Cathay General Bancorp
Annual Report 2001

Plain-text annual report

looking forward Annual Report 2001 shanghai 40years of dedicated service 40years and beyond ...the next About the Cover Cathay Bancorp Inc. is the holding company for Cathay Bank. This year, 2002, will be a busy and exciting one. To celebrate our first 40 years in business and to rededicate the company to the next 40 years and beyond, the Board has planned activities to thank our stockholders, customers, employees, and the community that has supported and nurtured us. In addition, we shall be opening two new offices – one in Brooklyn, New York, and another in Sacramento, California. The Bank is also setting up its third overseas representative office, in Shanghai, China. Over the last several years, our customers have seen a significant increase in import business from China. With China’s accession into the World Trade Organization and China’s increasing importance in the world economy, we believe the Shanghai Office will allow Cathay Bank to project our presence into China and be helpful in promoting the Bank’s services in this potent new market. financial highlights $43 $39 $246 $215 $179 $157 $136 $1,622 $30 $25 $20 $2,453 $2,207 $1,996 $1,781 97 98 99 00 01 97 98 99 00 01 97 98 99 00 01 Net Income (in millions) Stockholder’s Equity (in millions) Total Assets (in millions) (dollars in thousands, except per share data) 2001 2000 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 $ 42,620 $ 38,587 $ 4,033 10.45% 4.71 4.69 1.00 4.26 4.25 0.88 0.45 0.44 0.120 $ $ 623,314 1,640,032 2,453,114 2,122,348 246,011 27.40 $ 564,996 1,437,307 2,206,834 1,876,447 214,787 23.67 58,318 202,725 246,280 245,901 31,224 3.73 10.56 10.35 13.64 10.32% 14.10 11.16 13.10 14.54 15.76 1.82% 18.36% 1.81% 20.09% 11.15% 12.30% 9.48% 11.05% 12.25% 9.28% 1 Total capital ratio represents stockholders’ equity plus the allowance for loan losses allowable as a percentage of risk-weighted assets. Annual Report 2001 Cathay Bancorp, Inc. and Subsidiary 1 letter to stockholders Record Earnings $42.6 $246$204 million deposit growth million loan growth million Dear Stockholders: In the Chinese zodiac, 2001 was the Year of the Snake. According to folklore, the Year of the Snake would be both eventful and challenging. For the year past, that proved to be extremely prescient. On September 11, our country faced unprecedented terrorist attacks, which resulted in the tragic deaths of over 3,000 innocent people, and precipitated the war in Afghanistan. This immense tragedy prompted our Board, on September 20, to donate $250,000 to the related relief efforts. In addition, it author- ized the formation of a non-profit organization, 911 Healing Hands, Inc., to encourage further donations to the 911 Healing Hands Fund from our stockholders, customers, and friends. To make it convenient for donors to give, the Bank worked with Gus Networks to establish a website, 911healinghands.org, to process donations online. The Bank also invited the Organization for Chinese Americans and other community organizations to join in this effort. The Fund closed at year-end, having raised approximately $400,000. The severity of the impact of September 11 on New York Chinatown, according to the New York Times, was sec- ond only to Ground Zero, leading to many business closures and a tremendous loss of jobs. Therefore, the 911 Healing Hands Board of Directors voted to allocate 85% of the funds towards a grant to the Asian American Federation (AAF). AAF will use the grant money for job assistance programs, coordination with community and government sectors for case management for victims, and to promote Chinatown tourism. The remaining 15% of the funds will be devoted to two programs: one for public education to promote understanding and harmony amongst various communities, and the second to raise funds for a monument to memorialize Chinese-American victims of September 11. After ten years of continuous expansion, the longest in history, the economy slowed abruptly at the beginning of 2001. In an attempt to wrest the economy from a recession, the Federal Reserve Bank lowered interests rates successively and aggressively 11 times for a total 475 basis points. As a result, the Wall Street Prime Lending rate dropped from 9.50% to 4.75%. As a commercial bank, with many of our loans tied to the prime rate, the interest income of the bank declined with the drop in prime. On the other hand, much of our deposit base was in fixed-maturity time certificates of deposit that could not simultaneously be repriced. The net result was a narrowing of our net interest margin from 4.52% during the fourth quarter of 2000 to 4.09% in the last quarter of 2001. 2 Cathay Bancorp, Inc. and Subsidiary Annual Report 2001 Dunson K. Cheng Chairman of the Board and President Despite the many challenges, our company went on to report record results for 2001. Our net income was $42.6 million, an increase of 10.45% over the $38.6 million reported for the year 2000, and diluted earn- ings per share were $4.69 compared to $4.25 per diluted share for the previous year. Return on average stock- holders’ equity totaled 18.36% in 2001 compared to 20.09% in 2000. Return on average assets was 1.82% for the year 2001 compared to 1.81% for the previous year. We are gratified that our performance was recognized when American Banker, the authoritative banking newspaper, published a study that named us the 25th best performing banking company in the country and the 11th most efficient. Our loans increased by 14.10% to $1.7 billion, while deposits rose by 13.10% to $2.1 billion at year-end. Our total assets grew by 11.16% to $2.5 billion for the same period. Stockholders’ equity of $246.0 million was up $31.2 million or 14.54% from December 31, 2000 and our tier 1 leverage capital ratio was 9.48%, qualifying our bank as “well-capitalized”, in accordance with the Federal Deposit Insurance Corporation’s requirement for such classification. On October 5, we opened a new branch in Union City, California, our 7th in the San Francisco Bay Area. With this addition, we have built a complete branch network in the Chinese American market of this dynamic high growth area. As a result, no Bay Area customer is now more than 12 miles away from a Cathay Bank branch. This year, 2002, will be a busy and exciting one. To celebrate our first 40 years in business and to reded- icate the company to the next 40 years and beyond, the Board has planned activities to thank our stockholders, customers, employees, and the community that has supported and nurtured us. In addition, we shall be opening two new offices – one in Brooklyn, New York, and another in Sacramento, California. The Bank is also setting up its third overseas representative office, in Shanghai, China. Over the last several years, our customers have seen a significant increase in import business from China. With China’s accession into the World Trade Organization and China’s increasing importance in the world economy, we believe the Shanghai Office will allow us to project our presence into China and be helpful in promoting the Bank’s services in this potent new market. In its first forty years, Cathay Bank grew from a very humble community organization to a respected $2.5 billion regional financial institution. This could not have been accomplished without the support of our stockholders. The Board, our management, and our employees would like to express their gratitude to you. Dunson K. Cheng Chairman of the Board and President Annual Report 2001 Cathay Bancorp, Inc. and Subsidiary 3 4 Cathay Bancorp, Inc. and Subsidiary Annual Report 2001 Annual Report 2001 Cathay Bancorp, Inc. and Subsidiary 5 American Banker rankings 11 th Most Efficient 25 th Best Performing among the largest 500 U.S. bank holding companies among 300 publicly traded banking companies 40years of dedicated service ...the next 40 years and beyond Y e a r i n R e v i e w Continued Growth In a Difficult Environment In 2001, Cathay Bancorp, Inc., the holding company for Cathay Bank (together, “Cathay”), prepared to cele- brate 40 stellar years of financial strength, superior performance and outstanding service to the Chinese- American community. Again, it delivered record results. Earnings increased 10.4%, from $38.6 million to $42.6 million, an all-time high, marking 21 consecutive quarters of double-digit earnings growth. Total deposits increased $246.0 million to $2.1 billion, compared with $1.9 billion in 2000. Gross loans grew $204.5 million. Total assets were up 11.2% at year end to $2.5 billion, a solid foundation from which to begin a new era. Cathay was able to achieve this record growth, despite an economy in recession and the debilitating attack on the U.S. on September 11, by remaining intensely focused on its strategies: prudent financial man- agement, strategic market expansion, proactive technological modernization, competitive products and ser- vices, and employee excellence. The financial community recognizes Cathay’s achievements. In a survey published in the authoritative banking newspaper American Banker, the Bancorp ranked 11th among the 500 most efficient U.S. bank hold- ing companies, based on the ratio of expenses to assets. It ranked 25th among the 300 best performing pub- licly traded banking companies in America, based on the ratio of net income to assets. Cathay Bank was the first Chinese-American financial institution to offer full banking services in the three largest U.S. markets— California, New York, and Texas—and it remains so. Strategic Branch Expansion Cathay Bank will also be one of the leading Chinese-American banks to establish a representative office in mainland China. On February 5, 2002, the Bancorp announced that the People’s Bank of China had officially approved the Bank’s application to open a representative office in Shanghai. This new expansion comes as increasing numbers of customers seek services to support their export-import trade with China. With China’s admission into the World Trade Organization, the commercial relationship between the U.S. and China will be even stronger, providing Cathay Bank with new market opportunities. Domestically, the Bank’s branch expansion strategy targets growth opportunities in flourishing Chinese-American communities, where there is demand for its niche services. On October 5, the Bank opened a new branch in Union City, California, its seventh in the Bay Area. It now has 12 branches in Southern California, seven in Northern California, two in New York State and one in Houston, Texas. In April 2002, the Bank will open two additional branches, one in Brooklyn, New York, and one in Sacramento, California, strengthening its bi-coastal presence. Annual Report 2001 Cathay Bancorp, Inc. and Subsidiary 7 Departmental Performance The exciting growth in our service network was matched by encouraging performance in the Bank’s lending and international services. Real Estate and Construction Lending In 2001, demand in the real estate sector continued to be strong and Cathay Bank was well positioned to take advantage of the opportunities. Real estate and construction loan profitability increased nearly 8.0%. Fee income increased by 34.7%. The Bank has relationships with major developers and strives for diversity in the projects and borrowers it funds. Some of its 2001 loans included: • $17 million for construction of a residential development in Redondo Beach, California; • $12 million for development of a shopping center in San Diego, California; • $11 million for refinancing of a commercial building in Torrance, California; and • $7 million for construction of a commercial/retail building in Los Angeles, California. Corporate and Commercial Lending Cathay Bank made great strides forward by intensifying its focus on the financing needs of its corporate customers. In 2001, its Corporate and Commercial Lending officers generated more than double the number of loans generated in 2000, and increased fee income by 3.7%. International Banking Services Growth at the Bank’s international banking services exceeded expectations. The Bank’s wire transfer service served more than 100,000 customers. Total fee income increased 15.1% to $2,381,000. In addition, the Bank works closely with customers engaged in foreign financial transactions, helping them hedge against currency fluctuations by offering both spot and forward contracts. With competitive exchange rates and fee-free transaction advantage, the Bank makes it possible for customers to control their costs and remain competitive. In 2001, total customer volume for commercial foreign exchange trading services increased a remarkable 51.7%. Total fee income increased 46.0%, and the number of trades increased 26.0%. New Products and Services The Bank developed additional opportunities for fee income with two new insurance products at Cathay Global Investment Services offered through UVest Financial Services: Long-Term Care Insurance and Variable Life Insurance. Both products address growing markets created by an aging population. According to industry estimates, in 2002 more than 7 million Americans will need long-term care, at a per-person cost of approximately $50,000 a year. Demand and cost will increase as the aging baby boom gener- ation puts pressure on available resources. Few group health insurance policies cover the cost of long-term care. Long Term Care Insurance enables customers to ensure that they have the care they need as they grow older. With Variable Life Insurance, Cathay Bank again increases the investment choices available to customers wishing to plan for their golden years. This flexible tool enables customers to combine the death- benefit security of term life insurance with the loan option to withdraw income before retirement. A third new product addresses another demographic: the second baby boom. Today’s young parents will pay tomorrow’s college bills, expected in 20 years to be $100,000 or more for a four-year degree. Through its relationship with UVest Financial Services, Cathay Global Investment Services now offers a College Savings Investment Account, giving parents a valuable financial planning tool with tax-deferred earnings to help them save for their children’s education. 8 Cathay Bancorp, Inc. and Subsidiary Annual Report 2001 relief fund 119 healing hands Community-Focused for 40 Years Cathay Bank has responded compassionately to community needs since its inception in 1962. In 2001, the Bank financed a number of affordable-housing projects, established a relief fund in response to the events of September 11, and gave to numerous other deserving causes. September 11 Relief Fund In response to the horrific attacks on the World Trade Center and the Pentagon, Cathay Bank reached out to help by donating $250,000 to establish the 911 Healing Hands Fund. The Organization of Chinese Americans (OCA) helped the Bank launch a nationwide campaign to seek additional donations. At year-end, the fund had raised approximately $400,000. The funds will be devoted to public education promoting understanding and harmony amongst various communities, job assistance programs, and case management for victims. In 2002, Cathay Bank plans to join OCA in building a monument as a memorial to the Chinese-American victims of September 11. 40years of dedicated service ...the next 40 years and beyond Affordable Housing Beginning in 1999, the Bank invested more than $5 million for a 99.9% limited partner- ship interest in Wilshire Courtyard, a 102-unit senior housing project in Los Angeles. This five-story building, fully leased prior to completion of construction, will address a critical shortage by providing affordable hous- ing for senior citizens. In September, Cathay Bank also provided $9.3 million in financing the construction and renovation of Pine Villa, an assisted living facility in Long Beach. In addition, the Bank financed $5.3 million in construction loan bonds for Cesar Chavez Gardens, a four-story complex in Los Angeles Chinatown that will provide affordable housing apartments and a day care center. Construction should be complete by October 2002. Supporting Community Organizations In 2001, the Bank continued to support worthy causes in the commu- nities it serves. These included: • funding low-income housing and community economic development projects through the Federal Home Loan Bank of San Francisco’s Affordable Housing Program; • providing grants to the First African Methodist Episcopal Church (FAME) and the Valley Economic Development Center (VEDC) to help meet the loan loss reserve requirement for their SBA Micro Loan Program; • expanding early childhood programs through Child Care, Inc., in New York City; • supporting youth banking education in underserved communities through Operation HOPE; • supporting public health programs in the City of Long Beach; and • financing the $7 million construction of a low-income housing project in Brooklyn, New York. The Bank is also in the process of establishing a Cathay Bank Foundation to contribute to the many worth- while charitable organizations that help those in need. 2002 and Beyond The entire Cathay family has entered 2002 with a great sense of excitement, proud of its 40 years of achieve- ment and energized by the opportunities ahead. Throughout the coming Year of the Horse, Cathay will hold 40th anniversary celebration activities to thank the stockholders, customers, employees and community mem- bers who have supported and nurtured its growth and helped make it the successful financial institution it continues to be. As it prepares for the next milestone, Cathay rededicates itself to continued banking excellence. Forty years is a mere beginning. In the infinite universe that is the future, Cathay has mapped a pow- erful trajectory for ascendancy in the many years to come. 10 Cathay Bancorp, Inc. and Subsidiary Annual Report 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ¥ n ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ñscal year ended December 31, 2001 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission Ñle number 0-18630 Cathay Bancorp, Inc. (Exact name of Registrant as speciÑed in its charter) Delaware (State or other jurisdiction of incorporation or organization) 95-4274680 (I.R.S. Employer IdentiÑcation No.) 777 North Broadway, Los Angeles, California 90012 (Address of principal executive oÇces) (Zip Code) Registrant's telephone number, including area code: (213) 625-4700 Securities registered pursuant to Section 12(b) of the Act: None Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ¥ No n Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥ The aggregate market value of the voting stock held by non-aÇliates of Registrant as of February 26, 2002 was $477,272,693 (computed on the basis of $65.50 per share, which was the closing price of our Common Stock reported by the Nasdaq National Market on February 26, 2002).* The number of shares outstanding as of February 26, 2002: Common Stock, $.01 par value Ì 8,985,667 shares. DOCUMENTS INCORPORATED BY REFERENCE ‚ Portions of Registrant's deÑnitive proxy statement relating to Registrant's 2002 Annual Meeting of Stockholders to be held April 15, 2002, as Ñled, are incorporated by reference into Part I and Part III. * Estimated solely for the purposes of this cover page. The market value of shares held by Registrant's directors, oÇcers, and Employee Stock Ownership Plan have been excluded. CATHAY BANCORP 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 1. BUSINESS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Business of Bancorp ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Overview ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Business of the BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset Quality ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on Equity and Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest Rates and DiÅerentials ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Analysis of Changes in Net Interest Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commitments and Lines of Credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subsidiaries of Cathay Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expansion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Principal OÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Regulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Regulation of Bancorp and the Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Regulatory EnvironmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fiscal and Monetary Policies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bank Holding Company Regulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Services Modernization Legislation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ USA Patriot ActÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Banking Regulations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 2. PROPERTIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 3. LEGAL PROCEEDINGS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART IIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 5. MARKET FOR CATHAY BANCORP'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 6. SELECTED FINANCIAL DATAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 3 3 3 3 3 4 4 4 6 6 6 7 7 7 7 7 7 7 8 8 9 9 10 10 10 11 11 11 14 14 18 20 20 20 20 22 1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Review of Financial ConditionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Risk Elements of the Loan Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital Resources ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Liquidity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Critical Accounting Policies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Recent Accounting Pronouncements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Factors That May AÅect Future ResultsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ÏÏÏÏÏÏÏÏÏÏÏÏ Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Quantitative Information About Interest Rate Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial DerivativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART III ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 11. EXECUTIVE COMPENSATION ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ÏÏÏÏÏÏ ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART IV ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KÏÏÏÏÏÏÏ SIGNATURESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Index To Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 23 23 24 32 38 48 49 50 50 51 55 55 57 58 59 59 59 59 59 59 60 61 61 62 64 2 In this annual report on Form 10-K, ""Bancorp""refers to Cathay Bancorp, Inc. and the ""Bank'' refers to Cathay Bank. The terms ""Company,'' ""we,'' ""us,'' and ""our'' refer to Bancorp and the Bank collectively. The statements in this report include forward-looking statements regarding management's beliefs, projections, and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, also include words such as ""believes,'' ""expects,'' ""anticipates,'' ""intends,'' ""plans,'' ""estimates'' or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially diÅerent from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, adverse developments, or conditions related to or arising from: ‚ our expansion into new market areas ‚ Öuctuations in interest rates ‚ demographic changes ‚ increases in competition ‚ deterioration in asset or credit quality ‚ changes in the availability of capital ‚ adverse regulatory developments ‚ changes in business strategy or development plans, including plans regarding the registered investment company ‚ general economic or business conditions ‚ other factors discussed in Part II Ì Item 7 Ì ""Factors that May AÅect Future Results.'' 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 reÖect future developments or events. PART I Items 1. Business Business of Bancorp Overview Cathay Bancorp, Inc. is a business corporation organized under the laws of the State of Delaware on March 1, 1990. Our only oÇce, and our principal place of business, is located at the main oÇce of Cathay Bank at 777 North Broadway, Los Angeles, California 90012. Our telephone number is (213) 625-4700. We are the holding company of Cathay Bank, a California state-chartered commercial bank. Our sole current business activity is to hold all of the outstanding stock of Cathay Bank. In the future, we may become an operating company or acquire savings institutions, banks or companies engaged in bank-related activities and may engage in or acquire such other businesses, or activities as may be permitted by applicable law. Competition Our primary business is the business of the Bank. Therefore, the competitive conditions to be faced by us are expected to continue to include those faced by the Bank. See ""Business of the Bank Ì Competition.'' In addition, many banks and Ñnancial institutions have formed holding companies. It is likely that these holding companies will attempt to acquire other banks, thrift institutions, or companies engaged in bank-related 3 activities. Thus, we may face increased competition in undertaking acquisitions of such institutions and in operating after any such acquisition. Employees Due to the limited nature of our activities, Bancorp currently does not employ any persons other than our management, which includes the President, the Chief Financial OÇcer, and the General Counsel. In the future, if we acquire other Ñnancial institutions or pursue other lines of business, we may hire additional employees. See ""Business of the Bank Ì Employees'' below. Business of the Bank General The Bank was incorporated under the laws of the State of California on August 22, 1961 and was licensed by the Department of Financial Institutions (previously known as the California State Banking Department) and commenced operations as a California state-chartered bank on April 19, 1962. Cathay Bank is an insured bank under the Federal Deposit Insurance Act but, like most state-chartered banks of similar size in California, it is not a member of the Federal Reserve System. The Bank's main oÇce is located in the Chinatown area of Los Angeles, at 777 North Broadway, Los Angeles, California 90012. In addition, the Bank has the following branch oÇces: ‚ Southern California Ì 11 branches located in the cities of: ‚ Monterey Park ‚ Alhambra (2 locations) ‚ City of Industry (2 locations) ‚ Westminster ‚ San Gabriel ‚ Torrance ‚ Cerritos ‚ Irvine ‚ Diamond Bar ‚ Northern California Ì Seven branches located in the cities of: ‚ San Jose ‚ Oakland ‚ Cupertino ‚ Milpitas ‚ Millbrae ‚ Richmond ‚ Union City ‚ New York Ì Two branches located in the cities of: ‚ Flushing ‚ New York 4 ‚ Texas Ì One branch located in the city of Houston ‚ Hong Kong Ì One representative oÇce. Our primary market area is deÑned by the Community Reinvestment Act delineation, which includes the contiguous areas surrounding each of the Bank's branch oÇces. It is the Bank's policy to reach out and actively oÅer services to low and moderate income groups in the delineated branch service areas. Many of the Bank's employees speak both English and one or more Chinese dialects or Vietnamese, and are thus able to serve the Bank's Chinese, Vietnamese, and English speaking customers. The Bank conducts substantially the same business operations as a typical commercial bank. It accepts checking, savings, and time deposits, and makes commercial, real estate, personal, home improvement, automobile, and other installment and term loans. From time to time, the Bank invests available funds in other interest-earning assets, such as U.S. Treasury securities, U.S. government agencies securities, state and municipal securities, mortgage-backed securities, asset-backed securities, corporate bonds and venture capital investments. The Bank's services also include: ‚ letters of credit ‚ wire transfers ‚ spot and forward contracts ‚ traveler's checks ‚ safe deposit ‚ night deposit ‚ social security payment deposit ‚ collection ‚ bank-by-mail ‚ drive-up and walk-up windows ‚ automatic teller machines (""ATM'') ‚ Internet banking services ‚ other customary bank services. To accommodate those customers who cannot conduct banking business during normal banking hours, the Bank has extended its banking hours to include Saturday hours for most branches and Sunday hours at its New York branches. In addition, the operations of the drive-up and walk-up facilities are extended past normal banking hours. Since its inception, the Bank's policy has been to attract business from, and to focus its primary services for the beneÑt of, individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located. The three general areas to which the Bank has directed its lendable assets are: ‚ residential mortgage loans, commercial mortgage loans, construction loans, mortgage warehousing loans ‚ commercial loans, trade Ñnancing loans ‚ home equity lines of credit, installment loans to individuals for automobile, household, and other consumer expenditures. Beginning in 1999, the Bank launched a program under the name of Cathay Global Investment Services, which allows its customers to purchase mutual funds, annuities, equities, bonds, and short-term money market 5 instruments through Prime Vest Financial Services. In 2001, UVest Financial Services Group, Inc. replaced Prime Vest Financial Services. In February 2001, Cathay Bank, in conjunction with Trade.com, became one of the Ñrst Chinese-American banks to oÅer Internet stock trading services. However, Trade.com ceased operations in July 2001, and online trading is now made available through UVest Financial Services Group, Inc. Securities The Bank's securities portfolio is managed by the Vice President and Investment OÇcer in accordance with a comprehensive written Investment Policy which addresses strategies, types, and levels of allowable investments, and which is reviewed and approved by the Board of Directors of the Company. Information concerning the carrying value and the maturity distribution and yield analysis of the Company's securities available-for-sale and securities held-to-maturity portfolios is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Operations,'' and in ""Note 4 to the Consolidated Financial Statements.'' A summary of the amortized cost and estimated fair value of the Bank's securities by contractual maturity is included in Part II Ì Item 7 Ì ""Management Discussion and Analysis of Financial Condition and Results of Operations,'' and in ""Note 4 to the Consolidated Financial Statements.'' Loans Our Board of Directors and senior management establish the basic lending policy for the Bank. Each loan is generally considered in terms of, among other things, character, repayment ability, Ñnancial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower's business or project, and prevailing economic trends and conditions. In the case of mortgage loans, our lending policy requires an independent appraisal on real estate property in accordance with applicable regulatory guidelines. Loan originations are obtained by a variety of sources, including existing customers, walk-in customers, referrals from brokers, and advertising. In its present marketing eÅorts, the Bank emphasizes its community ties, customized personal service, competitive rates, and an eÇcient underwriting and approval process, with loan applications taken at all of the Bank's branch oÇces. The Bank's centralized documentation department supervises the obtaining of credit reports, appraisals, and other documentation involved with a loan. Distribution and maturity of loans. Information concerning loan type and mix, distribution of loans and maturity of loans is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Operations,'' and in ""Note 5 to the Consolidated Financial Statements.'' Non-performing Loans and Allowance for Loan Losses. Information concerning non-performing loans, allowance for loan losses, loans charged-oÅ, loan recoveries, and other real estate owned is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Opera- tions,'' and in ""Note 5 to the Consolidated Financial Statements.'' Asset Quality The Company monitors its asset quality with lending and credit policies, which require the regular review of its loan portfolio. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under closer supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-oÅ. The Company's policy is to place loans on a non-accrual 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 non-accrual status, any interest collected or accrued in the previous three months, is generally reversed against current income. Thereafter, any payment is generally Ñrst applied towards the principal balance. Depending on the circumstances, management may elect to continue 6 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 opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. Information concerning non-accrual, past due, and restructured loans is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Operations,'' and in ""Note 5 to the Consolidated Financial Statements.'' Deposits The Bank attempts to price its deposits in order to promote deposit growth and oÅers a wide array of deposit products in order to satisfy its customers' needs. The Bank's current deposit products include passbook accounts, checking accounts, money market deposit accounts, certiÑcates of deposit, individual retirement accounts, college certiÑcates of deposit, and public funds deposits. The Bank's deposits are generally obtained from residents within the Company's geographic market area. The Bank utilizes traditional marketing methods to attract new customers and deposits, by oÅering a wide variety of products and services and utilizing various forms of advertising media. Information concerning types of deposit accounts, average deposits and rates, and maturity of time deposits of $100,000 or more is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Operations.'' Borrowings Borrowings include securities sold under agreements to repurchase, the purchase of federal funds, and funds obtained as advances from the Federal Home Loan Bank (""FHLB'') of San Francisco. Information concerning the types, amounts, and maturity of our borrowings is included in ""Note 9 to the Consolidated Financial Statements.'' Return on Equity and Assets Information concerning the return on average assets, return on average stockholders' equity, average equity to assets ratio and dividend payout ratio is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Operations.'' Interest Rates and DiÅerentials Information concerning interest-earning asset mix, average interest-earning assets, average interest- bearing liabilities and the yields on interest-earning assets and interest-bearing liabilities is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Operations.'' Analysis of Changes in Net Interest Income An analysis of changes in net interest income due to changes in rate and volume is included in Part II Ì Item 7 Ì ""Management's Discussion and Analysis of Financial Condition and Results of Operations.'' Commitments and Lines of Credit Information concerning the Bank's outstanding loan commitments and letters of credit is included in ""Note 12 to the Consolidated Financial Statements.'' Subsidiaries of Cathay Bank Cathay Investment Company. Cathay Investment Company is a wholly owned subsidiary of Cathay Bank that was formed in 1984 to invest in real property. In 1987, Cathay Investment Company opened an 7 oÇce in Taipei, Taiwan to promote Taiwanese real estate investments in Southern California. The oÇce in Taipei is located at Sixth Floor, Suite 3, 146 Sung Chiang Road, Taipei, Taiwan. Cathay Securities Fund, Inc. Cathay Securities Fund, Inc. is a registered investment company and a wholly owned subsidiary of the Bank. It was formed in 2000 to engage in the business of investing in, owning, and holding loans and securities. Its oÇce is located at 777 North Broadway, Los Angeles, California 90012. The long-term plan for the registered investment company is currently under review. Expansion Management of the Bank continues to look for opportunities to expand the Bank's branch network by seeking new branch locations and/or by acquiring other Ñnancial institutions to diversify its customer base in order to compete for new deposits and loans, and to be able to serve its customers more eÅectively. On October 5, 2001, we opened a new branch in Union City, Northern California. We have obtained regulatory approval to open a new branch in Brooklyn, New York, and we have applied for regulatory approval to open a new branch in Sacramento, California. We anticipate both branches will be opened in the early part of the second quarter 2002. In addition, with China's accession into the World Trade Organization and its increasing importance in the world economy, we applied and received approval to open a representative oÇce in Shanghai, China. We expect this oÇce to be opened in the second quarter 2002. Competition The banking business in California, and speciÑcally in the market areas served by most of Cathay Bank's branch oÇces, is highly competitive. The Bank competes for deposits and loans with other commercial banks, savings and thrift institutions, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies and other Ñnancial and non-Ñnancial institutions and entities. In addition, the Bank also competes with other entities (both governmental and private industry) that are seeking to raise capital through the issuance and sale of debt and equity securities. Many of these institutions and entities oÅer services that are not oÅered directly by the Bank and have substantially greater Ñnancial resources than does the Bank. The direction of federal legislation in recent years seems to favor increased competition between diÅerent types of Ñnancial institutions and to foster new entrants into the Ñnancial services market. Competitive conditions are expected to continue to intensify as legislation is enacted which has the eÅect of dissolving historical barriers that limit participation in certain markets, increasing the cost of doing business for banks, or aÅecting the competitive balance between banks and other Ñnancial and non-Ñnancial institutions and entities. Technological factors, such as on-line banking and brokerage services, and economic factors can also be expected to have an ongoing impact on increasingly competitive conditions. To compete with other Ñnancial institutions in its primary service areas, the Bank relies principally upon the following: ‚ local promotional activities ‚ personal contacts by its oÇcers, directors, employees, and stockholders ‚ extended hours on weekdays, Saturday banking, and in certain locations Sunday banking ‚ Internet banking ‚ an Internet website, located at ""www.cathaybank.com'' ‚ certain other specialized services. For customers whose loan demands exceed the Bank's lending limit, the Bank has arranged in the past, and intends in the future, to arrange for such loans on a participation basis with correspondent banks. The Bank also assists customers requiring other services not oÅered by the Bank to obtain such services from its correspondent banks. 8 In Southern California, at least three other Chinese-American banks of comparable size compete for loans and deposits with us and two super-regional banks also compete for deposits. In Northern California, one of these Chinese-American banks competes for loans and deposits and the same two super-regional banks compete for deposits as well. In addition, there are many other Chinese-American banks in both Southern and Northern California. Banks from the PaciÑc Rim countries, such as Taiwan, Hong Kong, and China also continue to open branches in the Los Angeles area, thus increasing competition in the Bank's primary markets. Employees As of December 31, 2001, Bancorp and Bank (including subsidiaries) employed approximately 555 per- sons, including 126 oÇcers. None of the employees are represented by a union. Management believes that its relations with employees are excellent. Principal OÇcers The table below sets forth the names, ages, and positions of all executive oÇcers of the Company. See Part III, Item 10 Ì ""Directors and Executive OÇcers of the Registrant,'' below for further information regarding the executive oÇcers of Bancorp and Cathay Bank. Name Age Dunson K. Cheng ÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 Anthony M. Tang ÏÏÏÏÏÏÏÏÏÏÏÏÏ 48 Irwin Wong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 Elena Chan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51 Present Position and Principal Occupation During the Past Five Years Chairman of the Board of Directors of each of Bancorp, Cathay Bank and Cathay Investment Company since 1994. President of Bancorp since 1990. President of Cathay Bank since 1985 and director of Cathay Bank since 1982. Secretary of Cathay Investment Company from 1985 until 1994; President of Cathay Investment Company since 1999; Chief Executive OÇcer of Cathay Investment Company since 1995 and director of Cathay Investment Company since 1984. Chairman of the Board of Directors and President of Cathay Securities Fund, Inc. since July 2000. Executive Vice President of Bancorp since 1994; Assistant Secretary of Bancorp from 1991 to April, 2001; Chief Financial OÇcer and Treasurer of Bancorp since 1990; and Senior Vice President of Bancorp from 1990 until 1994. Chief Lending OÇcer of Cathay Bank since 1985; director of Cathay Bank since 1986; Assistant Secretary of Cathay Bank from 1994 to April, 2001; Senior Executive Vice President of Cathay Bank since December 1998; Senior Vice President of Cathay Bank from 1990 until 1994; and Executive Vice President of Cathay Bank from 1994 to December 1998. Vice President and director of Cathay Securities Fund, Inc. since July 2000. Executive Vice President-Branch Administration for Cathay Bank since 1999; Senior Vice President-Branch Administration of Cathay Bank from 1989 until 1999; and Vice President- Branch Administration for Cathay Bank from 1988 until 1989. Vice President and director of Cathay Securities Fund, Inc. since July 2000. Senior Vice President and Chief Financial OÇcer of Cathay Bank since 1992; Internal Auditor of Cathay Bank from 1985 to 1992. Secretary and director of Cathay Securities Fund, Inc. since July 2000. 9 Name Age James P. Lin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 Present Position and Principal Occupation During the Past Five Years Senior Vice President and Manager Ì Corporate Commercial Loan and International Banking Department of Cathay Bank since November, 2001; Senior Vice President and Manager Ì International Banking Department of Cathay Bank from December, 1996 to November, 2001; First Vice President and Manager Ì International Banking Department of Cathay Bank from July 1990 to December, 1996. Regulation Regulation of Bancorp and the Bank As a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended and as revised by the Gramm-Leach-Bliley Act of 1999, Bancorp's primary regulatory authority is the Board of Governors of the Federal Reserve System (or the Federal Reserve Board). The Bank Holding Company Act requires Bancorp to Ñle annual reports of its operations with the Federal Reserve Board. Bancorp is also subject to examination by the Federal Reserve Board. Cathay Bank, as a California state-chartered commercial bank, is regulated by the Federal Deposit Insurance Corporation (or FDIC) and by the State of California Department of Financial Institutions. The Bank's deposits are insured, up to the legal maximum, by the FDIC. Although not a member of the Federal Reserve System, the Bank is subject to Federal and State rules and regulations. Regulatory authorities review key operational areas of Bancorp and the Bank, including asset quality, capital adequacy, liquidity, management and administrative ability, compliance with consumer protection laws and security of conÑdential customer information. Applicable law and regulations also limit the business activities in which Bancorp, the Bank, and its subsidiaries may be engaged. See also, ""Other Banking Regulations Ì Interstate Banking'' and ""Federal Limits on the Activities and Investments of State-Chartered Banks'' below. Bancorp also Ñles periodic reports, proxy statements, and other information with the Securities and Exchange Commission. The following summary describes some of the more signiÑcant laws, regulations, and policies that aÅect our operations. It is not a complete listing of all laws that apply to Bancorp and the Bank. To the extent that the information in this Section, ""Regulation of Bancorp, and the Bank,'' describes statutory or regulatory provisions, it is qualiÑed in its entirety by reference to such provisions. Regulatory Environment The banking and Ñnancial services industry is heavily regulated. Regulations, statutes and policies aÅecting the industry are frequently under review by Congress, state legislatures and the federal and state agencies charged with supervisory and examination authority over banking institutions. This regulatory framework is intended primarily to protect the Bank's depositors, the federal deposit insurance fund, and the safety and soundness of the regulated Ñnancial institutions. Generally, the regulatory framework is not intended to protect our stockholders. We expect that changes in the banking and Ñnancial services industry will continue to occur in the future. Some of the changes may create opportunities for us to compete in Ñnancial markets with less regulation. However, these changes also may create new competitors in geographic and product markets which have historically been limited by law to banking institutions, such as Cathay Bank. We cannot predict how changes in regulations, statutes, or policies will impact us. These changes may have a material adverse eÅect on our business and earnings. 10 Fiscal and Monetary Policies The operations of bank holding companies and their subsidiaries are aÅected by the Ñscal and monetary policies of the Federal Reserve Bank. An important function of the Federal Reserve Bank is to regulate the national supply of bank credit. The Federal Reserve Bank uses the following instruments of monetary policy, among others, as a means to implement its objectives: ‚ open market purchases and sales of U.S. government securities ‚ changes in the discount rate on bank borrowings ‚ changes in reserve requirements on bank deposits and borrowings by banks and their aÇliates. The Federal Reserve Bank uses these instruments of monetary policy in varying combinations to seek to inÖuence the overall level of bank loans, investments and deposits; the interest rates charged on loans and paid for deposits; the price of the dollar in foreign exchange markets; and the level of inÖation. The Federal Reserve Bank's Ñscal and monetary policies will continue to have a signiÑcant eÅect on Bancorp and the Bank. Bank Holding Company Regulation As a bank holding company, Bancorp is subject to regulation, supervision, and examination by the Federal Reserve Board. It is required to Ñle reports with the Federal Reserve Board and furnish such other information as may be required by the Federal Reserve Board under the Bank Holding Company Act. The Federal Reserve Board has a policy that bank holding companies must serve as a source of Ñnancial and managerial strength to their subsidiary banks and may not conduct their operations in an unsafe or unsound manner. It is the Federal Reserve Bank's position that bank holding companies should stand ready to use their available resources to provide adequate capital to their subsidiary banks during periods of Ñnancial stress or adversity. Bank holding companies should also maintain the Ñnancial Öexibility and capital-raising capacity to obtain additional resources for assisting their subsidiary banks. If a bank holding company fails in these requirements, the Federal Reserve Board will generally consider such failure to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. The Federal Reserve Board also has the authority to regulate bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Federal Reserve Board may require Bancorp to Ñle written notice and obtain its approval prior to purchasing or redeeming Bancorp's equity securities. Bancorp must also obtain the prior approval of the Federal Reserve Board if it acquires more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of a bank or bank holding company. The Federal Reserve Board must also give prior approval to any merger or consolidation with another bank holding company. In addition, under the Bank Holding Company Act, Bancorp cannot acquire direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company. It cannot engage directly or indirectly in activities other than banking, managing or controlling banks or furnishing services to its subsidiaries. However, there are some statutory exceptions. Subject to prior approval of the Federal Reserve Board, Bancorp can acquire shares of companies engaged in activities that the Federal Reserve Board deems to be closely related to banking or managing or controlling banks. In addition, as discussed below under ""Financial Services Modernization Legislation,'' if Bancorp becomes a ""Financial Holding Company,'' certain restrictions on acquiring ownership or control of certain non-banking companies will no longer apply. Financial Services Modernization Legislation On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (referred to in this report as the Modernization Act), which among other things revised the Bank Holding 11 Company Act. EÅective March 12, 2000, the Modernization Act repealed the two aÇliation provisions of the Glass-Steagall Act that restricted banks and securities Ñrms from aÇliating. The Modernization Act repealed: ‚ Section 20 of the Glass-Steagall Act, which restricted the aÇliation of Federal Reserve member banks with Ñrms ""engaged principally'' in speciÑed securities activities, and ‚ Section 33 of the Glass-Steagall Act, which restricted oÇcer, director, or employee interlocks between a member bank and any company or person ""primarily engaged'' in speciÑed securities activities. In addition, the Modernization Act expressly preempted any state law restricting the establishment of Ñnancial aÇliations, primarily related to insurance. The law established a comprehensive framework to permit aÇliations among commercial banks, insurance companies, securities Ñrms, and other Ñnancial service providers. The Modernization Act revised and expanded the Bank Holding Company Act framework and permitted a bank holding company to engage in additional types of Ñnancial activities provided that it became a ""Financial Holding Company'' under the Modernization Act. Such Ñnancial activities include banking, insurance, and securities activities; merchant banking; and additional activities incidental to such Ñnancial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the Ñnancial system generally. To aÇliate with other Ñnancial service providers, we would have to become a ""Financial Holding Company.'' We would have to Ñle a declaration with the Federal Reserve Board, electing to engage in activities permissible for Financial Holding Companies and certify that we are eligible to do so because the Bank is ""well-capitalized'' and ""well-managed.'' The Federal Reserve Board must also determine that the Bank, as the insured depository institution subsidiary, has at least a ""satisfactory'' rating under the Community Reinvestment Act. We have not sought to become a Financial Holding Company. We will continue to monitor our strategic business plan, market conditions, and other factors to determine whether we will elect to become a Financial Holding Company and take advantage of the expanded powers provided in the Modernization Act. Under the Modernization Act, securities Ñrms and insurance companies that become Financial Holding Companies may acquire banks and other Ñnancial institutions. No regulatory approval will be required for a Financial Holding Company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are Ñnancial in nature or incidental to activities that are Ñnancial in nature, as determined by the Federal Reserve Board. Prior Federal Reserve Board approval is required before a Financial Holding Company acquires the beneÑcial ownership or control of more than 5% of the voting shares of a bank holding company, bank or savings association. To the extent that the Modernization Act permits banks, securities Ñrms, and insurance companies to aÇliate, the Ñnancial services industry may experience further consolidation. The Modernization Act also added a new section to the Federal Deposit Insurance Act. The new section allows subsidiaries of state banks to engage in ""activities as principal that would only be permissible'' for a national bank to conduct in a Ñnancial subsidiary. It expressly preserved a state bank's right to retain all existing subsidiaries. California permits state chartered commercial banks to engage in any activity permissible for national banks. Under the Modernization Act, a national bank subsidiary may engage in any Ñnancial activity which may be conducted through a Financial Holding Company subsidiary, except for insurance underwriting, insurance investments, real estate investment or development or merchant banking. Therefore, Cathay Bank can form subsidiaries to engage in the activities authorized by the Modernization Act to the same extent as a national bank. To form a Ñnancial subsidiary, the Bank must be ""well-capitalized'' and meet other regulatory requirements. See ""Other Banking Regulations Ì Federal Limits on the Activities and Investments of State-Chartered Banks'' below. The Modernization Act may have the result of increasing the amount of competition that Bancorp and the Bank face from larger institutions and other types of companies oÅering Ñnancial products, many of which may have substantially more Ñnancial resources than Bancorp and the Bank. Privacy. The Modernization Act provides consumers with new protections against the transfer and use of their nonpublic personal information by Ñnancial institutions. The OÇce of the Comptroller of the 12 Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation and the OÇce of Thrift Supervision issued Ñnal rules on June 1, 2000. Under the new rules, Ñnancial institutions must provide among other things: ‚ initial notices to customers about their privacy policies (including a description of the conditions under which they may disclose nonpublic personal information to nonaÇliated third parties and aÇliates) ‚ annual notices of such privacy policies to current customers ‚ subject to certain exceptions, a reasonable method for customers to ""opt out'' of disclosure to nonaÇliated third parties. The rules became eÅective November 13, 2000, with compliance being optional until July 1, 2001. These federal privacy protections do not prohibit state governments from imposing more protective rules, and a variety of such bills are currently pending in the California state legislature. Consumer Protection Rules Ì Sale of Insurance Products. On December 4, 2000, the federal bank and thrift regulatory agencies adopted consumer protection rules for the sale of insurance products by depository institutions as required by the Modernization Act. The eÅective date was originally April 1, 2001, but on March 19, 2001, the federal agencies postponed the eÅective date until October 1, 2001. The rules apply to any depository institution or any person selling, soliciting, advertising, or oÅering insurance products or annuities to a customer at an oÇce of the institution or on behalf of the institution. The rule requires oral and written disclosure, before the completion of the sale of an insurance product or annuity, that such product: ‚ is not a deposit or other obligation of, or guaranteed by, the depository institution or its aÇliate ‚ is not insured by the FDIC or any other agency of the United States, the depository institution or its aÇliates ‚ has certain risks of investment, including possible loss of value. Finally, the depository institution may not condition an extension of credit on the consumer's purchase of an insurance product or annuity from the depository institution or from any of its aÇliates; on the consumer's agreement not to obtain an insurance product or annuity from an unaÇliated entity; or by prohibiting a consumer from obtaining an insurance product or annuity from an unaÇliated entity. The disclosure must be understandable and the customer must acknowledge receipt of such disclosure. In addition, to the extent practicable, a depository institution must keep insurance and annuity activities physically segregated from the areas where retail deposits are routinely accepted from the general public. Safeguarding ConÑdential Customer Information. In February 2001, the federal bank and thrift regulatory agencies published guidelines requiring Ñnancial institutions to establish an information security program to: ‚ identify and assess the risks that may threaten customer information ‚ develop a written plan containing policies and procedures to manage and control these risks ‚ implement and test the plan ‚ adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information, and internal or external threats to information security. Each institution may implement a security program appropriate to its size and complexity and the nature and scope of its operations. The guidelines outline speciÑc security measures that institutions should consider in implementing a security program. A Ñnancial institution must adopt those security measures determined to be appropriate. The guidelines require the Board of Directors to oversee an institution's eÅorts to develop, implement and 13 maintain an eÅective information security program and approve written information security policies and programs. The guidelines became eÅective July 1, 2001. The precise impact of the Modernization Act on Bancorp and the Bank will not be fully known until the last of the Modernization Act's phased eÅective dates occurs on November 12, 2004, and until regulatory agencies promulgate all the administrative regulations implementing many portions of the Act. It can be expected that state regulatory authorities and/or legislatures may act in response to the Modernization Act. USA Patriot Act On October 26, 2001, in response to the tragic events of September 11, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the ""Patriot Act''). The Patriot Act is directed at the prevention, detection, and prosecution of international money laundering and Ñnancing of terrorism and, among other things, requires or will require Ñnancial institutions to do the following (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures, and controls with respect to private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. Regulations interpreting the Patriot Act have not been Ñnalized and the Company is not yet able to determine the impact of the Patriot Act on its Ñnancial condition or results of operations. Other Banking Regulations Cathay Bank, as a California state-chartered commercial bank, the Bank is subject to primary supervision, periodic examination, and regulation by the FDIC and by the State of California Department of Financial Institutions. The Bank's deposits are insured by the FDIC up to the legal maximum and the Bank is subject to FDIC rules applicable to insured banks. Although not a member of the Federal Reserve System, the Bank is subject to Federal and State rules and regulations. Capital Requirements. The Federal Reserve Board and the FDIC have established risk-based minimum capital guidelines that seek to ensure that banking organizations are appropriately capitalized. The guidelines are intended to provide a measure of capital that reÖects the degree of risk associated with a banking organization's operations for transactions reported on the balance sheet as assets, and transactions which are recorded as oÅ-balance sheet items, such as letters of credit or recourse arrangements. Under these guidelines, the nominal dollar amounts of assets and the credit equivalent amounts of oÅ-balance sheet items are multiplied by one of several risk-adjusted percentages. The risk-adjusted percentages range from 0% for assets with low credit risk, such as U.S. Treasury Securities, to 100% for assets with high credit risk, such as commercial loans. The federal regulators require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% (10% to be well capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well capitalized). In addition, the federal regulators require a minimum Tier 1 leverage ratio of 4% (5% to be well capitalized). The Company was well capitalized as of December 31, 2001 with a total risk-based capital ratio of 12.30%, a Tier 1 risk-based capital ratio of 11.15% and Tier 1 leverage ratio of 9.48%. The tables presenting our risk-based capital and leverage ratios as of December 31, 2001 are included in Note 11 to the Consolidated Financial Statements of Cathay Bancorp, which are included in this Annual Report on Form 10-K. Prompt Corrective Action. In December 1991, the Federal Deposit Insurance Corporation Improve- ment Act of 1991 (or FDICIA) was enacted into law. FDICIA provided for the recapitalization of the Bank Insurance Fund and improved examinations of insured depository institutions. It required each federal banking regulatory agency to revise its risk-based capital standards and to specify levels at which regulated institutions are considered ""well capitalized,'' ""adequately capitalized,'' ""undercapitalized,'' ""signiÑcantly undercapital- ized'' or ""critically undercapitalized.'' It prescribes standards for safety and soundness of all insured depository 14 institutions. FDICIA requires each federal banking agency and the FDIC to take ""prompt corrective action'' against those institutions that fail to satisfy their minimum capital requirements. As of December 31, 2001, the Bank was well capitalized for these regulatory purposes. An institution that, based on its capital levels, is classiÑed as well capitalized, adequately capitalized or undercapitalized may be treated as though it were in the next lower capital category, if the appropriate federal banking agency determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. The aÅected institution must receive proper notice and have an opportunity for a hearing. At each successive lower capital category, an insured bank is subject to more restrictions, including restrictions on the bank's activities, operational practices, and ability to pay dividends. In addition to measures taken under the prompt corrective action provision, commercial banking organizations may be subject to potential enforcement actions by federal regulators for, among other things, unsafe or unsound practices in conducting their businesses, or violations of any law, rule, regulation, or any condition imposed in writing by the relevant regulatory agency or any written agreement with a regulatory agency. Premiums for Deposit Insurance. The Bank's deposit accounts are insured by the Bank Insurance Fund, as administered by the FDIC, up to the maximum permitted by law. The amount of FDIC assessments paid by each Bank Insurance Fund member institution is based on its capitalization risk level and its supervisory subgroup category. The supervisory subgroup category is based on the FDIC's assessment of the Ñnancial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The Bank Insurance Fund assessment rate as of December 31, 2001, ranged from zero to 27 basis points per $100 of insured deposits. At December 31, 2001, the Bank's assessment rate was zero. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. An increase in the Bank Insurance Fund assessment rate could have a material adverse eÅect on our earnings. The FDIC is authorized to terminate a depository institution's deposit insurance if it Ñnds among other things that: ‚ the institution's condition is unsafe or unsound ‚ the institution has engaged in unsafe or unsound practices ‚ the institution has violated any applicable law, rule, regulation, order or condition imposed in writing by the relevant regulating agency or any written agreement with a regulating agency. Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, on January 1, 1997, banks began paying an annual assessment towards the retirement of U.S. government issued Financing Corporation bonds. The bonds were issued in the 1980s to capitalize the Federal Savings and Loan Insurance Corporation to assist in the recovery of the savings and loan industry. FDIC insured institutions paid approximately 1.90 cents per $100 of Bank Insurance Fund-assessable deposits in 2001. Dividends. As a California corporation and a state-chartered bank, the Bank may not pay dividends to Bancorp in excess of certain statutory and regulatory limits. As of December 31, 2001, the maximum dividend that the Bank could have declared, subject to regulatory approval, was $87,228,000. The California Commissioner of Financial Institutions and the Federal Reserve Board may also prohibit a bank from paying dividends to its bank holding company if they determine that such payment would constitute an unsafe or unsound banking practice. In addition, if Cathay Bank fails to comply with its minimum capital requirements, its regulators may restrict its ability to pay dividends using prompt corrective action or other enforcement powers. Community Reinvestment Act and Fair Lending. The Bank is subject to certain fair lending require- ments and reporting obligations involving its home mortgage lending operations and Community Reinvest- ment Act activities. Under the Community Reinvestment Act, a bank is obligated to help meet the credit needs of its entire community, including low and moderate income neighborhoods, consistent with safe and 15 sound operation. The Community Reinvestment Act does not establish speciÑc lending requirements or programs, nor does it limit a bank's discretion to develop the types of products and services that it believes are best suited to its community. However, the Community Reinvestment Act does require that federal regulators, when examining an institution, assess the institution's record of meeting the credit needs of its community and take such record into account in evaluating certain applications, including an application to become a Financial Holding Company under the Modernization Act. Federal regulators are required to provide a written examination of an institution's Community Reinvestment Act performance. The regulators rate an institution's performance using a four tiered rating system. The ratings are: outstanding record of meeting community credit needs; satisfactory record of meeting community credit needs; needs to improve record of meeting community credit needs; and substantial noncompliance of meeting community credit needs. The ratings are available to the public. Based upon an examination by the FDIC in January 2001, the Bank's Community Reinvestment Act rating was ""satisfac- tory'' in meeting community credit needs. The Bank is also subject to other fair lending requirements and reporting obligations related to its home mortgage lending operations. The Equal Credit Opportunity Act and Fair Housing Act prohibit discrimination on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract). A bank can become subject to substantial penalties and corrective measures for violations of fair lending laws. Federal Limits on the Activities and Investments of State-Chartered Banks. Federal restrictions on the direct and indirect activities and investments of state-chartered or licensed depository institutions exist if the institution either carries federal deposit insurance or is involved in activities with foreign banks. The FDIC is the regulatory agency with the authority to determine federal restrictions on all direct and indirect activities and investments. Prior to 1999, subject to a number of grandfathering provisions and a few exceptions, there were three rules, which limited the activities and investments of state-chartered banks. 