Back to GetFilings.com



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended     June 30, 2002

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                      to                                                          

 

Commission file number                   0-18630

 

CATHAY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

95-4274680

(State of other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer
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 ý      No o

 

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, 18,005,539 shares outstanding as of August 1, 2002

 

 



 

CATHAY BANCORP, INC. AND SUBSIDIARY

2ND QUARTER 2002 REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I —   FINANCIAL INFORMATION

 

 

Item 1.  FINANCIAL STATEMENTS (Unaudited)

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Business

 

Basis of Presentation

 

Recent Accounting Pronouncements

 

Financial Derivatives

 

Earnings per Share

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Consolidated Income Statement Review

 

Financial Condition Review

 

Capital Resources

 

Asset Quality Review

 

Capital Adequacy Review

 

Liquidity

 

Critical Accounting Policies

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk

 

Financial Derivatives

PART II - OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

Item 2.

CHANGES IN SECURITIES AND USE OF PROCEEDS

Item 3.

DEFAULTS UPON SENIOR SECURITIES

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 5

OTHER INFORMATION

Item 6.

EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

 

2



 

PART I – FINANCIAL INFORMATION

 

 

Item 1. FINANCIAL STATEMENTS

(Unaudited)

 

3



 

CATHAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

(In thousands, except share and per share data)

 

June 30, 2002

 

December 31,
2001

 

% change

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

62,880

 

$

73,514

 

(14

)

Federal funds sold and securities purchased under agreements to resell

 

53,500

 

13,000

 

312

 

Cash and cash equivalents

 

116,380

 

86,514

 

35

 

Securities available-for-sale (amortized cost of $286,663 in 2002 and $241,788 in 2001)

 

294,386

 

248,958

 

18

 

Securities held-to-maturity (estimated fair value of  $372,479 in 2002 and $382,814 in 2001)

 

359,735

 

374,356

 

(4

)

Loans

 

1,726,922

 

1,667,905

 

4

 

Less:  Allowance for loan losses

 

(22,035

)

(23,973

)

(8

)

Unamortized deferred loan fees

 

(3,991

)

(3,900

)

2

 

Loans, net

 

1,700,896

 

1,640,032

 

4

 

Other real estate owned, net

 

653

 

1,555

 

(58

)

Investments in real estate, net

 

21,484

 

17,727

 

21

 

Premises and equipment, net

 

30,036

 

29,403

 

2

 

Customers’ liability on acceptances

 

12,219

 

12,729

 

(4

)

Accrued interest receivable

 

14,727

 

14,545

 

1

 

Goodwill

 

6,552

 

6,552

 

 

Other assets

 

21,917

 

20,743

 

6

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,578,985

 

$

2,453,114

 

5

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest-bearing demand deposits

 

$

272,462

 

$

260,427

 

5

 

Interest-bearing deposits:

 

 

 

 

 

 

 

NOW deposits

 

138,444

 

135,650

 

2

 

Money market deposits

 

147,255

 

136,806

 

8

 

Savings deposit

 

272,859

 

252,322

 

8

 

Time deposits under $100

 

416,919

 

414,490

 

1

 

Time deposits of $100 or more

 

958,704

 

922,653

 

4

 

Total deposits

 

2,206,643

 

2,122,348

 

4

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

28,506

 

22,114

 

29

 

Advances from the Federal Home Loan Bank

 

50,000

 

30,000

 

67

 

Acceptances outstanding

 

12,219

 

12,729

 

(4

)

Other liabilities

 

15,003

 

19,912

 

(25

)

Total liabilities

 

2,312,371

 

2,207,103

 

5

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued

 

 

 

 

Common stock, $0.01 par value, 25,000,000 shares authorized, 18,278,802 issued and 18,001,002 outstanding in 2002 and 18,235,538 issued and 17,957,738 outstanding in 2001

 

183

 

182

 

1

 

Treasury stock, at cost (277,800 shares in 2002 and in 2001)

 

(7,342

)

(7,342

)

 

Additional paid-in-capital

 

69,899

 

68,518

 

2

 

Accumulated other comprehensive income, net

 

5,419

 

5,063

 

7

 

Retained earnings

 

198,455

 

179,590

 

11

 

Total stockholders’ equity

 

266,614

 

246,011

 

8

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

2,578,985

 

$

2,453,114

 

5

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

4



 

CATHAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(In thousands, except share and per share data)

 

2002

 

2001

 

2002

 

2001

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

25,788

 

$

30,737

 

$

52,596

 

$

63,111

 

Interest on securities available-for-sale

 

4,103

 

3,604

 

8,054

 

6,748

 

Interest on securities held-to-maturity

 

5,186

 

6,057

 

10,472

 

12,045

 

Interest on federal funds sold and securities purchased under agreements to resell

 

182

 

307

 

392

 

836

 

Interest on deposits with banks

 

8

 

16

 

19

 

27

 

Total interest income

 

35,267

 

40,721

 

71,533

 

82,767

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Time deposits of $100 or more

 

5,641

 

10,689

 

12,030

 

22,334

 

Other deposits

 

3,373

 

6,585

 

6,934

 

13,612

 

Other borrowed funds

 

821

 

386

 

1,554

 

1,121

 

Total interest expense

 

9,835

 

17,660

 

20,518

 

37,067

 

Net interest income before provision for loan losses

 

25,432

 

23,061

 

51,015

 

45,700

 

Provision for loan losses

 

1,500

 

1,200

 

3,000

 

2,400

 

Net interest income after provision for loan losses

 

23,932

 

21,861

 

48,015

 

43,300

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

Securities gains (losses)

 

502

 

(38

)

460

 

826

 

Letters of credit commissions

 

466

 

575

 

938

 

1,115

 

Depository service fees

 

1,480

 

1,203

 

2,961

 

2,415

 

Other operating income

 

1,574

 

1,312

 

2,997

 

2,548

 

Total non-interest income

 

4,022

 

3,052

 

7,356

 

6,904

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

6,248

 

5,613

 

12,413

 

11,507

 

Occupancy expense

 

817

 

786

 

1,748

 

1,704

 

Computer and equipment expense

 

780

 

672

 

1,584

 

1,370

 

Professional services expense

 

764

 

1,412

 

1,854

 

2,682

 

FDIC and State assessments

 

122

 

116

 

246

 

232

 

Marketing expense

 

438

 

241

 

771

 

583

 

Other real estate owned (income)

 

(195

)

(121

)

(385

)

(183

)

Operations of investments in real estate

 

502

 

326

 

1,118

 

1,241

 

Other operating expense

 

738

 

1,295

 

1,517

 

2,315

 

Total non-interest expense

 

10,214

 

10,340

 

20,866

 

21,451

 

Income before income tax expense

 

17,740

 

14,573

 

34,505

 

28,753

 

Income tax expense

 

5,502

 

4,375

 

10,879

 

9,175

 

Net income

 

12,238

 

10,198

 

23,626

 

19,578

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

3,527

 

(730

)

1,193

 

1,018

 

Cumulative adjustment upon adoption of SFAS 133

 

 

 

 

566

 

Unrealized gains (losses) on cash flow hedge derivatives

 

141

 

(148

)

75

 

108

 

Less:  reclassification adjustment included in net income

 

718

 

79

 

912

 

103

 

Total other comprehensive income (loss), net of tax

 

2,950

 

(957

)

356

 

1,589

 

Total comprehensive income

 

$

15,188

 

$

9,241

 

$

23,982

 

$

21,167

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

$

0.56

 

$

1.31

 

$

1.08

 

Diluted

 

$

0.67

 

$

0.56

 

$

1.31

 

$

1.07

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.140

 

$

0.125

 

$

0.265

 

$

0.250

 

 

 

 

 

 

 

 

 

 

 

Basic average common shares outstanding

 

17,992,971

 

18,184,940

 

17,980,834

 

18,175,094

 

Diluted average common shares outstanding

 

18,133,705

 

18,237,640

 

18,089,358

 

18,233,904

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

5



 

CATHAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the six months ended June 30,

 

(In thousands)

 

2002

 

2001

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

23,626

 

$

19,578

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

3,000

 

2,400

 

Depreciation

 

779

 

732

 

Gain on sales of other real estate owned

 

(395

)

(4

)

Gain on sale of loans

 

(187

)

 

Gain on sale and call of investment securities

 

(665

)

(826

)

Amortization of investment security premium, net

 

322

 

236

 

Amortization of goodwill

 

 

432

 

Increase (decrease) in deferred loan fees, net

 

91

 

(209

)

(Increase) decrease in accrued interest receivable

 

(182

)

301

 

(Increase) decrease in other assets, net

 

(1,303

)

2,012

 

Decrease in other liabilities

 

(4,909

)

(1,535

)

Total adjustments

 

(3,449

)

3,539

 

Net cash provided by operating activities

 

