itself
in the third quarter.
- Interest expense on Federal funds purchased and securities sold under
agreements to repurchase was up $1.0 million in the third quarter of 2000
as the average volume advanced $52.1 million and the average rate climbed
163 basis points from 4.96% to 6.59%.
- Accordingly, average cost of funds increased 83 basis points from 3.73%
to 4.56%.
NET INTEREST MARGIN
- As a result of the factors noted above, net interest margin, defined as
taxable equivalent net interest income to average interest earning assets,
increased 21 basis points from 4.54% to 4.75%.
YEAR-TO-DATE
Net interest income before provision for loan losses for the nine months
ended September 30, 2000 and 1999 are summarized below:
10
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Net interest income before provision for loan losses $67,207 $55,163
Net interest income before provision for loan losses,
tax equivalent $68,507 $56,408
</TABLE>
The following points summarize the factors impacting the increase in the
year-to-date net interest income:
INTEREST INCOME
- Average net loans grew $263.8 million or 25% to $1,313.4 million in the
first nine months of 2000. This increase in volume contributed an
additional $19.6 million to interest income.
- Average yield on loans climbed 82 basis points from 8.55% to 9.37%. This
increase in average loan yield contributed an additional $5.4 million to
interest income. Contributing to the higher loan yield in the first nine
months of 2000 was mainly a 128 basis point increase in the Bank's average
reference rate from 8.12% to 9.40%.
- The return on average interest earning assets increased 85 basis points
from 7.57% to 8.42%.
INTEREST EXPENSE
- Average time deposits rose $116.3 million to $1,106.6 million. This
increase in volume added another $4.3 million to interest expense.
- Average rate on time deposits increased 59 basis points from 4.68% to
5.27%, which added another $4.6 million to interest expense.
- Cost of funds advanced 51 basis points from 3.79% to 4.30%.
NET INTEREST MARGIN
- Net interest margin increased 39 basis points from 4.33% in the first nine
months of 1999 to 4.72% in the same period of 2000.
PROVISION FOR LOAN LOSSES
Management provided $1.05 million for loan losses in the third quarter of
2000 as well as 1999. The provision for loan losses for the nine months ended
September 30, 2000 and 1999 amounted to $3.15 million. Net charge-offs for the
third quarter and first nine months of 2000 were $383,000 and $1.1 million,
respectively.
NON-INTEREST INCOME
3RD QUARTER
Non-interest income totaled $2.7 million and $2.4 million for the third
quarter of 2000 and 1999. The $385,000 or 16% increase in the third quarter of
2000 was primarily due to the following items:
11
<PAGE>
- 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 $8.3 million and $6.5 million for the first
nine months of 2000 and 1999. In addition to the items mentioned in the previous
paragraph, fees and charges related to loans and fee income from financial
guarantees contributed to the increase in the year-to-date non-interest income.
NON-INTEREST EXPENSE
3RD QUARTER
Non-interest expense amounted to $9.5 million for the third quarter of 2000
as compared to $7.6 million for the same quarter of 1999. The $1.9 million or
24% increase was substantially attributable to the operations of the two New
York branches which were acquired in December 1999 and the new Diamond Bar
branch which opened for business in January 2000. The more significant items are
discussed below:
- An increase of $776,000 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 2000.
- An increase of $319,000 in other operating expense. Other operating expense
includes primarily operating supplies, communications, postage, travel,
administrative, amortization of goodwill and general insurance expenses.
The increase in these expenses were partially related to the two New York
branches and the Diamond Bar branch.
- An increase of $267,000 in professional services expense. Professional
services expense consists of, among other things, bank paid appraisal fees,
delivery service, armored service, legal fees, accounting fees, consulting
fees, computer related expense and facility management expense.
- An increase of $202,000 in operations of investments in real estate. The
increase in the third quarter of 2000 was due to higher expense in
operations of investments in real estate arising from passive operation
losses on low income housing.
As a result, the efficiency ratio was slightly higher at 36.19% for the
third quarter of 2000 as compared to 35.13% for the same quarter of 1999.
