2002 Annual Report
taking off . . .
and setting our sights
on the next 40 years
and beyond
Financial Highlights
(dollars in thousands, except per share data)
2002
2001
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
$
48,700
$
42,620
$
6,080
14.27%
2.71
2.69
0.545
2.35
2.35
0.500
0.36
0.34
0.045
$
707,725
1,848,078
2,753,998
2,314,643
287,961
16.00
$
623,314
1,640,032
2,453,114
2,122,348
246,011
13.70
$
84,411
208,046
300,884
192,295
41,950
2.30
15.32
14.47
9.00
13.54%
12.69
12.27
9.06
17.05
16.79
1.88%
18.30%
1.82%
18.36%
11.93%
13.01%
10.11%
11.15%
12.30%
9.48%
1 Total capital ratio represents Tier 1 capital plus the allowance for loan losses allowable as a percentage of risk-weighted assets.
$49
>
$43
$39
$30
$25
$179
$157
$288
>
$246
$215
$2,754
>
$2,453
$2,207
$1,996
$1,781
98
99
00
01
02
98
99
00
01
02
98
99
00
01
02
Net Income
(in millions)
Stockholders’ Equity
(in millions)
Total Assets
(in millions)
1
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
Letter to Stockholders
Dunson K. Cheng
Chairman of the Board and President
Dear Stockholders:
2002 was both a joyous and busy year for our company, having marked, as it did, the 40th year that Cathay Bank has
been in business. During the intervening years since 1962, Cathay Bank has grown from a small, local organization
with no more than $550,000 in capital, to a regional institution with stockholders’ equity totaling $288.0 million;
from a single storefront of 1,000 square feet, to a bank with 24 branches, located in the states of California, New
York and Texas, representative offices in Hong Kong and Shanghai, and an office for its subsidiary, Cathay Investment
Company, in Taipei; from a work force of 7 to a current staff of approximately 600. Along the way, we have lived
through the woes of several recessions, the distress of credits gone awry, and sadness at the departure of a number of
colleagues. But, we have also experienced the joy of new branch openings, the satisfaction of meeting the needs of
our customers, and the exhilaration of witnessing the extraordinary growth of our company. Through it all, we have
felt privileged to work for a company that provides a reasonable return for its stockholders while simultaneously estab-
lishing the opportunity for making a difference to our customers in their efforts to achieve financial success. So, in
recognizing the 40th anniversary of Cathay Bank, the Board of Directors celebrated with all our stakeholders — with
our stockholders, employees and customers, and, at large, with the community we serve.
On March 22, 2002, the Board approved both a two-for-one stock split of the company’s common stock, and a 12%
increase in the cash dividend, from 12.5 cents to 14 cents, on a post-stock split basis. It also invited all stockholders
to join us on April 20, 2002, in an event to kick off a series of celebrations during the year. That event took place at
Cathay Bank’s Los Angeles headquarters of the past 38 years, and was attended by over 1,000 stockholders, employ-
ees, and guests. It brought together many long-time stockholders and retired colleagues for a pleasant and, at times,
emotional reunion.
On June 9, Cathay Bank hosted an outdoor dinner at the Bowers Museum in Santa Ana, California, for 300 of its valued cus-
tomers in appreciation of their continued patronage. The day coincided with the opening of a special exhibition, the Symbols
of Power, that included many treasures of the early emperors of the Qing Dynasty, all on loan from the Nanjing Museum.
2
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
On September 27 and November 22, the Board traveled to New York City and the northern California Bay Area, respec-
tively, to participate in events commemorating the achievements of Cathay Bank over the past 40 years, and to thank
our customers for their support, as well as our colleagues for the dedication they have shown in building Cathay Bank
into the successful enterprise it is today.
In addition to the many celebrations, Cathay Bank continued to move forward in 2002. As a complement to our exist-
ing locations in Hong Kong and Taipei, we opened the Shanghai representative office on April 20, and thereby expand-
ed our overseas presence to the three largest commercial centers in the greater China region.
These offices provide important linkage to our overseas clientele, and on-the-spot assistance to our trade finance cus-
tomers that import from the region. Our third branch in the New York area opened for business on June 27 in
Brooklyn, the borough with the third highest concentration of Asian-Americans. And, on September 9, we brought
Cathay Bank to the capitol of California with the opening of the Sacramento office. Although there is little question
these new facilities will add to our expenses in the short run, they will most assuredly expand our market reach, and
should also help contribute to our future growth and profitability.
Financially, our total assets increased this past year by 12%, to $2.75 billion; gross loans grew 13%, to $1.88 billion,
and total deposits rose 9%, to $2.31 billion. For the ninth consecutive year, we posted double-digit growth in net
income, to a record $48.7 million, an increase of 14% over 2001. Diluted earnings per share increased similarly, by
14%, to $2.69. Equally gratifying, the damage from the recession of 2001 was well-contained, and the company’s non-
performing assets declined 24%, to $7.2 million, or 0.39% of gross loans plus other real estate owned. Our efficien-
cy ratio continued to improve, from 37% in 2001 to 36% in 2002, as a result of which the American Banker recently
rated our institution the eighth most efficient amongst the largest 500 bank holding companies in the nation.
In 2002, the company paid out $9.8 million in dividends, repurchased 27,500 shares of its common stock, and
retained $38.9 million as capital. As a result, total stockholders’ equity increased 17%, to $288.0 million, an amount
fully 524 times greater than total capital at the time of our establishment 40 years ago.
In closing, Cathay Bank has come a very long way in the past 40 years, and we thank you for your continued support
through good times and bad. We believe we have a viable business model that will allow us to grow and to serve our
community and our stockholders well into the future.
>
Dunson K. Cheng
Chairman of the Board and President
3
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
4
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
5
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
strategicexpansion
In April, Cathay Bank opened a representative office in Shanghai, becoming one of a handful
of pioneers providing valuable links for Chinese-American customers in China.
Year in Review
>
Sacramento
Shanghai
Brooklyn
In 2002, Cathay Bancorp, Inc. celebrated 40 years of bank-
Growing Cathay’s Presence in the Marketplace Key to
ing excellence by its subsidiary, Cathay Bank, and reported
Cathay Bancorp's success has been its ability to assess the
record earnings of $48.7 million, which is an increase of 14
potential of the marketplace intelligently and strategically,
percent over 2001 and which marks the ninth consecutive
year of double-digit earnings growth. Total assets grew 12 per-
cent to $2.75 billion; total deposits increased 9 percent to
$2.31 billion; and gross loans increased 13 percent to $1.88
billion. These results, achieved in a difficult economic envi-
ronment, are consistent with Cathay Bank’s long history of
maintaining steady growth in good times and bad, and reflect
visionary management and prudent business practices, as
well as a dedication to customer service that is unsurpassed.
Despite a reduction of 525 basis points in the target feder-
and to target markets where its efforts have the potential to
produce the best returns. As a result, it has been a leader
among Chinese-American financial institutions. It was the
first Chinese-American financial institution to offer full
banking services in all three of the largest Asian-American
markets: California, New York, and Texas. In June, Cathay
Bank opened a branch in Brooklyn, its third in New York. In
September, Cathay Bank’s eighth Northern California
branch opened for business in Sacramento. Both new
branches made an encouraging start; by year end, they had
attracted a total of $8.8 million in deposits.
al funds rate by the Federal Reserve over the past two years,
In addition, during the month of April, Cathay Bank opened
Cathay Bancorp maintained a net interest margin above 4
a representative office in Shanghai, thus becoming one of a
percent throughout 2002. Its efficiency ratio improved from
handful of pioneer institutions providing valuable links for
37 percent to 36 percent, making Cathay Bancorp the
Chinese-American customers in China.
eighth most efficient bank holding company among the 500
largest in the U.S., based on a ratio of non-interest expense
to total income minus interest expense.
above, left to right: Cathay Bank’s new locations in Sacramento, Shanghai, and Brooklyn.
7
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
Cathay Bancorp reported record earnings of $48.7 million, which
is an increase of 14 percent over 2001 and which marks the ninth
consecutive year of double-digit earnings growth.
steady
growth
Facilitating International Transactions These links have become increasingly important as the U.S. continues to develop its ties
with China. In both countries, and in both directions, further development of these ties depends on the reliable transfer of
monies. Cathay Bank’s China remittance service allows users to remit funds to China at a competitive rate. After targeting
its promotions to heavy users, Cathay Bank has seen total fee income for China remittances surge to $2.1 million in 2002.
Customers may now remit funds through any one of the 44,000 offices of the Agricultural Bank of China.
With the rise of electronic commerce and the increasing use of electronic payment systems, wire transfers have become a
preferred payment method. As a result of this trend, Cathay Bank increased its commercial international wire fee income
from $981,000 in 2001 to $1.1 million in 2002, an increase of 14 percent.
The corporate commercial loan department continues to provide various commercial financing programs tailored to small- and
medium-sized importers, exporters, and trading companies in California, New York, and Texas. Programs include lines of cred-
it, equipment financing, and short- or long-term working capital financing to address trade cycle, working capital, expansion,
and acquisition needs.
In addition, in 2002, Cathay Bank consolidated its international financing and corporate commercial loan departments. This
consolidation resulted in enhanced operating efficiency and avenues for growth. During the year, Cathay Bank’s corporate com-
mercial financing grew 11 percent to $563.7 million in outstanding balances.
8
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
Servicing Homeowners With long-term interest rates at their
lowest level in decades, Cathay Bank saw a marked increase
in loan originations for residential real estate. In 2002, the
number of loan originations increased 33 percent. The bal-
ance of new loans jumped an astounding 51 percent and
fees collected grew 25 percent.
Low interest rates also spurred new activity in Cathay Bank’s
home equity loan business. Consumers responded favorably
to Cathay Bank’s competitive 3.88 percent introductory
rate, resulting in a 21 percent increase to the outstanding
balance total from $40.4 million in 2001 to $49.0 million
in 2002.
Electronic Banking It is not low interest rates alone, howev-
er, that give Cathay Bank its competitive edge. Customers
also come to Cathay Bank for outstanding customer service,
the result of its comprehensive approach to building lifelong
banking relationships. In addition to benefiting from Cathay
Bank's friendly, capable, and efficient branch office facilities,
Cathay Bank customers have increasingly been taking advan-
tage of Cathay Bank's convenient Internet banking service.
In 2002, signups soared 74 percent for eCashManagement
and 84 percent for eBanking.
>
Financing Commercial Real Estate and Construction
Domestically, one of the few bright spots of the 2002 econ-
omy was a strong housing and construction sector. With its
asset strength, agility, and focused services, Cathay Bank
was well positioned to participate in this activity. In 2002,
it continued to demonstrate steady growth in real estate and
construction financing. Total related outstanding balances
increased by $161.4 million, or 18 percent.