20,177

 

23,117

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(177,730

)

(463,325

)

Proceeds from maturity and call of investment securities available-for-sale

 

135,999

 

417,256

 

Proceeds from sale of investment securities available-for-sale

 

5,030

 

462

 

Proceeds from repayment of mortgage-backed securities available-for-sale

 

2,919

 

4,929

 

Purchase of investment securities held-to-maturity

 

(32,134

)

(75,136

)

Proceeds from maturity and call of investment securities held-to-maturity

 

12,070

 

33,819

 

Purchase of mortgage-backed securities held-to-maturity

 

(9,225

)

(7,355

)

Proceeds from repayment of mortgage-backed securities held-to-maturity

 

33,092

 

26,825

 

Net increase in loans

 

(64,175

)

(65,502

)

Purchase of premises and equipment

 

(1,412

)

(225

)

Proceeds from sale of other real estate owned

 

1,704

 

227

 

Net increase in investments in real estate

 

(3,757

)

(869

)

Net cash used in investing activities

 

(97,619

)

(128,894

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Net increase in demand deposits, NOW deposits, money market and savings deposits

 

45,815

 

17,144

 

Net increase in time deposits

 

38,480

 

113,913

 

Net increase (decrease) in federal funds purchased and securities sold under agreements to
repurchase

 

6,392

 

(45,708

)

Increase in advances from Federal Home Loan Board

 

20,000

 

 

Cash dividends

 

(4,761

)

(4,540

)

Proceeds from shares issued to the Dividend Reinvestment Plan

 

964

 

977

 

Proceeds from exercise of stock options

 

418

 

253

 

Purchase of treasury stock

 

 

(209

)

Net cash provided by financing activities

 

107,308

 

81,830

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

29,866

 

(23,947

)

Cash and cash equivalents, beginning of the period

 

86,514

 

84,687

 

Cash and cash equivalents, end of the period

 

$

116,380

 

$

60,740

 

 

 

 

 

 

 

Supplemental disclosure of cash flows information

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

Interest

 

$

20,997

 

$

38,222

 

Income taxes

 

$

16,869

 

$

4,673

 

Non-cash investing activities:

 

 

 

 

 

Transfers to investment securities available-for-sale within 90 days of maturity

 

$

10,484

 

$

5,889

 

Net change in unrealized holding gains on securities available-for-sale, net of tax

 

$

281

 

$

915

 

Cumulative adjustment upon adoption of SFAS No. 133, net of  tax

 

$

 

$

566

 

Net change in unrealized gains on cash flow hedge derivatives, net of tax

 

$

75

 

$

108

 

Transfers to other real estate owned

 

$

407

 

$

441

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

6



 

CATHAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Business

 

Cathay Bancorp, Inc. (the “Company”) is the one-bank holding company for Cathay Bank (the “Bank”).  Cathay Bank was founded in 1962 and offers a wide range of financial services.  The Bank now operates twelve branches in Southern California, seven branches in Northern California, three branches in New York State, one branch in Houston, Texas, and two representative offices, one in Hong Kong, and one in Shanghai, China.  In addition, the Bank’s subsidiary, Cathay Investment Company, maintains an office in Taiwan.  The Bank has received regulatory approvals to open a new branch in Sacramento, California, which is expected to be ready for business this year.  The Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.  Certain reclassifications have been made to the prior year’s financial statements to conform to the June 30, 2002 presentation.  For further information, refer to the consolidated financial statements and footnotes included in Cathay Bancorp’s annual report on Form 10-K for the year ended December 31, 2001.

 

7



 

 

Recent Accounting Pronouncements

 

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment.  Upon adoption of SFAS No. 142, the Company was required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period.  In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company was required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142.  Any impair ment loss is measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.  The Company adopted SFAS No. 142 effective January 1, 2002.  Upon adoption, the Company discontinued the amortization of goodwill, and reclassified $2.33 million from goodwill to core deposit intangible, which is classified under other assets in the Statements of Financial Condition.  The Company also reassessed the useful lives and residual value of all intangible assets acquired in purchase business combinations, and tested goodwill for impairment, and found no impairment.

 

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  For long-lived assets to be held and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value.  Further, SFAS No. 144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a “primary-asset” approach to determine the cash flow estimation period.  For long-lived asset to be disposed of by sale, SFAS No. 144 retains the requirements of SFAS No. 121 to measure a long-lived asset classified as held-for-sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation.  Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would be no longer recognized before they occur.  SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held-for-sale, prohibits retroactive reclassification of the asset as held-for-sale at the balance sheet date if the criteria are met after the balance sheet date but before issuance of the financial statements, and provides accounting guidance for the reclassification of an asset from “held-for-sale” to “held-and-used.”  The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001.  The Company adopted SFAS No. 144 effective January 1, 2002.  Adoption of SFAS No. 144 did not have any impact on the results of operations or financial condition of the Company.

 

8



 

In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”).  SFAS No.145 rescinds SFAS No. 4 that required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect.  Henceforth, those gains and losses from extinguishment of debt are to be classified in accordance with the criteria in APB Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.  SFAS No. 64 which amended SFAS No. 4 is no longer necessary with the rescission of SFAS No. 4.  SFAS No. 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980.  Since the transition has been completed, SFAS No. 44 is no longer necessary.  SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions.  SFAS No. 145 is effective for financial statements for periods beginning after May 15, 2002.  Upon adoption, the Company is required to reclassify prior period items that do not meet the extraordinary classification criteria in APB 30.  The Company adopted SFAS No. 145 effective May 15, 2002.  Adoption of SFAS No. 145 did not have any impact on the results of operations or financial condition of the Company.

 

On July 30, 2002, FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”  (“SFAS No. 146”).  SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets.  Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel.  Under Statement No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value.  A liability is incurred when an event leaves the company little or no discretion to avoid transferring or using the assets in the future.  Previous accounting guidance was provided by the Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 145 is effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged.  The Company expects that adoption of SFAS No.146 will not have a material impact on the Company’s results of operations or financial condition.

 

Financial Derivatives

 

The Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks related to its interest-earning assets and interest-bearing liabilities.  For periods prior to January 1, 2001, for those qualifying financial derivatives that altered the interest rate characteristics of assets or liabilities, the net differential to be paid or received on the financial derivative was treated as an adjustment to the yield on the underlying assets or liabilities.  Interest rate financial derivatives that did not qualify for the accrual method were recorded at fair value, with gains and losses recorded in earnings.

 

9



 

Effective January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended by SFAS No. 137 and No. 138.  SFAS No. 133 establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities.  It requires the recognition of all financial derivatives as assets or liabilities in the Company’s statement of financial condition and measurement of those financial derivatives at fair value.  The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and if so, the type of hedge.

 

Upon adoption of SFAS No. 133, the Company recognizes all derivatives on the balance sheet at fair value.  Fair value is based on dealer quotes, or quoted prices from instruments with similar characteristics.  The Company uses financial derivatives designated for hedging activities as cash flow hedges.  For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings.

 

On March 21, 2000, the Company hedged a portion of its floating interest rate loans through an interest rate swap agreement with a $20.00 million notional amount.  The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at June 30, 2002 was approximately less than three years.  Amounts to be paid or received on the interest rate swap will be reclassified into earnings upon the receipt of interest payments on the underlying hedged loans, including amounts totaling $525,000 that were reclassified into earnings during the six months ended June 30, 2002.  The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to be reclassified into earnings within the next 12 months is approximately $1.06 million.

 

Earnings per Share

 

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings.  All share and per share amounts included herein have been adjusted for the two-for-one stock split payable on May 9, 2002, to stockholders of record on April 19, 2002.

 

The following table sets forth basic and diluted earnings per share calculations:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(Dollars in thousands, except share and per share data)

 

2002

 

2001

 

2002

 

2001

 

Net income

 

$

12,238

 

$

10,198

 

$

23,626

 

$

19,578

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

Basic weighted-average number of common shares outstanding

 

17,992,971

 

18,184,940

 

17,980,834

 

18,175,094

 

Dilutive effect of weighted-average outstanding common shares equivalents

 

140,734

 

52,700

 

108,524

 

58,810

 

Diluted weighted-average number of common shares outstanding

 

18,133,705

 

18,237,640

 

18,089,358

 

18,233,904

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

$

0.56

 

$

1.31

 

$

1.08

 

Diluted

 

$

0.67

 

$

0.56

 

$

1.31

 

$

1.07

 

 

10



 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion is given based on the assumption that the reader has access to and read the Annual Report on Form 10-K for the year ended December 31, 2001 of Cathay Bancorp, Inc. (“Bancorp”) and its subsidiary Cathay Bank (the “Bank” and together the “Company” or “we”, “us,” or “our”).

