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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission file number 0-18630
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CATHAY BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 95-4274680
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 North Broadway, Los Angeles, California 90012
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 625-4700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
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.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 6, 1998 was $242,755,116 (computed on the basis of
$33.625 per share, which was the last sale price of the Company's Common Stock
reported by the Nasdaq National Market on March 6, 1998).*
The number of shares outstanding of each of the Registrant's classes of
Common Stock as of March 6, 1998: Common Stock, $.01 par value - 8,952,338
shares**
DOCUMENTS INCORPORATED BY REFERENCE
- - Portions of Registrant's definitive proxy materials relating to its 1998
Annual Meeting of Stockholders, as filed, are incorporated by reference
into Part III.
- - Portions of Registrant's Annual Report to Stockholders for the Year Ended
December 31, 1997 (referred to below as "Annual Report to Stockholders")
are incorporated by reference into Parts I, II and IV.
________________
* Estimated solely for the purposes of this cover page. The market value of
shares held by the Company's directors, officers and Employee Stock
Ownership Plan have been excluded.
** Includes 34,519 and 34,000 rights, respectively, to receive Common Stock
that are held by former holders of Cathay Bank common stock and former
holders of First Public Savings Bank common stock that have not yet been
submitted for exchange into Common Stock of Cathay Bancorp, Inc.
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PART I
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the factors
described in this Annual Report and the other documents the Registrant files
from time to time with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
BUSINESS OF THE COMPANY
GENERAL
The Company is a business corporation organized under the laws of the State
of Delaware on March 1, 1990. The only office of the Company, and its principal
place of business, is located at the main office of Cathay Bank (the "Bank" or
"Cathay Bank") at 777 North Broadway, Los Angeles, California 90012. Its
telephone number is (213) 625-4700.
The Company was organized for the purpose of becoming the holding company
of Cathay Bank, a California-chartered bank. As a result of a reorganization and
merger approved by the Bank's stockholders in July 1990 and effective on
December 10, 1990 (the "Reorganization"), the Bank is a wholly-owned subsidiary
of the Company.
The Company's sole current business activity is to hold the stock of Cathay
Bank. In the future, the Company may become an operating company or acquire
savings institutions, banks or companies engaged in bank-related activities and
may engage in or acquire such other businesses or activities as may be permitted
by applicable law.
On November 18, 1996, the Company acquired First Public Savings Bank,
F.S.B. ("First Public"), through the merger of First Public into the Company's
wholly owned subsidiary, Cathay Bank. In connection with the acquisition of
First Public, the Company paid $15.486 million in cash and issued 905,735 shares
of its Common Stock valued at $16.114 million, for a total purchase price of
$31.6 million.
PROPERTY
The Company currently neither owns nor leases any real or personal
property. The Company uses the premises, equipment and furniture of the Bank
without the payment of any rental fees to the Bank. See "Business of the Bank -
Premises" and "Cathay Investment Company" below.
COMPETITION
The primary business of the Company is the business of the Bank. Therefore,
the competitive conditions to be faced by the Company are expected to continue
to include those faced by the Bank. See "Business of the Bank -- Competition."
In addition, many banks and financial institutions have formed holding
companies. It is likely that these holding companies will attempt to acquire
other banks, thrift institutions or companies engaged in bank-related
activities. Thus, the Company may face increased competition in undertaking
acquisitions of such institutions and in operating after any such acquisition.
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EMPLOYEES
The Company currently does not employ any persons other than its
management, which includes the President and the Chief Financial Officer, due to
the limited nature of its activities. If the Company acquires other financial
institutions or pursues other lines of business, it may hire additional
employees. See "Business of the Bank - Employees" below.
BUSINESS OF THE BANK
GENERAL
Cathay Bank was incorporated under the laws of the State of California on
August 22, 1961 and was licensed by the California State Banking Department (now
named the "Department of Financial Institutions") and commenced operations as a
California state-chartered bank on April 19, 1962. Cathay Bank is an insured
bank under the Federal Deposit Insurance Act but, like most state-chartered
banks of similar size in California, it is not a member of the Federal Reserve
System.
Cathay Bank's main office is located in the Chinatown area of Los Angeles,
at 777 North Broadway, Los Angeles, California 90012. In addition, the Bank has
17 other branch offices located in the cities of Monterey Park, Alhambra,
Hacienda Heights, Westminster, San Gabriel, Torrance, Cerritos, City of
Industry, Irvine and Los Angeles in Southern California, as well as the cities
of San Jose, Oakland, Cupertino, Fremont and Millbrae in Northern California.
Cathay Bank's primary market area is defined by its Community Reinvestment Act
(CRA) delineation which includes the contiguous areas surrounding each of the
Bank's branch offices. It is the Bank's policy to reach out and actively offer
services to low and moderate income groups in the delineated branch service
areas. Many of the Bank's employees speak both English and one or more Chinese
dialects or Vietnamese, and are thus able to serve the Bank's numerous Chinese
and Vietnamese-speaking customers, as well as the English-speaking customers.
