-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pa2z1/Neic7zekHt5Ux1Y39Zd+GMAo37qjdVyPUJXfBlD2E8P3xvknEBya8gTRnS 9Wm7gcREBX9aO0CuITEa5g== 0001047469-99-032027.txt : 19990816 0001047469-99-032027.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-032027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATHAY BANCORP INC CENTRAL INDEX KEY: 0000861842 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 954274680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18630 FILM NUMBER: 99689735 BUSINESS ADDRESS: STREET 1: 777 N BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 BUSINESS PHONE: 2136254700 MAIL ADDRESS: STREET 1: 777 NORTH BROADWAY CITY: LOS ANGELES STATE: CA ZIP: 90012 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ---------------------- to --------------------- Commission file number 0-18630 -------------------------------------------------------- CATHAY BANCORP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4274680 - -------------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation 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 ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value, 9,021,158 shares outstanding as of August 10, 1999. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 3 Item 1. Financial Statements (unaudited). . . . . . . . . . . . . . . 4 Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .23 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . .24 Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .24 Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . .24 Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . .24 Item 4. Submission of Matters to a Vote of Security Holders . . . . .24 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . .24 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .25 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
-2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -3- CATHAY BANCORP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION As of June 30, 1999 and December 31, 1998 (in thousands, except share data)
June 30, 1999 Dec. 31, 1998 (unaudited) (unaudited) ----------------------- ------------------------ ASSETS Cash and due from banks $ 53,184 $ 64,656 Federal funds sold and securities purchased under agreements to resell 23,500 17,000 ----------------------- ------------------------ Cash and cash equivalents 76,684 81,656 Securities available-for-sale (amortized cost of $137,041 in 1999 and $237,877 in 1998) 136,469 239,928 Securities held-to-maturity (estimated fair value of $452,181 in 1999 and $426,778 in 1998) 454,085 418,156 Loans (net of allowance for loan losses of $17,662 in 1999 and $15,970 in 1998) 1,056,187 961,876 Other real estate owned, net 9,965 10,454 Investments in real estate, net 15,946 1,457 Premises and equipment, net 25,682 25,827 Customers' liability on acceptance 14,737 10,847 Accrued interest receivable 13,146 11,996 Goodwill 8,252 8,590 Other assets 10,256 10,111 ----------------------- ------------------------ Total assets $ 1,821,409 $ 1,780,898 ======================= ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand deposits $ 184,134 $ 178,068 Interest bearing accounts NOW accounts 116,271 114,982 Money market deposits 85,866 113,869 Savings deposits 204,625 207,365 Time deposits under $100,000 332,816 326,968 Time deposits of $100,000 or more 673,777 619,150 ----------------------- ------------------------ Total deposits 1,597,489 1,560,402 Securities sold under agreements to repurchase 7,415 16,436 Advances from Federal Home Loan Bank 30,000 30,000 Acceptances outstanding 14,737 10,847 Other liabilities 5,637 6,561 ----------------------- ------------------------ Total liabilities 1,655,278 1,624,246 Stockholders' equity Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized, 9,010,829 and 8,988,760 shares issued and outstanding in 1999 and 1998, respectively 90 90 Additional paid-in-capital 63,694 62,919 Accumulated other comprehensive income(loss) (332) 1,189 Retained earnings 102,679 92,454 ----------------------- ------------------------ Total stockholders' equity 166,131 156,652 ----------------------- ------------------------ Total liabilities and stockholders' equity $ 1,821,409 $ 1,780,898 ======================= ======================== SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-4- CATHAY BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Income and Comprehensive Income For the three and six months ended June 30, 1999 and 1998 (In thousands, except share and per share data) (unaudited)
Three months Ended Six months Ended June 1999 June 1998 June 1999 June 1998 ----------------- ----------------- ----------------- -------------- INTEREST INCOME Interest on loans $ 22,443 $ 20,352 $ 43,078 $ 39,906 Interest on securities available-for-sale 2,558 3,395 5,808 6,593 Interest on securities held-to-maturity 6,962 5,738 13,622 11,458 Interest on Federal funds sold and securities purchased under agreements to resell 574 737 1,538 1,439 Interest on deposits with banks 46 12 51 17 ----------------- ------------- ----------------- ----------------- Total interest income 32,583 30,234 64,097 59,413 ----------------- ------------- ----------------- ----------------- INTEREST EXPENSE Time deposits of $100,000 or more 8,185 7,605 15,924 14,978 Other deposits 4,953 5,901 10,042 11,757 Other borrowed funds 1,185 576 2,363 838 ----------------- ------------- ----------------- ----------------- Total interest expense 14,323 14,082 28,329 27,573 ----------------- ------------- ----------------- ----------------- Net interest income before provision for loan losses 18,260 16,152 35,768 31,840 Provision for loan losses 1,050 900 2,100 1,800 ----------------- ------------- ----------------- ----------------- Net interest income after provision for loan losses 17,210 15,252 33,668 30,040 ----------------- ------------- ----------------- ----------------- NON-INTEREST INCOME Securities gains(losses) 19 -- (13) 35 Letter of credit commissions 579 511 1,065 955 Service charges 880 1,034 1,824 2,052 Other operating income 703 608 1,223 1,113 ----------------- ------------- ----------------- ----------------- Total non-interest income 2,181 2,153 4,099 4,155 ----------------- ------------- ----------------- ----------------- NON-INTEREST EXPENSE Salaries and employee benefits 4,684 4,447 9,348 8,811 Occupancy expense 605 603 1,277 1,256 Computer and equipment expense 637 604 1,258 1,199 Professional services expense 845 902 1,770 1,657 FDIC and State assessments 99 101 196 200 Marketing expense 255 333 568 665 Real estate operations, net (79) (327) (532) (182) Operations of investments in real estate (305) (41) (274) (4) Other operating expense 732 856 1,547 1,758 ----------------- ------------- ----------------- ----------------- Total non-interest expense 7,473 7,478 15,158 15,360 ----------------- ------------- ----------------- ----------------- Income before income tax expense 11,918 9,927 22,609 18,835 Income tax expense 4,733 3,906 8,921 7,396 ----------------- ------------- ----------------- ----------------- Net Income 7,185 6,021 13,688 11,439 Other comprehensive income, net of tax: Unrealized holding gain(loss) arising during the period (673) 552 (1,310) 456 Less: reclassification adjustment for realized gain(loss) on securities included in net income 5 -- 211 (15) ----------------- ------------- ----------------- ----------------- Total other comprehensive income(loss), net of tax (678) 552 (1,521) 471 ----------------- ------------- ----------------- ----------------- Total comprehensive income $ 6,507 $ 6,573 $ 12,167 $ 11,910 ================= ============= ================= ================= Net income per common share Basic $ 0.80 $ 0.67 $ 1.52 $ 1.28 Diluted $ 0.80 $ 0.67 $ 1.52 $ 1.28 Cash dividends paid per common share $ 0.210 $ 0.175 $ 0.385 $ 0.350 Basic average common shares outstanding 9,007,496 8,962,147 9,001,770 8,956,020 Diluted average common shares outstanding 9,011,491 8,962,147 9,006,510 8,956,020