YEAR-TO-DATE
Non-interest expense reached $28.0 million for the nine months ended
September 30, 2000, compared with $22.8 million for the same period in 1999. In
addition to a $2.3 million increase in salaries and employee benefits and a
$499,000 increase in other operating expense due to the same reasons as
explained previously, the following items also contributed to the $5.2 million
or 23% increase in the year-to date non-interest expense:
12
<PAGE>
- An increase of $916,000 in operations of investments in real estate. The
Bank recorded an expense of $736,000 in operations of investments in real
estate arising from passive operation losses on low income housing in the
first nine months of 2000 compared with income of $180,000 in the same
period of 1999 due to a $394,000 gain on sale of a real estate investment
property.
- An increase of $600,000 in net other real estate owned ("OREO") expense.
This was attributable to a decrease of $422,000 in net gains on sales of
OREO and a decrease of $389,000 in OREO rental income offset by a reduction
of $227,000 in the provision for OREO losses.
- An increase of $452,000 in occupancy expense, largely from the rent expense
for the New York branches.
The efficiency ratio for the nine months ended September 30, 2000 was
37.14%, which approximated the 37.00% for the same period a year ago.
INCOME TAX EXPENSE
The effective tax rate in the third quarter of 2000 declined to 27.0%
compared with 39.6% in the third quarter of 1999 reflecting a decline in the
expected tax rate for fiscal year 2000 to 34.8% from 39.5% in 1999. The decline
is due primarily to the impact of the formation of a regulated investment
company subsidiary that provides flexibility to raise additional capital in a
tax efficient manner. The long-term plan for the regulated investment company is
currently under review. There can be no assurance as to the timing or ability of
the Company to raise capital through this subsidiary.
FINANCIAL CONDITION OVERVIEW
We continued our steady growth during the first nine months of 2000. The
following are the major balance sheet items which are discussed in detail later
in this report:
- Total assets increased 10% to $2,202.2 million from $1,995.9 million at
year-end 1999.
- Total net loans grew 13% to $1,406.9 million from $1,245.6 million at
year-end 1999.
- Securities available-for-sale increased 37% to $220.1 million from $161.0
million at year-end 1999.
- Securities held-to-maturity decreased 5% to $406.9 million from $426.3
million at year-end 1999.
- Total deposits increased 5% to $1,809.5 million from $1,721.7 million at
year-end 1999.
- Federal funds purchased and securities sold under agreements to repurchase
increased 197% to $139.5 million from $47.0 million at year-end 1999.
- Advance from Federal Home Loan Bank decreased 67% to $10.0 million from
$30.0 million at year-end 1999.
- Stockholders' equity rose 14% to $204.7 million from $179.1 million at
year-end 1999.
13
<PAGE>
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 9/30/00 AS OF 12/31/99
------------------------- ----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ -0- 0.0% $ 5,000 0.3%
Securities available-for-sale 220,092 10.8 160,991 8.8
Securities held-to-maturity 406,912 20.0 426,332 23.2
Loans, net of deferred loan fees 1,428,493 70.2 1,265,087 68.8
Allowance for loan losses (21,574) (1.1) (19,502) (1.1)
---------- --------- ----------- ------
Loans, net 1,406,919 69.1 1,245,585 67.7
Deposits with banks 808 0.1 568 -0-
---------- ---------- ----------- ------
Total interest earning assets $2,034,731 100.0% $1,838,476 100.0%
========== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
AVERAGE INTEREST EARNING ASSETS: 3RD QTR, 2000 3RD QTR, 1999
----------------------------- -----------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 9,777 0.5% $ 21,288 1.2%
Securities available-for-sale 253,923 12.6 169,628 9.8
Securities held-to-maturity 380,165 19.0 446,579 25.8
Loans, net of deferred loan fees 1,380,045 68.9 1,110,309 64.2
Allowance for loan losses (21,241) (1.1) (18,051) (1.0)
---------- ------ ---------- -------
Loans, net 1,358,804 67.8 1,092,258 63.2
Deposits with banks 1,156 0.1 511 -0-
---------- ------ ---------- -------
Total interest earning assets $2,003,825 100.0% $1,730,264 100.0%
========== ====== ========== =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
AVERAGE INTEREST EARNING ASSETS: SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------- -----------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------
<S> <C> <C> <C> <C>
Federal funds sold and securities purchased
under agreements to resell $ 11,976 0.6% $ 47,853 2.7%
Securities available-for-sale 209,540 10.8 193,244 11.1
Securities held-to-maturity 400,735 20.7 452,467 26.0
Loans, net of deferred loan fees 1,333,986 68.9 1,066,859 61.2
Allowance for loan losses (20,579) (1.1) (17,224) (1.0)
---------- ------ ---------- ------
Loans, net 1,313,407 67.8 1,049,635 60.2
Deposits with banks 1,186 0.1 509 -0-
---------- ------ ---------- ------
Total interest earning assets $1,936,844 100.0% $1,743,708 100.0%
========== ====== ========== ======
</TABLE>
14
<PAGE>
From the tables above, we can see that:
- Loan demand continued to be strong during the third quarter as well as the
first nine months of 2000. Average net loans grew 24% between the third
quarter of 1999 and 2000 and 25% between the first nine months of 1999 and
2000.