Cathay Bank conducts substantially the same business operations as a
typical commercial bank, including the acceptance of checking, savings, and time
deposits, and the making of commercial, real estate, personal, home improvement,
automobile and other installment and term loans. It also offers letters of
credit, wire transfers, spot and forward contracts, traveler's checks, safe
deposit, night deposit, social security payment deposit, collection,
bank-by-mail, drive-up and walk-up windows, automatic teller machine ("ATM") and
other customary bank services to its customers. The operations of the drive-up
and walk-up facilities are extended past normal banking hours to accommodate
those customers who cannot conduct banking businesses during normal banking
hours.
Since its inception, the Bank's policy has been to attract business from,
and to focus its primary services for the benefit of, individuals, professionals
and small to medium-sized businesses in the local markets in which its branches
are located. The three general areas to which the Bank has directed its lendable
assets are: (1) loans secured by real estate; (2) commercial loans and trade
financing; and (3) installment loans to individuals for automobile, household
and other consumer expenditures.
SELECTED FINANCIAL DATA
Information concerning changes in the Bank's and the Company's financial
condition and results of operations is included under the caption "Selected
Consolidated Financial Data" on page 13 of the Annual Report to Stockholders and
is incorporated herein by reference.
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SECURITIES
Information concerning the carrying value and the maturity distribution and
yield analysis of the Bank's securities available-for-sale and securities
held-to-maturity portfolios is included on pages 19 through 21 of the Annual
Report to Stockholders and is incorporated herein by reference. A summary of the
book value and fair value of the Bank's securities by contractual maturity is
found in Note 4 to the Consolidated Financial Statements on pages 48 and 49 of
the Annual Report to Stockholders, and is incorporated herein by reference.
LOANS
Distribution and maturity of loans. Information concerning loan type and
mix, distribution of loans and maturity of loans is included on pages 22 and 23
of the Annual Report to Stockholders and is incorporated herein by reference.
Nonperforming Loans and Allowance for Loan Losses. Information concerning
past due loans, allowance for loan losses, loans charged-off, loan recoveries
and other real estate owned is included on pages 23 through 29 and in Notes 5
and 6 to the Consolidated Financial Statements on pages 50 through 52 of the
Annual Report to Stockholders and is incorporated herein by reference.
DEPOSITS
Information concerning types of deposit accounts and average deposits and
rates is included on pages 29 and 30 of the Annual Report to Stockholders and is
incorporated herein by reference.
RETURN ON EQUITY AND ASSETS
The following table sets forth information concerning the return on assets,
return on stockholders' equity, equity to assets ratio and dividend payout ratio
for the periods indicated:
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
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Return on Average Assets (net income
divided by average assets) 1.29% 1.05% 1.05% 1.06% 0.91%
Return on Average Equity (net income
divided by average equity) 15.63 13.06 11.68 11.43 9.82
Average Equity as a Percentage of
Average Assets 8.25 8.04 8.97 9.25 9.22
Dividend Payout Ratio(1) 27.65 36.14 44.12 48.78 58.82
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(1) Computed by using dividends declared per common share divided by net income
per common share.
INTEREST RATES AND DIFFERENTIALS
Information concerning average interest-earning assets, average
interest-bearing liabilities and the yields on the assets and liabilities is
included on pages 17 and 18 of the Annual Report to Stockholders and is
incorporated herein by reference.
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ANALYSIS OF CHANGES IN NET INTEREST INCOME
An analysis of changes in net interest income due to changes in rate and
volume is included on pages 14 through 16 of the Annual Report to Stockholders
and is incorporated herein by reference.
COMMITMENTS AND LINES OF CREDIT
Information concerning the Bank's outstanding loan commitments and letters
of credit is included in Note 12 to the Consolidated Financial Statements on
pages 56 and 57 of the Annual Report to Stockholders and is incorporated herein
by reference.
CATHAY INVESTMENT COMPANY
Cathay Investment Company ("CIC") is a wholly owned subsidiary of Cathay
Bank that was formed in 1984 to invest in real property. In 1987, CIC opened a
branch office in Taipei, Taiwan to promote Taiwanese real estate investments in
Southern California. The office in Taipei was moved to a new location in October
1996 which consists of 1,512 square feet. The lease is for three years from
10/5/96 to 10/4/99 for a monthly rent of approximately $3,400 at the exchange
rate in effect at December 31, 1997.
As of December 31, 1997, CIC owned one property with a net equity
investment of $680,091. The property is an 8,200 square foot strip shopping
center on a 27,000 square foot parcel of land located on Harbor Boulevard,
Garden Grove, California. The Bank filed an application for consent for
subsidiary to continue to engage in activity on February 4, 1994, and received
approval from the FDIC on March 8, 1995 to hold the property for an additional
five years.
