Cathay Poised for Expansion in Markets With Demographic Fit

By KATE BERRY
Staff Reporter

After Cathay Bancorp acquired local rival GBC Bancorp last October, investors waited patiently to see how much value the Los Angeles-based financial institution, known for its efficiency, could wring from the deal.

GBC, operating as General Bank, had gone through some operational and management turmoil, so there were improvements to be made. But it was unclear whether Cathay would uncover more problems and Cathay's management is as tight-lipped as it is tightfisted.

Now investors have some answers.

Since the newly renamed Cathay General Bancorp released quarterly and annual results in late January, its shares have risen 12.8 percent.

For the fourth quarter ended Dec. 31, the first quarterly result since the GBC purchase closed Oct. 20, net income rose 39 percent to $16.8 million, compared with $12.1 million for the like period a year ago.

Due to the higher number of shares outstanding, net income rose only 6 percent, to 71 cents versus 67 cents in the like year-ago period.

One reason shares have risen is the expectation that earnings will grow at double-digit rates for the next several years now that GBC's bad loans have been put behind.

"One thing General Bank did right is that once the problem was known, they recognized the charge-offs," said Dunson Cheng, Cathay's chairman, president and chief executive.

Before the merger, General Bank took a charge-off of $6.3 million for the first nine months of 2003, $74 million in 2002 and $15.9 million in 2001, Cheng said.

"It was well-documented that the bank had some problems with the quality of loans," he said. "But the numbers show there's no more deterioration in non-accrual loans."

Growth plans

The acquisition doubled Cathay General's total assets to $5.54 billion, vaulting it to the No. 2 position among Chinese-American banks in the U.S. behind UCBH Holdings Inc. of San Francisco.

Cathay is taking its time combining the operations to avoid alienating customers. For now, the bank plans to close four branches in Southern California and three in Northern California, bringing its total number of branches to 38. At the same time, it is looking to expand in other locations, so the number of branches could increase over time, Cheng said.

Cathay is expected to seek market share gains in New York, Texas and Washington states with large Chinese-America populations.

Cheng said loan demand remains steady in Southern California, New York and Houston but Northern California remains sluggish in the aftermath of the tech bubble.

"The performance of the bank speaks for itself," said Joe Morford, an analyst at RBC Capital Markets in San Francisco. "We've got 15 percent plus earnings growth projected for the next couple of years, driven by double-digit loan growth and widening margins."

Target market

Demographics also work in the company's favor. Chinese-Americans are the fastest-growing ethnic group in Los Angeles County, making up 27 percent of the 1.3 million Asian population. Moreover, seven cities in Los Angeles County already boast populations that are more than 50 percent Asian, including Cerritos, Monterey Park, Rosemead, Rowland Heights, San Gabriel, San Marino and Walnut.

Yet, for all its pluses, Cathay has a downside. Like other Asian banks, it continues to operate as if it were a family-owned business. It doesn't hold quarterly conference calls with investors and analysts. It also rarely takes part in investor conferences that would give it more exposure to a wider group of financial institutions (although one of its largest shareholders is Fidelity Management & Research, which owns nearly 5 percent of its outstanding shares).

One of the company's seven founders, George T.M. Ching, 89, still holds a position on the board, as co-vice chairman. Another board member is Wilbur K. Woo, 88. Ching, a former president of the bank, has been a director for 42 years.

What's more, the stock is no longer the bargain it once was. Since its earnings were reported, shares have risen from $55.60 to $61.82 as of March 10.

"The stock is expensive, as most bank stocks are in this market," said Dan Boyle, a principal at Schwerin Boyle Capital Management in Springfield, Mass., which owns Cathay shares.

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