- Average securities as a whole decreased 5% from the first nine months of
1999 to the same period of 2000 primarily due to proceeds from some matured
or called securities not being reinvested to meet strong loan demand.
However, average securities altogether increased 3% between the third
quarter of 1999 and 2000 resulting primarily from higher average securities
available-for-sale.
- As discussed previously in the net interest income section, we experienced
a change in the interest earning assets from securities to loans, which is
generally favorable to our net interest margin.
SECURITIES
As of September 30, 2000, we had $260,000 in unrealized holding gains on
securities available-for-sale compared with unrealized holding losses of $1.7
million at year-end 1999. These unrealized gains or losses, net of tax
effect, were included in the Company's stockholders' equity for the periods
reported. The unrealized gains, net of tax, were $151,000 at September 30,
2000 and the unrealized losses, net of tax, were $1.0 million at year-end
1999.
The average taxable equivalent yield on securities rose 26 basis points to
6.43% in the third 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 securities portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AS OF 9/30/00 (IN THOUSANDS)
------------------------------------------------------------------
AMORTIZED GROSS GROSS
SECURITIES AVAILABLE-FOR-SALE: COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government agencies $ 65,446 $ 872 $ -0- $ 66,318
State and municipal securities 345 -0- -0- 345
Mortgage-backed securities 12,910 1 100 12,811
Collateralized mortgage obligations 6,339 -0- 124 6,215
Assets-backed securities 11,448 -0- 370 11,078
Federal Home Loan Bank Stock 5,521 -0- -0- 5,521
Commercial paper 49,816 -0- 16 49,800
Corporate bonds 59,568 566 530 59,604
Equity securities 8,439 -0- 39 8,400
----------- ---------- --------- -----------
Total $219,832 $1,439 $1,179 $220,092
======== ====== ====== ========
</TABLE>
15
<PAGE>
<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>
<TABLE>
<CAPTION>
AS OF 9/30/00 (IN THOUSANDS)
-----------------------------------------------------------------
CARRYING GROSS GROSS ESTIMATED
SECURITIES HELD-TO-MATURITY: VALUE UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government agencies $ 74,673 $ 168 $ 1,069 $ 73,772
State and municipal securities 69,823 904 1,564 69,163
Mortgage-backed securities 142,266 221 2,109 140,378
Collateralized mortgage obligations 52,060 -0- 622 51,438
Assets-backed securities 16,835 -0- 159 16,676
Corporate bonds 51,255 -0- 1,638 49,617
--------- -------- --------- ---------
Total $406,912 $1,293 $ 7,161 $401,044
======== ====== ======== ========
</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>
16
<PAGE>
SECURITIES PORTFOLIO MATURITY DISTRIBUTION:
<TABLE>
<CAPTION>
AS OF 9/30/00 (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. government agencies $ -0- $16,802 $49,516 $ -0- $ 66,318
State and municipal securities 345 -0- -0- -0- 345
Mortgage-backed securities* 2,582 571 1,739 7,919 12,811
Collateralized mortgage obligations* -0- -0- 2,764 3,451 6,215
Assets-backed securities* 1,453 -0- 9,625 -0- 11,078
Federal Home Loan Bank stock 5,521 -0- -0- -0- 5,521
Commercial paper 49,800 -0- -0- -0- 49,800
Corporate bonds 11,442 38,618 9,544 -0- 59,604
Equity securities 8,400 -0- -0- -0- 8,400
---------- ----------- ----------- ----------- -----------
Total $ 79,543 $55,991 $73,188 $11,370 $220,092
======== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF 9/30/00 (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- $ 64,683 $ 9,990 $ -0- $ 74,673
State and municipal securities 2,744 8,484 24,361 34,234 69,823
Mortgage-backed securities* 2,539 8,258 48,954 82,515 142,266
Collateralized mortgage obligations* -0- -0- 41,585 10,475 52,060
Assets-backed securities* -0- 16,835 -0- -0- 16,835
Corporate bonds 4,002 42,217 5,036 -0- 51,255
--------- ---------- ----------- ------------- ----------
Total $ 9,285 $140,477 $129,926 $127,224 $406,912
======== ======== ======== ======== ========
</TABLE>
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
LOANS
Our loan demand remained strong in the first nine months as well as the
third quarter of 2000. Total gross loans grew $164.0 million or 13% to $1,432.7
million at September 30, 2000, compared with $1,268.7 million at year-end 1999.
