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, 1997 -------------------------------------------- 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, 8,895,878 shares outstanding as of March 31, 1997.
TABLE OF CONTENTS PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .3 Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . .4-6 Note to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . 8-16 PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .17 Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .17 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . .17 Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . .17 Item 4. Submission of Matters to a Vote of Security Holders. . . . . .17 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . .17 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .17 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3
CATHAY BANCORP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF MARCH 31, 1997 AND DECEMBER 31, 1996 (IN THOUSANDS) <TABLE> <CAPTION> Mar. 31, 1997 Dec. 31, 1996 (unaudited) (unaudited) ------------ ------------- <S> <C> <C> ASSETS Cash and due from banks $ 54,630 $ 47,194 Federal funds sold and securities purchased under agreement to resell 20,000 28,000 ------------ ------------- Cash and cash equivalents 74,630 75,194 Securities available-for-sale (with amortized costs of $331,021 in 1997 and $385,228 in 1996) 327,153 383,391 Securities held-to-maturity (with estimated fair values of $246,633 in 1997 and $212,002 in 1996) 248,157 210,129 Loans (net of allowance for loan losses of $14,414 in 1997 and $13,529 in 1996) 778,407 744,384 Other real estate owned, net 14,202 18,854 Investments in real estate, net 3,919 3,987 Premises and equipment, net 25,544 25,771 Customers' liability on acceptance 5,988 6,653 Accrued interest receivable 11,078 15,008 Goodwill 9,986 9,897 Other assets 11,966 11,061 ------------ ------------- Total assets $ 1,511,030 $ 1,504,329 ------------ ------------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand deposits $ 139,040 $ 135,345 Interest bearing accounts NOW accounts 117,372 118,498 Money market deposits 97,101 95,158 Savings deposits 219,216 224,443 Time deposits under $100,000 304,768 302,981 Time deposits of $100,000 or more 497,322 488,315 ------------ ------------- Total deposits 1,374,819 1,364,740 ------------ ------------- Securities sold under agreements to repurchase 2,221 10,000 Acceptances outstanding 5,988 6,653 Other liabilities 7,181 4,490 ------------ ------------- Total liabilities 1,390,209 1,385,883 ------------ ------------- 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, 8,895,878 and 8,878,144 shares issued and outstanding in 1997 and 1996, respectively 89 89 Additional paid-in-capital 60,145 59,812 Unrealized holding loss on securities available-for-sale, net of tax (2,205) (1,059) Retained earnings 62,792 59,604 ------------ ------------- Total stockholders' equity 120,821 118,446 ------------ ------------- Total liabilities and stockholders' equity $ 1,511,030 $ 1,504,329 ------------ ------------- ------------ ------------- SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. </TABLE> 4
CATHAY BANCORP, INC AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31, 1997 and 1996 (In thousands, except per share data) (unaudited) <TABLE> <CAPTION> 1997 1996 --------- --------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 17,459 $ 13,312 Interest on securities available-for-sale 5,442 3,680 Interest on securities held-to-maturity 3,239 2,409 Interest on Federal funds sold and securities purchased under agreement to resell 576 435 --------- --------- Total interest income 26,716 19,836 --------- --------- INTEREST EXPENSE Time deposits of $100,000 or more 5,979 5,388 Other deposits 6,003 3,674 Other borrowed funds 23 46 --------- --------- Total interest expense 12,005 9,108 --------- --------- Net interest income before provision for loan losses 14,711 10,728 Provision for loan losses 900 900 --------- --------- Net interest income after provision for loan losses 13,811 9,828 --------- --------- NON-INTEREST INCOME Securities gains 4 22 Letter of credit commissions 209 281 Service charges 816 756 Other operating income 361 269 --------- --------- Total non-interest income 1,390 1,328 --------- --------- NON-INTEREST EXPENSE Salaries and employee benefits 3,951 3,105 Occupancy expense 678 553 Computer and equipment expense 600 507 Professional services expense 737 713 FDIC and State assessments 55 86 Marketing expense 411 329 Net other real estate owned expense 226 497 Other operating expense 970 772 --------- --------- Total non-interest expense 7,628 6,562 --------- --------- Income before income tax expense 7,573 4,594 Income tax expense 3,054 1,706 --------- --------- Net Income $ 4,519 $ 2,888 --------- --------- --------- --------- NET INCOME PER COMMON SHARE, based on the weighted average number of shares outstanding during the periods: $ 0.51 $ 0.37 Weighted average number of common shares outstanding 8,890,703 7,876,755 SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. </TABLE> 5
