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, 1999 ----------------------------------------------------- [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 0-18630 --------------------------------------------------------- CATHAY BANCORP, INC. - ------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 95-4274680 - ------------------------------------ ----------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 777 North Broadway, Los Angeles, California 90012 - ------------------------------------------------------------------------------- (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 - ------------------------------ ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value - ------------------------------------------------------------------------------- (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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 3, 2000 was $306,968,592 (computed on the basis of $42.00 per share, which was the last sale price of the Company's Common Stock reported by the Nasdaq National Market on March 3, 2000).* The number of shares outstanding of each of the Registrant's classes of Common Stock as of March 3, 2000: Common Stock, $.01 par value - 9,044,624 shares DOCUMENTS INCORPORATED BY REFERENCE - - Portions of Registrant's definitive proxy materials relating to its 2000 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, 1999 (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. 2
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 Cathay Bancorp, Inc. (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. The 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. The Company's sole current business activity is to hold all of the outstanding 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 December 10, 1999, Cathay Bank assumed approximately $80.6 million of the deposits of, and purchased approximately $84.1 million of the assets of, New York-based Golden City Commercial Bank. Please see Note 2 to the Consolidated Financial Statements on page 46 of the Annual Report to Stockholders which is incorporated herein by reference. 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. 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 3
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 11 branch offices located in the cities of Monterey Park, Alhambra, City of Industry, Westminster, San Gabriel, Torrance, Cerritos, Irvine and Diamond Bar in Southern California, six branch offices located in the cities of San Jose, Oakland, Cupertino, Fremont, Millbrae and Richmond in Northern California, two branch offices located in the cities of Flushing and New York in the State of New York and one loan production office in Houston, Texas. 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 Chinese, Vietnamese and English speaking customers. Cathay Bank conducts substantially the same business operations as a typical commercial bank, which is to accept checking, savings, and time deposits, and to make commercial, real estate, personal, home improvement, automobile and other installment and term loans. From time to time, the Bank invests available funds in other interest earning assets, such as U.S. Treasury securities, U.S. government agencies securities, state and municipal securities, mortgage-backed securities, asset-backed securities and corporate bonds. The Bank's services also include 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 accommodate those customers who cannot conduct banking businesses during normal banking hours, the Bank has extended its banking hours to include Saturdays for all branches and Sundays for certain branches. In addition, the operations of the drive-up and walk-up facilities are extended past normal banking hours. Beginning in 1999, the Bank launched a program under the name of Cathay Global Investment Services to allow its customers to purchase mutual funds, annuities, equities, bonds and short-term money market instruments offered through BISYS Brokerage Services, Inc. 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 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. 4
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 amortized cost and estimated fair value of the Bank's securities by contractual maturity is found in Note 4 to the Consolidated Financial Statements on pages 47 through 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. NON-PERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES. Information concerning non-performing loans, allowance for loan losses, loans charged-off, loan recoveries and other real estate owned is included on pages 24 through 29 and in Notes 5 and 6 to the Consolidated Financial Statements on pages 49 through 51 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 through 31 of the Annual Report to Stockholders and is incorporated herein by reference. RETURN ON EQUITY AND ASSETS Information concerning the return on average assets, return on average stockholders' equity, average equity to assets ratio and dividend payout ratio is included on page 13 of the Annual Report to Stockholders and is incorporated herein by reference. 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. 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. 5