During the third quarter of 2000, gross loans increased $65.6 million.
The growth was primarily attributable to real estate construction loans,
commercial mortgage loans and commercial loans. The majority of our loans are
made in California. As the California economic conditions continued to be
favorable leading to strong real estate markets, we continued to experience high
demand in construction and commercial mortgage loans. Management believes this
trend will continue in the near future. Total construction loan commitment
outstanding was approximately $58.3 million as of September 30, 2000.
In the third quarter, commercial loans had a sizable increase of $35.8
million. Management believes the increase in commercial loans due to both new
loans and higher usage of credit lines was seasonal as the commercial loan
customers are preparing for the upcoming holiday season.
17
<PAGE>
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 9/30/00 AS OF 12/31/99
TYPES OF LOANS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Commercial loans $ 440,559 31.3% $ 395,138 31.7%
Residential mortgage loans 215,809 15.3 207,568 16.7
Commercial mortgage loans 629,250 44.7 577,541 46.4
Real estate construction loans 117,694 8.4 62,516 5.0
Installment loans 28,806 2.1 25,498 2.1
Other loans 576 0.0 419 0.0
---------- ----------
Total loans, gross 1,432,694 1,268,680
Allowance for loan losses (21,574) (1.5) (19,502) (1.6)
Unamortized deferred loan fees (4,201) (0.3) (3,593) (0.3)
---------- ------ ----------- ------
Total loans, net $1,406,919 100.0% $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 $3.8 million or 17% to $18.0 million at
September 30, 2000 as compared to $21.8 million at year-end 1999. Nonaccrual
loans decreased $7.1 million while loans past due 90 days or more and still
accruing interest increased $2.6 million and OREO rose $761,000. As a percentage
of gross loans plus OREO, our non-performing assets decreased to 1.25% at
September 30, 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, increased to 167.15% at September 30, 2000,
which was considerably higher than that of 111.95% at year-end 1999. This was
primarily due to the reduction of $4.5 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)
9/30/00 12/31/99
------- --------
<S> <C> <C>
Accruing loans past due 90 days or more $ 6,278 $ 3,724
Nonaccrual loans 6,629 13,696
--------- --------
Total non-performing loans 12,907 17,420
Real estate acquired in foreclosure 5,098 4,337
--------- ---------
Total non-performing assets $18,005 $21,757
======= =======
Accruing troubled debt restructurings 4,545 4,581
Non-performing assets as a percentage of gross loans plus OREO 1.25% 1.71%
Allowance for loan losses as a percentage of non-performing loans 167.15% 111.95%
</TABLE>
18
<PAGE>
NONACCRUAL LOANS
The nonaccrual loans of $6.6 million at September 30, 2000 consisted mainly
of $4.0 million in commercial mortgage loans and $2.1 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:
<TABLE>
<CAPTION>
(In thousands)
9/30/00 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 $ 671 $ 459 $ 1,014 $ 628
Commercial 304 1,050 4,971 5,425
Land 2,989 30 -0- -0-
Others -0- 336 186 307
Unsecured -0- 221 -0- 392
----------- ----------- ---------- ----------
Total $ 3,964 $ 2,096 $ 6,171 $ 6,752
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
9/30/00 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 $ 94 $ 354 $ 347
Real estate management -0- -0- 4,366 100
Wholesale/retail -0- 618 -0- 896
Food/Restaurant -0- 883 -0- 889
Import 332 -0- 621 3,307
Motel -0- -0- 425 -0-
Investments 303 -0- 334 -0-
Manufacturing -0- 240 -0- 270
Others 340 261 71 943
--------- --------- ----------- ----------
Total $ 3,964 $ 2,096 $ 6,171 $ 6,752
======== ======== ======== ========
</TABLE>
COMMERCIAL MORTGAGE NONACCRUAL LOANS
- The balance of $3.0 million consisted of two credits secured by first
trust deeds on land.