PREMISES
The Bank's main corporate office and headquarters branch is located in the
Chinatown district of Los Angeles. The offices are in a spacious traditional
three-story structure containing 26,527 square feet and constructed of glass and
concrete. The Bank owns both the building and the land upon which the building
is situated. The main floor currently has 24 teller stations (including 16
regular tellers, seven commercial tellers, and one Automatic Teller Machine),
four pneumatic drive-up teller stations, one walk-up teller station, a vault
area and the Bank's operations area. The second floor contains executive offices
and the Bank's Board Room. The third floor houses the Bank's corporate lending
department. Parking for approximately 126 automobiles is provided on three lots
adjacent to the Bank's building, two of which are owned by the Bank while the
third lot is leased under a 55-year term with a 30-year option commencing in
January 1987 at a current monthly rent of approximately $14,000.
Moreover, the Bank owns properties located in the cities of Monterey Park,
Alhambra, Westminster, San Gabriel, Torrance, Cerritos, City of Industry and
Cupertino, where certain of its branch offices are located. Those properties
were acquired between years 1979 and 1993.
In addition to the aforementioned bank-owned properties and the lease for
the CIC Taipei office, the Bank leases certain premises under the following
lease terms and conditions: (1) total of 10,430 square feet of space for
administrative offices in a building located near the Bank's main office at a
monthly rent of approximately $12,200 under two separate leases for three years
beginning 2/1/98; (2) 4,483 square feet of space for the Hacienda Heights office
at a monthly rent of $4,842 under a lease from January 1996 to June 1999 with
two five-year options; (3) 4,800 square feet of space for the San Jose office
under a re-negotiated lease commencing March 1996 for ten years and two months
with two five-year options; current rent is $8,640; the Bank has a one-time
right to cancel the lease after the fifth year upon the payment of $55,500 in
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consideration; (4) 5,000 square feet of space for the Oakland office at a
monthly rent of $6,000 under a renewed lease beginning in September 1996 for
five years; (5) 2,400 square feet of space for the Fremont office at a current
monthly rent of $3,360 under a three-year lease beginning in May 1994 with two
three-year options; the Bank has exercised the first option; (6) 4,450 square
feet of space for the Irvine office at a monthly rent of $6,089 under a 20-year
ground lease commencing in May 1988 with two five-year options; (7) 3,441 square
feet of space for the Millbrae Office at a current monthly rent of $7,002 under
a five-year lease beginning in January 1995 with two five-year options; and (8)
580 square feet of space for the Hong Kong representative office at a current
monthly rent of approximately $3,400 based on the exchange rate in effect on
December 31, 1997 under a renewed lease from March 1, 1998 to February 29, 2000.
In October 1997, the Bank entered into a lease agreement to lease 2,535 square
feet of space for the Berkeley/Richmond Branch expected to be opened in the near
future. The lease calls for a term of six years at a monthly rent of $6,338. One
of the leases referred to under (1) above has been entered into between the Bank
and T.C. Realty in which Mr. Patrick Lee, a director of Bancorp and the Bank,
has an interest. Management believes that these leases are on terms at least as
favorable to the Bank as would have existed in a transaction with an unrelated
third party.
Moreover, with the acquisition of First Public in November 1996, the
following leases were added: (1) 8,707 square feet of space for the Hill/Alpine
office under a lease from February 1979 to February 1989 with three five-year
options; First Public has exercised the second option to renew the lease until
February 1999; the current monthly rent is $5,017; (2) 1,976 square feet of
space for the Valley/Stoneman office under a lease from August 1986 to August
1991 which was extended for five years with three five-year options; the current
monthly rent is $4,412; and (3) 2,000 square feet of space for the
Valley/Prospect office under a lease from February 1991 to February 1996 which
was extended for five years with two five-year options; the current monthly rent
is $4,091.
The Bank currently operates 18 domestic branch offices, one branch office
of CIC in Taiwan, and one representative office in Hong Kong. Each branch office
has loan approval rights subject to the branch manager's authorized lending
limits. Activities of the CIC Taiwan office and Hong Kong representative office
are limited to coordinating the transportation of documents to the Bank's main
office and performing liaison services. A list of the offices of the Bank and
CIC is included on page 68 of the Annual Report to Stockholders and is
incorporated herein by reference.
As of December 31, 1997, the Bank's investment in premises and equipment
totaled $25,201,883. See also Note 8 to the Consolidated Financial Statements on
page 53 of the Annual Report to Stockholders, which is incorporated herein by
reference.
EXPANSION
Management of the Bank continues to look for opportunities to expand the
Bank's branch network by seeking new branch locations and/or by acquiring other
financial institutions to diversify the customer base in order to compete for
new deposits and loans, and to be able to serve the customers more effectively.