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 is located at 146 Sung Chiang Road, Sixth Floor, Suite 3, Taipei, Taiwan, and consists of 1,806 square feet. The lease was renewed for three years from October 5, 1999 to October 4, 2002 for a monthly rent of approximately $3,500 based on the exchange rate in effect at December 31, 1999. CIC sold its property located in Garden Grove, California in April, 1999 for $1.05 million with a net gain of $394,000. As of December 31, 1999, CIC did not own any properties. 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 accomodates a platform area for consumer loans and certain business and commercial real estate loans, a new account area, 24 teller stations (including 16 regular tellers, seven commercial tellers, and one ATM), four pneumatic drive-up teller stations, one walk-up teller station, the branch's operations area and a vault 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 $15,000. Furthermore, 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, the parking lot lease and the lease for the CIC Taipei office, the Bank leases certain other premises. The following table depicts the location, square footage, purpose, lease term and monthly payment of each lease. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ Location Sq. ft. Purpose Lease term Monthly payment - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> 767 N. Hill Street 8,912 Administrative offices 2/98 - 1/01 $8,912 Los Angeles, CA (Rm 305-306, 308-309, 313-315,320)* - ------------------------------------------------------------------------------------------------------------------------ 767 N. Hill Street 1,800 Administrative offices 2/98 - 1/01 $1,800 Los Angeles, CA (Rm 301-302) - ------------------------------------------------------------------------------------------------------------------------ 16025 E. Gale Avenue 4,483 Hacienda Heights branch 7/99 - 6/04 with one $5,229 Suite B-1 office more 5-year option City of Industry, CA - ------------------------------------------------------------------------------------------------------------------------ 2010 Tully Road 4,800 San Jose branch office 3/96 - 4/06 with two $8,640 San Jose, CA 5-year options** - ------------------------------------------------------------------------------------------------------------------------ 710 Webster Street Oakland, CA 5,000 Oakland branch office 9/96 - 9/01 $6,000 - ------------------------------------------------------------------------------------------------------------------------ 47998 Warm Springs Blvd. 2,400 Fremont branch office 10/97 - 9/00 with one $3,613 Fremont, CA more 3-year option - ------------------------------------------------------------------------------------------------------------------------ </TABLE> 6
<TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ Location Sq. ft. Purpose Lease term Monthly payment - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> 15323 Culver Drive 4,450 Irvine branch office 4/89 - 4/09 with two $6,089 Irvine, CA 5-year options - ------------------------------------------------------------------------------------------------------------------------ 1095 El Camino Real 3,441 Millbrae branch office 1/00 - 12/04 with one $7,337 Millbrae, CA more 5-year option - ------------------------------------------------------------------------------------------------------------------------ 800 N. Hill Street 8,707 Administrative offices 2/99 - 2/04 $5,105 Los Angeles, CA - ------------------------------------------------------------------------------------------------------------------------ 43 E. Valley Blvd. 1,976 Valley/Stoneman branch 8/96 - 8/01 with three $4,412 Alhambra, CA office 5-year options - ------------------------------------------------------------------------------------------------------------------------ 3288 Pierce Street 2,535 Berkeley/Richmond branch 10/97 - 10/03 with two $6,591 Suite D-101 office 5-year options Richmond, CA - ------------------------------------------------------------------------------------------------------------------------ 420 W. Valley Blvd. 2,000 Previous Valley/Prospect 2/96 - 2/01 (subleased $4,193 (sublease San Gabriel, CA branch office 4/1/99 -2/14/01) rental income $2,500) - ------------------------------------------------------------------------------------------------------------------------ 1195 S. Diamond Bar Blvd. 2,500 Diamond Bar branch office 9/99 - 9/07 $5,875 Diamond Bar, CA - ------------------------------------------------------------------------------------------------------------------------ 45 E. Broadway 6,450 New York Chinatown branch 1/97 - 12/06 $25,500 New York, NY office - ------------------------------------------------------------------------------------------------------------------------ 10375 Richmond Avenue 1,797 Houston loan production 5/99 - 4/02 $3,414 Suite 1600 office Houston, TX - ------------------------------------------------------------------------------------------------------------------------ Room 902-3, 9/F 700 Hong Kong representative 1/00 - 1/03 with one $2,000 approximately Printing House office 2-year option based on the exchange 6 Duddell Street, Central rate in effect at Hong Kong 3/24/00 - ------------------------------------------------------------------------------------------------------------------------ </TABLE> * The lease referred to here has been entered into between the Bank and T.C. Realty, Inc., a California corporation owned by the spouse of Mr. Patrick Lee, a director of Bancorp and the Bank. Management believes that the lease is on terms at least as favorable to the Bank as would have existed in a transaction with an unrelated third party. ** Cathay Bank has a one-time right to cancel the lease after the fifth year upon the payment of $55,500 in consideration. The Bank currently operates 20 domestic branch offices, one loan production office in Houston, Texas, 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. The Houston loan production office currently does not have loan approval rights. All loans made at the Houston loan production office must be approved by the Loan Committee of the Bank's Board of Directors. 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, 1999, the Bank's investment in premises and equipment totaled $25,298,666. See also Note 8 to the Consolidated Financial Statements on page 52 of the Annual Report to Stockholders, which is incorporated herein by reference. On March 17, 2000, the Bank received title to the property which housed the Bank's Flushing branch office at a foreclosure sale. The Bank's investment in the Flushing property totaled approximately $4.2 million. 7