19
<PAGE>
COMMERCIAL NONACCRUAL LOANS
---------------------------
- The balance of $1.1 million consisted of four credits secured primarily by
first trust deeds on commercial buildings and warehouses.
TROUBLED DEBT RESTRUCTURINGS
----------------------------
Troubled debt restructurings were reduced slightly to $4.5 million as of
September 30, 2000 compared with $4.6 million at year-end 1999. All of the
troubled debt restructurings at September 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, 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 September 30, 2000 we identified impaired loans with a recorded
investment of $27.5 million, compared to $26.3 million as of December 31, 1999.
LOAN CONCENTRATION
------------------
We experienced no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of September 30, 2000.
ALLOWANCE FOR LOAN LOSSES
The following table presents information relating to the allowance for loan
losses for the periods indicated:
20
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
For the For the
nine months ended year ended
9/30/00 12/31/99
------------------ -----------
<S> <C> <C>
Balance at beginning of period $19,502 $15,970
Provision for loan losses 3,150 4,200
Loans charged-off (1,214) (1,731)
Recoveries of charged-off loans 136 1,063
---------- ---------
Balance at end of period $21,574 $19,502
======= =======
Average net loans outstanding during the period $1,313,407 $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) 0.32% 0.39%
Allowance to non-performing loans at period-end 167.15% 111.95%
Allowance to gross loans at period-end 1.51% 1.54%
</TABLE>
- The $1.2 million charged-off loans in the first nine months of 2000
comprised $500,000 in construction loans, $414,000 in commercial loans and
$300,000 in installment loans and other loans.
- The $136,000 recoveries were mainly from installment loans and commercial
loans.
In determining 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
allowances as of the dates indicated:
21
<PAGE>
<TABLE>
<CAPTION>
AS OF 9/30/00 (IN THOUSANDS)
--------------------------------------------
RECORDED NET
INVESTMENT ALLOWANCE BALANCE
---------- --------- -------
<S> <C> <C> <C>
Commercial $14,423 $3,979 $ 10,444
Commercial mortgage 13,035 2,488 10,547
Other 16 16 -0-
----------- --------- ----------
Total $27,474 $6,483 $20,991
======= ====== =======
</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 September 30, 2000 to be adequate to absorb estimated
probable losses identified through its analysis.
OTHER REAL ESTATE OWNED
Our OREO, net of a valuation allowance of $131,000, was carried at $5.1
million as of September 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 nine months of 2000, we acquired four properties in the
amount of $4.8 million and disposed of eight properties totaling $4.5 million
with a net gain of $238,000. There were four outstanding OREO properties at
September 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 $71,000 to the provision for OREO losses in
the first nine months of 2000.
INVESTMENTS IN REAL ESTATE
Our investments in real estate increased $396,000 to $17.4 million at
September 30, 2000 from $17.0 million at year-end 1999. They are consisted of
investments in four limited
22
<PAGE>
partnerships formed for the purpose of investing in low income housing
projects, which qualify for Federal low income housing tax credits and/or
California tax credit.
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 9/30/00 12/31/99
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Las Brisas 49.50% 12/93 $ 119 $ 209
Los Robles 99.00% 08/95 395 431
California tax credit fund 36.00% 03/99 14,230 14,841
Wilshire Courtyard 99.90% 05/99 2,639 1,506
--------- ---------
$17,383 $16,987
======= =======
</TABLE>
DEPOSITS
During the first nine months of 2000, total deposits grew by $87.8 million
or 5% to $1,809.5 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.
However, total deposits decreased $6.8 million in the third quarter of
2000. The decrease resulted from a reduction of $4.8 million in Jumbo CD's and a
decline of $2.0 million in core deposits. Most of our Jumbo CD customers seek
1-year term under the prevailing interest rate environment. As the market
interest rates are pointing to a decreasing trend, management was unwilling to
lock in 1-year CD's at higher interest rates and would rather be
non-competitive. Nonetheless, average deposits increased $30.0 million during
the third quarter of 2000, 92% of which came from core deposits.