CATHAY BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) <TABLE> <CAPTION> (In thousands) ----------------------- 1997 1996 - ------------------------------------------------------------------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 4,519 $ 2,888 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 133 500 Depreciation 348 367 Net (gain) loss on disposition of other real estate owned 76 (25) Net gain on sales and calls of securities (4) (22) Amortization and accretion of investment security premiums, net 195 206 Decrease in deferred loan fees, net (19) (32) Increase in accrued interest receivable, net 3,930 2,980 (Increase) decrease in other assets, net (110) 1,919 Increase in other liabilities, net 2,691 505 - ------------------------------------------------------------------------------------------ Total adjustments 8,140 7,298 - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 12,659 10,186 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale (5,086) (80,218) Proceeds from sale, maturity and call of securities available-for-sale 58,051 10,095 Purchase of securities held-to-maturity (10,240) (26) Proceeds from maturity and call of securities held-to-maturity 8,965 11,130 Proceeds from repayments and sale of mortgage-backed securities available-for-sale 1,679 -- Purchase of mortgage-backed securities held-to-maturity (39,546) (10,003) Repayments from mortgage-backed securities held-to-maturity 2,166 58 Proceeds from sale of loans 1,834 -- Net change in loans (34,441) (16,353) Purchase of premises and equipment (121) (127) Proceeds from disposition of other real estate owned 2,146 559 Net decrease in investments in real estate 68 34 - ------------------------------------------------------------------------------------------ Net cash used in investing activities (14,525) (84,851) - ------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts, money market and savings deposits (715) 29,671 Net increase in time deposits 10,794 67,612 Decrease in securities sold under agreements to repurchase (7,779) (1,500) Cash dividends (1,331) (1,180) Proceeds from shares issued to Dividend Reinvestment Plan 333 204 - ------------------------------------------------------------------------------------------ Net cash provided by financing activities 1,302 94,807 - ------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents (564) 20,142 Cash and cash equivalents, beginning of the period 75,194 71,326 - ------------------------------------------------------------------------------------------ Cash and cash equivalents, end of the period $ 74,630 $ 91,468 - ------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 11,678 $ 9,098 Income taxes $ 680 $ -- Non-cash investing activities: Transfer to securities available-for-sale $ 630 $ -- Net change in unrealized loss on securities available-for-sale, net of tax $ (1,146) $ (2,062) Transfers to other real estate owned $ 403 $ 3,191 Loans to facilitate the sale of other real estate owned $ 2,700 $ 600 - ------------------------------------------------------------------------------------------ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </TABLE> 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 three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. 2. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the FASB issued SFAS No. 128, "EARNINGS PER SHARE". This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. This Statement supersedes Opinion 15 and AICPA Accounting Interpretations 1-102 of Opinion 15. It also supersedes or amends other accounting pronouncements. The provisions in this Statement are substantially the same as those in International Accounting Standard 33, EARNINGS PER SHARE, recently issued by the International Accounting Standards Committee. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. Upon adoption of SFAS No. 128, the Company anticipates that its basic EPS disclosures will be increased as compared to the primary EPS disclosures presently required by APB Opinion 15. Diluted EPS disclosures are not expected to differ materially from the fully-diluted disclosures presently required by APB Opinion 15. 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 the 1996 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 1997, the Company reported net income of $4.5 million or $0.51 per share, as compared to $2.9 million or $0.37 per share for the first quarter of 1996, representing an increase of $1.6 million or 56.5%. Income before income tax expense amounted to $7.6 million for the first quarter of 1997, an increase of $3.0 million or 64.9% over $4.6 million for the same quarter a year ago. The strong earnings growth was due to the increase in assets through the acquisition of First Public Savings Bank last November, increases in loans and the resulting synergy of the combination of the two banks. The annualized return on average assets and return on average stockholders' equity was 1.20% and 15.11%, respectively for the first quarter of 1997, as compared to 1.02% and 12.23%, respectively for the same quarter of 1996. NET INTEREST INCOME For the first quarter of 1997, net interest income before provision for loan losses totaled $14.7 million, as compared to $10.7 million for the same quarter of 1996. This represents an increase of $4.0 million or 37.1%. On a taxable equivalent basis, net interest income was up $4.0 million as well or 36.2% to $15.0 million for the first quarter of 1997, as compared to $11.0 million for the same quarter of 1996. The increase in net interest income was substantially attributable to a $362.3 million growth in the average earning assets with average loans increasing $208.8 million. Average loans consisted of 55.5% of the average earning assets in the first quarter of 1997 as compared to 54.7% a year ago. The taxable equivalent average yield on earning assets were 8.02% and 8.07% for the first quarter of 1997 and 1996, respectively. The slightly lower yield on earning assets in the 1997 first quarter was mainly due to a 6 basis point decline in the Bank's average reference rate on loans from 8.58% to 8.52%. A majority of the increase in the average earning assets was funded by time deposits and, to a lesser extent, by regular savings, interest-bearing checking and demand deposits. However, cost of funds was 3.92% for the 1997 first quarter, which was 15 basis points lower than 4.07% for the same quarter a year ago. This was primarily due to the lagging repricing characterics of the Bank's time deposits in an increasing interest rate environment in the first quarter of 1997 while the repricing of time deposits in the first quarter of 1996 lagged in a decreasing interest rate environment. Net interest margin, defined as taxable equivalent net interest income to average earning assets, improved four basis points from 4.42% to 4.46% between the first quarter of 1996 and 1997. NON-INTEREST INCOME Non-interest income totaled $1.4 million and $1.3 million for the first quarter of 1997 and 1996, respectively. The slight increase resulted from a combination of higher income in service charges, wire transfer fees and documentation fees offset by reduced letter of credit commissions and securities gains. The following tables illustrate the components of non-interest income, as well as the amount and percentage changes for the periods indicated: (Dollars in thousands) Three Months Ended Increase Percent Non-interest income: 03/31/97 03/31/96 (Decrease) Change -------- -------- -------- ------- Letter of credit commissions $ 209 $ 281 $ (72) (25.6)% Service charges 816 756 60 7.9 Other operating income 361 269 92 34.2 Securities Gains 4 22 (18) (81.8) ------- ------- ------- Total non-interest income $ 1,390 $ 1,328 $ 62 4.7% ------- ------- ------- ------- ------- ------- 8