1. A state-chartered bank could not engage as principal in any type of activity that was prohibited for a national bank, unless the FDIC determined the activity posed no signiÑcant risk to the aÅected deposit insurance fund and the institution met its fully phased in capital requirements. 2. A state-chartered bank could not make or retain an equity investment of a type or in an amount that was prohibited for a national bank; and, divestiture of such an investment was required by 1996. 3. A state-chartered bank could retain an equity investment in the form of a majority-owned subsidiary engaged as principal in activities prohibited for a national bank subsidiary, but only if the FDIC had made the same determinations respecting risk to the insurance fund and capital compliance by the bank. The Modernization Act added a new section to the Federal Deposit Insurance Act to provide that an insured state bank may control or hold an interest in a subsidiary engaged as principal in activities that would be permissible for a national bank to conduct through a Ñnancial subsidiary, subject to certain conditions. Under the Modernization Act, in January 2001, the FDIC adopted Ñnal rules to streamline the certiÑcation process. State nonmember banks may self certify that they meet the requirements necessary to qualify for conducting non-agency activities. The insured state bank must certify that: it is ""well managed;'' it is ""well capitalized;'' it will deduct the aggregate amount of its outstanding equity investment in all Ñnancial subsidiaries that engage in activities as principal from the bank's total assets and tangible equity; and it will deduct such equity investment in such Ñnancial subsidiaries from its total risk-based capital. In addition, the bank must have received a Community Reinvestment Act rating of ""satisfactory'' in meeting community credit needs in its most recent examination. Additional requirements must be satisÑed in order for a Ñnancial subsidiary of a state nonmember insured bank to conduct securities underwriting. Securities activities are subject to a variety of general and speciÑc safety and soundness restrictions. Further, state banks wishing to engage in activities prohibited to national 16 banks, such as real estate development or investment, must continue to seek FDIC consent by Ñling a notice or application, as was the procedure before the Modernization Act. Interstate Banking. The Federal Riegle-Neal Interstate Banking and Branching EÇciency Act of 1994 were signed into law on September 29, 1994. The Riegle-Neal Act signiÑcantly relaxed or eliminated many restrictions on interstate banking. EÅective September 29, 1995, the Riegle-Neal Act permitted a bank holding company to acquire banks in states other than its ""home state,'' even if applicable state law would not permit that acquisition. Such acquisitions continue to require Federal Reserve Board approval and remain subject to certain state laws. EÅective June 1, 1997, the Riegle-Neal Act permitted interstate mergers of banks, thereby allowing a single merged bank to operate branches in multiple states. The Riegle-Neal Act allowed each state to adopt legislation to ""opt-out'' of these interstate merger provisions. Conversely, the Riegle-Neal Act permitted states to ""opt in'' to the merger provisions of the Act prior to their stated eÅective date, to permit interstate mergers in that state prior to June 1, 1997. The enactment of the California Interstate Banking and Branching Act of 1995 provided for interstate banking and branching in California. This early opt-in legislation became eÅective on October 2, 1995. It required out-of-state institutions, which did not own a California bank to acquire an existing whole Ñve-year old bank before establishing a California branch. De novo interstate branching was not permitted. This act revised much of the original California interstate banking law Ñrst enacted in 1986 that permitted interstate banking with other states on a reciprocal basis. Banks and bank holding companies contemplating acquisitions must comply with the following Acts, as applicable: ‚ the competitive standards of the Bank Holding Company Act ‚ the Change in Bank Control Act ‚ the Bank Merger Act. The crucial test under each Act is whether the proposed acquisition will ""result in a monopoly'' or will ""substantially'' lessen competition in the relevant geographic market. Both the Bank Holding Company Act and the Bank Merger Act preclude granting regulatory approval for any transaction that will ""result in'' a monopoly or is in furtherance of a plan to create a monopoly. However, where a proposed transaction is likely to cause a substantial reduction in competition, or tends to create a monopoly or otherwise restrain trade, these Acts permit the granting of regulatory approval under certain circumstances. The applicable regulator may approve the transaction if it concludes that the perceived anti-competitive eÅects are clearly outweighed by the probable beneÑcial eÅects of the transaction in meeting the convenience and needs of the community to be served. We seek to expand our market areas by acquiring other Ñnancial institutions or establishing de novo branches in or outside of California as permitted by applicable laws, whenever suitable opportunities present themselves. The Riegle-Neal Act may have the eÅect of increasing competition by facilitating entry into the California banking market by out of state banks and bank holding companies. Federal Home Loan Bank. The Federal Home Loan Bank System consists of twelve district banks and is supervised by the Federal Housing Finance Board. Commercial banks, credit unions, savings associations, and certain other insured depository institutions making long-term home mortgage loans are eligible to become members of the Federal Home Loan Bank System. In January 1993, the Bank became a member and stockholder of the Federal Home Loan Bank in San Francisco. As a member and stockholder, the Bank has access to a source of low-cost liquidity. The level of stock ownership is currently governed by the Federal Home Loan Bank Act, and the amount of borrowing is deÑned by the amount of stock purchased. Stock is purchased and redeemed at par. The Bank's investment in Federal Home Loan Bank stock totaled 56,417 shares or $5,641,700 as of December 31, 2001. 17 All credit extended by the district bank requires full collateralization. Eligible collateral includes the following: ‚ residential Ñrst mortgage loans on single and multi-family projects ‚ U.S. government and agency securities ‚ deposits in district banks ‚ certain other real estate related assets permitted by law. Item 2. Properties Cathay Bancorp. Cathay Bancorp currently neither owns nor leases any real or personal property. We use the premises, equipment, and furniture of the Bank without the payment of any rental fees to the Bank. Cathay Bank. The Bank's main corporate oÇce and headquarters branch is located in the Chinatown district of Los Angeles. The oÇces are in a spacious three-story structure containing 26,527 square feet and constructed of glass and concrete. The Bank owns both the building and the land upon which the building is situated. ‚ The main Öoor currently accommodates: ‚ a platform area for consumer loans and certain commercial and commercial mortgage loans ‚ a platform area for Cathay Global Investments Services ‚ a new accounts area ‚ 24 teller stations (including 16 regular tellers, seven commercial tellers, and one ATM) ‚ four pneumatic drive-up teller stations ‚ one walk-up teller station ‚ an operations area ‚ a vault area ‚ The second Öoor contains executive oÇces and the Bank's Board Room ‚ The third Öoor houses the Bank's corporate lending department Parking for approximately 126 automobiles is provided on three lots adjacent to the Bank's building, two of which are owned by the Bank. The third lot is leased under a 55-year term with a 30-year option commencing in January 1987 at a current monthly rent of approximately $14,700. Furthermore, the Bank owns properties in the following cities where certain of its branch oÇces are located: ‚ Monterey Park ‚ Alhambra ‚ Westminster ‚ San Gabriel ‚ Torrance ‚ Cerritos ‚ City of Industry ‚ Cupertino ‚ Flushing, New York 18 In addition to the bank-owned properties, the parking lot lease and the lease for the Cathay Investment Company's Taipei oÇce described below, the Bank leases certain other premises. The following table lists the location, square footage, purpose, lease term, and monthly payment of each lease. Location Sq. ft. Purpose Lease term 767 N. Hill Street ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,912 Administrative oÇces 2/01-1/04 Los Angeles, CA (Rm 305-306, 308-309, 313-315, 320)* 767 N. Hill Street ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,800 Administrative oÇces 2/01-1/04 Los Angeles, CA (Rm 301-302) 16025 E. Gale Ave. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,483 Hacienda Heights Ste. B-1 City of Industry, CA branch oÇce 2010 Tully Road ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,800 San Jose branch oÇce San Jose, CA 710 Webster Street ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,000 Oakland branch oÇce Oakland, CA 1759 N. Milpitas Blvd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,121 Milpitas branch oÇce Milpitas, CA 15323 Culver Drive ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,450 Irvine branch oÇce Irvine, CA 1095 El Camino Real ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,441 Millbrae branch oÇce Millbrae, CA 800 N. Hill Street ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,707 Administrative oÇces 7/99-6/04 with one more 5-year option 3/96-4/06 with two 5-year options** 9/01-9/06 with one 5-year option 10/00-10/05 with two 5-year options 10/94-4/09 with two 5-year options 1/00-12/04 with one more 5-year option 2/99-2/04 Los Angeles, CA 43 E. Valley Blvd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,976 Alhambra, CA 3288 Pierce Street ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,535 Suite D-101 Richmond, CA Valley/Stoneman branch oÇce Berkeley/Richmond branch oÇce 11/01-11/06 with three 5-year options 10/97-10/03 with two 5-year options 1195 S. Diamond Bar Blvd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,500 Diamond Bar branch 9/99-9/07 Diamond Bar, CA oÇce 1701 Decoto RoadÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,100 Union City branch 04/01-04/06 Union City, CA oÇce 45 E. Broadway ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ New York, NY 10375 Richmond Avenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Suite 1600, Houston, TX*** 6,450 New York Chinatown branch oÇce 1,797 Houston branch oÇce 1/97-12/06 with two Ñve year option 5/99-4/02 5402 Eight Avenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,700 Brooklyn branch oÇce Brooklyn, NY Room 902-3, 9/F ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 700 Hong Kong Printing House 6 Duddell Street, Central Hong Kong representative oÇce 09/01-08/11 with Ñve year option 1/00-1/03 with one 2-year option * The lease is between the Bank and T.C. Realty, Inc., a California corporation owned by the spouse of Mr. Patrick Lee. Mr. Lee is a director of Bancorp and the Bank. Management believes that the lease is on terms at least as favorable to the Bank as would have existed in a transaction with an unrelated third party. ** Cathay Bank has a one-time right to cancel the lease after the Ñfth year upon the payment of $55,500 in consideration. *** The Houston branch oÇce lease is being renegotiated for a term ranging between one to three years. 19 The Bank currently operates 22 domestic branch oÇces, one branch oÇce of Cathay Investment Company in Taiwan, and one representative oÇce in Hong Kong. Each branch oÇce has loan approval rights subject to the branch manager's authorized lending limits. Activities of Cathay Investment Company's Taiwan oÇce and Hong Kong representative oÇce are limited to coordinating the transportation of documents to the Bank's main oÇce and performing liaison services. As of December 31, 2001, the Bank's investment in premises and equipment totaled $29,403,000. See also Note 8 to the Consolidated Financial Statements of Cathay Bancorp, which is included in this Annual Report on Form 10-K. Cathay Investment Company. The oÇce in Taipei is located at Sixth Floor, Suite 3, 146 Sung Chiang Road, Taipei, Taiwan, and consists of 1,812 square feet. The lease was renewed for three years from October 5, 1999 to October 4, 2002. The lease contains an option to renew the lease for an additional period ranging from one to three years, after October 4, 2002. As of December 31, 2001, Cathay Investment Company did not own any properties. Cathay Securities Fund, Inc. Its oÇce is located at 777 North Broadway, Los Angeles, California 90012. The long-term plan for the registered investment company is currently under review. Item 3. Legal Proceedings Management is not currently aware of any litigation that is expected to have material adverse impact on our consolidated Ñnancial condition or the results of operations. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 2001. PART II Item 5. Market for Cathay Bancorp's Common Equity and Related Stockholder Matters (a) Market Information Cathay Bancorp trades on the Nasdaq National Market under the symbol ""CATY.'' The closing price of the Company's common stock on February 26, 2002 was $65.50 per share, as reported by the Nasdaq National Market. The Company does not represent that the outstanding shares may be either bought or sold at a certain price. The high and low common stock prices by quarter were as follows: Years Ended December 31, 2000 2001 High Low High Low First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $64.50 59.72 58.00 66.94 $45.13 43.63 45.65 52.80 $80.00 49.00 50.00 59.38 $38.50 40.75 43.00 47.00 (b) Holders As of February 26, 2002, there were approximately 1,700 holders of record of our Common Stock. 20 (c) Dividends The cash dividends declared by quarter were as follows: First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.25 0.25 0.25 0.25 $0.25 0.21 0.21 0.21 Year Ended December 31, 2000 2001 21 Item 6. Selected Financial Data The following table presents selected historical consolidated Ñnancial data for Cathay Bancorp, and is derived in part from the audited Consolidated Financial Statements of the Company. The selected historical consolidated Ñnancial data should be read in conjunction with the Consolidated Financial Statements of Cathay Bancorp and the Notes thereto, which are included in this Annual report on Form 10-K. 2001 Year Ended December 31, 1999 (Dollars in thousands, except share and per share data) 1998 2000 1997 Selected Consolidated Financial Data Income Statement(1) Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 159,352 $ 164,553 $ 133,046 $ 123,309 $ 111,978 Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest income before provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏ Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other non-interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,153 93,199 6,373 2,157 12,622 40,165 61,440 18,820 74,156 90,397 4,200 1,085 11,671 38,504 60,449 21,862 57,408 75,638 4,200 (3) 8,858 30,282 50,011 19,720 57,225 66,084 3,600 43 8,093 30,065 40,555 15,976 50,874 61,104 3,600 41 6,734 30,928 33,351 13,243 Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 42,620 $ 38,587 $ 30,291 $ 24,579 $ 20,108 Net income per common share Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends paid per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ $ 4.71 4.69 1.00 $ $ $ 4.26 4.25 0.88 $ $ $ 3.36 3.36 0.81 $ $ $ 2.74 2.74 0.70 $ $ $ 2.26 2.26 0.63 Weighted-average common shares Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,053,895 Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,082,630 9,056,751 9,073,885 9,013,428 9,017,760 8,967,188 8,968,230 8,915,936 8,915,936 Statement of Condition Securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 248,958 $ 177,796 $ 160,991 $ 239,928 $ 216,158 Securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 374,356 387,200 Net loans(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,640,032 Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,453,114 Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,122,348 Securities sold under agreements to repurchaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Advances from Federal Home Loan Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,114 30,000 1,437,307 2,206,834 1,876,447 68,173 10,000 426,332 1,245,585 1,995,924 1,721,736 46,990 30,000 418,156 961,876 1,780,898 1,560,402 16,436 30,000 350,336 846,151 1,622,462 1,449,121 23,419 Ì Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 246,011 214,787 179,109 156,652 135,877 Common Stock Data Shares of common stock outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,978,869 9,074,365 9,033,583 8,988,760 8,941,743 Book value per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 27.40 $ 23.67 $ 19.83 $ 17.43 $ 15.20 ProÑtability Ratios Return on average assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.82% 1.81% 1.63% 1.44% 1.29% Return on average stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average equity to average assets ratioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÇciency ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.36 21.23 9.03 37.20 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 (1) Includes the operating results 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, allowance for loan losses and unamortized deferred loan fees. 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated Ñnancial condition of Cathay Bancorp, Inc. (""Bancorp'') and its subsidiary Cathay Bank (the ""Bank'' and together the ""Company,'' ""we,'' ""us,'' or ""our'') and their consolidated results of operations. It should be read in conjunction with the audited consolidated Ñnancial statements and footnotes appearing elsewhere in this report. Cathay Bank oÅers a wide range of Ñnancial services. Cathay Bank now operates twelve branches in Southern California, seven branches in Northern California, two branches in New York State, one branch in Houston, Texas, and two overseas oÇces (one in Taiwan and one in Hong Kong). 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. The Bank has obtained regulatory approval to open a new branch in Brooklyn, New York, and has applied for regulatory approval to open a new branch in Sacramento, California. We expect to open both branches for business in the early part of the second quarter 2002. In addition, with China's accession into the World Trade Organization and its increasing importance in the world economy, we decided to open our third overseas oÇce, in Shanghai, China. The People's Bank of China has approved our application, and we expect this oÇce to be open in the second quarter 2002. The following discussion and other sections of this report, include forward-looking statements regarding management's beliefs, projections, and assumptions concerning future results and events. These forward- looking statements may, but do not necessarily, also include words such as ""believes,'' ""expects'', ""antici- pates'', ""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 the actual results, performance or achievements to be materially diÅerent from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, adverse developments, or conditions related to or arising from: ‚ Our expansion into new market areas. ‚ Fluctuations in interest rates. ‚ Demographic changes. ‚ Increases in competition. ‚ Deterioration in asset or credit quality. ‚ Changes in the availability of capital. ‚ Adverse regulatory developments. ‚ Changes in business strategy or development plans, including plans regarding the registered investment company. ‚ General economic or business conditions. ‚ Other factors discussed in the section entitled ""Factors that May AÅect 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 hereof. 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 reÖect future developments or events. The Ñnancial information presented herein includes the accounts of the Corporation, the Bank, and the Bank's wholly owned subsidiaries. All material transactions between these entities are eliminated. 23 Results of Operations Consolidated net income for the year 2001 was $42.62 million or $4.69 per diluted share, a 10.45% increase in net income compared to net income of $38.59 million or $4.25 per diluted share for 2000, and an increase of 40.70% in net income, when compared to net income of $30.29 million or $3.36 per diluted share for 1999. The return on average assets and return on average stockholders' equity are presented below for the three years indicated: 2001 2000 1999 Return on average assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Return on average stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.82% 1.81% 1.63% 18.36% 20.09% 18.31% Year 2001 Interest Income Interest income decreased $5.20 million or 3.16% to $159.35 million in 2001, largely as a result of actions taken by the Federal Open Market Committee (""FOMC''), which lowered the target Federal funds rate by 475 basis points during the year. The $5.20 million decrease in interest income was due to a combination of the following: ‚ Increase in volume: Average interest-earning assets increased $239.83 million, to $2.17 billion at December 31, 2001, an increase of 12.45% over interest-earning assets of $1.93 billion at December 31, 2000. The increase in volume was primarily attributable to the increase in average net loans of $206.37 million, which contributed an additional $18.12 million to interest income. ‚ Decrease in rate: The non-taxable-equivalent yield on interest-earning assets decreased 118 basis points from 8.54% in 2000 to 7.36% in 2001. As a result of this lower interest rate environment, the interest yield earned on average net loans decreased 168 basis points from 9.62% to 7.94%, decreasing interest income on net loans by $23.86 million. The decrease in yield of average interest-earning assets was primarily due to eleven consecutive drops in interest rates by the FOMC. ‚ A change in the mix of interest earning assets: Average net loans of $1.52 billion, which yield higher than other types of investments, increased by $206.37 million in 2001 and comprised 70.14% of total average interest-bearing assets compared to 68.16% in 2000. Conversely, total average securities declined by $9.97 million and comprised 28.21% of total average interest-earning assets in 2001 compared to 31.21% in 2000. ‚ The taxable-equivalent yield on earning assets was 7.45% in 2001 compared to 8.63% in 2000. Interest Expense Interest expense decreased by $8.00 million to $66.15 million in 2001 compared to $74.16 million in 2000, primarily due to a combination of the following: ‚ Increase in volume: Average interest-bearing liabilities increased $149.05 million in 2001, and added $6.76 million of additional interest expense in 2001. ‚ Decrease in rate: As a result of the lower interest rate environment during 2001, the average cost of interest-bearing liabilities decreased 79 basis points to 3.60% in 2001 compared to 4.39% in 2000, decreasing interest expense by $14.76 million. The average cost of funds on deposits and borrowings, which includes non-interest-bearing demand deposits, decreased by 70 basis points to 3.20% in 2001 compared to 3.90% in 2000. ‚ A change in the mix of deposits and borrowings: Average time deposits of $1.29 billion increased by $169.62 million and comprised 62.21% of total deposits and borrowings in 2001 compared to 58.74% of total deposits and borrowings in 2000. Other borrowed funds decreased by $41.22 million to 24 $3.08 million in 2001. Average savings deposits, which include savings accounts, NOW accounts and money market accounts increased by $33.25 million to $496.94 million in 2001, average non-interest- bearing demand deposits increased by $17.62 million to $229.59 million in 2001 compared to $211.98 million in 2000, and securities sold under agreements to repurchase decreased by $7.49 million to $32.34 million in 2001. Taxable-equivalent Net Interest Margin ‚ As a result of the eleven consecutive drops in interest rates during 2001, the taxable-equivalent net interest margin, deÑned as taxable-equivalent net interest income to average interest-earning assets, decreased 38 basis points from 4.78% in 2000 to 4.40% in 2001. The Company was asset sensitive in the short-term scenario, which resulted in lower yielding assets and lagging time deposits in 2001. Year 2000 Interest Income Interest income increased $31.51 million or 23.68% to $164.55 million in 2000 primarily due to an increase of $32.56 million from interest income on loans to $126.34 million. The $31.51 million increase in interest income was attributable to the following: ‚ Increase in volume: the increase of $224.60 million or 20.63% in average net loans from $1.09 billion in 1999 to $1.31 billion in 2000 contributed an additional $20.76 million to interest income. The increase in average loans were funded primarily by growth in deposits, and secondarily by Federal funds purchased and securities sold under agreements to repurchase, and proceeds from matured securities. ‚ Increase in rate: the increase of 101 basis points in average loan yield from 8.61% to 9.62% contributed $11.80 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. ‚ A change in the mix of interest-earning assets: as loan demand remained strong in 2000, average net loans, which yield higher than other types of investments, rose from 62.10% to 68.16% as a percentage of total interest-earning assets. Conversely, total average securities declined from 35.71% to 31.21% and average Federal funds sold and securities purchased under agreements to resell decreased from 2.17% to 0.57%. ‚ Consequently, the average taxable-equivalent yield on interest-earning assets increased 95 basis points from 7.68% to 8.63%. Interest Expense Interest expense increased $16.75 million or 29.17% to $74.16 million, which was primarily attributable to an increase of $13.23 million in interest expense on time deposits. ‚ Increase in volume: Average time deposits grew $115.47 million or 11.53% to $1.12 billion, of which, $78.3 million were from time deposits over $100,000. The increase in average time deposits added $5.77 million to interest expense. ‚ Increase in rate: The increase of 70 basis points in average rate on time deposits from 4.69% to 5.39% added $7.47 million to interest expense. This was primarily due to the repricing of time deposits in response to the market rate changes. Interest expense on Federal funds purchased and securities sold under agreements to repurchase decreased $651,000 in 2000 as the average volume decreased $15.66 million and the average rate climbed 32 basis points from 4.99% to 5.31%. ‚ Accordingly, the average cost of funds, which includes non-interest-bearing demand deposits, in- creased 49 basis points from 3.41% in 1999 to 3.90% in 2000. 25 Taxable-equivalent Net Interest Income ‚ As a result of the factors noted above, the taxable-equivalent net interest margin increased 37 basis points from 4.41% in 1999 to 4.78% in 2000. Net interest income before provision for loan losses for 2001, 2000, and 1999 are summarized below: Net interest income before provision for loan lossesÏÏÏÏÏÏÏÏÏÏÏÏ Taxable-equivalent net interest income before provision for loan 2001 $93,199 2000 (In thousands) $90,397 1999 $75,638 losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $95,250 $92,132 $77,301 Taxable-Equivalent Net Interest Income Ì Changes Due to Rate and Volume(1) 2001-2000 Increase Decrease in Net Interest Income Due to: Changes in Rate Changes in Volume Total Change 2000-1999 Increase Decrease in Net Interest Income Due to: Changes in Rate Changes in Volume Total Change Interest-Earning Assets Federal funds sold and securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities available-for-sale (In thousands) $ 938 $ (308) $ 630 $(1,584) $ 389 $(1,195) (Taxable) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12) (487) (499) Securities available-for-sale (Nontaxable)(2) ÏÏÏÏÏÏÏÏÏÏÏ 14 Securities held-to-maturity (Taxable) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (371) (3) 34 598 14 2,085 2,683 1 15 11 (337) (2,985) 150 (2,835) Securities held-to-maturity (Nontaxable)(2) ÏÏÏÏÏÏÏÏÏÏÏ Agency preferred stock(2)ÏÏÏÏÏÏ Deposits with other banks ÏÏÏÏÏÏ Loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total increase (decrease) in (29) 1,169 45 18,119 (7) (93) (29) (23,865) (36) 1,076 16 (5,746) 60 314 23 20,756 (47) Ì 4 11,801 13 314 27 32,557 interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,873 (24,758) (4,885) 17,196 14,383 31,579 Interest-Bearing Liabilities Savings deposits, NOW accounts, and others ÏÏÏÏÏÏÏÏÏ Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other borrowed fundsÏÏÏÏÏÏÏÏÏÏ Advances from Federal Home Loan Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage indebtedness ÏÏÏÏÏÏÏÏÏ Total increase (decrease) in 524 8,441 (2,700) (10,346) (2,176) (1,905) (564) (1,379) (423) (1,361) (987) (2,740) (251) (14) 70 Ì (181) (14) 606 5,766 (820) 2,874 (251) (3) 943 7,468 169 Ì 3 (7) 1,549 13,234 (651) 2,874 (248) (10) interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,757 (14,760) (8,003) 8,172 8,576 16,748 Changes in net interest income ÏÏÏÏ $13,116 $ (9,998) $ 3,118 $ 9,024 $ 5,807 $14,831 26 (1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate. (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 eÅective federal income tax rate of 35%. (3) Amounts are net of allowance for loan losses of $23,973,000 in 2001, $21,967,000 in 2000, and $19,502,000 in 1999, and net of unamortized deferred loan fees of $3,900,000 in 2001, $4,139,000 in 2000, and $3,593,000 in 1999. Interest-Earning Asset Mix As of December 31, 2001 As of December 31, 2000 Percentage of Total Interest- Earning Assets Amount Percentage of Total Interest- Earning Assets Amount (Dollars in thousands) Amount Changed From 2000 to 2001 Percentage Changed From 2000 to 2001 Types of Interest- Earning Assets Federal funds sold and securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏ Securities available- $ 13,000 0.57% $ 19,000 0.94% $ (6,000) (31.58%) for-saleÏÏÏÏÏÏÏÏÏÏ 248,958 10.93 177,796 8.79 71,162 40.02 Securities held-to- maturityÏÏÏÏÏÏÏÏÏ 374,356 16.44 387,200 19.15 (12,844) (3.32) Deposits with other banks ÏÏÏÏÏÏÏÏÏÏÏ Loans (net of allowance for loans losses and unamortized deferred loan fees) Total interest-earning assets ÏÏÏÏÏÏÏÏÏÏÏ 1,399 0.06 899 0.04 500 55.62 1,640,032 72.00 1,437,307 71.08 202,725 14.10 $2,277,745 100.00% $2,022,202 100.00% $255,543 12.64% 27 The following table sets forth information concerning average interest-earning assets, average interest- bearing liabilities, and the yields and rates paid on those assets and liabilities. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and Interest-Bearing Liabilities 2001 Years Ended December 31, 2000 (Dollars in thousands) 1999 Interest-Earnings Assets Federal Funds Sold and Securities Purchased Under Agreements to Resell Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ 32,397 4.06% 1,316 $ $ 11,053 6.21% 686 $ $ 38,013 4.95% 1,881 Securities Available-for-Sale, Taxable Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities Available-for-Sale, Nontaxable Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities Held-to-Maturity, Taxable Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities Held-to-Maturity, Nontaxable Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Agency Preferred Stock Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deposits with Other Banks Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans(1) Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Interest-Earning Assets Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average yield(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest earned(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 196,934 $ 197,004 $ 178,188 6.46% 12,717 693 7.65% 53 $ $ $ 6.71% 13,216 510 8.24% 42 $ $ $ 5.91% 10,533 345 7.83% 27 $ $ $ $ 324,760 $ 330,841 $ 378,753 6.21% 20,167 69,096 7.40% 5,113 19,722 7.05% 1,390 3,264 1.72% 56 $ $ $ $ $ $ $ 6.20% 20,504 69,478 7.41% 5,149 3,398 9.24% 314 1,124 3.56% 40 $ $ $ $ $ $ $ 6.16% 23,339 68,702 7.48% 5,136 Ì Ì Ì 459 2.83% 13 $ $ $ $ $ $ $ $1,519,548 $1,313,177 $1,088,578 7.94% 9.62% 8.61% $ 120,591 $ 126,337 $ 93,780 $2,166,414 $1,926,585 $1,753,038 7.45% 8.63% 7.68% $ 161,403 $ 166,288 $ 134,709 28 Interest-Bearing Liabilities Savings Deposits(3) Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest paid or accrued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time Deposits Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest paid or accrued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities Sold Under Agreements to Repurchase Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest paid or accrued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Borrowed Funds Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest paid or accrued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Advances from Federal Home Loan Bank Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest paid or accrued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage Indebtedness Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paid(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest paid or accrued(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Interest-Bearing Liabilities Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount of interest paid or accrued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-Interest-Bearing Demand Deposits Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deposits and borrowed fundsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average rate paid on deposits and borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Interest Income(7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest rate spread(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest margin on interest-earning assets(4)(7) ÏÏÏÏÏÏÏÏÏÏÏ 2001 Years Ended December 31, 2000 (Dollars in thousands) 1999 $ 496,942 $ 463,695 $ 424,500 1.12% 5,585 $ 1.67% 7,761 $ 1.46% 6,212 $ $1,286,973 $1,117,350 $1,001,878 4.53% 58,279 32,342 3.49% 1,128 3,075 4.42% 136 19,863 5.16% 1,025 $ $ $ $ $ $ $ 5.39% 60,184 39,831 5.31% 2,115 44,297 6.49% 2,876 24,809 4.86% 1,206 Ì $ Ì Ì $ 160 8.75% 14 $ $ $ $ $ $ $ $ $ 4.69% 46,950 55,486 4.99% 2,766 33 6.06% 2 30,000 4.85% 1,454 183 13.11% 24 $ $ $ $ $ $ $ $ $ $1,839,195 $1,690,142 $1,512,080 3.60% 4.39% 3.80% $ 66,153 $ 74,156 $ 57,408 $ 229,592 $2,068,787 $ 211,975 $1,902,117 $ 169,013 $1,681,093 3.20% 3.90% 3.41% $ 95,250 $ 92,132 $ 77,301 4.25% 4.40% 4.73% 4.78% 4.27% 4.41% (1) Nonaccrual loans are included in the average balance. (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 eÅective Federal income tax rate of 35%. (3) Savings deposits include NOW accounts and money market accounts. (4) Calculated by dividing net interest income by average outstanding interest-earning assets. (5) Yields and amounts of interest earned include loan fees. 29 (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 oÅ the loans when the Company obtained title to the properties and thereafter. (7) Net interest income, interest rate spread and net interest margin on interest-earning assets have been adjusted to a fully taxable-equivalent basis using an eÅective Federal income tax rate of 35%. Provision for Loan Losses The provision for loan losses was $6.37 million in 2001 compared to $4.20 million in 2000 and in 1999. Due to the current recessionary environment, management believes the increase is prudent to cover additional inherent risk resulting from the overall increase of our loan portfolio, and the impact of a weaker economy. Management continues to recognize these pressures and is committed to maintaining an adequate allowance for loan losses. Net charge-oÅs for 2001 were $4.37 million or 0.29% of average net loans compared to charge- oÅs of $1.74 million or 0.13% of average net loans during 2000, and charge-oÅs of $668,000 or 0.06% of average net loans during 1999. Also see ""Allowance for Loan Losses'' on this 2001 Annual Report on Form 10-K. Non-interest Income Non-interest income totaled $14.78 million in 2001, $12.76 million in 2000, and $8.86 million in 1999. The increase of $2.02 million or 15.86% from 2000 to 2001, was primarily due to the following items: ‚ An increase of $539,000 in depository service fee income, up 11.83%, to $5.10 million compared to $4.56 million in 2000. ‚ An increase of $1.07 million in securities gains. The increase was the result of a gain of $1.06 million on investment securities sold during the third quarter 2001. These securities were sold during the third quarter 2001 and were either callable or scheduled to mature within the 21 months following the end of the third quarter 2001. In addition, we had a gain of $851,000 on a forward rate agreement (""FRA'').The FRA settled on March 5, 2001. ‚ Letters of credit commissions decreased by $287,000 or 11.77%, to $2.15 million in 2001, as a result of a slowdown of overseas purchases from some of our importing customers. ‚ Other operating income, which includes primarily loan fees, wire transfer fees, safe deposit fees, and foreign exchange fees were $5.37 million, up $699,000, compared to $4.67 million in 2000. The increase of $3.90 million or 44.05% from 1999 to 2000, was the result of the following items: ‚ Recognition of $1.10 million premium on a FRA contract as of December 31, 2000 under securities gains. The FRA contract was entered into on August 31, 2000 and settled on March 5, 2001, at which time the Company recognized an additional premium in 2001. ‚ Fee income from wire transfers increased $1.08 million due to increased transaction volume, primarily from our New York branches. ‚ Other notable increases in non-interest income items included, among others, safe deposit box income, fees income related to loans, letters of credit commissions and fee income from Cathay Global Investment Services' alternative investment program. Non-interest Expense Non-interest expense totaled $40.17 million in 2001, compared to $38.50 million in 2000, and $30.28 million in 1999. The increase of $1.66 million or 4.31% in non-interest expense in 2001, was primarily a combination of the following: ‚ an increase of $954,000 in salaries and employee beneÑts. Primarily due to annual salary adjustments for the Bank's employees. 30 ‚ an increase of $277,000 in marketing expenses. Primarily due to a $250,000 donation towards the establishment of the 911 Healing Hands non-proÑt organization and fund to help with relief eÅorts in response to the terrible events of September 11, 2001. ‚ an increase of $1.77 million in professional services. Primarily due to legal fees in connection with litigation and corporate matters. ‚ an increase of $1.57 million in investments in real estate. Primarily due to operational losses from low income housing investments that qualify for investments tax credits. ‚ a decrease of $3.40 million in real estate operations. Primarily due to a $3.38 million gain on the sale of other real estate owned (""OREO''). The eÇciency ratio, deÑned as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, decreased to 37.20% in 2001 compared with 37.33% in 2000. The decrease in the eÇciency ratio for 2001 was primarily the result of the increase in our net interest income before provision for loan losses, coupled with the increase in non-interest income. Non-interest expense amounted to $38.50 million in 2000, compared to $30.28 million in 1999. The $8.22 million or 27.15% increase in 2000 non-interest expense was substantially attributable to the operations of the two new New York branches acquired in December 1999, and the new Diamond Bar branch, which opened for business in January 2000. Other signiÑcant items are discussed below: ‚ an increase of $3.59 million in salaries and employee beneÑts. In addition to the payroll expense for the three new branches mentioned above and annual salary adjustments for employees, the Bank incurred higher year-end bonus expense of $670,000 in 2000. ‚ an increase of $1.23 million in net other real estate owned (""OREO'') expense. The Bank recorded $1.55 million in net gains on sales of OREO properties in 1999 versus $263,000 in net gains on sales of OREO in 2000. ‚ an increase of $1.08 million in other operating expense. Other operating expense includes primarily operating supplies, communications, postage, travel, administrative, amortization of goodwill and general insurance expenses. The increase in these expenses was partially related to the operations of the three new branches mentioned above. ‚ an increase of $757,000 in operations of investments in real estate. This was due to higher expense in operations of investments in real estate arising from passive operation losses on low income housing. ‚ an increase of $460,000 in professional services expense. Professional services expense consists of, among other things, bank paid appraisal fees, delivery service, armored service, legal fees, accounting and tax fees, consulting fees, computer related expense and facility management expense. Due to the foregoing, the eÇciency ratio, deÑned 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. Income Tax Expense The eÅective tax rate in 2001 was 30.63% compared to 36.17% in 2000, and 39.43% in 1999. The decline in the eÅective tax rate in 2001 was the result of a registered investment company subsidiary of the Bank, which provides Öexibility to raise additional capital in a tax eÇcient manner, and additional tax credits earned from qualiÑed low income housing investments. The long-term plan for the registered investment company is currently under review. Depending on the results of the review and other factors, the eÅective tax rate for 2002 may change. There can be no assurance that the subsidiary will continue as a registered investment company, or that any past tax beneÑts will continue, or as to our ability to raise capital through this subsidiary. In addition, a proposed change to California's tax law introduced on February 21, 2002, related to registered investment companies could negatively impact the Company's eÅective tax rates in future periods. See discussion below under the heading ""Adverse EÅects of Changes in California Tax Law Could Cause Us to 31 Incur Losses'' in the section entitled ""Factors That May AÅect Future Results'' of this Annual Report on Form 10-K. Review of Financial Condition The Company's total assets increased by $246.28 million, up 11.16%, to $2.45 billion at December 31, 2001, compared to $2.21 billion at December 31, 2000. During 2001, we continued our growth. The major changes in the Statement of Financial Condition during 2001 are listed below: ‚ Total net loans grew 14.10% to $1.64 billion. ‚ Securities available-for-sale increased 40.02% to $248.96 million. ‚ Securities held-to-maturity decreased 3.32% to $374.36 million. ‚ Total deposits increased 13.10% to $2.12 billion. ‚ Federal funds purchased & securities sold under agreements to repurchase decreased 67.56% to $22.11 million. ‚ Stockholders' equity rose 14.54% to $246.01 million. Securities Under our investment policy, we classify the Company's investment securities portfolio as follows: ‚ Those securities, which we have the positive intent and ability to hold until maturity, are classiÑed as securities held-to-maturity, and carried at amortized cost. ‚ Those securities which could 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 classiÑed as securities available-for-sale, and carried at estimated fair value, with unrealized gains or losses, net of deferred taxes, reÖected in stockholders' equity. ‚ Securities held-to-maturity are transferred to the available-for-sale category when those securities are within 90 days to maturity, to further enhance the Company's liquidity. Securities available-for-sale increased $71.16 million or 40.02% to $248.96 million at year-end 2001 from $177.77 million at year-end 2000. The portfolio is comprised primarily of US Government Agency securities, corporate bonds, and trust preferred equity securities. Securities available-for-sale are carried at fair value and had a net unrealized gain of $7.17 million at December 31, 2001 compared to $3.96 million at December 31, 2000. The increase in unrealized holding gains at year-end 2001 resulted from the decreasing interest rate environment during 2001. See Note 4 to the Consolidated Statements of Financial Condition. These unrealized gains do not impact net income and are recorded as adjustments to stockholders' equity, net of related deferred income taxes. Securities held-to-maturity decreased $12.84 million or 3.32% to $374.36 million at year-end 2001 from $387.20 million at year-end 2000. The portfolio is comprised primarily of US agencies mortgage-backed- securities, corporate bonds, state and municipal securities, US Government Agency securities, and collater- ized mortgage obligations. Securities held-to-maturity is carried at cost and at December 31, 2001 had a fair value of $382.81 million. The average taxable-equivalent yield on our total investment securities dropped 7 basis points to 6.45% in 2001, compared to 6.52% in 2000 as some matured securities were replaced at lower prevailing interest rates. 32 The following table summarizes the carrying value of our portfolio of securities for each of the past three years: 2001 As of December 31, 2000 (In thousands) 1999 Securities Available-for-Sale: U.S. Treasury securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and municipal securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market fund ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ 118,324 Ì 8,543 2,705 10,395 20,000 Ì 60,334 28,657 78,317 1,277 13,207 5,804 10,370 Ì Ì 60,370 8,451 25 40,218 540 14,634 7,823 16,448 Ì 40,076 34,376 Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $248,958 $177,796 $154,140 Securities Held-to-Maturity U.S. Treasury securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and municipal securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 50,017 69,906 110,342 50,282 920 73,031 19,858 Ì $ 24,998 64,373 68,834 133,282 63,397 19,999 51,449 Ì 64,689 68,820 135,494 48,694 13,156 56,347 Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $374,356 $387,200 $426,332 33 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: One Year or Less After One Year to Five Years As of December 31, 2001 After Five Years to Ten Years (Dollars in thousands) Over Ten Years Total Maturity Distribution: U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations(1) ÏÏÏÏÏÏÏ Asset-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market fund ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $45,762 270 Ì 10,395 Ì 37,551 Ì Ì Ì Ì 20,000 12,067 28,657 $72,562 1,293 1,498 Ì Ì 10,716 Ì $ Ì $118,324 8,543 2,705 10,395 20,000 60,334 28,657 6,980 1,207 Ì Ì Ì Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $60,724 $93,978 $86,069 $8,187 $248,958 Weighted-Average Yield: U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations(1) ÏÏÏÏÏÏÏ Asset-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market fund ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì% Ì Ì Ì 2.02 6.18 5.10 4.25% 4.94% 5.94 Ì 5.70 Ì 6.83 Ì 5.77% 6.96% 6.57 5.92 Ì Ì 7.17 Ì 6.96% Ì% 7.14 6.01 Ì Ì Ì Ì 6.97% 6.16% 7.02 5.96 5.70 2.02 6.75 5.10 5.85% (1) Securities reÖect stated maturities and not anticipated prepayments. (2) Average yield has been adjusted to a fully-taxable equivalent basis. 34 Securities Held-to-Maturity Portfolio Maturity Distribution and Yield Analysis One Year or Less After One Year to Five Years As of December 31, 2001 After Five Years to Ten Years (Dollars in thousands) Over Ten Years Total Maturity Distribution: U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and municipal securities(2)ÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations(1) ÏÏÏÏÏÏ Asset-backed securities(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,020 850 5 Ì Ì Ì Ì $ 39,997 10,514 13,235 Ì 920 51,946 9,974 $ Ì $ Ì $ 50,017 69,906 110,342 50,282 920 73,031 19,858 37,114 38,540 18,369 Ì Ì Ì 21,428 58,562 31,913 Ì 21,085 9,884 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,875 $126,586 $142,872 $94,023 $374,356 Weighted-Average Yield: U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and municipal securities(2)ÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations(1) ÏÏÏÏÏÏ Asset-backed securities(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.31% 7.28 5.76 Ì Ì Ì Ì 5.47% 5.88% 8.48 5.55 Ì 5.63 5.91 4.86 5.99% Ì% Ì% 7.87 6.10 6.33 Ì 6.71 5.71 6.77 7.08 5.34 Ì Ì Ì 6.48% 6.62% 5.77% 7.37 6.38 5.97 5.63 6.13 5.29 6.32% (1) Securities reÖect stated maturities and not anticipated prepayments. (2) Average yield has been adjusted to a fully-taxable equivalent basis. Loans 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, Ñnancial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower's business or project, and prevailing economic trends and conditions. In case of real estate loans, our lending policy requires an independent appraisal on real estate property in accordance with Regulatory guidelines. Gross loans increased by $204.49 million, up 13.97%, to $1.67 billion at year-end 2001 compared to $1.46 billion at year-end 2000. The growth was primarily attributable to the following: ‚ Commercial mortgage loans increased $107.72 million or 17.08% to $738.38 million at year-end 2001, compared to $630.66 million at year-end 2000. Total commercial mortgage loans accounted for 44.27% of gross loans at year-end 2001 compared to 43.10% at year-end 2000. These loans are typically secured by Ñrst deeds of trust of the respective commercial properties, including primarily commercial retail properties, shopping center and owner-occupied industrial facilities, and secondarily oÇce buildings, 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, typically exceeding 1.25:1. In view of the recent general economic slowdown, management has 35 tightened the lending standards for commercial mortgage loans as well as construction loans to be more conservative. ‚ Commercial loans were up $63.95 million or 14.46% to $506.13 million at December 31, 2001, compared to $442.18 at December 31, 2000. The Company is continuing to focus primarily on commercial lending to small-to-medium size businesses, within the Company's geographic market area. The purpose of these loans is for general business purposes, or to provide working capital to business in the form of lines of credit to Ñnance trade-Ñnance loans. General business loans are made based on the Ñnancial strength of the borrowers. Trade-Ñnance loans are typically secured by the borrower's accounts receivables and inventories. ‚ Real estate construction loans increased $24.37 million or 17.16% to $166.42 million at year-end 2001 compared to $142.05 million at year-end 2000. Our construction loan projects are located primarily in California, Texas, Nevada, and New York. The construction loan projects in California totaled $192.87 million, of which $145.27 had been disbursed at December 31, 2001. The construction loan projects in Texas, Nevada, and New York totaled approximately $32.08 million, of which $21.15 had been disbursed at December 31, 2001. Despite the recessionary economy, projects requiring construc- tion-Ñnancing still exhibit a strong demand, and we expect this trend to continue into 2002. ‚ Residential mortgage loans grew by $15.19 million or 6.88% to $235.91 million at year-end 2001, compared to $220.72 million at year-end 2000. Included with our residential mortgage loans are our home equity lines. At December 31, 2001, the portfolio of home equity lines was $40.35 million, up 19.41%, from $33.79 million at year-end 2000. The growth in residential mortgage loans in 2001 was largely due to reÑnances, which accounted for 70.97% of residential mortgage loan fundings. ‚ Installment loans decreased $7.01 million, down 25.64% to $20.32 million at December 31, 2001, compared to $27.33 million at December 31, 2000. These consumer-oriented loans are funded primarily for the purpose of Ñnancing the purchase of automobiles, recreational vehicles, boats, and other personal use of the borrower. The classiÑcation of loans by type as of December 31 for each of the past Ñve 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, 2001 are presented below: Loan Type and Mix 2001 Amount Outstanding as of December 31, 1998 1999 2000 1997 (In thousands) Type of Loans: Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏ Commercial mortgage loans ÏÏÏÏÏÏÏÏÏÏÏ Real estate construction loans ÏÏÏÏÏÏÏÏÏ Installment loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 506,128 235,914 738,379 166,417 20,322 745 $ 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 Gross loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,667,905 1,463,413 1,268,680 981,477 865,316 Less: Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized deferred loan fees ÏÏÏÏÏÏÏÏ (23,973) (3,900) (21,967) (4,139) (19,502) (3,593) (15,970) (3,631) (15,379) (3,786) Net loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,640,032 $1,437,307 $1,245,585 $961,876 $846,151 36 Changes in Loan Portfolio Composition As of December 31, 2001 As of December 31, 2000 Amount Percentage of Total Loans Amount (Dollars in thousands) Percentage of Total Loans Percentage Increase (Decrease) Type of Loans: Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate construction loans ÏÏÏÏÏÏÏÏÏÏÏ Installment loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized deferred loan fees ÏÏÏÏÏÏÏÏÏÏ $ 506,128 235,914 738,379 166,417 20,322 745 (23,973) (3,900) 30.86% $ 442,181 220,720 14.38 630,662 45.02 142,048 10.15 27,329 1.24 473 0.05 (21,967) (1.46) (4,139) (0.24) 30.77% 15.36 43.88 9.88 1.90 0.03 (1.53) (0.29) 14.46% 6.88 17.08 17.16 (25.64) 57.51 9.13 (5.77) Net loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,640,032 100.00% $1,437,307 100.00% 14.10% Contractual Maturity of Loan Portfolio(1)(2) Within One Year One to Five Years Over Five Years Total (In thousands) $314,326 84,210 $ 58,309 19,851 $ 25,154 3,714 $ 397,789 107,775 Commercial Loans Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential Mortgage Loans Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial Mortgage Loans Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real Estate Construction Loans Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Installment Loans Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Loans Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 902 74,906 5,874 30,067 95,624 39 6,725 Ì 743 Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $613,416 Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $419,338 194,078 Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 613,416 Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37 451 10,747 170,965 78,346 2,631 37,660 Ì 13,545 Ì Ì $392,505 $232,356 160,149 392,505 51,793 171,249 296,182 109,977 Ì Ì Ì 13 Ì 2 52,244 182,898 542,053 194,197 32,698 133,284 39 20,283 Ì 745 $658,084 $1,664,005 $373,129 284,955 $1,024,823 639,182 658,084 1,664,005 (23,973) $1,640,032 (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 Öows. (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, non-accrual loans, and OREO. The Company's policy is to place loans on a non-accrual 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 non-accrual status, any interest accrued in the previous three months, is generally reversed against current income. Thereafter, any payment is generally Ñrst applied towards the principal balance. Depending on the circumstances 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 opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under closer supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-oÅ. Our non-performing assets decreased $10.98 million or 53.65% to $9.48 million at year-end 2001 compared to $20.46 million at year-end 2000. The decrease was due to a combination of the following: ‚ A increase of $100,000 in loans past due 90 days or more and still accruing interest ‚ An decrease of $7.46 million in non-accrual loans ‚ An decrease of $3.62 million in OREO. As a percentage of gross loans plus OREO, our non-performing assets decreased to 0.57% at year-end 2001 from 1.39% at year-end 2000. The non-performing loan coverage ratio, deÑned as the allowance for loan losses to non-performing loans, increased to 302.42% at year-end 2001, which was considerably higher than that of 143.72% at year-end 2000. The increase was primarily due to the reduction of $7.46 million in the non-accrual loans from $14.70 million in 2000 to $7.24 million in 2001. 38 The following table presents the breakdown of total non-accrual, past due, and restructured loans for the past Ñve years: Non-accrual, Past Due and Restructured Loans Accruing loans past due 90 days or more ÏÏÏÏÏÏÏÏÏÏ Non-accrual loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 689 7,238 $ 589 14,696 2001 2000 1998 December 31, 1999 (Dollars in thousands) $ 3,724 13,696 $ 4,683 13,090 Total non-performing loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,927 15,285 17,420 Real estate acquired in foreclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,555 5,174 4,337 17,773 10,454 1997 $ 2,373 16,886 19,259 13,269 Total non-performing assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,482 $20,459 $21,757 $28,227 $32,528 Troubled debt restructurings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-performing assets as a percentage of gross loans and other real estate owned at year-endÏÏÏÏÏÏÏÏÏÏ Allowance for loan losses as a percentage of $4,474 $ 4,531 $ 4,581 $ 4,642 $ 4,874 0.57% 1.39% 1.71% 2.85% 3.70% non-performing loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 302.42% 143.72% 111.95% 89.86% 79.85% (1) Troubled debt restructurings are accruing interest at their restructured terms. The eÅect of non-accrual loans and troubled debt restructurings on interest income for the years 2001, 2000, 1999, 1998, and 1997 is presented below: 2001 2000 1999 (In thousands) 1998 1997 Non-accrual Loans Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest recognizedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $823 96 $1,408 627 $1,396 234 $1,395 112 $1,845 471 Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $727 $ 781 $1,162 $1,283 $1,374 Troubled Debt Restructurings Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest recognizedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $409 370 $ 422 407 $ 429 414 $ 421 412 $ 406 387 Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 39 $ 15 $ 15 $ 9 $ 19 Non-accrual loans Non-accrual loans were $7.24 million at year-end 2001 and $14.70 million at year-end 2000. They consisted mainly of $4.85 million in commercial loans and $2.20 million in commercial mortgage loans at year-end 2001, and $9.52 million in commercial loans and $4.85 million in commercial mortgage loans at year-end 2000. 39 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 non-accrual loan categories as of the dates indicated: December 31, 2001 Commercial Mortgage Commercial December 31, 2000 Commercial Mortgage Other (In thousands) Commercial Other Type of Collateral Single/multi-family residenceÏÏÏÏÏÏ Commercial real estate ÏÏÏÏÏÏÏÏÏÏÏ Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ UCC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unsecured ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 252 122 1,821 Ì Ì Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,195 Type of Business Real estate development ÏÏÏÏÏÏÏÏÏÏ Wholesale/Retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Food/Restaurant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Import ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,821 122 Ì Ì Ì 252 $ 266 839 Ì 3,647 Ì 102 $4,854 $ 27 3,421 701 400 Ì 305 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,195 $4,854 Commercial mortgage non-accrual loans $189 Ì Ì Ì Ì Ì $189 $ Ì Ì Ì Ì Ì 189 $189 $ 174 2,277 2,403 Ì Ì Ì $4,854 $2,648 174 Ì Ì 2,032 Ì $4,854 $ 531 1,139 Ì 7,083 540 231 $9,524 $ 166 4,798 2,005 2,092 Ì 463 $9,524 $252 Ì Ì Ì 59 7 $318 $ Ì Ì Ì Ì Ì 318 $318 ‚ The balance of $1.82 million represented one credit secured by Ñrst trust deed on land. ‚ The remaining balance of $374,000 consisted of two credits secured by Ñrst trust deeds on a single- family-residence and on one commercial property. Commercial non-accrual loans ‚ The balance of $3.65 million comprised six credits secured by company assets, mainly accounts receivables and inventories, through UCC-1 Ñlings. ‚ The balance of $1.20 million consisted of eight credits secured primarily by Ñrst trust deeds on single- family-residences or commercial buildings and warehouses, and one unsecured credit. 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 Ñnancial diÇculties, 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. Troubled debt restructurings decreased slightly to $4.47 million at December 31, 2001 compared to $4.53 million at December 31, 2000. With the exception of one borrower with loans totaling $2.63 million, which were 41 days past due, all other accruing troubled debt restructurings were performing under their revised terms as of December 31, 2001. 40 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 classiÑed and restructured in our evaluation of loan impairment. The classiÑed loans are stratiÑed by size, and loans less than our deÑned selection criteria are treated as a homogeneous portfolio. If loans meeting the deÑned criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash Öows discounted at the loan's eÅective interest rate. If loans meeting the deÑned criteria are collateral dependent, we measure the impairment by using the loan's observable market price or the fair value of the collateral. If the measurement of the impaired loan is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. We identiÑed impaired loans with a recorded investment of $19.35 million at year-end 2001, compared to $27.82 million at year-end 2000. The average balance of impaired loans was $23.46 million in 2001 and $29.52 in 2000. Interest collected on impaired loans totaled $959,000 in 2001, and $2.12 million in 2000. The following tables present a breakdown of impaired loans and the related allowances as of the dates indicated: At December 31, 2001 At December 31, 2000 Recorded Investment Allowance Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial mortgage ÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,924 12,426 Ì $2,143 1,764 Ì Net Balance Recorded Investment (In thousands) $ 4,781 10,662 Ì $13,868 13,208 742 Allowance Net Balance $3,682 1,881 133 $10,186 11,327 609 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,350 $3,907 $15,443 $27,818 $5,696 $22,122 Loan Concentration We experienced no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of December 31, 2001. See ""Factors That May AÅect Future Results'' below for a discussion of some of the factors that may aÅect the matters discussed in this Section. Allowance for Loan Losses We have established a monitoring system for our loans in order to identify impaired loans, and potential problem loans and to permit periodic evaluation of impairment and the adequacy of the allowance for loan losses in a timely manner. In addition, our Board of Directors has established a written loan policy that includes an eÅective loan review and control system to ensure that the Bank maintains an adequate allowance for loan losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and judge that it is adequate to absorb estimated losses in the loan portfolio. The determination of the amounts of the allowance for loan losses and the provision for loan losses is based on management's current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that aÅect collectibility when determining the appropriate level for the allowance for loan losses. A sustained weakness or further weakening of the economy or other factors that adversely aÅect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-oÅs, and provision for loan losses in future periods. See ""Factors That May AÅect Future Results,'' in this Annual Report on Form 10-K, for additional factors that could cause actual results to diÅer 41 materially from forward-looking statements, or historical performance. Our allowance for loan losses consists of the following: ‚ SpeciÑc allowances: For impaired loans, we provide speciÑc allowances based on an evaluation of impairment, and for each classiÑed loan, we allocate a portion of the general allowance to each loan based on a loss percentage assigned. The percentage assigned depends on a number of factors including loan classiÑcation, the current Ñnancial condition of the borrowers and guarantors, the prevailing value of the underlying collateral, charge-oÅ history, management's knowledge of the portfolio and general economic conditions. ‚ General allowance: The unclassiÑed portfolio is segmented on a group basis. Segmentation is determined by loan type and by identifying risk characteristics that are common to the groups of loans. The allowance is provided to each segmented group based on the group's historical loan loss experience, the trends in delinquency, and non-accrual, and other signiÑcant factors, such as national and local economy, trends and conditions, strength of management and loan staÅ, underwriting standards and the concentration of credit. The allowance for loan losses amounted to $23.97 million and represented 1.44% of year-end gross loans and 302.42% of non-performing loans at December 31, 2001. The comparable ratios were 1.50% of year-end gross loans and 143.72%, of non-performing loans at December 31, 2000. The increase in the allowance for loan losses ratio to non-performing loans at year-end 2001 was due primarily to the decrease in non-performing loans. During the year, $6.37 million was added to the allowance for loan losses. The net charge-oÅ ratio was 0.29% of average net loans for the twelve months ended December 31, 2001, and 0.13% for the like period in 2000. The tables below present information relating to the allowance for loan losses, charge-oÅs, and recoveries by loan type for the past Ñve years: Allowance for Loan Losses 2001 Amount Outstanding as of December 31, 1998 1999 2000 1997 (Dollars in thousands) Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏ Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans charged-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Recoveries of charged-oÅ loans ÏÏÏÏÏÏÏÏ $ $ $ 21,967 6,373 (4,663) 296 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 Balance at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 23,973 $ 21,967 $ 19,502 $ 15,970 $ 15,379 Average net loans outstanding during year endedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,519,548 $1,313,177 $1,088,578 $907,639 $792,176 Ratio of net charge-oÅs to average net loans outstanding during the yearÏÏÏÏÏ 0.29% 0.13% 0.06% 0.33% 0.22% Provision for loan losses to average net loans outstanding during the yearÏÏÏÏÏ 0.42% 0.32% 0.39% 0.40% 0.45% Allowance to non-performing loans at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowance to gross loans at year-endÏÏÏÏ 302.42% 1.44% 143.72% 1.50% 111.95% 1.54% 89.86% 1.63% 79.85% 1.78% 42 Loan Charged-oÅ by Loan Type Commercial loanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percentage of total commercial loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $3,465 2000 Year Ended December 31, 1999 (Dollars in thousands) $1,116 1998 $2,394 $ 537 1997 $1,387 0.68% 0.12% 0.28% 0.65% 0.41% Real estate loanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percentage of total real estate loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,080 $1,066 $ 388 $ 873 $ 574 0.09% 0.11% 0.05% 0.15% 0.11% Installment and other loan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Percentage of total installment and other loans(1)ÏÏÏÏÏÏÏ $ 118 $ 302 $ 227 $ 252 $ 178 0.56% 1.09% 0.88% 0.86% 0.66% Total loans charged-oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,663 $1,905 $1,731 $3,519 $2,139 (1) Percentages were calculated based on year-end balances. Recoveries by Loan Type Commercial loanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate loanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Installment and other loan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $196 11 89 Year Ended December 31, 1999 1998 2000 (In thousands) $ 761 181 121 $ 74 3 93 $188 280 42 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $296 $170 $1,063 $510 1997 $219 111 60 $390 We allocate the allowance for loan losses to the major loan categories as set forth in the following table. These allocations 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-oÅs will occur, or if they do occur, that they will be in the proportion indicated in the following table: Allocation of Allowance for Loan Losses 2001 Percentage of loans in each category to average gross loans Amount 2000 Percentage of loans in each category to average gross loans Amount As of December 31, 1999 Percentage of loans in each category to average gross loans Amount 1998 Percentage of loans in each category to average gross loans Amount 1997 Percentage of loans in each category to average gross loans Amount (Dollars in thousands) Type of Loans: Commercial loans ÏÏÏÏÏÏÏÏÏÏ $11,504 2,181 Residential mortgage loansÏÏÏ 7,702 Commercial mortgage loansÏÏ 2,386 Real estate construction loans 197 Installment loans ÏÏÏÏÏÏÏÏÏÏÏ 3 Other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.61% $10,231 808 14.86 8,564 42.19 1,855 11.73 380 1.57 129 0.04 30.00% $ 8,546 1,743 15.61 7,781 45.25 843 7.11 464 1.99 125 0.04 35.06% $ 7,468 1,901 18.15 5,815 39.95 365 4.30 414 2.46 7 0.08 38.58% $ 7,480 1,549 18.46 5,439 35.16 401 4.77 356 2.98 154 0.05 39.20% 17.81 35.07 4.80 3.09 0.03 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $23,973 100.00% $21,967 100.00% $19,502 100.00% $15,970 100.00% $15,379 100.00% Based on our evaluation process and the methodology to determine the level of the allowance for loan losses mentioned previously, management believes the allowance for loan losses to be adequate as of December 31, 2001 to absorb estimated probable losses identiÑed through its analysis. See ""Factors That May AÅect Future Results'' below for a discussion of some of the factors that may aÅect the matters discussed in this Section. 