Cathay General Bancorp
Annual Report 2000

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A n n u a l R e p o r t 2 0 0 0 New York California Texas About the cover: Cathay Bank is the largest Chinese- American financial institution offering full banking services in the three largest Chinese-American markets of the U.S.: California, New York and Texas. We are here. > Financial Highlights (dollars in thousands, except per share data) 2000 1999 Amount Percentage Increase (Decrease) For the Year Net income Net income per common share Basic Diluted Cash dividends paid per common share At Year-End Securities Loans, net Assets Deposits Stockholders’ equity Book value per common share Profitability Ratios Return on average assets Return on average stockholders’ equity Capital Ratios Tier 1 capital ratio Total capital ratio 1 Leverage ratio $ 38,587 $ 30,291 $ 8,296 27.39 % 4.26 4.25 0.880 3.36 3.36 0.805 0.90 0.89 0.075 26.79 26.49 9.32 $ $ 570,609 1,437,307 2,206,834 1,876,447 214,787 23.67 $ 587,323 1,245,585 1,995,924 1,721,736 179,109 19.83 (16,714) 191,722 210,910 154,711 35,678 3.84 (2.85)% 15.39 10.57 8.99 19.92 19.36 1.81% 20.09% 1.63% 18.31% 11.05% 12.25% 9.28% 10.50% 11.71% 8.93% 1 Total capital ratio represents stockholders’ equity plus the allowance for loan losses allowable as a percentage of risk-weighted assets. Net Income (in millions) Total Stockholders’ Equity (in millions) Total Assets (in millions) Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 1 Letter to Stockholders Dear Stockholders, > > > Another piece of our quest to build a nationwide Chinese-American banking network recently fell into place. On December 12, 2000, our Houston Loan Production Office was successfully converted to a full branch facility. Together with our New York acquisition in 1999, Cathay Bank now occupies a unique place in the Chinese-American banking market. It is the only Chinese-American institution that has full banking operations in the three states in America with the most Chinese-American population—California, New York and Texas. We believe this network will provide a valuable platform from which to expand our market share in the years to come. It places us in a better position to compete for those Asian busi- nesses whose scope spans the entire country. And, it offers geographic diversification in a business whose well-being is intimately entwined with the local economies in which it operates. We also believe that we have only taken the first step in this endeavor. New York devoted much of the first half of 2000 toward integrating its information systems and banking operations with our California headquarters. Then came the cross-pollination of our business cultures. The challenge for Houston, on the other hand, lies in building a branch network almost from the ground up. In both cases, we foresee the ultimate reward will come from an accumulation of many small, patient steps. 2 2 < You are here You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Letter to Stockholders > After the demise of so many dot com companies and the attendant evaporation of billions of dollars in investments, people are waking up to the fact that the New and Old Economies are separated by only a channel—a new and efficient delivery channel provided by the Internet. And, the Old Economy companies are just as adept at using this channel to provide products and services to their customers. Cathay Bank began offering its Internet banking services in September, 2000. Our corporate customers will find the Bank’s eCashManagement service contains all the tools a diligent CFO will need to manage his company’s finances efficiently. Our consumer customers will delight in the ease with which our eBanking package may be used. In February, 2001, Cathay Bank, in conjunction with Trade.com, became one of the first Chinese-American banks to offer Internet stock trading capability. With many of our customers scattered around the world, globalization of business through the Internet takes on a special meaning for us. > > > > Financially, our company completed another four quarters of year-over-year double-digit earn- ings growth in 2000. Our pretax income for the year increased by 21% over 1999, to $60.4 million, while net income after taxes increased 27%, to $38.6 million. The earnings per dilut- ed common share rose 27%, to $4.25, compared with $3.36 for the year 1999. The return on average equity improved from 18.31% in 1999 to 20.09% for 2000. This accomplishment was made all the more meaningful as our leverage ratio continued to strengthen, from 8.93% in 1999 to 9.28% by year-end 2000. We continue to believe that a strong balance sheet, com- bined with a healthy capital base, will enable our company to take advantage of acquisition opportunities that may come along and form a solid financial base for expanding its operations. The impetus for the earnings growth came from a 15% growth in net loans, to $1,437.3 mil- lion, and a 44% increase in non-interest income, to $12.8 million in 2000. On the other hand, our non-interest expense increased $8.2 million, or 27%, to $38.5 million in 2000, which was mostly attributable to our new out-of-state operations and to the new Diamond Bar branch. Our total assets ended the year at $2.2 billion, an increase of 11% over 1999, and our deposits increased $154.7 million, or 9%, to $1,876.4 million. In October, 2000, the Board of Directors approved a 19%, or 4-cent increase in the quarterly dividend, to 25 cents per share. This increase followed the 20% increase in April, 1999. Despite the successive increas- es in dividends, the company’s dividend pay-out ratio dropped from 24% in 1999 to 21% for 2000, and stockholders’ equity increased 20%, to $214.8 million in 2000. By all accounts, the U.S. economy will slow dramatically in 2001. As a result, this year will prove to be a challenging one. But, with your support and counsel, we’ll work to forge ahead in our combined efforts to make our company an even better one. Dunson K. Cheng Chairman of the Board and President Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 3 > > > > 4 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report > > > > Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 5 < < < < < < < we have Expanded 6 6 < You are here You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report > The Bank received recognition for its exceptional operating performance from a number of benchmarking agencies: Findley Reports, Sheshunoff Information Services, and Los Angeles Business Journal. > > > > > Year in Review In 2000, Cathay Bancorp, Inc. 1, the holding company of Cathay Bank, again demonstrated solid financial strength and leadership in the banking industry. With assets of $2.2 billion, Bancorp achieved its 18th consecutive quarter of year-over-year, double-digit earnings growth, reporting $38.6 million in net income, up 27% from 1999. The Bank received recognition for its exceptional operating performance from a number of benchmarking agencies. In May, it was rated a “Super Premier Performing Bank” by the Findley Reports, a nationally recognized bank research and rating firm headquartered in Anaheim, California. This rating is the highest given in California’s banking industry and places Cathay Bank among the top banks for safety, strength and performance. In addition, the Bank was ranked as the most efficient bank in California by Sheshunoff Information Services, and as the fifth-largest commercial bank in Los Angeles County by the Los Angeles Business Journal. In October, Cathay Bancorp, Inc. became a component of the Nasdaq Financial- 100 Index, listed on the Nasdaq National Market tier of the Nasdaq Stock Market. With Bancorp’s market capitalization of $557 million, Cathay Bank became the largest Chinese-American bank that focuses primarily on the California market. Branch Expansion and Customer Service In keeping with its market expansion strategy, the Bank converted its Houston loan production office to a full-service branch in December. Cathay Bank is the only Chinese-American financial institution offering full banking services to the burgeoning Asian communities in the three largest Chinese-American markets of the U.S.: California, New York and Texas. In 2000, the Bank focused strongly on customer service. It also continued to fos- ter progressive sales management and service training, implementing new programs to recognize and reward employee performance. As a result, employees learned more than the basic service skills; they learned to think like owners of the Bank, which motivated them to become more efficient and serve customers better. 1 The business activities of Bancorp consist primarily of the operations of the Bank. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here You are here > 7 7 > > > > > > > > In addition, Cathay Bank revised polices and streamlined procedures to improve the accuracy of customer transactions and make operations more efficient. It continued to upgrade and enhance its technological support systems, installing new teller systems at numerous branches to help front-line employees be more productive and expedite customer service by processing higher volumes of transactions. New Products and Services Cathay Bank further reinforced its commitment to technology by developing customer-friendly Internet banking services—Cathay eBanking and Cathay eCashManagement Services. Since their introduction, these services have helped hundreds of customers man- age their finances more efficiently and profitably. Customers can obtain on-line account information, pay bills, initiate wire and transfer funds, and meet other banking needs at the click of a mouse. Alternative Investment Services Cathay Global Investment Services continued to implement its long-term strategy of customer acquisition with efficient marketing and employee referral program. The department is acknowledged for its superior customer service, as well as for its understanding of Asian customers’ business needs. Cathay Global Investment Services offers a broad spectrum of investment vehi- cles, including mutual funds, annuities, bonds and money market accounts, through PrimeVest Financial Services. Building on its success, the Bank will expand its investment products and services to include term life insurance, estate planning, and asset management services in 2001. The investment service will extend its service area to New York, Houston, Hong Kong and Taiwan, expand- ing the Bank’s customer base. In February 2001, Cathay Bank, in conjunction with Trade.com, became one of the first Chinese-American banks to offer Internet stock trading services. International Banking Cathay Bank continues to be a major player in trade financing in California for the growing companies of the Pacific Rim. Fee income from international bank- ing services increased by 27%, with outstanding international loan commitments exceeding $265,952,000. The Bank’s leading-edge wire transfer service to China served close to 12,000 customers, totaling $26.1 million in transactions. Fee income increased 48.14% to $146,365. Another major source of fee generation within the international banking services was the Bank’s foreign exchange services. During the year, the number of commercial and retail transactions increased 11.89%. 8 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report There we are < we are Here > Texas.> York New d n a l banking services in the three largest Chinese-American markets of alifornia, U.S.: the C l u f g n i r e f f o n o i t u t i t s n i l a i c n a n i f n a c i r e m A - e s e n i h C y l n o e h t s i k n a B y a h t a C Real Estate Construction Lending > The Bank has been a provider of construction financing in the State of California and maintains long-standing relationships with many of California’s top develop- ers. Its portfolio is diversified by project type and borrower. In 2000, its Commercial Real Estate Department continued to generate outstanding, record- earning growth, with fee income expanding by 57.85%. Departmental profitabil- ity increased 82.75%. Some of the major construction loan projects included: n $28-million, commercial retail shopping center in Los Angeles n $27-million, “high-tech” campus facility in Richmond n $12-million, industrial complex in Carlsbad n $11-million, commercial/retail development in Aliso Viejo Town Center n $10-million, Courtyard by Marriott hotel in Los Altos Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 9 Community Involvement > > Cathay Bank puts a high premium on its relationship with the community, and demonstrates commitment at every level, from the involvement of individual staff, to a growing level of corporate contributions. In 2000, the Bank con- tributed nearly $80,000 to charitable organizations in support of human servic- es, community economic development, education, civic needs and other philan- thropic activities. To meet the credit needs of people in low-to-moderate income communities, the Bank participated in capital investments and loan pools of various community development corporations. To increase the availability of affordable housing, the Bank financed a $1-million construction loan for senior housing at Caesar Chavez Gardens and sponsored a $390,000 revitalization grant for the Pico Aliso public housing project. we are Profitable 1 9 9 9 . m fr o % 2 7 e, u p m n e t i n c o m illi o n i n $ 3 8 .6 r e p o rti n g , h t w o r g s g n i n r a e t i g i d - e l b u o d r, a e y - r e v o - r a e y f o $ $ $ $ $$ Bancorp achieved its 18th consecutive quarter 10 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report > In February 2001, Cathay Bank, in conjunc- tion with Trade.com, became one of the first Chinese-American banks to offer Internet stock trading services. > > > > > In 2000, the Los Angeles City Council established a Business Development District to revitalize Chinatown. Cathay Bank was instrumental in its formation, as it donated $100,000 to the Los Angeles Chinatown Business Council. Mr. Patrick Lee, a Cathay Bancorp, Inc. board member and Mr. Wilson Tang, a bank officer, worked with other community leaders to make it a reality. The funding is to eradicate graffiti, increase private security patrols, sweep sidewalks and oth- erwise improve the area for Los Angeles Chinatown’s 13,500 residents. To improve the economic well-being of the local community, the Bank also invest- ed a 99.9% limited partnership interest in the Wilshire Courtyard. This 102-unit housing facility is in close proximity to the Saint Barnabas Senior Center which houses special rooms for games, reading, classroom instruction and counseling for the urban elderly. It will be open for occupancy in April 2001. In addition, the Bank actively encourages and supports volunteerism on the part of its employees. Organized events such as the Chinatown American Heart Walk received enthusiastic support from officers and employees alike. Future Focus As it enters the new millennium, Cathay Bank is hopeful about its future growth. Its key growth objectives are to: n Build our branch network in New York and Texas; n Adopt new technology to deliver value-added products and services, and to utilize technology to streamline and automate operations for greater efficiency; n Enhance Internet banking and on-line investment services; and n Expand offering of investments products. With its strong balance sheet and management stability, Cathay Bank believes that it is well positioned to meet the many challenges that 2001 will bring. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here You are here > 11 11 Financial Information 13 Selected Consolidated Financial Data 14 Management’s Discussion and Analysis of Financial Condition and Results of Operations 41 Market for Cathay Bancorp, Inc. Stock 42 Distribution of Assets, Liabilities and Stockholders’ Equity 43 Consolidated Statements of Condition 44 Consolidated Statements of Income and Comprehensive Income 45 Consolidated Statements of Changes in Stockholders’ Equity 46 Consolidated Statements of Cash Flows 47 Notes to Consolidated Financial Statements 70 Independent Auditors’ Report Selected Consolidated Financial Data (dollars in thousands, except share and per share data) Income Statement 1 Interest income Interest expense Net interest income before provision for loan losses Provision for loan losses Net interest income after provision for loan losses Securities gains (losses) Other non-interest income Non-interest expense $ $ $ $ $ Income before income tax expense Income tax expense Net income Net income per common share Basic Diluted Cash dividends paid per common share Weighted average common shares Basic Diluted Statement of Condition Securities available-for-sale Securities held-to-maturity Net loans 2 Total assets Deposits Securities sold under agreements to repurchase Advances from Federal Home Loan Bank Stockholders’ equity Common Stock Data Year ended December 31, 2000 1999 1998 1997 1996 $ 164,553 74,156 $ 133,046 57,408 $ 123,309 57,225 $ 111,978 50,874 $ 86,098 39,209 90,397 4,200 86,197 1,085 11,671 38,504 60,449 21,862 75,638 4,200 66,084 3,600 71,438 (3) 8,858 30,282 50,011 19,720 62,484 43 8,093 30,065 40,555 15,976 61,104 3,600 57,504 41 6,734 30,928 33,351 13,243 46,889 3,600 43,289 22 5,837 28,013 21,135 7,819 38,587 $ 30,291 $ 24,579 $ 20,108 $ 13,316 4.26 4.25 0.880 9,056,751 9,073,885 183,409 387,200 1,437,307 2,206,834 1,876,447 $ $ $ $ 3.36 3.36 0.805 9,013,428 9,017,760 160,991 426,332 1,245,585 1,995,924 1,721,736 $ $ $ $ 2.74 2.74 0.700 8,967,188 8,968,393 239,928 418,156 961,876 1,780,898 1,560,402 $ $ $ $ 2.26 2.26 0.625 $ $ $ 1.66 1.66 0.600 8,915,936 8,915,936 8,017,398 8,017,398 216,158 350,336 846,151 1,622,462 1,449,121 $ 383,391 210,129 744,384 1,504,329 1,364,740 68,173 10,000 214,787 46,990 30,000 179,109 16,436 30,000 156,652 23,419 — 135,877 10,000 — 118,446 Shares of common stock outstanding Book value per share 9,074,365 23.67 $ 9,033,583 19.83 $ 8,988,760 17.43 $ 8,941,743 15.20 $ 8,878,144 13.34 $ Profitability Ratios Return on average assets Return on average stockholders’ equity Dividend payout ratio Average equity to average assets ratio Efficiency ratio 1.81% 1.63% 1.44% 1.29% 1.05% 20.09 20.66 9.03 37.33 18.31 23.95 8.89 35.84 17.00 25.55 8.47 40.51 15.63 27.65 8.25 45.20 13.06 36.14 8.04 53.11 1 Includes the operating results of First Public Savings Bank, F.S.B. subsequent to the November 18, 1996, its acquisition date, and the selected assets and assumed deposits and liabilities of Golden City Commercial Bank subsequent to the December 10, 1999, their acquisition date. 2 Net loans represents gross loans net of loan participations sold, unamortized deferred loan fees and the allowance for loan losses. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 13 Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition of Cathay Bancorp, Inc. (“Bancorp”) and its subsidiary Cathay Bank (the “Bank” and together the “Company” or “we”, “us” or “our”) and their consolidated results of operations. It should be read in conjunction with the audited consolidated financial statements and footnotes appearing elsewhere in this report. The following discussion, and other sections of this report, include forward-looking statements regarding manage- ment’s beliefs, projections and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, also include words such as “believes”, “expects”, “anticipates”, “intends”, “plans”, “estimates” or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking state- ments. Such factors include, among other things, adverse developments or conditions related to or arising from: n Our expansion into new market areas. n Fluctuations in interest rates. n Demographic changes. n Increases in competition. n Deterioration in asset or credit quality. n Changes in the availability of capital. n Adverse regulatory developments. n Changes in business strategy or development plans, including plans regarding the registered investment company. n General economic or business conditions. n Other factors discussed in the section entitled “Factors that May Affect Future Results” later in this report. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, we caution readers not to place undue reliance on any forward-looking statements, which speak as of the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events. Results of Operations We reported net income of $38.6 million or $4.25 per diluted common share for 2000, compared with $30.3 million or $3.36 per diluted common share for 1999 and $24.6 million or $2.74 per diluted common share for 1998. In 2000, pre-tax income increased $10.4 million or 21% to $60.4 million. The increases in 2000 were primarily due to the following: n A $14.8 million or 20% increase in net interest income before provision for loan losses. n A $3.9 million or 44% increase in non-interest income. n A $8.2 million or 27% increase in non-interest expense. In 1999, pre-tax income increased $9.5 million or 23% to $50.0 million. The increase in net interest income was primarily attributable to growth in interest and fees on loans. The return on average assets and return on average stockholders’ equity are presented below for the three years indicated: Return on average assets Return on average stockholders’ equity 2000 1999 1998 1.81% 20.09% 1.63% 18.31% 1.44% 17.00% 14 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report The increases in interest income, interest expense and net interest margin in 2000 and 1999 are discussed below: Year 2000 Interest Income Interest income increased $31.5 million or 24% to $164.6 million in 2000 primarily due to an increase of $32.6 million from interest income on loans to $126.3 million. The $32.6 million increase in interest income on loans was primarily attributable to the following: n Increase in volume: Average net loans grew $224.6 million or 21% from $1,088.6 million in 1999 to $1,313.2 million in 2000. The growth contributed an additional $20.8 million to interest income. The increase in average net loans was funded primarily by growth in deposits, and secondarily by Federal funds purchased, securities sold under agreements to repurchase and proceeds from matured securities. n Increase in rate: Average loan yield increased 101 basis points from 8.61% to 9.62%. This contributed $11.8 million to interest income. The increase in average loan yield was mainly a result of six consecutive interest rate increases by the Federal Reserve Board from the third quarter of 1999 to the second quarter of 2000, which led to a 124 basis point increase in our average reference rate from 8.24% to 9.48%. A majority of the Bank’s loans reprice immediately. n A change in the mix of interest earning assets: Loan demand remained strong in 2000. Average net loans, which yield higher than other types of investments, rose from 61.9% to 68.5% as a percentage of total inter- est earning assets. In comparison, average securities declined from 35.9% to 30.9% and average Federal funds sold and securities purchased under agreements to resell decreased from 2.2% to 0.6% as a percentage to total interest earning assets. Consequently, the average taxable equivalent yield on interest earning assets increased 95 basis points from 7.66% to 8.61%. Interest Expense Interest expense increased $16.7 million or 29% to $74.2 million, which was primarily attributable to an increase of $13.2 million in interest expense on time deposits. Average time deposits grew $115.5 million or 12% to $1,117.4 million, of which $78.3 million were from time deposits over $100,000. n n The increase in average time deposits added $5.8 million to interest expense. The increase of 70 basis points in the average rate on time deposits from 4.69% to 5.39% added $7.5 million to interest expense. This was primarily due to the repricing of time deposits in response to the market rate changes. Interest expense also increased on Federal funds purchased and securities sold under agreements to repurchase by $2.2 million in 2000. The increase was due to increase in average volume to $23.8 million and increase in average rate by 131 basis points from 4.99% to 6.30%. Accordingly, average cost of funds increased 60 basis points from 3.80% to 4.39%. Net Interest Margin As a result of the factors noted above, the net interest margin, defined as taxable equivalent net interest income to average interest-earning assets, increased 38 basis points from 4.39% in 1999 to 4.77% in 2000. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 15 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Year 1999 Interest Income Interest income increased $9.7 million or 8% to $133.0 million in 1999 largely resulting from a $10.9 million increase in interest income on loans. The $10.9 million increase in loan interest income was primarily due to a combination of the following: n Increase in volume: Average net loans grew $181.0 million or 20% to $1,088.6 million in 1999, which was funded primarily from increases in average deposits and secondarily from increases in other borrowed funds, proceeds from maturities of securities and cash. The increase in loan volume contributed an additional $15.8 million to interest income. n Decrease in rate: The average yield on loans decreased 52 basis points from 9.13% in 1998 to 8.61% in 1999, which reduced the loan interest income by $4.9 million. The decrease in the average loan yield was pri- marily due to a 36 basis point drop in our average reference lending rate from 8.60% to 8.24% as a result of the Federal Reserve Board’s fiscal policies. Another factor leading to lower average loan yield in 1999 was the increased competition in our marketplace. Yields on other categories of interest-earning assets decreased as well due to the prevailing interest rate environment. As a result, the taxable equivalent average yield on interest-earning assets decreased 28 basis points to 7.66% in 1999 from 7.94% in 1998. Interest Expense Average cost of funds decreased 35 basis points from 4.15% in 1998 to 3.80% in 1999. The decrease in average cost of funds was substantially attributable to a decline of 37 basis points in average cost of deposits from 4.10% in 1998 to 3.73% in 1999. The decrease in average cost of deposits helped reduce $4.5 million in interest expense. The decrease in interest expense due to rate reduction was partially offset by $3.7 million, due to an increase of $108.8 million in average interest bearing deposits from $1,317.5 million to $1,426.4 million. Average balance on Federal Home Loan Bank advances increased $23.0 million, which added $1.1 million to interest expense in 1999. Net Interest Margin As a result of average cost of funds decreasing more than average yield on interest bearing assets, the net interest margin increased 9 basis points from 4.30% in 1998 to 4.39% in 1999. Net Interest Income Net interest income before provision for loan losses for 2000, 1999 and 1998 are summarized below: Net interest income before provision for loan losses Net interest income before provision for loan losses, tax equivalent 2000 1999 1998 $ $ 90,397 92,132 $ $ 75,638 77,301 $ $ 66,084 67,375 16 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Changes Due to Rate and Volume 1 (in thousands) Interest Earning Assets Federal funds sold and securities purchased under agreements to resell Securities available-for-sale 2000-1999 Increase (Decrease) in Net Interest Income Due to: 1999-1998 Increase (Decrease) in Net Interest Income Due to: Changes in Rate Changes in Volume Total Change Changes in Rate Changes in Volume Total Change $ 389 $ (1,584) $ (1,195) $ (442) $ (1,627) $ (2,069) (Taxable) 1,441 1,147 2,588 (533) (2,400) (2,933) Securities available-for-sale (Nontaxable) 2 Securities held-to-maturity (Taxable) Securities held-to-maturity (Nontaxable) 2 Agency preferred stock 2 Federal Home Loan Bank stock Deposits with other banks Loans 3 1 14 15 5 (12) (7) 150 (2,985) (2,835) (948) 3,947 2,999 (47) — 145 4 11,801 60 314 (50) 23 20,756 13 314 95 27 32,557 (231) — (31) (5) (4,918) 1,461 — 26 (15) 15,832 1,230 — (5) (20) 10,914 Total $ 13,884 $ 17,695 $ 31,579 $ (7,103) $ 17,212 $ 10,109 Interest Bearing Liabilities Savings deposits, NOW accounts and others $ Time deposits Securities sold under agreements to repurchase Other borrowed funds Advances from Federal Home Loan Bank Mortgage indebtedness $ 943 7,468 $ 606 5,766 1,549 13,234 $ (1,934) $ (2,563) $ 140 3,513 (1,794) 950 169 — 3 (7) (820) 2,874 (251) (3) (651) 2,874 (248) (10) (193) 3 4 12 123 (8) 1,117 (31) (70) (5) 1,121 (19) 183 9,926 Total Changes in net interest income $ $ 8,576 5,308 $ $ 8,172 9,523 $ $ 16,748 14,831 $ $ (4,671) $ 4,854 (2,432) $ 12,358 $ $ 1 Changes in interest income and interest expense attributable to changes in both rate and volume have been allocated proportionately to changes due to rate and changes due to volume. 2 The amount of interest earned on certain securities of states and political subdivisions and other securities held have been adjusted to a fully taxable equivalent basis, using effective Federal income tax rate of 35%. 3 Amounts are net of unamortized deferred loan fees of $4,139,000 in 2000, $3,593,000 in 1999 and $3,631,000 in 1998. Interest Earning Asset Mix (dollars in thousands) Types of Interest Earning Assets Federal funds sold and securities purchased under agreements to resell Securities available-for-sale Securities held-to-maturity Deposits with other banks Loans (net of unamortized deferred loan fees and allowance for loan losses) As of December 31, 2000 As of December 31, 1999 Percentage of Total Interest Amount Earning Assets Percentage of Total Interest Amount Earning Assets Amount Changed from 1999 to 2000 Percentage Changed from 1999 to 2000 $ 19,000 183,409 387,200 899 0.94% $ 9.04 19.09 0.04 5,000 160,991 426,332 568 0.27% 8.76 23.19 0.03 14,000 22,418 (39,132) 331 280.00% 13.93 (9.18) 58.27 1,437,307 70.89 1,245,585 67.75 191,722 15.39 Total interest earning assets $2,027,815 100.00% $1,838,476 100.00% 189,339 10.30% Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 17 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued The following table sets forth information concerning average interest earning assets, average interest bearing liabilities, and the yields on those assets and liabilities. Average outstanding amounts included in the table are daily averages. Interest Earning Assets and Interest Bearing Liabilities (dollars in thousands) Interest Earning Assets: Federal Funds Sold and Securities Purchased Under Agreements to Resell Average outstanding Average yield Amount of interest earned Securities Available-for-Sale, Taxable Average outstanding Average yield Amount of interest earned Securities Available-for-Sale, Nontaxable Average outstanding Average yield 2 Amount of interest earned Securities Held-to-Maturity, Taxable Average outstanding Average yield Amount of interest earned Securities Held-to-Maturity, Nontaxable Average outstanding Average yield 2 Amount of interest earned Agency Preferred Stock Average outstanding Average yield 2 Amount of interest earned Federal Home Loan Bank Stock Average outstanding Average yield Amount of interest earned Deposits with Other Banks Average outstanding Average yield Amount of interest earned Loans 1 Average outstanding Average yield 5 Amount of interest earned 5 Total Interest Earning Assets Average outstanding Average yield 5 Amount of interest earned 5 Year ended December 31, 2000 1999 1998 $ $ 11,053 6.21% 686 $ $ 38,013 4.95% 1,881 $ $ 69,915 5.65% 3,950 $ 197,004 6.49% 12,790 $ $ 178,188 5.73% 10,202 $ $ 219,556 5.98% 13,135 $ $ $ 510 8.24% 42 $ $ 345 7.83% 27 $ $ 499 6.73% 34 $ 330,841 6.20% 20,504 $ $ 378,753 6.16% 23,339 $ $ 315,257 6.45% 20,340 $ $ $ $ $ $ $ $ $ 69,478 7.41% 5,149 3,398 9.24% 314 5,858 7.27% 426 1,124 3.56% 40 $ $ $ $ $ $ $ $ 68,702 $ 7.48% 5,136 $ 48,757 7.92% 3,906 — $ — — $ — — — 6,309 5.25% $ 331 $ 5,841 5.75% 336 459 2.83% 13 $ $ 958 3.44% 33 $1,313,177 $1,088,578 $ 907,627 9.13% 82,866 9.62% $ 126,337 8.61% 93,780 $ $ $1,932,443 $1,759,347 $1,568,410 7.94% $ 124,600 7.66% $ 134,709 8.61% $ 166,288 18 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Interest Earning Assets and Interest Bearing Liabilities continued (dollars in thousands) Interest Bearing Liabilities: Savings Deposits 3 Average outstanding Average rate paid Amount of interest paid or accrued Time Deposits Average outstanding Average rate paid Amount of interest paid or accrued Securities Sold Under Agreements to Repurchase Average outstanding Average rate paid Amount of interest paid or accrued Other Borrowed Funds Average outstanding Average rate paid Amount of interest paid or accrued Advances from Federal Home Loan Bank Average outstanding Average rate paid Amount of interest paid or accrued Mortgage Indebtedness Average outstanding Average rate paid 6 Amount of interest paid or accrued 6 Total Interest Bearing Liabilities Average outstanding Average rate paid Amount of interest paid or accrued Net interest earnings 7 Net yield on interest earnings assets 4,7 Yield spread 7 Year ended December 31, 2000 1999 1998 $ 463,695 1.67% 7,761 $ $ 424,500 1.46% 6,212 $ $ 417,105 1.92% 8,006 $ $1,117,350 $1,001,878 $ 900,441 5.11% 46,000 4.69% 46,950 5.39% 60,184 $ $ $ $ $ $ $ $ $ $ 39,831 5.31% 2,115 44,297 6.49% 2,876 24,809 4.86% 1,206 160 8.75% 14 $ $ $ $ $ $ $ $ $ 55,486 4.99% 2,766 $ 53,104 5.34% 2,836 33 6.06% 2 30,000 4.85% 1,454 183 13.11% 24 $ $ $ $ $ $ 181 3.87% 7 6,959 4.79% 333 440 9.77% 43 $1,690,142 $1,512,080 $1,378,230 4.15% 57,225 3.80% 57,408 4.39% 74,156 $ $ $ $ $ 92,132 4.77% 4.22% 77,301 4.39% 3.86% $ 67,375 4.30% 3.79% 1 Nonaccrual loans are included in the average balances. 2 The average yield has been adjusted to a fully taxable equivalent basis for certain securities of states and political subdivisions and other securities held using an effective Federal income tax rate of 35%. 3 Savings deposits include NOW accounts and money market accounts. 4 Calculated by dividing Net Interest Earnings by Average Outstanding Interest Earning Assets. 5 Yields and amounts of interest earned include loan fees. 6 Yield and amount of interest paid or accrued include interest paid on senior debts of other real estate owned, either to bring the loans current or to pay off the loans when the Company obtained title to the properties and thereafter. 7 Net interest earnings, net yield on earning assets and yield spread have been adjusted to a fully taxable equivalent basis using an effective Federal income tax rate of 35%. Provision for Loan Losses Management provided an additional $4.2 million for loan losses in each of 2000 and 1999, and an additional $3.6 million in 1998. Net charge-offs were $1.7 million for 2000, $668,000 for 1999 and $3.0 million for 1998. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Non-interest Income Non-interest income totaled $12.8 million in 2000, $8.9 million in 1999 and $8.1 million in 1998. The increase of $3.9 million or 44% from 1999 to 2000 was primarily due to the following: n A $1.1 million unrealized gain on a Forward Rate Agreement (“FRA”) contract that was included in securities gains. The FRA was entered into on August 31, 2000 and settled on March 5, 2001. n A $1.1 million increase in wire transfer fees due to increased transaction volume largely from our New York branches. We have operated these branches since December 1999. n Increases in non-interest income due to normal growth of operations including, among others, increases in safe deposit box income, fees and charges related to loans and letter of credit commissions. Fee income from Cathay Global Investment Services’ alternative investment program increased in 2000. This program was established in September 1999, and the year 2000 was its first full year of operation. The increase of $719,000 or 9% from 1998 to 1999 primarily resulted from the following: n n n Increase in letter of credit commissions due to increased transaction volume. Increase in fees and charges related to loans. Increase in wire transfer fees and miscellaneous income. n Partially offsetting the above increases were decreases in service charges due to the Bank’s outsourcing of its merchant bank card portfolio in the third quarter of 1998. Non-interest Expense Non-interest expense amounted to $38.6 million in 2000, $30.3 million in 1999 and $30.1 million in 1998. The $8.2 million or 27% increase in the 2000 non-interest expense was substantially attributable to the operations of the two new New York branches, which we have been operating since December 1999, and the new Diamond Bar branch in California, which opened for business in January 2000. The more significant items are discussed below: n An increase of $3.6 million in salaries and employee benefits. The increase included additional payroll expense for the three new branches described above, annual salary adjustments and an additional $1.1 million in year-end bonuses in 2000. n An increase of $1.2 million in net other real estate owned (“OREO”) expense. The Bank recorded $1.5 million in net gains on sales of OREO properties in 1999 versus $263,000 in net gains on disposal in 2000. n An increase of $1.1 million in other operating expense. These expenses included primarily operating supplies, communications, postage, travel, administrative, amortization of goodwill and general insurance expenses. The increase in these expenses was partially related to the growth of our operations, including the three new offices. n An increase of $350,000 in operations of investments in real estate. This was due to higher expense in opera- tions of investments in real estate arising from operational losses on low income housing. n An increase of $460,000 in professional services expense. Professional services expenses consisted of, among other things, bank paid appraisal fees, delivery service, armored service, legal fees, accounting fees, consult- ing fees, computer related expense, facility management expense and fees related to the formation of the reg- istered investment company. Due to the foregoing, the efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, increased to 37.33% in 2000 compared with 35.84% in 1999. From 1998 to 1999, non-interest expense increased $217,000 or 0.7% primarily due to the following: n An increase of $1.1 million in salaries and employee benefits. This was resulted primarily from higher year- end bonus expense and overall annual salary increases. n A decrease of $572,000 in other operating expense. The decrease in other operating expense was primarily due to the Bank’s outsourcing of its merchant bank card portfolio in the third quarter of 1998. n An increase of $291,000 in net OREO income. The Bank realized $1.5 million in gains on sale of OREO properties leading to a net OREO income of $1.4 million in 1999, compared with $1.1 million of net OREO income in 1998. The efficiency ratio improved from 40.51% in 1998 to 35.84% in 1999. 20 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Income Tax Expense Our effective tax rates were 36.17% in 2000, 39.43% in 1999 and 39.39% in 1998. The decline in our 2000 effective tax rate was due primarily to the impact of the formation of a registered investment company subsidiary that provides flexibility to raise additional capital in a tax efficient manner. The long-term plan for the registered investment company is currently under review. There can be no assurance that the subsidiary will continue to be a registered investment company, that any past tax benefit will continue or as to our timing or ability to raise capital through this subsidiary. Financial Condition Overview We continued our steady growth during 2000. Changes of the major balance sheet items during 2000 are listed below: n n Total assets increased 11% to $2,206.8 million. Total net loans grew 15% to $1,437.3 million. n Securities available-for-sale increased 14% to $183.4 million. n Securities held-to-maturity decreased 9% to $387.2 million. n n Total deposits increased 9% to $1,876.4 million. Federal funds purchased and securities sold under agreements to repurchase increased 45% to $68.2 million. n Stockholders’ equity rose 20% to $214.8 million. Securities Under our investment policy, we classify the Bank’s investment securities portfolio as follows: n n Those securities which we have the positive intent and ability to hold until maturity are classified as securities held-to-maturity, and carried at amortized cost. Those securities may be sold in response to changes in interest rates, changes in prepayment risk, increases in loan demand, the need to increase regulatory capital, general liquidity needs, or other similar factors are classified as securities available-for-sale, and carried at estimated fair value, with unrealized gains or losses, net of tax, reflected in stockholders’ equity. n Securities held-to-maturity are transferred to the available-for-sale category when they are within 90 days of maturity to further enhance the Bank’s liquidity. Securities available-for-sale increased $22.4 million or 14% to $183.4 million at year-end 2000 from $161.0 million at year-end 1999. Securities held-to-maturity decreased $39.1 million or 9% to $387.2 million at year-end 2000 from $426.3 million at year-end 1999. Average securities as a whole decreased $25 million or 4% to $607.1 million from 1999 to 2000 primarily due to proceeds from some matured or called securities not being reinvested to meet strong loan demand. Management constantly seeks to maximize the yields on interest-earning assets within the Company’s investment guidelines. As a result, we increased our holdings of U.S. government agencies and corporate bonds with longer maturities at year-end 2000 compared with year-end 1999. The average taxable equivalent yield on securities rose 28 basis points to 6.45% in 2000, compared to 6.17% in 1999 as some matured securities were replaced at higher prevailing interest rates. At year-end 2000, we had $4.0 million in unrealized holding gains on securities available-for-sale compared with unrealized holding losses of $1.7 million at year-end 1999. These unrealized holding gains or losses, net of tax effect, were included in the Company’s stockholders’ equity for the periods reported. The unrealized holding gains, net of tax, were $2.3 million at year-end 2000 and the unrealized holding losses, net of tax, were $1.0 million at year-end 1999. The unrealized holding gains at year-end 2000 resulted from the decreasing interest rate environ- ment in the fourth quarter of 2000. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued The following table summarizes the carrying value of our portfolio of securities for each of the past three years: (in thousands) Securities Available-for-Sale: U.S. Treasury securities U.S. government agencies State and municipal securities Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Federal Home Loan Bank stock Commercial paper Corporate bonds Equity securities Total Securities Held-to-Maturity: U.S. Treasury securities U.S. government agencies State and municipal securities Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Corporate bonds Total As of December 31, 2000 1999 1998 $ — $ 78,317 1,277 13,207 5,804 10,370 5,613 — 60,370 8,451 25 40,218 540 14,634 7,823 16,448 6,851 40,076 34,376 — $ 2,014 103,020 22,317 18,266 14,159 8,220 5,991 29,945 35,996 — $ 183,409 $ 160,991 $ 239,928 $ — $ 64,689 68,820 135,494 48,694 13,156 56,347 24,998 64,373 68,834 133,282 63,397 19,999 51,449 $ 26,026 54,426 61,495 146,018 83,535 — 46,656 $ 387,200 $ 426,332 $ 418,156 The scheduled maturities and taxable equivalent yields by security type are presented in the following tables: Securities Available-for-Sale Portfolio Maturity Distribution and Yield Analysis: (dollars in thousands) Maturity Distribution: U.S. government agencies State and municipal securities Mortgage-backed securities 2 Collateralized mortgage obligations 2 Asset-backed securities 2 Corporate bond Equity securities Federal Home Loan Bank stock Total Weighted Average Yield: U.S. government agencies States and municipal securities 1 Mortgage-backed securities 2 Collateralized mortgage obligations 2 Asset-backed securities 2 Corporate bond Equity securities Federal Home Loan Bank stock Total As of December 31, 2000 One Year or Less After One Year to Five Years After Five Years to Ten Years Over Ten Years $ — $ 1,277 2,214 — 462 11,496 8,451 5,613 $ 17,081 — 512 — — 41,691 — — $ 61,236 — 1,696 2,618 9,908 7,183 — — — $ — 8,785 3,186 — — — — Total 78,317 1,277 13,207 5,804 10,370 60,370 8,451 5,613 $ 29,513 $ 59,284 $ 82,641 $ 11,971 $ 183,409 —% 8.52 4.43 — 6.48 5.47 6.76 7.15 6.16% 8.00% — 6.06 — — 6.82 — — 7.15% 7.27% — 6.59 6.08 5.70 7.56 — — 7.04% —% — 7.34 6.49 — — — — 7.09% 7.43% 8.52 6.65 6.30 5.74 6.64 6.76 7.15 6.95% 1 Average yield has been adjusted to a fully-taxable equivalent basis. 2 Securities reflect stated maturities and not anticipated prepayments. 