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -5- CATHAY BANCORP, INC. & SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(In thousands) -------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 13,688 $ 11,439 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,100 1,800 Provision for losses on other real estate owned 77 56 Depreciation 695 610 Net gain on sales of other real estate owned (547) (199) Net gain on sale of investments in real estate (394) (2) (Gain) loss on sales and calls of investment securities 13 (35) Amortization and accretion of investment security premiums, net 440 144 Amortization of goodwill 338 602 Increase (decrease) in deferred loan fees (5) 113 Increase in accrued interest receivable (1,150) (305) (Increase) decrease in other assets, net (145) 2,256 Increase (decrease) in other liabilities (924) 2,071 - --------------------------------------------------------------------------------------------------------------- Total adjustments 498 7,111 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 14,186 18,550 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale (428,625) (291,318) Proceeds from maturity and call of securities available-for-sale 524,262 317,759 Proceeds from sale of securities available-for-sale - 6,424 Purchase of mortgage-backed securities available-for-sale - (24,581) Proceeds from repayments of mortgage-backed securities available-for-sale 6,515 18,634 Purchase of securities held-to-maturity (45,057) (5,193) Proceeds from maturity and call of securities held-to-maturity 810 1,130 Purchase of mortgage-backed securities held-to-maturity (38,157) (51,305) Proceeds from repayments of mortgage-backed securities held-to-maturity 45,808 31,196 Net increase in loans (96,857) (51,227) Purchase of premises and equipment (550) (931) Proceeds from sale of equipment - 2 Proceeds from sale of other real estate owned 1,410 1,801 Proceeds from sale of investments in real estate 1,026 - Reduction (Addition) of investments in real estate (15,121) 89 - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (44,536) (47,520) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in demand deposits, NOW accounts, money market and savings deposits (23,388) (6,978) Net increase in time deposits 60,475 35,645 Net decrease in securities sold under agreements to repurchase (9,021) (9,639) Cash dividends (3,463) (3,132) Proceeds from shares issued to Dividend Reinvestment Plan 775 818 - --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 25,378 16,714 - --------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (4,972) (12,256) Cash and cash equivalents, beginning of the period 81,656 124,728 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of the period $ 76,684 $ 112,472 - --------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 28,548 $ 27,644 Income taxes $ 6,950 $ 6,770 Non-cash investing activities: Transfers to securities available-for-sale within 90 days of maturity $ 426 $ 365 Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax $ (1,521) $ 471 Transfers to other real estate owned $ 776 $ 2,714 Loans to facilitate the sale of other real estate owned $ 325 $ 1,436 - ---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -6- CATHAY BANCORP, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1998. 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was subsquently amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of The Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133". SFAS No. 133 amends FASB Statement No. 52, "Foreign Currency Translation", to permit special accounting for a hedge of a foreign currency forecasted transaction with a derivative. It supersedes FASB Statements No. 80 , "Accounting for Future Contracts", No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk", and No.119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". It also amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments", the disclosure provisions about concentrations of credit risk from Statement No. 105. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivative) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. As amended by SFAS No. 137, SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The impact of implementing SFAS No. 133 is not expected to be material to the Company's results of operations or financial condition. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is given based on the assumption that the reader has access to and read the Annual Report on Form 10-K for the year ended December 31, 1998 of Cathay Bancorp, Inc. ("Bancorp") and its subsidiary Cathay Bank ("the Bank"), together ("the Company"). The following discussion includes forward-looking statements regarding management's beliefs, projections and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, also include words such as "believes", "expects", "anticipates", "intends", "plans", "estimates" or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, fluctuations in interest rates, demographic changes, increases in competition, deterioration in asset or credit quality, changes in the availability of capital, adverse regulatory developments, changes in business strategy or development plans, general economic or business conditions and other factors discussed in the section entitled "Factors that May Affect Future Results" in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Actual results in any future period may also vary from the past results discussed herein. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak as of the date hereof. The Company has no intention and undertakes no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events. RESULTS OF OPERATIONS For the second quarter of 1999, the Company reported net income of $7.2 million or $0.80 per basic and diluted common share, compared with $6.0 million or $0.67 per basic and diluted common share for the same quarter of 1998, representing an increase of $1.2 million or 19.3%. Income before income tax expense amounted to $11.9 million for the second quarter of 1999, compared with $9.9 million for the same quarter of 1998, representing an increase of $2.0 million or 20.1%. The increase in 1999 second quarter income before income tax expense was primarily attributable to a $2.1 million increase in net interest income before provision for loan losses. The annualized return on average assets ("ROA") and return on average stockholders' equity ("ROE") were 1.57% and 17.77%, respectively, for the second quarter of 1999, compared with 1.46% and 16.92%, respectively, for the same quarter of 1998. For the six months ended June 30, 1999, the Company reported net income of $13.7 million or $1.52 per basic and diluted common share, compared with $11.4 million or $1.28 per basic and diluted common share for the same period of 1998. This represents an increase of $2.2 million or 19.7%. The ROA and ROE were 1.53% and 17.22%, respectively, for the first six months of 1999, compared with 1.41% and 16.40%, respectively, for the same period of 1998. NET INTEREST INCOME For the second quarter of 1999, net interest income before provision for loan losses totaled $18.3 million, compared with $16.2 million for the corresponding quarter of 1998. This represents an increase of $2.1 million or 13.1%. On a taxable equivalent basis, net interest income totaled $18.7 million in the second quarter of 1999, representing an increase of $2.2 million or 13.5% over the net interest income of $16.5 million in the same period of 1998. The increase of $2.1 million in net interest income before provision for loan losses was substantially attributable to an increase of $195.1 million in average interest-earning -8- assets, from $1,529.2 million to $1,724.3 million. Approximately 76% or $148.4 million of the increase in average interest-earning assets came from loans (net of deferred loan fees and the allowance for loan losses). Securities held-to-maturity increased $101.2 million. These increases were partially offset by decreases of $48.6 million in securities available-for-sale, $4.9 million in Federal funds sold and securities purchased under agreements to resell, and $1.0 million in deposits with other banks. The increase in average interest-earning assets was funded by increases in: 1) average deposits of $125.9 million, of which $108.7 million were interest bearing and $17.2 million were non-interest bearing; 2) other borrowed funds (including securities sold under agreements to repurchase and advances from Federal Home Loan Bank) of $51.7 million; and 3) cash and other sources of approximately $17.5 million. The increase in average loans contributed an additional $2.1 million to net interest income, which was partially offset by a decrease of 51 basis points in the average yield from 9.22% to 8.71%. This was primarily due to a decrease of 75 basis points in the Company's average reference lending rate from 8.75% to 8.00%, as a result of three consecutive 25 basis point rate cuts by the Federal Reserve Board in the last two quarters of 1998. Meanwhile, yields on all other categories of interest-earning assets decreased due to the prevailing interest rate environment causing a 33 basis point decrease in the average yield on overall interest-earning assets from 8.01% in the second quarter of 1998 to 7.68% in the same quarter of 1999. During the same period, cost of funds decreased 38 basis points from 4.20% in 1998 to 3.82% in 1999 which more than offset the decline of 33 basis points in the average yield on interest-earning assets. In addition, average loans, which generally yield higher than other types of interest-earning assets, increased as a percentage of average interest-earning assets from 57.9% in the second quarter of 1998 to 59.9% in the same quarter of 1999. Consequently, net interest margin (defined as taxable equivalent net interest income to average interest-earning assets) increased 3 basis points from 4.32% in 1998 to 4.35% in 1999. For the first six months of 1999, net interest income before provision for loan losses amounted to $35.8 million, compared with $31.8 million a year ago. On a taxable equivalent basis, net interest income was $36.6 million versus $32.5 million a year ago. The primary reason for the $3.9 million increase in year-to-date net interest income was an increase of $208.3 million in average interest-earning assets, $119.2 million of which was contributed by loans. The net interest margin for the first six months of 1999 was 4.31% compared with 4.35% for the same period a year ago. NON-INTEREST INCOME For the second quarter of 1999 and 1998, non-interest income was approximately at the same level of $2.2 million with a slight increase in 1999. This was due to increases totaling $182,000 in other operating income, letter of credit commissions and securities gains, which were largely offset by a decrease of $154,000 in service charges. The decrease in service charges was primarily due to the Bank's outsourcing of its merchant bank card portfolio in the third quarter of 1998, as a result of which the Bank received only a percentage of the income from the portfolio rather than receiving the full income and incurring the related expenses. The higher other operating income in 1999 was primarily due to increased fees and charges related to wire transfers, loans, and foreign exchange transactions. For the six months ended June 30, 1999, non-interest income totaled $4.1 million compared with $4.2 million for the same period a year ago. The slight decrease of $56,000 was attributable to a combination of a $228,000 decrease in service charges plus a slight increase in securities losses, which were substantially offset by increases totaling $220,000 in other operating income and letter of credit commissions. NON-INTEREST EXPENSE Non-interest expense stayed at $7.5 million for the second quarter of 1999, approximately the same level as the second quarter of 1998. The Company realized $305,000 from net real estate operations income primarily due to gains on sale of a real estate investment property in the second quarter of 1999. This compared with net real estate operations income of $41,000 in the same period of 1998. In -9- addition, there were decreases totaling $259,000 in other operating expense, marketing expense and professional services expense. To offset the above were an increase of $237,000 in salaries and employee benefits, and an increase of $248,000 in net other real estate owned (OREO) expense. The increase in salaries and employee benefits was largely attributable to officers' annual salary adjustments in the second quarter of 1999. The Company realized $327,000 from net OREO income in the second quarter of 1998 mainly attributable to rental income and gains on sale of OREO properties. This compared with net OREO income of $79,000 in the second quarter of 1999. The efficiency ratio continued to improve from 40.85% in the second quarter of 1998 to 36.56% in the second quarter of 1999. For the six months ended June 30, 1999, non-interest expense totaled $15.2 million compared with $15.4 million for the same period in 1998. The decrease of $202,000 was caused by declines of $350,000 in real estate operations, net, $270,000 in operations of investments in real estate, $211,000 in other operating expense and $97,000 in marketing expense, which were partially offset by increases of $537,000 in salaries and employee benefits, $113,000 in professional services expense and slight increases in occupancy and equipment expenses. The Company realized $547,000 in income from gains on sale of OREO properties in the first quarter of 1999 leading to a net OREO income of $532,000 for the first half of 1999. Salaries and employee benefits increased primarily due to officers' annual salary adjustments mentioned above along with higher accrual of cash bonuses. The efficiency ratios for the first six months of 1999 and 1998 were 38.02% and 42.67%, respectively. FINANCIAL CONDITION OVERVIEW The Company maintained moderate growth during the first six months of 1999. From year-end 1998 to June 30, 1999, total assets increased $40.5 million or 2.3% to $1,821.4 million; loans grew $94.3 million or 9.8% to $1,056.2 million; securities available-for-sale decreased $103.5 million or 43.1% to $136.5 million while securities held-to-maturity increased $35.9 million or 8.6% to $454.1 million; investments in real estate increased $14.5 million to $15.9 million; deposits increased $37.1 million or 2.4% to $1,597.5 million; and stockholders' equity increased $9.5 million or 6.1% to $166.1 million. INTEREST EARNING ASSET MIX Total interest earning assets increased $32.5 million to $1,670.8 million at June 30, 1999, compared with $1,638.3 million at year-end 1998. During the first six months of 1999, the Bank experienced a shift in the interest-earning assets from securities to loans as a result of continued good loan demand. As a percentage of total interest earning assets, loans increased from 58.7% at year-end 1998 to 63.2% at June 30, 1999; conversely, investment securities decreased from 40.2% to 35.4% during the same period. This change in the interest earning asset mix from securities to loans is generally favorable to net interest income. SECURITIES Securities available-for-sale decreased $103.4 million from $239.9 million to $136.5 million and securities held-to-maturity increased $35.9 million from $418.2 million to $454.1 million during the first six months of 1999. The overall decrease of $67.5 million or 10.3% in investment securities was primarily attributable to the excellent loan demand that the Company experienced during the period. As of June 30, 1999, unrealized holding losses on securities available-for-sale were $572,000 compared with unrealized holding gains of $2,051,000 as of December 31, 1998. These unrealized losses or gains, net of tax effect were included in the Company's stockholders' equity for the periods reported. The unrealized holding losses, net of tax, were $332,000 as of June 30, 1999 compared with the unrealized holding gains, net of tax of $1,189,000 as of year-end 1998. The unrealized holding losses resulted mainly from the increasing interest rate environment towards the end of the second quarter of 1999. -10- The following tables summarize the composition and maturity distribution of the investment portfolio as of the dates indicated:
