1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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, 8,953,307 shares outstanding as of March 31,
1998.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION ........................................... 3
Item 1. Financial Statements .......................................... 4-6
Notes to Condensed Consolidated Financial Statements .......... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 8-17
PART II - OTHER INFORMATION .............................................. 18
Item 1. Legal Proceedings .............................................. 18
Item 2. Changes in Securities .......................................... 18
Item 3. Defaults upon Senior Securities ................................ 18
Item 4. Submission of Matters to a Vote of Security Holders ............ 18
Item 5. Other Information .............................................. 18
Item 6. Exhibits and Reports on Form 8-K ............................... 18
SIGNATURES ............................................................... 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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4
CATHAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS)
MAR. 31, 1998 DEC. 31, 1997
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks $ 84,631 $ 57,728
Federal funds sold and securities purchased under
agreement to resell 24,400 67,000
---------- ----------
Cash and cash equivalents 109,031 124,728
Securities available-for-sale (with amortized costs of
$218,104 in 1998 and $215,466 in 1997) 218,602 216,158
Securities held-to-maturity (with estimated fair
values of $362,622 in 1998 and $356,187 in 1997) 356,590 350,336
Loans (net of allowance for loan losses of
$16,435 in 1998 and $15,379 in 1997) 878,516 846,151
Other real estate owned, net 13,481 13,269
Investments in real estate, net 1,610 1,654
Premises and equipment, net 25,376 25,202
Customers' liability on acceptance 9,200 10,296
Accrued interest receivable 10,498 12,246
Goodwill 9,356 9,530
Other assets 10,337 12,892
---------- ----------
Total assets $1,642,597 $1,622,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 169,030 $ 175,875
Interest bearing accounts
NOW accounts 114,458 111,653
Money market deposits 96,090 94,708
Savings deposits 206,825 210,291
Time deposits under $100,000 316,141 307,504
Time deposits of $100,000 or more 565,094 549,090
---------- ----------
Total deposits 1,467,638 1,449,121
---------- ----------
Securities sold under agreements to repurchase 15,261 23,419
Acceptances outstanding 9,200 10,296
Other liabilities 10,455 3,749
---------- ----------
Total liabilities 1,502,554 1,486,585
---------- ----------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 10,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, 8,953,307 and 8,941,743 shares issued and
outstanding in 1998 and 1997, respectively 90 89
Additional paid-in-capital 61,665 61,271
Accumulated other comprehensive income 289 370
Retained earnings 77,999 74,147
---------- ----------
Total stockholders' equity 140,043 135,877
---------- ----------
Total liabilities and stockholders' equity $1,642,597 $1,622,462
========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CATHAY BANCORP, INC AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1998 1997
----------- -----------
INTEREST INCOME
Interest and fees on loans $ 19,554 $ 17,459
Interest on securities available-for-sale 3,198 5,442
Interest on securities held-to-maturity 5,720 3,239
Interest on Federal funds sold and securities sold
under agreement to resell 702 576
Interest on deposits with banks 5 --
----------- -----------
Total interest income 29,179 26,716
----------- -----------
INTEREST EXPENSE
Time deposits of $100,000 or more 7,373 5,979
Other deposits 5,856 6,003
Other borrowed funds 262 23
----------- -----------
Total interest expense 13,491 12,005
----------- -----------
Net interest income before provision for loan losses 15,688 14,711
Provision for loan losses 900 900
----------- -----------
Net interest income after provision for loan losses 14,788 13,811
----------- -----------
NON-INTEREST INCOME
Securities gains 35 4
Letter of credit commissions 444 209
Service charges 1,018 816
Other operating income 505 361
----------- -----------
Total non-interest income 2,002 1,390
----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,364 3,951
Occupancy expense 653 678
Computer and equipment expense 595 600
Professional services expense 755 737
FDIC and State assessments 99 55
Marketing expense 332 411
Net other real estate owned expense 145 226
Other operating expense 939 970
----------- -----------
Total non-interest expense 7,882 7,628
----------- -----------
Income before income tax expense 8,908 7,573
Income tax expense 3,490 3,054
----------- -----------
Net Income $ 5,418 $ 4,519
Other comprehensive loss, net of tax :
Unrealized holding losses arising during the period (96) (1,154)
Less: reclassification of the portion of realized loss included in
net income previously included in other comprehensive loss 15 8
----------- -----------
Total other comprehensive loss, net of tax (81) (1,146)
----------- -----------
Comprehensive income $ 5,337 $ 3,373
=========== ===========
NET INCOME PER COMMON SHARE, based on the
weighted average number of common shares
outstanding during the periods: $ 0.61 $ 0.51
Weighted average number of common shares outstanding 8,949,825 8,890,703
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CATHAY BANCORP, INC. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
(In thousands)
---------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,418 $ 4,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 900