COMPETITION
The banking business in California, and specifically in the market areas
served by Cathay Bank, is highly competitive with respect to both loans and
deposits. The Bank competes for deposits principally with other commercial
banks, savings and thrift institutions and other financial institutions
operating in the Bank's service areas, some of which offer certain services that
are not offered directly by the Bank and some of which have substantially
greater financial resources than
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does the Bank. In addition, other entities (both governmental and private
industry) seeking to raise capital through the issuance and sale of debt and
equity securities provide competition for the Bank in the acquisition of
deposits.
In seeking to obtain customers for loans, Cathay Bank competes primarily
with other commercial and savings banks, as well as other non-bank financial
intermediaries, including insurance companies, mortgage companies, credit
unions, and other lending institutions. Certain legislation has served to ease
regulatory restrictions on certain such institutions, thus increasing their
ability to compete with banks such as Cathay Bank.
To compete with other financial institutions in its primary service areas,
the Bank relies principally upon local promotional activities, personal contacts
by its officers, directors, employees, and stockholders, extended hours,
Saturday banking, and specialized services. For customers whose loan demands
exceed the Bank's lending limit, the Bank has attempted in the past, and intends
in the future, to arrange for such loans on a participation basis with
corresponding banks. The Bank also assists customers requiring other services
not offered by the Bank to obtain such services from its correspondent banks.
There are approximately 13 Asian-American banks and one other major
financial institution in the Bank's headquarters branch area, which compete for
California Asian-American customers, as well as other ethnic customers. In
addition, banks from the Pacific Rim countries, such as Taiwan, Hong Kong and
China continue to open branches in the Los Angeles area, thus increasing the
Bank's competition.
EMPLOYEES
As of December 31, 1997, the Company and Cathay Bank (including CIC)
employed approximately 505 persons, including 109 officers. None of the
employees are represented by a union. Management believes that its employee
relations are excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Part III, Item 10 ("Directors and Executive Officers of the
Registrant") below for information regarding the executive officers of the
Company and Cathay Bank.
REGULATION OF THE COMPANY AND THE BANK
GENERAL
As a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended (the "BHCA"), the Company's primary regulatory authority
is the Board of Governors of the Federal Reserve System (the "Board"). The
Company is required by the BHCA to file annual reports of its operations with,
and is subject to examination by, the Board. Cathay Bank, as a state-chartered
commercial bank, is regulated by the California Department of Financial
Institutions. The Bank's deposits are insured, up to the legal maximum, by the
FDIC, and the Bank is subject to FDIC rules applicable to insured banks.
Although not a member of the Federal Reserve System, the Bank is subject to
certain Federal Reserve Board rules and regulations by virtue of its
FDIC-insured deposits.
The regulatory authorities review key operational areas of the Company and
the Bank, including asset quality, capital adequacy, liquidity, and management
and administrative ability. Applicable law and regulations also limit the
business activities in which the Company, the Bank
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and its subsidiaries may be engaged. (see, e.g. "Interstate Banking" and
"Federal Limits on the Activities and Investments of State-chartered Banks"
below).
In addition to banking regulations, the Company is subject to periodic
reporting and other requirements under the Securities Exchange Act of 1934, as
amended.
To the extent the information in this Section ("Regulation of the Company
and the Bank") describes statutory or regulatory provisions, it is qualified in
its entirety by reference to such provisions.
CAPITAL REQUIREMENTS
Among other matters, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") required each federal banking regulatory agency to revise
its risk-based capital standards and to specify levels at which regulated
institutions will be considered "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". Information concerning regulations of the risk-based capital
requirements prescribed by the regulatory authorities is included on page 31 of
the Annual Report to Stockholders and is incorporated herein by reference.
The Board has adopted percentage minimum leverage ratios for banking
organizations (including state member banks and bank holding companies). The
Company is expected to maintain at least a four percent minimum leverage ratio
depending on interest rate risk exposure, asset quality, liquidity, earnings,
expansion plans, growth patterns and other relevant factors. The Company was
well capitalized as of December 31, 1997 with a leverage ratio of 7.94%.
The tables presenting the Company and the Bank's risk-based capital and
leverage ratios as of December 31, 1997 are included in Note 11 to the
Consolidated Financial Statements on page 55 of the Annual Report to
Stockholders, which is incorporated herein by reference.
FDIC IMPROVEMENT ACT OF 1991
In December 1991, the FDICIA was enacted into law. The FDICIA provides for
the recapitalization of the Bank Insurance Fund and improved examinations of
insured institutions. It prescribes standards for safety and soundness of all
insured depository institutions; and requires each federal banking agency and
the FDIC to take prompt corrective regulatory action to resolve the problems of
insured depository institutions that fall below a certain capital ratio.