43 Other Real Estate Owned Other Real Estate Owned (""OREO''), net of a valuation allowance of $131,000, decreased to $1.56 million at December 31, 2001, compared to $5.17 million at year-end 2000. As of December 31, 2001, there were Ñve outstanding OREO properties, which included one parcel of land, one commercial building, and three single-family-residences (""SFR''). All Ñve properties are located in California. During 2001, we acquired Ñve SFR properties, and sold four SFR properties, and one commercial real estate property. The carrying value of the Ñve properties sold was approximately $5.19 million and the OREO sales resulted in gains on sale of OREO of $3.38 million. To reduce the carrying value of OREO to the estimated fair value of the properties, we maintain a valuation allowance for OREO properties. We perform periodic evaluations on each property and make corresponding adjustments to the valuation allowance, if necessary. Any decline in value is recognized by a corresponding increase to the valuation allowance in the current period. Management did not make any provision for OREO losses in 2001. We recognized net income of $3.59 million from operating OREO properties in 2001 compared to $185,000 in 2000 and $1.42 million in 1999. In addition to the $3.38 million net gains on sales of OREO properties, we received $325,000 in rental income. These amounts were partially oÅset by operating expenses of $135,000. Although the California real estate market continued to show strength in 2001, the future performance of the market is unpredictable. See ""Factors That May AÅect Future Results'' below for a discussion of some of the factors that may aÅect the matters discussed in this Section. The following table shows the components of OREO expense (income) for the years ended: OREO (Income) Expense by Type 2001 2000 (In thousands) 1999 Operating expense (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net gains on disposalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (213) Ì (3,376) $ 7 71 (263) $ (206) 339 (1,549) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,589) $(185) $(1,416) Investments in Real Estate As of December 31, 2001, our investments comprised of four limited partnerships formed for the purpose of investing in low income housing projects, which qualify for federal low income housing tax credits and/or California tax credit. As of December 31, 2001, investments in real estate increased $379,000 to $17.72 million from $17.35 million at year-end 2000. During 2001, we recognized $2.26 million in net losses from the limited partnerships operations. In addition, we contributed $2.64 million to the Wilshire Courtyard investment. 44 The following table summarizes the composition of our investments in real estate as of the dates indicated: Percentage of Ownership Acquisition Date December 31, 2001 (Dollars in thousands) December 31, 2000 Carrying Amount Las Brisas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Los Robles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ California Corporate Tax Credit Fund III ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Wilshire CourtyardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.50% 99.00% 32.50% 99.90% December 1993 August 1995 March 1999 May 1999 $ Ì 386 12,426 4,915 $17,727 $ 189 393 14,127 2,639 $17,348 Deposits The Company uses primarily customer deposits to fund its operations, and to a lesser extent borrowings in the form of securities sold under agreements to repurchase, and advances from the Federal Home Loan Bank. The Bank's deposits are generally obtained from residents within the Company's geographic market area. The Bank utilizes traditional marketing methods to attract new customers and deposits, by oÅering a wide variety of products and services and utilizing various forms of advertising media. The Company's vast majority of its deposits are retail in nature, however the Company does engage in certain wholesale activities, primarily accepting time deposits from political subdivisions and public agencies. The Company considers wholesale deposits to be an alternative borrowing source rather than a customer relationship, and as such, their levels are determined by management's decisions as to the most economic funding sources. At December 31, 2001, the Company had no brokered-deposits and public deposits totaled $73.30 million or 3.45% of total deposits. The Company's total deposits increased $245.90 million or 13.10% from $1.88 billion at year-end 2000 to $2.12 billion at December 31, 2001. ‚ Core deposits increased $120.87 million or 11.20%. The increase in core deposits, deÑned as total deposits less time deposits of $100,000 or more, was attributable to increases of $38.62 million in non- interest-bearing demand deposits, up 17.41%, to $260.43 million at year-end 2001 compared to $221.81 at year-end 2000, and time deposits under $100,000, which increased by 9.13% or $34.68 million to $414.49 million at December 31, 2001 compared to $379.81 million at year-end 2000. Other core deposit accounts increased by $47.57 million. ‚ Time deposits of $100,000 or more (""Jumbo CDs'') increased $125.03 million or 15.68% to $922.65 million in 2001 compared to $797.62 million in 2000. 45 The following table displays the deposit mix for the past three years and average deposits and rates for the past Ñve years: Deposit Mix 2001 Amount Percentage Year Ended December 31, 2000 Amount (Dollars in thousands) Percentage 1999 Amount Percentage $ 260,427 135,650 136,806 252,322 414,490 12.27% $ 221,805 125,647 6.39 119,805 6.45 231,761 11.89 379,809 19.53 11.82% $ 195,140 121,394 97,821 236,764 362,553 6.70 6.38 12.35 20.24 11.33% 7.05 5.68 13.75 21.06 922,653 43.47 797,620 42.51 708,064 41.13 Demand ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NOW accounts ÏÏÏÏÏÏÏÏÏÏÏ Money market accounts ÏÏÏÏ Savings depositsÏÏÏÏÏÏÏÏÏÏÏ Time deposits under $100 ÏÏ Time deposits of $100 or more ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,122,348 100.00% $1,876,447 100.00% $1,721,736 100.00% Average deposits grew $220.49 million or 12.30% from $1.79 billion in 2000 to $2.01 billion in 2001. ‚ Average core deposits increased $86.45 million or 8.23%. ‚ Average Jumbo CDs increased $133.82 million or 18.01%. The following table displays average deposits and rates for the past Ñve years: Average Deposits and Rates 2001 2000 1999 1998 1997 Amount % Amount % Amount % Amount % Amount % (Dollars in thousands) Demand ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NOW accounts ÏÏÏÏÏÏÏÏÏ Money market accountsÏÏ Savings deposits ÏÏÏÏÏÏÏÏ Time deposits ÏÏÏÏÏÏÏÏÏÏ $ 229,592 128,973 129,629 238,340 1,286,973 Ì% $ 211,975 122,851 112,817 228,027 1,117,350 2.10 0.40 0.99 1.42 Ì% $ 169,013 117,374 99,628 207,498 1,001,878 1.20 2.32 1.61 5.39 Ì% $ 166,657 111,900 99,833 205,372 900,441 1.22 1.59 1.54 4.69 Ì% $ 148,907 114,453 97,470 216,840 820,310 1.42 2.11 2.10 5.11 Ì% 1.47 2.26 2.19 5.09 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,013,507 1.18% $1,793,020 3.79% $1,595,391 3.33% $1,484,203 3.58% $1,397,980 3.60% As interest rate spreads broadened between Jumbo CDs and other types of interest-bearing deposits under the prevailing interest rate environment, our Jumbo CD portfolio maintained its faster growth than other types of deposits. Nevertheless, management considers our Jumbo CDs generally less volatile primarily due to the following reasons: (1) approximately 60.95% of the Bank's Jumbo CDs have stayed with the Bank for more than two years; (2) the Jumbo CD portfolio continued to be diversiÑed with 4.593 individual accounts averaging approximately $187,000 per account owned by 3,163 individual depositors as of January 9, 2002; (3) 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 eÅorts in the following areas: (1) to oÅer only retail interest rates on Jumbo CDs; (2) to oÅer new transaction-based products, such as the tiered money market accounts; 46 (3) to promote transaction-based products from time to time, such as demand deposits; (4) to seek to diversify the customer base by branch expansion and/or acquisition as opportunities arise. Almost 97.69% of our Jumbo CDs mature within one year as of year-end 2001. 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, 2001: Time Deposits of $100,000 or More by Maturity Less than three months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Three to six months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Six to twelve months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Over one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ At December 31, 2001 (In thousands) $482,248 264,620 154,454 21,331 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $922,653 Maturities of Time Deposits with a Remaining Term of More Than One Year for Each of the Five Years Following December 31, 2001 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (In thousands) $28,443 10,023 202 117 6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $38,791 Borrowings Borrowings include securities sold under agreements to repurchase (""reverse repurchase agreements''), the purchase of federal funds, and funds obtained as advances from the Federal Home Loan Bank (""FHLB'') of San Francisco. Securities Sold under Agreements to Repurchase at December 31, 2001 equaled $22.11 million a decrease of $46.06 million or 67.56% from $68.17 million at December 31, 2000. The weighted average interest rate during 2001 was 3.51% compared to 6.25% during 2000. The decrease in yield of average interest- earning assets was primarily due to eleven consecutive drops in interest rates by the FOMC. The underlying collateral pledged for the repurchase agreements consists of U.S. government agency and mortgage-backed securities with a carrying value of $37,894,000, and a fair value of $38,295,000 as of December 31, 2001, and are held by a custodian and maintained under the Company's control. These borrowings generally mature in less than 30 days. The table below provides comparative data for securities sold under agreements to repurchase: Average amount outstanding during the year(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ Maximum amount outstanding at month-end(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏ Balances, December ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rate at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average interest rate for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47 2001 $34,799 55,412 22,114 December 31, 2000 (In thousands) $ 70,701 110,145 68,173 1999 $55,519 79,185 46,990 1.01% 3.51% 6.09% 6.25% 5.80% 5.73% (1) Average balances were computed using daily averages. (2) Highest month-end balances were at February in 2001, October in 2000 and February in 1999. Advances from the Federal Home Loan Bank (""FHLB'') amounted to $30 million at December 31, 2001, and $10 million at December 31, 2000. Of the Bank's $30 million in FHLB advances outstanding at December 31, 2001, $10 million at 4.90% was obtained in 1998, and matures on October 28, 2003, and $20 million at 5.45% was obtained in 2001, and matures on March 21, 2005. These advances are non-callable with Ñxed interest rates. Capital Resources Stockholders' Equity We obtain capital primarily from retained earnings and to a lesser extent, the issuance of additional common stock through our Dividend Reinvestment Plan, and options exercised. Stockholders' equity of $246.01 million was up $31.22 million or 14.54% compared to $214.79 at December 31, 2000. Our stockholders' equity equaled 10.03% of total assets, compared to 9.73% of total assets at year-end 2000. The increase of $31.22 million or 14.54% in stockholders' equity was due to the following: ‚ an addition of $42.62 million from net income less payments of dividends on common stock of $9.06 million; ‚ an increase of $2.24 million from issuance of additional common shares through the Dividend Reinvestment Plan and proceeds from exercise of stock options less the purchase of 138,900 shares of treasury stock during 2001, at an average price of $52.86, totaling $7.34 million; ‚ an increase of $2.76 million in accumulated other comprehensive income, including: ‚ a favorable diÅerence of $1.89 million in the net unrealized holding gains on securities available- for-sale, net of tax; ‚ an increase in unrealized gains totaling $566,000, net of tax, in cumulative adjustment upon adoption of SFAS No. 133; ‚ an increase of $302,600 from unrealized gains on cash Öow hedging derivatives, net of tax; We declared cash dividends of $0.25 per common share in January 2001 on 9,074,365 shares outstanding, in April 2001 on 9,086,323 shares outstanding, in July 2001 on 9,093,576 shares outstanding, and in October 2001 on 8,970,131 shares outstanding. Total cash dividends paid in 2001 amounted to $9.06 million. On April 6, 2001, the Board of Directors approved a stock repurchase program of up to $15 million of our common stock. The Company intends to repurchase shares under the program, from time to time, in the open market or through negotiated purchases, under conditions which allow such repurchases to be accretive to earnings, while maintaining capital ratios that exceed the guidelines for a ""well capitalized'' Ñnancial institution. During 2001, the Company repurchased 138,900 shares at an average price of $52.86 per share. On February 19, 1998 our Board of Directors adopted an ""Equity Incentive Plan'' (""the Plan'') which was approved by stockholders at the April 20, 1998 Annual Meeting of Stockholders. The Plan will expire on February 18, 2008. ‚ On September 17, 1998, we granted 45,000 shares of common stock options with an exercise price of $33.00 per share to eligible senior oÇcers and directors. ‚ On January 20, 2000, we granted 55,000 shares of common stock options with an exercise price of $42.50 per share to eligible oÇcers and directors. ‚ On January 18, 2001, we granted 55,500 shares, and on March 15, 2001, we granted 900 shares of common stock options with an exercise price of $60.19 per share to eligible oÇcers and directors. 48 Management seeks to retain the Company's capital at a level suÇcient to support future growth, to protect depositors and stockholders, to absorb any unanticipated losses and to comply with various regulatory requirements. Capital Adequacy Management seeks to retain the Company's capital at a level suÇcient to support future growth, protect depositors and stockholders, and 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 2001, Tier 1 risk-based capital ratio of 11.15%, total risk-based capital ratio of 12.30%, and Tier 1 leverage capital ratio of 9.48%, continued to place Cathay Bancorp in the ""well capitalized'' category, which is deÑned as institutions with Tier 1 risk-based capital ratio equal to or greater than six percent, Tier 1 leverage capital ratio equal to or greater than Ñve percent, and total risk-based capital ratio equal to or greater than ten percent. The comparable ratios for 2000 were Tier 1 risk-based capital ratio of 11.05%, total risk- based capital ratio of 12.25%, and Tier 1 leverage capital ratio of 9.28%. A table displaying the Company and the Bank's capital and leverage ratios at year-end 2001 and 2000 is included in Note 11 to consolidated Ñnancial statements. Liquidity Liquidity Liquidity is our ability to maintain suÇcient cash Öow to meet maturing Ñnancial obligations and customer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other Ñnancial instruments, repayments from securities and loans, Federal funds purchased and securities sold under agreements to repurchase and advances from Federal Home Loan Bank (""FHLB''). At year-end 2001, our liquidity ratio (deÑned as net cash, short-term and marketable securities to net deposits and short-term liabilities) remained relatively Öat at 30.40%, compared to 30.76% at year-end 2000. To supplement its liquidity needs, the Bank maintains a total credit line of $52.50 million for federal funds with three correspondent banks, and master agreements with Ñve brokerage Ñrms whereby up to $230.00 million would be available through the sale of securities subject to repurchase. The Bank is also a shareholder of the FHLB, which enables the Bank to have access to lower cost FHLB Ñnancing when necessary. At December 31, 2001, the Bank had a total approved credit with the FHLB of San Francisco totaling $600.88 million. The total credit outstanding with the FHLB of San Francisco at December 31, 2001 was $30.00 million. These advances are non-callable, bear Ñxed interest rates with $10.00 million maturing in 2003 and $20.00 million maturing in 2005. These borrowings are generally secured by securities available-for- sale or by residential mortgages. ""See Note 9 to the Consolidated Financial Statements.'' Liquidity can also be provided through the sale of liquid assets, which consists of short-term investments, and securities available-for-sale. At December 31, 2001, such assets at fair value totaled $261.96 million, with $64.21 million pledged as collateral for borrowings and other commitments. The remaining $197.75 million was available to be pledged as collateral for additional borrowings. We had a signiÑcant portion of our time deposits maturing within one year or less as of December 31, 2001. Management anticipates that there may be some outÖow of these deposits upon maturity due to the keen competition in the Company's marketplace. However, based on our historical runoÅ experience, we expect the outÖow will be minimal and can be replenished through our normal growth in deposits. Management believes all the above-mentioned sources will provide adequate liquidity to the Company to meet its daily operating needs. Bancorp, 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 exercise of stock options. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. The business 49 activities of Bancorp consist primarily of the operation of the Bank with limited activities in other investments. Management believes Bancorp's liquidity generated from its prevailing sources are suÇcient to meet its operational needs. Also, see Note 12 Commitments and Contingencies of the Notes to Consolidated Financial Statements, on this Annual Report on Form 10-K. Critical Accounting Policies The discussion and analysis of our Ñnancial condition and results of operations are based upon our consolidated Ñnancial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Ñnancial statements require management to make estimates and judgments that aÅect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our Ñnancial statements. Actual results may diÅer from these estimates under diÅerence assumptions or conditions. Accounting for the allowance for loan losses involves signiÑcant judgments and assumptions by management, which has a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading ""Allowance for Loan Losses.'' Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statement No. 141, ""Business Combinations'' (""SFAS No. 141'') and Statement No. 142, ""Goodwill and Other Intangible Assets'' (""SFAS No. 142''). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142, which for the Company was January 1, 2002. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the Ñrst interim period. In addition, to the extent an intangible asset is identiÑed as having an indeÑnite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative eÅect of a change in accounting principle in the Ñrst interim period. The Company adopted SFAS No. 142 eÅective January 1, 2002. Assuming no impairment adjustments are necessary, the Company expects non-interest expense to decrease by approximately $661,000 in 2002, resulting from the cessation of goodwill amortization. In June 2001, the FASB issued SFAS No. 143, ""Accounting for Asset Retirement Obligations,'' which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accrued at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are eÅective for Ñscal years beginning after June 15, 2002. Management does not expect that adoption of SFAS No. 143 will have a material impact on the results of operations or Ñnancial condition of the Company. In August 2001, the FASB issued SFAS No. 144, ""Accounting for the Impairment or Disposal of Long- Lived Assets.'' For long-lived assets to be held and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash Öows and (b) measure an impairment loss as the diÅerence between 50 the carrying amount and fair value. Further, SFAS No. 144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash Öow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash Öows, and establishes a ""primary-asset'' approach to determine the cash Öow estimation period. For long-lived asset to be disposed of by sale, SFAS No. 144 retains the requirements of SFAS No. 121 to measure a long-lived asset classiÑed as held-for-sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would be no longer recognized before they occur. SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long- lived asset is held-for-sale, prohibits retroactive reclassiÑcation of the asset as held-for-sale at the balance sheet date if the criteria are met after the balance sheet date but before issuance of the Ñnancial statements, and provides accounting guidance for the reclassiÑcation of an asset from ""held-for-sale'' to ""held-and-used.'' The provisions of SFAS No. 144 are eÅective for Ñscal years beginning after December 15, 2001. Management does not expect that adoption of SFAS No. 144 will have a material impact on the results of operations or Ñnancial condition of the Company. Factors That May AÅect Future Results The Allowance for Loan Losses is an Estimate of Estimable and Probable Loan Losses. Actual Loan Losses in Excess of the Estimate Could Adversely AÅect 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 aÅect our net income and capital. Such excess could also lead to larger allowances for loan losses in future periods, which could in turn adversely aÅect net income and capital. Management believes that the allowance for loan losses at December 31, 2001 is adequate to cover estimable and probable losses from its loan portfolio as of that date. If economic conditions diÅer 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 may require us to establish additional allowances based on their judgment of the information available at the time of their examinations. No assurance can be given that we will not sustain loan losses in excess of present or future levels of the allowance for loan losses. Fluctuations in Interest Rates Could Adversely AÅect Our Business. The interest rate risk inherent in our lending, investing, and deposit taking activities is a signiÑcant market risk to us and our business. Income associated with interest-earning assets and cost associated with interest-bearing liabilities may not be aÅected uniformly by Öuctuations in interest rates. The magnitude and duration of changes in interest rates, events over which we have no control, may have an adverse eÅect on net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can signiÑcantly aÅect our assets and liabilities. Increases in interest rates may adversely aÅect the ability of our Öoating rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-oÅs. Generally, the interest rates on interest-earning assets and interest-bearing liabilities of the Company do not change at the same rate, to the same extent, or on the same basis. Even assets and liabilities with similar maturities or periods of repricing may react in diÅerent degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may Öuctuate 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 Ñxed and adjustable rate mortgage loans, have features that limit change in interest rates on a short-term basis and over the life of the asset. We seek to minimize the adverse eÅects 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 51 assist us in estimating the optimal asset-liability composition. However, such management tools have inherent limitations that impair their eÅectiveness. There can be no assurance that we will be successful in minimizing the adverse eÅects of changes in interest rates. See also, ""Loan Portfolio Risk Elements'' and ""Market Risk'' below. InÖation May Adversely AÅect Our Financial Performance. The consolidated Ñnancial statements and related Ñnancial data presented in this report have been prepared in accordance with accounting principles generally accepted in the United States. These principles require the measurement of Ñnancial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inÖation. The primary impact of inÖation on the operation of the Company is reÖected in increased operating cost. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more signiÑcant impact on our performance than the general levels of inÖation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. As We Expand Our Business Outside of California Markets, We Will Encounter Risks That Could Adversely AÅect 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 began this expansion with the acquisition of certain assets and assumptions of certain liabilities from Golden City Commercial Bank in New York in 1999 and the opening of the Houston loan production oÇce, which was subsequently converted into a full-service branch in 2000. In addition, on October 5, 2001, we opened a new branch in Union City, Northern California. We have obtained regulatory approval to open a new branch in Brooklyn, New York City, and we have applied for regulatory approval to open a new branch in Sacramento, California. We expect both branches will be ready to open in the early part of the second quarter 2002. In addition, with China's accession into the World Trade Organization and its increasing importance in the world economy, we decided to open a new representative oÇce in Shanghai, China. We expect this oÇce to be open in the second quarter 2002. In the course of this expansion, we will encounter signiÑcant risks and uncertainties that could have a material adverse eÅect on our operations. These risks and uncertainties include increased operational diÇculties arising from, among other things, our ability to attract suÇcient business in new markets, to manage operations in noncontiguous market areas and to anticipate events or diÅerences 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 Ñnancial and operational risks associated with such acquisitions. For example, risks can include diÇculties 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 and policies; potentially dilutive issuances of equity securities; incurrence of additional debt and contingent liabilities; use of cash resources; large write-oÅs; and amortiza- tion expenses related to goodwill and other intangible assets. Adverse 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 secondarily 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, and erode the value of loan collateral. These events could increase the amount of our non-performing assets and have an adverse eÅect on our eÅorts to collect our non-performing loans or otherwise liquidate our non-performing assets (including other real estate owned) on terms favorable to us. 52 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 relevant 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 Ñscal policies, acts of nature including earthquakes, Öood and hurricanes (which may result in uninsured losses), and other factors beyond our control. The Risks Inherent in Construction Lending May Adversely AÅect Our Net Income. The risks inherent in construction lending may adversely aÅect 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 relevant properties; substantial cost overruns in excess of original estimates and Ñnancing; market deterioration during construction; and lack of permanent take-out Ñnancing. 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 Öow to be generated by the completed project. There is no assurance that such properties will be sold or leased so as to generate the cash Öow anticipated by the borrower. Such consideration can aÅect the borrowers' ability to repay their obligations to us and the value of our security interest in collateral. 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 reÖect 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. 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 Ñnancial institutions that dominate the commercial banking industry. This may cause our cost of funds to exceed that of our competitors. Such banks and Ñnancial institutions have greater resources than us, including the ability to Ñnance 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 oÅered by us. We also compete for loans and deposits, as well as other banking services with savings and loan associations, Ñnance companies, money market funds, brokerage houses, credit unions and non-Ñnancial institutions. Adverse EÅects of Banking Regulations or Changes in Banking Regulations Could Adversely AÅect Our Business. We are governed by signiÑcant federal and state regulation and supervision, which is primarily for the beneÑt and protection of our customers and not for the beneÑt of our stockholders. In the past, our business has been materially aÅected by such regulation and supervision. This trend is likely to continue in the future. Laws, regulations, or policies currently aÅecting 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 aÅect the competitive balance between banks and other Ñnancial institutions. It is impossible to predict the competitive impact that any such changes would have on commercial banking in general or on our business in particular. 