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 most of Cathay Bank's branch offices, is highly competitive. The Bank competes for deposits and loans with other commercial banks, savings and thrift institutions, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies and other financial and non-financial institutions and entities. In addition, the Bank also competes with other entities (both governmental and private industry) that are seeking to raise capital through the issuance and sale of debt and equity securities. Many of these institutions and entities offer services that are not offered directly by the Bank and have substantially greater financial resources than does the Bank. The direction of federal legislation in recent years seems to favor increased competition between different types of financial institutions and to foster new entrants into the financial services market. Competitive conditions are expected to continue to intensify as legislation is enacted which has the effect of dissolving historical barriers that limit participation in certain markets, increasing the cost of doing business for banks, or affecting the competitive balance between banks and other financial and non-financial institutions and entities. Technological factors, such as on-line banking and brokerage services, and economic factors can also be expected to have an ongoing impact on increasingly competitive conditions. 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 on week days, Saturday banking, and in certain locations Sunday banking, an internet website 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 correspondent 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 11 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, 1999, the Company and Cathay Bank (including CIC) employed approximately 547 persons, including 127 officers. None of the employees are represented by a union. Management believes that its relations with employees 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. 8
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 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. REGULATORY ENVIRONMENT The banking and financial services industry is heavily regulated. Regulations, statutes and policies affecting the industry are frequently under review by Congress and state legislatures, and by the federal and state agencies charged with supervisory and examination authority over banking institutions. Changes in the banking and financial services industry can be expected to occur in the future. Some of the changes may create opportunities for the Company and the Bank to compete in financial markets with less regulation. However, these changes also may create new competitors in geographic and product markets which have historically been limited by law to bank institutions, such as the Bank. Changes in the regulation, statutes or policies that impact the Company and the Bank cannot necessarily be predicted and may have a material adverse effect on their business and earnings. The operations of bank holding companies and their subsidiaries are affected by the credit and monetary policies of the Federal Reserve Bank (the "FRB"). An important function of the FRB is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the FRB to implement its objectives are open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets, and the level of inflation. The credit and monetary policies of the FRB will continue to have a significant effect on the Bank and on the Company. 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 9
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, 1999 with a leverage ratio of 8.93%. The tables presenting the Company and the Bank's risk-based capital and leverage ratios as of December 31, 1999 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 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 1999 the Company maintained its compliance with the requirements of Section 112 of FDICIA. Section 112 affects all banks having $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 10
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 authorized the increase of insurance premiums paid by FDIC-insured institutions. Title VI permitted the acquisition of thrifts by bank holding companies. Title IX enhanced the enforcement authority of all federal banking agencies, including their authority to levy civil money penalties and penalties on criminal offenses, and it also broadened the definition of insiders, to increase the types of persons subject to regulatory action. Title XI required appraisals used in making credit decision to be written and performed in accordance with generally accepted appraisal standards, as promulgated by the Appraisal Standards Board of the Appraisal Foundation, and to meet federal guidelines. Title XII expanded the recordkeeping requirements of reporting under the Home Mortgage Disclosure Act ("HDMA") to cover race, income and gender; changed the 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 required 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. 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), CIC has sold the Garden Grove property. The Bank is in compliance with these limitations. 11