Cathay Bank’s major construction and financing projects
Rewarding Customer Loyalty In 2002, Cathay Bank inaugu-
include the following:
• $20.0 million for construction of a 198-unit apartment
in Chula Vista, California
• $17.0 million for refinancing of a retail shopping center
in Simi Valley, California
rated a new customer service program to reward its top cus-
tomers. The Premium Banking Program offers favorable
rates, priority service, and customer telephone support that
is available 24 hours a day, seven days a week. Many cus-
tomers have expressed their appreciation of this program.
Some have consolidated their financial relationships so that
• $9.6 million for construction of 29 planned development
they all now reside at Cathay Bank.
units in Redondo Beach, California
• $7.3 million for refinancing of 11 industrial buildings
Strengthening the Communities We Serve Cathay Bank func-
in Houston, Texas
• $13.0 million for construction of a 158-room Sheraton
tions as a vital part of the communities it serves, working to
contribute to the whole and, in turn, benefiting from the wel-
Four Points Hotel in Midtown Manhattan, New York
coming and cooperative environment it helps to create.
• $12.9 million for construction of four condo/apartment
buildings in Flushing, New York
• $13.0 million for financing the purchase of a 21-story
commercial building in the fashion district of
Manhattan, New York
Cathay Bank proactively seeks opportunities to support
community projects and, in 2002, contributed $120,000 to
deserving organizations.
above: Total outstanding balance of commercial real estate and construction
increased by $161.4 million, a jump of 18 percent.
9
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
stockholders, employees, and customers
appreciation
On April 20, 2002, Cathay Bancorp held a celebration at its
Los Angeles headquarters to show its appreciation.
>
In September 2002, Cathay Bank received a $66,000 cash award from the U.S. Department of the Treasury for Community
Reinvestment Act (CRA) activities that supported the Community Development Financial Institution program (CDFI) in the
following ways:
• In support of CDFI activities for distressed communities, Cathay Bank deposited $100,000 at the Northwest Community
Federal Credit Union in San Francisco for five years at a zero percent interest rate.
• Cathay Bank funded $500,000 as part of a syndication loan to the Community Financial Resource Center (CFRC);
CFRC in turn uses these funds to make revolving loans to businesses in low- and moderate-income communities.
Other CRA-related activities include:
• Cathay Bank’s investment of $4.9 million in Lend Lease Institutional Tax Credit Fund XXIII for an affordable
housing project called Scott Street Townhomes located in Houston, Texas.
• Cathay Bank’s investment of $1.0 million in WNC Institutional Tax Credit Fund X-California to finance
six affordable housing properties, representing 352 units, located in Sacramento and Southern California.
• Cathay Bank’s investment of $2.0 million in WNC Institutional Tax Credit Fund X- New York, toward a
total of $50 million needed to build nine affordable housing projects within the five boroughs of New York.
Appreciating Stockholders and Employees Cathay Bancorp is grateful to the many loyal stockholders who have supported it over
the years. There are thousands of companies in which they could invest their money, but they chose Cathay Bancorp. Cathay
Bancorp, through its subsidiary, Cathay Bank, provides products and services that addresses the needs of real people and
businesses — products and services created and provided by Cathay Bank’s able and dedicated employees. On April 20,
2002, Cathay Bancorp held a simple celebration at its Los Angeles headquarters to show its appreciation. More than 1,000
stockholders, customers, and employees attended. In addition, in September and November, Cathay Bancorp’s directors trav-
eled to New York and Northern California to hold similar celebrations for customers and employees there.
Customers, stockholders, and employees are all part of the Cathay global banking family. Through responsible management,
strong financial performance, and a commitment to innovation and excellence, Cathay Bancorp will strive to continue sup-
porting these much-valued and cherished family members as they seek to achieve, and help others to achieve, the goals,
hopes, and dreams that enrich and fulfill their lives.
10
2002 Annual Report
Cathay Bancorp, Inc. and Subsidiary
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Ñscal year ended December 31, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
¥
n
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)
777 North Broadway,
Los Angeles, California
(Address of principal executive oÇces)
95-4274680
(I.R.S. Employer
IdentiÑcation No.)
90012
(Zip Code)
Registrant's telephone number, including area code:
(213) 625-4700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $01 par value
(Title of class)
Preferred Stock Purchase Rights
(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. ¥
Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in rule 12b-2 of the
Act). Yes ¥
No n
The aggregate market value of the voting stock held by non-aÇliates of Registrant as of February 3, 2003
was $558,605,248 (computed on the basis of $37.75 per share, which was the closing price of our Common
Stock reported by the Nasdaq National Market on February 3, 2003).*
The aggregate market value of the voting stock held by non-aÇliates of the Registrant, computed by
reference to the price at which the common equity was last sold as of the last business day of the Registrant's
most recently completed second Ñscal quarter (June 28, 2002) was $603,555,500
The number of shares outstanding as of February 3, 2003: Common Stock, $.01 par value Ì
18,015,315 shares.
DOCUMENTS INCORPORATED BY REFERENCE
‚ Portions of Registrant's deÑnitive proxy statement relating to Registrant's 2003 Annual Meeting of
Stockholders to be held April 21, 2003, 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,
executive officers, and Employee Stock Ownership Plan have been excluded.
CATHAY BANCORP, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Items 1. Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Business of Bancorp ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OverviewÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Business of the BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset Quality ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on Equity and Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Rates and DiÅerentials ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Analysis of Changes in Net Interest Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments and Letters of Credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subsidiaries of Cathay Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expansion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Competition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Executive OÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Regulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Regulation of Bancorp and the Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Regulatory EnvironmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fiscal and Monetary Policies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bank Holding Company Regulation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Services Modernization Legislation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
USA Patriot Act ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Banking Regulations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 4. Submission of Matters to a Vote of Security HoldersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART IIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏ
Item 6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selected Consolidated Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
3
3
3
3
4
4
4
4
6
6
8
8
8
9
9
9
9
9
9
9
10
11
11
11
12
12
13
13
15
16
19
22
22
22
22
23
24
1
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Critical Accounting PoliciesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Events in 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Review of Financial ConditionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital Resources ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk Elements of the Loan Portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liquidity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recent Accounting PronouncementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Factors That May AÅect Future Results ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Market RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quantitative Information About Interest Rate Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial DerivativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 8. Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
DisclosureÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART III ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related
Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 14. Controls and ProceduresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART IV ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SIGNATURES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CERTIFICATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Index to Consolidated Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
25
25
25
26
26
36
47
48
58
58
61
64
64
67
67
68
68
68
68
69
69
69
69
69
69
71
73
77
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,''
""may,'' ""will,'' ""should,'' ""could,'' ""predicts,'' ""potential,'' ""continue'' 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, including the formation of a real estate investment trust and the
application to the Securities and Exchange Commission for deregistration of the registered investment
company;
‚ general economic or business conditions; and
‚ 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.
We invite you to visit us at our Web site at www.cathaybank.com, to access free of charge our annual
report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports, all of which are made available as soon as reasonably practicable after we electronically Ñle such
material with or furnish it to the Securities and Exchange Commission. In addition, you can write to us to
obtain a free copy of any of those reports at Cathay Bancorp Inc., 777 North Broadway, Los Angeles,
California 90012, Attn: Investor Relations.
3
Competition
Our primary business is the business of the Bank. Therefore, the competitive conditions to be faced by us
are expected 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
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, Secretary, Assistant Secretary, 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.''
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 Eleven branches located in the cities of:
‚ Alhambra (2 locations)
‚ Cerritos
‚ City of Industry (2 locations)
‚ Diamond Bar
‚ Irvine
‚ Monterey Park
‚ San Gabriel
‚ Torrance
‚ Westminster
‚ Northern California Ì Eight branches, located in the cities of:
‚ Cupertino
‚ Millbrae
‚ Milpitas
‚ Oakland
‚ Richmond
‚ Sacramento
‚ San Jose
‚ Union City
4
‚ New York Ì Three branches, located in the cities of:
‚ Brooklyn
‚ Flushing
‚ New York City (Located in the Chinatown area)
‚ Texas Ì One branch located in the city of Houston
‚ Hong Kong Ì One representative oÇce
‚ Shanghai, China 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
‚ forward currency, 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.
5
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, home equity lines loans;
‚ commercial loans, trade Ñnancing loans, Small Business Administration (""SBA'') loans; and
‚ installment loans to individuals for automobile, household, and other consumer expenditures.
The Bank oÅers a program called Cathay Global Investment Services, which allows its customers to trade
stocks online and to purchase mutual funds, annuities, equities, bonds, and short-term money market
instruments, through UVest Financial Services Group, Inc.
Securities
The Bank's securities portfolio is managed by the First Vice President and Manager and the Company's
Investment Committee, in accordance with a comprehensive written Investment Policy which addresses
strategies, types, and levels of allowable investments, and which is reviewed and approved by our Board of
Directors of the Company.
Our investment portfolio is managed to meet our liquidity needs through proceeds from scheduled
maturities and is also utilized for pledging requirements for deposits of state and local subdivisions, securities
sold under repurchase agreements, and Federal Home Loan Bank (""FHLB'') advances. The portfolio is
comprised of U.S. government agency securities, mortgage-backed securities, collateralized mortgage obliga-
tions, obligations of states and political subdivisions, corporate debt instruments and equity securities. At
December 31, 2002, the aggregate investment securities portfolio, with a carrying value of $707.73 million,
was classiÑed as investment grade securities, except for our $4.06 million of non-rated venture capital
investments. We do not include federal funds sold and certain other short-term securities as investment
securities. These other investments are included in cash and cash equivalents.
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 3 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's
Discussion and Analysis of Financial Condition and Results of Operations,'' and in ""Note 3 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 or existing customers, 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.
Commercial Mortgage Loans. These loans are typically secured by Ñrst deeds of trust on commercial
properties, including primarily commercial retail properties, shopping centers and owner-occupied industrial
facilities, and secondarily oÇce buildings, multiple-unit apartments, and multi-tenanted industrial properties.
6
In addition, the Bank provides medium-term commercial mortgage loans secured by commercial or industrial
buildings where the owner either uses the property for business purposes or derives income from tenants.
Commercial Loans. The Bank provides personalized Ñnancial services to diverse commercial and
professional businesses in its market areas. Commercial loans consist primarily of short-term loans (normally
with a maturity of up to one year) to support general business purposes, or to provide working capital to
businesses in the form of lines of credit to Ñnance trade-Ñnance loans. The Bank continues to focus primarily
on commercial lending to small-to-medium size businesses, within the Company's geographic market area.