53 Adverse EÅects of Changes in California Tax Law Could Cause Us to Incur Losses. A proposed change to California's tax law introduced on February 21, 2002, related to registered investment companies could negatively impact the Company's eÅective tax rates in future periods. As currently drafted, the change would have retroactive application to earlier years. The Company, relying on existing tax laws and an outside tax opinion, reÖected California tax beneÑts relating to its registered investment company subsidiary in 2000 and 2001, respectively. Management cannot predict the ultimate outcome of this proposed legislation, including whether this proposed bill will be enacted in its present form, whether the Ñnal eÅective date of the proposed tax law will be prior to 2000 or after 2001 or whether the proposed bill will be enacted at all. If enacted in its present form, and if enacted with its current eÅective date of application, the Company could be required to pay additional California taxes related to earlier years, which would increase the Company's tax expense in a future period. Further, absent a replacement tax eÇcient capital raising vehicle, the Company's eÅective tax rate applied to current period earnings in future periods would increase. Management continues to evaluate long-term plans for its registered investment company subsidiary. If eÅorts to raise capital through this wholly owned subsidiary were discontinued, management believes the Company currently has adequate alternative sources of capital available to it and has the ability to raise suÇcient funds to fund its operations in future periods and does not believe that the impact of the de- discontinuance of the registered investment company will have a material impact on the Company's Ñnancial condition or liquidity. Adverse Economic Conditions in Asia Could Cause Us to Incur Losses. While Asian economic conditions, at least outside of Japan, were reasonably satisfactory in 2001, it is diÇcult to predict the behavior of the Asian economy in the future. The U.S. Ñscal 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 outÖow 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 proÑtability 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 Öow 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. 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 SigniÑcant Capital Spending. As we begin to oÅer internet banking and other on-line services to our customers, and continue to expand our existing 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 signiÑcant 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 eÇciently develop and introduce services that are accepted by our customers and cost eÅective for us to provide. Systems failures, delays, breaches of conÑdentiality and other problems could harm our reputation and business. 54 Certain Provisions of Our Charter, Bylaws and Rights Agreement Could Make the Acquisition of Our Company More DiÇcult. Certain provisions of our Charter, Bylaws, and Rights Agreement between us and American Stock Transfer and Trust Company, as Rights Agent, could make the acquisition of our company more diÇcult. These provisions include authorized but unissued shares of preferred and common stock that may be issued without stockholder 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 oÅer for 15% or more of our common stock; special requirements for stockholder proposals and nominations for director; and super-majority voting requirements in certain situations including certain types of business combinations. Terrorist Attacks. The impact of the September 11th terrorist attacks or any future terrorist attacks and responses to such activities cannot be predicted at this time with respect to severity or duration. The impact could adversely aÅect the Company in a number of ways, including, among others, an increase in delinquencies, bankruptcies or defaults that could result in a higher level of non-performing assets, net charge-oÅs, and provision for loan losses. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The principal market risk to the Company is the interest rate risk inherent in our lending, investing, and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent, or on the same basis. We actively monitor and manage our interest rate risk through analyzing the repricing characteristics of our loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse eÅects of changes in interest rates on our earnings, and ultimately the underlying market value of equity, while structuring our asset-liability composition to obtain the maximum spread. Management uses certain basic measurement tools in conjunction with established risk limits to regulate its interest rate exposure. Due to the limitation inherent in any individual risk management tool, we use both an interest rate sensitivity analysis and a simulation model to measure and quantify the impact to our proÑtability or the market value of our assets and liabilities. The interest rate sensitivity analysis details the expected maturity and repricing opportunities mismatch or sensitivity gap between interest-earning assets and interest-bearing liabilities over a speciÑed timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates, net interest margin may be enhanced with a positive gap. A negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of increasing interest rates, net interest margin may be impaired with a negative gap. The following table indicates the maturity or repricing and rate sensitivity of our interest-earning assets and interest-bearing liabilities as of December 31, 2001. Our exposure as reÖected in the table, represents the estimated diÅerence 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 diÅerent assumptions were used or if actual experience diÅers from the assumptions used. As reÖected in the table below, we were asset sensitive with a cumulative gap ratio of a positive 18.67% within three months, and liability sensitive with a cumulative gap ratio of a negative 5.18% 55 within one year at year-end 2001 compared with a positive 18.13 % within three months, and a negative 9.78% within one year at year-end 2000. Interest Rate Sensitivity December 31, 2001 Interest Rate Sensitivity Period Within 3 Months Over Over 3 Months Over 1 Year to 5 Years 5 Years (Dollars in thousands) to 1 Year Non-interest Sensitive Total Interest-Earning Assets: Cash and due from banks ÏÏÏÏÏÏÏ Federal funds Sold ÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities available-for-sale ÏÏÏÏÏÏ Securities held-to-maturity ÏÏÏÏÏÏ Loans receivable Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏ Real estate loans ÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial mortgage loans ÏÏÏ Real estate construction loans ÏÏ Installment loansÏÏÏÏÏÏÏÏÏÏÏÏÏ Other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total loans, gross(1) ÏÏÏÏÏÏÏÏÏÏÏ Non-interest-earning assets, net ÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,158 13,000 60,725 50 427,531 52,365 543,751 138,259 2,826 743 1,165,475 Ì $1,240,408 $ $ 166 Ì Ì 10,875 50,114 886 5,282 23,677 3,938 Ì 83,897 Ì 94,938 $ Ì $ Ì 93,979 126,585 Ì $ Ì 94,254 236,846 72,190 Ì Ì Ì $ 73,514 13,000 248,958 374,356 19,878 10,771 78,605 2,660 13,545 Ì 125,459 Ì $346,023 3,751 171,703 110,367 Ì 13 2 285,836 Ì $616,936 Ì 501,274 Ì 235,725 Ì 738,005 Ì 164,596 Ì 20,322 745 Ì Ì 1,660,667 82,619 $2,453,114 82,619 $ 154,809 Interest-bearing Liabilities Deposits: Demand ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market and NOW(2) ÏÏ Savings(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TCDs under $100 ÏÏÏÏÏÏÏÏÏÏÏÏ TCDs $100 and over ÏÏÏÏÏÏÏÏÏ Total deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Advances from Federal Home Loan Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-interest-bearing other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 17,129 15,348 243,719 484,002 760,198 22,114 Ì Ì Ì Ì 42,163 52,162 167,405 418,264 679,994 Ì Ì Ì Ì $ Ì $ 109,076 122,646 3,246 20,387 255,355 Ì 30,000 Ì Ì Ì $ 260,427 Ì Ì Ì Ì 260,427 104,088 62,166 120 Ì 166,374 Ì Ì Ì Ì Ì Ì 32,641 246,011 $ 260,427 272,456 252,322 414,490 922,653 2,122,348 22,114 30,000 32,641 246,011 $ 782,312 $ 679,994 $285,355 $166,374 $ 539,079 $2,453,114 Interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏÏÏ Cumulative interest sensitivity gap ÏÏ Gap ratio (% of total assets)ÏÏÏÏÏÏÏ Cumulative gap ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 458,096 $ 458,096 18.67% 18.67% $(585,056) $(126,960) (23.85)% (5.18)% $ 60,668 $(66,292) 2.47% (2.71)% $450,562 $384,270 18.37% 15.66% $(384,270) $ Ì (15.66)% Ì Ì Ì Ì Ì (1) Loans are gross of the allowance for loan losses and unamortized deferred loan fees. Non-accrual loans are included in non-earning assets. Adjustable loans are included in the ""within three months'' category, as they are subject to an interest adjustment depending upon terms on the loan. (2) The Company's own historical experience and decay factor are used to estimate the money market and NOW, and savings deposit runoÅ. Since interest rate sensitivity analysis does not measure the timing diÅerences in the repricing of assets and liabilities, we use a net interest income simulation model to measure the extent of the diÅerences in the behavior of the lending and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company's traditional business activities of extending loans and accepting deposits. Many factors, including economic and Ñnancial conditions, movements in interest rates and consumer preferences aÅect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to 56 measure the volatility of net interest income and net portfolio value, deÑned as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis points increments. Although the modeling is very helpful in managing interest rate risk, it does require signiÑcant assumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or precisely predict the eÅect of higher or lower interest rates on net interest income. Actual results will diÅer from simulated results due to the timing, magnitude, and frequency of interest rates changes, the diÅerences between actual experience and the assumed volume, changes in market conditions, and management strategies among other factors. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a signiÑcant decrease in net interest income caused by a change in interest rates We establish a tolerance level in our policy to deÑne and limit interest income volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on proÑtability. At December 31, 2001, if interest rates were to increase instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would increase by 0.69%, and if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 0.13%. Conversely, if interest rates were to decrease instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 1.52%, and if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 8.43%. The Company's net interest income simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level to value the net economic value of our portfolio of assets and liabilities in our policy to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. At December 31, 2001, if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that the net economic value of our portfolio of assets and liabilities would decrease by 24.92%, and conversely, if interest rates were to decrease instantane- ously by 200 basis points, the simulation indicated that the net economic value of our assets and liabilities would increase by 24.54%. Quantitative Information About Interest Rate Risk The following table shows our Ñnancial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at December 31, 2001, and 2000. For assets, expected maturities are based on contractual maturity. For liabilities, we use our historical experience and decay factors to estimate the deposit runoÅs of interest-bearing transactional deposits. We use certain assumptions to estimate fair values and expected maturities. OÅ-balance sheet commitments to extend credit, letters of credit, and bill of lading guarantees represent the contractual unfunded amounts. OÅ-balance sheet 57 Ñnancial instruments represent fair values. The results presented may vary if diÅerent assumptions are used or if actual experience diÅers from the assumptions used. Average Interest Rate Expected Maturity Date at December 31, 2002 2003 2004 2005 2006 Thereafter (Dollars in thousands) As of December 31, 2001 2000 Total Fair Value Total Fair Value Interest-Sensitive Assets: Federal funds sold and securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities and collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securitiesÏÏÏÏÏÏÏÏÏÏ Loans Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate residential mortgageÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate commercial mortgageÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate construction ÏÏÏÏÏ Installment & others ÏÏÏÏÏÏÏÏ Interest rate swap ÏÏÏÏÏÏÏÏÏÏÏÏ Interest-Sensitive Liabilities: Other interest-bearing deposits Time depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to Repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏ Advances from Federal Home 6.47 5.95 5.42 6.98 6.65 5.34 7.83 Ì 0.67 2.99 1.23 1.00% $ 13,000 $ Ì $ Ì $ Ì $ Ì $ Ì $ 13,000 $ 13,000 $ 19,000 $ 19,000 5 9,491 71,594 31,496 38,786 37,237 99,540 Ì 3,744 270 158,362 172,789 171,872 451,442 175,184 456,588 203,199 361,797 204,007 362,445 392,795 26,935 22,434 9,906 17,758 28,452 498,280 498,486 435,064 434,854 890 1,343 839 3,171 5,683 219,829 231,755 234,002 216,679 215,994 79,616 46,190 83,474 51,185 64,870 Ì 123,880 39,711 1,369 3,008 Ì Ì Ì 4,156 Ì 1,928 Ì 4,817 7,398 Ì 126,802 83,565 65,977 44,475 37,705 117 1,298,279 28,443 10,023 202 22,114 Ì Ì Ì 400,308 Ì 15 Ì 166,254 79 Ì Ì 45,530 Ì Ì Ì Ì 725,643 163,591 20,763 1,928 726,234 163,906 20,831 1,928 619,077 139,102 27,385 Ì 612,651 139,949 27,508 977 524,778 477,292 1,337,143 1,343,618 1,177,429 1,181,975 524,805 477,213 22,114 22,114 68,173 68,201 30,000 30,937 10,000 9,951 676,513 17,595 26,923 12,729 Ì (349) (64) (91) (72) 619,872 15,435 44,371 20,729 Ì 100,000 (509) (63) (238) (125) 1,104 Ì Ì 200 Ì Ì Ì Ì Loan Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.27 Ì 10,000 Ì 20,000 OÅ-Balance Sheet Financial Instruments: Commitments to extend credit Standby letters of credit ÏÏÏÏÏÏÏ Others letters of credit ÏÏÏÏÏÏÏÏ Bill of lading guaranteeÏÏÏÏÏÏÏÏ Forward rate agreement ÏÏÏÏÏÏÏ Financial Derivatives 594,719 30,411 41 17,554 Ì 26,923 Ì 12,729 Ì Ì 5,010 Ì Ì Ì Ì 644 Ì Ì Ì Ì It is the policy of the Bank not to speculate on the future direction of interest rates. However, the Company enters into Ñnancial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the assets or liabilities and against risk in speciÑc transactions. In such instances, the Bank may protect its position through the purchase or sale of interest rate futures contracts for a speciÑc cash or interest rate risk position. Other hedge transactions may be implemented using interest rate swaps, interest rate caps, Öoors, Ñnancial futures, forward rate agreements, and options on futures or bonds. Prior to considering any hedging activities, we seek to analyze the costs and beneÑts of the hedge in comparison to other viable alternative strategies. All hedges will require an assessment of basis risk and must be approved by the Bank's Investment Committee. For periods prior to January 1, 2001, for those qualifying Ñnancial derivatives that altered the interest rate characteristics of assets or liabilities, the net diÅerential to be paid or received on the Ñnancial derivative was treated as an adjustment to the yield on the underlying assets or liabilities. Interest rate Ñnancial derivatives that did not qualify for the accrual method, were recorded at fair value, with gains and losses recorded in earnings. EÅective January 1, 2001, the Company adopted SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities'' (""SFAS No. 133''), as amended by SFAS No. 137 and No. 138. SFAS No. 133 establishes accounting and reporting standards for Ñnancial derivatives, including certain Ñnancial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all Ñnancial derivatives as assets or liabilities in the Company's statement of Ñnancial condition and measurement of those Ñnancial 58 derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a Ñnancial derivative is designated as a hedge and if so, the type of hedge. Upon adoption of SFAS No. 133, the Company recognized all derivatives on the balance sheet at fair value. Fair value is based on dealer quotes, or quoted prices from instruments with similar characteristics. The Company uses Ñnancial derivatives designated for hedging activities as cash Öow hedges. For derivatives designated as cash Öow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. The Company entered into a forward rate agreement with a notional amount of $100 million that was recorded at fair value, with gains recorded as securities gains in the accompanying consolidated statements of income and comprehensive income. The agreement expired in March 2001. On March 21, 2000, we entered into an interest rate swap agreement with a major Ñnancial institution in the notional amount of $20 million for a period of Ñve years. The interest rate swap was for the purpose of hedging the cash Öows from a portion of our Öoating rate loans against declining interest rates. The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at December 31, 2001, was approximately three years. At December 31, 2001 the fair value of the interest rate swap was $1.93 million ($869,000, net of tax) compared to $977,000 ($566,000, net of tax) at December 31, 2000. For the twelve months ended December 31, 2001, amounts totaling $557,000 were reclassiÑed into earnings. The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to reclassify into earnings within the next 12 months is approximately $1.06 million. Item 8. Financial Statements and Supplementary Data For Ñnancial statements, see ""Index to Consolidated Financial Statements on page 64. Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. Item 10. Directors and Executive OÇcers of the Registrant PART III The information under the caption ""Election of Directors'' on our deÑnitive Proxy Statement relating to our 2002 Annual Meeting of Stockholders (the ""Proxy Statement'') is incorporated herein by reference. The term of oÇce of each oÇcer is from the time of appointment until the next annual organizational meeting of the Board of Directors of Bancorp or Cathay Bank (or action in lieu of a meeting) and until the appointment of his or her successor unless, before that time, the oÇcer resigns or is removed or is otherwise disqualiÑed from serving as an oÇcer of Bancorp or Cathay Bank. The information under the caption ""Section 16(a) BeneÑcial Ownership Reporting Compliance'' on our Proxy Statement is incorporated herein by reference. Item 11. Executive Compensation The information under the captions ""Compensation of Directors'', ""Information Concerning Manage- ment Compensation'', ""Compensation Committee Interlocks and Insider Participation'' and ""Compensation Committee Report on Executive Compensation'' in our Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain BeneÑcial Owners and Management The information under the captions ""Principal Holders of Securities'' and ""Election of Directors'' of our Proxy Statement is incorporated herein by reference. 59 Item 13. Certain Relationships and Related Transactions The information under the captions ""Election of Directors'' and ""Certain Transactions'' of our Proxy Statement is incorporated herein by reference. 60 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Documents Filed as Part of this Report (a)(1) Financial Statements See Index to Consolidated Financial Statements on page 64. (a)(2) Financial Statement Schedules Schedules have been omitted since they are not applicable, they are not required, or the information required to be set forth in the schedules is included in the Consolidated Financial Statements or Notes thereto. (a)(3) Exhibits 3.1 3.2 3.3 4.1 10.1 Restated Articles of Incorporation. Previously Ñled with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. Restated Bylaws. Previously Ñled with the Securities and Exchange Commission as an exhibit to Bancorp's Annual Report on Form 10-K for the year ended December 31, 1990 and reÑled herewith. CertiÑcate of Designation of Series A Junior Participating Preferred Stock. Shareholders Rights Plan. Previously Ñled with the Securities and Exchange Commission as an exhibit to Bancorp's Registration Statement on Form 8-A on December 20, 2000 and incorporated herein by reference. Form of Indemnity Agreements between Bancorp and its directors and certain oÇcers. Previously Ñled with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. 10.2 Amended and Restated Cathay Bank Employee Stock Ownership Plan eÅective January 1, 1997. 10.3 Dividend Reinvestment Plan of Bancorp. Previously Ñled with the Securities and Exchange Commission as an exhibit to Registration Statement No. 33-33767 and incorporated herein by reference. Equity Incentive Plan of Bancorp. Previously Ñled with the Securities and Exchange Commission as an exhibit to Bancorp's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.* Subsidiaries of Bancorp Consent of Independent Auditors 22.1 23.1 10.4 * Management compensatory plan (b) Reports on Form 8-K The Company did not Ñle any reports on Form 8-K during the last quarter of 2001. 61 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES CATHAY BANCORP, INC. Date: February 26, 2002 By: /s/ DUNSON K. CHENG Dunson K. Cheng Chairman and President POWERS OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dunson K. Cheng and Anthony M. Tang, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to Ñle the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and conÑrming all that each of said attorneys- in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ DUNSON K. CHENG Dunson K. Cheng /s/ ANTHONY M. TANG Anthony M. Tang /s/ RALPH ROY BUON-CRISTIANI Ralph Roy Buon-Cristiani /s/ KELLY L. CHAN Kelly L. Chan President, Chairman of the Board and Director (principal executive oÇcer) Executive Vice President, Chief Financial OÇcer/Treasurer and Director (principal Ñnancial oÇcer) (principal accounting oÇcer) February 26, 2002 February 26, 2002 Director February 26, 2002 Director February 26, 2002 /s/ MICHAEL M.Y. CHANG Secretary of the Board and Director February 26, 2002 Michael M.Y. Chang /s/ GEORGE T.M. CHING George T.M. Ching /s/ WING K. FAT Wing K. Fat Co-Vice Chairman of the Board and Director February 26, 2002 Director February 26, 2002 62 Signature /s/ PATRICK S.D. LEE Patrick S.D. Lee /s/ JOSEPH C.H. POON Joseph C.H. Poon /s/ THOMAS G. TARTAGLIA Thomas G. Tartaglia /s/ WILBUR K. WOO Wilbur K. Woo Title Director Date February 26, 2002 Director February 26, 2002 Director February 26, 2002 Co-Vice Chairman of the Board and Director February 26, 2002 63 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Condition at December 31, 2001 and 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Income and Comprehensive Income for each of the years ended December 31, 2001, 2000 and 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 31, 2001, 2000 and 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ÏÏÏ Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Parent-only condensed Ñnancial information of Cathay Bancorp, Inc. as of December 31, 2001, 2000 and 1999 is included in Note 16 to the Consolidated Financial Statements in this Annual Report on Form 10-KÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 65 66 67 68 69 71 94 64 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, 2001 and 2000, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash Öows for each of the years in the three-year period ended December 31, 2001. These consolidated Ñnancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated Ñnancial 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 Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated Ñnancial statements referred to above present fairly, in all material respects, the Ñnancial position of Cathay Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash Öows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Los Angeles, California January 16, 2002 KPMG LLP 65 CONSOLIDATED STATEMENTS OF CONDITION As of December 31, 2001 2000 (In thousands, except share and per share data) ASSETS Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Federal funds sold and securities purchased under agreements to resell ÏÏÏÏÏÏÏÏ Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities available-for-sale (amortized cost of $241,788 in 2001 and $173,841 $ 73,514 13,000 86,514 $ 65,687 19,000 84,687 in 2000) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 248,958 177,796 Securities held-to-maturity (estimated fair value of $382,814 in 2001 and $388,656 in 2000) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ LoansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized deferred loan fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other real estate owned, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investments in real estate, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Premises and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customers' liability on acceptances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued interest receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 374,356 1,667,905 (23,973) (3,900) 1,640,032 1,555 17,727 29,403 12,729 14,545 8,880 18,415 $2,453,114 387,200 1,463,413 (21,967) (4,139) 1,437,307 5,174 17,348 29,723 20,355 15,633 9,744 21,867 $2,206,834 Deposits LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing demand depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest-bearing accounts: NOW accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Savings accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time deposits under $100 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time deposits of $100 or moreÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Advances from the Federal Home Loan Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acceptances outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stockholders' equity Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued ÏÏ Common stock, $0.01 par value; 25,000,000 shares authorized, 9,117,769 issued and 8,978,869 outstanding in 2001, and 9,074,365 issued and outstanding in 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury stock, at cost (138,900 shares in 2001 and none in 2000) ÏÏÏÏÏÏÏÏÏ Additional paid-in-capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 260,427 $ 221,805 135,650 136,806 252,322 414,490 922,653 2,122,348 22,114 30,000 12,729 19,912 2,207,103 125,647 119,805 231,761 379,809 797,620 1,876,447 68,173 10,000 20,355 17,072 1,992,047 Ì Ì 90 (7,341) 68,518 5,063 179,681 246,011 $2,453,114 91 Ì 66,275 2,303 146,118 214,787 $2,206,834 See accompanying notes to consolidated Ñnancial statements. 66 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Year Ended December 31, 2000 (In thousands, except share and per share data) 1999 2001 $ 120,591 13,762 23,627 $ 126,337 13,473 24,017 $ 93,780 10,551 26,821 INTEREST INCOME Interest on loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest on securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest on securities held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest on federal funds sold and securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest on deposits with banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ INTEREST EXPENSE Time deposits of $100 or moreÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest income before provision for loan losses ÏÏÏÏÏÏÏÏÏÏ Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net interest income after provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏ NON-INTEREST INCOME Securities gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Letters of credit commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depository service fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total non-interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NON-INTEREST EXPENSE Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Computer and equipment expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Professional services expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FDIC and State assessments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Marketing expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other real estate owned (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operations of investments in real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other operating expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the yearÏÏÏÏÏÏ Cumulative adjustment upon adoption of SFAS No. 133ÏÏÏÏÏÏ Unrealized gains on cash Öow hedge derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: reclassiÑcation adjustment included in net income ÏÏÏÏÏÏ Total other comprehensive income (loss), net of tax ÏÏÏÏÏÏÏÏÏ Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,316 56 159,352 686 40 164,553 40,005 23,859 2,289 66,153 93,199 6,373 86,826 2,157 2,152 5,097 5,373 14,779 23,689 3,422 2,928 5,395 475 1,449 (3,589) 2,257 4,139 40,165 61,440 18,820 42,620 2,408 566 303 517 2,760 45,380 $ 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 3,084 Ì Ì (225) 3,309 41,896 $ Net income per common share Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ 4.71 4.69 9,053,895 9,082,630 $ $ 4.26 4.25 9,056,751 9,073,885 See accompanying notes to consolidated Ñnancial statements. 67 1,881 13 133,046 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 (2,229) Ì Ì (34) (2,195) 28,096 3.36 3.36 9,013,428 9,017,760 $ $ $ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 2001, 2000 and 1999 Common Stock Number of Shares Amount Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Total Stockholders' Equity (In thousands, except share and per share amounts) 8,988,760 $90 $62,920 $ 1,189 $ 92,453 $ Ì $156,652 Balance at December 31, 1998ÏÏ Issuances of common stock Ì Dividend Reinvestment Plan Stock options exercised ÏÏÏÏÏÏÏÏ Cash dividends of $0.805 per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Change in other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,523 300 Ì Ì Ì Balance at December 31, 1999ÏÏ 9,033,583 Issuances of common stock Ì Dividend Reinvestment Plan Stock options exercised ÏÏÏÏÏÏÏÏ Cash dividends of $0.88 per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Change in other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,330 1,452 Ì Ì Ì Balance at December 31, 2000ÏÏ 9,074,365 Issuances of common stock Ì Dividend Reinvestment Plan Stock options exercised ÏÏÏÏÏÏÏÏ Purchases of treasury stockÏÏÏÏÏ Cash dividends of $1.00 per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Change in other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,657 8,747 (138,900) Ì Ì Ì Ì Ì Ì Ì Ì 90 1 Ì Ì Ì Ì 91 Ì Ì (1) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 1,600 9 Ì Ì Ì Ì Ì Ì (2,195) Ì Ì Ì (7,248) Ì 30,291 64,529 (1,006) 115,496 1,690 56 Ì Ì Ì 66,275 1,811 432 Ì Ì Ì Ì Ì Ì Ì 3,309 Ì 2,303 Ì Ì Ì Ì 2,760 Ì Ì Ì (7,965) Ì 38,587 146,118 Ì Ì Ì Ì Ì (7,341) (9,057) Ì 42,620 Ì Ì Ì 1,600 9 (7,248) (2,195) 30,291 179,109 1,691 56 (7,965) 3,309 38,587 214,787 1,811 432 (7,342) (9,057) 2,760 42,620 Balance at December 31, 2001ÏÏ 8,978,869 $90 $68,518 $ 5,063 $179,681 $(7,341) $246,011 See accompanying notes to consolidated Ñnancial statements. 