Provision for losses on other real estate owned 55 133
Depreciation 298 348
Net gain(loss) on sale of other real estate owned (9) 76
Net gain on sales and calls of securities (35) (4)
Amortization and accretion of investment
security premiums, net 32 195
Amortization of goodwill 174 (89)
Decrease in deferred loan fees, net (99) (19)
Decrease in accrued interest receivable, net 1,748 3,930
(Increase) decrease in other assets, net 2,555 (905)
Increase in other liabilities, net 6,706 2,691
- ------------------------------------------------------------------------------------------------------
Total adjustments 12,325 7,256
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,743 11,775
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (50,513) (5,086)
Proceeds from maturity and call of securities available-for-sale 50,723 58,935
Purchase of securities held-to-maturity (3,433) (10,240)
Proceeds from maturity and call of securities held-to-maturity 738 8,965
Proceeds from sale of securities available-for-sale 6,424 --
Purchase of mortgage-backed securities available-for-sale (24,582) --
Proceeds from repayments of mortgage-backed securities
available-for-sale 15,664 1,679
Purchase of mortgage-backed securities held-to-maturity (15,057) (39,546)
Repayments from mortgage-backed securities held-to-maturity 11,259 2,166
Proceeds from sale of loans -- 1,834
Net increase in loans (33,952) (34,441)
Purchase of premises and equipment (472) (121)
Proceeds from sale of other real estate owned 528 2,146
Decrease in investments in real estate 44 68
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (42,629) (13,641)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts,
money market and savings deposits (6,124) (715)
Net increase in time deposits 24,641 10,794
Net decrease in securities sold under agreement to repurchase (8,158) (7,779)
Cash dividends (1,565) (1,331)
Proceeds from shares issued to Dividend Reinvestment Plan 395 333
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,189 1,302
- ------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (15,697) (564)
Cash and cash equivalents, beginning of the period 124,728 75,194
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the period $ 109,031 $ 74,630
- ------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 13,450 $ 11,678
Income taxes $ 570 $ 680
Non-cash investing activities:
Transfers to securities available-for-sale $ 230 $ 630
within 90 days of maturity
Net change in unrealized holding gain(loss) on securities
available-for-sale, net of tax $ (81) $ (1,146)
Transfers to other real estate owned $ 786 $ 403
Loans to facilitate the sale of other real estate owned $ -- $ 2,700
- ------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial
statements.
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CATHAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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, 1997.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards to report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 is effective for financial statement for
periods beginning after December 15, 1997, with comparative information for
earlier years to be restated. The Company has concluded it is in one
segment-banking. Accordingly, the adoption of SFAS No. 131 did not have material
effect on the consolidated financial statements or disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure About
Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the
disclosure requirement for pension and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate analysis; and eliminates certain disclosure
required by SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination of Benefits", and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pension" which are no longer
useful. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997, with comparative information for earlier years to be restated. The impact
on the Company of adopting SFAS No. 132 is not expected to be material.
3. STATEMENT OF COMPREHENSIVE INCOME
Effective with the quarter ended March 31, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires all items that
are required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
in equal prominence with the other financial statements and to disclose as a
part of shareholders' equity accumulated comprehensive income. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Comprehensive income
generally includes net income, foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on investments in certain debt and
equity securities (i.e., securities available-for-sale).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is given based on the assumption that the reader
has access to the 1997 Annual Report of Cathay Bancorp, Inc. ("Bancorp") and its
subsidiary Cathay Bank ("the Bank"), together ("the Company").
RESULTS OF OPERATIONS
For the first quarter of 1998, the Company reported net income of $5.4
million or $0.61 per common share, compared with $4.5 million or $0.51 per
common share for the first quarter of 1997, representing an increase of $0.9
million or 19.9%. Pre-tax income amounted to $8.9 million for the first quarter
of 1998, compared with $7.6 million for the same period a year ago, representing
an increase of $1.3 million or 17.6%. The increase in 1998 first quarter pre-tax
income was attributed to a $1.0 million increase in net interest income before
provision for loan losses and a $0.6 million increase in non-interest income
while non-interest expense advanced moderately. The annualized return on average
assets ("ROA") and return on average stockholders' equity ("ROE") were 1.35% and
15.93%, respectively, compared with 1.22% and 15.32%, respectively, for the
first quarter of 1997.
