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.
2 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 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3
4 CATHAY BANCORP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF MARCH 31, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS) <TABLE> <CAPTION> MAR. 31, 1998 DEC. 31, 1997 (UNAUDITED) (UNAUDITED) <S> <C> <C> 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 ========== ========== </TABLE> SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4
5 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) <TABLE> <CAPTION> 1998 1997 ----------- ----------- <S> <C> <C> 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 </TABLE> SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5
6 CATHAY BANCORP, INC. & SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) <TABLE> <CAPTION> (In thousands) --------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> 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 - ------------------------------------------------------------------------------------------------------ </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 6
7 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). 7
8 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: 8
9 <TABLE> <CAPTION> (Dollars in thousands) Three Months Ended Percent Non-interest income: 03/31/98 03/31/97 Increase Change - -------------------- -------- -------- -------- ------ <S> <C> <C> <C> <C> 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% ======== ========= ===== </TABLE> 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: <TABLE> (Dollars in thousands) Three Months Ended Increase Percent Non-interest income: 03/31/98 03/31/97 (Decrease) Change -------- -------- -------- ------ <S> <C> <C> <C> <C> 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% ======== ======== ======== </TABLE> 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) 9
10 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: <TABLE> <CAPTION> (Dollars in thousands) As of 03/31/98 As of 12/31/97 Types of earning assets: Amount Percent Amount Percent ---------- ----- ---------- ----- <S> <C> <C> <C> <C> 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% ========== ===== ========== ===== </TABLE> 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: <TABLE> <CAPTION> (Dollars in thousands) SECURITIES AVAILABLE-FOR-SALE: As of 03/31/98 Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value --------- ---------------- ----------------- ---------- <S> <C> <C> <C> <C> 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 ======== ======== ======== ======== </TABLE> <TABLE> As of 12/31/97 Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value --------- ---------------- ----------------- ---------- <S> <C> <C> <C> <C> 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 ======== ======== ======== ======== </TABLE> 10
11 <TABLE> <CAPTION> (Dollars in thousands) SECURITIES HELD-TO-MATURITY: As of 03/31/98 Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value ---------- ---------------- ----------------- ---------- <S> <C> <C> <C> <C> 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 ======== ====== ======= ======== </TABLE> <TABLE> As of 12/31/97 Carrying Gross Gross Estimated Value Unrealized Gains Unrealized Losses Fair Value ---------- ---------------- ----------------- ---------- <S> <C> <C> <C> <C> 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 ======== ====== ======== ======== </TABLE> <TABLE> <CAPTION> 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 - ----------------------------- ----------- ------------ ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> 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 ========== ========= =========== =========== ======== </TABLE> * The mortgage-backed securities and assets-backed securities reflect stated maturities and not anticipated prepayments. 11
12 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: <TABLE> <CAPTION> (Dollars in thousands) As of 03/31/98 As of 12/31/97 Types of loans: Amount Percent Amount Percent -------- ------- -------- ------- <S> <C> <C> <C> <C> 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% ======== ====== ======== ====== </TABLE> 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: <TABLE> <CAPTION> (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 -------- -------- -------- -------- <S> <C> <C> <C> <C> 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% </TABLE> 12
13 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: <TABLE> <CAPTION> (Dollars in thousands) 03/31/98 12/31/97 -------------------------- ----------------------------- Non-accrual Loan Balance -------------------------------------------------------------- Commercial Commercial Type of property: Real Estate Commercial Real Estate Commercial ----------- ---------- ----------- ---------- <S> <C> <C> <C> <C> 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 ========= ======== ========= ======== </TABLE> 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: 13
14 <TABLE> <CAPTION> (Dollars in thousands) YTD YTD YTD YTD Allowance for loan losses: 03/31/98 12/31/97 09/30/97 06/30/97 <S> <C> <C> <C> <C> 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% </TABLE> 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: <TABLE> <CAPTION> (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 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> 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 ======= ====== ======= ====== </TABLE> 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 14
15 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: <TABLE> <CAPTION> (Dollars in thousands) As of 03/31/98 As of 12/31/97 -------------- -------------- Types of deposits: Amount Percent Amount Percent ------ ------- ------ ------- <S> <C> <C> <C> <C> 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% ========== ===== ========== ===== </TABLE> 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. 15
16 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%. <TABLE> <CAPTION> (Dollars in thousands) Company Bank As of 03/31/1998 As of 03/31/1998 ---------------- ---------------- Balance Percent Balance Percent ------- ------- ------- ------- <S> <C> <C> <C> <C> 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 </TABLE> * 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 16
17 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. 17
18 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 18
19 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