The FDICIA also, among other things, (1) limits the percentage of interest
paid on brokered deposits and limits the use of such deposits to only those
institutions that are well-capitalized; (2) requires the FDIC to charge
insurance premiums based on the risk profile of each institution; (3) prohibits
insured state chartered banks from engaging, as principal, in any type of
activity that is not permissible for a national bank unless the FDIC permits
such activity and the bank meets all of its regulatory capital requirements; (4)
directs the appropriate federal banking agency to determine the amount of
readily marketable purchased mortgage servicing rights that may be included in
calculating such institution's tangible, core and risk-based capital; (5)
provides that, subject to certain limitations, any federal savings association
may acquire or be acquired by any insured depository institution, and (6)
restricts capital distributions by institutions that are, or as a result of the
distributions will become, undercapitalized.
On December 31, 1992, the bank regulatory agencies adopted uniform
regulations relating to real estate loans that require institutions to adopt
written real estate policies that are consistent with regulatory guidelines.
Those guidelines include maximum loan-to-value ratios for various categories of
real estate loans. Institutions are permitted to make loans in excess of such
ratios if
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the loans are supported by other credit factors; however, loans that do not
conform to the maximum loan-to-value ratios may not, in the aggregate, exceed
the institution's risk-based capital and non-conforming loans secured by
property other than 1-4 family residential property may not, in the aggregate,
exceed 30% of risk-based capital.
The FDICIA also required the regulatory agencies to establish, by the end
of 1993, (a) minimum acceptable operational and managerial standards covering
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth and employee compensation and (b) standards for asset
quality, earnings and valuation of publicly traded shares (which must specify a
maximum ratio of market value to book value for publicly traded shares).
During 1997 the Company maintained its compliance with the requirements of
Section 112 of FDICIA. Section 112 affects all banks of $150 million or more in
assets, and reflects the government's growing concern for legislative reform to
strengthen bank accounting, auditing, and internal control oversight.
Essentially, it establishes standards for composition of a bank's audit
committee; requires assessment of the organization's compliance with designated
laws and regulations; mandates documentation and testing of the bank's internal
control structure as it relates to financial reporting controls; and, compels
management's positive report (attested to by the bank's independent auditors) as
of the end of each fiscal year, concerning the quality, adequacy and efficiency
of the bank's internal controls.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") focused on restructuring the regulation of the savings and loan
industry and its deposit insurance; and instituted a new regulatory structure
for the resolution of troubled and insolvent savings associations. Nevertheless,
a number of provisions (described below) also apply to commercial banks.
Title II authorizes the increase of insurance premiums paid by the
FDIC-insured institutions. Title VI permits the acquisition of thrifts by bank
holding companies. Title IX enhances the enforcement authority of all federal
banking agencies, including their authority to levy civil money penalties and
penalties on criminal offenses, and it also broadens the current definition of
insiders, to increase the types of persons subject to regulatory action. Title
XI requires appraisals used in making credit decision be written and performed
in accordance with generally accepted appraisal standards, as promulgated by the
Appraisal Standards Board of the Appraisal Foundation, and should meet federal
guidelines. Title XII expands the recordkeeping requirements of reporting on
Home Mortgage Disclosure Act (HDMA) to cover race, income and gender; changes
the current Community Reinvestment Act ("CRA") rating system to a four-tiered
rating system, which includes (1) outstanding record of meeting community credit
needs; (2) satisfactory record of meeting community credit needs; (3) needs to
improve record of meeting community credit needs, and (4) substantial
noncompliance in meeting community credit needs. It further requires that the
CRA rating be publicly disclosed.
The aforementioned provisions have not had a material adverse impact on the
Company's consolidated financial condition or results of operations.
FEDERAL LIMITS ON THE ACTIVITIES AND INVESTMENTS OF STATE-CHARTERED BANKS
Federal restrictions on the direct and indirect activities and investments
of state-chartered or licensed depository institutions exist if the institution
either carries federal deposit insurance or is involved in activities with
foreign banks. The FDIC is the regulatory agency with the authority to determine
federal restrictions on all direct and indirect activities and investments.
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As a general matter, subject to a number of grandfathering provisions and a
few exceptions, there are three rules which limit the activities and investments
of state-chartered banks: (1) a state-chartered bank may not engage as principal
in any type of activity that is not permissible for a national bank, unless the
FDIC determines that the activity would pose no significant risk to the affected
deposit insurance fund and the institution meets its fully phased in capital
requirements; (2) a state-chartered bank may not make or retain an equity
investment of a type or in an amount that is not permissible for a national
bank, and divestiture is required as soon as possible and within five years of
FDICIA in any event; and (3) a state-chartered bank may retain an equity
investment in the form of a majority-owned subsidiary engaged as principal in
activities not permissible for a subsidiary of a national bank, but only if the
FDIC has made the same determinations respecting risk to the insurance fund and
capital compliance by the bank.
As stated above (see "Cathay Investment Company" on page 6 of this report),
Cathay Bank has received FDIC approval of CIC's ownership of the Garden Grove
property. The Bank is in compliance with these limitations.