NET INTEREST INCOME
Net interest income before provision for loan losses totaled $15.7 million
for the first quarter of 1998, which represents an increase of $1.0 million or
6.6% over the $14.7 million for the same quarter of 1997. On a taxable
equivalent basis, net interest income rose $1.0 million or 6.6% as well to $16.0
million for the first quarter of 1998, compared with $15.0 million for the same
quarter of 1997. The increase in net interest income before provision for loan
losses was substantially attributable to a $99.8 million growth in the average
earning assets, mainly loans. Average net loans amounted to $854.2 million and
accounted for 57.9% of average earning assets in the first quarter of 1998,
compared with $756.7 million or 55.0% of average earning assets for the same
period a year ago. The increase in average loans was primarily funded by time
deposits and secondarily demand deposits and securities sold under agreement to
repurchase. The increase in volume contributed an additional $2.1 million to net
interest income, which was slightly offset by a seven basis point decrease in
the average yield on loans despite a 23 basis point increase in the Bank's
reference rate in the first quarter of 1998. The keen competition in the Bank's
marketplace played an important role in the decrease in the average loan yield.
Nevertheless, the taxable equivalent average yield on earning assets advanced 14
basis points from 7.95% a year ago to 8.10% due to higher yields on securities
(including available-for-sale and held-to-maturity) and securities purchased
under agreement to resell. Meanwhile, cost of funds increased 27 basis points
from 3.92% to 4.19% largely due to higher rates paid on time deposits.
Consequently, net interest margin, defined as taxable equivalent net interest
income to average earning assets, decreased 3 basis points from 4.42% to 4.39%
between the first quarter of 1997 and 1998.
NON-INTEREST INCOME
Non-interest income totaled $2.0 million and $1.4 million for the first
quarter of 1998 and 1997, respectively, representing an increase of $612,000 or
44.0% for 1998. The increase in 1998 resulted from: 1) higher letter of credit
commissions due to increased transaction volume; 2) higher service charges due
to fee increases; 3) income earned in outsourcing the issuing and processing of
cashier's checks and money orders; 4) higher fees related to loan documentation
and other charges; 5) more securities gains; and 6) higher wire transfer fees.
The following tables illustrate the components of non-interest income, as
well as the amount and percentage changes for the periods indicated:
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(Dollars in thousands)
Three Months Ended Percent
Non-interest income: 03/31/98 03/31/97 Increase Change
- -------------------- -------- -------- -------- ------
Letter of credit commissions $ 444 $ 209 $235 112.4%
Service charges 1,018 816 202 24.8
Other operating income 505 361 144 39.9
Securities Gains 35 4 31 775.0
-------- --------- -----
Total non-interest income $2,002 $1,390 $612 44.0%
======== ========= =====
NON-INTEREST EXPENSE
Non-interest expense amounted to $7.9 million and $7.6 million,
respectively for the first quarter of 1998 and 1997, respectively. The moderate
increase of $254,000 or 3.3% in 1998 non-interest expense was primarily
attributed to higher salaries and employee benefits of $413,000 due in large
part to added personnel to support the newly opened Berkeley/Richmond Branch as
well as new officers for northern California branches. All other categories in
non-interest expense showed reduction with the exception of FDIC and State
assessments and professional services expense both of which advanced slightly.
The following tables present the components of the non-interest expense
with the amount and percentage changes for the periods indicated:
(Dollars in thousands)
Three Months Ended Increase Percent
Non-interest income: 03/31/98 03/31/97 (Decrease) Change
-------- -------- -------- ------
Salaries and employee benefits $4,364 $3,951 $ 413 10.5%
Occupancy expense 653 678 (25) (3.7)
Computer and equipment expense 595 600 (5) (0.8)
Professional services expense 755 737 18 2.4
FDIC and State assessments 99 55 44 80.0
Marketing expense 332 411 (79) (19.2)
Net other real estate owned expense 145 226 (81) (35.8)
Other operating expense 939 970 (31) (3.2)
-------- -------- --------
Total non-interest expense $7,882 $7,628 $ 254 3.3%
======== ======== ========
FINANCIAL CONDITION
The Company experienced moderate growth during the first quarter of 1998.
Total assets increased $20.1 million to $1,642.6 million; loans, net of deferred
loan fees, gained $33.4 million to $895.0 million; investment securities
(including available-for-sale and held-to-maturity) advanced $8.7 million to
$575.2 million; deposits grew $18.5 million to $1,467.6 million; and
stockholders' equity increased $4.2 million to $140.0 million, compared to
December 31, 1997.