 

The following discussion and other sections of this report include forward-looking statements regarding management’s beliefs, projections, and assumptions concerning future results and events.  These forward-looking statements may, but do not necessarily, also include words such as “believes,” “expects,” “anticipates,” “intends”, “plans”, “estimates,” or similar expressions.  Forward-looking statements are not guarantees.  They involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among other things, adverse developments, or conditions related to or arising from:

                  Our expansion into new market areas.

                  Fluctuations in interest rates.

                  Demographic changes.

                  Increases in competition.     

                  Deterioration in asset or credit quality.

                  Changes in the availability of capital.

                  Adverse regulatory developments.

                  Changes in business strategy or development plans, including plans regarding the registered investment company.

                  General economic or business conditions; and

                  Other factors discussed in the section entitled “Factors that May Affect Future Results” in our Annual Report on Form 10-K for the year ended December 31, 2001.

Actual results in any future period may also vary from the past results discussed in this report.  Given these risks and uncertainties, we caution readers not to place undue reliance in any forward-looking statements, which speak as of the date of the report.  We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events.

 

Cathay Bank’s web page is found at http://www.cathaybank.com/

 

SECOND QUARTER HIGHLIGHTS:

 

                  2nd quarter 2002 net income increased 20.00% to $12.24 million compared to $10.20 million during the same quarter a year ago.

                  Return on average stockholders’ equity was 19.03% and return on average assets was 1.93% for the quarter ended June 30, 2002.

                  A net interest margin of 4.31%, and a tax-equivalent net interest margin of 4.40%.

                  An increase of 31.78% in non-interest income, which totaled $4.02 million compared to $3.05 million in the year ago quarter.

                  The efficiency ratio improved to 34.68% from 39.60% a year ago.

                  Non-performing assets (“NPAs”) dropped to $7.80 million from $19.70 million in the 2nd quarter 2001.

                  Tier 1 risk-based capital ratio of 11.88%, total risk-based capital ratio of 12.92%, and Tier 1 leverage capital ratio of 9.95%.

                  On May 10, 2002, Cathay Bank, received the “Preferred Lender Program” status, from the U.S. Small Business Administration (“SBA”), for the Los Angeles District Office territory.

                  June 20, 2002, marked the grand opening ceremony for the Bank’s representative office in Shanghai, China.

                  Brooklyn Branch opened for business on June 27, 2002.

 

11



Consolidated Income Statement Review

 

Net Income

Consolidated net income of $12.24 million for the second quarter of 2002, was up 20.00% from second quarter 2001 net income of $10.20 million, and an increase of 7.46% over the first quarter of 2002.  On an earnings-per-share basis, second quarter 2002 net income was $0.67 per diluted share, an increase of 19.64%, over the $0.56 per diluted share one year ago.

 

Pretax income

Pretax income for the second quarter 2002 increased $3.17 million to $17.74 million, up 21.73%, from the corresponding quarter of last year.  The change in pretax income was the result of the following:

 

                  An increase of $2.37 million in net interest income before provision for loan losses.

                  An increase of $300,000 in the provision for loan losses.

                  An increase of $970,000 or 31.78% in non-interest income.

                  A decrease of $126,000 or 1.22% in non-interest expense.

 

Net Interest Income Before Provision for Loan Losses

 

Net interest income of $25.43 million for the second quarter of 2002 increased $2.37 million, or 10.28%, compared to $23.06 million during the like quarter a year ago.  The increase in net interest income was primarily due to an increase of $32.35 million in the excess of average interest-earning assets over total average deposits and other borrowed funds.  The net interest margin equaled 4.31% for the second quarter of 2002, compared with an adjusted 4.28% for the first quarter of 2002, and 4.36% in last year’s second quarter.  During the first quarter 2002, our net interest margin equaled 4.43%, which included 15 basis points due to the recapture of $861,000 in interest income on three non-accrual loans that paid off in February 2002.

 

Average interest-earning assets increased $248.37 million over last year’s second quarter and provided an additional $4.44 million of interest income during the second quarter 2002.  The majority of this growth was funded by a 10.65% increase in total average deposits and other borrowed funds, resulting in $1.52 million of additional interest expense.  Quarter-over-quarter, overall changes in volume resulted in $2.92 million of additional net interest income.

 

The interest rate earned on our interest-earning assets decreased by 174 basis points to 5.97%, and as a result, the amount of interest earned decreased $9.90 million from the year ago quarter.  Because of the repricing of our interest-bearing liabilities in a lower interest rate environment, the average interest paid on interest-bearing liabilities declined by 193 basis points to 1.99%, reducing interest expense by $9.35 million.  The net change related to interest rates earned and paid was a decrease of $554,000 in net interest income, due to rate change.

 

12



 

Quarter-to-quarter, the net interest income before provision for loan losses increased by $2.37 million.  Our average cost of funds on deposits (which includes non-interest-bearing demand deposits) and other borrowed funds equaled 1.76% during the second quarter 2002 compared to 3.49% during the year ago quarter.

 

Net Interest Income – Taxable-Equivalent Basis

 

The following table reflects changes, on a taxable-equivalent basis, on net interest income and margin resulting from the interaction between the volume and composition of earning assets, related yields, and associated funding costs.  Portfolio size, composition, and yields earned and funding costs can have a significant impact on net interest income and margin.  Average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income, and interest expense and the weighted-average interest rate and net interest margin were as follows:

 

Three months ended June 30,

 

2002

 

2001

 

Taxable-equivalent basis
(Dollars in thousands)

 

Average
Balances

 

Interest
Income/
Expense

 

Average
Yields/
Rates

 

Average
Balances

 

Interest
Income/
Expense

 

Average
Yields/
Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and securities purchased under agreements to resell

 

$

42,093

 

$

182

 

1.73

%

$

28,396

 

$

307

 

4.34

%

Securities available-for-sale

 

301,475

 

4,189

 

5.57

 

221,639

 

3,731

 

6.75

 

Securities held-to-maturity

 

365,873

 

5,630

 

6.17

 

400,356

 

6,464

 

6.48

 

Loans receivable, net

 

1,657,729

 

25,788

 

6.24

 

1,464,080

 

30,737

 

8.42

 

Deposits with banks

 

938

 

8

 

3.42

 

5,267

 

16

 

1.22

 

Total interest-earning assets

 

$

2,368,108

 

$

35,797

 

6.06

%

$

2,119,738

 

$

41,255

 

7.81

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking deposits

 

$

288,560

 

$

490

 

0.68

%

$

256,706

 

$

889

 

1.39

%

Savings deposit

 

267,014

 

363

 

0.55

 

235,508

 

684

 

1.16

 

Time deposits

 

1,356,445

 

8,161

 

2.41

 

1,273,996

 

15,701

 

4.94

 

Total interest-bearing deposits

 

1,912,019

 

9,014

 

1.89

 

1,766,210

 

17,274

 

3.92

 

Other borrowed funds

 

70,233

 

821

 

4.69

 

39,094

 

386

 

3.96

 

Total interest-bearing liabilities

 

1,982,252

 

9,835

 

1.99

 

1,805,304

 

17,660

 

3.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing demand deposits

 

262,938

 

 

 

223,869

 

 

 

Total deposits and other borrowed funds

 

$

2,245,190

 

$

9,835

 

1.76

%

$

2,029,173

 

$

17,660

 

3.49

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

4.30

%

 

 

 

 

4.32

%

Net interest income/margin

 

 

 

$

25,962

 

4.40

%

 

 

$

23,595

 

4.46

%

 

Net interest income on a taxable-equivalent basis was $25.96 million in the second quarter of 2002 compared with $26.13 million in the first quarter of 2002 and $23.60 million in the second quarter of 2001.  The increase of $2.37 million in the net taxable-equivalent interest income before provision for loan losses from last year’s second quarter was primarily the result of a net increase of $32.35 million in average interest-earning assets over average deposits and other borrowed funds.  The relatively higher net interest income in the first quarter 2002 was due to the recapture of $861,000 in interest income on three non-accrual loans that paid off in February 2002.

 

Our taxable-equivalent net interest margin was 4.40% in the second quarter of 2002, compared with 4.52% in the first quarter of 2002 and 4.46% one year ago.  The recapture of $ $861,000 in interest income on three non-accrual loans that paid off in February 2002, contributed 15 basis points to the net interest margin during the first quarter 2002.

 

13



 

Provision for Loan Losses

 

The provision for loan losses represents the charge against current earnings that is determined by management, through a disciplined credit review process, as the amount needed to maintain an allowance that is sufficient to absorb loan losses inherent in the Company’s loan portfolio.  In view of the still uncertain economic picture, and the additional inherent risk resulting from the overall increase of our loan portfolio, we increased the provision for loan losses by $300,000 from the quarter ended June 30, 2001.  The provision for loan losses was $1.50 million in the second quarter of 2002 compared to $1.20 million for the second quarter of 2001.