Commercial loan pricing is generally at a rate tied to the prime rate, as quoted in the Wall Street Journal, or
the Banks' reference rate.
Small Business Administration Loans. The Bank originates SBA loans in California, under the
""preferred lender'' status. Preferred lender status is granted to a lender which has made a certain number of
SBA loans and which, in the opinion of the SBA, has staÅ who are qualiÑed and experienced in this area. As a
preferred lender, the Bank's SBA Lending Group has the authority to make, on behalf of the SBA, the SBA
guaranty on loans under the 7(a) program. This can represent a substantial savings in loan processing time to
the customer. Under this program, the SBA delegates loan underwriting, closing, and most servicing and
liquidation authority and responsibility to carefully selected lenders.
The Bank utilizes both the 504 program, which is focused toward long-term Ñnancing of buildings and
other long-term Ñxed assets, and the 7(a) program, which is the SBA's primary loan program, and which can
be used for Ñnancing of a variety of general business purposes such as acquisition of land and buildings,
equipment, inventory and working capital needs of eligible businesses generally over a 5- to 25-year term. The
collateral position in the SBA loans is enhanced by the SBA guaranty in the case of 7(a) loans, and by lower
loan-to-value ratios under the 504 program. During 2002, the Bank sold the guaranteed portion of certain of its
SBA 7(a) loans in the secondary market. SBA loan pricing is generally at a rate tied to the prime rate, as
quoted in the Wall Street Journal.
Residential Mortgage Loans. The Bank originates single-family-residential mortgage loans, and home
equity lines of credit. The single-family-residential mortgage loans are comprised of conforming, non-
conforming, and jumbo residential mortgage loans, and are secured by Ñrst and subordinate liens on single
(one-to-four units) family residential properties. The Bank's products include a Ñxed-rate residential
mortgage loan, an adjustable-rate residential mortgage loan, and a variable-rate home equity line of credit
loan. The pricing on our variable-rate home equity line of credit is generally at a rate tied to the prime rate, as
quoted in the Wall Street Journal, or the Banks' reference rate. These mortgage loans are underwritten in
accordance with the Bank's guidelines, on the basis of the borrower's Ñnancial strength, historical loan quality,
and other qualiÑcations. The Bank's highest concentration of residential mortgage loans relates to properties in
California.
Real Estate Construction. The Bank's real estate construction loan activity focuses on providing short-
term loans, typically ranging between approximately $1.0 million and $5.0 million, to individuals and
developers with whom the Bank has established relationships for the construction primarily of multi-unit
projects. Residential real estate construction loans are typically secured by Ñrst deeds of trust and guarantees
of the borrower. The economic viability of the projects, the borrower's credit worthiness, and the borrower's
and contractor's developmental experience are primary considerations in the loan underwriting decision. The
Bank utilizes approved independent licensed appraisers. The Bank monitors projects during the construction
phase through regular construction inspections and a disbursement program tied to the percentage of
completion of each project. The Bank also occasionally makes unimproved property loans to borrowers who
intend to construct a single-family-residence on the lot generally within twelve months. In addition, the Bank
also makes commercial real estate construction loans to high net worth clients with adequate liquidity for
construction of oÇce and warehouse properties. Such loans are typically secured by Ñrst deeds of trust and
guarantees of the borrower.
Installment Loans. The Bank's installment loan portfolio is divided between installment loans secured
by automobiles and home improvement loans. Installment loans tend to be Ñxed rate and longer-term (one-to-
7
six year maturity). These consumer-oriented loans are funded primarily for the purpose of Ñnancing the
purchase of automobiles and other personal uses of the borrower.
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 4 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 Operations,''
and in ""Notes 4 and 5 to the Consolidated Financial Statements.''
Asset Quality
The Bank 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 Bank'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 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 4 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 from time to time include securities sold under agreements to repurchase, the purchase of
federal funds, and funds obtained as advances from the FHLB of San Francisco. Information concerning the
types, amounts, and maturity of our borrowings is included in ""Note 8 to the Consolidated Financial
Statements.''
8
Return on Equity and Assets
Information concerning the return on average assets, return on average stockholders' equity, the average
equity to assets ratio and the 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 the 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 Letters of Credit
Information concerning the Bank's outstanding loan commitments and letters of credit is included in
""Note 11 to the Consolidated Financial Statements.''
Subsidiaries of Cathay Bank
Cathay Investment Company. Cathay Investment Company is a wholly-owned subsidiary of the Bank
that was formed in 1984 to invest in real property. In 1987, Cathay Investment Company opened an 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 Company has applied to the Securities and Exchange Commission to deregister this registered investment
company. See discussion below in the section entitled ""Factors That May AÅect Future Results'' of this
Annual Report on Form 10-K.
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
June 27, 2002, the Bank opened a new branch in Brooklyn, New York, and on September 9, 2002, the Bank
opened a new branch in Sacramento, Northern California. In addition, with China's accession into the World
Trade Organization and its increasing importance in the world economy, the Bank opened a representative
oÇce in Shanghai, China, on April 20, 2002.
Competition
The banking business in California, and speciÑcally in the market areas served by most of the 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
9
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 Sunday banking in certain locations
‚ 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 attempted in the past,
and intends in the future, to arrange for such loans on a participation basis with correspondent banks. The
Bank also assists customers requiring other services not oÅered by the Bank to obtain such services from its
correspondent banks.
In Southern California, at least three other Chinese-American banks of comparable size provide
particular competition for loans and deposits with the Bank and at least two super-regional banks provide such
competition for deposits. In Northern California, one of these Chinese-American banks provide particular
competition for loans and deposits with the Bank and the same two super-regional banks provide such
competition 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, 2002, Bancorp and Bank (including subsidiaries) employed approximately 581 per-
sons, including 131 oÇcers. None of the employees are represented by a union. Management believes that its
relations with employees are excellent.
10
Executive 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
Present Position and Principal Occupation During the Past Five Years
Dunson K. Cheng ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Anthony M. Tang ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Irwin Wong ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Elena Chan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
58 Chairman of the Board of Directors 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. 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. Trustee and
President of Cathay Real Estate Investment Trust since February
2003.
49 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; Executive Vice President of Cathay Bank from 1994 to
December 1998; and Senior Vice President of Cathay Bank from
1990 until 1994. Vice President, Chief Financial OÇcer, and
director of Cathay Securities Fund, Inc. since July 2000. Trustee
and Vice President of Cathay Real Estate Investment Trust since
February 2003.
54 Executive Vice President-Branch Administration for Cathay Bank
since 1999; Senior Vice President Ì Branch Administration of
Cathay Bank from 1989 until 1999; and Vice President Ì Branch
Administration for Cathay Bank from 1988 until 1989. Treasurer of
Cathay Real Estate Investment Trust since February 2003.
52 Senior Vice President and Chief Financial OÇcer of Cathay Bank
since 1992; Internal Auditor of Cathay Bank from 1985 to 1992.
Secretary of Cathay Securities Fund, Inc. since July 2000.
Secretary of Cathay Real Estate Investment Trust since
February 2003.
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 Federal
Reserve System (the ""Federal Reserve''). The Bank Holding Company Act requires Bancorp to Ñle annual
reports of its operations with the Federal Reserve. Bancorp is also subject to examination by the Federal
Reserve.
11
The Bank, as a California state-chartered commercial bank, is regulated by the Federal Deposit
Insurance Corporation (or FDIC), and by the 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,
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, and is subject to federal and state securities laws, including the Sarbanes-Oxley Act of
2002, which contains provisions dealing with corporate governance and management, disclosure, oversight of
the accounting profession, and auditor independence.
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 the 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.
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. An important function of the Federal Reserve is to regulate the national
supply of bank credit.
The Federal Reserve 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; and
‚ changes in reserve requirements on bank deposits and borrowings by banks and their aÇliates.
The Federal Reserve 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's Ñscal and monetary policies will continue to have a signiÑcant eÅect on Bancorp and the Bank.
12
Bank Holding Company Regulation
As a bank holding company, Bancorp is subject to regulation, supervision, and examination by the
Federal Reserve. It is required to Ñle reports with the Federal Reserve and furnish such other information as
may be required by the Federal Reserve under the Bank Holding Company Act.
The Federal Reserve 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'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 will generally consider such failure to be an unsafe and unsound banking
practice or a violation of the Federal Reserve's regulations or both.
The Federal Reserve 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 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 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 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, Bancorp can acquire shares of companies engaged in activities that the
Federal Reserve 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
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.
13
Such Ñnancial activities include banking, insurance, securities activities, merchant banking, and addi-
tional 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, 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 must also determine that the Bank, as the
insured depository institution subsidiary, has at least a ""satisfactory'' rating under the Community Reinvest-
ment 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. Prior Federal Reserve 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 permissi-
ble 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,
the 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 Invest-
ments 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
Currency, the Federal Reserve, the Federal Deposit Insurance Corporation and the OÇce of Thrift
Supervision issued Ñnal rules on June 1, 2000.
Under the 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; and
‚ subject to certain exceptions, a reasonable method for customers to ""opt out'' of disclosure to
nonaÇliated third parties.
These federal privacy protections do not prohibit state governments from imposing more protective rules.
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
14
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; and
‚ 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; and
‚ 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
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
15
(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. 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
As a California state-chartered commercial bank, the Bank is subject to primary supervision, periodic
examination, and regulation by the FDIC and by the 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, the Bank is subject to Federal
and State rules and regulations.
Capital Requirements. The Federal Reserve 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, 2002, with a total risk-based capital ratio
of 13.01%, a Tier 1 risk-based capital ratio of 11.93% and Tier 1 leverage ratio of 10.11%.
The tables presenting our risk-based capital and leverage ratios as of December 31, 2002, are included in
Note 10 to the Consolidated Financial Statements of 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
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, 2002,
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.
16
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, 2002, ranged from zero to 27 basis points
per $100 of insured deposits. At December 31, 2002, 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; and
‚ 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 1.71 cents per $100 of Bank Insurance Fund-assessable deposits in 2002.
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, 2002, the maximum dividend
that the Bank could have declared, subject to regulatory approval, was $103,076,000.
The California Commissioner of Financial Institutions and the Federal Reserve 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 the 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
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 the
last Community Reinvestment Act examination by the FDIC in January 2001, the Bank's Community
Reinvestment Act rating was ""satisfactory'' 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
17
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
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
was 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 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
18
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; and
‚ 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 55,606 shares or $5,560,600 as of December 31, 2002.
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. The 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.