(In thousands) SECURITIES AVAILABLE-FOR-SALE: As of 6/30/99 --------------------------------------------------------------------- Amortized Gross Gross Fair Cost Unrealized Gains Unrealized Losses Value ----------- ---------------- ------------------- ------------ U.S. Treasury securities $ -0- $ -0- $ -0- $ -0- U.S. government agencies 50,160 178 -0- 50,338 State and municipal securities 302 19 -0- 321 Mortgage-backed securities 25,234 129 100 25,263 Assets-backed securities 19,965 -0- 466 19,499 Federal Home Loan Bank stock 6,152 -0- -0- 6,152 Corporate bonds 35,228 155 487 34,896 --------- ------- ------- --------- Total $137,041 $ 481 $1,053 $136,469 ======== ======= ====== ======== (In thousands) SECURITIES AVAILABLE-FOR-SALE: As of 12/31/98 ---------------------------------------------------------------------- Amortized Gross Gross Fair Cost Unrealized Gains Unrealized Losses Value ----------- ---------------- ----------------- ------------- U.S. Treasury securities $ 2,005 $ 9 $ -0- $ 2,014 U.S. government agencies 102,524 496 -0- 103,020 State and municipal securities 21,974 343 -0- 22,317 Mortgage-backed securities 31,754 676 5 32,425 Assets-backed securities 8,264 8 52 8,220 Federal Home Loan Bank stock 5,991 -0- -0- 5,991 Commercial paper 29,950 -0- 5 29,945 Corporate bonds 35,415 630 49 35,996 --------- ------- -------- --------- Total $237,877 $2,162 $ 111 $239,928 ======== ====== ======= ======== (In thousands) SECURITIES HELD-TO-MATURITY: As of 6/30/99 -------------------------------------------------------------------- Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value --------- ---------------- ----------------- ----------- U.S. Treasury securities $ 26,012 $ 245 $ -0- $ 26,257 U.S. government agencies 64,400 203 979 63,624 State and municipal securities 70,292 2,056 919 71,429 Mortgage-backed securities 221,808 529 1,799 220,538 Assets-backed securities 19,998 -0- 234 19,764 Corporate bonds 51,575 116 1,122 50,569 --------- ------- ------- --------- Total $454,085 $3,149 $5,053 $452,181 ======== ====== ====== ======== (In thousands) As of 12/31/98 ------------------------------------------------------------------ Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value ---------- ---------------- ----------------- ----------- U.S. Treasury securities $ 26,026 $ 578 $ -0- $ 26,604 U.S. government agencies 54,426 819 -0- 55,245 State and municipal securities 61,495 3,144 32 64,607 Mortgage-backed securities 229,553 3,552 323 232,782 Corporate bonds 46,656 884 -0- 47,540 --------- ------- --------- --------- Total $418,156 $8,977 $ 355 $426,778 ======== ====== ======= ========
-11-
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (In thousands) As of 6/30/99 --------------------------------------------------------------------------- After 1 But After 5 But SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total - ----------------------------- ----------- ------------ ------------ ---------- ----- U.S. government agencies $ 35,277 $ 15,061 $ -0- $ -0- $ 50,338 State and municipal securities 165 -0- 156 -0- 321 Mortgage-backed securities* 694 3,628 6,229 14,712 25,263 Assets-backed securities* -0- 9,899 9,600 -0- 19,499 Federal Home Loan Bank stock 6,152 -0- -0- -0- 6,152 Corporate bonds -0- 30,311 4,585 -0- 34,896 ------------ --------- ---------- ------------ --------- Total $ 42,288 $ 58,899 $ 20,570 $ 14,712 $136,469 ========= ======== ========= ========= ======== (In thousands) As of 6/30/99 ----------------------------------------------------------------------------- After 1 But After 5 But SECURITIES HELD-TO-MATURITY: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total - --------------------------- ----------- ------------ ------------ ---------- ----- U.S. Treasury securities $ 11,026 $ 14,986 $ -0- $ -0- $ 26,012 U.S. government agencies -0- 64,400 -0- -0- 64,400 State and municipal securities 1,336 9,444 22,935 36,577 70,292 Mortgage-backed securities* 164 22,050 72,917 126,677 221,808 Assets-backed securities* -0- 19,998 -0- -0- 19,998 Corporate bonds -0- 27,880 23,695 -0- 51,575 ------------ --------- --------- ------------ --------- Total $ 12,526 $158,758 $119,547 $163,254 $454,085 ========= ======== ======== ======== ========
* The mortgage-backed securities and assets-backed securities reflect stated maturities and not anticipated prepayments. LOANS The Bank continued to experience excellent loan demand in the first half of 1999. Total gross loans increased $96.0 million or 9.8% to $1,077.5 million as of June 30, 1999, from $981.5 million at year-end 1998. Commercial real estate loans, commercial loans and residential real estate loans, which added $58.8 million, $18.8 million and $13.1 million, respectively, continued to account for most of the increase. During the second quarter of 1999, total gross loans grew by $50.8 million, of which, $38.0 million came from commercial real estate loans. The favorable economic conditions and strong real estate market in the Company's marketplace increased the demand for the commercial real estate loans. These loans are primarily secured by the first deeds of trust of the respective commercial properties, including shopping centers, retail shops, office buildings, multiple-unit apartments, hotels, motels and warehouses. The Company's underwriting policy for commercial real estate loans generally requires that the loan-to-ratio at the time of origination not exceed 70% of the appraised value of the property. The following table sets forth the classification of loans by type and mix as of the dates indicated: -12-
(Dollars in thousands) TYPES OF LOANS: As of 6/30/99 As of 12/31/98 ---------------------- ------------------------- Amount Percentage Amount Percentage ------ ---------- ------- ---------- Commercial loans $ 389,318 36.9% $370,539 38.5% Commercial real estate loans 415,422 39.3 356,608 37.1 Residential real estate loans 199,549 18.9 184,158 19.2 Real estate construction loans 45,495 4.3 40,738 4.2 Installment loans 27,488 2.6 29,165 3.0 Other loans 203 0.0 269 0.1 -------------- ----------- Total loans - Gross 1,077,475 981,477 Allowance for loan losses (17,662) (1.7) (15,970) (1.7) Unamortized deferred loan fees (3,626) (0.3) (3,631) (0.4) -------------- --------- ----------- --------- Total loans - Net $1,056,187 100.0% $961,876 100.0% ========== ====== ======== ======
Recently, there have been signs of improvements in Asian economic conditions. Management continues to believe that the Company's financial condition and results of operations have not been adversely impacted and does not consider the Company's loan portfolio to have direct exposure to transfer risk. RISK ELEMENTS OF THE LOAN PORTFOLIO NON-PERFORMING ASSETS Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. The Company's non-performing assets decreased $4.1 million or 14.5% to $24.1 million as of June 30, 1999, compared with $28.2 million at year-end 1998. The decrease resulted from reductions of $2.6 million in non-accrual loans, $1.0 million in loans past due 90 days or more and still accruing interest and $0.5 million in OREO. As a percentage of total loans plus OREO, non-performing assets decreased to 2.22% at June 30, 1999 compared with 2.85% at year-end 1998. The following table presents the breakdown of non-performing assets by categories as of the dates indicated:
(Dollars in thousands) NON-PERFORMING ASSETS: As of 6/30/99 As of 12/31/98 --------------- --------------- Accruing loans past due 90 days or more $ 3,661 $ 4,683 Non-accrual loans 10,512 13,090 -------- -------- Total non-performing loans 14,173 17,773 Real estate acquired in foreclosure 9,965 10,454 -------- -------- Total non-performing assets $24,138 $28,227 ======= ======= Accruing troubled debt restructurings 4,617 4,642 Non-performing assets as a percentage of total loans plus OREO 2.22% 2.85%
The non-accrual loans of $10.5 million at June 30, 1999 consisted mainly of $5.9 million in commercial real estate loans and $3.9 million in commercial loans. The following tables present the type of properties securing the loans and the type of businesses the borrowers engaged in under commercial real estate and commercial non-accrual loan categories as of the dates indicated: -13-
(in thousands) 6/30/99 12/31/98 ------------------------------ --------------------------------- Non-accrual Loan Balance ------------------------------------------------------------------ Commercial Commercial Type of property: Real Estate Commercial Real Estate Commercial -------------- ------------- ------------ -------------- Single/multi-family residence $ 454 $ 841 $ 348 $ 1,052 Commercial 5,253 1,576 5,533 2,613 Motel 186 30 1,501 30 UCC -0- 666 -0- -0- TCD -0- -0- -0- 696 Others -0- -0- -0- 93 Unsecured -0- 739 -0- -0- ---------- --------- ---------- ---------- Total $ 5,893 $ 3,852 $ 7,382 $ 4,484 ======== ======== ======== ======== (in thousands) 6/30/99 12/31/98 ------------------------------ ------------------------------ Non-accrual Loan Balance ---------------------------------------------------------------- Commercial Commercial Type of business: Real Estate Commercial Real Estate Commercial --------------- ------------- ----------------- ----------- Real estate development $ 186 $ 147 $ 451 $ 187 Real estate management 3,671 -0- 3,903 35 Wholesale 209 650 209 1,021 Retail -0- -0- -0- 38 Food/Restaurant -0- 934 -0- 1,008 Import 289 175 -0- 918 Motel 453 -0- 1,315 -0- Investments 355 -0- 375 -0- Industrial -0- 854 -0- 310 Clothing -0- -0- 348 161 Trading -0- 490 -0- -0- Others 730 602 781 806 --------- --------- --------- --------- Total $ 5,893 $ 3,852 $ 7,382 $ 4,484 ======== ======== ======== ========