 

Non-Interest Income

 

Non-interest income was $4.02 million for the second quarter of 2002, up $970,000 or 31.78%, when compared with $3.05 million during the same quarter a year ago.

 

During the second quarter 2002, securities gains of $502,000 was an increase of $540,000 over the corresponding quarter of last year, primarily as a result of one sale and calls of securities available-for-sale.  Depository service fees for the second quarter 2002 increased by $277,000 or 23.03% to $1.48 million, compared to $1.20 million during the like period a year ago.  The increase in depository service fees during the second quarter 2002 was predominantly due to an increase in service charges on deposit accounts, and an increase in investment services fee income from our Global Investment Services unit.  Letters of credit commissions were down 18.96%, to $466,000, likely as a result of a continuing uncertainty over the outlook for the U.S. economy from the point of view of some of our importing customers.  Other operating income increased by $262,000, up 19.97%, to $1.57 million compared to $1.31 million in the year ago quarter.  The increase in other operating income was primarily due to increases in commercial and commercial mortgage loan fees, gain on sale of SBA and residential mortgage loans, and an increase in wire transfer fees.

 

Non-Interest Expense

 

Non-interest expense decreased $126,000 to $10.21 million in the second quarter of 2002, and the efficiency ratio improved to 34.68% compared to 39.60% in the year ago quarter.

 

The decrease during the second quarter 2002 was primarily attributable to decreases of $648,000 in professional services expense and $557,000 in other operating expense.  The higher professional fees in the second quarter 2001 included fees related to the formation of a registered investment company, and the increase in last year’s other operating expense was primarily due to an accrual related to a litigation, which was settled in the fourth quarter 2001.  Annual salary adjustments, additional employees and salary expense for our Union City branch, which opened for business in the 4th quarter 2001, drove the increase of $635,000 in salaries and employee benefits in the second quarter 2002.  In addition, the quarterly goodwill amortization of $165,000 was discontinued upon the adoption of SFAS No. 142 on January 1, 2002.

 

14



 

Income taxes

 

The provision for income taxes was $5.50 million or 31.01% for the second quarter 2002 compared with $4.38 million or 30.02% in the year ago quarter.  The effective income tax rate during both quarters reflects the income tax benefits of a registered investment company subsidiary of the Bank, which provides flexibility to raise additional capital in a tax efficient manner, and tax credits earned from qualified low income housing investments.  The long-term plan for the registered investment company is currently under review.  Depending on the results of the review and other factors, the effective tax rate for 2002 may change.  There can be no assurance that the subsidiary will continue as a registered investment company, or that any tax benefits will continue, or as to our ability to raise capital through this subsidiary.  A proposed change to California tax law introduced on February 21, 2002, related to registered investment companies that could have negatively impacted the Company’s effective tax rate in future periods, was withdrawn on April 3, 2002.  However, there can be no assurance that a similar bill will not be introduced at a future time, or that any tax benefits will continue.

 

YEAR-TO-DATE REVIEW – CONSOLIDATED INCOME STATEMENT

 

Net income was $23.63 million or $1.31 per diluted share for the six months ended June 30, 2002, an increase of 20.68% over the $19.58 million or $1.07 per diluted share for the same period a year ago.  The Company’s net interest income before provision for loan losses increased by $5.32 million for the six months ended June 30, 2002, to $51.02 million, up 11.63%, compared to $45.70 million during the same period a year ago.  The net interest margin for the six months ended June 30, 2002 decreased 4 basis points to 4.38% compared to 4.42% during the like period a year ago.  On a taxable-equivalent basis, the net interest margin equaled 4.47% compared to 4.52% a year ago.

 

Non-interest income was up 6.55% to $7.36 million for the first six months of 2002, compared to $6.90 million in the like period a year ago.  Non-interest income in 2001, included an $851,000 premium on a Forward Rate Agreement, recognized as securities gains during the first quarter 2001.  The increase in 2002 was primarily attributable to increases in depository services fees and other operating income.

 

Return on average stockholders’ equity was 18.74% and return on average assets was 1.89% for the six months of 2002 compared to a return on average stockholders’ equity of 17.66% and a return on average assets of 1.75%, for the six months ended June 30, 2001.  The efficiency ratio for the six months ended June 30, 2002 was 35.75% compared to 40.78% during the same period a year ago.

 

15



 

Financial Condition Review

 

Assets

 

Total assets were $2.58 billion at June 30, 2002, up 5.13% from year-end 2001 of $2.45 billion, primarily reflecting the $59.02 million growth mainly in commercial mortgage loans and commercial loans.  Our investment securities portfolio increased 4.94% to $654.12 million at June 30, 2002, up $30.81 million, from the $623.31 million at December 31, 2001.  As a percentage of total assets, the investment securities portfolio remained relatively unchanged at 25.36%.  Cash and cash equivalents increased by $29.87 million from December 31, 2001.

 

Securities

 

Securities available-for-sale represented 12.30% of average interest-earning assets for the first six months of 2002 compared with 9.73% for the first six months of 2001.  The fair value of securities available-for-sale at June 30, 2002 was $294.39 million compared to $248.96 million at December 31, 2001.  The increase of $45.43 million for the six months ended June 30, 2002, represented primarily increases in purchases of US government agency securities.  During the first six months of 2002, the Bank sold one available-for sale security, with a net book value of $5.03 million, which resulted in a gain on sale of securities of $432,000.  During the second quarter the financial market expectation of an upcoming increase in the federal funds interest rate by the Federal Reserve, flattened the yield curve, from the steeper levels during the first quarter 2002, and as a result the net unrealized gain on securities available-for-sale, which represented the difference between fair value and amortized cost, increased to $7.72 million compared to a net unrealized gain of $2.88 million at March 31, 2002, and $7.17 million at year-end 2001.  Net unrealized gains and losses in the securities available-for-sale are included in accumulated other comprehensive income or loss, net of tax.

 

Securities held-to-maturity represented 15.57% of average interest-earning assets for the first six months of 2002 compared with 18.99% for the first six months of 2001.  Securities held-to-maturity at June 30, 2002 decreased $14.62 million to $359.74 million compared to $374.36 million at December 31, 2001.  The decrease in securities held-to-maturity during the first six months of 2002 was the result of calls and maturities of securities held-to-maturity.

 

The average taxable-equivalent yield on investment securities decreased 62 basis points to 6.04% for the six months ended June 30, 2002, compared with 6.66% for the same period in 2001.  For the three months ended June 30, 2002, the average taxable-equivalent yield on investment securities decreased 67 basis points to 5.90% compared with 6.57% for the same period in 2001.

 

16



 

The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale, as of June 30, 2002 and December 31, 2001:

 

 

 

June 30, 2002

 

(In thousands)

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Fair Value

 

US government agencies

 

$

182,185

 

$

5,782

 

$

144

 

$

187,823

 

State and municipal securities

 

200

 

 

 

200

 

Mortgage-backed securities

 

7,039

 

288

 

 

7,327

 

Collateralized mortgage obligations

 

1,039

 

43

 

 

1,082

 

Asset-backed securities

 

9,995

 

450

 

 

10,445

 

Corporate bonds

 

40,905

 

2,409

 

 

43,314

 

Commercial paper

 

16,406

 

 

3

 

16,403

 

Equity securities

 

28,894

 

 

1,102

 

27,792

 

Total

 

$

286,663

 

$

8,972

 

$

1,249

 

$

294,386

 

 

 

 

December 31, 2001

 

(In thousands)

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Fair Value

 

US government agencies

 

$

113,873

 

$

4,500

 

$

49

 

$

118,324

 

Mortgage-backed securities

 

8,336

 

213

 

6

 

8,543

 

Collateralized mortgage obligations

 

2,658

 

47

 

 

2,705

 

Asset-backed securities

 

9,994

 

401

 

 

10,395

 

Money market fund

 

20,000

 

 

 

20,000

 

Corporate bonds

 

57,973

 

2,532

 

171

 

60,334

 

Equity securities

 

28,954

 

34

 

331

 

28,657

 

Total

 

$

241,788

 

$

7,727

 

$

557

 

$

248,958

 

 

The following tables summarize the composition, carrying value, gross unrealized gains, gross unrealized losses and estimated fair values of securities held-to-maturity, as of June 30, 2002 and December 31, 2001:

 

 

 

June 30, 2002

 

(In thousands)

 

Carrying Value

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

 

US government agencies

 

$

49,994

 

$

1,600

 

$

 

$

51,594

 

State and municipal securities

 

70,429

 

3,345

 

2

 

73,772

 

Mortgage-backed securities

 

88,848

 

3,316

 

 

92,164

 

Collateralized mortgage obligations

 

47,759

 

1,302

 

17

 

49,044

 

Asset-backed securities

 

9,999

 

253

 

 

10,252

 