19
Cathay Bank. The Bank's main corporate oÇce and headquarters branch is located in the Chinatown
area of Los Angeles. The oÇces are in a 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 account area
‚ teller stations
‚ pneumatic drive-up teller stations
‚ 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 $16,031.
Furthermore, the Bank owns its branch oÇces in the following cities:
‚ Monterey Park
‚ Alhambra
‚ Westminster
‚ San Gabriel
‚ Torrance
‚ Cerritos
‚ City of Industry
‚ Cupertino
‚ Flushing, New York
20
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, and lease term of each lease.
Location
Sq. Ft.
Purpose
Lease Term
767 N. Hill StreetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Los Angeles, CA
(Rm 305-306, 308-309, 313-315, 320)*
767 N. Hill StreetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Los Angeles, CA
(Rm 301-302)
16025 E. Gale Ave., Ste B-1ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
City of Industry, CA
2010 Tully Road** ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
San Jose, CA
710 Webster Street ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Oakland, CA
1759 N. Milpitas Blvd ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Milpitas, CA
15323 Culver DriveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Irvine, CA
1095 El Camino RealÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Millbrae, CA
800 N. Hill StreetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Los Angeles, CA
43 E. Valley Blvd ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Alhambra, CA
3288 Pierce Street, Suite D-101 ÏÏÏÏÏÏÏÏÏÏÏ
Richmond, CA
1195 S. Diamond Bar Blvd ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diamond Bar, CA
1701 Decoto Road ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Union City, CA
5591 Sky Parkway ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Suite 411-415
Sacramento, CA
45 E. BroadwayÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
New York, NY
10375 Richmond Avenue, Suite 1600*** ÏÏÏ
Houston, TX
5402 Eight Avenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Brooklyn, NY
Room 902-3, 9/F ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Printing House
6 Duddell Street, Central
Hong Kong
Unit 1808 Shanghai Kerry Centre, ÏÏÏÏÏÏÏÏÏ
1515 Nanjing Road West
Shanghai, 200040
People's Republic of China
8,912
Administrative oÇces
2/01 Ó 1/04
1,800
Administrative oÇces
2/01 Ó 1/04
4,483 Hacienda Heights
branch oÇce
San Jose branch oÇce
4,800
5,000
Oakland branch oÇce
3,121 Milpitas branch oÇce
4,450
Irvine branch oÇce
3,441 Millbrae branch oÇce
8,707
Administrative oÇces
1,976
2,535
2,500
Valley/Stoneman
branch oÇce
Berkeley/Richmond
branch oÇce
Diamond Bar branch
oÇce
7/99 Ó 6/04 with
one 5-year option
3/96 Ó 4/06 with
two 5-year options
9/01 Ó 9/06 with
one 5-year option
10/00 Ó 10/05 with
two 5-year options
10/94 Ó 4/09 with
two 5-year options
1/00Ó 12/04 with
one 5-year option
2/99 Ó 2/04
11/01 Ó 11/06 with
three 5-year options
10/97 Ó 10/03 with
two 5-year options
9/99 Ó 9/07
2,100 Union City branch
04/01 Ó 04/06
3,235
oÇce
Sacramento branch
oÇce
06/2002 Ó 06/2007
6,450 New York Chinatown
branch oÇce
1,797 Houston branch oÇce
1/97 Ó 12/06 with
two 5-year options
5/02 Ó 4/03
2,700
Brooklyn branch oÇce
740 Hong Kong
representative oÇce
09/01 Ó 08/11 with
one 5-year option
1/03 Ó 1/05
726
Shanghai representative
oÇce
4/02 Ó 4/05
21
* 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 of one additional year.
The Bank currently operates 24 domestic branch oÇces, one branch oÇce of Cathay Investment
Company in Taiwan, one representative oÇce in Hong Kong, and one representative oÇce in Shanghai,
China. 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 the Hong Kong and Shanghai representative
oÇces are limited to coordinating the transportation of documents to the Bank's headquarters oÇce and
performing liaison services.
As of December 31, 2002, the Bank's investment in premises and equipment totaled $29,788,000. See
also Note 7 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 1,806 square feet. The lease was renewed for one year from October 5,
2002 to October 4, 2003. The lease contains an option to renew the lease for an additional period ranging from
one to three years, after October 4, 2003. As of December 31, 2002, 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 Company has applied to the Securities and Exchange Commission to deregister this registered
investment company. See discussion below in the section entitled ""Factors That May AÅect Future Results''
of this Annual Report on Form 10-K.
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 2002.
PART II
Item 5. Market for Registrant'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 3, 2003 was $37.75 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.
22
The following table sets forth the high and low closing prices as reported on the Nasdaq National Market,
as adjusted to reÖect a two-for-one stock split in the form of a 100 percent stock dividend, eÅective May 9,
2002:
Year Ended December 31,
2002
2001
High
Low
High
Low
First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$36.74
48.30
45.46
44.00
$30.71
35.73
33.32
31.90
$32.25
29.86
29.00
33.47
$22.57
21.82
22.83
26.40
(b) Holders
As of February 3, 2003, there were approximately 1,640 holders of record of our Common Stock.
(c) Dividends
The cash dividends declared by quarter, as adjusted to reÖect a two-for-one stock split eÅective May 9,
2002, were as follows:
Year Ended
December 31,
2002
2001
First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.125
0.140
0.140
0.140
$0.125
0.125
0.125
0.125
Item 6. Selected Financial Data
The following table presents selected historical consolidated Ñnancial data for the 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.
23
Selected Consolidated Financial Data
2002
Year Ended December 31,
2000
(Dollars in thousands, except share and per share data)(3)
1999
2001
1998
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,991,333
18,115,119
Income Statement(1)
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income before provision
for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for loan losses ÏÏÏÏÏÏÏÏÏÏ
Securities gains (losses) ÏÏÏÏÏÏÏÏÏÏ
Other non-interest income ÏÏÏÏÏÏÏÏ
Non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income tax expense
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per common share
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends paid per common
share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average common shares
Statement of Condition
Securities available-for-saleÏÏÏÏÏÏÏÏ
Securities held-to-maturity ÏÏÏÏÏÏÏÏ
Net loans(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DepositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to
repurchaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Advances from the Federal Home
Loan Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common Stock Data
Shares of common stock
outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Book value per common share ÏÏÏÏÏ
ProÑtability Ratios
Return on average assetsÏÏÏÏÏÏÏÏÏÏ
Return on average stockholders'
equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend payout ratio ÏÏÏÏÏÏÏÏÏÏÏÏ
Average equity to average assets
ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÇciency ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
144,061
39,920
$
159,352
66,153
$
164,553
74,156
$
133,046
57,408
$
123,309
57,225
104,141
6,000
1,926
14,245
43,317
70,995
22,295
48,700
2.71
2.69
0.545
$
$
$
$
$
248,273
459,452
1,848,078
2,753,998
2,314,643
93,199
6,373
2,157
12,622
40,165
61,440
18,820
42,620
2.35
2.35
0.500
18,107,790
18,165,260
248,958
374,356
1,640,032
2,453,114
2,122,348
$
$
$
$
$
90,397
4,200
1,085
11,671
38,504
60,449
21,862
38,587
2.13
2.13
0.440
18,113,502
18,147,770
177,796
387,200
1,437,307
2,206,834
1,876,447
$
$
$
$
$
$
$
$
$
$
75,638
4,200
(3)
8,858
30,282
50,011
19,720
30,291
1.68
1.68
0.405
18,026,856
18,035,520
160,991
426,332
1,245,585
1,995,924
1,721,736
66,084
3,600
43
8,093
30,065
40,555
15,976
24,579
1.37
1.37
0.350
17,934,376
17,936,460
239,928
418,156
961,876
1,780,898
1,560,402
$
$
$
$
$
28,500
22,114
68,173
46,990
16,436
50,000
287,961
30,000
246,011
10,000
214,787
30,000
179,109
30,000
156,652
17,999,955
16.00
$
17,957,738
13.70
$
18,148,730
11.83
$
18,067,166
9.91
$
17,977,520
8.71
$
1.88%
1.82%
1.81%
1.63%
1.44%
18.30
20.11
10.27
36.00
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
(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.
(3) Shares and per share data have been adjusted to reÖect a two-for-one stock split in the form of a
100 percent stock dividend, eÅective May 9, 2002.
24
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'' or ""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. The Bank oÅers a wide range of Ñnancial services. The Bank now operates
twelve branches in Southern California, eight branches in Northern California, three branches in New York
State, one branch in Houston, Texas, and two representative oÇces, one in Hong Kong and one in Shanghai,
China. In addition, the Bank's subsidiary, Cathay Investment Company, maintains an oÇce in Taiwan. 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 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,'' ""may,'' ""will,'' ""should,'' ""could,'' ""predicts,'' ""potential,'' ""continue''
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;
‚ 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, including the formation of a real estate investment trust and the
application to the Securities and Exchange Commission for deregistration of the registered investment
company;
‚ general economic or business conditions; and
‚ 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 Company, the Bank, and the
Bank's wholly-owned subsidiaries. All material transactions between these entities are eliminated.
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 consolidated Ñnancial
statements requires management to make estimates and judgments that aÅect the reported amounts of assets
25
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.''
Financial Events in 2002
New branches and representative oÇce
The Bank opened two new branches and one overseas representative oÇce during the year. The
Sacramento Branch opened for business on September 9, 2002. The Brooklyn Branch opened for business on
June 27, 2002, and became our third branch in the New York area. On April 20, 2002, we opened a
representative oÇce in Shanghai, China.
Acquisition of deposit accounts of the New York branch of CITIC International Financial Holdings
Limited
On November 27, 2002, the Bank entered into a deposit account purchase agreement with CITIC
International Financial Holdings Limited, a limited company incorporated in Hong Kong, to purchase and
assume certain deposit accounts with an aggregate value not to exceed $10 million, and for a total premium
not to exceed $60,000. This transaction is pending regulatory approval.
Two-for-one stock split
On March 22, 2002, the Bancorp announced that its Board of Directors approved a two-for-one split of
the Company's common stock, in the form of a 100% stock dividend, payable May 9, 2002, to stockholders of
record on April 19, 2002. Stockholders received one additional share for every one share of Cathay Bancorp
common stock held on the record date. The Company common stock had been trading at or near its historic
closing highs, and to commemorate the 40th Anniversary of the Bank, the Board of Directors approved the
splitting of the Company's common stock to help make it more accessible to a wider range of investors and
improve its liquidity.