From the tables above, under the June 30, 1999 commercial real estate loan category, the balance of $5.3 million in commercial loans represents five credits, 95% of which were secured by first trust deeds on commercial buildings and warehouses. Under the June 30, 1999 commercial loan category, the balance of $1.6 million was comprised of 16 credits, a majority of which are less than $200,000 each. The collateral on these credits include primarily first trust deeds, as well as second and third trust deeds on commercial buildings and warehouses. Troubled debt restructurings stayed approximately the same at $4.6 million as of June 30, 1999 and at year-end 1998. All of these restructured loans were current under their revised terms as of June 30, 1999. On June 30, 1999, the company had $26.8 million of loans, which were considered impaired including $14.8 million of commercial loans and $11.9 million of commercial real estate loans, compared to $22.0 million of impaired loans at December 31, 1998. -14- There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of June 30, 1999. OTHER REAL ESTATE OWNED The Company's OREO, net of a valuation allowance of $494,000, was carried at $10.0 million as of June 30, 1999, compared with OREO, net of a valuation allowance of $494,000, being carried at $10.5 million at year-end 1998. During the first half of 1999, the Company acquired two properties in the amount of $1.1 million and disposed of twelve properties totaling $1.6 million with a net gain of $547,000. As of June 30, 1999 the Company owned 13 OREO properties, which include land, commercial buildings, a motel and condominiums, all of which are located in Southern California. The Company maintains a valuation allowance for OREO properties in order to reduce the carrying value of OREO to the estimated fair value of the properties. Periodic evaluation is performed on each property and a corresponding adjustment is made to the valuation allowance, if necessary. Any decline in value is recognized by a corresponding increase to the valuation allowance in the current period. Management provided approximately $77,000 to the provision for OREO losses in the first half of 1999. The Company recognized net income of $532,000 from operating its OREO properties. In addition to the $547,000 net gains on sales of OREO properties, the Company received $220,000 in rental income. These amounts were partially offset by operating expenses of $158,000 and the provision for OREO losses of $77,000. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $17.7 million or 1.64% of total loans as of June 30, 1999, compared with $16.0 million or 1.63% of total loans at year-end 1998. The Company's provision for loan losses was $2.1 million in the first six months of 1999, compared with $1.8 million for the same period of 1998. Management believes the increase was prudent to cover additional inherent risk from the growth of the Company's loan portfolio. The charge-offs of $1.1 million in the first half of 1999 were basically related to commercial and commercial real estate loans and the recoveries of $0.7 million were largely from commercial loans. The following table presents information relating to the allowance for loan losses for the periods indicated:
ALLOWANCE FOR LOAN LOSSES: (Dollars in thousands) Six months ended Year ended 6/30/99 12/31/98 ----------------- --------------- Balance at beginning of period $15,970 $15,379 Provision for loan losses 2,100 3,600 Loans charged-off (1,117) (3,519) Recoveries of charged-off loans 709 510 --------- --------- Balance at end of period $17,662 $15,970 ======= ======= Average loans outstanding during the period $1,005,602 $907,639 Ratio of net charge-offs to average loans outstanding during the period (annualized) 0.08% 0.33% Provision for loan losses to average loans outstanding during the period (annualized) 0.42% 0.40% Allowance to non-performing loans at period-end 124.62% 89.86% Allowance to total loans at period-end 1.64% 1.63%
-15- In determing the allowance for loan losses, management continues to assess the risks inherent in the loan portfolio, the possible impact of known and potential problem loans, and other factors such as collateral value, portfolio composition, loan concentration, financial strength of borrower, and trends in local economic conditions. The Company has established a monitoring system for its loans in order to identify impaired loans, and potential problem loans and to permit periodic evaluation of impairment and the adequacy of the allowance for loan losses in a timely manner. The monitoring system and methodology have evolved over a period of years, and loan classifications have been incorporated into the determination of the level of allowance. This monitoring system and allowance methodology include a loan-by-loan analysis for significant classified loans as well as loss factors for the balance of the portfolio that are based on historical loss trend analysis relative to the company's unclassified portfolio and other factors such as current portfolio delinquency and trends, and other inherent risk factors such as economic conditions, concentrations in the portfolio risk levels of particular loan categories, internal loan review and management oversight. Based on the Company's evaluation process and the methodology to determine the level of the allowance for loan losses mentioned previously, management believes the allowance level as of June 30, 1999 to be adequate to absorb estimable and probable losses identified through its analysis. INVESTMENTS IN REAL ESTATE At the end of the first quarter of 1999, the Company invested $15 million for an approximate 40% limited partnership interest in a partnership that was formed to invest in multi-family housing in California that will qualify for Federal and/or State low income housing tax credits. During the second quarter of 1999, the Company entered into an agreement to purchase a 99.9% interest in a California limited partnership as a limited partner. The purpose of the partnership is to construct and operate a housing project consisting of 102 residential units for seniors. The total investment for the Bank is approximately $5.3 million. During the second quarter of 1999, the Bank made its first contribution for $265,000 upon execution of the agreement. OTHER INFORMATION The Bank established another 100% owned subsidiary, Cathay Holding Corporation ("CHC"), a California corporation, during the second quarter of 1999. The business activities of CHC consist solely of the operations of its wholly-owned subsidiary, Cathay Realty Corporation ("CRC"), a real estate investment trust ("REIT") as defined under Sections 856-859 of the Internal Revenue Code of 1986 as amended. CRC was incorporated in Texas during the second quarter of 1999. The Bank contributes qualifying assets (comprised of participation interests in real estate loans and real estate related securities) to CHC in exchange for its common stock. The authorized stock of CRC consists of common stock, authorized and issued, and non-voting, non-cumulative and non-convertible preferred stock, authorized but not yet issued. The REIT received from CHC real estate related loans and/or participation interests therein and interests in mortgage-backed and mortgage related securities in exchange for its common stock. The Bank plans to also acquire all of the shares of the REIT's preferred stock. The business activities of the REIT consist of the acquisition and holding of long-term real estate related assets, including participation interests in residential mortgage loans and possibly