EARNING ASSET MIX
Total earning assets amounted to $1,494.9 million at March 31, 1998,
compared with $1,495.9 million at year-end 1997. The $940,000 decrease was
primarily due to a $42.6 million decrease in securities purchased under
agreement to resell offset by a $33.4 million increase in loans, net of deferred
fees, and a $8.7 million increase in investment securities (including
available-for-sale and held-to-maturity). However, average earning assets
increased $99.8 million to $1,476.2 million for the first quarter of 1998,
compared with $1,376.4 million for the same quarter a year ago. The Bank
continued to experience good loan growth in the first quarter of 1998. Average
net loans continued to increase as a percentage of total earning assets from
55.0% for the first quarter of 1997 to 57.9% for the first quarter of 1998,
while investment securities (including available-for-sale and held-to-maturity)
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decreased from 41.9% for the first quarter of 1997 to 38.8% for the same quarter
of 1998. This change in the earning asset mix from securities to loans is
favorable to net interest income.
The table below shows the changes in the earning asset mix as of the dates
indicated:
(Dollars in thousands)
As of 03/31/98 As of 12/31/97
Types of earning assets: Amount Percent Amount Percent
---------- ----- ---------- -----
Federal funds sold and securities purchased
under agreement to resell $ 24,400 1.6% $ 67,000 4.5%
Securities available-for-sale 218,602 14.6 216,158 14.4
Securities held-to-maturity 356,590 23.8 350,336 23.4
Loans (net of deferred fees) 894,951 59.9 861,530 57.6
Deposits with banks 396 0.1 855 0.1
---------- ----- ---------- -----
Total earning assets $1,494,939 100.0% $1,495,879 100.0%
========== ===== ========== =====
SECURITIES
As of March 31, 1998 securities available-for-sale and held-to-maturity
increased $2.4 million and $6.3 million, respectively, from $216.2 million and
$350.3 million at year-end 1997 to $218.6 million and $356.6 million,
respectively. The moderate increase of $8.7 million in the overall investment
securities was primarily attributable to healthy loan demand that the Company
experienced during the first quarter of 1998. The following tables summarize the
composition and maturity distribution of the investment portfolio as of the
dates indicated:
(Dollars in thousands)
SECURITIES AVAILABLE-FOR-SALE: As of 03/31/98
Amortized Gross Gross Estimated
Cost Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- ----------
U.S. Treasury securities $ 21,014 $ 4 $ 25 $ 20,993
U.S. government agencies 108,101 233 -0- 108,334
State and municipal securities 230 1 -0- 231
Mortgage-backed securities 31,215 272 22 31,465
Assets-backed securities 16,167 25 -0- 16,192
Federal Home Loan Bank stock 5,736 -0- -0- 5,736
Commercial paper 30,997 3 -0- 31,000
Other securities 4,644 10 3 4,651
-------- -------- -------- --------
Total $218,104 $ 548 $ 50 $218,602
======== ======== ======== ========
As of 12/31/97
Amortized Gross Gross Estimated
Cost Unrealized Gains Unrealized Losses Fair Value
--------- ---------------- ----------------- ----------
U.S. Treasury securities $ 38,020 $ 11 $ 60 $ 37,971
U.S. government agencies 113,255 97 46 113,306
Mortgage-backed securities 28,689 685 6 29,368
Assets-backed securities 19,878 11 -0- 19,889
Federal Home Loan Bank stock 5,653 -0- -0- 5,653
Commercial paper 9,971 -0- -0- 9,971
-------- -------- -------- --------
Total $215,466 $ 804 $ 112 $216,158
======== ======== ======== ========
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(Dollars in thousands)
SECURITIES HELD-TO-MATURITY: As of 03/31/98
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
---------- ---------------- ----------------- ----------
U.S. Treasury securities $ 26,047 $ 368 $ -0- $ 26,415
U.S. government agencies 39,368 384 -0- 39,752
State and municipal securities 47,696 2,011 32 49,675
Mortgage-backed securities 234,371 3,140 72 237,439
Assets-backed securities 187 -0- 6 181
Other securities 8,921 239 -0- 9,160
---------- ---------------- ----------------- ----------
Total $356,590 $6,142 $ 110 $362,622
======== ====== ======= ========
As of 12/31/97
Carrying Gross Gross Estimated
Value Unrealized Gains Unrealized Losses Fair Value
---------- ---------------- ----------------- ----------
U.S. Treasury securities $ 26,054 $ 354 $ -0- $ 26,408
U.S. government agencies 39,374 291 -0- 39,665
State and municipal securities 44,497 2,264 -0- 46,761
Mortgage-backed securities 230,573 2,762 35 233,300