Increase to common stock dividend
On March 22, 2002, the Board of Directors of the Bancorp approved a quarterly cash dividend of 14 cents
per share on a post-split basis payable April 16, 2002, to stockholders of record on April 1, 2002. This dividend
represented a 12 percent increase from the 12.5 cents per share dividend paid on a post-split basis in the
previous quarter.
Repurchase of common stock
In 2002, the Company repurchased a total of 27,500 shares of common stock at an average price of
$34.37. At December 31, 2002, the Company is still authorized to purchase an additional $6.71 million under
the $15.00 million repurchase program adopted by the Board of Directors in April 2001. Cumulatively through
December 31, 2002, the Company has repurchased 305,300 shares of our common stock for $8.29 million.
Results of Operations
Summary
For the year 2002, the Company reported a record consolidated net income of $48.70 million or $2.69 per
diluted share, a 14.27% increase in net income compared with net income of $42.62 million or $2.35 per
26
diluted share for 2001, and an increase of 26.21% in net income, when compared with net income of
$38.59 million or $2.13 per diluted share for 2000.
An increase of $29.34 million in the excess of average interest-earning assets over average deposits and
borrowings coupled with changes in the mix of average interest-earning assets and in the mix of average
deposits and borrowings, were the main drivers of the total $6.08 million increase to net income between 2002
and 2001. These changes increased our net interest income before provision for loan losses by 11.74%, or
$10.94 million, between 2002 and 2001. Net interest income before provision for loan losses for 2002 totaled
$104.14 million compared to $93.20 million for 2001.
During the same period, non-interest income increased by $1.39 million, reÖecting increases in wire
transfer fee income, safe deposit fee income, loan related fee income, and gains on sale of SBA loans.
Although we were able to improve our eÇciency ratio to 36.00% in 2002 compared to 37.20% in 2001, the
Company's non-interest expense increased by $3.15 million between 2002 and 2001 to $43.32 million, as a
result of increases in year-end bonuses and in annual salary adjustments.
Net income and key Ñnancial performance ratios are presented below for the three years indicated:
2002
2001
(In thousands, except share
and per share data)
2000
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on average assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Return on average stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total average assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total average stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÇciency ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅective income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
$
$
48,700
2.71
2.69
1.88%
18.30%
$
$
$
42,620
2.35
2.35
1.82%
18.36%
38,587
2.13
2.13
1.81%
20.09%
$2,590,837
$ 266,136
$2,339,669
$ 232,105
$2,126,853
$ 192,117
36.00%
31.40%
37.20%
30.63%
37.33%
36.17%
Year 2002 compared to Year 2001
Taxable-Equivalent Interest Income
During 2002, we experienced compression to our taxable-equivalent net interest margin due to the
declining interest rate environment on a balance sheet that is asset sensitive. During 2001, the Federal Open
Market Committee (""FOMC''), lowered the target federal funds rate by 475 basis points in rapid succession
during the year. In November 2002, an additional reduction of 50 basis points was approved by the FOMC,
bringing the total decrease to 525 basis points during the past two years. As a commercial bank, most of our
loans are variable-rate, and reprice each time there is a change in the target Federal funds rate. In response to
these conditions, we made eÅorts to manage our interest-earning assets by increasing average loans, which
yield higher than other types of investments, and made eÅorts to obtain lower cost core deposits, thus
optimizing the mix of our deposit portfolios. The impact of these eÅorts allowed us to maintain our taxable-
equivalent margin well above the 4.00% mark during 2002, and increased our taxable-equivalent net interest
income by $11.04 million to $106.29 million compared with $95.25 million for 2001. On a combined basis,
these changes to our balance sheet should position us to slightly reduce our exposure to declining interest
rates, while also eÅectively allowing us to take advantage of market interest rates in the event they move
upward. The increase of $11.04 million to taxable-equivalent interest income was due to a combination of the
following:
‚ Increase in volume: Average interest-earning assets increased $252.52 million, to $2.42 billion in 2002,
an increase of 11.66% over interest-earning assets of $2.17 billion in 2001. The increase in total
interest-earning assets contributed an additional $17.35 million to taxable-equivalent interest income
between 2002 and 2001.
27
‚ Decrease in rate: As mentioned above, the rapidly declining interest rate environment was the main
factor behind our decrease in taxable-equivalent interest income in 2002, resulting in a $32.54 million
decrease to taxable-equivalent interest income due to rate changes. The taxable-equivalent yield on
interest-earning assets decreased 141 basis points from 7.45% in 2001 to 6.04% in 2002.
‚ Change in the mix of interest earning assets: Average net loans of $1.72 billion, which yield higher than
other types of investments, increased by $205.25 million in 2002 and comprised 71.30% of total average
interest-bearing assets compared with 70.14% in 2001. Conversely, total average investment securities
as a percentage of total average interest-earning assets declined to 26.63% in 2002 compared to 28.21%
in 2001, and equaled $644.27 million in 2002 compared with $611.21 million in 2001.
Interest Expense
Interest expense decreased by $26.23 million to $39.92 million in 2002 compared with $66.15 million in
2001. The reason for the decrease was a combination of the repricing of deposits in a lower interest rate
environment, and a change in the mix of these deposits, partially oÅset by increases in volume, more
particularly described as follows:
‚ Increase in volume: Average interest-bearing liabilities increased $178.16 million in 2002, and added
$5.53 million of additional interest expense in 2002.
‚ Decrease in rate: As a result of the lower interest rate environment during 2002, the average cost of
interest-bearing liabilities decreased 162 basis points to 1.98% in 2002 compared with 3.60% in 2001,
decreasing interest expense by $31.77 million. The average cost of funds on total deposits and
borrowings, which includes non-interest-bearing demand deposits, decreased by 146 basis points to
1.74% in 2002 compared with 3.20% in 2001.
‚ Change in the mix of deposits and borrowings: As a percentage of total average deposits and
borrowings, average time deposits of $100,000 or more decreased to 41.35% for 2002 compared with
42.39% during 2001. For the year 2002, total average deposits and borrowings increased by
$223.18 million, of which 57.58% or $128.49 million of the total increase was comprised of average
core deposits, while the remaining 42.18% or $94.65 million was comprised of average time deposits of
$100,000 or more and borrowings.
Taxable-Equivalent Net Interest Margin
The excess of average interest-earning assets over average deposits and borrowings increased by
$29.34 million in 2002 to $126.96 million compared with $97.63 million in 2001. The taxable-equivalent net
interest margin, deÑned as taxable-equivalent net interest income to average interest-earning assets decreased
one basis point from 4.40% in 2001 to 4.39% in 2002.
Year 2001 compared to Year 2000
Taxable-Equivalent Interest Income
Taxable-equivalent interest income decreased $4.89 million or 2.94% to $161.40 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 $4.89 million decrease in taxable-equivalent 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 in 2001,
an increase of 12.45% over interest-earning assets of $1.93 billion in 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 taxable-equivalent yield on interest-earning assets decreased 118 basis points
from 8.63% in 2000 to 7.45% in 2001. As a result of the lower interest rate environment, the interest
yield earned on average net loans decreased 168 basis points from 9.62% to 7.94%, decreasing interest
28
income on net loans by $23.87 million. The decrease in yield of average interest-earning assets was
primarily due to eleven consecutive drops in interest rates by the FOMC.
‚ 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 with 68.16% in 2000. Conversely, total average securities
increased by $9.97 million and comprised 28.21% of total average interest-earning assets in 2001
compared with 31.21% in 2000.
Interest Expense
Interest expense decreased by $8.00 million to $66.15 million in 2001 compared with $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 with 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 with 3.90% in 2000.
‚ 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
$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 with
$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 interest rates cuts by the FOMC during 2001, the Company's 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.
Net interest income before provision for loan losses for 2002, 2001, and 2000 are summarized below:
Net interest income before provision for loan lossesÏÏÏÏÏÏÏÏÏÏÏ
Taxable-equivalent net interest income before provision for loan
losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
$104,141
2001
(In thousands)
$93,199
2000
$90,397
$106,294
$95,250
$92,132
29
Taxable-Equivalent Net Interest Income Ì Changes Due to Rate and Volume(1)
2002-2001
Increase (Decrease) in
Net Interest Income Due to:
Changes in
Rate
Total
Change
Changes in
Volume
2001-2000
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 resellÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities available-for-sale
(In thousands)
$
488
$
(991)
$
(503)
$
938
$
(308)
$
630
(Taxable)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,127
(1,977)
1,150
(12)
(487)
(499)
Securities available-for-sale
(Nontaxable)(2)ÏÏÏÏÏÏÏÏÏÏÏ
(37)
2
(35)
14
(3)
11
Securities held-to-maturity
(Taxable)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,515)
(1,437)
(2,952)
(371)
34
(337)
Securities held-to-maturity
(Nontaxable)(2)ÏÏÏÏÏÏÏÏÏÏÏ
Agency preferred stock(2)ÏÏÏÏÏ
Deposits with other banks ÏÏÏÏÏ
Loans(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total increase (decrease) in
32
320
(59)
14,996
98
(377)
35
(27,894)
130
(57)
(24)
(12,898)
(29)
1,169
45
18,119
(7)
(93)
(29)
(23,865)
(36)
1,076
16
(5,746)
interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,352
(32,541)
(15,189)
19,873
(24,758)
(4,885)
Interest-Bearing Liabilities
Savings deposits, NOW
accounts, and others ÏÏÏÏÏÏÏÏ
Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under
agreements to repurchase ÏÏÏÏ
Other borrowed funds ÏÏÏÏÏÏÏÏÏ
Advances from the Federal
Home Loan Bank ÏÏÏÏÏÏÏÏÏÏ
Mortgage indebtedness ÏÏÏÏÏÏÏÏ
Total increase (decrease) in
690
3,672
(2,945)
(28,542)
(2,255)
(24,870)
524
8,441
(2,700)
(10,346)
(2,176)
(1,905)
(172)
23
(50)
(101)
(222)
(78)
(564)
(1,379)
(423)
(1,361)
(987)
(2,740)
1,319
(127)
1,192
(251)
(14)
70
Ì
(181)
(14)
interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,532
(31,765)
(26,233)
6,757
(14,760)
(8,003)
Changes in net interest income ÏÏÏ
$11,820
$
(776)
$ 11,044
$13,116
$ (9,998)
$ 3,118
(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 $24,543,000 in 2002, $23,973,000 in 2001, and
$21,967,000 in 2000, and net of unamortized deferred loan fees of $4,606,000 in 2002, $3,900,000 in 2001,
and $4,139,000 in 2000.