commercial real estate loans, mortgage-backed and mortgage-related securities. CRC will acquire additional real estate related assets from the Bank from time to time as the Bank's Board approves to sell. CRC intends to distribute 100% of its taxable income to its shareholders annually. -16- DEPOSITS Total deposits increased $37.1 million or 2.4% from $1,560.4 million at year-end 1998 to $1,597.5 million at June 30, 1999. Time deposits over $100,000 ("Jumbo CD's") increased $54.6 million while core deposits, defined as total deposits minus Jumbo CD's and brokered deposits, decreased $17.5 million. The decrease in core deposits resulted from decreases of $28.0 million in money market deposits and $2.7 million in savings deposits which were offset by increases of $6.1 million in demand deposits, $5.8 million in time deposits under $100,000 and $1.3 million in NOW accounts. The sharp decrease in money market deposits was primarily attributable to the average low interest rate which declined 69 basis points from 2.30% to 1.61% comparing the first six months of 1998 and 1999. Consequently the ratio of core deposits to total deposits decreased from 60.32% at year-end 1998 to 57.82% at June 30, 1999. The Company had no brokered deposits as of June 30, 1999. Average total deposits grew $126.3 million or 8.7% to $1,583.2 million comparing the first six months of 1998 and 1999. Of the $126.3 million, average Jumbo CD's accounted for $78.3 million or 13.9% and average core deposits accounted for $47.9 million or 5.4% with the most increase in average demand deposits of $21.5 million or 13.3%. Quarterly, average total deposits increased $125.9 million or 8.6% to $1,590.7 million in the second quarter of 1999, compared with $1,464.8 million in the same quarter of 1998. Approximately 70% of the quarterly increase in average deposits came from Jumbo CD's which added $88.2 million or 15.5%. Although the Bank's Jumbo CD portfolio continues to grow faster than other types of deposits, management considers the Bank's Jumbo CD's generally less volatile primarily due to the following reasons: 1) approximately 50% of the Bank's Jumbo CD's have stayed with the Bank for more than two years; 2) the Jumbo CD portfolio continued to be diversified with 3,977 individual accounts averaging approximately $168,000 per account owned by 2,765 individual depositors as of July 9, 1999; and 3) this phenomenon of having a relatively higher percentage of Jumbo CD's to total deposits exists in most of the Asian American banks in the Company's market due to the fact that the customers in this market tend to have a higher savings rate. Management continues to monitor the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the patrons the Bank is servicing. To discourage the growth in Jumbo CD's, management has continued to make efforts in the following areas: 1) to offer non-competitive interest rates paid on Jumbo CD's; 2) to promote transaction-based products; and 3) to seek to diversify the customer base by branch expansion and/or acquisition as opportunities arise. The following tables display the deposit mix as of the dates and for the periods indicated:
(Dollars in thousands) As of 6/30/99 As of 12/31/98 ----------------------------- --------------------------- TYPES OF DEPOSITS: Amount Percentage Amount Percentage ------------- ------------- --------------- ---------- Demand $ 184,134 11.5% $ 178,068 11.4% NOW accounts 116,271 7.3 114,982 7.4 Money market accounts 85,866 5.4 113,869 7.3 Savings deposits 204,625 12.8 207,365 13.3 Time deposits under $100,000 332,816 20.8 326,968 20.9 Time deposits of $100,000 or more 673,777 42.2 619,150 39.7 ----------- -------- ----------- --------- Total deposits $1,597,489 100.0% $1,560,402 100.0% ========== ====== ========== ======
-17-
(Dollars in thousands) 2nd Qtr, 1999 2nd Qtr, 1998 ----------------------------- --------------------------- AVERAGE DEPOSITS: Amount Percentage Amount Percentage ---------------- ------------- --------------- ---------- Demand $ 180,073 11.3% $ 162,812 11.1% NOW accounts 116,091 7.3 112,035 7.7 Money market accounts 93,212 5.9 95,162 6.5 Savings deposits 207,109 13.0 204,012 13.9 Time deposits under $100,000 335,080 21.1 319,843 21.8 Time deposits of $100,000 or more 659,181 41.4 570,936 39.0 ----------- -------- ------------------------ Total deposits $1,590,746 100.0% $1,464,800 100.0% ========== ====== ========== ====== (Dollars in thousands) YTD 6/30/99 YTD 6/30/98 ----------------------------------------------------------- AVERAGE DEPOSITS: Amount Percentage Amount Percentage -------------- -------------- -------------- ---------- Demand $ 183,470 11.6% $ 162,006 11.1% NOW accounts 115,216 7.3 112,086 7.7 Money market accounts 102,165 6.4 95,258 6.5 Savings deposits 205,740 13.0 205,118 14.1 Time deposits under $100,000 334,126 21.1 318,306 21.9 Time deposits of $100,000 or more 642,505 40.6 564,194 38.7 ----------- -------- ------------------------ Total deposits $1,583,222 100.0% $1,456,968 100.0% ========== ====== ========== ======
CAPITAL RESOURCES Stockholders' equity amounted to $166.1 million or 9.12% of total assets as of June 30, 1999, compared with $156.7 million or 8.80% of total assets at year-end 1998. The increase of $9.5 million or 6.1% in stockholders' equity was primarily from an addition of $13.7 million from net income less dividends paid of $3.5 million, and $775,000 from issuance of additional common shares through the Dividend Reinvestment Plan. These amounts were partially offset by an increase of $1.5 million in the net unrealized holding losses on securities available-for-sale, net of tax. The Company declared a cash dividend of $0.175 per common share in January 1999 on 8,988,760 shares outstanding and a cash dividend of $0.21 per common share in April and July 1999, respectively, on 8,998,412 shares and 9,010,829 shares outstanding, respectively. Total cash dividends paid in 1999, including the $1.9 million paid in July 1999, amounted to $5.4 million. Management seeks to retain the Company's capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements. Despite slight decreases in the tier 1 and total capital ratios, the Company and the Bank's regulatory capital continued to well exceed the regulatory minimum requirements on June 30, 1999. The decrease in capital ratios was primarily attributable to increases in loans, which were 100% risk-weighted. The capital ratios of the Bank place it in the "well capitalized" category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio equal to or greater than 5.0%. The following tables present the Company and the Bank's capital and leverage ratios as of June 30, 1999 and December 31, 1998: -18-
(Dollars in thousands) COMPANY -------------------------------------------------------------- As of 6/30/99 As of 12/31/98 --------------------------- ----------------------------- Balance Percentage Balance Percentage ------------ -------------- -------------- ------------- Tier 1 capital (to risk-weighted assets) $ 158,211(1) 11.36% $ 146,874(2) 11.44% Tier 1 capital minimum requirement 55,702 4.00 51,372 4.00 ---------- ---------- ----------- ---------- Excess $ 102,509 7.36% $ 95,502 7.44% ========== ========== ========== ========== Total capital (to risk-weighted assets) $ 175,621(1) 12.61% $ 162,844(2) 12.68% Total capital minimum requirement 111,404 8.00 102,744 8.00 ---------- ---------- ---------- ---------- Excess $ 64,217 4.61% $ 60,100 4.68% ========== ========== ========== ========== Risk-weighted assets $1,392,554 $1,284,296 Tier 1 capital (to average assets) - Leverage ratio $ 158,211(1) 8.67% $ 146,874(2) 8.45% Minimum leverage requirement 73,022 4.00 69,508 4.00 ---------- ---------- ---------- ---------- Excess $ 85,189 4.67% $ 77,366 4.45% ========== ========== ========== ========== Total average assets $1,825,556 $1,737,710