Assets-backed securities 922 -0- 6 916
Other securities 8,916 221 -0- 9,137
---------- -------- --------- ----------
Total $350,336 $5,892 $ 41 $356,187
======== ====== ======== ========
SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (Dollars in thousands)
As of March 31, 1998
Maturity Schedule
-------------------------------------------------------------------------------
After 1 But After 5 But
SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10Yrs Total
- ----------------------------- ----------- ------------ ------------ ---------- ----------
U.S. Treasury securities $ 18,977 $ 2,016 $ -0- $ -0- $ 20,993
U.S. government agencies 30,005 78,329 -0- -0- 108,334
State and municipal securities 231 -0- -0- -0- 231
Mortgage-backed securities* -0- 6,533 6,827 18,105 31,465
Assets-backed securities* -0- 16,192 -0- -0- 16,192
Federal Home Loan Bank stock 5,736 -0- -0- -0- 5,736
Other securities 31,000 -0- 4,651 -0- 35,651
---------- ------------ ---------- ------------ ----------
Total $ 85,949 $103,070 $ 11,478 $ 18,105 $ 218,602
========= ======== ========= ========= ========
SECURITIES HELD-TO-MATURITY:
U.S. Treasury securities $ -0- $ 26,047 $ -0- $ -0- $ 26,047
U.S. government agencies -0- 39,368 -0- -0- 39,368
State and municipal securities 1,111 9,741 20,216 16,628 47,696
Mortgage-backed securities* -0- 17,492 60,527 156,352 234,371
Assets-backed securities* -0- -0- -0- 187 187
Corporate bonds -0- 8,921 -0- -0- 8,921
------------ ---------- ------------ ------------ -----------
Total $ 1,111 $ 101,569 $ 80,743 $ 173,167 $356,590
========== ========= =========== =========== ========
* The mortgage-backed securities and assets-backed securities reflect stated
maturities and not anticipated prepayments.
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LOANS
The Bank continued to experience satisfactory loan demand in the first
quarter of 1998. Total gross loans increased $33.3 million or 3.9% to $898.6
million as of March 31, 1998, from $865.3 million at year-end 1997. Excluding
the $18.1 million investments in banker's acceptances which were included in
commercial loans at year-end 1997, total commercial loans increased $19.1
million or 6.0% to $339.2 million at March 31, 1998. Real estate mortgage loans
comprised primarily of real estate commercial loans and real estate residential
loans, which increased $11.4 million or 3.8% and $8.3 million or 6.1%,
respectively, to $315.1 million and $145.3 million, respectively, during the
first quarter of 1998. The increase in real estate residential loans was
attributable to low interest rates which brought up new purchases and
refinancing activities. As of March 31, 1998, construction loans totaled $49.9
million, an increase of $8.2 million or 19.7% over $41.7 million at year-end
1997. Construction loans are made on a selective basis to those projects with
good location and experienced, financially strong borrowers. The projects are
primarily in southern California and secondarily in northern California and Las
Vegas area. The following table sets forth the classification of loans by type
and mix as of the dates indicated:
(Dollars in thousands)
As of 03/31/98 As of 12/31/97
Types of loans: Amount Percent Amount Percent
-------- ------- -------- -------
Commercial loans $339,210 38.6% $338,285 40.0%
Real estate mortgage loans 478,684 54.5 458,417 54.2
Real estate construction loans 49,958 5.7 41,736 4.9
Installment loans 25,866 2.9 26,611 3.1
Other loans 4,920 0.6 267 0.1
-------- ----- -------- -----
Total loans - Gross 898,638 865,316
Allowance for loan losses (16,435) (1.9) (15,379) (1.8)
Unamortized deferred loan fees (3,687) (0.4) (3,786) (0.5)
-------- ----- -------- -----
Total loans - Net $878,516 100.0% $846,151 100.0%
======== ====== ======== ======
RISK ELEMENTS OF THE LOAN PORTFOLIO
NON-PERFORMING ASSETS
Non-performing assets were reduced slightly to $31.9 million or 3.5% of
total loans plus OREO as of March 31, 1998, compared with $32.5 million or 3.7%
of total loans plus OREO at year-end 1997. Non-performing assets include loans
past due 90 days or more and still accruing interest, non-accrual loans, and
OREO. The slight decrease of $613,000 at March 31, 1998 resulted primarily from
a reduction of $910,000 in loans past due 90 days or more and still accruing
interest offset by a $212,000 increase in OREO. The non-performing loan coverage
ratio, defined as the allowance for loan losses to non-performing loans,
advanced from 79.85% at year-end 1997 to 89.16% as of March 31, 1998, due to the