30
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
2002
Year Ended December 31,
2001
(Dollars in thousands)
2000
Interest-Earnings Assets
Federal Funds Sold and Securities Purchased Under
Agreements to Resell
Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount of interest earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
48,966
1.66%
813
$
$
32,397
4.06%
1,316
$
$
11,053
6.21%
686
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
$ 250,197
$ 196,934
$ 197,004
5.54%
13,867
226
7.96%
18
6.46%
12,717
693
7.65%
53
6.71%
13,216
510
8.24%
42
$
$
$
$
$
$
$
$
$
$ 299,398
$ 324,760
$ 330,841
5.75%
17,215
69,529
7.54%
5,243
24,923
5.35%
1,333
894
3.58%
32
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$1,724,796
$1,519,548
$1,313,177
6.24%
7.94%
9.62%
$ 107,693
$ 120,591
$ 126,337
31
Total Interest-Earning Assets
Average outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average yield(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount of interest earned(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 the 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
2002
Year Ended December 31,
2001
(Dollars in thousands)
2000
$2,418,929
$2,166,414
$1,926,585
6.04%
7.45%
8.63%
$ 146,214
$ 161,403
$ 166,288
$ 565,289
$ 496,942
$ 463,695
0.59%
3,330
$
1.12%
5,585
$
1.67%
7,761
$
$1,372,854
$1,286,973
$1,117,350
2.43%
33,409
27,173
3.33%
906
3,680
1.58%
58
48,356
4.58%
2,217
$
$
$
$
$
$
$
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 $
Ì $
Ì%
Ì $
160
8.75%
14
$
$
$
$
$
$
$
$
$
$2,017,352
$1,839,195
$1,690,142
1.98%
3.60%
4.39%
$
39,920
$
66,153
$
74,156
$ 274,614
$ 229,592
$ 211,975
Total deposits and borrowed fundsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average rate paid on deposits and borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,291,966
$2,068,787
$1,902,117
1.74%
3.20%
3.90%
32
Net Interest Income(7)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest rate spread(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest margin on interest-earning assets(4)(7) ÏÏÏÏÏÏÏÏÏÏÏ
2002
Year Ended December 31,
2001
(Dollars in thousands)
$
95,250
$
$ 106,294
4.30%
4.39%
4.25%
4.40%
2000
92,132
4.73%
4.78%
(1) Non-accrual 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.
(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%.
The following table highlights the change in the composition of interest-earning asset mix as of
December 31, 2002, and 2001:
Interest-Earning Asset Mix
As of December 31, 2002
As of December 31, 2001
Percentage of
Total Interest-
Earning Assets
Amount
Percentage of
Total Interest-
Earning Assets
Amount
(Dollars in thousands)
Amount
Changed
From
2001 to 2002
Percentage
Changed
From
2001 to 2002
Types of Interest-Earning
Assets
Federal funds sold and
Securities purchased under
agreements to resell ÏÏÏÏÏÏÏ
Securities available-for-saleÏÏÏ
Securities held-to-maturity ÏÏÏ
Deposits with other banks ÏÏÏÏ
Loans (net of allowance
for loans losses and
unamortized deferred
loan fees) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
19,000
248,273
459,452
370
0.74%
9.64
17.84
0.01
$
13,000
248,958
374,356
1,399
0.57%
10.93
16.44
0.06
$
6,000
(685)
85,096
(1,029)
46.15%
(0.28)
22.73
(73.55)
Total interest-earning assets ÏÏ
$2,575,173
100.00%
$2,277,745
100.00%
$297,428
1,848,078
71.77
1,640,032
72.00
208,046
12.69
13.06%
Year 2002 compared to Year 2001
Provision for Loan Losses
The provision for loan losses represents the charge against current earnings that is determined by
management, through a credit review process, as the amount needed to maintain an allowance that
management believes is suÇcient to absorb loan losses inherent in the Company's loan portfolio. The provision
for loan losses was $6.00 million in 2002 compared with $6.37 million in 2001. For the year 2002, net charge-
oÅs equaled $5.43 million or 0.31% of average net loans, primarily as a result of one credit totaling
$3.62 million, which Ñled for Chapter 7 protection and was charged-oÅ during the second quarter of 2002. The
comparable numbers for the year 2001 were net charge-oÅs of $4.37 million or 0.29% of average net loans,
33
principally to recognize deterioration in two credits that were partially charged-oÅ in the 4th quarter 2001.
Also, see ""Allowance for Loan Losses'' in this 2002 Annual Report on Form 10-K.
Non-interest Income
Securities gains and losses, depository service fees, letters of credit commissions, gains and losses on loan
sales, and a wide range of fee-based services provided non-interest income. These fee-based services include
among other things wire transfer fees, safe deposit fees, fees on loan related activities, fee income from our
Global Investment Services unit, and foreign exchange fees. Non-interest income from all of these activities
totaled $16.17 million in 2002 compared with $14.78 million in 2001. The increase of $1.39 million or 9.42%
from 2001 to 2002, was primarily due to the following items:
‚ an increase of $658,000 in depository service fee income, an increase of 12.91%, to $5.76 million
compared with $5.10 million in 2001. The increase in depository service fees during 2002 was
predominantly due to an increase in service charges on deposit accounts, and an increase in investment
services fee income from our Global Investment Services unit;
‚ an increase of $1.17 million in other operating income, which includes primarily loan fees, wire transfer
fees, safe deposit fees, foreign exchange fees and gain on sale of loans, and which totaled $6.54 million
in 2002, compared with $5.37 million in 2001. The increase in other operating income was primarily
due to increases in commercial and commercial real estate loan fees, gain on sale of SBA and
residential mortgage loans, an increase in wire transfer service fees, and an increase in service fee
income from the rental of our safe deposit boxes;
‚ a decrease of $231,000 in securities gains. During the third quarter of 2002, due to our increasing loan
demand, and also to take advantage of the lower interest rate environment, we sold investment
securities with a carrying value of $20.14 million resulting in gains on sale totaling $1.89 million. In
addition, during 2002, investment securities calls and write-downs on venture capital investments
resulted in a net gain of $32,000, bringing the total of securities gains to $1.93 million for 2002. The
comparable numbers for 2001 were sales of investment securities totaling $21.12 million, resulting in
gains of $1.06 million, a gain of $851,000 on a forward rate agreement (""FRA''), and securities calls
and write-downs on venture capital investments resulting in a net gain of $251,000, for a total of
$2.16 million in securities gains during 2001; and
‚ letters of credit commissions decreased by $205,000 or 9.53%, to $1.95 million in 2002, likely as a
result of a continuing uncertainty over the outlook for the U.S. economy from the point of view of some
of our importing customers.
Non-interest Expense
Non-interest expense totaled $43.32 million in 2002, compared with $40.17 million in 2001. The increase
of $3.15 million or 7.85% in non-interest expense in 2002 was primarily a combination of the following:
‚ an increase of $2.03 million in salaries and employee beneÑts. Annual salary adjustments, increases in
year-end bonuses, and additional employees and salary expense to accommodate our new branches in
Union City Ì California, which opened for business on October 2001, Brooklyn Ì New York, which
opened for business in June 2002, Sacramento Ì California, which opened for business in September
2002, and our new representative oÇce in Shanghai Ì China, which opened for business in April 2002,
drove the increase of $2.03 million in salaries and employee beneÑts in 2002;
‚ an increase of $605,000 in occupancy expense and computer and equipment expense, as a result of our
three new branches and our representative oÇce in Shanghai, China;
‚ a decrease of $44,000 in marketing expenses, primarily due to a $250,000 donation towards the
establishment of the 911 Healing Hands non-proÑt organization in 2001;
34
‚ a decrease of $1.36 million in professional services. During 2001, professional services fees in
connection with litigation, the formation of the registered investment company of the Bank, and other
corporate matters drove the increase of $1.36 million to $5.40 million for 2001 compared with
$4.04 million in 2002; and
‚ a decrease of $3.24 million in real estate operations. During the fourth quarter of 2001, non-interest
expenses were lowered by a $3.2 million gain on the sale of one other real estate owned commercial
property.
Despite the $3.15 million increase in non-interest expense during 2002, the eÇciency ratio, deÑned as
non-interest expense divided by net interest income before provision for loan losses plus non-interest income,
decreased to 36.00% in 2002 compared with 37.20% in 2001. The decrease in the eÇciency ratio for 2002 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.
Income Tax Expense
The provision for income taxes was $22.30 million or an eÅective income tax rate of 31.40% for 2002
compared with $18.82 million or an eÅective income tax rate of 30.63% in 2001, and compared with
$21.86 million or an eÅective income tax rate of 36.17% in 2000. The eÅective income tax rate during 2002
and 2001 reÖected the income tax beneÑts of a registered investment company subsidiary of the Bank, which
provided Öexibility to raise additional capital in a tax eÇcient manner, and additional tax credits earned from
qualiÑed low income housing investments. See discussion below in the section entitled ""Factors That May
AÅect Future Results'' of this Annual Report on Form 10-K.
Year 2001 compared to Year 2000
Provision for Loan Losses
The provision for loan losses was $6.37 million in 2001 compared with $4.20 million in 2000. The increase
of $2.17 million in 2001 compared with 2000 was primarily due two credits that were partially charged-oÅ in
the fourth quarter of 2001. Net charge-oÅs for 2001 were $4.37 million or 0.29% of average net loans
compared with charge-oÅs of $1.74 million or 0.13% of average net loans during 2000.
Non-interest Income
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 in 2001
compared with $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 of 2001 and were either callable or scheduled to mature within the 21 months following the end
of the third quarter of 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; and
‚ 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 with $4.67 million in 2000.
35
Non-interest Expense
Non-interest expense totaled $40.17 million in 2001, compared with $38.50 million in 2000. 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;
‚ 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 investment tax credits; and
‚ 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.
The eÇciency ratio, deÑned as non-interest expense divided by net interest income before provision for
loan losses plus non-interest income, improved to 37.20% in 2001 compared with 37.33% in 2000. The
improvement in our 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.
Income Tax Expense
The eÅective tax rate in 2001 was 30.63% compared with 36.17% in 2000. The decline in the eÅective tax
rate in 2001 was the result of a registered investment company subsidiary of the Bank, which provided
Öexibility to raise additional capital in a tax eÇcient manner, and additional tax credits earned from qualiÑed
low income housing investments. See discussion below in the section entitled ""Factors That May AÅect
Future Results'' of this Annual Report on Form 10-K.
Review of Financial Condition
Total assets increased $300.88 million or 12.27% to $2.75 billion at December 31, 2002, compared with
total assets of $2.45 billion at December 31, 2001. The major changes in the Consolidated Statements of
Condition during 2002 are listed below:
‚ Total net loans grew $208.05 million or 12.69% to $1.85 billion, based on strong net growth in
commercial mortgage loans and commercial loans.