(Dollars in thousands) BANK ------------------------------------------------------------- As of 6/30/99 As of 12/31/98 ---------------------------- ----------------------------- Balance Percentage Balance Percentage ----------- -------------- ------------ ----------- Tier 1 capital (to risk-weighted assets) $ 152,499(1) 10.95% $ 141,834(2) 11.04% Tier 1 capital minimum requirement 55,702 4.00 51,372 4.00 ---------- ---------- ----------- ---------- Excess $ 96,797 6.95% $ 90,462 7.04% ========== ========== ========== ========== Total capital (to risk-weighted assets) $ 169,909(1) 12.20% $ 157,804(2) 12.29% Total capital minimum requirement 111,404 8.00 102,744 8.00 ---------- ---------- ---------- ---------- Excess $ 58,505 4.20% $ 55,060 4.29% ========== ========== ========== ========== Risk-weighted assets $1,392,548 $1,284,296 Tier 1 capital (to average assets) - Leverage ratio $ 152,499(1) 8.35% $ 141,834(2) 8.16% Minimum leverage requirement 73,059 4.00 69,508 4.00 ---------- ---------- ---------- ---------- Excess $ 79,440 4.35% $ 72,326 4.16% ========== ========== ========== ========== Total average assets $1,826,468 $1,737,709
1 Excluding the unrealized holding losses on securities available-for-sale of $332,000, and goodwill of $8,252,000. 2 Excluding the unrealized holding gains on securities available-for-sale of $1,189,000, and goodwill of $8,590,000. LIQUIDITY AND MARKET RISK LIQUIDITY The Company's principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans and advances from Federal Home Loan Bank. The Company's liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) decreased moderately from 46.04% at year-end 1998 to 40.16% at June 30, 1999. -19- To supplement its liquidity needs, the Bank maintains a total credit line of $45 million for Federal funds with three correspondent banks, a repo line of $110 million with three brokerage firms and a retail certificate of deposit line of approximately $100 million with another brokerage firm. The Bank is also a shareholder of Federal Home Loan Bank (FHLB) which enables the Bank to have access to lower cost FHLB financing when necessary. The Bank obtained non-callable advances from FHLB totaling $30 million in the third quarter of 1998 at fixed interest rates. In connection with the Company's preparation of Year 2000 readiness, the Company obtained an additional $20 million Year 2000 liquidity commitment from FHLB in July 1999. The Company had significant portion of its time deposits maturing within one year or less as of June 30, 1999. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Company's marketplace. However, based on its historical runoff experience, the Company expects the outflow will be minimal and can be replenished through its normal growth in deposits. Management believes all the above-mentioned sources will provide adequate liquidity to the Company to meet its daily operating needs. Bancorp, on the other hand, obtains funding for its activities only through dividend income contributed by the Bank and proceeds from investments in the Dividend Reinvestment Plan. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. Since the business activities of Bancorp consist primarily of the operation of the Bank, and no other operating business activities are proposed for Bancorp in the near future, management believes Bancorp's liquidity generated from its prevailing sources are sufficient to meet its operational needs. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The principal market risk to the Company is the interest rate risk inherent in its lending, investing and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities of the Company do not change at the same speed, to the same extent, or on the same basis. The Company actively monitors and manages its interest rate risk through analyzing the repricing characteristics of its loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse effects of changes in interest rates on its earnings, and ultimately the underlying market value of equity, while structuring the Company's asset-liability composition to obtain the maximum spread. Management uses certain basic measurement tools in conjunction with established risk limits to regulate its interest rate exposure. Because of the limitation inherent in any individual risk management tool, the Company uses both an interest rate sensitivity analysis and a simulation model to measure and quantify the impact to the Company's profitability or the market value of its assets and liabilities. The interest rate sensitivity analysis measures the Company's exposure to differential changes in interest rates between assets and liabilities. This analysis details the expected maturity and repricing opportunities mismatch or sensitivity gap between interest-earning assets and interest-bearing liabilities over a specified timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates, net interest margin may be enhanced with a positive gap. A negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of increasing interest rates, net interest margin may be impaired with a negative gap. As of June 30, 1999, the Company was asset sensitive with a cumulative gap ratio of a positive 11.55% within three months, and liability sensitive with a cumulative gap ratio of a negative 15.29% within a 1-year period. This compared with a positive 15.61% within three months, and a negative 11.48% within a 1-year period as of year-end 1998. -20- Since interest rate sensitivity analysis does not measure the timing differences in the repricing of asset and liabilities, the Company uses a simulation model to quantify the extent of the differences in the behavior of the lending and funding rates, so as to project future earnings or market values under alternative interest scenarios. The simulation measures the volatility of net interest income and net portfolio value (defined as net present value of assets and liabilities) under immediate rising or falling interest rate scenarios in 100 basis point increments. The Company establishes a tolerance level in its policy to define and limit interest income volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the tolerance level is met or exceeded, the Company then seeks corrective action after considering, among other things, market conditions, customer reaction and the estimated impact on profitability. As of June 30, 1999, the Company's interest income volatility was within the Company's established tolerance level. To manage and control its interest rate risk, the Company concentrates its efforts on seeking to increase its yield-cost spread through growth and competitive pricing. The Company is not utilizing hedging instruments currently to maintain and/or augment its spread, as management believes that it is not cost-effective at this time. The composition of the Company's financial instruments that are sensitive to changes in interest rates have not significantly changed since December 31, 1998. YEAR 2000 READINESS DISCLOSURES THE COMPANY'S STATE OF READINESS The "Year 2000" ("Y2K") problem is the result of computer programs being written using two digits rather than four to identify a year in the date field. Consequently, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This issue, if not properly addressed, could cause systems to fail or create erroneous results by or at the Year 2000. Y2K issues impact both the Company's information technology ("IT") systems, such as its computer hardware and software, and its non-IT systems, such as its utilities, telephones, elevators, automated teller machines, copiers, fax machines, security systems and emergency communications. Y2K issues may also affect the Company's vendors, suppliers and customers. The Company established a Y2K Committee (the "Committee") in 1997. The Committee is made up of representatives from key sectors of the Company and is assigned the responsibility of identifying, assessing and designing an action plan to mitigate the risks that the Company may encounter relative to the Y2K problem. The actions undertaken by the Committee to date include formulating and initiating a company-wide program to identify and prioritize all the mission critical systems (defined as systems to be vital to the successful continuance of a core business activity) that may be affected by the Y2K issue and developing and implementing a comprehensive remediation program to provide that the Company's IT and non-IT systems are Y2K compliant in time. PROGRESS SCHEDULE The progress of the Company's Y2K efforts is discussed below: 1. AWARENESS: During the awareness phase, the Company sought to educate its employees and directors about the material Y2K issues facing the Company and its vendors and customers. This phase was completed by December 31, 1997. 