INTERSTATE BANKING
The Federal Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") was signed into law on September 29, 1994. When
fully effective, the Riegle-Neal Act will significantly relax or eliminate many
restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act permitted a bank holding company to acquire banks in states
other than its "home state", even if applicable state law would not permit that
acquisition. Such acquisitions would continue to require Board approval and
would remain subject to certain state laws.
Effective June 1, 1997, the Riegle-Neal Act permitted interstate mergers of
banks, thereby allowing a single, merged bank to operate branches in multiple
states. The Riegle-Neal Act allows each state to adopt legislation to "opt-out"
of these interstate merger provisions. Conversely, the Riegle-Neal Act permits
states to "opt in" to the merger provisions of Act prior to their stated
effective date, to permit interstate mergers in that state prior to June 1,
1997. The enactment of the California Interstate Banking and Branching Act of
1995 provides for interstate banking and branching in California. This early
opt-in legislation, which became effective on October 2, 1995, requires
out-of-state institutions which do not already own a California bank to acquire
an existing whole five-year old bank before establishing a California branch. De
novo branching is not permitted. This act revised much of the original
California interstate banking law first enacted in 1986 that permitted
interstate banking with other states on a reciprocal basis.
Banks and bank holding companies contemplating acquisitions must comply
with the competitive standards of the BHCA, the Change in Bank Control Act
("CBA") or the Bank Merger Act ("BMA"), as applicable. The crucial test under
each Act is whether the proposed acquisition will "result in a monopoly" or will
"substantially" lessen competition in the relevant geographic market. Both the
BHCA and the BMA preclude granting regulatory approval for any transaction that
will result in a monopoly or where the furtherance of a plan to create a
monopoly. However, where a proposed transaction is likely to cause a substantial
reduction in competition, or tends to create a monopoly or otherwise restrain
trade, these Acts permit the granting of regulatory approval if the applicable
regulator finds that the perceived anti-competitive effects of the proposed
transaction "are clearly outweighed in the public interest by the probable
effect of the transaction on the convenience and needs of the community to be
served."
With regard to any interstate banking, the Justice Department issued
revised merger guidelines in March 1995. On the basis of the revised criteria,
the Department has challenged several proposed transactions involving
institutions that compete directly in the same market(s). In contrast to the
Justice Department, the Federal Reserve has recently shown a greater inclination
11
12
to consider factors that contribute to the safety and soundness of the banking
system, or which contribute positively to the "convenience and needs" of the
affected communities. To the extent these two Federal Agencies apply different
(and at times incompatible) analysis to assess the competitive effects of
proposed bank and thrift mergers and acquisitions, federal antitrust objections
must be considered in connection with any interstate acquisition.
The Company constantly seeks to expand its market areas through acquiring
other financial institutions or establishing de novo branches in or outside of
California as permitted by applicable laws, whenever opportunities strike. The
Riegle-Neal Act may have the effect of increasing competition by facilitating
entry into the California banking market by out of state banks and bank holding
companies.
RECENT ACCOUNTING DEVELOPMENTS
Information concerning recent accounting developments is included in Note 1
to the Consolidated Financial Statements under "Recent Accounting
Pronouncements" on page 46 of the Annual Report to Stockholders and is
incorporated herein by reference.
FEDERAL HOME LOAN BANK
The Federal Home Loan Bank System (FHL Bank System) consists of twelve
district banks (FHLB) and is supervised by the Federal Housing Finance Board
(FHFB). Commercial banks, credit unions, savings associations, and certain other
insured depository institutions making long-term home mortgage loans are
eligible to become members of the FHL Bank System.
To qualify for membership, an institution not a member on January 1, 1989
must meet the qualified thrift lender test, which means, among other things,
that such institution has at least ten percent of its total assets in
residential mortgage loans. Any new institution formed after January 1, 1989 may
become a member if it met the ten percent asset test requirement within one year
after commencing operations.
The Bank received FHLB membership approval in January 1993, and became a
member/stockholder of the FHLB of San Francisco. By becoming a FHLB member, the
Bank may have access to a source of low-cost liquidity. To access the credit
services offered by the district banks, a member must also become a stockholder
of the FHLB in its district. The level of stock ownership is currently governed
by the Federal Home Loan Bank Act, and the amount of borrowing is defined by the
amount of stock purchased. FHLB stock is purchased and redeemed at par. The
Bank's investment in FHLB stock totaled 56,529 shares or $5,652,900 as of
December 31, 1997.
All credits extended by the district bank require full collateralization.
Eligible collateral includes residential first mortgage loans on single and
multi-family projects, U.S. government and agency securities, deposits in
district banks, and certain other real estate related assets permitted by law.
DIVIDENDS
As a California corporation, Cathay Bank may not pay dividends to the
Company in excess of certain statutory limits. As of December 31, 1997, the
maximum dividend that Cathay Bank could have declared, subject to regulatory
approval, was $29,040,000. The banking regulatory agencies may prohibit a bank
from paying dividends to its bank holding company if the agencies determine that
such a payment would constitute an unsafe or unsound banking practice.