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. The Riegle-Neal Act significantly relaxed or eliminated 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 allowed each state to adopt legislation to "opt-out" of these interstate merger provisions. Conversely, the Riegle-Neal Act permitted 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 provided for interstate banking and branching in California. This early opt-in legislation, which became effective on October 2, 1995, required out-of-state institutions which did 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 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 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 suitable opportunities present themselves. 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. 12
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 68,507 shares or $6,850,700 as of December 31, 1999. 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, 1999, the maximum dividend that Cathay Bank could have declared, subject to regulatory approval, was $55,892,000. 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. FINANCIAL SERVICES MODERNIZATION LEGISLATION On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Modernization Act"). The Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricts the affiliation of Federal Reserve member banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged' in specified securities activities. In addition, the Modernization Act also expressly preempts any state law restricting the establishment of financial affiliations, primarily related to insurance. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a "Financial Holding Company". "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities of a nature incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. 13
In order for the Company to take advantage of the ability provided by the Modernization Act to affiliate with other financial service providers, it would have to become a "Financial Holding Company." To do so, the Company would have to file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because its insured depository institution subsidiary (the Bank) is well-capitalized and well-managed. In addition, the Federal Reserve must also determine that Cathay Bank, as the insured depository institution subsidiary, has at least a "satisfactory" rating under the Community Reinvestment Act. The Company has not sought to become a Financial Holding Company. The Company will continue to monitor its strategic business plan to determine whether, based on market conditions and other factors, the Company wishes to take steps to use any of the expanded powers provided in the Modernization Act. The Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Modernization Act to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be well-capitalized, and the Bank would be subject to the same capital deduction, risk management and affiliate transaction rules as are applicable to national banks. Under the Modernization Act, securities firms and insurance companies that elect to become Financial Holding Companies may acquire banks and other financial institutions. To the extent that the Modernization Act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Modernization Act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Bank. The Modernization Act also provides consumers with new protections against the transfer and use of their nonpublic personal information by financial institutions. For example, customers of financial institutions gain new rights to "opt out" of having their personal financial information shared with unaffiliated third parties, subject to certain exceptions. These federal privacy protections do not prohibit state governments from imposing more protective rules, and a variety of such bills are currently pending in the California state legislature. Effective January 1, 1999, the FDIC's rules limiting the non-agency activities of state-chartered insured banks and their subsidiaries to those activities permissable to national banks were revised and liberalized, and these rules will likely undergo additional changes under the Modernization Act. Such non-agency activities, including real estate investment and securities activities, are and will continue to be subject to a variety of general and specific safety and soundness restrictions. The precise impact of the Modernization Act on the Company and the Bank will not be fully known until the last of the Modernization Act's phased effective dates occurs on November 12, 2004 and until regulatory agencies complete the promulgation of administrative regulations implementing many portions of the Act. The Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision issued a joint notice of proposed rulemaking on February 22, 2000 relating to proposed privacy rules under the Modernization Act. It can be expected that state regulatory authorities and/or legislatures may act in response to the Modernization Act. 14
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 1999. 15