22 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Securities Held-to-Maturity Portfolio Maturity Distribution and Yield Analysis: (dollars in thousands) Maturity Distribution: U.S. government agencies State and municipal securities Mortgage-backed securities 2 Collateralized mortgage obligations 2 Asset-backed securities 2 Corporate bonds Total Weighted Average Yield: U.S. government agencies State and municipal securities 1 Mortgage-backed securities 2 Collateralized mortgage obligations 2 Asset-backed securities 2 Corporate bonds Total As of December 31, 2000 One Year or Less After One Year to Five Years After Five Years to Ten Years Over Ten Years Total $ — $ 2,312 1,140 — — 4,001 $ $ 54,699 8,961 7,410 — 13,156 42,150 9,990 23,667 60,042 39,234 — 10,196 — $ 64,689 68,820 135,494 48,694 13,156 56,347 33,880 66,902 9,460 — — $ 7,453 $ 126,376 $ 143,129 $ 110,242 $ 387,200 —% 7.21 5.91 — — 6.95 6.87% 6.17% 8.71 6.25 — 5.61 5.91 6.21% 7.53% 7.96 6.14 6.64 — 7.38 6.74% —% 6.71 7.05 6.39 — — 6.89% 6.38% 7.42 6.60 6.59 5.61 6.14 6.61% 1 Average yield has been adjusted to a fully-taxable equivalent basis. 2 Securities reflect stated maturities and not anticipated prepayments. Loans Loan demand remained strong throughout year 2000. Total gross loans grew $194.7 million or 15% to $1,463.4 million at year-end 2000, compared with $1,268.7 million at year-end 1999. The growth was primarily attributable to the following: n Real estate construction loans increased $79.5 million or 127% to $142.0 million. Although the California economy began to moderate in the third quarter of 2000, it still continued to be strong compared to other regions in the country. Consequently, construction loan demand increased for both residential and commercial real estate in California in 2000. Our construction loan projects are located primarily in California and sec- ondarily in Texas and Nevada. The construction loan projects in Texas and Nevada totaled approximately $19 million. As of December 31, 2000, we had approximately $58 million in construction loan commitments. n Commercial mortgage loans increased $53.1 million or 9% to $630.7 million. Commercial mortgage loans are typically secured by first deeds of trust on the respective commercial properties, including primarily commer- cial retail properties, shopping centers and owner-occupied industrial facilities, and secondarily office build- ings, multiple-unit apartments, hotels and motels. The Company’s underwriting policy for commercial mortgage loans generally requires that the loan-to-value ratio at the time of origination not exceed 70 percent of the appraised value of the property, and that there be an adequate debt service coverage ratio. In view of recent general economic slowdown, management has tightened the lending standards for commercial mortgage loans as well as construction loans. n Commercial loans gained $47.0 million or 12% to $442.2 million. Commercial loans are for general business purposes and include short-term loans to finance trade. General business loans are made based on the finan- cial strength of the borrowers. Trade finance loans are typically secured by companies’ accounts receivables and inventories. We target our commercial lending to small-to-medium businesses and professionals for their working capital needs. n Residential mortgage loans advanced $13.2 million or 6% to $220.7 million. These loans included home equity lines of $33.8 million. The growth in residential mortgage loans in 2000 was largely due to new purchases. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 23 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Our Board of Directors establishes the basic lending policy for the Bank. Each loan is generally considered in terms of, among other things, character, repayment ability, financial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower’s business or proj- ect, and prevailing economic trends and conditions. For real estate loans, our lending policy requires an independ- ent appraisal on real estate property in accordance with regulatory guidelines. The classification of loans by type as of December 31 for each of the past five years, as well as the changes in loan portfolio composition for the past two years and the contractual maturity of the loan portfolio as of December 31, 2000 are presented below: Loan Type and Mix (in thousands) 2000 1999 1998 1997 1996 Amount outstanding as of December 31, Type of Loans: Commercial loans Residential mortgage loans Commercial mortgage loans Real estate construction loans Installment loans Other loans Gross loans Less Unamortized deferred loan fees Allowance for loan losses $ 442,181 $ 220,720 630,662 142,048 27,329 473 395,138 $ 207,725 577,384 62,516 25,498 419 370,539 $ 184,158 356,608 40,738 29,165 269 338,285 $ 154,692 303,725 41,736 26,611 267 283,894 134,966 285,349 33,510 23,551 385 1,463,413 1,268,680 981,477 865,316 761,655 (4,139) (21,967) (3,593) (19,502) (3,631) (15,970) (3,786) (15,379) (3,742) (13,529) Net loans $ 1,437,307 $ 1,245,585 $ 961,876 $ 846,151 $ 744,384 Changes in Loan Portfolio Composition (dollars in thousands) Type of Loans: Commercial loans Residential mortgage loans Commercial mortgage loans Real estate construction loans Installment loans Other loans Unamortized deferred loan fees Allowance for loan losses As of December 31, 2000 As of December 31, 1999 $ Amount 442,181 220,720 630,662 142,048 27,329 473 (4,139) (21,967) Percentage of Total Loans 30.77% $ 15.36 43.88 9.88 1.90 0.03 (0.29) (1.53) Amount 395,138 207,725 577,384 62,516 25,498 419 (3,593) (19,502) Percentage of Total Loans Percentage Increase (Decrease) 31.72% 16.68 46.35 5.02 2.05 0.03 (0.29) (1.56) 11.91% 6.26 9.23 127.22 7.18 12.89 15.20 12.64 Net loans $ 1,437,307 100.00% $ 1,245,585 100.00% 15.39% 24 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Contractual Maturity of Loan Portfolio 1,2 (in thousands) Commercial Loans Floating rate Fixed rate Real Estate Residential Mortgage Loans Floating rate Fixed rate Real Estate Commercial Mortgage Loans Floating rate Fixed rate Real Estate Construction Loans Floating rate Fixed rate Installment Loans Floating rate Fixed rate Other Loans Floating rate Fixed rate Total loans Floating rate Fixed rate Total loans Allowance for loan losses Net loans Within One Year One to Five Years Over Five Years Total $ 298,443 56,379 $ 43,488 13,900 $ 14,582 14,923 $ 356,513 85,202 81 234 525 8,633 49,263 161,254 49,869 170,121 40,126 8,533 176,431 49,044 269,157 85,248 485,714 142,825 93,459 13,576 — 7,516 — 469 34,193 — 29 19,784 — — — — — — — 4 127,652 13,576 29 27,300 — 473 $ 518,816 $ 346,027 $ 594,431 $1,459,274 $ 432,109 86,707 $ 254,666 91,361 $ 333,002 261,429 $1,019,777 439,497 $ 518,816 $ 346,027 $ 594,431 $1,459,274 (21,967) $1,437,307 1 In the normal course of business, loans are renewed, extended or prepaid from time to time; therefore, the above should not be viewed as an indication of future cash flows. 2 Loans are net of unamortized deferred loan fees. Risk Elements of the Loan Portfolio Non-performing Assets Non-performing assets include loans past due 90 days or more and still accruing interest, nonaccrual loans, and OREO. Our non-performing assets decreased $1.3 million or 6% to $20.5 million at year-end 2000 as compared to $21.8 million at year-end 1999. The decrease was due to a combination of the following: n A decrease of $3.1 million in loans past due 90 days or more and still accruing interest. n An increase of $1.0 million in nonaccrual loans. n An increase of $837,000 in OREO. As a percentage of gross loans plus OREO, our non-performing assets decreased to 1.39% at year-end 2000 from 1.71% at year-end 1999. The non-performing loan coverage ratio, defined as the allowance for loan losses to non- performing loans, increased to 143.72% at year-end 2000, which was considerably higher than that of 111.95% at year-end 1999. This was primarily due to the reduction of $2.1 million in the non-performing loans from $17.4 mil- lion to $15.3 million. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business, man- agement becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agree- ments. Such loans are placed under close supervision with consideration given to placing the loan on nonaccrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. Our policy is to place loans on a nonaccrual status if interest and principal or either interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on nonaccrual status, any interest accrued in the previous three months, is generally reversed against current income. The payment received is generally first applied towards the principal. Depending on the cir- cumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opin- ion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. The following table presents the breakdown of total nonaccrual, past due and restructured loans for the past five years: Nonaccrual, Past Due and Restructured Loans (dollars in thousands) 2000 1999 1998 1997 December 31, Accruing loans past due 90 days or more Nonaccrual loans Total non-performing loans Real estate acquired in foreclosure Total non-performing assets Troubled debt restructurings 1 Non-performing assets as a percentage of gross loans and other real estate owned at year-end Allowance for loan losses as a percentage $ $ $ 589 14,696 15,285 5,174 20,459 4,531 $ $ $ 3,724 13,696 17,420 $ 4,683 13,090 $ 2,373 16,886 $ 17,773 19,259 4,337 10,454 13,269 1996 2,050 9,305 11,355 18,854 21,757 4,581 $ $ 28,227 $ 32,528 $ 30,209 4,642 $ 4,874 $ 3,201 1.39% 1.71% 2.85% 3.70% 3.87% of non-performing loans 143.72% 111.95% 89.86% 79.85% 119.15% 1 Troubled debt restructurings are accruing interest at their restructured terms. The effect of nonaccrual loans and troubled debt restructurings on interest income for the years 2000, 1999, 1998, 1997 and 1996 is presented below: (in thousands) Nonaccrual Loans Contractual interest due Interest recognized Net interest foregone (in thousands) Troubled Debt Restructurings Contractual interest due Interest recognized Net interest foregone 2000 1999 1998 1997 1996 $ 1,408 627 $ 1,396 234 $ 1,395 112 $ 1,845 471 1,121 268 781 $ 1,162 $ 1,283 $ 1,374 $ 853 2000 1999 1998 1997 1996 $ 422 407 $ 429 414 $ 421 412 $ 406 387 15 $ 15 $ 9 $ 19 $ 339 311 28 $ $ $ $ 26 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Nonaccrual Loans Nonaccrual loans were $14.7 million at year-end 2000 and $13.7 million at year-end 1999. They consisted mainly of $9.5 million in commercial loans and $4.9 million in commercial mortgage loans at year-end 2000, and $6.8 million in commercial loans and $6.2 million in commercial mortgage loans at year-end 1999. The following tables present the type of properties securing the loans and the type of businesses the borrowers engaged in under commercial mortgage and commercial nonaccrual loan categories as of the dates indicated: (in thousands) Type of Property Single/multi-family residence Commercial Land UCC Others Unsecured Total Type of Business Real estate development Real estate management Wholesale/retail Food/restaurant Import Motel Investments Manufacturing Others Total December 31, 2000 Nonaccrual Loan Secured by Real Estate Property December 31, 1999 Nonaccrual Loan Secured by Real Estate Property Commercial Mortgage Commercial Commercial Mortgage Commercial $ $ 174 2,277 2,403 — — — $ 531 1,139 — 7,083 540 231 $ 1,014 4,971 — — 186 — 628 5,425 — — 307 392 $ 4,854 $ 9,524 $ 6,171 $ 6,752 December 31, 2000 Nonaccrual Loan Balance December 31, 1999 Nonaccrual Loan Balance Commercial Mortgage Commercial Commercial Mortgage Commercial $ $ 2,648 — 174 — — — 2,032 — — $ 166 — 4,798 2,005 2,092 — — 220 243 $ 354 4,366 — — 621 425 334 — 71 347 100 896 889 3,307 — — 270 943 $ 4,854 $ 9,524 $ 6,171 $ 6,752 Commercial Mortgage Nonaccrual Loans n n The balance of $2.3 million consisted of four credits secured by first trust deeds on respective commercial properties. The balance of $2.4 million represented one credit secured by first trust deed on land. Commercial Nonaccrual Loans n n The balance of $7.1 million comprised eight credits secured by borrowers’ assets, mainly accounts receivables and inventories. The balance of $1.1 million consisted of five credits secured primarily by first trust deeds on commercial buildings and warehouses. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 27 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Troubled Debt Restructurings A troubled debt restructuring is a formal restructure of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date. Our troubled debt restructurings decreased slightly to $4.5 million at year-end 2000, compared with $4.6 million at year-end 1999. All of the troubled debt restructurings at year-end 2000 were commercial mortgage loans and were accruing interest under their revised terms. Impaired Loans A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. We consider all loans classified and restructured in our evaluation of loan impairment. The classified loans are stratified by size, and loans less than our defined selection criteria are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. If the measurement of the impaired loan is less than the recorded amount of the loan, we then recog- nize an impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the pro- vision for loan losses. We identified impaired loans with a recorded investment of $27.8 million at year-end 2000, compared to $26.3 million at year-end 1999. The average balance of impaired loans was $29.5 million and interest collected on impaired loans totaled $2.1 million in 2000. Loan Concentration We have no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as of December 31, 2000. See “Factors That May Affect Future Results” below for a discussion of some of the factors that may affect the matters discussed in this Section. Allowance for Loan Losses The allowance for loan losses amounted to $22.0 million or 1.50% of total loans at year-end 2000, representing an increase of $2.5 million or 13% over the $19.5 million or 1.54% of total loans at year-end 1999. The Bank recorded net charge-offs of $1.7 million in 2000, up from $668,000 in 1999. Nonetheless, the non-performing coverage ratio increased to 143.72% in 2000, up from 111.95% in 1999 primarily due to a reduction of $2.1 million in the non-performing loans. The tables below present information relating to the allowance for loan losses, charge-offs, and recoveries by loan type for the past five years: Allowance for Loan Losses Amount outstanding as of December 31, (dollars in thousands) 2000 1999 1998 1997 1996 Balance at beginning of year Allowance from acquisition Provision for loan losses Loans charged-off Recoveries of charged-off loans $ $ 19,502 — 4,200 (1,905) 170 $ 15,970 — 4,200 (1,731) 1,063 $ 15,379 — 3,600 (3,519) 510 $ 13,528 — 3,600 (2,139) 390 12,742 1,644 3,600 (5,388) 930 Balance at end of year $ 21,967 $ 19,502 $ 15,970 $ 15,379 $ 13,528 Average loans outstanding during year ended Ratio of net charge-offs to average loans $1,313,177 $1,088,578 $ 907,639 $ 792,176 $ 579,634 outstanding during the year 0.13% 0.06% 0.33% 0.22% 0.77% Provision for loan losses to average loans outstanding during the year Allowance to non-performing loans at year-end Allowance to total loans at year-end 0.32% 143.72% 1.50% 0.39% 111.95% 1.54% 0.40% 89.86% 1.63% 0.45% 79.85% 1.78% 0.62% 119.15% 1.78% 28 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Loans Charged-off by Loan Type 1 (dollars in thousands) Commercial loan Percentage of total commercial loans Real estate loan Percentage of total real estate loans Installment and other loan Percentage of total installment and other loans Total loans charged-off 1 Percentages were calculated based on year-end balances. Recoveries by Loan Type (in thousands) Commercial loan Real estate loan Installment and other loan Total $ $ $ $ $ $ Year ended December 31, 2000 537 0.12% 1,066 0.11% 302 1.09% $ $ $ 1999 1,116 0.28% 388 0.05% 227 0.88% $ $ $ 1998 2,394 0.65% 873 0.15% 252 0.86% $ $ $ 1997 1,387 0.41% 574 0.11% 178 0.66% $ $ $ 1996 4,010 1.41% 1,177 0.26% 201 0.84% 1,905 $ 1,731 $ 3,519 $ 2,139 $ 5,388 Year ended December 31, 2000 74 3 93 $ 1999 761 181 121 $ 1998 188 280 42 $ 1997 219 111 60 $ 170 $ 1,063 $ 510 $ 390 $ 1996 640 205 85 930 We have established a monitoring system for our loans that seeks to identify impaired and potential problem loans and to permit periodic evaluation of impairment and the adequacy of the allowance for loan losses in a timely man- ner. The monitoring system and methodology have evolved over a period of years, and loan classifications have been incorporated into the determination of the level of allowance. This monitoring system and allowance methodology include a loan-by-loan analysis for significant classified loans and loss factors for the balance of the portfolio that are based on historical loss trend analysis relative to our unclassified portfolio, other factors such as current portfo- lio delinquency and trends, and other inherent risk factors including economic conditions and concentrations in the portfolio risk levels of particular loan categories. Our allowance for loan losses consists of the following: n Specific allowances: For impaired loans, we provide specific allowances based on an evaluation of impairment. For other classified loans, we allocate a portion of the general allowance to each impaired loan based on a loss percentage assigned. The percentage assigned depends on a number of factors including the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral, charge- off history, management’s knowledge of the portfolio and general economic conditions. n General allowance: The unclassified portfolio is categorized by loan types. The allocation is arrived by assign- ing a loss percentage to each loan type based on an evaluation of the degree of inherent risk, potential loan losses and other significant risk factors inherent in the loans. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 29 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued The following tables present a breakdown of impaired loans and the related allowances as of the dates indicated: 2000 (in thousands) Commercial Commercial mortgage Other Total 1999 (in thousands) Commercial Commercial mortgage Other Total Recorded Investment Allowance $ $ 13,868 13,208 742 $ 3,682 1,881 133 Net Balance 10,186 11,327 609 $ 27,818 $ 5,696 $ 22,122 Recorded Investment Allowance $ $ 12,686 13,412 181 $ 1,831 1,912 181 Net Balance 10,855 11,500 — $ 26,279 $ 3,924 $ 22,355 We allocate the allowance for loan losses to the major loan categories as set forth in the following table. These allo- cations are estimates based on historical loss experience and management’s judgment. The allocation of the allowance for loan losses is not necessarily an indication that the charge-offs will occur, or if they do occur, that they will be in the proportion indicated in the following table: 2000 Percentage of loans in each category to average gross loans Amount 1999 Percentage of loans in each category to average gross loans Amount As of December 31, 1998 Percentage of loans in each category to average gross loans Amount 1997 Percentage of loans in each category to average gross loans Amount 1996 Percentage of loans in each category to average gross loans Amount $10,231 30.00% $8,546 35.06% $7,468 38.58% $7,480 39.20% $6,190 37.27% (dollars in thousands) Type of Loans: Commercial loans Residential mortgage loans 808 15.61 1,743 18.15 1,901 18.46 1,549 17.81 1,517 17.72 Commercial mortgage loans 8,564 45.25 7,781 39.95 5,815 35.16 5,439 35.07 5,424 37.47 Real estate construction loans Installment loans Other loans 1,855 380 129 7.11 1.99 0.04 843 464 125 4.30 2.46 0.08 365 414 7 4.77 2.98 0.05 401 356 154 4.80 3.09 0.03 294 72 31 4.40 3.09 0.05 Total $21,967 100.00% $19,502 100.00% $15,970 100.00% $15,379 100.00% $13,528 100.00% Based on our evaluation process and the methodology to determine the level of the allowance for loan losses men- tioned previously, management believes the allowance for loan losses to be adequate as of December 31, 2000 to absorb estimable and probable losses identified through its analysis. See “Factors That May Affect Future Results” below for a discussion of some of the factors that may affect the matters discussed in this Section. Other Real Estate Owned Our OREO, net of a valuation allowance of $131,000, was carried at $5.2 million at year-end 2000 compared with OREO, net of a valuation allowance of $614,000, being carried at $4.3 million at year-end 1999. 30 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report During 2000, we acquired six properties in the amount of $5.3 million and disposed of nine properties totaling $5.0 million with a net gain of $263,000. There were five outstanding OREO properties at year-end 2000, which included land, commercial buildings, and a single family residence. All properties are located in California. We maintain a valuation allowance for OREO properties to reduce the carrying value of OREO to the estimated fair value of the properties less estimated costs to sell. We perform periodic evaluations on each property and make corresponding adjustments to the valuation allowance, if necessary. Any decline in value is recognized by a corre- sponding increase to the valuation allowance in the current period. Management provided approximately $71,000 to the provision for OREO losses in 2000. We recognized net income of $185,000 in 2000, $1.4 million in 1999 and $1.1 million in 1998 from operating our OREO properties. Net gains on sales of OREO properties was $263,000 in 2000, $1.5 million in 1999 and $1.0 million in 1998. In addition to the gains on sales, we also received rental income of $311,000 in 2000, $575,000 in 1999 and $748,000 in 1998. These amounts were partially offset by operating expenses of $318,000 and the provision for OREO losses of $71,000 in 2000, by operating expenses of $369,000 and the provision for OREO losses of $339,000 in 1999 and by operating expenses of $426,000 and the provision for OREO losses of $195,000 in 1998. Although the California real estate market continued to show strength in 2000, the market started to moderate in the last quarter and may continue to slow in future periods. The future performance of the market is unpredictable. See “Factors That May Affect Future Results” below for a discussion of some of the factors that may affect the mat- ters discussed in this Section. The following table shows the OREO expense by type for years 2000, 1999 and 1998: (in thousands) Operating expense (income) Provision for losses Net gain on disposal Total 2000 7 71 (263) $ 1999 (206) $ 339 (1,549) 1998 (321) 195 (999) (185) $ (1,416) $ (1,125) $ $ Investments in Real Estate Investments in real estate increased $361,000 to $17.3 million at year-end 2000, from $17.0 million at year-end 1999. They consisted of investments in four limited partnerships formed for the pur- pose of investing in low income housing projects, which qualify for Federal low income housing tax credits and/or California tax credit. The following table summarizes the composition of investments in real estate as of the dates indicated: (dollars in thousands) Las Brisas Los Robles California tax credit fund Wilshire Courtyard Percentage of Ownership Acquisition Date December 31, 2000 1999 49.50% 99.00% 36.00% 99.90% $ $ 12/93 08/95 03/99 05/99 189 393 14,127 2,639 209 431 14,841 1,506 $ 17,348 $ 16,987 Deposits Total deposits increased $154.7 million or 9% from $1,721.7 million at year-end 1999 to $1,876.4 mil- lion at year-end 2000. n Core deposits increased $65.1 million or 6%. Contributing to the growth in core deposits were primarily increases in demand deposits and money market accounts arising from various bank promotions. Time deposits under $100,000 also increased $17.3 million, which contributed to 26% of the increase of core deposits. n Time deposits of $100,000 or more (“Jumbo CDs”) increased $89.6 million or 13%. The growth was largely attributable to deposits received from the State of California in the fourth quarter of 2000, totaling $68 million. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 31 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued The following table displays the deposit mix for the past three years and average deposits and rates for the past five years: Deposit Mix Year ended December 31, (dollars in thousands) Amount Percentage Amount Percentage Amount Percentage 2000 1999 1998 Demand NOW accounts Money market accounts Savings deposits Time deposits under $100 Time deposits of $100 or more $ 221,805 125,647 119,805 231,761 379,809 797,620 11.82% $ 6.70 6.38 12.36 20.24 42.50 195,140 121,394 97,821 236,764 362,553 708,064 11.33% $ 7.05 5.68 13.75 21.06 41.13 178,068 114,982 113,869 207,365 326,968 619,150 11.41% 7.37 7.30 13.29 20.95 39.68 Total $ 1,876,447 100.00% $ 1,721,736 100.00% $ 1,560,402 100.00% Average deposits grew $197.6 million or 12% from $1,595.4 million in 1999 to $1,793.0 million in 2000. n Average core deposits increased $119.3 million or 13%. n Average Jumbo CDs increased $78.3 million or 12%. The following table displays average deposits and rates for the past five years: Average Deposits and Rates (dollars in thousands) 2000 1999 1998 1997 1996 Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage Demand $ 211,975 —% $ 169,013 —% $ 166,657 —% $ 148,907 —% $ 121,952 NOW accounts 122,851 1.2 117,374 1.2 111,900 1.4 114,453 1.5 96,759 —% 1.5 Money market accounts 112,817 2.3 99,628 1.6 99,833 2.1 97,470 2.3 100,898 2.3 Savings deposits 228,027 Time deposits 1,117,350 1.6 5.4 207,498 1,001,878 1.5 4.7 205,372 900,441 2.1 5.1 216,840 820,310 2.2 5.1 151,284 632,211 2.3 5.0 Total $1,793,020 3.8% $1,595,391 3.3% $1,484,203 3.6% $1,397,980 3.6% $1,103,104 3.5% As interest rate spreads broadened between Jumbo CDs and other types of interest-bearing deposits under the pre- vailing interest rate environment, our Jumbo CD portfolio continued to grow faster than other types of deposits. Management believes our Jumbo CDs are generally less volatile primarily due to the following reasons: n Approximately 50% of the Bank’s Jumbo CDs have stayed with the Bank for more than two years. n n The Jumbo CD portfolio continued to be diversified with 4,318 individual accounts averaging approximately $173,000 per account owned by 3,048 individual depositors as of January 19, 2001. This phenomenon of having a relatively higher percentage of Jumbo CDs to total deposits exists in most of the Asian American banks in our California market due to the fact that the customers in this market tend to have a higher savings rate. Management continues to monitor the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the patrons the Bank is servicing. To discourage the concentration in Jumbo CDs, management has continued to make efforts in the following areas: n n n n To offer non-competitive interest rates paid on Jumbo CDs. To offer new transaction-based products, such as the tiered money market accounts. To promote transaction-based products from time to time, such as demand deposits. To seek to diversify the customer base by branch expansion and/or acquisition as opportunities arise. 32 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report The following tables display time deposits of $100,000 or more by maturity and time deposits with remaining term of more than one year at December 31, 2000: Time Deposits of $100 or More by Maturity (in thousands) Less than three months Three to six months Six to twelve months Over one year Total At December 31, 2000 $ 384,775 242,355 164,436 6,054 $ 797,620 Maturities of Time Deposits with a Remaining Term of More Than One Year at December 31, 2000 for Each of the Five Years Following December 31, 2000 (in thousands) 2002 2003 2004 2005 2006 Total $ 13,450 5,463 249 82 16 $ 19,260 Capital Resources We obtain capital primarily from retained earnings and to a lesser extent, the issuance of addi- tional common stock through our Dividend Reinvestment Plan and options exercised. Stockholders’ equity amounted to $214.8 million or 9.73% of total assets as of year-end 2000, compared with $179.1 million or 8.97% of total assets at year-end 1999. The increase of $35.7 million in stockholders’ equity was primarily due to the following: n An addition of $38.6 million from net income, less dividends paid of $8.0 million. n $1.7 million from the issuance of additional common stock through the Dividend Reinvestment Plan and from the exercise of stock options. n A favorable difference of $3.3 million in the net unrealized holding gains and the net unrealized holding losses on securities available-for-sale, net of tax. We paid a cash dividend of $0.21 per common share in January on 9,033,583 shares outstanding, in April on 9,044,685 shares outstanding and in July 2000 on 9,054,782 shares outstanding. In October 2000, the Board of Directors authorized and paid a cash dividend of $.25 per share, an increase of $.04 or 19% per common share, on 9,064,486 shares outstanding. Total cash dividends paid in 2000 amounted to $8.0 million. On February 19, 1998 our Board of Directors adopted an “Equity Incentive Plan” (“the Plan”) which was approved by our stockholders at the Annual Meeting of Stockholders in 1998. The Plan will expire on February 18, 2008. n On September 17, 1998, we granted 45,000 options to purchase 45,000 shares of common stock with an exercise price of $33.00 per share to eligible senior officers and directors. n On January 20, 2000, we granted 55,000 options to purchase 55,000 shares of common stock with an exer- cise price of $42.50 per share to eligible officers and directors. n On January 18, 2001, we granted 55,500 options to purchase 55,500 shares of common stock with an exer- cise price of $60.19 per share to eligible officers and directors. Management seeks to retain the Company’s capital at a level sufficient to support future growth, to protect depositors and stockholders, to absorb any unanticipated losses and to comply with various regulatory requirements. The primary measure of capital adequacy is based on the ratio of risk-based capital to risk weighted assets. At year-end 2000, our Total capital ratio was 12.25%, our Tier 1 capital ratio was 11.05% and our Tier 1 leverage ratio was 9.28%. At year-end 1999, our Total capital ratio was 11.71%, our Tier 1 capital ratio was 10.50% and our Tier 1 leverage ratio was 8.93%. These capital ratios not only exceeded the regulatory minimum requirements but also Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 33 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued placed the Company in the “well capitalized” category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio equal to or greater than 5.0%. A table displaying the Company and the Bank’s capital and leverage ratios at year-end 2000 and 1999 is includ- ed in Note 11 to consolidated financial statements. Liquidity and Market Risk Liquidity Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and cus- tomer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. The Bank’s principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, Federal funds purchased and securities sold under agreements to repurchase and advances from Federal Home Loan Bank (“FHLB”). The Bank’s liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) decreased to 30.76% at year-end 2000, compared with 33.91% at year-end 1999. The decrease was due to a combination of: n A reduction of $6.9 million in net cash, short-term and marketable securities. n An increase of $153.6 million in net deposit and short-term liabilities. To supplement its liquidity needs, the Bank maintains a total credit line of $52 million for Federal funds with three correspondent banks, repo lines of $110 million with three brokerage firms and a retail certificate of deposit line of five percent of total deposits with another brokerage firm. The Bank is also a shareholder of FHLB which enables the Bank to have access to lower cost FHLB financing when necessary. The Bank obtained non-callable advances from FHLB totaling $30 million in the third quarter of 1998 at fixed interest rates, $20 million of which expired during the third quarter of 2000. We had significant portion of our time deposits maturing within one year or less as of December 31, 2000. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competi- tion in our marketplaces. However, based on our historical runoff experience, we expect the outflow will be minimal and can be replenished through our normal growth in deposits. Management believes all the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs. Bancorp, on the other hand, obtains funding for its activities primarily through dividend income contributed by the Bank and proceeds from investments in the Dividend Reinvestment Plan and the exercise of stock options. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. The business activities of Bancorp con- sist primarily of the operation of the Bank with limited activities in other investments. Management believes Bancorp’s liquidity generated from its prevailing sources are sufficient to meet its operational needs. Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. Our principal market risk is the interest rate risk inherent in our lending, investing and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same extent, or on the same basis. We actively monitor and manage our interest rate risk through analyzing the repricing characteristics of our loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse effects of changes in interest rates on our earnings, and ultimately the underlying market value of equity, while structuring our asset-lia- bility composition to obtain the maximum spread. Management uses certain basic measurement tools in conjunction with established risk limits to regulate its interest rate exposure. Due to the limitations inherent in any individual risk management tool, we use both an interest rate sensitivity analysis and a simulation model to measure and quan- tify the impact to our profitability or the market value of our assets and liabilities. The interest rate sensitivity analysis details the expected maturity and repricing opportunities mismatch or sensi- tivity gap between interest-earning assets and interest-bearing liabilities over a specified timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During peri- ods of increasing interest rates, net interest margin may be enhanced with a positive gap. A negative gap exists 34 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of increasing interest rates, net interest margin may be impaired with a negative gap. The following table indicates the maturity and rate sensitivity of our interest-earning assets and interest-bearing liabilities as of December 31, 2000. Our exposure as reflected in the table, represents the estimated difference between the amount of interest-earning assets and interest-bearing liabilities repricing during future periods based on certain assumptions. The interest rate sensitivity of our assets and liabilities presented in the table may vary if different assumptions were used or if actual experience differs from the assumptions used. As seen from the table, we were asset sensitive with a cumulative gap ratio of a positive 18.13% within three months, and liability sensitive with a cumulative gap ratio of a negative 9.78% within one year at year-end 2000, compared with a positive 16.25% within three months, and a negative 9.78% within one year at year-end 1999. Interest Rate Sensitivity (dollars in thousands) Interest Earnings Assets: Cash and due from banks Federal funds sold and securities purchased under agreements to resell Securities available-for-sale Securities held-to-maturity Loans: Commercial loans Residential mortgage loans Commercial mortgage loans Real estate construction loans Installment loans Other loans Total loans 1 Non-interest earning assets, net December 31, 2000 Interest Rate Sensitivity Period 0 to 90 Days 91 to 365 Days 1 Year to 5 Years Over 5 Years Non-interest Sensitive Total $ 844 $ 55 $ — $ — $ 64,788 $ 65,687 19,000 16,176 — 373,556 49,901 488,082 139,645 3,744 450 1,055,378 — — 13,338 7,453 30,184 226 5,381 — 3,800 12 39,603 — — 59,283 126,376 13,941 8,646 49,197 — 19,727 — — 94,612 253,371 14,975 161,694 85,552 — — 4 — — — — — — — — — 19,000 183,409 387,200 432,656 220,467 628,212 139,645 27,271 466 91,511 262,225 — 1,448,717 — — 102,821 102,821 Total assets $ 1,091,398 $ 60,449 $ 277,170 $ 610,208 $ 167,609 $ 2,206,834 Interest Bearing Liabilities: Deposits: Demand Money market and NOW 2 Savings 2 TCDs under $100 TCDs $100 and over $ — $ — $ — $ 18,302 17,318 183,327 404,265 49,518 60,042 179,392 387,338 104,222 100,242 17,009 6,017 — $ 221,805 $ 221,805 245,452 — 231,761 — 379,809 — 797,620 — 73,410 54,159 81 — Total deposits 623,212 676,290 227,490 127,650 221,805 1,876,447 Securities sold under agreements to repurchase Advances from Federal Home Loan Bank Non-interest bearing other liabilities Stockholders’ equity 68,173 — — — — — — — — 10,000 — — — — — — — — 37,427 214,787 68,173 10,000 37,427 214,787 Total liabilities & stockholders’ equity $ 691,385 $ 676,290 $ 237,490 $ 127,650 $ 474,019 $ 2,206,834 Interest sensitivity gap $ 400,013 $ (615,841) $ 39,680 $ 482,558 $ (306,410) $ Cumulative interest sensitivity gap $ 400,013 $ (215,828) $ (176,148) $ 306,410 $ — $ Gap ratio (% of total assets) 18.13% (27.91)% 1.80% 21.87% (13.88)% Cumulative gap ratio 18.13% (9.78)% (7.98)% 13.88% — — — — — 1 Loans are gross of unamortized deferred loan fees and the allowance for loan losses. Nonaccrual loans are included in non-earning assets. Adjustable loans are included in the “0 to 90 days” category, as they are subject to an interest adjustment depending upon terms of the loans. 2 The Company’s own historical experience and decay factors are used to estimate the money market and NOW, and savings deposit runoff. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 35 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued Since interest rate sensitivity analysis does not measure the timing differences in the repricing of assets and lia- bilities, we use a simulation model to quantify the extent of the differences in the behavior of the lending and fund- ing rates, so as to project future earnings or market values under alternative interest scenarios. The simulation measures the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments. We establish a tolerance level in our policy to define and limit interest income volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the tolerance level is met or exceeded, we then seek corrective action after considering, among other things, market conditions, customer reac- tion and the estimated impact on profitability. The following table presents the estimated impacts of immediate changes in interest rates at the specified levels at December 31, 2000. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used. Changes in Interest Rates (in basis points) +200 +100 -100 -200 Percentage Change in: Net Interest Income 1 Net Portfolio Value 2 14.59 % 7.80 (6.63) (13.38) (27.14)% (13.95) 12.53 25.00 1 The percentage change represents net interest income for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios. 2 The percentage change represents net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in various rate scenarios. In 2000, we entered into a limited number of derivative financial instruments in order to mitigate the risk of interest rate exposures related to our interest earning assets and interest bearing liabilities. We believe that these transac- tions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the balance and against identified risk in specific transactions. In such instances, the Bank may protect its position through the purchase or sale of future contracts for a specific cash or interest rate risk position. Other hedge transactions may be implemented using interest rate swaps, interest rate caps, floors, financial futures, forward rate agreements, and options on futures or bonds. Prior to considering any off-balance sheet hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All off-balance sheet hedges require an assessment of basis risk and must be approved by the Bank’s Investment Committee. In the first quarter of 2000, we entered into an interest rate swap agreement with a major financial institution in the notional amount of $20 million for a period of five years. The interest rate swap was for the purpose of hedging a portion of our floating rate loans against declining interest rates. In the third quarter of 2000, we entered into a forward rate agreement (“FRA”) with a major financial institution in the notional amount of $100 million with a term of six months. The FRA was for the purpose of hedging a portion of our Jumbo CD portfolio against declining interest rates. We recognized $1.1 million unrealized gain on the FRA as of December 31, 2000. The FRA settled on March 5, 2001. The following table shows our financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments’ fair values at December 31, 2000. For assets, expected maturities are based on contractual maturity. For liabilities, we use our historical experience and decay factors to estimate the deposit runoffs of interest bearing transactional deposits. Off-balance sheet commitments to extend credit, letters of credit and bill of lading guarantees represent the contractual unfunded amounts. Off-balance sheet financial instru- ments represent the underlying notional amounts. We use certain assumptions to estimate fair values and expected maturities. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used. 36 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Expected Maturity Date at December 31, 2000 As of Dec, 31, 2000 As of Dec.31, 1999 2001 2002 2003 2004 2005 Thereafter Total Fair Value Total Fair Value Average Interest Rate (dollars in thousands) Interest-Sensitive Assets: Federal funds sold and 6.18% $ securities purchased under agreements to resell Mortgage-backed securities and collateralized mortgage obligations 6.69% 6.42% Investment securities Federal Home Loan Bank stock Loans Commercial Real estate mortgage Real estate 19,000 $ — $ — $ — $ — $ — $ 19,000 $ 19,000 $ 5,000 $ 5,000 3,354 27,999 31 28,861 — 64,801 7,891 40,322 — 191,923 43,753 156,061 203,199 361,797 204,007 362,445 219,436 362,773 215,592 355,375 6.64% 5,613 — — — — — 5,613 5,613 6,851 6,851 9.71% 349,481 14,304 12,614 23,219 6,386 29,060 435,064 434,854 388,551 380,466 9.10% 48,237 57,417 44,755 63,378 65,551 556,418 835,756 828,645 770,313 754,727 construction Installment & others 9.88% 8.46% 105,424 7,864 33,678 3,317 — 5,870 — 6,761 — 3,569 — 4 139,102 27,385 139,949 27,508 61,203 25,518 59,717 24,426 Interest-Sensitive Liabilities: Other interest bearing deposits Time deposits Federal funds purchased and securities sold under agreements to repurchase Advances from Federal Home Loan Bank Off-Balance Sheet Financial Instruments: Commitments to extend credit Standby letters of credit Others letters of credit Bill of lading guarantee Interest rate swap Forward rate 1.67% 145,448 5.42% 1,158,104 76,734 13,450 57,760 5,463 41,773 249 6.09% 68,173 4.90% 10,000 — — — — — — 82 — — 31,981 123,517 477,213 477,292 81 1,177,429 1,181,975 455,979 456,049 1,070,617 1,059,076 — 68,173 68,201 46,990 47,649 — 10,000 9,951 30,000 29,305 N/A 500,493 79,937 2,155 128 217 36,942 619,872 (509) 580,727 (328) 15,335 100 N/A N/A N/A N/A 44,371 20,729 — — — — — — — — — — — — — — — — — 20,000 — — — — — — — 15,435 (63) 11,748 (64) 44,371 (238) 31,866 (193) 20,729 20,000 (125) 977 13,924 20,000 100,000 1,104 — (69) 35 — agreement N/A 100,000 Factors That May Affect Future Results The Allowance for Loan Losses is an Estimate of Estimable and Probable Losses. Actual Loan Losses in Excess of the Estimate Could Adversely Affect Our Net Income and Capital. The allowance for loan losses is based on management’s estimate of the estimable and probable losses from our loan portfolio. If actual losses exceed the estimate, the excess losses could adversely affect our net income and capital. Such excess could also lead to larger allowances for loan losses in future periods, which could in turn adversely affect net income and capital. Management believes that the allowance for loan losses at December 31, 2000 is adequate to cover estimable and probable losses from our loan portfolio as of that date. If economic conditions dif- fer substantially from the assumptions used in the estimate or adverse developments arise with respect to our loans, future losses may occur and increases in the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of our allowance. These agencies Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 37 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued may require us to establish additional allowances based on their judgement of the information available at the time of their examinations. We may sustain loan losses in excess of present or future levels of the allowance for loan losses. Fluctuations in Interest Rates Could Adversely Affect Our Business. The interest rate risk inherent in our lending, investing and deposit taking activities is a significant market risk to us and our business. Income associated with interest-earning assets and cost associated with interest-bearing liabili- ties may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in inter- est rates, events over which we have no control, may have an adverse effect on net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can significantly affect our assets and liabilities. Increases in interest rates may adversely affect the ability of our floating rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-offs. Generally, the interest rates on our interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same extent, or on the same basis. Even assets and liabilities with similar maturities or periods of repricing may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. Certain assets, such as fixed and adjustable rate mortgage loans, have features which limit the change in interest rates on a short-term basis and over the life of the asset. We seek to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition to obtain the maximum spread. We use interest rate sensitivity analysis and a simulation model to assist us in esti- mating the optimal asset-liability composition. However, such management tools have inherent limitations that impair their effectiveness. We may not be successful in minimizing the adverse effects of changes in interest rates. See also, “Risk Elements of the Loan Portfolio” and “Liquidity and Market Risk—Market Risk” above. Inflation May Adversely Affect Our Financial Performance. The consolidated financial statements and related financial data presented in this report have been prepared in accor- dance with accounting principles generally accepted in the United States. These accounting principles require the measurement of our financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our opera- tions is reflected in increased operating costs. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As We Expand Our Business Outside of California Markets, We Will Encounter Risks That Could Adversely Affect Us. We primarily operate in California markets with a concentration of Chinese American individuals and businesses; however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Chinese American individuals and businesses. We have begun this expansion with the acquisition of certain assets and assumption of certain liabilities of Golden City Commercial Bank in New York and the conversion of our Houston loan production office into a branch facility. In the course of this expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations. These risks and uncertainties include increased operational difficulties arising from, among other things, our ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas and to anticipate events or differences in markets in which we have no current experience. To the extent that we expand through acquisitions, such acquisitions may also adversely harm our business, if we fail to adequately address the financial and operational risks associated with such acquisitions. For example, risks can include difficulties in assimilating the operations, technology and personnel of the acquired company; diversion of management’s attention from other business concerns; inability to maintain uniform standards, controls, procedures 38 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report and policies; potentially dilutive issuances of equity securities; incurrence of additional debt and contingent liabilities; use of cash resources; large write-offs; and amortization expenses related to goodwill and other intangible assets. Poor Economic Conditions in California and Other Regions Where the Bank has Operations, Could Cause Us to Incur Losses. Our banking operations are concentrated primarily in Southern and Northern California, and to a lesser extent in Houston, Texas and New York City. Adverse economic conditions in these regions could impair borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, erode the value of loan collateral, increase claims and lawsuits, and reduce the demand for our products and services. These events could increase the amount of our non-performing assets, and have an adverse effect on our ability to collect our non-performing loans or otherwise liquidate our non-performing assets (including other real estate owned) on terms favorable to us, and otherwise adversely affect our business. Real estate securing our lending activity is also principally located in Southern and Northern California, and to a lesser extent, in Houston, Texas and New York City. The value of such collateral depends upon conditions in the rel- evant real estate markets. These include general or local economic conditions and neighborhood characteristics, real estate tax rates, the cost of operating the properties, governmental regulations and fiscal policies, acts of nature including earthquakes, flood and hurricanes (which may result in uninsured losses), and other factors beyond our control. Although the California economy and its real estate market continued to be relatively strong in 2000, they began to moderate in the third quarter of 2000. The economic conditions in Houston and New York were both favor- able in 2000, but have also moderated recently. It is difficult for management to predict the future economic per- formance of these regions, and economic condition in one or more of these regions may decline in the future. The Risks Inherent in Construction Lending May Adversely Affect Our Net Income. The risks inherent in construction lending may adversely affect our net income. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the rele- vant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risk because such properties have no operating history. In these loans, loan funds are advanced upon the security of the project under construction, which is of uncertain value prior to completion of construction, and the estimated operating cash flow to be generated by the completed project. If these properties cannot be sold or leased so as to generate the cash flow anticipated by the borrowers, the borrowers may not be able to repay their obligations to us and the value of our security interest in collateral may be adversely impaired. Our Use of Appraisals in Deciding Whether to Make a Loan on or Secured by Real Property Does Not Insure the Value of the Real Property Collateral. In considering whether to make a loan on or secured by real property, we generally require an appraisal of such property. However, the appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. Our Need to Continue to Adapt to Our Information Technology Systems to Allow Us to Provide New and Expanded Services Could Present Operational Issues and Require Significant Capital Spending. As we begin to offer internet banking and other on-line services to our customers, and continue to expand our exist- ing conventional banking services, we will need to adapt our information technology systems to handle these changes in a way that meets constantly changing industry standards. This can be very expensive and may require significant capital expenditures. In addition, our success will depend, among other things, on our ability to provide secure and reliable services, anticipate changes in technology and efficiently develop and introduce services that are accepted by our customers and cost effective for us to provide. Systems failures, delays, breaches of confidentiality and other problems could harm our reputation and business. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 39 Management’s Discussion and Analysis of Financial Condition and Results of Operations continued We Face Substantial Competition From Larger Competitors. We face substantial competition for deposits and loans as well as other banking services throughout our market area from the major banks and financial institutions that dominate the commercial banking industry. This may cause our cost of funds to exceed that of our competitors. It may also result in us making less desirable loans. Such banks and financial institutions have greater resources than us, including the ability to finance advertising campaigns and allocate their investment assets to regions of higher yield and demand. By virtue of their larger capital bases, such institutions have substantially greater lending limits than us and perform certain functions, including trust services, which are not presently offered by us. We also compete for loans and deposits as well as other types of banking services with savings and loan associations, finance companies, money market funds, brokerage houses, credit unions and non-financial institutions. Adverse Effects of Banking Regulations or Changes in Banking Regulations Could Adversely Affect Our Business. We are governed by significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of our stockholders. In the past, our business has been material- ly affected by such regulation and supervision. This trend is likely to continue in the future. Laws, regulations or policies currently affecting us may change at any time. Regulatory authorities may also change their interpretation of existing laws and regulations. Such changes may, among other things, increase the cost of doing business, limit permissible activities or affect the competitive balance between banks and other financial institutions. It is impossi- ble to predict the competitive impact that any such changes would have on commercial banking in general or on our business in particular. Poor Economic Conditions in Asia Could Cause Us to Incur Losses. While the Asian economic conditions were satisfactory in 2000, it is difficult to predict the behavior of the Asian economy in the future. The U.S. fiscal policy and an unfavorable global economic condition may adversely impact the Asian economy. If the Asian economic conditions should deteriorate, we could be exposed to economic and transfer risk, and could experience an outflow of deposits by our Asian-American customers. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of investments with or loans made to such entities. Adverse economic conditions may also negatively impact asset values and the profitability and liquidity of companies operating in this region. Statutory Restrictions on Dividends and Other Distributions From the Bank May Adversely Impact Us. A substantial portion of our cash flow comes from dividends that the Bank pays to us. Various statutory provisions restrict the amount of dividends that the Bank can pay without regulatory approval. In addition, if the Bank were to liquidate, the Bank’s creditors would be entitled to receive distributions from the assets of the Bank to satisfy their claims against the Bank before we, as a holder of an equity interest in the Bank, would be entitled to receive any of the assets of the Bank. Certain Provisions of Our Charter, Bylaws and Rights Agreement Could Make the Acquisition of Our Company More Difficult. Certain provisions of our Charter, Bylaws and recently adopted successor Rights Agreement between us and American Stock Transfer and Trust Company, as Rights Agent, could make the acquisition of our company more difficult. These provisions include authorized but unissued shares of preferred and common stock that may be issued without stock- holder approval; three classes of directors serving staggered terms; preferred share purchase rights that generally become exercisable if a person or group acquires 15% or more of our common stock or announces a tender offer for 15% or more of our common stock; special requirements for stockholder proposals and nominations for director; and supermajority voting requirements in certain situations including certain types of business combinations. 40 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Market for Cathay Bancorp, Inc. Stock The Company’s common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market SM under the symbol: “CATY”. During 2000, total trading volume was approximately 2,248,605 and the prices ranged from a high of $80.00 to a low of $38.50. As of February 26, 2001, the closing price per share was $60.13. The approximate number of stockholders at year-end 2000 was 1,700. The Company paid an aggregate per share cash dividend of $0.880 in 2000 and $0.805 in 1999. The following table summarizes the quarterly high, low and closing prices, and the trading volume for the past two years: Bancorp Stock Trading History 1 2000 First Quarter Second Quarter Third Quarter Fourth Quarter 1999 First Quarter Second Quarter Third Quarter Fourth Quarter High Low End of Period Trading Volume $ $ $ $ 80.000 49.000 50.000 57.380 41.000 43.000 42.938 42.000 $ $ 38.500 40.750 43.000 47.000 33.250 32.500 34.688 35.000 46.000 46.380 48.750 59.000 37.625 42.500 35.688 41.000 754,407 439,881 348,929 705,388 305,330 416,760 516,312 318,483 1 The Company does not represent that the outstanding shares may either be bought or sold at a certain price. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 41 Distribution of Assets, Liabilities and Stockholders’ Equity The following table shows the daily average balances of the Company’s assets, liabilities, and stockholders’ equity for the years 2000, 1999 and 1998. (dollars in thousands) Amount % 1 Amount % 1 Amount % 1 2000 1999 1998 Year ended December 31, Assets Cash and due from banks Federal funds sold and securities purchased under agreements to resell Securities available-for-sale, taxable Securities available-for-sale, nontaxable Securities held-to-maturity, taxable Securities held-to-maturity, nontaxable Total net loans 2 Premises and equipment, net Other assets Total assets Liabilities Demand deposits Savings deposits 3 Time deposits Total deposits Federal funds purchased and securities sold under agreements to repurchase Advances from Federal Home Loan Bank Mortgage indebtedness Other liabilities Total liabilities Stockholders’ Equity Common stock and additional paid-in-capital Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity $ 56,793 2.67% $ 50,969 2.74% $ 58,892 3.45% 11,053 0.52 38,013 2.04 69,915 4.09 205,154 9.65 184,497 9.91 225,397 13.20 510 0.02 345 0.02 499 0.03 330,841 15.56 378,753 20.35 315,257 18.46 69,478 1,343,970 28,691 80,363 3.27 63.19 1.35 3.77 68,702 1,088,578 25,668 25,799 3.69 58.48 1.38 1.39 48,757 907,627 25,571 55,888 2.85 53.15 1.50 3.27 $ 2,126,853 100.00% $ 1,861,324 100.00% $ 1,707,803 100.00% $ 211,975 463,695 1,117,350 9.97% $ 21.80 52.54 169,013 424,500 1,001,878 9.08% $ 22.81 53.82 166,657 417,105 900,441 9.76% 24.42 52.73 1,793,020 84.31 1,595,391 85.71 1,484,203 86.91 79,276 3.73 55,519 2.98 53,285 3.12 29,781 40 32,619 1.40 — 1.53 30,000 183 14,770 1.61 0.01 0.80 6,959 440 18,304 0.40 0.03 1.07 1,934,736 90.97 1,695,863 91.11 1,563,191 91.53 65,578 126,539 192,117 3.08 5.95 9.03 63,897 101,564 165,461 3.43 5.46 8.89 62,259 82,353 144,612 3.65 4.82 8.47 $ 2,126,853 100.00% $ 1,861,324 100.00% $ 1,707,803 100.00% 1 Percentage of categories under Assets, Liabilities and Stockholders’ Equity are shown as a percentage of average assets. 2 Total net loans means total loans net of loan participations sold, unamortized deferred loan fees and allowance for loan losses. 3 Savings deposits include NOW, money market and savings accounts. 42 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Consolidated Statements of Condition (in thousands, except share and per share data) Assets Cash and due from banks Federal funds sold and securities purchased under agreements to resell Cash and cash equivalents Securities available-for-sale (amortized costs of $179,454 in 2000 and $162,728 in 1999) Securities held-to-maturity (estimated fair values of $388,656 in 2000 and $416,827 in 1999) Loans (net of allowance for loan losses of $21,967 in 2000 and $19,502 in 1999 ) Other real estate owned, net Investments in real estate, net Premises and equipment, net Customers’ liability on acceptance Accrued interest receivable Goodwill Other assets Total assets Liabilities and Stockholders’ Equity Deposits Non-interest bearing demand deposits Interest bearing accounts NOW accounts Money market deposits Savings deposits Time deposits under $100 Time deposits of $100 or more Total deposits Securities sold under agreements to repurchase Advances from Federal Home Loan Bank Acceptances outstanding Other liabilities Total liabilities Stockholders’ equity Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued Common stock, $0.01 par value; 25,000,000 shares authorized, 9,074,365 and 9,033,583 shares issued and outstanding in 2000 and 1999, respectively Additional paid-in-capital Accumulated other comprehensive income (loss) Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes to consolidated financial statements. As of December 31, 2000 1999 $ $ 65,687 19,000 84,687 59,081 5,000 64,081 183,409 160,991 387,200 426,332 1,437,307 5,174 17,348 29,723 20,355 15,633 9,744 16,254 1,245,585 4,337 16,987 25,299 13,721 13,150 10,559 14,882 $ 2,206,834 $ 1,995,924 $ 221,805 $ 195,140 125,647 119,805 231,761 379,809 797,620 121,394 97,821 236,764 362,553 708,064 1,876,447 1,721,736 68,173 10,000 20,355 17,072 46,990 30,000 13,721 4,368 1,992,047 1,816,815 — — 91 66,275 2,303 146,118 90 64,529 (1,006) 115,496 214,787 179,109 $ 2,206,834 $ 1,995,924 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 43 Consolidated Statements of Income and Comprehensive Income (in thousands, except share and per share data) Interest Income Interest on loans Interest on securities available-for-sale Interest on securities held-to-maturity Interest on Federal funds sold and securities purchased under agreements to resell Interest on deposits with banks Total interest income Interest Expense Time deposits of $100 or more Other deposits Other borrowed funds Total interest expense Net interest income before provision for loan losses Provision for loan losses Net interest income after provision for loan losses Non-Interest Income Securities gains Letter of credit commissions Service charges Other operating income Total non-interest income Non-Interest Expense Salaries and employee benefits Occupancy expense Computer and equipment expense Professional services expense FDIC and State assessments Marketing expense Real estate operations, net Operations of investments in real estate Other operating expense Total non-interest expense Income before income tax expense Income tax expense Net Income Year ended December 31, 2000 1999 1998 $ $ 126,337 13,473 24,017 $ 93,780 10,551 26,821 686 40 1,881 13 82,866 13,494 22,966 3,950 33 164,553 133,046 123,309 41,431 26,514 6,211 74,156 90,397 4,200 86,197 1,085 2,439 4,558 4,674 12,756 22,735 3,242 2,773 3,625 462 1,172 (185) 683 3,997 38,504 60,449 21,862 38,587 32,724 20,438 4,246 57,408 75,638 4,200 71,438 (3) 2,179 3,635 3,044 8,855 19,150 2,521 2,573 3,165 409 1,036 (1,416) (74) 2,918 30,282 50,011 19,720 30,291 30,691 23,316 3,218 57,225 66,084 3,600 62,484 43 1,944 3,915 2,234 8,136 18,024 2,546 2,412 3,234 393 1,028 (1,125) 63 3,490 30,065 40,555 15,976 24,579 810 (8) 818 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year Less: reclassification adjustment for realized gains (losses) on securities included in net income Total other comprehensive income (loss), net of tax 3,309 (2,229) — (34) 3,309 (2,195) Total comprehensive income Net income per common share Basic Diluted Basic average common shares outstanding Diluted average common shares outstanding See accompanying notes to consolidated financial statements. $ $ $ 41,896 $ 28,096 $ 25,397 4.26 4.25 $ $ 3.36 3.36 $ $ 2.74 2.74 9,056,751 9,073,885 9,013,428 9,017,760 8,967,188 8,968,393 44 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Consolidated Statements of Changes in Stockholders’ Equity For the years ended December 31, 2000,1999 and 1998 (in thousands, except share and per share amounts) Common Stock Number of Shares Amount Additional Accumulated Other Paid-in- Comprehensive Income (Loss) Capital Retained Earnings Total Stockholders’ Equity Balance at December 31, 1997 8,941,743 $ 89 $ 61,272 $ 370 $ 74,146 $ 135,877 Issuances of common stock— Dividend Reinvestment Plan Cash dividends of $.70 per share Change in unrealized holding gain (loss) on securities available-for-sale, net of tax Net income 47,017 — — — 1 — — — 1,648 — — — — (6,272) 1,649 (6,272) — — 819 — — 24,579 819 24,579 Balance at December 31, 1998 8,988,760 $ 90 $ 62,920 $ 1,189 $ 92,453 $ 156,652 Issuances of common stock— Dividend Reinvestment Plan Stock options exercised Cash dividends of $0.805 per share Change in unrealized holding loss on securities available-for-sale, net of tax Net income 44,523 300 — — — — — — — — 1,600 9 — — — — — — 1,600 9 (7,248) (7,248) (2,195) — — 30,291 (2,195) 30,291 Balance at December 31, 1999 9,033,583 $ 90 $ 64,529 $ (1,006) $ 115,496 $ 179,109 Issuances of common stock— Dividend Reinvestment Plan Stock options exercised Cash dividends of $0.880 per share Change in unrealized holding loss on securities available-for-sale, net of tax Net income 39,330 1,452 — — — 1 — — — — 1,690 56 — — — — — — 1,691 56 (7,965) (7,965) 3,309 — — 38,587 3,309 38,587 Balance at December 31, 2000 9,074,365 $ 91 $ 66,275 $ 2,303 $ 146,118 $ 214,787 See accompanying notes to consolidated financial statements. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 45 Consolidated Statements of Cash Flows (dollars in thousands) Cash Flows from Operating Activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Provision for losses on other real estate owned Benefit for deferred taxes Depreciation Net gain on sale of other real estate owned Gain on sale of investments in real estate Gain (loss) on disposal of premises and equipment (Gain) loss on sales and calls of securities Amortization of investment security premiums, net Amortization of goodwill Increase (decrease) in deferred loan fees, net (Increase) decrease in accrued interest receivable (Increase) decrease in other assets, net Increase (decrease) in other liabilities Total adjustments Net cash provided by operating activities Cash Flows from Investing Activities Purchase of investment securities available-for-sale Proceeds from maturity and call of investment securities available-for-sale Proceeds from sale of investment securities available-for-sale Purchase of mortgage-backed securities available-for-sale Proceeds from repayments and sale of mortgage-backed securities available-for-sale Purchase of investment securities held-to-maturity Proceeds from maturity and call of investment securities held-to-maturity Purchase of mortgage-backed securities held-to-maturity Proceeds from repayment of mortgage-backed securities held-to-maturity Net increase in loans Purchase of premises and equipment Proceeds from sale of equipment Proceeds from sale of other real estate owned Proceeds from sale of investments in real estate Net (increase) decrease in investments in real estate Cash paid for the acquisition of Golden City Net cash used in investing activities Cash Flows from Financing Activities Net increase in demand deposits, NOW accounts, money market and savings deposits Net increase in time deposits Net increase (decrease) in securities sold under agreements to repurchase Increase (decrease) in borrowing from Federal Home Loan Bank Cash dividends Proceeds from shares issued to Dividend Reinvestment Plan Proceeds from exercise of stock options Net cash provided by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year Supplemental disclosure of cash flow information Cash paid during the year for: Interest Income taxes Non-cash investing activities: Transfer to investment securities available-for-sale within 90 days of maturity Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax Transfers to other real estate owned Loans to facilitate the sale of other real estate owned Acquisition: The Company purchased certain assets and assumed certain liabilities of Golden City for $5,511. In conjunction with the acquisition, liabilities were assumed as follows. See Note 2. Fair value of assets acquired Cash paid Liabilities assumed $ 86,779 (5,511) $ 81,268 See accompanying notes to consolidated financial statements. Year ended December 31, 2000 1999 1998 $ 38,587 $ 30,291 $ 24,579 4,200 71 637 1,500 (263) — — (1,085) (926) 815 544 (2,483) (1,372) 9,666 11,304 49,891 (660,275) 678,638 21,443 (949) 6,955 (47,824) 17,519 (29,604) 38,802 (200,298) (5,924) — 3,187 — (361) — (178,961) 47,899 106,812 21,183 (20,000) (7,965) 1,691 56 149,676 20,606 64,081 4,200 339 (1,472) 1,331 (1,549) (394) — 3 557 681 (38) (1,154) (2,480) (3,012) (2,988) 27,303 3,600 195 (10) 1,241 (999) — (2) (43) 286 940 (155) 251 3,443 2,158 10,905 35,484 (1,090,732) 1,160,919 — (911) (1,025,244) 1,006,491 6,429 (34,968) 9,906 (45,255) 1,385 (38,157) 70,851 (282,413) (803) — 4,730 1,026 (16,162) (5,511) (231,127) 36,835 124,499 30,554 — (7,248) 1,600 9 186,249 (17,575) 81,656 25,492 (82,268) 12,025 (73,787) 74,817 (120,021) (1,866) 2 4,470 — 197 — (208,231) 21,757 89,524 (6,983) 30,000 (6,272) 1,649 — 129,675 (43,072) 124,728 $ $ $ $ $ $ $ 84,687 $ 64,081 $ 81,656 72,644 17,411 59,858 3,309 5,347 1,515 $ $ $ $ $ $ 56,857 $ 20,350 $ 57,232 15,413 2,515 $ 1,340 (2,195) $ $ 886 $ 3,483 819 4,334 3,483 46 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of Cathay Bancorp, Inc. (“Bancorp”), a Delaware corporation and its wholly-owned subsidiary, Cathay Bank (“Bank”), a California state-chartered bank (together, “the Company”). All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. Management of the Bank has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from these estimates. The most significant estimate subject to change relates to the allowance for loan losses. Certain reclassifications have been made to the prior years’ financial statements to conform with the 2000 presentation. The following are descriptions of the more significant of these policies. Organization and Background The business activities of Bancorp consist primarily of the operations of the Bank and its wholly-owned subsidiaries, Cathay Investment Company (“CIC”) and Cathay Securities Fund, Inc. There are no operating business activities currently at Bancorp. Bancorp may, from time to time, explore various acquisition pos- sibilities. Bancorp currently does not employ any persons other than its management, which includes the President and the Chief Financial Officer, and does not own or lease any real or personal property. Bancorp uses the employ- ees, premises, equipment and furniture of the Bank without the payment of any service or rental fees to the Bank. It is expected that for the near future the primary business of the Bancorp will be the ongoing business of the Bank. The Bank is a commercial bank, servicing primarily the individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. Its operations include the acceptance of check- ing, savings, and time deposits, and the making of commercial, real estate and consumer loans. The Bank also offers trade financing, letter of credit, wire transfer, spot and forward contracts, internet banking, global investment services, and other customary banking services to its customers. Securities Securities are classified as held-to-maturity when management has the ability and intent to hold these securities until maturity. Securities are classified as available-for-sale when management intends to hold the securi- ties for an indefinite period of time, or when the securities may be utilized for tactical asset/liability purposes, and may be sold from time to time to manage interest rate exposure and resultant prepayment risk and liquidity needs. Securities purchased are designated as held-to-maturity or available-for-sale at the time of acquisition. Securities held-to-maturity are stated at cost, adjusted for the amortization of premiums and the accretion of dis- counts on a level-yield basis. The carrying value of these assets is not adjusted for temporary declines in fair value since the Company has the positive intent and ability to hold them to maturity. Securities available-for-sale are car- ried at fair value, and any unrealized holding gains or losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of tax, in accumulated other comprehensive income until realized. Realized gains or losses are determined on the specific identification method. Premium and discounts are amortized or accreted as adjustment of yield on a level-yield basis. The cost basis of an individual security is written down, if the decline in its fair value below the amortized cost basis is other than temporary. The write-down is accounted for as a realized loss, and is included in net income. The new cost basis is not changed for subsequent recoveries in fair value. Loans Loans are carried at amounts advanced, less principal payments collected and net deferred loan fees. Interest is accrued and earned daily on an actual or 360-day basis. Interest accruals on business loans and non-res- idential real estate loans are generally discontinued whenever the payment of interest or principal is 90 days or more past due. Such loans are placed on nonaccrual status, unless the loan is well secured, and there is a high Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 47 Notes to Consolidated Financial Statements, continued probability of recovery in full, as determined by management. When loans are placed on a nonaccrual status, previ- ously accrued but unpaid interest is reversed and charged against current period income, and interest is subse- quently recognized only to the extent cash is received. Interest collected on nonaccrual loans is applied to the out- standing principal balance unless the loan is returned to accrual status. In order to be returned to accrual status, all past due payments must be received and the loan must be paying in accordance with its payment terms. Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. If a loan is placed on nonaccrual status, the amortization of the loan fees and the accretion of discounts discontinue until such time when the loan is reverted back to accru- ing status. Allowance for Loan Losses Management believes the allowance for loan losses is being maintained at a level con- sidered adequate to provide for estimable and probable losses. Additions to the allowance for loan losses are made monthly by charges to operating expense in the form of a provision for loan losses. All loans judged to be uncol- lectible are charged against the allowance while any recoveries are credited to the allowance. Management monitors changing economic conditions, the loan mix by category, the industry segregation and geo- graphic distribution of the portfolio and the type of borrowers in determining the adequacy of the allowance for loan losses. Management also closely reviews its past, present and expected overall net loan losses in comparison to the existing level of the allowance. In addition, the Bank’s regulators, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to make additions to its allowance for loan losses based on their judgements of the information available to them at the time of their examination. Impaired Loans A loan is considered impaired when it is “probable” that a creditor will be unable to collect all amounts due (i.e. both principal and interest) according to the contractual terms of the loan agreement. The meas- urement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corre- sponding charge to the provision for loan losses. The Bank stratifies its loan portfolio by size and treats smaller per- forming loans with an outstanding balance less than the Bank’s defined criteria as a homogenous portfolio. For loans with a balance in excess of $750,000, the Bank conducts a periodic review of each loan in order to test for impair- ment. The Bank recognizes interest income on impaired loans based on its existing method of recognizing interest income on nonaccrual loans. Letter of Credit Fees Issuance and commitment fees received for the issuance of commercial or standby letters of credit are recognized over the term of the instruments. Premises and Equipment Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed on the straight-line method based on the following estimated useful lives of the assets: Type Estimated Useful Life Buildings Building improvements Furniture, fixtures and equipment Leasehold improvements 15 to 45 years 5 to 20 years 3 to 25 years Over the shorter of useful lives or the terms of the lease Improvements are capitalized and amortized to occupancy expense over the shorter of the estimated useful life of the improvement or the term of the lease. 48 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Other Real Estate Owned Real estate acquired in the settlement of loans is initially recorded and, subsequently is carried at fair value, less estimated costs to sell. Specific valuation allowances on other real estate owned are recorded through charges to operations to recognize declines in fair value subsequent to foreclosure. Gains on sales are recognized when certain criteria relating to the buyer’s initial and continuing investment in the property are met. Investments in Real Estate At December 31, 2000, the Company is a limited partner in four different partnerships that invest in low income housing projects that qualify for Federal income tax credits. As further discussed in Note 7, the partnership interests are accounted for utilizing the equity method of accounting. Costs directly related to the development or the improvement of real estate are capitalized. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired and the related acquisition costs, is amortized on a straight-line basis over the expected periods to be benefited (generally 15 years). The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. The assessment of the recoverabili- ty of goodwill will be impacted if estimated future operating cash flows are not achieved. Stock-Based Compensation The Company applies the intrinsic value method to account for stock-based compensa- tion whereby expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pro forma net income and pro forma net income per share disclosures for employee stock option grants are based on the recognition as expense, over the vesting period, of the fair value on the date of grant of all stock-based awards. Derivative Financial Instruments For those interest rate instruments that alter interest rate characteristics of assets or liabilities, the net differential to be paid or received on the instrument is treated as an adjustment to the yield on the underlying assets or liabilities (the accrual method). To qualify for the accrual method, the interest rate instrument must be designated to specific assets or liabilities or pools of assets or liabilities, and must be effective at altering the interest rate characteristics of the related assets or liabilities. Interest rate instruments that do not qualify for the accrual method, are recorded at fair value, with gains and losses recorded in earnings. Income Taxes The provision for income taxes is based on income reported for financial statement purposes and dif- fers from the amount of taxes currently payable, since certain income and expense items are reported for financial statement purposes in different periods than those for tax reporting purposes. The Company accounts for income taxes using the asset and liability approach, the objective of which is to estab- lish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance is established for deferred tax assets if, based on the weight of avail- able evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is established, when necessary, to reduce the deferred tax assets to the amount that is more likely than not to be realized. Foreign Exchange Operations The Company engages in foreign exchange transactions on behalf of its customers. Stated trading limits are maintained and monitored to ensure efficient operations. The majority of all transactions are settled on a cash and carry basis to minimize settlement risk to the Company. The Company requires cash collat- eral or an approved line of credit on all forward transactions. Comprehensive Income Comprehensive income is defined as the change in equity during a period from transac- tions and other events and circumstances from non-owner sources. Comprehensive income generally includes net income, foreign items, minimum pension liability adjustments, and unrealized gains and losses on investments in Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 49 Notes to Consolidated Financial Statements, continued securities available-for-sale. The Company reports and displays comprehensive income and its components in its consolidated statements of income and comprehensive income. Comprehensive income is a financial reporting con- cept and does not affect the Company’s financial position or results of operations. Net Income per Common Share Earnings per share (“EPS”) are computed on a basic and diluted basis. Basis EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings of the Company. Statement of Cash Flows Cash and cash equivalents include short-term, highly liquid investments that generally have an original maturity of three months or less. Segment Information and Disclosures Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim reports to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has concluded that it has one segment. Recent Accounting Pronouncements Statement of Financial Accounting Standards (“SFAS”) No.133, “Accounting for Derivative Instruments and Hedging Activities” is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. As amended by SFAS No.137, “Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No.133.” The impact of adopting SFAS No. 133 on January 1, 2001 did not have a materi- al impact on the Company. 2. Acquisition On December 10, 1999, the Bank entered into a Purchase and Assumption Agreement (“P&A Agreement”) with the Federal Deposit Insurance Corporation (“FDIC”), as the Receiver of Golden City Commercial Bank (“Golden City”) to purchase certain assets and to assume certain deposits and other liabilities of Golden City as of close of business on December 10, 1999 for $5.5 million in cash. The loans, securities, cash, Federal funds sold and deposits assumed by the Bank as of the closing on December 10, 1999 were $31.2 million, $22.1 million, $8.4 million, $22.0 million, and $80.6 million, respectively. Immediately upon acquisition, the branch operations of Golden City were merged into the Bank, and the two branches of Golden City were made branches of the Bank. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of Golden City subse- quent to the closing on December 10, 1999 have been included in the Company’s consolidated financial statements. The excess of the purchase price over the fair value of the net identifiable assets acquired totaled approximately $2.65 million has been recorded as goodwill to be amortized over 15 years. The P&A Agreement allowed the Bank to put back certain assets and contracts to the FDIC based on a six-month settlement schedule set by the FDIC. Upon completion of the settlement period, goodwill was adjusted in accor- dance with the settlement schedule. The following table presents an unaudited pro forma combined summary of operations of the Company and Golden City for the year ended December 31, 1999. The unaudited pro forma combined summary of operations is presented as if the merger had been effective January 1, 1999. This information combines the historical results of the Company and Golden City after giving effect to amortization of purchase accounting adjustments. The unaudited 50 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report pro forma combined summary of operations is based on the Company’s historical results and those Golden City. These pro forma statements are intended for informational purposes only and are not necessarily indicative of the future results of the Company or of the results of the Company that would have occurred had the acquisition been in effect for the full year presented. (in thousands, except per share data) Net interest income before provision for loan losses Net income Basic and diluted net income per common share 3. Cash and Cash Equivalents (Unaudited) Year ended December 31, 1999 75,865 30,040 3.33 $ $ $ The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserve balances required were $2,500,000 for 2000 and $2,788,000 for 1999. Securities purchased under agreements to resell are collateralized by U.S. agencies, asset-backed, corporate bond, and Collateralized Mortgage Obligations securities at December 31, 2000 and 1999 respectively. These agree- ments generally mature in one business day. The counterparties to these agreements are nationally recognized investment banking firms that meet credit requirements of the Company and with whom a master repurchase agree- ment has been duly executed. The following table sets forth information with respect to securities purchased under resale agreements. (in thousands) Balance, December 31 Weighted average interest rate, December 31 Average amount outstanding during the year Weighted average interest rate for the year Maximum amount outstanding at any month end 2000 1999 $ $ $ 19,000 6.18% 11,053 6.21% 19,500 $ $ $ 3,000 4.50% 36,741 5.06% 80,000 For those securities obtained under the resale agreements, the collateral is either held by a third party custodian or by the counterparty and segregated under written agreements that recognize the Company’s interest in the securi- ties. Interest income associated with securities purchased under resale agreements totaled $686,000 for 2000, $1,881,000 for 1999 and $3,950,000 for 1998. 4. Securities Securities Available-for-Sale The following table reflects the amortized cost, gross unrealized gains, gross unreal- ized losses and fair values of securities available-for-sale as of December 31, 2000 and 1999: 2000 (in thousands) U.S. government agencies State and municipal securities Mortgage-backed securities Asset-backed securities Federal Home Loan Bank stock Equity securities Corporate bonds Total $ $ Amortized Cost 75,187 1,275 19,001 10,452 5,613 8,460 59,466 Gross Unrealized Gains Gross Unrealized Losses $ 3,130 2 71 — — 9 1,119 — $ — 61 82 — 18 215 Fair Value 78,317 1,277 19,011 10,370 5,613 8,451 60,370 $ 179,454 $ 4,331 $ 376 $ 183,409 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 51 Notes to Consolidated Financial Statements, continued 1999 (in thousands) U.S. Treasury securities U.S. government agencies State and municipal securities Mortgage-backed securities Asset-backed securities Federal Home Loan Bank stock Commercial paper Corporate bonds Total $ $ Amortized Cost 25 40,553 540 22,758 16,867 6,851 40,100 35,034 Gross Unrealized Gains Gross Unrealized Losses — $ 3 — 1 — — — 13 — $ 338 — 302 419 — 24 671 Fair Value 25 40,218 540 22,457 16,448 6,851 40,076 34,376 $ 162,728 $ 17 $ 1,754 $ 160,991 The amortized cost and fair value of securities available-for-sale except for mortgage-backed securities and collater- alized mortgage obligations at December 31, 2000, by contractual maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties. Due in one year or less 1 Due after one year through five years Due after five years through ten years Mortgage-backed securities and collateralized mortgage obligations Total 1 Equity securities are reported in this category. $ Amortized Cost 27,331 57,649 75,474 19,000 $ Fair Value 27,300 58,771 78,328 19,010 $ 179,454 $ 183,409 Proceeds from sales and repayments of securities available-for-sale were $6,955,000 during 2000 and $9,906,000 during 1999. Proceeds from maturities and calls of securities available-for-sale were $678,638,000 during 2000 and $1,160,919,000 during 1999. There were no gains realized in 2000 and 1999. Gross realized gains of $59,000 were realized in 1998. The Company realized no losses in 2000. Gross realized losses of $34,000 was realized for 2000 and $19,000 for, 1999. Securities Held-to-Maturity The carrying value, gross unrealized gains, gross unrealized losses and estimated fair values of securities held-to-maturity are as follows at December 31, 2000 and 1999: 2000 (in thousands) U.S. government agencies State and municipal securities Mortgage-backed securities Asset-backed securities Corporate bonds Total $ $ Carrying Value 64,689 68,820 184,188 13,156 56,347 Gross Unrealized Gains Gross Unrealized Losses $ 586 1,567 1,564 — 159 262 422 756 80 900 $ Estimated Fair Value 65,013 69,965 184,996 13,076 55,606 $ 387,200 $ 3,876 $ 2,420 $ 388,656 52 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 1999 (in thousands) U.S. Treasury securities U.S. government agencies State and municipal securities Mortgage-backed securities Asset-backed securities Corporate bonds Total $ $ Carrying Value 24,998 64,373 68,834 196,679 19,999 51,449 Gross Unrealized Gains Gross Unrealized Losses 114 79 375 56 — 37 $ — $ 1,274 3,193 3,600 209 1,890 Estimated Fair Value 25,112 63,178 66,016 193,135 19,790 49,596 $ 426,332 $ 661 $ 10,166 $ 416,827 The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 2000, by contractual maturities are shown below. Actual matu- rities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties. Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed securities and collateralized mortgage obligations Total $ Carrying Value 6,313 118,966 43,853 33,880 184,188 $ Estimated Fair Value 6,339 118,517 45,020 33,784 184,996 $ 387,200 $ 388,656 Proceeds from the maturities and calls of securities held-to-maturity were $17,519,000 during 2000 and $1,385,000 during 1999. The Company realized gross realized gains of less than $1000 in 2000, $31,000 in 1999 and $3,000 in 1998. No losses were realized for 2000, 1999 and 1998. Securities having a carrying value of $209,537,000 at December 31, 2000 and $128,904,000 at December 31, 1999 were pledged to secure public deposits, treasury tax and loan, securities sold under agreements to repurchase and a line of credit with the Federal Home Loan Bank. 5. Loans Most of the Company’s business activity is with customers located in the predominantly Asian areas of Southern and Northern California, New York and Houston. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid-off from the operating profits of the borrowers, refinancing by another lender or through sale by the bor- rowers of the secured collateral. The components of loans in the consolidated statements of condition as of December 31, 2000 and 1999 were as follows: (in thousands) Commercial loans Residential mortgage loans Commercial mortgage loans Equity lines Real estate construction loans Installment loans Other loans Gross loans Less Unamortized deferred loan fees Allowance for loan losses Net loans $ 2000 1999 442,181 $ 186,926 630,662 33,794 142,048 27,329 473 395,138 181,131 577,541 26,437 62,516 25,498 419 1,463,413 1,268,680 4,139 21,967 3,593 19,502 $ 1,437,307 $ 1,245,585 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 53 Notes to Consolidated Financial Statements, continued The Company previously sold participations in certain residential mortgage loans to buyers in the secondary market. These participations covered substantially all of the loan balances and were sold without recourse. No such sales have been made since 1998. As of December 31, 2000, the Company had $6,151,000 of these loans in its servic- ing portfolio. There were no loans held for sale as of December 31, 2000 and 1999. The Company pledged approxi- mately $76,463,000 of its residential mortgage loans as of December 31, 2000 and $88,763,000 as of December 31, 1999 to secure a line of credit with the Federal Home Loan Bank. An analysis of the activity in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 is as follows: (in thousands) Balance, beginning of year Loans charged-off Recoveries on loans previously charged-off Provision for loan losses Balance, end of year 2000 1999 1998 $ $ 19,502 (1,905) 170 4,200 $ 15,970 (1,731) 1,063 4,200 15,379 (3,519) 510 3,600 $ 21,967 $ 19,502 $ 15,970 The Company had identified impaired loans with a recorded investment of approximately $27,818,000 as of December 31, 2000 and $26,279,000 as of December 31, 1999. The average balances of impaired loans were $29,516,000 for the year 2000, $26,707,000 for the year 1999 and $21,713,000 for the year 1998, and interest collected on impaired loans totaled $2,120,000 in 2000, $2,047,000 in 1999 and $2,080,000 in 1998. The Bank recognizes interest income on impaired loans based on its existing method of recognizing interest income on nonac- crual loans. The following table is a breakdown of impaired loans and the related specific allowance: 2000 (in thousands) Commercial Commercial mortgage Other Total 1999 (in thousands) Commercial Commercial mortgage Other Total Recorded Investment Allowance Allocated Net Balance $ $ 13,868 13,208 742 3,682 1,881 133 $ 10,186 11,327 609 $ 27,818 $ 5,696 $ 22,122 Recorded Investment Allowance Allocated Net Balance $ $ 12,686 13,412 181 1,831 1,912 181 $ 10,855 11,500 — $ 26,279 $ 3,924 $ 22,355 The Company has entered into transactions with its directors, significant stockholders and their affiliates (“Related Parties”). Such transactions were made in the ordinary course of business on substantially the same terms and con- ditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers. In management’s opinion, these transactions did not involve more than normal credit risk or pres- ent other unfavorable features. All loans to Related Parties were current as of December 31, 2000. An analysis of the activity with respect to loans to Related Parties is as follows: (in thousands) Balance at December 31, 1998 Additional loans made Payments received Balance at December 31, 1999 Additional loans made Payments received Balance at December 31, 2000 $ 15,904 918 (4,710) 12,112 1,036 (249) $ 12,899 54 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report The following is a summary of nonaccrual loans and troubled debt restructurings as of December 31, 2000, 1999 and 1998 and the related net interest foregone for the years then ended: (in thousands) Nonaccrual loans Contractual interest due Interest recognized Net interest foregone (in thousands) Troubled debt restructurings Contractual interest due Interest recognized Net interest foregone 2000 1999 1998 14,696 1,408 627 $ $ 13,696 1,396 234 $ $ 13,090 1,395 112 781 $ 1,162 $ 1,283 2000 4,531 422 407 $ $ 1999 4,581 429 414 $ $ 15 $ 15 $ 1998 4,642 421 412 9 $ $ $ $ $ $ As of December 31, 2000, there were no commitments to lend additional funds to those borrowers whose loans have been restructured. 6. Other Real Estate Owned The balance of other real estate owned at December 31, 2000 was $5,174,000 and December 31, 1999 was $4,337,000. The valuation allowance was $131,000 at December 31, 2000 and $614,000 at December 31, 1999. The following table presents the components of the valuation allowance balance at December 31, 2000, 1999 and 1998. The following table presents the components of other real estate owned expense (income) for the year-ended: (in thousands) Operating expense (income) Provision for losses Net gain on disposal Real estate operations, net 2000 7 71 (263) $ 1999 (206) $ 339 (1,549) 1998 (321) 195 (999) (185) $ (1,416) $ (1,125) $ $ An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 2000, 1999, and 1998 is as follows: (in thousands) Balance, beginning of year Provision for losses Charge-offs on disposal Balance, end of year 2000 614 71 (554) $ 1999 494 339 (219) $ 1998 1,081 195 (782) 131 $ 614 $ 494 $ $ Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 55 Notes to Consolidated Financial Statements, continued 7. Investments in Real Estate The Company’s investments in real estate were $17,348,000 as of December 31, 2000 and $16,987,000 as of December 31, 1999 consisted of four investments in limited partnerships formed for the purpose of investing in low income housing projects, qualified for Federal low income housing tax credits. The limited partnerships are expected to generate tax credits over a weighted average remaining period of approximately seven years. See Note 10 of the notes to consolidated financial statements for income tax effects. In 2000, the Company contributed approximately $1,134,000 to Wilshire Courtyard, the senior housing construction project. The following table presents the details of the four projects as of December 31, 2000 and 1999: (in thousands) Las Brisas Los Robles California Tax Credit Funds Wilshire Courtyard Percentage of Ownership Acquisition Date December 31, 2000 1999 49.50% 99.00% 36.00% 99.90% $ Dec 1993 Aug 1995 Mar 1999 May 1999 $ 189 393 14,127 2,639 209 431 14,841 1,506 $ 17,348 $ 16,987 The Company’s 99.0% and 99.90% interest in the Los Robles and Wilshire Courtyard limited partnerships were not consolidated as of December 31, 2000 and 1999 because the Company did not have ability to exercise significant influence over the operation of the partnerships. The Company’s investments are accounted for utilizing the equity method of accounting. The Company recognized a net loss of approximately $684,000 in 2000, $334,000 in 1999 and $158,000 in 1998 from the partnerships’ operations. The Company recognized a gain of $394,000 from the sale of a strip mall in 1999, and a net gain of $409,000 in 1999 and $95,000 in 1998 from the operations. 8. Premises and Equipment Premises and equipment consisted of the following at December 31, 2000 and 1999: (in thousands) Land and land improvements Building and building improvements Furniture, fixtures and equipment Other Construction in process Less: Accumulated depreciation Premises and equipment, net $ 2000 1999 $ 11,800 17,525 14,169 2,199 716 46,409 16,686 11,495 13,623 13,155 2,193 292 40,758 15,459 $ 29,723 $ 25,299 The amount of depreciation included in operating expense was $1,500,000 in 2000, $1,330,732 in 1999 and $1,241,354 in 1998. 56 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 9. Borrowings Securities Sold Under Agreements to Repurchase The underlying collateral pledged for the repurchase agree- ments consists of U.S. government agency and mortgage-backed securities with a carrying value of $49,369,000 and a fair value of $50,196,000 as of December 31, 2000. Pledged collateral is maintained at a custodian outside the control of the Company. These borrowings generally mature in less than 30 days. The table below provides com- parative data for securities sold under agreements to repurchase. (dollars in thousands) Average amount outstanding 1 Highest month-end balances 2 Year end balance Rate at year-end Weighted average interest rate for the year December 31, 2000 1999 1998 $ $ $ 70,701 110,145 68,173 6.09% 6.25% 55,519 79,185 46,990 5.80% 5.73% 53,285 55,185 16,436 4.53% 5.98% 1 Average balances were computed using daily averages. 2 Highest month-end balances were at October 2000, February 1999 and November 1998, respectively. Advances from the Federal Home Loan Bank As of December 31, 2000, advance with the Federal Home Loan Bank totaled $10 million at a fixed interest rate of 4.90%. The advance is non-callable and will mature in 2003. 10. Income Taxes For the years ended December 31, 2000, 1999 and 1998, the current and deferred amounts of the income tax expense are summarized as follows: (in thousands) Current Federal State Deferred Federal State 2000 1999 1998 $ $ 19,321 1,904 21,225 15,377 5,815 21,192 $ 11,697 4,289 15,986 479 158 637 (1,159) (313) (1,472) (105) 95 (10) Total income tax expense $ 21,862 $ 19,720 $ 15,976 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 57 Notes to Consolidated Financial Statements, continued Temporary differences between the amounts reported in the financial statements and the tax basis of assets and lia- bilities give rise to deferred taxes. Deferred tax assets and liabilities for the years ended December 31, 2000 and 1999 were as follows: (in thousands) Deferred Tax Assets Difference between provisions for loan losses for tax and financial reporting purposes Difference between provisions for other real estate owned losses for tax and financial reporting purposes State income tax Unrealized holding loss on securities available-for-sale, net Gross deferred tax assets Deferred Tax Liabilities Difference between provisions for other real estate owned losses for tax and financial reporting purposes Use of accelerated depreciation for tax purposes Deferred loan fees FHLB stock dividend Acquisition of FPSB Unrealized holding gain on securities available-for-sale, net Other, net Gross deferred tax liabilities Net deferred tax assets 2000 1999 $ 8,508 $ 9,531 55 307 — — 1,855 730 8,870 12,116 $ — $ (1,272) (2) (1,170) — (1,670) (855) (4,969) $ 3,901 (412) (1,534) (7) (1,088) (485) — (1,652) (5,178) 6,938 Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1999 are primarily the result of adjustments to conform to the tax returns as filed. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in mak- ing this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Bank will realize all benefits related to these deductible temporary differences. Included in other assets in the statements of condition, at December 31, 2000 and 1999 were net deferred tax assets of $3,901,011 and $6,938,370, respectively. Other assets as of December 31, 2000 included a current income tax receivable of $1,675,244. Other liabilities as of December 31, 2000 and 1999 include a current income tax payable of $4,429,275 and $1,059,867, respectively. Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years indicated as follows: (in thousands) 2000 1999 1998 Tax provision at Federal statutory rate State income taxes, net of $ 21,157 35.00% $ 17,504 35.00% $ 14,194 35.00% Federal income tax benefit 1,340 2.22 3,576 7.15 2,850 7.03 Interest on obligations of state and political subdivisions, which are exempt from Federal taxation Low income housing tax credits Non-deductible expense— Amortization of goodwill Other, net (1,240) (947) (2.05) (1.57) (1,081) (319) (2.16) (0.64) (927) (319) (2.29) (0.79) 231 1,321 0.38 2.19 240 (200) 0.48 (0.40) 239 (61) 0.59 (0.15) Total income tax expense $ 21,862 36.17% $ 19,720 39.43% $ 15,976 39.39% 58 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 11. Stockholders’ Equity and Earnings per Share As a bank holding company, Bancorp’s ability to pay dividends will depend upon the dividends it receives from the Bank and on the income which it may generate from any other activities in which Bancorp may engage, either direct- ly or through other subsidiaries. Currently, since Bancorp does not have any other significant business activities out- side the Bank’s and CIC’s operations, its ability to pay dividends will depend solely on dividends received from the Bank. Under California State banking law, the Bank may not pay a cash dividend, without regulatory approval, which exceeds the lesser of the Bank’s retained earnings or its net income for the last three fiscal years, less any cash dis- tributions made during that period. The amount of retained earnings available for cash dividends as of December 31, 2000 is restricted to approximately $71,973,000 under this regulation. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-bal- ance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. The Federal Deposit Insurance Corporation has established five capital ratio categories: “well capitalized”, “ade- quately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized.” A well capitalized institution must have a Tier 1 capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. At December 31, 2000, the Bank was in compliance with the minimum capital requirements and is considered well capitalized. The Company and the Bank’s capital and leverage ratios as of December 31, 2000 and 1999 are presented in the tables below: (dollars in thousands) Balance Percentage Balance Percentage Balance Percentage Balance Percentage Company As of December 31, 2000 Bank Company As of December 31, 2000 As of December 31, 1999 Bank As of December 31, 1999 Tier I Capital (to risk-weighted assets) $ 202,741 1 11.05% $ 194,694 1 10.64% $ 169,556 2 10.50% $ 163,093 2 10.10% Tier I Capital minimum requirement 73,392 4.00 73,206 4.00 64,588 4.00 64,588 4.00 Excess $ 129,349 7.05% $ 121,488 6.64% $ 104,968 6.50% $ 98,505 6.10% Total Capital (to risk-weighted assets) $ 224,708 1 12.25% $ 216,661 1 11.84% $ 189,058 2 11.71% $ 182,595 2 11.31% Total Capital minimum requirement 146,784 8.00 146,412 8.00 129,176 8.00 129,176 8.00 Excess $ 77,924 4.25% $ 70,249 3.84% $ 59,882 3.71% $ 53,419 3.31% Risk-weighted assets Tier I Capital (to average assets)— Leverage ratio Minimum leverage requirement $ 1,834,804 $ 1,830,161 $ 1,614,695 $ 1,614,695 $ 202,741 1 9.28% $ 194,694 1 8.93% $ 169,556 2 8.93% $ 163,093 5 8.59% 87,387 4.00 87,251 4.00 75,974 4.00 75,974 4.00 Excess $ 115,354 5.28% $ 107,443 4.93% $ 93,582 4.93% $ 87,119 4.59% Total average assets $ 2,184,666 3 $2,181,272 3 $1,899,358 3 $ 1,899,356 3 1 Excluding the unrealized holding gains on securities available-for-sale of $2,303,000 and goodwill of $9,744,000. 2 Excluding the unrealized holding losses on securities available-for-sale of $1,006,000 and goodwill of $10,559,000. 3 Average assets represent average balances for the fourth quarter of 2000 and 1999, respectively. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 59 Notes to Consolidated Financial Statements, continued The Board of Directors of Bancorp is authorized to issue preferred stock in one or more series and to fix the voting powers, designations, preferences or other rights of the shares of each such class or series and the qualifications, limitations and restrictions thereon. Any preferred stock issued by Bancorp may rank prior to Bancorp common stock as to dividend rights, liquidation preferences, or both, may have full or limited voting rights, and may be convertible into shares of Bancorp common stock. No preferred stock has been issued as of December 31, 2000. On November 16, 2000, Bancorp’s Board of Directors adopted a Rights Agreement between Bancorp and American Stock Transfer and Trust Company, as Rights Agent, and declared a dividend of one preferred share pur- chase right for each outstanding share of Bancorp common stock. The dividend was payable on January 19, 2001 to stockholders of record at the close of business on the record date, December 20, 2000. Each preferred share pur- chase right entitles the registered holder to purchase from Bancorp one one-thousandth of a share of Bancorp’s series A junior participating preferred stock at a price of $200, subject to adjustment. In general, the rights become exercisable if, after December 20, 2000, a person or group acquires 15% or more of Bancorp’s common stock or announces a tender offer for 15% or more of the common stock. The Board of Directors is entitled to redeem the rights at one cent per right at any time before any such person acquires 15% or more of the outstanding common stock. The rights will expire in ten years. The complete terms and conditions of the rights are contained in the Rights Agreement, between Bancorp and the Rights Agent, which was filed as an exhibit to Bancorp’s Form 8-A on December 20, 2000. The Rights Agreement is a successor to Bancorp’s prior rights agreement, which expired at the close of business on December 20, 2000. The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years indicated. (in thousands, except share and per share data) Net income Basic EPS Income available to stockholders Effect of Dilutive Stock Options Diluted EPS income available to common stockholders plus assumed conversions conversions Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998 Income Shares (Numerator) (Denominator) Per Share Amount Income Shares (Numerator) (Denominator) Per Share Amount Income Shares (Numerator) (Denominator) Per Share Amount $ 38,587 $ 30,291 $ 24,579 $ 38,587 9,056,751 $ 4.26 $ 30,291 9,013,428 $ 3.36 $ 24,579 8,967,188 $ 2.74 17,134 4,332 1,205 $ 38,587 9,073,885 $ 4.25 $ 30,291 9,017,760 $ 3.36 $ 24,579 8,968,393 $ 2.74 12. Commitments and Contingencies Litigation The Company is involved in various litigation concerning transactions entered into during the normal course of business. Management, after consultation with legal counsel, does not believe that the resolution of such litigation will have a material effect upon its financial condition or results of operations. Lending In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments included commitments to extend credit in the form of loans or through commercial, standby letters of credit and financial guarantees. Those instru- 60 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report ments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying consoli- dated statements of condition. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instru- ment for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. Financial instruments whose contract amounts represent the amount of credit risk include the following: (in thousands) Commitments to extend credit Standby letters of credit Other letters of credit Financial guarantees Bill of lading guarantee Total 2000 1999 $ 619,872 15,435 44,371 — 20,729 $ 580,727 11,748 31,866 20,000 13,924 $ 700,407 $ 658,265 Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment agreement. These commitments generally have fixed expiration dates and are expect- ed to expire without being drawn upon. The total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of col- lateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the borrowers. As of December 31, 2000, the Company does not have fixed-rate or variable-rate commitments with characteris- tics similar to options, which provide the holder, for a premium paid at inception to the Company, the benefits of favorable movements in the price of an underlying asset or index with limited or no exposure to losses from unfavor- able price movements. The financial guarantees represent a conditional commitment issued by the Company to guarantee the credit per- formance on $20 million of corporate debt. The Company’s exposure to credit risk from this financial guarantee is essentially the same as if the Company was the owner of the corporation debt. At December 31, 2000 the Company has no outstanding financial guarantees. Letters of credit and bill of lading guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in making loans to customers. As of December 31, 2000, the Company had available credit lines with other financial institutions in the amount of $252,000,000. Derivative Financial Instruments The Company entered into derivative financial instruments in order to seek to mitigate the risk of interest rate exposures related to its interest earning assets and interest bearing liabilities. The Company entered into a pay fixed interest rate swap agreement with a notional amount of $20.0 million in order to alter interest rate exposures related to the mismatch of assets and liabilities. The difference between amounts receivable and payable under the terms of the interest rate swap were accrued and recognized over the term of the swap as an adjustment to net interest income. The Company entered into a forward rate agreement with a notional amount of $100.0 million that was recorded at fair value, with unrealized gains recorded as securities gains in the accompanying consolidated statements of income and comprehensive income. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 61 Notes to Consolidated Financial Statements, continued Leases The Company is obligated under a number of operating leases for premises and equipment with terms rang- ing from 1 to 55 years, many of which provide for periodic adjustment of rentals based on changes in various eco- nomic indicators. Rental expense was $2,200,000 for 2000, $1,823,000 for 1999 and $1,751,000 for 1998. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 2000: (in thousands) Year ended December 31, 2001 2002 2003 2004 2005 Thereafter Total minimum lease payments Commitments $ 1,476 1,358 1,188 1,016 974 9,306 $ 15,318 Rental income was $436,596 for 2000, $443,000 for 1999 and $455,000 for 1998. The following table shows future rental payments to be received under operating leases with terms in excess of one year as of December 31, 2000: (in thousands) Year ended December 31, 2001 2002 2003 2004 2005 Thereafter Total minimum lease payments to be received 13. Fair Value of Financial Instruments Commitments $ 389 353 280 171 24 — $ 1,217 The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Cash and Short-Term Instruments For cash and short-term instruments, the carrying amount was assumed to be a reasonable estimate of fair value. Investment Securities For securities (which include securities available-for-sale, and securities held-to-maturity), fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. 62 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Loans Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. Fair value for non-performing real estate loans was based on recent external appraisals of the underlying collater- al of the loan. If appraisals were not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates were judgementally determined using available market information and specific borrower information. Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market deposits was assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities. Other Borrowings This category includes Federal funds purchased and securities sold under repurchase agree- ments, and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. Advances from Federal Home Loan Bank The fair value of the advances is estimated by discounting the projected cash flows using the U.S. Treasury curve adjusted to approximate current entry-value interest rates applicable and similar obligations issued by the Bank. Off-Balance Sheet Financial Instruments The fair value of commitments to extend credit, standby letters of cred- it, and financial guarantees written were estimated using the fees currently charged to enter into similar agree- ments, taking into account the remaining terms of the agreements and the present creditworthiness of the counter- parties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the report- ing date. The fair value of interest rate swap and forward rate agreements were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offer- ing for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates were based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 63 Notes to Consolidated Financial Statements, continued Fair Market Value of Financial Instruments (in thousands) Financial Assets Cash and due from banks Federal funds sold and securities purchased under agreements to resell Securities available-for-sale Securities held-to-maturity Loans, net Financial Liabilities Deposits Securities sold under agreements to repurchase Advances from Federal Home Loan Bank As of December 31, 2000 As of December 31, 1999 Carrying Amount Fair Value Carrying Amount Fair Value $ 65,687 $ 65,687 $ 59,081 $ 59,081 19,000 183,409 387,200 1,437,307 19,000 183,409 388,656 1,430,956 5,000 160,991 426,332 1,245,585 5,000 160,991 416,827 1,219,336 $ 1,876,447 $ 1,881,071 $ 1,721,736 $ 1,710,265 68,173 10,000 68,201 9,951 46,990 30,000 47,649 29,305 As of December 31, 2000 As of December 31, 1999 (in thousands) Notional Amount Fair Value Notional Amount Fair Value Off-Balance Sheet Financial Instruments Commitments to extend credit Standby letters of credit Other letters of credit Financial guarantee Bill of lading guarantee Interest rate swap Forward rate agreement 14. Employee Benefit Plans $ 619,872 $ 15,435 44,371 — 20,729 20,000 100,000 (509) $ (63) (238) — (125) 977 1,104 580,727 $ 11,748 31,866 20,000 13,924 — — (328) (64) (193) 35 (69) — — Employee Stock Ownership Plan Under the Company’s 1985 Employee Stock Ownership Plan (“ESOP”), the Company makes annual contributions to a trust in the form of either cash or common stock of the Company for the benefit of eligible employees. Employees are eligible to participate in the ESOP Plan after completing two years of service for salaried full-time employees or 1,000 hours for each of two consecutive years for salaried part-time employees. The amount of the annual contribution is discretionary except that it must be sufficient to enable the trust to meet its current obligations. The Company also pays for the administration of this plan and of the trust. The ESOP purchased 18,755 shares in 2000, 33,163 shares in 1999 and 23,669 shares in 1998 of the Company’s stock at an aggregate cost of $812,359 in 2000, $1,162,829 in 1999, and $821,021 in 1998. The shares pur- chased in 2000 included 7,500 shares bought on the open market and 11,255 shares bought through the Dividend Reinvestment Plan. The shares purchased in 1999 included 20,160 shares bought on the open market and 13,003 shares bought through the Dividend Reinvestment Plan. The shares purchased in 1998 included 11,000 shares bought on the open market and 12,669 shares bought through the Dividend Reinvestment Plan. The Company con- tributed $564,800 in 2000, $537,200 in 1999 and $486,120 in 1998 to the trust which was charged to salaries and employee benefits in the accompanying consolidated statements of income and comprehensive income. In 2000, distribution of benefits to participants totaled 38,769 shares. As of December 31, 2000, the ESOP owned 551,636 shares or 6.08% of the Company’s outstanding common stock. 64 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Cathay Bancorp, Inc. 401(k) Plan In 1997, the Board approved the Cathay Bancorp, Inc. 401(k) Profit Sharing Plan, which began on March 1, 1997. Salaried employees who have completed three months of service and have attained the age of 21 are eligible to participate. Enrollment dates are on January 1st, April 1st, July 1st and October 1st of each year. Participants may contribute up to 15% of their compensation for the year but not to exceed the dollar limit set by the Internal Revenue Service (IRS). Participants may change their contribution election on the enrollment dates. The Company matches 50% of the participants’ contribution up to 4% of their compensation after one year of serv- ice. The vesting schedule for the matching contribution is 0% for less than two years of service, 25% after two years of service and from then on, at an increment of 25% each year until 100% vested after five years of service. In 2000, the Company’s contribution amounted to $198,119 in 2000, $186,736 in 1999 and $128,150 in 1998. The Plan allows participants to withdraw all or part of their vested amount in the plan due to certain financial hardship as designated by the IRS. Participants may also borrow up to 50% of the vested amount, up to a maximum of $50,000. The minimum loan amount is $1,000. 15. Equity Incentive Plan In 1998, the Board adopted the Cathay Bancorp, Inc. Equity Incentive Plan. Under the Equity Incentive Plan, directors and eligible employees may be granted incentive or nonstatutory stock options, or awarded restricted stock, for up to 1,075,000 shares of the Company’s common stock. The Equity Incentive Plan currently terminates in February 2008. The Company granted nonstatutory stock options to selected bank officers and non-employee directors in September 1999 to purchase a total of 45,000 shares, and in January 2000 to purchase a total of 55,000 shares of the Company’s common stock. The exercise price per share of these nonstatutory stock options is equal to the fair market value of a share of the Company’s common stock on the date of grant. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events). If such options expire or ter- minate without having been exercised, any unpurchased shares will again be available for future grants or awards. Balance, December 31, 1997 Granted Exercised Forfeited Expired Cancelled Balance, December 31, 1998 Granted Exercised Forfeited Expired Cancelled Balance, December 31, 1999 Granted Exercised Forfeited Expired Cancelled Balance, December 31, 2000 Shares Weighted-Average Exercise Price — 45,000 — — — — 45,000 — (300) — — — $ — 33.00 — — — — $ 33.00 — 33.00 — — — 44,700 $ 33.00 55,000 (1,452) (420) — — 42.50 33.00 42.50 — — 97,828 $ 38.30 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 65 Notes to Consolidated Financial Statements, continued The following table shows stock options outstanding and exercisable as of December 31, 2000, the corresponding exercise price and the weighted average contractual life remaining. Exercise Price $ 33.00 42.50 Outstanding Weighted-Average Remaining Contractual Life (in Years) Exercisable Shares 7.8 9.1 8.5 16,348 — 16,348 Shares 43,248 54,580 97,828 No compensation cost has been recognized for its stock option plans in the consolidated financial statements. The Company estimates the fair value of options granted during 2000 and 1998 using the Black-Scholes option- pricing model with following assumptions: (i) an expected life of the option of 4 years, (ii) a stock price volatility of 33.88% in 2000 and 33.50% in 1998 based on daily market prices for the preceding four-year period, (iii) an expected dividend yield of 2.1% per share per annum in 2000, and 1.9% per share per annum in 1998, and (iv) a risk-free interest rate of 5.1% in 2000 and 4.5% in 1998. The fair value of the options was calculated to be $12.05 per share for options granted in 2000 at the date of grant and $9.21 per share for options granted in 1998 at the date of grant. If the compensation cost for the Company’s stock option plan had been determined with the fair value at the grant dates, computed using the assumptions above, for awards under the Plan consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share for 2000, 1999 and 1998 would have been reduced to the pro forma amounts indicated below. (in thousands, except per share data) 2000 1999 1998 Net income As reported Pro forma Basic net income per share As reported Pro forma Diluted net income per share As reported Pro forma $ 38,587 38,457 $ 30,291 30,237 24,579 24,564 4.26 4.25 4.25 4.24 3.36 3.35 3.36 3.35 2.74 2.74 2.74 2.74 66 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 16. Condensed Financial Information of Cathay Bancorp, Inc. (Unaudited) The condensed financial information of Cathay Bancorp, Inc. as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 were as follows: Statements of Condition (in thousands, except share and per share data) Assets Cash Investment securities Investment in subsidiary—Cathay Bank Total assets Liabilities Accrued expenses Total liabilities Stockholders’ equity Preferred stock, $0.01par value; 10,000,000 shares authorized, none issued Common stock, $0.01par value; 25,000,000 shares authorized, 9,074,365 and 9,033,583 shares issued and outstanding in 2000 and 1999, respectively Additional paid-in-capital Accumulated other comprehensive income (loss) Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity Year ended December 31, 2000 1999 $ 4,701 3,409 206,740 $ 6,504 — 172,646 $ 214,850 $ 179,150 $ $ 63 63 — 41 41 — 91 66,275 2,303 146,118 90 64,529 (1,006) 115,496 214,787 179,109 $ 214,850 $ 179,150 Statements of Income and Comprehensive Income (in thousands) Year ended December 31, 2000 1999 1998 Cash dividends from Cathay Bank Amortization of organizational costs and other expenses $ $ 7,965 (280) $ 7,248 (321) Income before income tax expense Income tax benefit Income before undistributed earnings of subsidiary Equity in undistributed earnings of subsidiary Net income Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year Less: reclassification adjustment for realized gains (losses) on securities included in net income Total comprehensive income (loss), net of tax Total comprehensive income 7,685 118 7,803 30,784 38,587 6,927 136 7,063 23,228 30,291 6,272 (268) 6,004 113 6,117 18,462 24,579 3,309 (2,229) 810 — (34) 3,309 (2,195) (8) 818 $ 41,896 $ 28,096 $ 25,397 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 67 Notes to Consolidated Financial Statements, continued Statements of Cash Flows (in thousands) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary Increase (decrease) in accrued expenses Other Net cash provided by operating activities Cash Flows from Investing Activities Purchase of investment securities Net cash used in investing activities Cash Flows from Financing Activities Proceeds from issuance of common stock Cash dividends Net cash used in financing activities Increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes Non-cash investing activities: Net change in unrealized holding gains (losses) on securities available-for-sale, net of tax 17. Dividend Reinvestment Plan Year ended December 31, 2000 1999 1998 $ 38,587 $ 30,291 $ 24,579 (30,784) 22 — (23,228) — — (18,462) (30) 3 7,825 7,063 6,090 (3,409) (3,409) 1,746 (7,965) (6,219) (1,803) 6,504 — — 1,609 (7,248) (5,639) 1,424 5,080 — — 1,649 (6,272) (4,623) 1,467 3,613 $ 4,701 $ 6,504 $ 5,080 $ $ 150 $ 150 $ 150 3,309 $ (2,195) $ 818 The Company has a dividend reinvestment plan which allows for participants’ reinvestment of cash dividends and certain additional optional investments in the Company’s common stock. Shares issued under the plan and consider- ation received were 39,330 for $1,690,664 in 2000, 44,523 for $1,600,173 in 1999 and 47,017 for $1,649,426 in 1998. 68 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report 18. Quarterly Results of Operations (Unaudited) The following table sets forth selected unaudited quarterly financial data. Summary of Operations (in thousands, except per share data) Interest income Interest expense 2000 1999 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter $ 43,834 $ 43,039 $ 40,292 $ 37,388 $ 35,460 $ 33,489 $ 32,538 $ 31,514 14,006 20,644 16,094 14,278 14,985 17,861 14,094 19,557 Net interest income Provision for loan losses 23,190 1,050 23,482 1,050 22,431 1,050 21,294 1,050 20,475 1,050 19,395 1,050 18,260 1,050 17,508 1,050 Net interest income after provision for loan losses Non-interest income Non-interest expense Income before income tax expense Income tax expense 22,140 4,466 10,463 22,432 2,746 9,493 21,381 2,795 9,296 20,244 2,749 9,252 19,425 2,395 7,481 18,345 2,361 7,643 17,210 2,181 7,473 16,458 1,918 7,685 16,143 6,449 15,685 4,233 14,880 5,793 13,741 5,387 14,339 5,629 13,063 5,170 11,918 4,733 10,691 4,188 Net income 9,694 11,452 9,087 8,354 8,710 7,893 7,185 6,503 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year Less: reclassification adjustment for realized gains (losses) on securities included in net income Total other comprehensive income (loss), net of tax Total comprehensive 2,152 986 336 (165) (899) 231 (659) (875) — — — — — 6 19 (32) 2,152 986 336 (165) (899) 225 (678) (843) income $ 11,846 $ 12,438 $ 9,423 $ 8,189 $ 7,811 $ 8,118 $ 6,507 $ 5,660 Basic net income per common share Diluted net income per common share $ $ 1.07 $ 1.26 $ 1.00 $ 0.92 $ 0.96 $ 0.88 $ 0.80 $ 0.72 1.07 $ 1.26 $ 1.00 $ 0.92 $ 0.96 $ 0.87 $ 0.80 $ 0.72 Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 69 Independent Auditors’ Report The Stockholders and the Board of Directors of Cathay Bancorp, Inc.: We have audited the accompanying consolidated statements of condition of Cathay Bancorp, Inc. and subsidiary (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income and compre- hensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cathay Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Los Angeles, California January 15, 2001 70 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Administrative Information Board of Directors Front Row (left to right) Dunson K. Cheng Chairman of the Board and President Cathay Bancorp, Inc. George T. M. Ching Vice Chairman of the Board Cathay Bancorp, Inc. Wilbur K. Woo Secretary of the Board Cathay Bancorp, Inc. Wing K. Fat President Frank Fat, Inc. Ralph Roy Buon-Cristiani Retired Veterinarian Back Row (left to right) Kelly L. Chan CPA Vice President Phoenix Bakery Joseph C. H. Poon President Edward Properties, Inc. Michael M. Y. Chang Retired Attorney Patrick S. D. Lee Vice President TC Realty Inc. Anthony M. Tang Executive Vice President Cathay Bancorp, Inc. Thomas Tartaglia Director Cathay Bancorp, Inc. 72 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Officers Executive Officers of Cathay Bancorp, Inc. Administration of Cathay Bank Weston Barkwill Chief Internal Auditor Dunson K. Cheng Chairman of the Board and President Dunson K. Cheng Chairman of the Board and President George T. M. Ching Vice Chairman of the Board George T. M. Ching Vice Chairman of the Board Wilbur K. Woo Secretary of the Board Wilbur K. Woo Secretary of the Board Anthony M. Tang Executive Vice President and Chief Financial Officer/ Treasurer/Assistant Secretary Anthony M. Tang Senior Executive Vice President and Chief Lending Officer John Chen Executive Vice President Northern California Operations Irwin Wong Executive Vice President Branch Administration Elena Chan Senior Vice President and Chief Financial Officer James P. Lin Senior Vice President and International Banking Department Manager Maria Wei Senior Vice President and Commercial Loan Department Manager Chingying Chu First Vice President and Small Business Loan Department Manager Wilson Tang Regional Vice President Branch Administration Oliver Chen Vice President and Commercial Loan Officer Jay Cheng Vice President and Commercial Loan Officer Mary Figlioli Vice President and Commercial Real Estate Loan Officer John M. Fox Vice President Collateral Control Department Manager Angela Hui Vice President and Commercial Real Estate Loan Officer Scott Kleinert Vice President and Manager Information Systems Dennis Kwok Vice President Investments Margaret Li Vice President Mortgage Loan Department Manager Paul Liaw Vice President and International Loan Officer Tony Moya Vice President Branch Operations Administration Jack Tweedy First Vice President and Commercial Real Estate Loan Department Manager Francine Paxson Vice President Loan Operations Pin Tai General Manager New York Region Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report You are here > 73 Offices Corporate Office: 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 Branch Offices: California Los Angeles 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 Kenneth Chan Assistant Vice President and Manager Monterey Park 250 South Atlantic Boulevard Monterey Park, CA 91754 (626) 281-8808 Tel: Fax: (626) 281-2956 Frank Chen Regional Vice President and Manager Alhambra 601 North Atlantic Boulevard Alhambra, CA 91801 Tel: (626) 284-6556 Fax: (626) 282-3496 Frank Chen Regional Vice President and Manager Hacienda Heights 16025 East Gale Avenue City of Industry, CA 91745 Tel: (626) 333-8533 Fax: (626) 336-4227 Shu Lee Regional Vice President and Manager Westminster 9121 Bolsa Avenue Westminster, CA 92683 Tel: (714) 890-7118 Fax: (714) 898-9267 Allen Vi Assistant Vice President and Manager San Jose 2010 Tully Road San Jose, CA 95122 (408) 238-8880 Tel: Fax: (408) 238-2302 Edward Wong Vice President and Manager San Gabriel 825 East Valley Boulevard San Gabriel, CA 91776 (626) 573-1000 Tel: Fax: (626) 573-0983 Jack Sun Vice President and Manager Torrance 23228 Hawthorne Boulevard Torrance, CA 90505 Tel: (310) 791-8700 Fax: (310) 791-1862 Allen Lin Assistant Vice President and Manager Oakland 710 Webster Street Oakland, CA 94607 Tel: (510) 208-3700 Fax: (510) 208-3727 Cerritos 11355 South Street Cerritos, CA 90701 Tel: (562) 860-7300 Fax: (562) 860-2296 Henry Yoh Assistant Vice President and Manager City of Industry 1250 South Fullerton Road City of Industry, CA 91748 Tel: (626) 810-1088 Fax: (626) 810-2188 Shu Lee Regional Vice President and Manager Cupertino 10480 South De Anza Boulevard Cupertino, CA 95014 Tel: (408) 255-8300 Fax: (408) 255-8373 David Lin Vice President and Manager Milpitas 1759 North Milpitas Boulevard Milpitas, CA 95035 Tel: (408) 262-0280 Fax: (408) 262-0780 Tony Wen Vice President and Manager Irvine 15323 Culver Drive Irvine, CA 92714 Tel: (949) 559-7500 Fax: (949) 559-7508 Linda Kuo Vice President and Manager Millbrae Millbrae Plaza 1095 El Camino Real Millbrae, CA 94030 Tel: (650) 652-0188 Fax: (650) 652-0180 Stanley Wong Vice President and Manager Valley-Stoneman 43 East Valley Boulevard Alhambra, CA 91801 Tel: (626) 576-7600 Fax: (626) 576-5831 Claudia My Lu Vice President and Manager Berkeley-Richmond 3288 Pierce Street Richmond, CA 94804 Tel: (510) 526-8898 Fax: (510) 526-0639 Sumiko Wu Assistant Vice President and Assistant Manager Diamond Bar 1195 South Diamond Bar Boulevard Diamond Bar, CA 91765 Tel: (909) 860-8299 Fax: (909) 861-0920 Shu Lee Regional Vice President and Manager New York Flushing 40-14/16 Main Street Flushing, NY 11354 Tel: (718) 886-5225 Fax: (718) 886-0220 Betty Chou Assistant Vice President and Manager New York Chinatown 45 East Broadway New York, NY 10002 (212) 732-0200 Tel: Fax: (212) 732-7389 Louisa Ting Vice President and Manager Texas Houston 10375 Richmond Avenue #1600 Houston, TX 77042 Tel: (713) 278-9599 Fax: (713) 278-9699 Herbert Ng Vice President and Manager Overseas Office: Hong Kong Room 902-3, 9/F Printing House 6 Duddell Street Central, Hong Kong Tel: (852) 2522-0071 Fax: (852) 2810-1652 Winnie Lau Representative Subsidiary: Cathay Investment Company 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 George T.M. Ching President Taiwan C.I.C. Sixth Floor, Suite 3 146 Sung Chiang Road Taipei, Taiwan, R.O.C. Tel: (886) (2) 2537-5057 Fax: (886) (2) 2537-5059 Li Sung Representative and Manager Additional Information: Market Makers The following firms make a market in Cathay Bancorp, Inc. stock: Herzog, Heine, Geduld, Inc. Wedbush Morgan Securities Inc. Hoefer & Arnett, Inc. Registrar and Transfer Agent American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Tel: (800) 937-5449 Cathay Service Hotline (800) 9 CATHAY / 922-8429 Service available 24 hours throughout California. Cathay Bank Web site www.cathaybank.com 74 < You are here Cathay Bancorp, Inc. and Subsidiary 2000 Annual Report Annual Report Form 10-K For stockholders and others interested in information beyond that shown in this report, the Company’s Annual Report on Form 10-K for 2000 required to be filed with the Securities and Exchange Commission may be obtained without charge by writing to: Monica Chen Cathay Bank 777 North Broadway Los Angeles, California 90012 or by visiting our Web site at www.cathaybank.com h t i m S y c I : w e i v e R n i r a e Y m o c . n g i s e d g m c . w w w A C , a n e d a s a P , . c n I n g i s e D g M C : n g i s e D Member of Federal Deposit Insurance Corporation This annual report has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation. 777 North Broadway Los Angeles, California 90012 T: (213) 625-4700 F: (213) 625-1368 www.cathaybank.com

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