68 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flows from Operating Activities Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for losses on other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred tax beneÑt (liability) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net gain on sale of other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on sale of investments in real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Gain) Loss on sales and calls of securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Write-downs on Venture Capital Investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of investment security premiums, netÏÏÏÏÏÏÏÏÏÏÏ Amortization of goodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Decrease) increase in deferred loan fees, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Decrease (increase) in accrued interest receivable ÏÏÏÏÏÏÏÏÏÏÏ Decrease (increase) in other assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) in other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Flows from Investing Activities Purchase of investment securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from maturity and call of investment securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sale of investment securities available-for-sale ÏÏÏÏ Purchase of mortgage-backed securities available-for-sale ÏÏÏÏÏÏÏ Proceeds from repayment and sale of mortgage-backed securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase of investment securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from maturity and call of investment securities held-to- maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase of mortgage-backed securities held-to-maturity ÏÏÏÏÏÏÏÏ Proceeds from repayment of mortgage-backed securities held-to- maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net increase in loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase of premises and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sale of other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sale of investments in real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net increase in investments in real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash paid for the acquisition of Golden City ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 Year Ended December 31, 2000 (In thousands) 1999 $ 42,620 $ 38,587 $ 30,291 6,373 Ì (2,361) 1,472 (3,376) Ì (2,222) 65 575 864 (239) 1,088 2,200 2,840 7,279 49,899 4,200 71 637 1,500 (263) Ì (1,085) Ì (926) 815 544 (2,483) (1,372) 9,666 11,304 49,891 4,200 339 (1,472) 1,331 (1,549) (394) 3 Ì 557 681 (38) (1,154) (2,480) (3,012) (2,988) 27,303 (952,258) (660,275) (1,090,732) 865,867 22,179 Ì 678,368 21,443 (949) 1,160,919 Ì (911) 8,421 (82,313) 6,955 (47,824) 60,295 (40,052) 17,519 (29,604) 63,155 (204,516) (1,152) 6,995 Ì (379) Ì 38,802 (200,298) (5,924) 3,187 Ì (361) Ì 9,906 (45,255) 1,385 (38,157) 70,851 (282,413) (803) 4,730 1,026 (16,162) (5,511) Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (253,758) (178,961) (231,127) 69 2001 Year Ended December 31, 2000 (In thousands) 1999 Cash Flows from Financing Activities Net increase in demand deposits, NOW accounts, money market and savings deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net increase in time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) in borrowing from Federal Home Loan Bank Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from shares issued to Dividend Reinvestment Plan ÏÏÏÏÏ Proceeds from exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,187 159,714 47,899 106,812 (46,059) 20,000 (9,057) 1,811 432 (7,342) 21,183 (20,000) (7,965) 1,691 56 Ì Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205,686 149,676 Increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents, beginning of the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,827 84,687 20,606 64,081 36,835 124,499 30,554 Ì (7,248) 1,600 9 Ì 186,249 (17,575) 81,656 Cash and cash equivalents, end of the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 86,514 $ 84,687 $ 64,081 Supplemental disclosure of cash Öow information Cash paid during the year for: Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-cash investing activities: Transfer to investment securities available-for-sale within 90 days of maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net change in unrealized holding gain (loss) on securities available-for-sale, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cumulative adjustment upon adoption of SFAS No. 133, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net change in unrealized gains on cash Öow hedge derivatives, net of taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Transfers to other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans to facilitate the sale of other real estate owned ÏÏÏÏÏÏ Acquisition: The Company purchased certain assets and assumed certain liabilities of Golden City Commercial Bank for $5,511 in 1999. In conjunction with the acquisition, liabilities were assumed as follows. See Note 2. Fair value of assets acquired Cash paid $86,779 (5,511) Liabilities assumed $81,268 $ $ $ $ $ $ $ $ 68,020 5,561 11,722 1,891 566 303 1,057 5,400 $ $ $ $ $ $ $ $ 72,644 17,411 59,858 3,309 $ $ $ $ 56,857 20,350 2,515 (2,195) Ì $ Ì Ì $ $ $ 5,347 1,515 Ì 886 3,483 See accompanying notes to consolidated Ñnancial statements. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of SigniÑcant Accounting Policies The accompanying consolidated Ñnancial 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 signiÑcant inter-company transactions and balances have been eliminated in consolidation. The consolidated Ñnancial 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 Company 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 Ñnancial statements in conformity with GAAP. Actual results could diÅer from these estimates. The most signiÑcant estimate subject to change relates to the allowance for loan losses. Certain reclassiÑcations have been made to the prior years' Ñnancial statements to conform to the 2001 presentation. The following are descriptions of the more signiÑcant 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 possibilities. Bancorp currently does not employ any persons other than its management, which includes the President, the Chief Financial OÇcer and the General Counsel, and does not own or lease any real or personal property. Bancorp uses the employees, 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 checking, savings, and time deposits, and the making of commercial, real estate and consumer loans. The Bank also oÅers trade Ñnancing, letter of credit, wire transfer, spot and forward contracts, internet banking, investment services, and other customary banking services to its customers. Securities. Securities are classiÑed as held-to-maturity when management has the ability and intent to hold these securities until maturity. Securities are classiÑed as available-for-sale when management intends to hold the securities for an indeÑnite 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 discounts 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 carried 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 speciÑc identiÑcation 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-residential 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 non-accrual status, unless the loan is well secured, and there is a high probability of recovery in full, as determined by management. When loans are placed on a non-accrual status, previously accrued but unpaid interest is reversed and charged against current period 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) income, and interest is subsequently recognized only to the extent cash is received. Interest collected on non- accrual loans is applied to the outstanding 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, oÅset 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 non-accrual status, the amortization of the loan fees and the accretion of discounts discontinue until such time when the loan is reverted back to accruing status. Allowance for Loan Losses. Management believes the allowance for loan losses is being maintained at a level considered 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 un-collectible 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 geographic 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 the judgments 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 measurement of impairment may be based on (1) the present value of the expected future cash Öows of the impaired loan discounted at the loan's original eÅective 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 corresponding charge to the provision for loan losses. The Company stratiÑes its loan portfolio by size and treats smaller performing loans with an outstanding balance less than the Company's deÑned criteria as a homogenous portfolio. For loans with a balance in excess of $750,000, the Company conducts a periodic review of each loan in order to test for impairment. The Company recognizes interest income on impaired loans based on its existing method of recognizing interest income on non-accrual 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Building improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Furniture, Ñxtures and equipment ÏÏÏÏÏÏÏÏÏÏ Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15 to 45 years 5 to 20 years 3 to 25 years 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. 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. SpeciÑc valuation allowances on other real estate owned are recorded through charges to operations to recognize declines in fair value subsequent to 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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, 2001, the Company is a limited partner in four diÅerent partnerships that invest in low income housing projects that qualify for Federal and/or State income tax credits. As further discussed in Note 7, the partnership interests are accounted for utilizing the equity method of accounting. The costs related directly to the development or the improvement of real estate are capitalized. Gains on sales are recognized when certain criteria relating to the buyer's initial and continuing investment in the property are met. Goodwill. During 2001, Goodwill, which represents the excess of purchase price over fair value of net assets acquired and the related acquisition costs, was amortized on a straight-line basis over the expected periods to be beneÑted (generally 15 years). The amortization of goodwill ceases upon adoption of SFAS No. 142, which for the Company was January 1, 2002. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the Ñrst interim period. In addition, to the extent an intangible asset is identiÑed as having an indeÑnite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative eÅect of a change in accounting principle in the Ñrst interim period. The Company adopted SFAS No. 142 eÅective January 1, 2002. Assuming no impairment adjustments are necessary, the Company expects non-interest expense to decrease by approximately $661,000 in 2002, resulting from the cessation of goodwill amortization. Core Deposit Premium. Core deposit premium, which represents the purchase price over the fair value of the deposits acquired from other Ñnancial institutions are amortized on a straight-line basis over the expected periods to be beneÑted (generally 15 years). The Company assesses the recoverability of this intangible asset by determining whether the amortization of the premium balance over its remaining life can be recovered through the remaining deposit portfolio. Stock-Based Compensation. The Company applies the intrinsic value method to account for stock- based compensation 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. It is the policy of the Bank not to speculate on the future direction of interest rates. However, the Company enters into Ñnancial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the assets or liabilities and against risk in speciÑc transactions. In such instances, the Bank may protect its position through the purchase or sale of interest rate futures contracts for a speciÑc cash or interest rate risk position. Other hedge transactions may be implemented using interest rate swaps, interest rate caps, Öoors, Ñnancial futures, forward rate agreements, and options on futures or bonds. Prior to considering any hedging activities, we seek to analyze the costs and beneÑts of the hedge in comparison to other viable alternative strategies. All hedges require an assessment of basis risk and must be approved by the Bank's Investment Committee. For periods prior to January 1, 2001, for those qualifying Ñnancial derivatives that altered the interest rate characteristics of assets or liabilities, the net diÅerential to be paid or received on the Ñnancial derivative was treated as an adjustment to the yield on the underlying assets or liabilities. Interest rate Ñnancial derivatives that did not qualify for the accrual method, were recorded at fair value, with gains and losses recorded in earnings. EÅective January 1, 2001, the Company adopted SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities'' (""SFAS No. 133''), as amended by SFAS No. 137 and No. 138. SFAS No. 133 establishes accounting and reporting standards for Ñnancial derivatives, including certain Ñnancial derivatives 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) embedded in other contracts, and hedging activities. It requires the recognition of all Ñnancial derivatives as assets or liabilities in the Company's statement of Ñnancial condition and measurement of those Ñnancial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a Ñnancial derivative is designated as a hedge and if so, the type of hedge. Upon adoption of SFAS No. 133, the Company recognized all derivatives on the balance sheet at fair value. Fair value is based on dealer quotes, or quoted prices from instruments with similar characteristics. The Company uses Ñnancial derivatives designated for hedging activities as cash Öow hedges. For derivatives designated as cash Öow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. Income Taxes. The provision for income taxes is based on income reported for Ñnancial statement purposes and diÅers from the amount of taxes currently payable, since certain income and expense items are reported for Ñnancial statement purposes in diÅerent 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 establish deferred tax assets and liabilities for the temporary diÅerences between the Ñnancial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in eÅect when such amounts are realized or settled. A valuation allowance is established for deferred tax assets if, based on the weight of available 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 eÇcient operations. The majority of all transactions are settled on the transaction date to minimize settlement risk to the Company. The Company requires cash collateral or an approved line of credit on all forward transactions. Comprehensive Income. Comprehensive income is deÑned as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income generally includes net income, foreign items, minimum pension liability adjustments, unrealized gains and losses on investments in securities available-for-sale, and cash Öow hedges. Comprehensive income and its components are reported and displayed in the Company's consolidated statements of income and comprehensive income. Comprehensive income is a Ñnancial reporting concept and does not aÅect the Company's Ñnancial position or results of operations. Net Income per Common Share. Earnings per share (""EPS'') is computed on a basic and diluted basis. Basic 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 reÖects 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 shares 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 in the United States of America establish standards to report information about operating segments in annual Ñnancial 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 it has one segment. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statement No. 141, ""Business Combinations'' (""SFAS No. 141'') and Statement No. 142, ""Goodwill and Other Intangible Assets'' (""SFAS No. 142''). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142, which for the Company was January 1, 2002. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the Ñrst interim period. In addition, to the extent an intangible asset is identiÑed as having an indeÑnite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative eÅect of a change in accounting principle in the Ñrst interim period. The Company adopted SFAS No. 142 eÅective January 1, 2002. Assuming no impairment adjustments are necessary and no other changes to goodwill, the Company expects non-interest expense to decrease by approximately $661,000 in 2002, resulting from the cessation of goodwill amortization. In June 2001, the FASB issued SFAS No. 143, ""Accounting for Asset Retirement Obligations,'' which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accrued at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are eÅective for Ñscal years beginning after June 15, 2002. Management does not expect that adoption of SFAS No. 143 will have a material impact on the results of operations or Ñnancial condition of the Company. In August 2001, the FASB issued SFAS No. 144, ""Accounting for the Impairment or Disposal of Long- Lived Assets.'' For long-lived assets to be held and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash Öows and (b) measure an impairment loss as the diÅerence between the carrying amount and fair value. Further, SFAS No. 144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash Öow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated for the amount of possible future cash Öows, and establishes a ""primary-asset'' approach to determine the cash Öow estimation period. For long-lived asset to be disposed of by sale, SFAS No. 144 retains the requirements of SFAS No. 121 to measure a long-lived asset classiÑed as held-for-sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would be no longer recognized before they occur. SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long- lived asset is held-for-sale, prohibits retroactive reclassiÑcation of the asset as held-for-sale at the balance sheet date if the criteria are met after the balance sheet date but before issuance of the Ñnancial statements, and provides accounting guidance for the reclassiÑcation of an asset from ""held-for-sale'' to ""held-and-used.'' The provisions of SFAS No. 144 are eÅective for Ñscal years beginning after December 15, 2001. Management does not expect that adoption of SFAS No. 144 will have a material impact on the results of operations or Ñnancial condition of the Company. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 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 subsequent to the closing on December 10, 1999 have been included in the Company's consolidated Ñnancial statements. The excess of the purchase price over the fair value of the net identiÑable assets acquired totaled approximately $2.65 million has been recorded as core deposits intangible to be amortized over 15 years. 3. Cash and Cash Equivalents 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 $3,288,000 for 2001 and $2,500,000 for 2000. Securities purchased under agreements to resell are collateralized by U.S. government agency and mortgaged-backed securities at December 31, 2001 and 2000. These agreements generally mature in one business day. The counter-parties to these agreements are nationally recognized investment banking Ñrms that meet credit requirements of the Company and with whom a master repurchase agreement has been duly executed. The following table sets forth information with respect to securities purchased under resale agreements. Balance, December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average interest rate, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Average amount outstanding during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average interest rate for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maximum amount outstanding at any month end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 (In thousands) $ Ì $17,000 Ì $27,897 6.55% $ 8,945 4.21% 5.74% $36,000 $19,500 For those securities obtained under the resale agreements, the collateral is either held by a third party custodian or by the counter-party and segregated under written agreements that recognize the Company's interest in the securities. Interest income associated with securities purchased under resale agreements totaled $1,149,000 for 2001, $513,000 for 2000 and $1,860,000 for 1999. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 4. Securities Securities Available-for-Sale. The following table reÖects the amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities available-for-sale as of December 31, 2001 and 2000: Available-for-sale 2001 U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Money market fund ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortized Cost $113,873 8,336 2,658 9,994 20,000 57,973 28,954 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $241,788 2000 U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and municipal securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortized Cost $ 75,187 1,275 13,152 5,849 10,452 59,466 8,460 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $173,841 Gross Unrealized Gains Gross Unrealized Losses (In thousands) Fair Value $4,500 213 47 401 Ì 2,532 34 $7,727 $ 49 6 Ì Ì Ì 171 331 $557 Gross Unrealized Gains Gross Unrealized Losses (In thousands) $3,130 2 70 Ì Ì 1,119 10 $4,331 $ Ì Ì 15 45 82 215 19 $376 $118,324 8,543 2,705 10,395 20,000 60,334 28,657 $248,958 Fair Value $ 78,317 1,277 13,207 5,804 10,370 60,370 8,451 $177,796 The amortized cost and fair value of securities available-for-sale, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 2001, by contractual maturities are shown below. Actual maturities may diÅer 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) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Due after one year through Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Due after Ñve years through ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities and collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 60,971 91,144 78,679 10,994 $ 60,724 93,708 83,278 11,248 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $241,788 $248,958 Amortized Cost Fair Value (In thousands) (1) Equity securities are reported in this category. 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Proceeds from sales and repayments of securities available-for-sale were $30,600,000 during 2001 and $28,398,000 during 2000. Proceeds from maturities and calls of securities available-for-sale were $865,867,000 during 2001 and $678,638,000 during 2000. Gains realized in securities available-for-sale were $1,057,000, and losses realized were $65,000 in 2001 compared to no gains and losses realized of $18,000 in 2000. There were no gains in 1999 and losses realized in 1999 were $34,000. 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, 2001 and 2000: Held-to-Maturity Carrying Value Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (In thousands) 2001 U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and municipal securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50,017 69,906 110,342 50,282 920 73,031 19,858 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $374,356 $1,251 2,049 2,726 657 1 1,822 484 $8,990 $ Ì 380 14 57 Ì 81 Ì $532 $ 51,268 71,575 113,054 50,882 921 74,772 20,342 $382,814 Carrying Value Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (In thousands) 2000 U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and municipal securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 64,689 68,820 135,494 48,694 13,156 56,347 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $387,200 $ 586 1,567 1,382 182 Ì 159 $3,876 $ 262 422 631 125 80 900 $2,420 $ 65,013 69,965 136,245 48,751 13,076 55,606 $388,656 The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 2001, by contractual maturities are shown 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) below. Actual maturities may diÅer from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties. Amortized Cost Fair Value (In thousands) Due in one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Due after one year through Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Due after Ñve years through ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Due after ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mortgage-backed securities and collateralized mortgage obligations ÏÏÏÏÏÏ $ 10,870 113,351 52,397 37,114 160,624 $ 11,086 116,094 54,629 37,069 163,936 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $374,356 $382,814 Proceeds from repayment of securities held-to-maturity were $63,155,000 during 2001 and $38,802,000 during 2000. Proceeds from the maturities and calls of securities held-to-maturity were $60,295,000 during 2001 and $17,519,000 during 2000. The Company realized gross realized gains of $314,000 for 2001, less than $1,000 for 2000 and $31,000 for 1999. No losses were realized for 2001, 2000 and 1999. Securities having a carrying value of $125,250,000 at December 31, 2001 and $209,537,000 at December 31, 2000 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. Federal Home Loan Bank (""FHLB'') stock is carried at cost, and included in other assets in the Statements of Financial Condition. The carrying amount of the FHLB stock at December 31, 2001 was $5.64 million compared to $5.61 million at December 31, 2000. The Federal Home Loan Bank Act currently governs the level of stock ownership, and the stock is purchased and redeemed at par. The amount of Federal Home Loan Bank stock required is based on the member's year-end outstanding mortgage-backed securities, residential mortgages and advances from the FHLB. 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 City and Houston, Texas. The Company has no speciÑc 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-oÅ from the operating proÑts of the borrowers, 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) reÑnancing by another lender or through sale by the borrowers of the secured collateral. The components of loans in the consolidated statements of condition as of December 31, 2001 and 2000 were as follows: Type of Loans: Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Residential mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity linesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Real estate construction loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Installment loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 (In thousands) $ 506,128 195,562 738,379 40,352 166,417 20,322 745 $ 442,181 186,926 630,662 33,794 142,048 27,329 473 Gross loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,667,905 1,463,413 Less Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized deferred loan fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (23,973) (3,900) (21,967) (4,139) Net loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,640,032 $1,437,307 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, 2001, the Company had $3,580,000 of these loans in its servicing portfolio. There were no loans held for sale as of December 31, 2001 and 2000. The Company pledged approximately $96,413,000 of its residential mortgage loans as of December 31, 2001 and $76,463,000 as of December 31, 2000 to secure a line of credit with the Federal Home Loan Bank. The allowance for loan losses is a signiÑcant estimate that can and does change based on management's process in analyzing the loan portfolio and on management's assumptions about speciÑc borrowers and applicable economic and environmental conditions, among other factors. An analysis of the activity in the allowance for loan losses for the years ended December 31, 2001, 2000 and 1999 is as follows: Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans charged-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Recoveries of charged-oÅ loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21,967 6,373 (4,663) 296 2001 2000 (In thousands) $19,502 4,200 (1,905) 170 1999 $15,970 4,200 (1,731) 1,063 Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $23,973 $21,967 $19,502 The Company had identiÑed impaired loans with a recorded investment to be approximately $19,350,000 as of December 31, 2001 and $27,818,000 as of December 31, 2000. The average balances of impaired loans were $23,465,000 for 2001, $29,516,000 for 2000, and $26,707,000 for 1999. Interest collected on impaired loans totaled $959,000 in 2001, $2,120,000 in 2000 and $2,047,000 in 1999. The Bank recognizes interest 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) income on impaired loans based on its existing method of recognizing interest income on non-accrual loans. The following table is a breakdown of impaired loans and the related speciÑc allowance: Recorded Investment Allocated Net Balance Allowance (In thousands) 2001 CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial mortgage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,924 12,426 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,350 $2,143 1,764 $3,907 $ 4,781 10,662 $15,443 Recorded Investment Allocated Net Balance Allowance (In thousands) 2000 CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commercial mortgage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,868 13,208 742 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27,818 $3,682 1,881 133 $5,696 $10,186 11,327 609 $22,122 The Company has entered into transactions with its directors, signiÑcant stockholders and their aÇliates (""Related Parties''). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, 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 present other unfavorable features. All loans to Related Parties were current as of December 31, 2001. An analysis of the activity with respect to loans to Related Parties is as follows: Balance at December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional loans made ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments receivedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance at December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional loans made ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments receivedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (In thousands) $ 12,112 1,036 (249) 12,899 21,060 (15,147) Balance at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 18,812 The following is a summary of non-accrual loans and troubled debt restructurings as of December 31, 2001, 2000 and 1999 and the related net interest foregone for the years then ended: Non-accrual Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,238 2001 2000 (In thousands) $14,696 Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 823 96 $ 1,408 627 1999 $13,696 $ 1,396 234 Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 727 $ 781 $ 1,162 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Troubled Debt Restructurings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,726 Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 409 370 Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 39 2001 2000 (In thousands) $ 4,531 $ $ 422 407 15 1999 $ 4,581 $ $ 429 414 15 As of December 31, 2001, there were no commitments to lend additional funds to those borrowers whose loans have been restructured, impaired or in non-accrual status. 6. Other Real Estate Owned The balance of other real estate owned at December 31, 2001 was $1,555,000 and at December 31, 2000 was $5,174,000. The valuation allowance was $131,000 at December 31, 2001 and December 31, 2000. The following table presents the components of other real estate owned expense (income) for the year ended: 2001 2000 (In thousands) 1999 Operating expense (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss (gain) on disposalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (213) Ì (3,376) $ 7 71 (263) $ (206) 339 (1,549) Total other real estate owned (income) expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,589) $(185) $(1,416) An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 2001, 2000, and 1999 is as follows: Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Charge-oÅs on disposal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2001 2000 1999 131 Ì Ì 131 $ 614 71 (554) $ 494 339 (219) $ 131 $ 614 7. Investments in Real Estate The Company's investments in real estate were $17,727,000 as of December 31, 2001 and $17,348,000 as of December 31, 2000, consisting of four investments in limited partnerships formed for the purpose of investing in low income housing projects, qualiÑed for Federal low income housing tax credits. The limited partnerships are expected to generate tax credits over a weighted average remaining period of approximately eight years. In addition to the Federal tax credits, the California Corporate Tax Credit Fund also qualiÑed for State tax credits. See Note 10 of the notes to consolidated Ñnancial statements for income tax eÅects. In 2001, the Company contributed approximately $2,637,000 to Wilshire Courtyard, the senior housing construction 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) project, completed in 2001. The following table presents the details of the four projects as of December 31, 2001 and 2000: Percentage of Ownership Acquisition Date December 31, 2001 2000 Las Brisas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Los Robles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ California Corporate Tax Credit Fund III ÏÏÏÏÏÏÏÏÏÏÏÏÏ Wilshire CourtyardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.50% 99.00% 32.50% 99.90% (Dollars in thousands) Dec 1993 Aug 1995 Mar 1999 May 1999 $ Ì $ 386 12,426 4,915 189 393 14,127 2,639 $17,727 $17,348 The Company's 99.0% and 99.90% interest in the Los Robles and Wilshire Courtyard limited partner- ships were not consolidated as of December 31, 2001 and 2000 because the Company did not have ability to exercise signiÑcant inÖuence 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 $2,257,000 in 2001, $683,000 in 2000 and $334,000 in 1999 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 for 1999 from the operations. 8. Premises and Equipment Premises and equipment consisted of the following at December 31, 2001 and 2000: Land and land improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Building and building improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Furniture, Ñxtures and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 (In thousands) $11,800 17,685 14,414 2,512 291 46,702 17,299 $11,800 17,525 14,169 2,199 716 46,409 16,686 Premises and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,403 $29,723 The amount of depreciation included in operating expense was $1,472,000 in 2001, $1,500,000 in 2000, and $1,331,000 in 1999. 