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 38 and under the caption "Additional Information" on page 68 of the Annual Report to Stockholders is incorporated herein by reference. (b) Holders As of March 3, 2000, there were approximately 1,800 holders of record of the Company's Common Stock. (c) Dividends The information under the captions "Market for Cathay Bancorp, Inc. Stock" on page 38 and "Capital Resources" on page 31 and in Note 11 to the Consolidated Financial Statements on pages 54 through 56 of the 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 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 Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the captions "Liquidity and Market Risk" and "Interest Rate Sensitivity" on pages 31 through 34 of the 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 64 of the 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. 16
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Election of Directors" on pages 3 through 7 of the Company's definitive Proxy Statement relating to its 2000 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. 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. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 19 of the Company's Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Compensation of Directors", "Information Concerning Management Compensation" and "Compensation Committee Interlocks and Insider Participation" on pages 9 through 13 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 3 and "Election of Directors" on pages 3 through 7 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 7 and "Certain Transactions" on pages 19 and 20 of the Company's Proxy Statement is incorporated herein by reference. 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* <TABLE> <CAPTION> Page No. in Annual Report ------------- <S> <C> Consolidated Statements of Condition as of December 31, 1999 and 1998 39 Consolidated Statements of Income and Comprehensive Income for each of the years in the 3-year period ended December 31, 1999 40 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the 3-year period ended December 31, 1999 41 Consolidated Statements of Cash Flows for each of the years in the 3-year period ended December 31, 1999 42 Notes to Consolidated Financial Statements 43-63 Independent Auditors' Report of KPMG LLP 64 </TABLE> - ------------------- *Parent-only condensed financial information of the Company as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 is included in Note 16 to the Consolidated Financial Statements on pages 61 and 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. 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 Amended and Restated Cathay Bank Employee Stock Ownership Plan and Trust, each amended by the First Amendment, and Second Amendment thereto. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Amendment No.1 to Annual Report on Form 10-K/A for the year ended December 31, 1998 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 Equity Incentive Plan of the Company. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.* 13.1 Certain portions of the Registrant's 1999 Annual Report to Stockholders being incorporated herein by reference. 22.1 Subsidiaries of the Company 23.1 Consent of Independent Auditors 27 Financial Data Schedule * Management compensatory plan (b) Reports on Form 8-K There were no reportable events. 19
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 29, 2000 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. <TABLE> <CAPTION> Signature Title Date - --------- ----- ---- <S> <C> <C> /s/ Dunson K. Cheng President, Chairman of March 29, 2000 - ------------------------------------ the Board and Director Dunson K. Cheng (principal executive officer) /s/ Anthony M. Tang Executive Vice President, March 29, 2000 - ------------------------------------ Chief Financial Officer/ Anthony M. Tang Treasurer and Director (principal financial officer) (principal accounting officer) /s/ Ralph Roy Buon-Cristiani Director March 29, 2000 - ------------------------------------ Ralph Roy Buon-Cristiani /s/ Kelly L. Chan Director March 29, 2000 - ------------------------------------ Kelly L. Chan /s/ Michael M.Y. Chang Director March 29, 2000 - ------------------------------------ Michael M.Y. Chang </TABLE> [SIGNATURES CONTINUED] 20
[SIGNATURES CONTINUED] <TABLE> <CAPTION> Signature Title Date - --------- ----- ---- <S> <C> <C> /s/ George T.M. Ching Vice Chairman of the March 29, 2000 - ------------------------------------ Board and Director George T.M. Ching /s/ Wing K. Fat Director March 29, 2000 - ------------------------------------ Wing K. Fat /s/ Patrick S.D. Lee Director March 29, 2000 - ------------------------------------ Patrick S.D. Lee /s/ Chi-Hung Joseph Poon Director March 29, 2000 - ------------------------------------ Chi-Hung Joseph Poon /s/ Thomas G. Tartaglia Director March 29, 2000 - ------------------------------------ Thomas G. Tartaglia /s/ Wilbur K. Woo Secretary of the Board March 29, 2000 - ------------------------------------ and Director Wilbur K. Woo </TABLE> 21
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 Amended and Restated Cathay Bank Employee Stock Ownership Plan and Trust, each amended by the First Amendment, and Second Amendment thereto. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Amendment No.1 to Annual Report on Form 10-K/A for the year ended December 31, 1998 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 Equity Incentive Plan of the Company. Previously filed with the Securities and Exchange Commission as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.* 13.1 Certain portions of the Registrant's 1999 Annual Report to Stockholders being incorporated herein by reference. 22.1 Subsidiaries of the Company 23.1 Consent of Independent Auditors 27 Financial Data Schedule * Management compensatory plan (b) Reports on Form 8-K There were no reportable events.