12
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ITEM 3. LEGAL PROCEEDINGS
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
13
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The information under the caption "Market for Cathay Bancorp, Inc.
Stock" on page 37 and under the caption "Additional Information" on
page 68 of the Company's Annual Report to Stockholders is
incorporated herein by reference.
(b) Holders
As of March 6, 1998, there were approximately 1,800 holders of
record of the Company's Common Stock.
(c) Dividends
The information in Note 11 to the Consolidated Financial Statements
on pages 55 and 56 of the Company's Annual Report to Stockholders
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Consolidated Financial Data" on
page 13 of the Company's Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 14 through 37 of the
Company's Annual Report to Stockholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the captions "Market Risk" and "Liquidity and
Interest Rate Sensitivity" on pages 31 through 34 of the Company's Annual Report
to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report and the Company's Consolidated Financial
Statements and Notes thereto on pages 39 through 63 of the Company's Annual
Report to Stockholders is incorporated herein by reference. See Item 14 of this
report for information concerning financial statements filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Election of Directors" on pages 3
through 6 of the Company's definitive Proxy Statement relating to its 1998
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
The following persons are the executive officers and other significant
officers of the Company and/or Cathay Bank:
George T.M. Ching, age 83, Vice-Chairman of the Board of Directors of
Bancorp since 1990; Vice-Chairman of the Board of Directors of Cathay Bank
since 1985, President of Cathay Bank from 1962 until 1985 and director of
Cathay Bank since 1962; President of CIC since 1985 and director of CIC
since 1984.
Dunson K. Cheng, age 53, Chairman of the Board of Directors of each of
Bancorp, Cathay Bank and CIC since 1994; President of Bancorp since 1990;
President of Cathay Bank since 1985 and director of Cathay Bank since 1982;
Secretary of CIC from 1985 until 1994; Chief Executive Officer of CIC since
1995 and director of CIC since 1984.
Wilbur K. Woo, age 82, Secretary of Bancorp since 1990; Secretary of
the Board of Directors of Cathay Bank since 1980 and director of Cathay
Bank since 1978; Director of CIC since 1987.
Anthony M. Tang, age 44, Executive Vice President of Bancorp and Cathay
Bank since 1994; Senior Vice President of Bancorp and Cathay Bank from 1990
until 1994; Chief Financial Officer and Treasurer of Bancorp since 1990;
Chief Lending Officer of Cathay Bank since 1985; and director of Cathay
Bank since 1986.
Milly W. Joe, age 60, Senior Vice President and Cashier of Cathay Bank
since 1989; and Vice President and Cashier of Cathay Bank from 1981 to
1989. Ms. Joe has been associated with Cathay Bank since 1968.
Irwin Wong, age 50, Senior Vice President for Branch Administration of
Cathay Bank since 1989; and Vice President for Branch Administration from
1988 until 1989. Mr. Wong was employed by Security Pacific National Bank as
a Vice President and Manager from 1983 until 1988.
Elena Chan, age 46, Senior Vice President and Chief Financial Officer
of Cathay Bank since December 1992; Vice President of Finance from March
1992 to November 1992; and Vice President and Internal Auditor of Cathay
Bank from 1985 to February 1992.
All of the above-named officers were elected on April 17, 1997 at a regular
Board of Directors meeting. The term of office of each officer is from the time
of appointment until the next annual organizational meeting of the Board of
Directors of Bancorp or Cathay Bank (or action in lieu of a meeting) and until
the appointment of his or her successor unless, before that time, the officer
resigns or is removed or is otherwise disqualified from serving as an officer of
Bancorp or Cathay Bank.
15
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ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Information Concerning Management
Compensation" and "Compensation Committee Interlocks and Insider Participation"
on pages 8 through 10 of the Company's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information under the captions "Principal Holders of Securities" on
page 2 and "Election of Directors" on pages 3 through 6 of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the captions "Election of Directors" on pages 3
through 6 and "Certain Transactions" on page 14 of the Company's Proxy Statement
is incorporated herein by reference.
16
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Documents Filed as Part of this Report
(a)(1) Financial Statements
Financial Statements
of
Cathay Bancorp, Inc. and Subsidiary*
Page No. in
Annual Report
-------------
Consolidated Statements of Condition
as of December 31, 1997 and 1996 39
Consolidated Statements of Income
for each of the years in the 3-year period
ended December 31, 1997 40
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the 3-year period
ended December 31, 1997 41
Consolidated Statements of Cash Flows
for each of the years in the 3-year period
ended December 31, 1997 42
Notes to Consolidated Financial Statements 43-62
Independent Auditors' Report of KPMG Peat Marwick LLP 63
- ----------
*Parent-only condensed financial information of the Company as of December
31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 is
included in Note 15 to the Consolidated Financial Statements on pages 60 through
62 of the Annual Report to Stockholders, which is incorporated herein by
reference.