combination of a $1.1 million increase in the allowance for loans losses and a
$825,000 decrease in non-performing loans. The following table presents the
breakdown of non-performing assets by categories as of the dates indicated:
(Dollars in thousands)
As of As of As of As of
Non-Performing Assets: 03/31/98 12/31/97 09/30/97 06/30/97
-------- -------- -------- --------
Loans past due 90 days or more and
still accruing interest $ 1,463 $ 2,373 $ 3,516 $ 4,943
Non-accrual loans 16,971 16,886 16,841 13,618
-------- -------- -------- --------
Total non-performing loans 18,434 19,259 20,357 18,561
Real estate acquired in foreclosure 13,481 13,269 10,063 10,390
-------- -------- -------- --------
Total non-performing assets $31,915 $32,528 $30,420 $28,951
======= ======= ======= =======
Accruing troubled debt restructurings 4,379 4,874 2,911 3,673
Non-performing assets as a percentage of
period-end total loans plus OREO 3.50% 3.70% 3.63% 3.60%
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The non-accrual loans of $17.0 million consisted mainly of $10.5 million in
commercial real estate loans and $5.3 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:
(Dollars in thousands)
03/31/98 12/31/97
-------------------------- -----------------------------
Non-accrual Loan Balance
--------------------------------------------------------------
Commercial Commercial
Type of property: Real Estate Commercial Real Estate Commercial
----------- ---------- ----------- ----------
Single/multi-family residence $ 373 $ 266 $ 593 $ 311
Commercial 7,993 4,262 8,471 5,095
Motel 1,602 -0- 1,350 -0-
Marina -0- -0- -0- -0-
Others 534 193 214 73
Unsecured -0- 550 -0- 37
--------- --------- ----------- ---------
Total $ 10,502 $ 5,271 $10,628 $ 5,516
======= ======== ======= ========
Type of business:
Real estate development $ -0- $ 615 $ -0- $ 134
Real estate management 6,315 36 6,303 36
Wholesale 678 2,144 430 2,994
Food/Restaurant -0- 1,151 -0- 1,190
Import -0- 29 752 4
Motel 1,602 -0- 1,350 -0-
Investments 406 -0- 1,194 -0-
Industrial 199 224 214 263
Clothing 373 376 385 441
Others 929 696 -0- 454
--------- --------- --------- ---------
Total $10,502 $ 5,271 $ 10,628 $ 5,516
========= ======== ========= ========
As shown in the above tables under the commercial real estate loan category
as of March 31, 1998, the $8.0 million balance in commercial loans represents
eight credits, 97% of which were secured by first trust deeds on commercial
buildings and warehouses. The $1.6 million balance in motel loans represents two
credits secured by first trust deeds on the respective motels located in
Southern California. Under the commercial loan category as of March 31, 1998,
the $4.3 million balance consisted of 13 credits. The collateral on these
credits include primarily first trust deeds and secondarily second and third
trust deeds on commercial buildings and warehouses.
Troubled debt restructurings were $4.4 million as of March 31, 1998,
compared with $4.9 million at year-end 1997, representing a decrease of $495,000
or 10.2%. All of these restructured loans were current under their revised terms
as of March 31, 1998.
There were no loan concentrations to multiple borrowers in similar
activities, which exceeded 10% of total loans as of March 31, 1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $16.4 million or 1.83% of total
loans as of March 31, 1998, compared with $15.4 million or 1.78% of total loans
at year-end 1997. The following table presents information relating to the
allowance for loan losses for the periods indicated:
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(Dollars in thousands)
YTD YTD YTD YTD
Allowance for loan losses: 03/31/98 12/31/97 09/30/97 06/30/97
Balance at beginning of period $ 15,379 $13,529 $13,529 $13,529
Provision for loan losses 900 3,600 2,700 1,800
Loans charged-off (147) (2,139) (1,568) (1,346)
Recoveries of charged-off loans 303 389 308 43
-------- -------- -------- --------
Balance at end of period $ 16,435 $ 15,379 $ 14,969 $ 14,026
======== ======== ======== =======
Average loans outstanding during the period $854,161 $792,176 $780,756 $770,763
Ratio of net charge-offs to average loans
outstanding during the period (annualized) (0.07)% 0.22% 0.22% 0.34%
Provision for loan losses to average loans
outstanding during the period (annualized) 0.43% 0.45% 0.46% 0.47%
Allowance to non-performing loans at period-end 89.16% 79.85% 73.53% 75.57%
Allowance to total loans at period-end 1.83% 1.78% 1.81% 1.77%
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.