The following tables display the deposit mix as of the dates and for the
periods indicated:
<TABLE>
<CAPTION>
(Dollars in thousands)
AS OF 9/30/00 AS OF 12/31/99
------------------------------------------------------
TYPES OF DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand $ 215,460 11.9% $ 195,140 11.3%
NOW accounts 123,532 6.8 121,394 7.0
Money market accounts 120,939 6.7 97,821 5.7
Savings deposits 227,079 12.5 236,764 13.8
Time deposits under $100 375,674 20.8 362,553 21.1
Time deposits of $100 or more 746,865 41.3 708,064 41.1
----------- --------- ----------- --------
Total deposits $1,809,549 100.0% $1,721,736 100.0%
========== ====== ========== ======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
3RD QTR, 2000 3RD QTR, 1999
---------------------------- ----------------------------
AVERAGE DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand $ 219,963 12.1% $ 186,470 11.5%
NOW accounts 123,008 6.8 117,386 7.2
Money market accounts 116,037 6.4 91,885 5.7
Savings deposits 227,466 12.6 205,202 12.7
Time deposits under $100 377,547 20.9 334,401 20.7
Time deposits of $100 or more 745,383 41.2 682,829 42.2
------------ --------- ----------- --------
Total deposits $1,809,404 100.0% $1,618,173 100.0%
========== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
9/30/00 9/30/99
---------------------------------------------------------
AVERAGE DEPOSITS: AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand $ 208,423 11.7% $ 209,621 12.9%
NOW accounts 122,489 6.9 115,947 7.2
Money market accounts 108,042 6.1 98,700 6.1
Savings deposits 228,860 12.9 205,538 12.7
Time deposits under $100 371,847 21.0 334,219 20.6
Time deposits of $100 or more 734,751 41.4 656,094 40.5
----------- --------- ----------- --------
Total deposits $1,774,412 100.0% $1,620,119 100.0%
========== ====== ========== ======
</TABLE>
From the above tables, we can see that:
- Core deposits increased $49.0 million during the first nine months of 2000.
Contributing to the growth of core deposits were primarily money market
accounts and demand deposits partially attributable to various promotions.
- As a single deposit type, jumbo CD's still accounted for the most increase
which added $38.8 million in the first nine months of 2000 albeit the
growth was moderated.
- Between the third quarters of 2000 and 1999, average core deposits
increased $128.7 million while average Jumbo CD's rose $62.6 million.
As interest rate spreads widened between Jumbo CD's and other types of
interest-bearing deposits under the existing 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;
2) the Jumbo CD portfolio continued to be diversified with 4,241 individual
accounts averaging approximately $172,000 per account owned by 2,937
individual depositors as of August 3, 2000;
24
<PAGE>
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 concentration 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 $204.7 million or 9.30% of total assets as
of September 30, 2000, compared with $179.1 million or 8.97% of total assets at
year-end 1999. The increase of $25.6 million in stockholders' equity was
primarily from:
- an addition of $28.9 million from net income, less dividends paid of $5.7
million.
- $1.3 million from issuance of additional common shares through the Dividend
Reinvestment Plan and proceeds from exercise of stock options
- a favorable difference of $1.1 million in the net unrealized holding gains
and 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 9,054,782 shares outstanding,
respectively. In October 2000, the Board of Directors authorized a cash dividend
increase of $.04 or 19% per common share to $.25 on 9,064,486 shares
outstanding. Total cash dividends paid in 2000, including the $2.3 million paid
in October, amounted to $8.0 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 September 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 September 30, 2000 and December 31, 1999:
25
<PAGE>
<TABLE>
<CAPTION>
COMPANY (DOLLARS IN THOUSANDS)
--------------------------------------------------------------
AS OF 9/30/00 AS OF 12/31/99
--------------------------------------------------------------
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $194,675(1) 10.57% $169,556(2) 10.50%
Tier 1 capital minimum requirement 73,696 4.00 64,588 4.00
-------- ---------- -------- -----
Excess $120,979 6.57% $104,968 6.50%
======== ======== ======== =====
Total capital (to risk-weighted assets) $216,249(1) 11.74% $189,058(2) 11.71%
Total capital minimum requirement 147,392 8.00 129,176 8.00
-------- ---------- -------- ------
Excess $ 68,857 3.74% $ 59,882 3.71%
======== ======== ======== =====
Risk-weighted assets $1,842,398 $1,614,695
Tier 1 capital (to average assets)
- Leverage ratio $194,675(1) 9.01% $169,556(2) 8.93%
Minimum leverage requirement 86,397 4.00 75,974 4.00
-------- -------- -------- -----
Excess $ 108,278 5.01% $ 93,582 4.93%
========= ======== ======== ======
Total average assets $2,159,937 $1,899,358
</TABLE>
<TABLE>
<CAPTION>