‚ Total securities increased $84.41 million or 13.54% to $707.73 million.
‚ Total deposits increased by $192.30 million or 9.06% to $2.31 billion. The majority of the growth in
deposits or 66.65% was achieved from a strong growth in lower-cost core deposits.
‚ Federal Home Loan Bank (""FHLB'') borrowings and securities sold under agreements to repurchase
increased 50.63% to $78.50 million.
‚ Other liabilities increased by $42.4 million primarily as a result of the purchase of $33.55 million of
securities in December 2002, which did not settle until January 2003.
‚ Stockholders' equity rose 17.05% to $287.96 million.
36
Securities
Under our investment policy, we classify the Company's investment securities portfolio as follows:
‚ Those securities for 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 represented 11.38% of average interest-earning assets for 2002 compared
with 10.03% for 2001. The fair value of securities available-for-sale (""AFS'') at December 31, 2002, was
$248.27 million compared with $248.96 million at December 31, 2001. The portfolio is comprised primarily of
U.S. government agency securities, corporate bonds, agency preferred equity securities, and venture capital
investments. Securities available-for-sale are carried at fair value and had a net unrealized gain of
$9.53 million at December 31, 2002, compared with $7.17 million at December 31, 2001. The increase in
unrealized holding gains from year-end 2001 resulted from the Öattening of the yield curve during 2002, as a
result of the decreasing interest rate environment, uncertainties regarding general economic conditions, and
war and terrorism. These unrealized gains do not impact net income and are recorded as adjustments to
stockholders' equity, net of related deferred income taxes. Also, see Note 3 to the Consolidated Statements of
Condition.
During 2002, the Bank sold AFS securities with a net book value of $20.14 million. These AFS securities
sales resulted in gains of $1.89 million, exclusive of gains on calls of securities of $359,000 and $341,000 in
write-downs on AFS venture capital investments. The gain on sale from AFS securities was related to the sale
of U.S. government agency notes and corporate bonds.
The Company's AFS venture capital investments include investments in private equity funds, and at
December 31, 2002, had a fair value of $4.06 million. During 2002, $341,000 in write-downs were recorded
compared to write-downs of $65,000 in 2001. These write-downs were necessitated by the continued weakness
in the economy and capital markets. Management's assessment of the fair value of AFS venture capital
investments is based on several factors including: available information about the funds, the general partners'
fair value assessments, current economic conditions, available market comparables, eÅectiveness of the funds'
management teams, and other factors. Accordingly, the fair value estimates could diÅer signiÑcantly among
parties using diÅerent assumptions or judgments, and may not necessarily represent amounts that will
ultimately be realized.
Securities held-to-maturity (""HTM'') represented 15.25% of average interest-earning assets for 2002
compared with 18.18% for 2001. HTM securities at December 31, 2002 increased by $85.10 million to
$459.45 million compared with $374.36 million at December 31, 2001. The increase in HTM securities during
2002 was primarily the result of purchases of collateralized mortgage obligations during the fourth quarter of
2002, of which $33.55 million settled in January 2003. The portfolio is comprised primarily of U.S. agencies
mortgage-backed-securities, corporate bonds, state and municipal securities, U.S. government agency securi-
ties, and collateralized mortgage obligations. HTM securities are carried at cost, and at December 31, 2002,
had a fair value of $477.78 million.
The average taxable-equivalent yield on our total investment securities dropped 60 basis points to 5.85%
in 2002, compared with 6.45% in 2001 as some matured or call securities were replaced at lower prevailing
interest rates.
37
The following table summarizes the carrying value of our portfolio of securities for each of the past three
years:
2002
As of December 31,
2001
(In thousands)
2000
Securities Available-for-Sale:
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
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$170,183
100
6,147
847
10,510
Ì
33,069
27,417
$118,324
Ì
8,543
2,705
10,395
20,000
60,334
28,657
$ 78,317
1,277
13,207
5,804
10,370
Ì
60,370
8,451
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$248,273
$248,958
$177,796
Securities Held-to-Maturity
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
$ 49,996
72,770
66,135
168,055
9,999
72,611
19,886
$ 50,017
69,906
110,342
50,282
920
73,031
19,858
$ 64,689
68,820
135,494
48,694
13,156
56,347
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$459,452
$374,356
$387,200
38
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, 2002
After Five
Years to
Ten Years
(Dollars in thousands)
Over Ten
Years
Total
Maturity Distribution:
U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and municipal securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized mortgage obligations(1) ÏÏÏÏÏÏÏ
Asset-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $150,154
Ì
90
847
10,510
17,027
Ì
100
Ì
Ì
Ì
10,201
27,417
$20,029
Ì
1,033
Ì
Ì
5,841
Ì
$ Ì $170,183
100
6,147
847
10,510
33,069
27,417
Ì
5,024
Ì
Ì
Ì
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$37,718
$178,628
$26,903
$5,024
$248,273
Weighted-Average Yield:
U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and municipal securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized mortgage obligations(1) ÏÏÏÏÏÏÏ
Asset-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì%
7.60
Ì
Ì
Ì
7.85
3.88
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.03%
4.90%
Ì
5.69
5.86
5.69
5.48
Ì
5.01%
4.01%
Ì
6.56
Ì
Ì
7.61
Ì
4.80%
Ì%
Ì
7.12
Ì
Ì
Ì
Ì
7.12%
4.79%
7.60
7.00
5.86
5.69
6.60
3.88
5.03%
(1) Securities reÖect stated maturities and not anticipated prepayments.
(2) Average yield has been adjusted to a fully-taxable equivalent basis.
39
Securities Held-to-Maturity Portfolio Maturity Distribution and Yield Analysis
One Year
or Less
After One
Year to
Five Years
As of December 31, 2002
After Five
Years to
Ten Years
(Dollars in thousands)
Over Ten
Years
Total
Maturity Distribution:
U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and municipal securities(2)ÏÏÏÏÏÏÏÏÏÏ
Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized mortgage obligations(1) ÏÏÏÏÏ
Asset-backed securities(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $ 49,996
11,998
5,782
2,243
9,999
32,638
9,986
725
Ì
Ì
Ì
18,987
Ì
$
Ì $
25,073
39,023
48,508
Ì
20,986
9,900
Ì $ 49,996
72,770
66,135
168,055
9,999
72,611
19,886
34,974
21,330
117,304
Ì
Ì
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$19,712
$122,642
$143,490
$173,608
$459,452
Weighted-Average Yield:
U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and municipal securities(2)ÏÏÏÏÏÏÏÏÏÏ
Mortgage-backed securities(1) ÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized mortgage obligations(1) ÏÏÏÏÏ
Asset-backed securities(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì%
11.37
Ì
Ì
Ì
5.82
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.03%
5.47%
8.30
4.89
7.31
4.27
5.94
4.86
5.73%
Ì%
Ì%
7.54
6.03
4.94
Ì
6.70
5.70
7.00
7.10
4.19
Ì
Ì
Ì
6.00%
5.10%
5.47%
7.46
6.25
4.45
4.27
6.13
5.28
5.59%
(1) Securities reÖect stated maturities and not anticipated prepayments.
(2) Average yield has been adjusted to a fully-taxable equivalent basis.
Loans
Loans, net of deferred loan fees, represented 72.27% of average interest-earning assets during 2002
compared with 71.22% during 2001. Gross loans, exclusive of deferred loan fees, increased by $209.32 million,
an increase of 12.55%, to $1.88 billion at year-end 2002 compared with $1.67 billion at year-end 2001. The
growth was primarily attributable to the following:
‚ Commercial mortgage loans are typically secured by Ñrst deeds of trust on commercial properties,
including primarily commercial retail properties, shopping centers and owner-occupied industrial
facilities, and secondarily oÇce buildings, multiple-unit apartments, and multi-tenanted industrial
properties. In addition, the Bank provides medium-term commercial real estate loans secured by
commercial or industrial buildings where the owner either uses the property for business purposes or
derives income from tenants. Commercial mortgage loans increased $205.01 million or 27.77% to
$943.39 million at year-end 2002, compared to $738.38 million at year-end 2001. Total commercial
mortgage loans accounted for 50.25% of gross loans at year-end 2002 compared to 44.27% at year-end
2001.
‚ Commercial loans consist primarily of short-term loans (normally with a maturity of up to one year) to
support general business purposes, or to provide working capital to businesses in the form of lines of
credit to Ñnance trade-Ñnance loans, and SBA loans. Commercial loans were up $57.55 million or
11.37% to $563.68 million at December 31, 2002, compared to $506.13 at December 31, 2001. The
Company is continuing to focus primarily on commercial lending to small-to-medium size businesses,
40
within the Company's geographic market area. The third quarter of 2002 brought an additional
challenge, as an unresolved labor dispute forced all of the PaciÑc Coast ports to close for approximately
one week. This disruption to international trade did not have a material impact to the Bank's trade-
Ñnance loan portfolio. The portfolio of SBA loans at December 31, 2002, equaled $19.37 million
compared with $17.56 million at December 31, 2001. During 2002, the Bank sold $7.75 million of SBA
loans, resulting in a gain on sale of loans of $411,000.
‚ Real estate construction loans decreased $43.64 million or 26.23% to $122.77 million at year-end 2002
compared to $166.42 million at year-end 2001. Our construction loan projects are located primarily in
California, Texas, Nevada, and New York. Due to the recessionary economy, projects requiring
construction Ñnancing declined during 2002.
‚ Residential mortgage loans decreased by $4.54 million or 1.93% to $231.37 million at year-end 2002,
compared to $235.91 million at year-end 2001. Included with our residential mortgage loans are our
home equity line of credit loans. At December 31, 2002, the portfolio of home equity lines of credit was
$48.96 million, an increase of 21.32%, from $40.35 million at year-end 2001. The portfolio of
residential mortgage loans, excluding the home equity line of credit loan portfolio, decreased by
$13.15 million to $182.41 million at year-end 2002. New loan originations and reÑnances total
$79.19 million in 2002, which was partially oÅset by loan sales in 2002 totaling $7.05 million, and
payments and payoÅs during the year totaling $85.29 million. Residential mortgage loans sold in 2002,
excluding home equity lines of credit, totaled $7.05 million, and resulted in a gain on sale of loans of
$22,400.