Corporate bonds

 

72,832

 

2,561

 

350

 

75,043

 

Other securities

 

19,874

 

736

 

 

20,610

 

Total

 

$

359,735

 

$

13,113

 

$

369

 

$

372,479

 

 

 

 

December 31, 2001

 

(In thousands)

 

Carrying Value

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

 

US government agencies

 

$

50,017

 

$

1,251

 

$

 

$

51,268

 

State and municipal securities

 

69,906

 

2,049

 

380

 

71,575

 

Mortgage-backed securities

 

110,342

 

2,726

 

14

 

113,054

 

Collateralized mortgage obligations

 

50,282

 

657

 

57

 

50,882

 

Asset-backed securities

 

920

 

1

 

 

921

 

Corporate bonds

 

73,031

 

1,822

 

81

 

74,772

 

Other securities

 

19,858

 

484

 

 

20,342

 

Total

 

$

374,356

 

$

8,990

 

$

532

 

$

382,814

 

 

17



 

Loans

 

Loans, net of deferred loan fees, represented 71.17% of average interest-earning assets for the first six months of 2002 compared with 70.58% for the first six months of 2001.  In view of the uncertainties that still abound in the economy and markets, gross loans increased at a 3.54% pace from year-end 2001, to $1.73 billion at June 30, 2002 compared to $1.67 billion at year-end 2001.  The majority of the growth was in commercial mortgage loans, which grew by $59.56 million to $797.94 million at June 30, 2002 compared to $738.38 million at year-end 2001.  Commercial loans increased by $24.48 million to $530.60 million at period-end compared to $506.13 million at year-end 2001.  During the six months ended June 30, 2002, the Bank sold $7.04 million of residential mortgage loans, resulting in a gain on sale of loans of $22,400, and sold $3.20 million of SBA loans, resulting in a gain on sale of loans of $165,000.

 

The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated:

 

(Dollars in thousands)

 

June 30, 2002

 

% of Total

 

December 31, 2001

 

% of Total

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

$

530,604

 

31

%

$

506,128

 

31

%

5

 

Residential mortgage loans

 

230,684

 

14

 

235,914

 

15

 

(2

)

Commercial mortgage loans

 

797,940

 

47

 

738,379

 

45

 

8

 

Real estate construction loans

 

152,074

 

9

 

166,417

 

10

 

(9

)

Installment loans

 

15,234

 

1

 

20,322

 

1

 

(25

)

Other loans

 

386

 

 

745

 

 

(48

)

Gross loans

 

1,726,922

 

102

 

1,667,905

 

102

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(22,035

)

(2

)

(23,973

)

(2

)

(8

)

Unamortized deferred loan fees

 

(3,991

)

 

(3,900

)

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

 

$

1,700,896

 

100

%

$

1,640,032

 

100

%

4

 

 

Other Real Estate Owned

 

Other Real Estate Owned (“OREO”) of $653,000, net of a valuation allowance of $131,000, decreased $902,000 at June 30, 2002, compared to $1.56 million at year-end 2001.

 

As of June 30, 2002, there were two outstanding OREO properties, which included one parcel of land and one commercial building.  Both properties are located in Southern California.  During the first six months of 2002, we acquired two single-family-residential (“SFR”) properties and sold five SFR properties, two of which were the properties acquired during the first half of 2002.  The carrying value of the five SFR properties sold was approximately $1.31 million, and the sale resulted in gains of $395,000.

 

To reduce the carrying value of OREO to the estimated fair value of the properties, we maintain a valuation allowance for OREO properties.  We perform periodic evaluations on each property and make corresponding adjustments to the valuation allowance, if necessary.  Any decline in value is recognized by a corresponding increase to the valuation allowance in the current period.  Management did not make any provision for OREO losses in the first half of 2002.

 

18



 

Investments in Real Estate

 

As of June 30, 2002, our investments comprised of five limited partnerships, one of which was acquired in March 2002.  The limited partnerships are formed for the purpose of investing in low income housing projects, which qualify for federal and/or state low income housing tax credits.

 

As of June 30, 2002, investments in real estate increased $3.76 million to $21.48 million from $17.73 million at year-end 2001.  During 2002, we recognized $1.12 million in net operating losses from the five limited partnerships.  In addition, in March 2002 we acquired an interest in the Lend Lease Institutional Tax Credits XXIII, a limited partnership for $4.87 million.

 

The following table summarizes the composition of our investments in real estate as of the dates indicated:

 

 

 

Percentage of
Ownership

 

Acquisition
Date

 

Carrying Amount

 

(Dollars in thousands)

 

 

 

June 30, 2002

 

December 31, 2001

 

Las Brisas

 

49.5

%

December 1993

 

$

 

$

 

Los Robles

 

99.0

%

August 1995

 

363

 

386

 

California Corporate Tax Credit Fund III

 

32.5

%

March 1999

 

11,634

 

12,426

 

Wilshire Courtyard

 

99.9

%

May 1999

 

4,706

 

4,915

 

Lend Lease ITC XXIII

 

4.5

%

March 2002

 

4,781

 

 

 

 

 

 

 

 

$

21,484

 

$

17,727

 

 

Deposits

 

During the first half of 2002, deposits grew by $84.30 million, up 3.97%, to $2.21 billion.  The increase in customer deposits was led by increases in time certificates of deposit of $38.48 million to $1.38 billion, savings deposit of $20.54 million to $272.86 million, interest-bearing checking deposits of $13.24 million to $285.70 million, and non-interest-bearing deposits of $12.04 million to $272.46 million.

 

The following tables display the deposit mix as of the dates indicated:

 

(Dollars in thousands)

 

June 30, 2002

 

% of Total

 

December 31, 2001

 

% of Total

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing demand deposits

 

$

272,462

 

12

%

$

260,427

 

12

%

5

 

Interest-bearing checking deposits

 

285,699

 

13

 

272,456

 

13

 

5

 

Savings deposit

 

272,859

 

13

 

252,322

 

12

 

8

 

Time deposits

 

1,375,623

 

62

 

1,337,143

 

63

 

3

 

Total deposits

 

$

2,206,643

 

100

%

$

2,122,348

 

100

%

4

 

 

As interest rate spreads widened between Jumbo CDs and other types of interest-bearing deposits under the prevailing interest rate environment, our Jumbo CD portfolio continued to grow.  Management believes our Jumbo CDs are generally less volatile primarily due to the following reasons:

 

                  approximately 66.72% of the Bank’s total Jumbo CDs have stayed with the Bank for more than two years;

                  the Jumbo CD portfolio continued to be diversified with 4,656 accounts averaging approximately $191,000 per account owned by 3,222 individual depositors as of July 8, 2002;

                  this phenomenon of having a relatively higher percentage of Jumbo CDs to total deposits exists in most of the Asian American banks in our California market due to the fact that the customers in this market tend to have a higher savings rate.

 

19



 

Management continues to monitor the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the patrons the Bank is servicing.  To discourage the concentration in Jumbo CDs, management has continued to make efforts in the following areas:

 

1)          to offer only retail interest rates on Jumbo CDs;

2)          to offer new transaction-based products, such as the tiered money market deposits;

3)          to promote transaction-based products from time to time, such as demand deposits;

4)          to seek to diversify the customer base by branch expansion and/or acquisition as opportunities arise.

 

Borrowings

 

Our borrowings mostly take the form of advances from the Federal Home Loan Bank of San Francisco (“FHLB”), and repurchase agreements.  Advances from the FHLB were $50.00 million at June 30, 2002, an increase of $20.00 million over the $30.00 million at December 31, 2001.  Securities sold under agreements to repurchase increased by $6.39 million to $28.51 million compared to $22.11 million at December 31, 2001.

 

Capital Resources

 

Stockholders’ equity of $266.61 million at June 30, 2002 increased by $20.60 million, or 8.37%, compared to $246.01 million at December 31, 2001.  Stockholders’ equity equaled 10.34% of total assets at June 30, 2002.  The increase of $20.60 million in stockholders’ equity was due to the following:

 

                  an addition of $23.63 million from net income, less dividends paid on common stock of $4.76 million;

                  an increase of $1.38 million from issuance of additional common shares through the Dividend Reinvestment Plan and proceeds from exercise of stock options;

                  an increase of $356,000 in accumulated other comprehensive income, including:

                  an increase of $1.19 million in the net unrealized holding gains on securities available-for-sale, net of tax;

                  an increase of $75,000 from unrealized gains on cash flow hedging derivatives, net of tax;

                  an increase of $912,000 in reclassifications adjustments included in net income.

 

On March 22, 2002, our Board of Directors approved and announced a two-for-one stock split of the Company’s common stock, in the form of a 100% stock dividend, payable May 9, 2002, to stockholders of record on April 19, 2002.  The Board of Directors also approved a 12% increase in the quarterly cash dividend from 25 cents per share to 28 cents per share on a pre-split basis, payable April 16, 2002, to stockholders of record on April 1, 2002.