BANK (DOLLARS IN THOUSANDS)
-------------------------------------------------------------
AS OF 9/30/00 AS OF 12/31/99
-------------------------------------------------------------
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets) $187,074(1) 10.16% $163,093(2) 10.10%
Tier 1 capital minimum requirement 73,669 4.00 64,588 4.00
-------- ------- -------- -----
Excess $113,405 6.16% $ 98,505 6.10%
======== ======== ======== =====
Total capital (to risk-weighted assets) $208,648(1) 11.33% $182,595(2) 11.31%
Total capital minimum requirement 147,337 8.00 129,176 8.00
-------- ------- -------- -----
Excess $ 61,311 3.33% $ 53,419 3.31%
======== ======== ======== =====
Risk-weighted assets $1,841,714 $1,614,695
Tier 1 capital (to average assets)
- Leverage ratio $187,074(1) 8.67% $163,093(2) 8.59%
Minimum leverage requirement 86,266 4.00 75,974 4.00
--------- ------- --------- -----
Excess $100,808 4.67% $ 87,119 4.59%
======== ======= ========= =====
Total average assets $2,156,655 $1,899,356
</TABLE>
1 Excluding the unrealized holding gains on securities available-for-sale of
$151,000, and goodwill of $9,895,000.
2 Excluding the unrealized holding losses on securities available-for-sale of
$1,006,000, and goodwill of $10,559,000.
26
<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, Federal funds purchased and securities sold under
agreements to repurchase and advances from Federal Home Loan Bank ("FHLB"). As
of September 30, 2000, our liquidity ratio (defined as net cash, short-term and
marketable securities to net deposits and short-term liabilities) decreased to
28.43%, compared with 33.91% at year-end 1999. The decrease was due to a
combination of:
- A reduction of $69.8 million in net cash, short-term and marketable
securities
- An increase of $86.1 million in net deposit and short-term liabilities
To supplement its liquidity needs, the Bank maintains a total credit line
of $52 million for Federal funds with three correspondent banks, repo lines 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, $20
million of which expired during the third quarter of 2000.
We had significant portion of our time deposits maturing within one year or
less as of September 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.
27
<PAGE>
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 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 details the expected maturity and
repricing opportunities mismatch or sensitivity gap between interest-earning
assets and interest-bearing liabilities over a specified timeframe. A positive
gap exists when rate sensitive assets which reprice over a given time period
exceed rate sensitive liabilities. During periods of increasing interest rates,
net interest margin may be enhanced with a positive gap. A negative gap exists
when rate sensitive liabilities which reprice over a given time period exceed
rate sensitive assets. During periods of increasing interest rates, net interest
margin may be impaired with a negative gap.
As of September 30, 2000, the Company was asset sensitive with a cumulative
gap ratio of a positive 19.34% within three months, and liability sensitive with
a cumulative gap ratio of a negative 9.69% 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 assets 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, management will use hedging
instruments when deemed prudent to maintain and/or increase our spread. In the
first quarter of 2000, management entered into an interest rate swap agreement
with a major financial institution in the notional amount of $20 million for a
period of five years. The interest rate swap was for the purpose of hedging a
portion of our floating rate loans against declining interest rates. In the
third quarter of 2000, we entered into a forward rate agreement with a major
financial institution in the notional amount of $100 million to be effective six
months from the contract date for a year. The forward rate agreement was for the
purpose of hedging a portion of our Jumbo CD portfolio against declining
interest rates.
28
<PAGE>
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 27 and 28.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, including its wholly-owned subsidiary, Cathay Bank, has been a
party to ordinary routine litigation incidental to various aspects of its
operations.
Management is not currently aware of any other litigation that is expected
to have material adverse impact on the Company's consolidated financial
condition, or the results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the third quarter of 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
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CATHAY BANCORP, INC.
--------------------
(Registrant)
Date: NOVEMBER 10, 2000 BY /s/ DUNSON K. CHENG
------------------ ----------------------
Dunson K. Cheng
Chairman and President
Date: NOVEMBER 10, 2000 BY /s/ ANTHONY M. TANG
----------------- ----------------------
Anthony M. Tang
Chief Financial Officer
30