NON-INTEREST EXPENSE Non-interest expense amounted to $7.6 million and $6.6 million, respectively for the first quarter of 1997 and 1996. The increase of $1.0 million or 16.3% in 1997 non-interest expense was primarily due to the higher operating cost associated with added personnel and facilities from the acquisition while net other real estate owned ("OREO") expense showed a decrease of $271,000. The following tables present the components of the non-interest expense with the amount and percentage changes for the periods indicated: <TABLE> <CAPTION> (Dollars in thousands) Three Months Ended Increase Percent Non-interest expense: 03/31/97 03/31/96 (Decrease) Change -------- -------- --------- ------ <S> <C> <C> <C> <C> Salaries and employee benefits $ 3,951 $ 3,105 $ 846 27.2% Occupancy expense 678 553 125 22.6 Computer and equipment expense 600 507 93 18.3 Professional services expense 737 713 24 3.4 FDIC and State assessments 55 86 (31) (36.0) Marketing expense 411 329 82 24.9 Net other real estate owned expense 226 497 (271) (54.5) Other operating expense 970 772 198 25.6 -------- -------- --------- ------- Total non-interest expense $ 7,628 $ 6,562 $ 1,066 16.2% -------- -------- --------- ------- -------- -------- --------- ------- </TABLE> FINANCIAL CONDITION During the three-month period since year-end 1996, the Company experienced a steady but moderate growth. Total assets increased $6.7 million to $1,511.0 million; deposits were up $10.1 million to $1,374.8 million; loans, net of unearned fees, grew by $34.9 million to $792.8 million; securities held-to-maturity increased $38.0 million to $248.2 million while securities available-for-sale decreased $56.2 million to $327.2 million; and stockholders' equity advanced $2.4 million to $120.8 million. EARNING ASSET MIX Total earning assets reached $1,388.1 million as of March 31, 1997, as compared to $1,379.4 million at year-end 1996, representing an increase of $8.7 million. The Bank continued to experience good loan growth in the first quarter of 1997. Loans, net of unearned fees, accounted for 57.1% of total earning assets as of March 31, 1997 as compared to 55.0% at year-end 1996, while securities available-for-sale and securities held-to-maturity together comprised 41.5% of total earning assets as of March 31, 1997 as compared to 43.0% at year-end 1996. As a result, net interest margin improved moderately comparing the first quarter of 1997 and 1996. The table below shows the changes in the earning asset mix as of the dates indicated: <TABLE> <CAPTION> (Dollars in thousands) As of 03/31/97 As of 12/31/96 ---------------------- ---------------------- Types of earning assets: Amount Percent Amount Percent ---------- ------- ---------- ------- <S> <C> <C> <C> <C> Federal funds sold $ 20,000 1.4% $28,000 2.0% Securities available-for-sale 327,153 23.6 383,391 27.8 Securities held-to-maturity 248,157 17.9 210,129 15.2 Loans (net of deferred fees) 792,821 57.1 757,913 55.0 ---------- ------- ---------- ------ Total earning assets $1,388,131 100.0% $1,379,433 100.0% ---------- ------- ---------- ------ ---------- ------- ---------- ------ </TABLE> 9
SECURITIES As of March 31, 1997 securities available-for-sale decreased $56.2 million or 14.7% to $327.2 million from $383.4 million at year-end 1996, and securities held-to-maturity increased $38.0 million or 18.1% to $248.2 million from $210.1 million at year-end 1996. The decrease of $18.2 million in the overall investment securities was primarily attributable to a stronger loan demand that the Company experienced during the first quarter of 1997. The following tables summarize the composition and maturity distribution of the investment portfolio as of the dates indicated: <TABLE> <CAPTION> (Dollars in thousands) SECURITIES AVAILABLE-FOR-SALE: As of 03/31/97 ----------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized Losses Fair Value ------------ ---------------- ----------------- ---------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 91,076 $ 73 $ 655 $ 90,494 U.S. government agencies 202,541 3 2,739 199,805 State and municipal securities 630 -0- -0- 630 Mortgage-backed securities 21,374 -0- 538 20,836 Assets-backed securities 4,999 -0- 8 4,991 Federal Home Loan Bank stock 5,401 -0- -0- 5,401 Other securities 5,000 -0- 4 4,996 ---------- -------- ------ -------- Total $331,021 $ 76 $3,944 $327,153 ---------- -------- ------ -------- ---------- -------- ------ -------- </TABLE> <TABLE> <CAPTION> As of 12/31/96 ----------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized Losses Fair Value ------------ ---------------- ----------------- ---------- <S> <C> <C> <C> <C> U.S. Treasury securities $122,116 $ 197 $ 544 $121,769 U.S. government agencies 229,695 128 1,446 228,377 State and municipal securities 50 -0- -0- 50 Mortgage-backed securities 23,053 7 178 22,882 Assets-backed securities 4,999 -0- 1 4,998 Federal Home Loan Bank stock 5,315 -0- -0- 5,315 -------- -------- ------ --------- Total $385,228 $ 332 $2,169 $ 383,391 -------- -------- ------ --------- -------- -------- ------ --------- </TABLE> <TABLE> <CAPTION> (Dollars in thousands) SECURITIES HELD-TO-MATURITY: As of 03/31/97 ----------------------------------------------------------------- Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value ------------ ---------------- ----------------- ---------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 26,074 $ -0- $ 254 $ 25,820 U.S. government agencies 59,394 -0- 690 58,704 State and municipal securities 40,253 1,094 150 41,197 Mortgage-backed securities 100,504 4 1,470 99,038 Assets-backed securities 3,027 -0- 9 3,018 Corporate bonds 8,904 -0- -0- 8,904 Other securities 10,001 -0- 49 9,952 -------- ------ ------ -------- Total $248,157 $1,098 $2,622 $246,633 -------- ------ ------ -------- -------- ------ ------ -------- </TABLE> <TABLE> <CAPTION> As of 12/31/96 ----------------------------------------------------------------- Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value ------------ ---------------- ----------------- ---------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 26,081 $ 91 $ 9 $ 26,163 U.S. government agencies 66,900 -0- 106 66,794 State and municipal securities 40,393 1,513 31 41,875 Mortgage-backed securities 63,109 504 103 63,510 Assets-backed securities 3,545 -0- 1 3,544 Other securities 10,101 15 -0- 10,116 -------- ------ ------- -------- Total $210,129 $2,123 $ 250 $212,002 -------- ------ ------- -------- -------- ------ ------- -------- </TABLE> 10
<TABLE> <CAPTION> SECURITIES PORTFOLIO MATURITY DISTRIBUTION: (Dollars in thousands) As of March 31, 1997 Maturity Schedule ---------------------------------------------------------------------- After 1 But After 5 But SECURITIES AVAILABLE-FOR-SALE: Within 1 Yr Within 5 Yrs Within 10Yrs Over 10rs Total - ----------------------------- ----------- ------------ ------------ --------- ---------- <S> <C> <C> <C> <C> <C> U.S. Treasury securities $ 48,988 $ 41,506 $ -0- $ -0- $ 90,494 U.S. government agencies 5,003 173,015 21,787 -0- 199,805 State and municipal securities 630 -0- -0- -0- 630 Mortgage-backed securities* -0- -0- 3,586 17,250 20,836 Assets-backed securities* -0- 4,991 -0- -0- 4,991 Federal Home Loan Bank stock 5,401 -0- -0- -0- 5,401 Other securities 4,996 -0- -0- -0- 4,996 --------- -------- --------- --------- -------- Total $ 65,018 $219,512 $ 25,373 $ 17,250 $327,153 --------- -------- --------- --------- -------- --------- -------- --------- --------- -------- SECURITIES HELD-TO-MATURITY: - ---------------------------- U.S. Treasury securities $ -0- $ 26,074 $ -0- $ -0- $ 26,074 U.S. government agencies -0- 39,394 20,000 -0- 59,394 State and municipal securities -0- 9,478 15,817 14,958 40,253 Mortgage-backed securities* -0- 23,319 11,793 65,392 100,504 Assets-backed securities* -0- -0- -0- 3,027 3,027 Corporate bonds -0- 8,904 -0- -0- 8,904 Other securities 10,001 -0- -0- -0- 10,001 --------- -------- --------- --------- -------- Total $ 10,001 $107,169 $ 47,610 $ 83,377 $248,157 --------- -------- --------- --------- -------- --------- -------- --------- --------- -------- </TABLE> * The mortgage-backed securities and asset-backed securities reflect stated maturities and not anticipated prepayments. LOANS The Bank continued to experience fair loan demand in the first quarter of 1997. Total gross loans increased $34.9 million or 4.6% to $796.5 million as of March 31, 1997, from $761.6 million at year-end 1996. In addition to a $12.0 million increase in commercial real estate loans and a $2.0 million increase in construction loans, the Bank also made $27.7 million investments in the banker's acceptances which were included in the other loan category as of March 31, 1997. However, commercial loans continued to decrease from $283.9 million at year-end 1996 to $277.9 million as of March 31, 1997 largely due to pay-offs. The following table sets forth the classification of loans by type and mix as of the dates indicated: <TABLE> <CAPTION> (Dollars in thousands) As of 03/31/97 As of 12/31/96 -------------------------------------------- Types of loans: Amount Percent Amount Percent -------- ------- ------ ------- <S> <C> <C> <C> <C> Commercial loans $277,873 35.7% $283,894 38.1% Real estate mortgage loans 430,802 55.3 420,315 56.5 Real estate construction loans 35,547 4.6 33,510 4.5 Installment loans 24,109 3.1 23,551 3.1 Other loans 28,214 3.6 385 0.1 -------- ------ -------- ------ Total loans - Gross 796,545 761,655 Allowance for loan losses (14,414) (1.8) (13,529) (1.8) Unamortized deferred loan fees (3,724) (0.5) (3,742) (0.5) -------- ------ -------- ------ Total loans - Net $778,407 100.0% $744,384 100.0% -------- ------ -------- ------ -------- ------ -------- ------ </TABLE> 11