(a)(2) Financial Statement Schedules
Schedules have been omitted since they are not applicable, they are
not required, or the information required to be set forth in the
schedules is included in the Consolidated Financial Statements or
notes thereto incorporated by reference into this report.
(a)(3) Exhibits
3.1 Restated Articles of Incorporation. Previously filed with the
Securities and Exchange Commission as an exhibit to Registration
Statement No. 33-33767 and incorporated herein by reference.
3.2 Restated Bylaws. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990 and incorporated herein by
reference.
17
18
4.1 Shareholders Rights Plan. Previously filed with the Securities and
Exchange Commission as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990 and incorporated
herein by reference.
10.1 Form of Indemnity Agreements between the Company and its directors
and certain officers. Previously filed with the Securities and
Exchange Commission as an exhibit to Registration Statement No.
33-33767 and incorporated herein by reference.
10.2 Employee Stock Ownership Plan and Trust of the Company and First
Amendment thereto. Previously filed with the Securities and
Exchange Commission as an exhibit to Registration Statement No.
33-33767 and incorporated herein by reference.
10.3 Dividend Reinvestment Plan of the Company. Previously filed with
the Securities and Exchange Commission as an exhibit to
Registration Statement No. 33-33767 and incorporated herein by
reference.
10.4 Second Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
10.5 Third Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
10.6 Fourth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
10.7 Fifth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
10.8 Sixth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
10.9 Seventh Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
10.10 Eighth Amendment to the Cathay Bank Employee Stock Ownership Plan
and Trust. Previously filed with the Securities and Exchange
Commission as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
13.1 Certain portions of the Registrant's 1996 Annual Report to
Stockholders incorporated herein by reference.
18
19
22.1 Subsidiaries of the Company
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reportable events.
19
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 27, 1998 By: /s/ Dunson K. Cheng
----------------------
Dunson K. Cheng
Chairman and President
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dunson K. Cheng and Anthony M. Tang,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Dunson K. Cheng President, Chairman of March 27, 1998
- ------------------------------------ the Board and Director
Dunson K. Cheng (Principal executive officer)
/s/ Anthony M. Tang Executive Vice President, March 27, 1998
- ------------------------------------ Chief Financial Officer
Anthony M. Tang /Treasurer and Director
(principal financial officer)
(principal accounting officer)
/s/ Ralph Roy Buon-Cristiani Director March 27, 1998
- ------------------------------------
Ralph Roy Buon-Cristiani
/s/ Kelly L. Chan Director March 27, 1998
- ------------------------------------
Kelly L. Chan
/s/ Michael M.Y. Chang Director March 27, 1998
- ------------------------------------
Michael M.Y. Chang
[SIGNATURES CONTINUED]
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[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
/s/ George T.M. Ching Vice Chairman of the March 27, 1998
- ------------------------------------ Board and Director
George T.M. Ching
/s/ Wing K. Fat Director March 27, 1998
- ------------------------------------
Wing K. Fat
/s/ Patrick S.D. Lee Director March 27, 1998
- ------------------------------------
Patrick S.D. Lee
/s/ Chi-Hung Joseph Poon Director March 27, 1998
- ------------------------------------
Chi-Hung Joseph Poon
/s/ Thomas G. Tartaglia Director March 27, 1998
- ------------------------------------
Thomas G. Tartaglia
/s/ Wilbur K. Woo Secretary of the Board March 27, 1998
- ------------------------------------ and Director
Wilbur K. Woo
22
EXHIBIT INDEX
Exhibit No. Description
3.1 Restated Articles of Incorporation. Previously filed with the Securities and Exchange
Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by
reference.
3.2 Restated Bylaws. Previously filed with the Securities and Exchange Commission as an exhibit to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated
herein by reference.
4.1 Shareholders Rights Plan. Previously filed with the Securities and Exchange Commission as an
exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
10.1 Form of Indemnity Agreements between the Company and its directors and certain officers.
Previously filed with the Securities and Exchange Commission as an exhibit to Registration
Statement No. 33-33767 and incorporated herein by reference.
10.2 Employee Stock Ownership Plan and Trust of the Company and First Amendment thereto. Previously
filed with the Securities and Exchange Commission as an exhibit to Registration Statement No.
33-33767 and incorporated herein by reference.
10.3 Dividend Reinvestment Plan of the Company. Previously filed with the Securities and Exchange
Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by
reference.
10.4 Second Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1991 and incorporated herein by reference.
10.5 Third Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
10.6 Fourth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
10.7 Fifth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
23
10.8 Sixth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1991 and incorporated herein by reference.
10.9 Seventh Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.
10.10 Eighth Amendment to the Cathay Bank Employee Stock Ownership Plan and Trust. Previously filed
with the Securities and Exchange Commission as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein by reference.
13.1 Certain portions of the Registrant's 1997 Annual Report to Stockholders incorporated herein by
reference.
22.1 Subsidiaries of the Company
27 Financial Data Schedule