2. ASSESSMENT: During the assessment phase, the Company inventoried its mission critical IT and non-IT systems, and identified third-party vendors and service providers whose failures to adequately address Y2K issues would likely affect the financial condition or operations of the Company. This phase was completed by June 30, 1998. -21- 3. RENOVATION: During the renovation phase, which was conducted concurrent with the validation and implementation phases discussed below, the Company implemented hardware and software upgrades of its material IT systems and requested vendor certifications of Y2K readiness of the Company's material existing systems and upgrades. This phase was completed by May 31, 1999. 4. VALIDATION: This phase consists of the testing of the Company's IT and non-IT systems, and the testing of third-party vendors and service providers for Y2K readiness. The Company has completed the testing of its core computer systems. Testing of its other mission-critical IT systems has also been completed as of July 30, 1999. The Company has received written assurances from its utilities and telephone suppliers that the non-IT services or systems provided by such suppliers should be Y2K compliant in time. The Company has also obtained Y2K compliance certifications from its other material non-IT system providers. As a part of the validation phase, the Company also seeks to evaluate its major borrowers' and depositors' Y2K readiness. Such evaluation began in June 1998, and continues to be updated as borrowers and depositors progress towards Y2K readiness. 5. IMPLEMENTATION: This phase began shortly after the validation phase. The Company is progressing through the implementation phase by determining the necessary remedial actions and establishing timelines for alternative actions with respect to third-party vendors, service providers or borrowers who are not yet Y2K compliant. The Company believes its material operations are Y2K compliant as of June 30, 1999. COSTS TO ADDRESS THE COMPANY'S Y2K ISSUES The total cost of the Company's plan to address the Y2K issues is currently estimated to be $750,000 which includes allocated human resource expense and hardware and software upgrades. Hardware and software upgrades will be depreciated over their useful lives in accordance with the Company's policy. All other costs, including human resources, system testings, consulting services, training and any other contingency expenses will be expensed as incurred. The Company is funding these costs through operating cash flows, and does not expect such costs to have a material adverse effect on the Company's financial condition or results of operations. The amount expensed as of August 10, 1999 was approximately $633,000. THE RISKS TO THE COMPANY OF THE Y2K ISSUES The Company relies on its core computer system for its information technology needs, as it supports virtually all of the Company's deposits, loans and accounting processing. A failure of the core computer system to be Y2K compliant could cause substantial disruption to the Company's operations, including the ability to conduct its business, to process transactions and to provide customer services, and could have a material adverse financial impact on the Company. Essential third-party services upon which the Company depends, including telecommunications and electrical power, could be interrupted if such third-party servicers are not Y2K compliant. As a result, the Company would be unable to operate normally which could have a material adverse financial impact on the Company. Borrowers may be unable to repay their loans and comply with other loan covenants, if their businesses or operations are disrupted. Such failures could impair the credit quality of the Company's loan portfolio and adversely affect the amount and timing of the recognition of the anticipated revenue related to these loans. -22- The inability of the Company's correspondent banks, such as the Federal Reserve Bank, to provide currency or related services, could materially impair the Company's liquidity, and therefore, affect the Company's ability to fund loans and meet deposit withdrawals. Liquidity may also be adversely affected if the Company experiences an increase in the outflow of deposits due to depositors who may be concerned about the possibility of computer failure. Despite the Company's effort to address the Y2K problem, (1) the Company's remediation efforts may not effectively address all Y2K issues or achieve complete Y2K compliance; (2) the ultimate time and cost to prepare the Company for Y2K compliance may substantially exceed the Company's current estimates; (3) the systems of borrowers or other companies upon which the company's operations rely may not be timely converted; and (4) depositors concerned about the possibility of computer failure may seek to withdraw their funds from the Company. In any such event, the Company's financial condition, results of operations and liquidity could be materially and adversely affected. THE COMPANY'S CONTINGENCY PLANS As a precautionary measure, the Company has formed a Y2K contingency team to address key functions of the Company and to determine alternate resources and procedures should the normal business operations fail. The Company cannot, at this time, determine whether the consequences of any Y2K failure will have a material impact on the Company's'operations, liquidity or financial condition. The contingency plan covers critical dates in 1999 and 2000. The contingency procedures have been tested and will continue to be revised based upon the test results. These procedures have been validated by the Company's Internal Audit Department, reviewed by senior management and presented to the Board of Directors. The contingency plan, which met the expected timeline for completion on June 30, 1999, has also been reviewed and deemed satisfactory by the Company's regulatory agencies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information concerning market risk, see "Liquidity and Market Risk - Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations above on pages 20 and 21. -23- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company, including its wholly-owned subsidiary, Cathay Bank, has been a party to ordinary routine litigation incidental to various aspects of its operations. Management is not currently aware of any other litigation that is expected to have material adverse impact on the Company's consolidated financial condition, or the results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of stockholders was held on April 19, 1999. At the 1999 Annual Meeting, the stockholders approved to elect the following three Class III directors to serve until the 2002 annual meeting of stockholders: George T.M. Ching Wing K. Fat Wilbur K. Woo The number of votes cast for or withheld, with respect to the election of each Class III Director was as follows:
BROKER FOR WITHHELD AGAINST NON-VOTE ---------- ------------- ---------- ----------- George T.M. Ching 6,673,659 161,185 -0- -0- Wing K. Fat 6,681,935 152,909 -0- -0- Wilbur K. Woo 6,677,680 157,164 -0- -0-
Other directors whose terms of office continued after the meeting:
Term Ending in 2000 (Class I) Term Ending in 2001 (Class II) ----------------------------- ------------------------------ Michael M.Y. Chang Ralph Roy Buon-Cristiani Patrick S.D. Lee Kelly L. Chan Anthony M. Tang Dunson K. Cheng Thomas G. Tartaglia Chi-Hung Joseph Poon
ITEM 5. OTHER INFORMATION Not applicable. -24- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit: 27 Financial Data Schedule Form 8-K: None -25- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Cathay Bancorp, Inc. -------------------- (Registrant) Date: August 13, 1999 By /s/ DUNSON K. CHENG ---------------------- Dunson K. Cheng Chairman and President Date: August 13, 1999 by /s/ ANTHONY M. TANG ---------------------- Anthony M. Tang Chief Financial Officer -26- EX-27 2 EXHIBIT 27
9 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 52,657 527 23,500 0 136,469 454,085 452,181 1,073,849 17,662 1,821,409 1,597,489 7,415 20,374 30,000 0 0 90 166,041 1,821,409 43,078 19,481 1,538 64,097 25,966 28,329 35,768 2,100 (13) 15,158 22,609 22,609 0 0 13,688 1.52 1.52 4.31 10,512 3,661 4,617 14,976 15,970 1,117 709 17,662 17,662 0 0
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