The Bank's allowance for loan losses consists of a specific allowance and a
general allowance. The specific allowance is further broken down to provide for
impaired loans and the remaining internally classified loans. Management
allocates a specific allowance to those remaining internally classified loans
which do not require impairment allowance, based on the current financial
condition of the borrowers and guarantors, the prevailing value of the
underlying collateral and general economic conditions. The general allowance is
determined by an assessment of the overall quality of the unclassified portion
of the loan portfolio as a whole, and by loan type. Management maintained the
percentage assigned to the general allowance based on charge-off history and
management's knowledge of the quality of the portfolio. The following table
presents a breakdown of impaired loans and the impairment allowance related to
impaired loans:
(Dollars in thousands)
As of March 31, 1998 As of December 31, 1997
-------------------------------- ------------------------
Impaired loans: SFAS No. 114 SFAS No. 114
Recorded Impairment Recorded Impairment
Loans with impairment allowance: Investment Allowance Investment Allowance
---------- ---------- ---------- ----------
Commercial $ 6,954 $1,307 $ 7,784 $1,499
Commercial real estate 15,129 2,875 14,027 2,396
Other 59 59 95 95
-------- -------- -------- ------
Total loans with impairment allowance $ 22,142 $4,241 $ 21,906 $3,990
======= ====== ======= ======
Based on the Company's evaluation process and the methodology to determine
the level of the allowance for loan losses mentioned previously and the fact
that a majority of the Company's non-performing loans are secured, management
believes the allowance level as of March 31, 1998 to be adequate to absorb the
estimated known and inherent risks identified through its analysis.
OTHER REAL ESTATE OWNED
The Company's OREO properties, net of valuation allowance, were carried at
$13.5 million as of March 31, 1998, compared with those carried at $13.3 million
at year-end 1997. During the first quarter of 1998, the Company acquired one
property at $786,000 and disposed three properties totaling $775,000 with a net
gain of $9,000. As of March 31, 1998, the Bank's OREO properties
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include commercial buildings, warehouses, land, single family residences and
apartments, all of which are located in Southern California.
The Bank continues to maintain a valuation allowance for the OREO
properties in order to record estimated fair value of the properties. Periodic
evaluation is performed on each property and corresponding adjustment is made to
the valuation allowance. Any decline in value is recognized as non-interest
expense in the current period and any balance in the valuation allowance is
reversed when the respective property is sold. During the first quarter of 1998,
management provided approximately $56,000 to the provision for OREO losses based
on new listing prices or new appraisals received bringing the valuation
allowance to $881,000 as of March 31, 1998.
DEPOSITS
Total deposits increased moderately to $1,467.6 million at March 31, 1998,
compared with $1,449.1 million at year-end 1997. Of the $18.5 million increase
in deposits, $16.0 million came from time deposits over $100,000 ("Jumbo CD's").
This continued growth in Jumbo CD's was primarily a result of the widening of
the interest rate spread between time deposits and other interest-bearing
deposits. Consequently, the ratio of core deposits (defined as all deposits
excluding Jumbo CD's and brokered deposits) to total deposits continued to
decline from 62.11% at year-end 1997 to 61.50% at March 31, 1998. There were no
brokered deposits as of March 31, 1998.
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. Although the Bank's Jumbo CD portfolio kept growing, management
considers the Bank's Jumbo CD's generally less volatile since 1) a majority of
the Bank's Jumbo CD's have been fairly consistent based on statistics which
support that a considerable portion of the Jumbo CD's stayed with the Bank for
more than two years; 2) the Jumbo CD portfolio continued to be diversified with
3,434 individual accounts owned by 2,409 individual depositors as of February
23, 1998. The balance of the accounts averaged approximately $164,000; and 3)
this phenomenon of having relatively higher percentage of Jumbo CD's exists in
most of the Asian American banks in the Company's market which is dictated by
the fact that the customers in this market tend to have a higher savings rate.
However, management has constantly made efforts to discourage the continued
growth in Jumbo CD's, such as to diversify the customer base by branch expansion
and acquisition, to offer non-competitive interest rates paid on Jumbo CD's and
to develop new transaction-based products to attract depositors. The following
table illustrates the deposit mix as of the dates indicated:
(Dollars in thousands)
As of 03/31/98 As of 12/31/97
-------------- --------------
Types of deposits: Amount Percent Amount Percent
------ ------- ------ -------
Demand $ 169,030 11.5% $ 175,875 12.1%
NOW accounts 114,458 7.8 111,653 7.7
Money market accounts 96,090 6.6 94,708 6.6
Savings deposits 206,825 14.1 210,291 14.5
Time deposits under $100,000 316,141 21.5 307,504 21.2
Time deposits of $100,000 or more 565,094 38.5 549,090 37.9
---------- ----- ---------- -----
Total deposits $1,467,638 100.0% $1,449,121 100.0%
========== ===== ========== =====
CAPITAL RESOURCES
Stockholders' equity amounted to $140.0 million or 8.53% of total assets as
of March 31, 1998, compared with $135.9 million or 8.37% of total assets at
year-end 1997. The $4.2 million or 3.1% increase in stockholders' equity was
primarily due to year-to-date net income of $5.4 million and $395,000 from
issuance of additional common shares through Dividend Reinvestment Plan, which
were partially offset by a decrease of $81,000 in the unrealized holding gain on
securities available-for-sale, net of tax, and dividends paid in the amount of
$1.6 million.