RISK ELEMENTS OF THE LOAN PORTFOLIO NON-PERFORMING ASSETS Non-performing assets were reduced by $5.8 million to $24.4 million or 3.01% of total loans plus OREO as of March 31, 1997, as compared to $30.2 million or 3.87% of total loans plus OREO at year-end 1996. Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. The decrease of $5.8 million in non-performing assets was accomplished by a $4.6 million reduction in OREO and a $2.0 million reduction in loans past due 90 days or more and still accruing interest offset by a $0.8 million increase in non-accrual loans. The non-accrual coverage ratio, which is the allowance for loan losses to non-performing loans, jumped from 119.15% at year-end 1996 to 141.65% as of March 31, 1997, primarily due to the combination of a $1.2 million decrease in non-performing loans along with a $0.9 million increase in the allowance for loan losses. The following table presents the breakdown of non-performing assets by categories as of the dates indicated: <TABLE> <CAPTION> (Dollars in thousands) As of As of As of As of Non-Performing Assets: 03/31/97 12/31/96 09/30/96 06/30/96 -------- -------- -------- -------- <S> <C> <C> <C> <C> Loans past due 90 days or more and still accruing interest $ 56 $ 2,050 $ 2,272 $ 1,171 Non-accrual loans 10,120 9,305 12,928 17,875 -------- -------- -------- -------- Total past due loans 10,176 11,355 15,200 19,046 Real estate acquired in foreclosure 14,202 18,854 15,570 12,170 -------- -------- -------- -------- Total non-performing assets $ 24,378 $ 30,209 $ 30,770 $ 31,216 -------- -------- -------- -------- -------- -------- -------- -------- Accruing troubled debt restructurings 3,195 3,201 2,737 3,945 Non-performing assets as a percentage of period-end total loans plus OREO 3.01% 3.87% 5.12% 5.43% </TABLE> The balance of $10.1 million in non-accrual loans consisted mainly of $4.8 million in commercial real estate loans and $4.8 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) 03/31/97 12/31/96 ----------------------- ----------------------- Non-accrual Loan Balance ------------------------------------------------ Commercial Commercial Type of property: Real Estate Commercial Real Estate Commercial ----------- ---------- ----------- ---------- Single/multi-family residence $ 2,212 $ 595 $ 583 $ 1,707 Commercial 377 3,436 226 3,302 Motel 1,350 503 1,350 511 Marina 769 -0- 769 -0- Others 86 194 -0- 399 Unsecured -0- 84 -0- 84 -------- -------- -------- -------- $ 4,794 $ 4,812 $ 2,928 $ 6,003 -------- -------- -------- -------- -------- -------- -------- -------- Type of business: Real estate development $ 769 $ 561 $ 995 $ 562 Wholesale -0- 762 -0- 780 Restaurant 613 -0- -0- -0- Import -0- -0- -0- 305 Motel 1,916 503 1,933 511 Others 1,496 2,986 -0- 3,845 -------- -------- -------- -------- $ 4,794 $ 4,812 $ 2,928 $ 6,003 -------- -------- -------- -------- -------- -------- -------- -------- 12
The above tables show a $1.4 million balance in non-accrual motel loan as of March 31, 1997, which represents one credit secured by the first trust deed on the respective motel located in Southern California. Under the non-accrual commercial loan category as of March 31, 1997, the $3.4 million balance consisted of nine 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 $3.2 million as of March 31, 1997, approximately the same level as year-end 1996. All of the restructured loans were current under their revised terms as of March 31, 1997 with the exception of one credit in the amount of $473,000 which was 11 days past due. There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of March 31, 1997. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses amounted to $14.4 million or 1.81% of total loans as of March 31, 1997, as compared to $13.5 million or 1.78% of total loans at year-end 1996. The following table presents information relating to the allowance for loan losses for the periods indicated: <TABLE> <CAPTION> (Dollars in thousands) YTD YTD YTD YTD Allowance for loan losses: 03/31/97 12/31/96 09/30/96 06/30/96 -------- -------- -------- -------- <S> <C> <C> <C> <C> Balance at beginning of period $13,529 $12,742 $12,742 $12,742 Allowance from acquisition -0- 1,644 -0- -0- Provision for loan losses 900 3,600 2,700 1,800 Loans charged-off (39) (5,388) (3,867) (3,489) Recoveries of charged-off loans 24 931 620 582 ------- ------- ------- ------- Balance at end of period $14,414 $13,529 $12,195 $11,635 ------- ------- ------- ------- ------- ------- ------- ------- Average loans outstanding during the period $756,679 $579,634 $555,382 $553,370 Ratio of net charge-offs to average loans outstanding during the period (annualized) 0.01% 0.77% 0.78% 1.05% Provision for loan losses to average loans outstanding during the period (annualized) 0.48% 0.62% 0.65% 0.65% Allowance to non-performing loans at period-end 141.65% 119.15% 80.22% 61.09% Allowance to total loans at period-end 1.81% 1.78% 2.08% 2.07% </TABLE> 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 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: 13
(Dollars in thousands) As of March 31, 1997 --------------------------- Impaired loans: Recorded Impairment Loans with impairment allowance: Investment Allowance ---------- ---------- Commercial $ 7,068 $ 1,374 Commercial real estate 10,545 1,718 Other 178 142 ------- ------- Total loans with impairment allowance $17,791 $ 3,234 ------- ------- ------- ------- With the reduction of non-performing loans and the increase in the coverage ratio from 119.15% at year-end 1996 to 141.65% as of March 31, 1997, management believes the allowance level as of March 31, 1997 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 a valuation allowance of $1.7 million, were carried at $14.2 million as of March 31, 1997. This compares with OREO, net of a valuation allowance of $1.6 million, carried at $18.8 million at year-end 1996. During the first quarter of 1997, five properties totaling $5.0 million were disposed of with a net loss of $76,000. As of March 31, 1997, the Bank's OREO properties include different types of residential properties, commercial buildings, warehouses, land, and a motel. With an exception of one single family residence which is out of state, all other properties are located in Southern California. The Bank maintains a valuation allowance for the OREO properties in order to record estimated fair value of these 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 1997, management provided approximately $133,000 to the provision for OREO losses based on new listing prices or new appraisals received. DEPOSITS As of March 31, 1997, total deposits increased $10.1 million to $1,374.8 million as compared to $1,364.7 million at year-end 1996. Time deposits over $100,000 ("Jumbo CD's") continued to account for the majority of the increase while core deposits (defined as total deposits excluding brokered deposits and Jumbo CD's) advanced slightly. The ratio of core deposits to total deposits declined barely from 64.22% at year-end 1996 to 63.83% at the end of the first quarter of 1997. Management continues to monitor the Jumbo CD portfolio. The Bank's Jumbo CD's are considered 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 2,900 individual accounts owned by 2,083 individual depositors as of January 28, 1997; 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 taken steps to discourage the continued growth in Jumbo CD's, such as to diversify the customer base by branch expansion and acquisition, to lower the interest rates paid on Jumbo CD's and to develop new transaction-based products to attract depositors. There were no brokered deposits as of March 31, 1997. The following table illustrates the deposit mix on the dates indicated: 14
(Dollars in thousands) As of 03/31/97 As of 12/31/96 -------------------- -------------------- Types of deposits: Amount Percent Amount Percent ---------- ------- ---------- ------- Demand $ 139,040 10.1% $ 135,345 9.9% NOW accounts 117,372 8.5 118,498 8.7 Money market accounts 97,101 7.1 95,158 7.0 Savings deposits 219,216 15.9 224,443 16.4 Time deposits under $100,000 304,768 22.2 302,981 22.2 Time deposits of $100,000 or more 497,322 36.2 488,315 35.8 ---------- ------ ---------- ------ Total deposits $1,374,819 100.0% $1,364,740 100.0% ---------- ------ ---------- ------ ---------- ------ ---------- ------ CAPITAL RESOURCES Stockholders' equity amounted to $120.8 million or 8.00% of total assets as of March 31, 1997, as compared to $118.4 million or 7.87% of total assets at year-end 1996. The $2.4 million increase in stockholders' equity was primarily due to year-to-date net income of $4.5 million and $333,000 from issuance of additional common shares through Dividend Reinvestment Plan and ESOP purchases, which were partially offset by an increase of $1.1 million in the unrealized holding losses on securities available-for-sale, net of tax, and dividends paid in the amount of $1.3 million. The Company declared a cash dividend of $0.15 per share in January and April of 1997, on 8,878,144 and 8,895,878 shares outstanding, respectively. Total cash dividends paid in 1997, including the $1.3 million paid in April 1997, amounted to $2.7 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, 1997 well exceeded 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%. <TABLE> <CAPTION> (Dollars in thousands) Company Bank As of 03/31/1997 As of 03/31/1997 --------------------- --------------------- Balance Percent Balance Percent ------- ------- ------- ------- <S> <C> <C> <C> <C> Tier 1 capital (to risk-weighted assets) $113,040* 12.65% $110,525* 12.37% Tier 1 capital minimum requirement 35,736 4.00 35,735 4.00 -------- ------ -------- ----- Excess $ 77,304 8.65% $ 74,790 8.37% -------- ------ -------- ----- -------- ------ -------- ----- Total capital (to risk-weighted assets) $124,247* 13.91% $121,732* 13.63% Total capital minimum requirement 71,471 8.00 71,471 8.00 -------- ------ -------- ----- Excess $ 52,776 5.91% $ 50,261 5.63% -------- ------ -------- ----- -------- ------ -------- ----- Risk-weighted assets $893,389 $893,382 Tier 1 capital (to average assets) - Leverage ratio $113,040* 7.55% $110,525* 7.38% Minimum leverage requirement 59,908 4.00 59,908 4.00 -------- ------ -------- ----- Excess $ 53,132 3.55% $ 50,617 3.38% -------- ------ -------- ----- -------- ------ -------- ----- Total average assets $1,497,694 $1,497,690 </TABLE> 15
* Excluding the unrealized holding losses on securities available-for-sale of $2,205,000, and goodwill of $9,986,000. LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity is the Company's ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs. The Company derives liquidity primarily from various types of deposits. In addition, liquidity can be obtained from assets as well, which include cash and cash equivalents, time deposits with other depository institutions, Federal funds sold and repurchases, unpledged securities available-for-sale, and unpledged securities held-to-maturity. The Company's liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) stood at 45.68% as of March 31, 1997, as compared to 47.09% at year-end 1996. To further enhance its liquidity, the Bank maintains a total credit line of $45 million for Federal funds with three correspondent banks, and a total retail certificate of deposit (CD) line of approximately $209 million with three brokerage firms. Moreover, the Bank is a shareholder of Federal Home Loan Bank (FHLB) since January 1993, 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. Interest sensitivity risk management minimizes the risk to net interest income resulting from the changes in market interest rates. The Bank's Investment Committee monitors interest sensitivity risk on an on-going basis by using, among other things, simulation model, gap analysis and certain key ratios. Gap analysis is a measure to identify the differences between rate sensitive assets and rate sensitive liabilities over certain periods of time. A positive gap exists when rate sensitive assets exceed rate sensitive liabilities and a negative gap exists when rate sensitive liabilities exceed rate sensitive assets. Generally, a positive gap would enhance net interest margin during periods of increasing interest rates and vice versa, and a negative gap would impair net interest margin during periods of increasing interest rates and vice versa. As of March 31, 1997, the Company's rate sensitive liabilities exceeded rate sensitive assets by roughly $176.4 million with a cumulative gap ratio of a negative 11.68% within a 1-year period. 16
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 The Company filed a report on Form 8-K/A dated February 13, 1997 to amend the report on Form 8-K dated November 18, 1996 to report the completion of the merger with First Public. Exhibit: 27 Financial Data Schedule 17
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, 1997 DUNSON K. CHENG ------------ --------------- Dunson K. Cheng Chairman and President Date: May 13, 1997 ANTHONY M. TANG ------------ --------------- Anthony M. Tang Chief Financial Officer 18