 

We declared cash dividends of 25 cents per common share on a pre-stock split basis in January 2002 on 8,978,868 shares outstanding, cash dividends of 28 cents per common share on a pre-stock split basis in March 2002 on 8,986,860 shares outstanding, and cash dividends of 14 cents per common share on a post stock split basis in July 2002 on 18,001,002 shares outstanding.  Total cash dividends paid in 2002, including the $2.52 million paid in July, amounted to $7.28 million.

 

Under the Equity Incentive Plan adopted by the Board of Directors in 1998, we granted options, on a pre-stock split basis, to purchase 56,720 shares of common stock with an exercise price of $65.10 per share to eligible officers and directors on February 21, 2002.

 

20



 

Return on average stockholders’ equity was 18.74% and return on average assets was 1.89% for the first half of 2002 compared with a return on stockholders’ equity of 17.66% and a return on average assets of 1.75%, during the same period a year ago.

 

Asset Quality Review

 

Non-performing Assets

 

Total non-performing assets which include accruing loans past due 90 days or more, non-accrual loans, and OREO were down $1.68 million to $7.80 million from year-end 2001, and down $11.90 million from the Company’s second quarter 2001 total of $19.70 million.  As a percentage of gross loans plus OREO, non-performing assets were 0.45% at June 30, 2002, compared to 0.57% at year-end 2001 and 1.29% at June 30, 2001.

 

Accruing loans 90 days past due or more on June 30, 2002 were $1.98 million, up $1.29 million from year-end 2001, and up $900,000 from June 30, 2001.  Non-accrual loans were $5.17 million, down $2.07 million from year-end 2001, and down $8.06 million from June 30, 2001.  OREO assets were $653,000, down $902,000 from year-end 2001, and down $4.74 million from June 30, 2001.

 

The following table sets forth the breakdown of non-performing assets by categories as of the dates indicated:

 

(Dollars in thousands)

 

June 30, 2002

 

December 31, 2001

 

Accruing loans past due 90 days or more

 

$

1,978

 

$

689

 

Non-accrual loans

 

5,173

 

7,238

 

Total non-performing loans

 

7,151

 

7,927

 

Real estate acquired in foreclosure

 

653

 

1,555

 

Total non-performing assets

 

$

7,804

 

$

9,482

 

 

 

 

 

 

 

Troubled debt restructurings(1)

 

$

6,833

 

$

4,474

 

Non-performing assets as a percentage of gross loans and OREO

 

0.45

%

0.57

%

Allowance for loan losses as a percentage of non-performing loans

 

308.14

%

302.42

%

 


(1) Excludes $1.25 million of non-performing troubled debt restructuring loans, which is included with non-accrual loans.  Troubled debt restructuring loans are accruing interest at their restructured term.

 

21



 

Non-accrual Loans

 

Non-accrual loans of $5.17 million at June 30, 2002 consisted mainly of $2.12 million in commercial mortgage loans and $2.28 million in commercial loans.  The following table presents non-accrual loans by type of collateral securing the loans, as of the dates indicated:

 

 

 

June 30, 2002

 

December 31, 2001

 

(In thousands)

 

Commercial
Mortgage

 

Commercial

 

Other

 

Commercial
Mortgage

 

Commercial

 

Other

 

Type of Collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

Single/multi-family residence

 

$

162

 

$

152

 

$

718

 

$

252

 

$

266

 

$

189

 

Commercial real estate

 

141

 

919

 

 

122

 

839

 

 

Land

 

1,821

 

468

 

 

1,821

 

 

 

UCC

 

 

739

 

 

 

3,647

 

 

Other

 

 

 

53

 

 

 

 

Unsecured

 

 

 

 

 

102

 

 

Total

 

$

2,124

 

$

2,278

 

$

771

 

$

2,195

 

$

4,854

 

$

189

 

 

The following table presents non-accrual loans by type of businesses the borrowers are engaged in, as of the dates indicated:

 

 

 

June 30, 2002

 

December 31, 2001

 

(In thousands)

 

Commercial
Mortgage

 

Commercial

 

Other

 

Commercial
Mortgage

 

Commercial

 

Other

 

Type of Business

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate development

 

$

1,821

 

$

152

 

$

 

$

1,821

 

$

27

 

$

 

Wholesale/Retail

 

162

 

1,803

 

 

122

 

3,421

 

 

Food/Restaurant

 

 

8

 

 

 

701

 

 

Import

 

 

139

 

 

 

400

 

 

Other

 

141

 

176

 

771

 

252

 

305

 

189

 

Total

 

$

2,124

 

$

2,278

 

$

771

 

$

2,195

 

$

4,854

 

$

189

 

 

Troubled Debt Restructurings

 

A troubled debt restructuring (“TDR”) is a formal restructure of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower.  The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date.

 

Troubled debt restructurings performing under their revised terms were $6.83 million at June 30, 2002 compared to $4.47 million at December 31, 2001.  The increase of $2.36 million from December 31, 2001 was primarily due to two credits totaling $4.22 million that were restructured during 2002, and were performing under their modified terms at June 30, 2002.

 

22



 

Impaired Loans

 

A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events.

 

We evaluate all classified and restructured loans for impairment.  The classified loans are stratified by size, and loans less than our defined selection criteria are treated as a homogenous portfolio.  If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate.  If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral.  If the measurement of the impaired loan is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses.

 

We identified impaired loans with a recorded investment of $20.80 million at June 30, 2002, compared to $19.35 million at year-end 2001.  The increase of $1.49 million was due to one current but slow-paying commercial mortgage credit, with a recorded investment of $2.24 million, which was classified as impaired during the first six months of 2002.

 

The following tables present a breakdown of impaired loans and the related allowances as of the dates indicated:

 

 

 

At June 30, 2002

 

At December 31, 2001

 

(In thousands)

 

Recorded
Investment

 

Allowance

 

Net
Balance

 

Recorded
Investment

 

Allowance

 

Net
Balance

 

Commercial

 

$

6,459

 

$

1,137

 

$

5,322

 

$

6,924

 

$

2,143

 

$

4,781

 

Commercial mortgage

 

14,306

 

2,046

 

12,260

 

12,426

 

1,764

 

10,662

 

Other

 

37

 

37

 

 

 

 

 

Total

 

$

20,802

 

$

3,220

 

$

17,582

 

$

19,350

 

$

3,907

 

$

15,443

 

 

Loan Concentration

 

There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of June 30, 2002.

 

23



 

Allowance for Loan Losses

 

The following table sets forth information relating to the allowance for loan losses for the periods indicated:

 

(Dollars in thousands)

 

For the six months
ended June 30, 2002

 

For the year ended
December 31, 2001

 

 

 

 

 

 

 

Balance at beginning of period

 

$

23,973

 

$

21,967

 

Provision for loan losses

 

3,000

 

6,373

 

Loans charged-off

 

(5,217

)

(4,663

)

Recoveries of loans charged-off

 

279

 

296

 

Balance at end of period

 

$

22,035

 

$

23,973

 

 

 

 

 

 

 

Average net loans outstanding during the period

 

$

1,648,668

 

$

1,519,548

 

Ratio of net charge-offs to average net loans outstanding during the period (annualized)

 

0.60

%

0.29

%

Provision for loan losses to average net loans outstanding during the period (annualized)

 

0.37

0.42

Allowance to non-performing loans, at period-end

 

308.14

%

302.42

%

Allowance to gross loans, at period-end

 

1.28

%

1.44

%

 

Commercial loans accounted for $5.19 million in charge-offs during the first half of 2002, primarily as a result of one credit totaling $3.62 million that was identified and reported as a non-accrual loan during the first quarter 2002. The borrower on that credit filed for Chapter 7 bankruptcy protection and the credit has been charged-off.

 

The determination of the amounts of the allowance for loan losses and the provision for loan losses is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectibility when determining the appropriate level for the allowance for loan losses.  A sustained weakness or further weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for loan losses in future periods.

 

Our allowance for loan losses consists of the following:

 

                  Specific allowances: For impaired loans, we provide specific allowances based on an evaluation of impairment, and for each classified loan, we allocate a portion of the general allowance to each loan based on a loss percentage assigned.  The percentage assigned depends on a number of factors including loan classification, the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral, charge-off history, management’s knowledge of the portfolio and general economic conditions.

                  General allowance: The unclassified portfolio is segmented on a group basis.  Segmentation is determined by loan type and by identifying risk characteristics that are common to the groups of loans.  The allowance is provided to each segmented group based on the group’s historical loan loss experience, the trends in delinquency, and non-accrual, and other significant factors, such as national and local economy, trends and conditions, strength of management and loan staff, underwriting standards and the concentration of credit.