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The Company declared a cash dividend of $0.175 per share in January and
April of 1998, on 8,941,743 and 8,953,307 shares outstanding, respectively.
Total cash dividends paid in 1998, including the $1.6 million paid in April
1998, amounted to $3.2 million.
Management is committed to retain the Company's capital at a level
sufficient to support future growth, to protect depositors, to absorb any
unanticipated losses and to comply with various regulatory requirements.
As presented in the following tables, the Company and the Bank's capital
and leverage ratios as of March 31, 1998 continued to be well above the
regulatory minimum requirements. 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%.
(Dollars in thousands)
Company Bank
As of 03/31/1998 As of 03/31/1998
---------------- ----------------
Balance Percent Balance Percent
------- ------- ------- -------
Tier 1 capital (to risk-weighted assets) $ 130,398* 11.49% $ 126,491* 11.14%
Tier 1 capital minimum requirement 45,399 4.00 45,398 4.00
---------- ----- ---------- -----
Excess $ 84,999 7.49% $ 81,093 7.14%
========== ===== ========== =====
Total capital (to risk-weighted assets) $ 144,613* 12.74% $ 140,706* 12.40%
Total capital minimum requirement 90,798 8.00 90,797 8.00
---------- ----- ---------- -----
Excess $ 53,815 4.74% $ 49,909 4.40%
========== ===== ========== =====
Risk-weighted assets $1,134,971 $1,134,960
Tier 1 capital (to average assets)
- Leverage ratio $ 130,398* 8.03% $ 126,491* 7.79%
Minimum leverage requirement 64,927 4.00 64,927 4.00
---------- ----- ---------- -----
Excess $ 65,471 4.03% $ 61,564 3.79%
========== ===== ========== =====
Total average assets $1,623,173 $1,623,167
* Excluding the unrealized holding gains on securities available-for-sale of
$289,000, and goodwill of $9,356,000.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The Company manages its assets and liabilities to maximize its net interest
income through growth opportunities and competitive pricing, while striving to
minimize its market risk and to maintain adequate liquidity to meet the maturing
financial obligations and customer credit needs. The Company can but 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 market risks to the Company are the risks that are by nature of its
activities and the economic environment. 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
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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 environment, net interest margin may be
enhanced with a positive gap. Contrarily, a negative gap exists when rate
sensitive liabilities which reprice over a given time period exceed rate
sensitive assets. During periods of increasing interest rate environment, net
interest margin may be impaired. As of March 31, 1998, the Company was asset
sensitive with a cumulative gap ratio of a positive 9.36% within three months,
and liability sensitive with a cumulative gap ratio of a negative 18.67% within
a 1-year period, compared to a positive 17.28% within three months, and a
negative 10.49% within a 1-year period as of December 31, 1997.
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 quantity 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 market
value of equity 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 March 31, 1998, the Company's
interest income volatility was within the Company's established tolerance level.
The Company derives liquidity primarily from various types of deposits. The
Company's principal sources of liquidity have been growth in deposits, proceeds
from the maturity or sale of securities and other financial instruments, and
repayments from securities and loans. The Company's liquidity ratio (defined as
net cash, short-term and marketable securities to net deposits and short-term
liabilities) stood at 45.24% as of March 31, 1998, compared to 45.59% at
year-end 1997.
The Bank maintains a total credit line of $45 million for Federal funds
with three correspondent banks, a repo line of $30 million with a brokerage firm
and a total retail certificate of deposit line of approximately $213 million
with three brokerage firms. Moreover, the Bank is a shareholder of Federal Home
Loan Bank (FHLB) which enables the Bank to have access to lower cost FHLB
financing when and if necessary. Management believes all the above-mentioned
sources will provide adequate liquidity to the Company to meet its daily
operating needs.
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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 will have
material adverse impact on the Company's consolidated financial condition, or
the results of operations.
Item 2. CHANGES IN SECURITIES
There have been no changes in securities.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no reportable events.
Item 5. OTHER INFORMATION
There were no reportable events.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit:
10.4 Cathay Bancorp, Inc. Equity Incentive Plan
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cathay Bancorp, Inc.
(Registrant)
Date: May 13, 1998 DUNSON K. CHENG
------------ -----------------------
Dunson K. Cheng
Chairman and President
Date: May 13, 1998 ANTHONY M. TANG
------------ -----------------------
Anthony M. Tang
Chief Financial Officer
19