9. Borrowings Securities Sold under Agreements to Repurchase. The underlying collateral pledged for the repurchase agreements consists of U.S. government agency and mortgage-backed securities with a carrying value of $37,894,000, and a fair value of $38,295,000 as of December 31, 2001, and are held by a custodian and 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) maintained under the Company's control. These borrowings generally mature in less than 30 days. The table below provides comparative data for securities sold under agreements to repurchase: Average amount outstanding during the year(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Maximum amount outstanding at month-end(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balances, December ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rate at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average interest rate for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $34,799 55,412 22,114 December 31, 2000 (In thousands) $ 70,701 110,145 68,173 1999 $55,519 79,185 46,990 1.01% 3.51% 6.09% 6.25% 5.80% 5.73% (1) Average balances were computed using daily averages. (2) Highest month-end balances were at February in 2001, October in 2000 and February in 1999. Advances from the Federal Home Loan Bank. As of December 31, 2001, the Bank had obtained two advances from the Federal Home Loan Bank of San Francisco totaling $30,000,000. These advances are non-callable with Ñxed interest rates. The advance for $10,000,000 at 4.90% was obtained in 1998, and matures on October 28, 2003. The advance for $20,000,000 at 5.45% was obtained in 2001, and matures on March 21, 2005. 10. Income Taxes For the years ended December 31, 2001, 2000 and 1999, the current and deferred amounts of the income tax expense are summarized as follows: Current Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,367 1,814 $19,321 1,904 $15,377 5,815 2001 2000 (In thousands) 1999 Deferred Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,181 21,225 21,192 (1,350) (1,011) (2,361) 479 158 637 (1,159) (313) (1,472) Total income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,820 $21,862 $19,720 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Temporary diÅerences between the amounts reported in the Ñnancial statements and the tax basis of assets and liabilities give rise to deferred taxes. Deferred tax assets and liabilities for the years ended December 31, 2001 and 2000 are as follows: Deferred Tax Assets DiÅerence between provisions for loan losses for tax and Ñnancial reporting purposes DiÅerence between provisions for other real estate owned losses for tax and Ñnancial reporting purposes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 (In thousands) $ 9,275 $ 8,508 71 705 676 55 307 Ì Gross deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,727 8,870 Deferred Tax Liabilities Use of accelerated depreciation for tax purposes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred loan fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FHLB stock dividend ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized holding gain on securities available-for-sale, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gain on cash Öow hedge derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,312) Ì (1,115) (3,043) (706) (368) (1,272) (2) (1,170) (1,670) Ì (855) Gross deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,544) (4,969) Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,183 $ 3,901 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 Ñled. Accordingly, the variances from the amounts previously reported for 2000 are primarily the result of adjustments to conform to the tax returns as Ñled. In assessing the realization 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 on the generation of future taxable income during the periods in which those temporary diÅerences become deductible. Management considers the projected future taxable income and tax planning strategies in making 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 beneÑts related to these deductible temporary diÅerences. Included in other assets in the statements of conditions, at December 31, 2001 and 2000 were net deferred tax assets of $4,183,000 for 2001 and $3,901,000 for 2000. Other assets as of December 31, 2001 and 2000 included a current income tax receivable of $996,000 for 2001 and $1,675,000 for 2000. Other liabilities as of December 31, 2001 and 2000 include a current income tax payable $19,370,000 for 2001 and $4,429,000 for 2000. 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Income tax expense results in eÅective tax rates that diÅer from the statutory Federal income tax rate for the years indicated as follows: Tax provision at Federal statutory rate ÏÏÏÏÏÏÏÏ State income taxes, net of Federal income tax 2001 2000 (In thousands) 1999 $21,504 35.00% $21,157 35.00% $17,504 35.00% beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 522 0.85 1,340 2.22 3,576 7.15 Interest on obligations of state and political subdivisions, which are exempt from Federal taxation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Low income housing tax creditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-deductible expense- (72) (2,294) (0.12) (3.73) (1,240) (947) (2.05) (1.57) (1,081) (319) (2.16) (0.64) Amortization of goodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 236 (1,076) 0.38 (1.75) 231 1,321 0.38 2.19 240 0.48 (200) (0.40) Total income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,820 30.63% $21,862 36.17% $19,720 39.43% 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 it may generate from any other activities in which Bancorp may engage, either directly or through other subsidiaries. Currently, since Bancorp does not have any other signiÑcant business activities outside the Bank'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 Ñscal years, less any cash distributions made during that period. The amount of retained earnings available for cash dividends as of December 31, 2001 is restricted to approximately $87,228,000 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 Ì and possibly additional discretionary Ì actions by regulators that, if undertaken, could have a direct material eÅect on the Bank's Ñnancial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet speciÑc capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain oÅ-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classiÑcation are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Federal Deposit Insurance Corporation has established Ñve capital ratio categories: ""well capital- ized'', ""adequately capitalized'', ""undercapitalized'', ""signiÑcantly undercapitalized'' and ""critically under- capitalized.'' 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, 2001, the Bank was in compliance with the minimum capital requirements and is considered well capitalized. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) The Company's and the Bank's capital and leverage ratios as of December 31, 2001 and 2000 are presented in the tables below: Company As of December 31, 2001 Bank As of December 31, 2001 Company As of December 31, 2000 Bank As of December 31, 2000 Balance Percentage Balance Percentage Balance Percentage Balance Percentage (Dollars in thousands) Tier I Capital (to risk- weighted assets) ÏÏÏÏÏÏ $ 231,916(1) 11.15% $ 224,239(1) 10.80% $ 202,741(2) 11.05% $ 194,694(2) 10.64% Tier I Capital minimum requirement ÏÏÏÏÏÏÏÏÏÏ 83,231 4.00 83,064 4.00 73,370 4.00 73,184 Excess ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 148,685 7.15% $ 141,175 6.80% $ 129,371 7.05% $ 121,510 4.00 6.64% Total Capital (to risk- weighted assets) ÏÏÏÏÏÏ $ 255,904(1) 12.30% $ 248,227(1) 11.95% $ 224,708(2) 12.25% $ 216,661(2) 11.84% Total Capital minimum requirement ÏÏÏÏÏÏÏÏÏÏ 166,462 8.00 166,129 8.00 146,740 8.00 146,369 Excess ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 89,442 4.30% $ 82,098 3.95% $ 77,968 4.25% $ 70,292 8.00 3.84% Risk-weighted assets ÏÏÏÏ Tier I Capital (to average assets) - Leverage ratio ÏÏÏÏÏÏÏÏ Minimum leverage $2,080,776 $2,076,608 $1,834,252 $1,829,609 $ 231,916(1) 9.48% $ 224,239(1) 9.18% $ 202,741(2) 9.28% 194,694(2) 8.93% requirement ÏÏÏÏÏÏÏÏÏÏ 97,843 4.00 97,665 4.00 87,387 4.00 87,251 Excess ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 134,073 5.48% $ 126,574 5.18% $ 115,354 5.28% $ 107,443 4.00 4.93% Total average assets ÏÏÏÏÏ $2,446,084(3) $2,441,623(3) $2,184,666(3) $2,181,272(3) (1) Excluding accumulated other comprehensive income of $5,063,000 and goodwill of $8,880,000. (2) Excluding accumulated other comprehensive income of $2,303,000 and goodwill of $9,744,000. (3) Average assets represent average balances for the fourth quarter of 2001 and the fourth quarter of 2000. The Board of Directors of Bancorp is authorized to issue preferred stock in one or more series and to Ñx the voting powers, designations, preferences or other rights of the shares of each such class or series and the qualiÑcations, 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, 2001. 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 purchase 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 purchase 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 oÅer 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 Ñled 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. 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years indicated. Year Ended December 31, 2001 Year Ended December 31, 2000 Year Ended December 31, 1999 Income (Numerator) Per Share (Denominator) Amount Shares Income (Numerator) Per Share (Denominator) Amount Shares Income (Numerator) Per Share (Denominator) Amount Shares Net income ÏÏÏ $42,620 $38,587 $30,291 (In thousands, except share and per share data) Basic EPS income available to common stockholders EÅect of dilutive stock options ÏÏÏÏÏ Diluted EPS income available to common stockholders $42,620 9,053,895 $4.71 $38,587 9,056,751 $4.26 $30,291 9,013,428 $3.36 28,735 17,134 4,332 $42,620 9,082,630 $4.69 $38,587 9,073,885 $4.25 $30,291 9,017,760 $3.36 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 eÅect upon its Ñnancial condition or results of operations. Lending. In the normal course of business, the Company becomes a party to Ñnancial instruments with oÅ-balance sheet risk to meet the Ñnancing needs of its customers. These Ñnancial instruments included commitments to extend credit in the form of loans or through commercial or standby letters of credit and Ñnancial guarantees. Those instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying consolidated statements of condition. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of Ñnancial instrument and is not a reÖection 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 Ñnancial instrument 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 Ñnancial instruments with credit risk. Financial instruments whose contract amounts represent the amount of credit risk include the following: 2001 2000 (In thousands) Commitments to extend credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Standby letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bill of lading guarantee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $676,513 17,595 26,923 12,729 $619,872 15,435 44,371 20,729 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $733,760 $700,407 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 Ñxed expiration 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) dates and are expected 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 collateral 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, 2001, the Company does not have Ñxed-rate or variable-rate commitments with characteristics similar to options, which provide the holder, for a premium paid at inception to the Company, the beneÑts of favorable movements in the price of an underlying asset or index with limited or no exposure to losses from unfavorable price movements. The Company's exposure to credit risk from this Ñnancial guarantee is essentially the same as if the Company was the owner of the corporation debt. At December 31, 2001 the Company has no outstanding Ñnancial 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, 2001, the Company had available credit lines with other Ñnancial institutions in the amount of $332,500,000. Derivative Financial Instruments. The Company entered into a forward rate agreement with a notional amount of $100 million that was recorded at fair value, with gains recorded as securities gains in the accompanying consolidated statements of income and comprehensive income. The agreement expired in March 2001. On March 21, 2000, we entered into an interest rate swap agreement with a major Ñnancial institution in the notional amount of $20 million for a period of Ñve years. The interest rate swap was for the purpose of hedging the cash Öows from a portion of our Öoating rate loans against declining interest rates. The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at December 31, 2001, was approximately three years. At December 31, 2001 the fair value of the interest rate swap was $1.93 million ($869,000, net of tax) compared to $977,000 ($566,000, net of tax) at January 1, 2001. For the twelve months ended December 31, 2001, amounts totaling $557,000 were reclassiÑed into earnings. The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to reclassify into earnings within the next 12 months is approximately $1.06 million. Leases. The Company is obligated under a number of operating leases for premises and equipment with terms ranging from 1 to 55 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. Rental expense was $2,269,000 for 2001, $2,200,000 for 2000 and $1,823,000 for 1999. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 2001. Commitments (In thousands) Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,664 1,531 1,356 1,318 1,129 9,594 Total minimum lease paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $16,592 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Rental income was $450,000 for 2001, $437,000 for 2000, and $443,000 for 1999. The following table shows future rental payments to be received under operating leases with terms in excess of one year as of December 31, 2001: Commitments (In thousands) Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total minimum lease payments to be received ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 429 343 208 40 16 Ì $1,036 13. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of Ñnancial 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. Loans. Fair values were estimated for portfolios of loans with similar Ñnancial characteristics. Each loan category was further segmented into Ñxed and adjustable rate interest terms and by performing and non- performing categories. The fair value of performing loans was calculated by discounting scheduled cash Öows through the estimated maturity using estimated market discount rates that reÖect 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 collateral of the loan. If appraisals were not available, estimated cash Öows are discounted using a rate commensurate with the risk associated with the estimated cash Öows. Assumptions regarding credit risk, cash Öows, and discount rates are determined judgmentally using available market information and speciÑc 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 Ñxed- maturity certiÑcates of deposit was estimated using the rates currently oÅered for deposits with similar remaining maturities. Other Borrowings. This category includes Federal funds purchased and securities sold under repurchase agreements, 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 Öows using the U.S. Treasury curve adjusted to approximate current entry-value interest rates applicable and similar obligations issued by the Bank. 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) OÅ-Balance-Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit, and Ñnancial guarantees written were estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthi- ness 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 counter-parties at the reporting 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 speciÑc points in time, based on relevant market information and information about the Ñnancial instrument. These estimates do not reÖect any premium or discount that could result from oÅering for sale at one time the Bank's entire holdings of a particular Ñnancial instrument. Because no market exists for a signiÑcant portion of the Bank's Ñnancial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various Ñnancial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of signiÑcant judgment and therefore cannot be determined with precision. Changes in assumptions could signiÑcantly aÅect the estimates. Fair Value of Financial Instruments As of December 31, 2001 Carrying Amount Fair Value As of December 31, 2000 Carrying Amount Fair Value (In thousands) $ 73,514 $ 73,514 $ 65,687 $ 65,687 Financial Assets Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Federal funds sold and securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest rate swapÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Liabilities 13,000 248,958 374,356 1,640,032 1,928 DepositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Securities sold under agreements to repurchase ÏÏ Advances from Federal Home Loan Bank ÏÏÏÏÏÏ 2,122,348 22,114 30,000 13,000 248,958 382,814 1,643,459 1,928 2,128,850 22,114 30,937 19,000 177,796 387,200 1,437,307 Ì 1,876,447 68,173 10,000 19,000 177,796 388,656 1,430,956 Ì 1,881,071 68,201 9,951 As of December 31, 2001 Notional Amount Fair Value As of December 31, 2000 Notional Amount Fair Value (In thousands) OÅ-Balance Sheet Financial Instruments Commitments to extend credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Standby letters of creditÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other letters of creditÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bill of lading guarantee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest rate swap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forward rate agreement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $676,513 17,595 26,923 12,729 Ì Ì $(349) (64) (91) (72) Ì Ì $619,872 15,435 44,371 20,729 20,000 100,000 $(509) (63) (238) (125) 977 1,104 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 14. Employee BeneÑt Plans Employee Stock Ownership Plan. Under the Company's Amended and Restated Cathay Bank Em- ployee 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 beneÑt of eligible employees. Employees are eligible to participate in the ESOP 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 suÇcient 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 14,459 shares in 2001, 18,755 shares in 2000, and 33,163 shares in 1999 of the Bancorp's stock at an aggregate cost of $773,163 in 2001, $812,359 in 2000, and $1,162,829 in 1999. The shares purchased in 2001 included 4,200 shares bought on the open market and 10,259 shares bought through the Dividend Reinvestment Plan. The shares purchased 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 Company contributed $598,500 in 2001, $564,800 in 2000, and $537,200 in 1999 to the trust. The expense was charged to salaries and employee beneÑts in the accompanying consolidated statements of income and comprehensive income. In 2001, distribution of beneÑts to participants totaled 43,851 shares. As of December 31, 2001, the ESOP owned 552,244 shares or 6.15% of the Company's outstanding common stock. Cathay Bancorp, Inc. 401(k) Plan. In 1997, the Board approved the Cathay Bancorp, Inc. 401(k) ProÑt 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 Code. 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 service. 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 Ñve years of service. The Company's contribution amounted to $227,879 in 2001, $198,119 in 2000, and $186,736 in 1999. The Plan allows participants to withdraw all or part of their vested amount in the Plan due to certain Ñnancial hardship as set forth in the Internal Revenue Code and Treasury Regulations. 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 Plans 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 non-statutory stock options, or awarded restricted stock, for up to 1,075,000 shares of the Company's common stock. The Equity Incentive Plan currently expires on February 2008. The Company granted non-statutory stock options to selected bank oÇcers and non-employee directors in 1998 to purchase a total of 45,000 shares, in 2000 to purchase a total of 55,000 shares, and in 2001 to purchase a total of 56,400 shares of the Company's common stock. The exercise price per share of these non-statutory 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 terminate without having been exercised, any shares not purchased will again be available for future grants or awards. 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Balance, December 31, 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares 45,000 Ì (300) Ì Ì Ì Balance, December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,700 Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,000 (1,452) (420) Ì Ì Weighted-Average Exercise Price $33.00 Ì 33.00 Ì Ì Ì $33.00 42.50 33.00 42.50 Ì Ì Balance, December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,828 $38.30 Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,400 (8,747) (11,870) Ì Ì 60.19 35.10 49.87 Ì Ì Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 133,611 $46.72 The following table shows stock options outstanding and exercisable as of December 31, 2001, the corresponding exercise prices and the weighted-average contractual life remaining. Exercise Price $33.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42.50 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60.19 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Outstanding Weighted-Average Remaining Contractual Life (in Years) 6.8 8.1 9.0 8.1 Exercisable Shares 17,092 3,789 Ì 20,881 Shares 35,092 47,789 50,730 133,611 No compensation cost has been recognized for its stock option plans in the consolidated Ñnancial statements. The Company estimated the fair value of options granted in 2001, 2000, and 1998 using the Black- Scholes option-pricing model with following assumptions: (i) an expected life of the option of four years, (ii) a stock price volatility of 35.80% in 2001, 33.88% in 2000 and 33.5% in 1998 based on daily market prices for the preceding four-year period, (iii) an expected dividend yield of 1.66% per share per annum in 2001, 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 3.89% in 2001, 5.1% in 2000 and 4.5% in 1998. The fair value of the options was calculated to be $17.56 per share for options granted in 2001 at the date of grant, $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 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) of SFAS No. 123, ""Accounting for Stock-Based Compensation,'' the Company's net income and earnings per share for 2001, 2000, and 1999 would have been reduced to the pro forma amounts indicated below. 2001 2000 (In thousands, except per share data) 1999 Net income As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $42,620 42,276 $38,587 38,457 $30,291 30,237 Basic net income per share As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted net income per share As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.71 4.67 4.69 4.65 4.26 4.25 4.25 4.24 3.36 3.35 3.36 3.35 16. Condensed Financial Information of Cathay Bancorp, Inc. (Unaudited) The condensed Ñnancial information of Cathay Bancorp, Inc. as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000, and 1999 were as follows: Statements of Condition Year Ended December 31, 2001 2000 (In thousands, except share and per share data) Assets Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment in subsidiary Ì Cathay Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,248 3,999 238,335 500 $ 4,701 3,409 206,740 Ì Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $246,082 $214,850 Liabilities Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stockholders' equity Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued ÏÏÏÏÏ Common stock, $0.01 par value; 25,000,000 shares authorized, 9,117,769 issued and 8,978,869 outstanding in 2001, and 9,074,365 issued and outstanding in 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury stock, at cost (138,900 shares in 2001 and none in 2000) ÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in-capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 71 71 Ì 63 63 Ì 90 (7,341) 68,518 5,063 179,681 91 Ì 66,275 2,303 146,118 Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 246,011 214,787 Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $246,082 $214,850 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Statements of Income and Comprehensive Income Cash dividends from Cathay Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 Year Ended December 31, 2000 (In thousands) $ 7,965 (280) $14,058 (469) 1999 $ 7,248 (321) Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,589 196 Income before undistributed earnings of subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,785 Equity in undistributed earnings of subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,835 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,620 7,685 118 7,803 30,784 38,587 6,927 136 7,063 23,228 30,291 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year ÏÏÏÏÏÏÏÏÏÏÏ Cumulative adjustment upon adoption of SFAS No. 133 ÏÏÏÏÏÏÏÏÏÏÏ Unrealized gains on cash Öow hedge derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: reclassiÑcation adjustments included in net income ÏÏÏÏÏÏÏÏÏÏÏ Total other comprehensive income (loss), net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,408 566 303 517 2,760 3,084 Ì Ì (225) (2,229) Ì Ì (34) 3,309 (2,195) Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $45,380 $41,896 $28,096 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Statements of Cash Flows 2001 Year Ended December 31, 2000 (In thousands) 1999 Cash Öows from Operating Activities Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net income to net cash provided by operating activities: $ 42,620 $ 38,587 $ 30,291 Equity in undistributed earnings of subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28,835) 8 (500) (30,784) 22 Ì (23,228) Ì Ì Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,293 7,825 7,063 Cash Flows from Investing Activities Purchase of investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Flows from Financing Activities Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from shares issued under the Dividend Reinvestment Plan ÏÏÏ Proceeds from exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (590) (590) (3,409) (3,409) Ì Ì (9,057) 1,811 432 (7,342) (7,965) 1,690 56 Ì (7,248) 1,600 9 Ì Net cash used in Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,156) (6,219) (5,639) Increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,453) 4,701 (1,803) 6,504 1,424 5,080 Cash and cash equivalents, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,248 $ 4,701 $ 6,504 Supplemental disclosure of cash Öow information Cash paid during the year for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-cash investing activities: Net change in unrealized holding gains (losses) on securities $ 150 $ 150 $ 150 available-for-sale, net of taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,760 $ 3,309 $ (2,195) 17. Dividend Reinvestment Plan 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 the consideration received were 34,657 for $1,811,507 in 2001, 39,330 for $1,690,664 in 2000 and 44,523 for $1,600,173 for 1999. 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 18. Quarterly Results of Operations (Unaudited) The following table sets forth selected unaudited quarterly Ñnancial data: Summary of Operations 2001 2000 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter (In thousands, except per share data) Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏ $36,608 13,121 $39,977 15,965 $40,721 17,660 $42,046 19,407 $43,834 20,644 $43,039 19,557 $40,292 17,861 $37,388 16,094 Net interest income ÏÏÏÏÏÏÏÏÏ Provision for loan lossesÏÏÏÏÏÏ 23,487 2,773 24,012 1,200 23,061 1,200 22,639 1,200 23,190 1,050 23,482 1,050 22,431 1,050 21,294 1,050 Net interest income after provision for loan losses ÏÏÏÏ 20,714 22,812 21,861 21,439 22,140 22,432 21,381 20,244 Non-interest income ÏÏÏÏÏÏÏÏ Non-interest expense ÏÏÏÏÏÏÏÏ 3,721 8,461 4,154 10,253 3,052 10,340 3,852 11,111 4,466 10,463 2,746 9,493 2,795 9,296 2,749 9,252 Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expense ÏÏÏÏÏÏÏÏÏ 15,974 4,437 16,713 5,208 14,573 4,375 14,180 4,800 16,143 6,449 15,685 4,233 14,880 5,793 13,741 5,387 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,537 11,505 10,198 9,380 9,694 11,452 9,087 8,354 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cumulative adjustment upon adoption of SFAS No. 133 Unrealized gains (losses) on cash Öow hedge derivatives Less: reclassiÑcation adjustments included in net incomeÏÏÏÏÏÏÏÏÏÏÏÏ Total other comprehensive (811) 2,201 (730) 1,748 2,152 984 338 (390) Ì Ì Ì (316) 511 (148) 566 256 127 287 79 24 Ì Ì Ì Ì Ì Ì Ì Ì Ì (2) 2 (225) income (loss) net of tax ÏÏÏ (1,254) 2,425 (957) 2,546 2,152 986 336 (165) Total comprehensive incomeÏÏ $10,283 $13,930 $ 9,241 $11,926 $11,846 $12,438 $ 9,423 $ 8,189 Basic net income per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.29 Diluted net income per common shareÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.28 $ $ 1.27 1.27 $ $ 1.12 1.12 $ $ 1.03 1.03 $ $ 1.07 1.07 $ $ 1.26 1.26 $ $ 1.00 1.00 $ $ 0.92 0.92 97 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 Vice Chairman 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 Secretary of the Board Cathay Bancorp, Inc. Patrick S. D. Lee Retired Real Estate Developer Anthony M. Tang Executive Vice President Cathay Bancorp, Inc. Thomas Tartaglia Director Cathay Bancorp, Inc. Officers Executive Officers of Cathay Bancorp, Inc. Administration of Cathay Bank 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 Vice Chairman of the Board Wilbur K. Woo Vice Chairman of the Board Michael M.Y. Chang Secretary of the Board Michael M.Y. Chang Secretary of the Board Anthony M. Tang Executive Vice President and Chief Financial Officer/ Treasurer/Assistant Secretary Perry P. Oei General Counsel Anthony M. Tang Senior Executive Vice President and Chief Lending Officer Irwin Wong Executive Vice President Branch Administration Elena Chan Senior Vice President and Chief Financial Officer James P. Lin Senior Vice President and Manager Corporate Commercial Loan and International Banking Perry P. Oei General Counsel Tina Chao First Vice President and Team Manager, Corporate Commercial Loan Chingying Chu First Vice President and Manager Small Business Loan Pin Tai General Manager New York Region Wilson Tang Regional Vice President Branch Administration Jack Tweedy First Vice President and Manager Commercial Real Estate Loan Weston Barkwill Chief Internal Auditor Oliver Chen Vice President and Team Manager, Corporate Commercial Loan Jay Cheng Vice President and Corporate Commercial Loan Officer Mary Figlioli Vice President and Commercial Real Estate Loan Officer John M. Fox Vice President and Manager Collateral Control 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 and Manager Mortgage Loan Tony Moya Vice President Bank Operations Administration Paul S. Ng Vice President and Manager Mortgage Warehousing Javier G. Otoya Vice President and Controller Francine Paxson Vice President Loan Operations Louisa Ting Vice President Branch Operations New York Region 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 (213) 625-4700 Tel: Fax: (213) 625-1368 Kenneth Chan Assistant Vice President and Manager Monterey Park 250 South Atlantic Boulevard Monterey Park, CA 91754 Tel: (626) 281-8808 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 (626) 333-8533 Tel: 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 Vice President and Manager San Jose 2010 Tully Road San Jose, CA 95122 Tel: (408) 238-8880 Fax: (408) 238-2302 Edward Wong Vice President and Manager San Gabriel 825 East Valley Boulevard San Gabriel, CA 91776 Tel: (626) 573-1000 Fax: (626) 573-0983 Jack Sun Vice President and Manager Torrance 23228 Hawthorne Boulevard Torrance, CA 90505 (310) 791-8700 Tel: 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 Claudia Wong Assistant Manager 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 (408) 262-0280 Tel: 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 (626) 576-7600 Tel: 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 Union City 1701 Decoto Road Union City, CA 94587 Tel: (510) 675-9190 Fax: (510) 675-9312 Tony Wen 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 Shanghai (to be opened) Unit 1808, Shanghai Kerry Centre 1515 Nanjing Road West Shanghai 200040 People’s Republic of China Subsidiary: Cathay Investment Company 777 North Broadway Los Angeles, CA 90012 Tel: (213) 625-4700 Fax: (213) 625-1368 Dunson K. Cheng Chief Executive Officer and President Sacramento (to be opened) 5591 Sky Parkway, #411-415 Sacramento, CA 95823 Taiwan C.I.C. Sixth Floor, Suite 3 146 Sung Chiang Road Taipei, Taiwan, R.O.C. New York Flushing 40-14/16 Main Street Flushing, NY 11354 Tel: (718) 886-5225 Fax: (718) 886-0220 Ivy Mok Assistant Manager New York Chinatown 45 East Broadway New York, NY 10002 Tel: (212) 732-0200 Fax: (212) 732-7389 Amy Tran Assistant Manager Brooklyn (to be opened) 5402 Eighth Avenue Brooklyn, NY 11220 Texas Houston 10375 Richmond Avenue #1600 Houston, TX 77042 Tel: (713) 278-9599 Fax: (713) 278-9699 Herbert Ng Vice President and Manager 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 Hoefer & Arnett, Inc. Registrar and Transfer Agent American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 (800) 937-5449 Tel: Cathay Service Hotline (800) 9 CATHAY / 922-8429 Cathay Bank Web Site www.cathaybank.com 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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