 

Based on our evaluation process and the methodology to determine the level of the allowance for loan losses mentioned previously, management believes the allowance level at June 30, 2002 to be adequate to absorb estimated probable losses identified through its analysis.

 

24



 

Capital Adequacy Review

 

Management seeks to retain the Company’s capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.

 

Both Bancorp’s and the Bank’s regulatory capital continued to well exceed the regulatory minimum requirements as of June 30, 2002.  In addition, the capital ratios of the Bank place it in the “well capitalized” category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio equal to or greater than 5.0%.

 

The following table presents the Company’s capital and leverage ratios as of June 30, 2002 and December 31, 2001:

 

 

 

Cathay Bancorp, Inc.

 

 

 

June 30, 2002

 

December 31, 2001

 

(Dollars in thousands)

 

Balance

 

%

 

Balance

 

%

 

Tier 1 capital (to risk-weighted assets)

 

$

251,771

(4)

11.88

%

$

231,916

(5)

11.15

%

Tier 1 capital minimum requirement

 

84,743

 

4.00

 

83,231

 

4.00

%

Excess

 

$

167,028

 

7.88

%

$

148,685

 

7.15

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

273,806

(4)

12.92

%

$

255,904

(5)

12.30

%

Total capital minimum requirement

 

169,486

 

8.00

 

166,462

 

8.00

 

Excess

 

$

104,320

 

4.92

%

$

89,442

 

4.30

%

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

– Leverage ratio

 

$

251,771

(4)

9.95

%

$

231,916

(5)

9.48

%

Minimum leverage requirement

 

101,236

 

4.00

 

97,843

 

4.00

 

Excess

 

$

150,535

 

5.95

%

$

134,073

 

5.48

%

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

$

2,118,579

(4)

 

 

$

2,080,776

(5)

 

 

Total average assets

 

$

2,530,903

 

 

 

$

2,446,084

 

 

 

 


(4)           Risk-weighted assets exclude the net valuation gains on debt securities available-for-sale of $8.83 million, except for $1.10 million of valuation losses on equity securities available-for-sale, which are included.  Tier 1 Capital and Total Capital exclude goodwill and other intangible assets of $8.79 million, and accumulated other comprehensive income of $5.42 million.

 

(5)           Risk-weighted assets exclude the net valuation gains on securities available-for-sale of $7.47 million, except for $298,000 of valuation losses on equity securities available-for-sale, which are included.  Tier 1 Capital and Total Capital excludes goodwill of $8.88 million, and accumulated other comprehensive income of $5.06 million.

 

25



 

The following table presents the Bank’s capital and leverage ratios as of June 30, 2002 and December 31, 2001:

 

 

 

Cathay Bank

 

 

 

June 30, 2002

 

December 31, 2001

 

(Dollars in thousands)

 

Balance

 

%

 

Balance

 

%

 

Tier 1 capital (to risk-weighted assets)

 

$

242,907

(4)

11.49

%

$

224,239

(5)

10.80

%

Tier 1 capital minimum requirement

 

84,580

 

4.00

 

83,064

 

4.00

 

Excess

 

$

158,327

 

7.49

%

$

141,175

 

6.80

%

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

264,942

(4)

12.53

%

$

248,227

(5)

11.95

%

Total capital minimum requirement

 

169,161

 

8.00

 

166,129

 

8.00

 

Excess

 

$

95,781

 

4.53

%

$

82,098

 

3.95

%

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

– Leverage ratio

 

$

242,907

(4)

9.62

%

$

224,239

(5)

9.18

%

Minimum leverage requirement

 

101,053

 

4.00

 

97,665

 

4.00

 

Excess

 

$

141,854

 

5.62

%

$

126,574

 

5.18

%

 

 

 

 

 

 

 

 

 

 

Risk-weighted assets

 

$

2,114,509

(4)

 

 

$

2,076,608

(5)

 

 

Total average assets

 

$

2,526,337

 

 

 

$

2,441,623

 

 

 

 


(4)           Risk-weighted assets exclude the net valuation gains on debt securities available-for-sale of $8.83 million, and include $1.10 million of valuation losses on equity securities available-for-sale.  Tier 1 Capital and Total Capital excludes goodwill and other intangible assets of $8.79 million, and accumulated other comprehensive income of $5.42 million.

(5)           Risk-weighted assets exclude the net valuation gains on securities available-for-sale of $7.47 million, and include $229,000 of valuation losses on equity securities available-for-sale.  Tier 1 Capital and Total Capital excludes goodwill of $8.88 million, and accumulated other comprehensive income of $5.06 million.

 

Liquidity

 

Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace.  Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, Federal funds purchased and securities sold under agreements to repurchase and advances from Federal Home Loan Bank (“FHLB”).  At June 30, 2002, our liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) increased to 33.22% compared to 30.40% at year-end 2001.

 

To supplement its liquidity needs, the Bank maintains a total credit line of $52.50 million for federal funds with three correspondent banks, and master agreements with five brokerage firms whereby up to $230.00 million would be available through the sale of securities subject to repurchase.  The Bank is also a shareholder of the FHLB, which enables the Bank to have access to lower cost FHLB financing when necessary.  At June 30, 2002, the Bank had a total approved credit with the FHLB of San Francisco totaling $627.85 million.  The total credit outstanding with the FHLB of San Francisco at June 30, 2002 was $50.00 million.  These advances are non-callable, bear fixed interest rates with $10.00 million maturing in 2003, $20.00 million maturing in 2004, and $20.00 million maturing in 2005.  These borrowings are secured by residential mortgages.

 

Liquidity can also be provided through the sale of liquid assets, which consists of short-term investments and securities available-for-sale.  At June 30, 2002, such assets at fair value totaled $347.89 million, with $93.46 million pledged as collateral for borrowings and other commitments.

 

26



 

We had a significant portion of our time deposits maturing within one year or less as of June 30, 2002.  Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Company’s marketplace.  However, based on our historical runoff experience, we expect the outflow will be minimal and can be replenished through our normal growth in deposits.  Management believes all the above-mentioned sources will provide adequate liquidity to the Company to meet its daily operating needs.

 

Bancorp obtains funding for its activities primarily through dividend income contributed by the Bank, proceeds from the Dividend Reinvestment Plan and the Equity Incentive Plan.  Dividends paid to Bancorp by the Bank are subject to regulatory limitations.  The business activities of Bancorp consist primarily of the operation of the Bank with limited activities in other investments.  Management believes Bancorp’s liquidity generated from its prevailing sources are sufficient to meet its operational needs.

 

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements.  Actual results may differ from these estimates under different assumptions or conditions.

 

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which has a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy.  The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading “Allowance for Loan Losses.”

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk

 

Market risk is the risk of loss from adverse changes in market prices and rates.  The principal market risk to the Company is the interest rate risk inherent in our lending, investing, and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent, or on the same basis.

 

We actively monitor and manage our interest rate risk through analyzing the repricing characteristics of our loans, securities, and deposits on an on-going basis.  The primary objective is to minimize the adverse effects of changes in interest rates on our earnings, and ultimately the underlying market value of equity, while structuring our 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.  Due to the limitation inherent in any individual risk management tool, we use both an interest rate sensitivity analysis and a simulation model to measure and quantify the impact to our profitability or the market value of our assets and liabilities.

 

The interest rate sensitivity analysis details the expected maturity and repricing opportunities mismatch or sensitivity gap between interest-earning assets and interest-bearing liabilities over a specified timeframe.  A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities.  During periods of increasing interest rates, net interest margin may be enhanced with a positive gap.  A negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets.  During periods of increasing interest rates, net interest margin may be impaired with a negative gap.

 

The following table indicates the maturity or repricing and rate sensitivity of our interest-earning assets and interest-bearing liabilities as of June 30, 2002.  Our exposure as reflected in the table, represents the estimated difference between the amount of interest-earning assets and interest-bearing liabilities repricing during future periods based on certain assumptions.  The interest rate sensitivity of our assets and liabilities presented in the table may vary if different assumptions were used or if actual experience differs from the assumptions used.  As reflected in the table below, we were asset sensitive with a gap

 

27



 

ratio of a positive 23.92% within three months, and a positive cumulative gap ratio of 1.28% within one year at June 30, 2002, compared with a positive gap ratio of 18.67 % within three months, and a negative cumulative gap ratio of 5.18% within one year at year-end 2001.

 

 

 

June 30, 2002
Interest Rate Sensitivity Period

 

(Dollars in thousands)

 

Within
3 Months

 

Over 3 Months
 to 1 Year

 

Over 1 Year
to 5 Years

 

Over
5 Years

 

Non-interest
Sensitive

 

Total

 

 

 

 

 

 

 

Interest-earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

514

 

$

120

 

$

 

$

 

$

62,246

 

$

62,880

 

Federal funds sold

 

53,500

 

 

 

 

 

 

 

 

 

53,500

 

Securities available-for-sale(6)

 

54,444

 

10,443

 

190,417

 

39,082

 

 

294,386

 

Securities held-to-maturity

 

 

605

 

142,214

 

216,916

 

 

359,735

 

Loans receivable, gross (7)

 

1,277,676

 

54,031

 

103,265

 

286,777

 

 

1,721,749

 

Non-interest-earning assets, net

 

 

 

 

 

86,735

 

86,735

 

Total assets

 

$

1,386,134

 

$

65,199

 

$

435,896

 

$

542,775

 

$

148,981

 

$

2,578,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

 

$

 

$

 

$

 

$

272,462

 

$

272,462

 

Money market and NOW deposits(8)

 

12,603

 

44,228

 

115,207

 

113,661

 

 

285,699

 

Savings deposit(8)

 

11,016

 

58,928

 

135,760

 

67,155

 

 

 

272,859

 

TCDs under $100

 

251,679

 

148,216

 

17,024

 

 

 

416,919

 

TCDs $100 and over

 

465,396

 

397,868

 

95,440

 

 

 

958,704

 

Total deposits

 

740,694

 

649,240

 

363,431

 

180,816

 

272,462

 

2,206,643

 

Securities sold under agreements to repurchase

 

28,506

 

 

 

 

 

28,506

 

Advances from FHLB

 

 

 

50,000

 

 

 

50,000

 

Non-interest-bearing other liabilities

 

 

 

 

 

27,222

 

27,222

 

Stockholders’ equity

 

 

 

 

 

266,614

 

266,614

 

Total liabilities and stockholders’ equity

 

$

769,200

 

$

649,240

 

$

413,431

 

$

180,816

 

$

566,298

 

$

2,578,985

 

Interest sensitivity gap

 

$

616,934

 

$

(584,041

)

$

22,465

 

$

361,959

 

$

(417,317

)

 

Cumulative interest sensitivity gap

 

$

616,934

 

$

32,893

 

$

55,358

 

$

417,317

 

 

 

Gap ratio (% of total assets)

 

23.92

%

(22.64

)%

0.87

%

14.03

%

(16.18

)%

 

Cumulative gap ratio

 

23.92

%

1.28

%

2.15

%

16.18

%

 

 

 


(6)          Includes $3.97 million of available-for-sale venture capital investments in the within three months column.  Includes $7.33 million of fixed-rate mortgage-backed securities, which are allocated based on their contractual maturity date, of which $167,000 are classified as “Over 1 Year to 5 Years,” and $7.16 million is classified as “Over 5 Years.”  In addition, it includes $1.08 million of fixed-rate collateralized mortgage obligations, which are allocated based on their contractual maturity date and categorized in this table as “Over 5 years.”  Variable-rate agency preferred stock totaling $23.82 million, and $16.40 million of commercial paper are categorized in this table in the “Within 3 Months.”  All other available-for-sale debt securities are fixed-rate and are allocated based on their contractual maturity date.

(7)          Excludes allowance for loan losses of $22.04 million, unamortized deferred loan fees of $3.99 million and $5.17 million of non-accrual loans, which are included in non-interest-earning assets.  Adjustable-rate loans are included in the “within three months” category, as they are subject to an interest adjustment depending upon the terms on the loan.

(8)          The Company’s own historical experience and decay factors are used to estimate the money market and NOW, and savings deposit runoff.

 

Since interest rate sensitivity analysis does not measure the timing differences in the repricing of assets and liabilities, we use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios.  Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits.  Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities.  The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis points increments.

 

28



 

Although the modeling is very helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate.  Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or precisely predict the effect of higher or lower interest rates on net interest income.  Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rates changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies among other factors.  The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.

 

We establish a tolerance level in our 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 net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability.  The results after running our simulation indicated that if interest rates were to increase instantaneously or decrease instantaneously by 200 basis points, the change to our net interest income is within our tolerance level and comparable to our December 31, 2001, results.

 

The Company’s net interest income simulation model also projects the net economic value of our portfolio of assets and liabilities.  We have established a tolerance level to value the net economic value of our portfolio of assets and liabilities in our policy to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points.  The results after running our simulation indicated that if interest rates were to increase instantaneously or decrease instantaneously by 200 basis points, the economic value of our portfolio of assets and liabilities is within our tolerance level and comparable to our December 31, 2001, results.

 

Financial Derivatives

 

It is the policy of the Bank not to speculate on the future direction of interest rates.  However, the Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities.  We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the assets or liabilities and against risk in specific transactions.  In such instances, the Bank may protect its position through the purchase or sale of interest rate futures contracts for a specific cash or interest rate risk position.  Other hedge transactions may be implemented using interest rate swaps, interest rate caps, floors, financial futures, forward rate agreements, and options on futures or bonds.  Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies.  All hedges will require an assessment of basis risk and must be approved by the Bank’s Investment Committee.  For periods prior to January 1, 2001, for those qualifying financial derivatives that altered the interest rate characteristics of assets or liabilities, the net differential to be paid or received on the financial derivative was treated as an adjustment to the yield on the underlying assets or liabilities.  Interest rate financial derivatives that did not qualify for the accrual method were recorded at fair value, with gains and losses recorded in earnings.

 

Effective January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended by SFAS No. 137 and No. 138.  SFAS No. 133 establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities.  It requires the

 

29



 

recognition of all financial derivatives as assets or liabilities in the Company’s statement of financial condition and measurement of those financial derivatives at fair value.  The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and if so, the type of hedge.

 

Upon adoption of SFAS No. 133, the Company recognized all derivatives on the balance sheet at fair value.  Fair value is based on dealer quotes, or quoted prices from instruments with similar characteristics.  The Company uses financial derivatives designated for hedging activities as cash flow hedges.  For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings.

 

On March 21, 2000, we entered into an interest rate swap agreement with a major financial institution in the notional amount of $20.00 million for a period of five years.  The interest rate swap was for the purpose of hedging the cash flows from a portion of our floating rate loans against declining interest rates.  The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at June 30, 2002, was approximately less than three years.  At June 30, 2002, the fair value of the interest rate swap was $2.12 million ($943,000, net of tax) compared to $1.93 million ($869,000, net of tax) at December 31, 2001.  For the six months ended June 30, 2002, amounts totaling $525,000 were reclassified into earnings.  The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to reclassify into earnings within the next 12 months is approximately $1.06 million.

 

 

PART II - OTHER INFORMATION

 

Item 1.        LEGAL PROCEEDINGS

 

Bancorp’s wholly-owned subsidiary, Cathay Bank, has been a party to ordinary routine litigation from time to time incidental to various aspects of its operations.

 

Management is not currently aware of any litigation that is expected to have material adverse impact on the Company’s consolidated financial condition, or the results of operations.

 

Item 2.        CHANGES IN SECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

Item 3.        DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

30



 

Item 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

An annual meeting of stockholders of Cathay Bancorp, Inc. was held on April 15, 2002 for the purpose of considering and acting upon the following:

 

Election of Directors:  Three directors were elected as Class III directors to serve until the 2005 Annual Meeting and the votes cast for or withheld were as follows:

 

 

 

FOR

 

WITHHELD

 

AGAINST

 

BROKER
NON-VOTE

 

 

 

 

 

 

George T.M. Ching

 

7,183,404

 

120,484

 

None

 

None

 

Wing K. Fat

 

7,189,880

 

114,008

 

None

 

None

 

Wilbur K. Woo

 

7,194,988

 

108,900

 

None

 

None

 

 

The above stockholders vote tabulation took place before the two-for-one stock split for stockholders of record on April 19, 2002.

 

Other Directors whose terms of office continued after the meeting:

 

Term ending in 2003 (Class I)

 

 

Term ending in 2004 (Class II)

 

 

 

 

Michael M. Y. Chang

 

 

Ralph Roy Buon-Cristiani

Patrick S. D. Lee

 

 

Kelly L. Chan

Anthony M. Tang

 

 

Dunson K. Cheng

Thomas G. Tartaglia

 

 

Joseph Chi-Hung Poon

 

31



 

Item 5.        OTHER INFORMATION

 

Not applicable.

 

Item 6.        EXHIBITS AND REPORTS ON FORM 8-K

 

Exhibits:

 

Exhibit 99.1            CEO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Exhibit 99.2            CFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Reports on Form 8-K:

 

None

 

32



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Cathay Bancorp, Inc.

 

 

(Registrant)

 

 

 

Date:  August 14, 2002

By /s/ DUNSON K. CHENG 

 

 

Dunson K. Cheng

 

Chairman and President

 

 

 

Date:  August 14, 2002

By /s/ ANTHONY M. TANG

 

 

Anthony M. Tang

 

Chief Financial Officer

 

33