‚ Installment loans decreased $4.75 million, down 23.38% to $15.57 million at December 31, 2002,
compared to $20.32 million at December 31, 2001. These consumer-oriented loans are funded
primarily for the purpose of Ñnancing the purchase of automobiles 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, 2002 are presented below:
Loan Type and Mix
2002
Amount Outstanding as of December 31,
2000
1999
(In thousands)
2001
1998
Type of Loans:
Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Residential mortgage loans ÏÏÏÏÏÏÏÏÏÏ
Commercial mortgage loans ÏÏÏÏÏÏÏÏÏ
Real estate construction loans ÏÏÏÏÏÏÏÏ
Installment loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 563,675
231,371
943,391
122,773
15,570
447
$ 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
Gross loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,877,227
1,667,905
1,463,413
1,268,680
981,477
Less:
Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized deferred loan feesÏÏÏÏÏÏÏ
(24,543)
(4,606)
(23,973)
(3,900)
(21,967)
(4,139)
(19,502)
(3,593)
(15,970)
(3,631)
Net loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,848,078
$1,640,032
$1,437,307
$1,245,585
$961,876
41
Changes in Loan Portfolio Composition
As of December 31, 2002
As of December 31, 2001
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
$ 563,675
231,371
943,391
122,773
15,570
447
(24,543)
(4,606)
30.50% $ 506,128
235,914
12.52
738,379
51.05
166,417
6.64
20,322
0.84
745
0.02
(23,973)
(1.32)
(3,900)
(0.25)
30.86%
14.38
45.02
10.15
1.24
0.05
(1.46)
(0.24)
11.37%
(1.93)
27.77
(26.23)
(23.38)
(40.00)
2.38
18.10
Net loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,848,078
100.00% $1,640,032
100.00%
12.69%
Contractual Maturity of Loan Portfolio(1),(2)
Within One Year
One to Five Years
Over Five Years
Total
(In thousands)
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
$338,783
104,173
$ 66,923
5,675
$ 40,291
7,346
$ 445,997
117,194
1,104
6,546
231,855
63,416
11,017
Ì
Ì
7,956
56,085
166,938
424,196
144,293
Ì
Ì
Ì
Ì
57,303
173,512
725,140
215,303
112,371
9,784
Ì
15,570
114
28
69,089
7,594
101,354
9,784
Ì
7,614
42
Within One Year
One to Five Years
Over Five Years
Total
(In thousands)
Other Loans
Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
446
Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$638,979
Floating rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$509,340
129,639
Total loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$638,979
Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
$394,492
$310,899
83,593
$394,492
Ì
1
Ì
447
$839,150
$1,872,621
$520,572
318,578
$1,340,811
531,810
$839,150
$1,872,621
(24,543)
$1,848,078
(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.
Other Real Estate Owned
Other Real Estate Owned, net of a valuation allowance of $131,000, decreased to $653,000 at
December 31, 2002, compared with $1.56 million at year-end 2001.
As of December 31, 2002, there were two outstanding owned properties, which included one parcel of
land, and one commercial building. Both properties are located in California. During 2002, we acquired two
single-family residential (""SFR'') properties, and sold Ñve SFR properties, two of which were the two
properties acquired in 2002. The carrying value of the Ñve properties sold was approximately $1.31 million,
and the sales resulted in gains on sale of $395,000.
To reduce the carrying value of other real estate owned to the estimated fair value of the properties, we
maintain a valuation allowance for owned 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, which is included in other real estate owned expense,
in the current period. Management did not make any additional provision for losses in 2002.
We recognized net operating income of $349,000 from operating owned properties in 2002 compared to
net operating income of $3.59 million in 2001, and net operating income of $185,000 in 2000. Operating
income declined from $348,000 in 2001 to $166,000 in 2002.
Although the California real estate market continued to show strength in 2002, 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 other real estate owned expense (income) for the years
ended:
Other Real Estate Owned Expense (Income) by Type
2002
Net operating expense (income)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net gains on disposal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
46
Ì
(395)
2001
(In thousands)
$ (213)
Ì
(3,376)
2000
$
7
71
(263)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(349)
$(3,589)
$(185)
43
Investments in Real Estate
As of December 31, 2002, our investments in real estate were comprised of seven limited partnerships,
three of which were acquired in 2002. We acquired an interest in the Lend Lease ITC XXIII in March 2002
for $4.87 million, an interest in the WNC Institutional Tax Credit Fund X New York Ì Series 3 in August
2002 with an initial commitment of $577,000, and an interest in the WNC Institutional Tax Credit California
Fund X Ì Series 2, with an initial contribution of $415,000 in September 2002, and an additional contribution
of $122,000 in October 2002. The limited partnerships are formed for the purpose of investing in low income
housing projects, which qualify for federal and/or state low income housing tax credits.
As of December 31, 2002, investments in real estate increased $3.95 million to $21.68 million from
$17.73 million at year-end 2001. During 2002, we recognized $2.04 million in net operating losses from the
limited partnerships, compared to $2.26 million in net operating losses in 2001.
The following table summarizes the composition of our investments in real estate as of the dates
indicated:
Percentage of
Ownership
Acquisition
Date
(Dollars in thousands)
December 31,
2002
December 31,
2001
Carrying Amount
Las Brisas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Los Robles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
California Corporate Tax Credit Fund III ÏÏ
Wilshire CourtyardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lend Lease ITC XXIII ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WNC Institutional Tax Credit Fund X
New York Ì Series 3 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WNC Institutional Tax Credit Fund X
49.5%
99.0%
32.5%
99.9%
4.5%
December 1993
August 1995
March 1999
May 1999
March 2002
4.2%
August 2002
California Ì Series 2 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.0%
September 2002
$ Ì
386
11,128
4,568
4,546
529
521
$ Ì
386
12,426
4,915
Ì
Ì
Ì
$21,678
$17,727
Deposits
The Bank 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 deposits are generally obtained from residents within the Bank'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. Although the Bank's vast majority of
the Bank's deposits are retail in nature, the Bank does engage in certain wholesale activities, primarily
accepting time deposits from political subdivisions and public agencies. The Bank 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, 2002, the
Bank had no brokered-deposits, and public deposits totaled $90.31 million or 3.90% of total deposits.
‚ The Bank's total deposits increased $192.30 million or 9.06% from $2.12 billion at year-end 2001 to
$2.31 billion at December 31, 2002.
‚ Core deposits increased $128.16 million or 10.68%. The increase in core deposits, deÑned as total
deposits less time deposits of $100,000 or more, was attributable to increases of $42.40 million in non-
interest bearing demand deposits, up 16.28%, to $302.83 million at year-end 2002 compared with
$260.43 million at year-end 2001, NOW accounts and money market accounts, which increased by
13.66% or $37.21 million to $309.67 million at December 31, 2002, compared with $272.46 million at
year-end 2001, savings accounts, which increased by $37.90 million to $290.23 million compared with
44
$252.32 million at year-end 2001, and time deposits under $100,000, which increased by 2.57% or
$10.65 million to $425.14 million compared with $414.49 million at year-end 2001.
‚ Time deposits of $100,000 or more (""Jumbo CDs'') increased $64.13 million or 6.95% to $986.79 mil-
lion in 2002 compared with $922.65 million in 2001.
The following table displays the deposit mix for the past three years:
Deposit Mix
2002
Amount
Percentage
Year Ended December 31,
2001
Amount
(Dollars in thousands)
Percentage
2000
Amount
Percentage
$ 302,828
148,085
161,580
290,226
425,138
13.08% $ 260,427
135,650
6.40
136,806
6.98
252,322
12.54
414,490
18.37
12.27% $ 221,805
125,647
119,805
231,761
379,809
6.39
6.45
11.89
19.53
11.82%
6.70
6.38
12.35
20.24
986,786
42.63
922,653
43.47
797,620
42.51
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
$2,314,643
100.00% $2,122,348
100.00% $1,876,447
100.00%
Average total deposits grew $199.20 million or 9.89% to $2.21 billion during 2002 compared with average
total deposits of $2.01 billion in 2001.
‚ Average core deposits increased $128.49 million or 11.31%.
‚ Average Jumbo CDs increased $70.76 million or 8.07%.
The following table displays average deposits and rates for the past Ñve years:
Average Deposits and Rates
2002
2001
2000
1999
1998
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in thousands)
Demand ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 274,568 Ì% $ 229,592 Ì% $ 211,975 Ì% $ 169,013 Ì% $ 166,657 Ì%
NOW accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Money market accountsÏÏÏÏÏÏÏ
Savings deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏ
139,589
154,414
271,286
Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,372,854
0.30
0.99
0.51
2.43
128,973
129,629
238,340
1,286,973
0.75
1.74
0.99
4.53
122,851
112,817
228,027
1,117,350
1.20
2.32
1.61
5.39
117,374
99,628
207,498
1,001,878
1.22
1.59
1.54
4.69
111,900
99,833
205,372
900,441
1.42
2.11
2.10
5.11
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,212,711
1.66% $2,013,507
3.17% $1,793,020
3.79% $1,595,391
3.33% $1,484,203
3.58%
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 faster growth than other
types of deposits. Nevertheless, management considers our Jumbo CDs generally less volatile primarily due to
the following reasons:
‚ approximately 68.48% of the Bank's Jumbo CDs have stayed with the Bank for more than two years;
‚ the Jumbo CD portfolio continued to be diversiÑed with 4,684 individual accounts averaging
approximately $192,000 per account owned by 3,266 individual depositors as of January 14, 2003; and
45
‚ 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:
‚ to oÅer only retail interest rates on Jumbo CDs;
‚ to oÅer new transaction-based products, such as the tiered money market deposits;
‚ to promote transaction-based products from time to time, such as demand deposits; and
‚ to seek to diversify the customer base by branch expansion and/or acquisition as opportunities arise.
Almost 87.94% of our Jumbo CDs mature within one year as of year-end 2002. 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, 2002:
Time Deposits of $100,000 or More by Maturity
Less than three months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Three to six months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Six to twelve months ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Over one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
At December 31,
2002
(In thousands)
$393,032
270,500
204,249
119,005
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$986,786
Maturities of Time Deposits with a Remaining Term
of More Than One Year for Each
of the Five Years Following December 31, 2002
(In thousands)
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$146,464
78,779
616
402
82
Borrowings
Borrowings include securities sold under agreements to repurchase (""reverse repurchase agreements''),
federal funds purchased, and funds obtained as advances from the Federal Home Loan Bank (""FHLB'') of
San Francisco.
Securities sold under agreements to repurchase at December 31, 2002, equaled $28.50 million, an
increase of $6.39 million or 28.88% from $22.11 million at December 31, 2001. The weighted-average interest
rate during 2002 was 3.08% compared to 3.51% during 2001. The underlying collateral pledged for the
repurchase agreement consists of a U.S. government agency security with a carrying value of $29,972,000, and
a fair value of $31,172,000 as of December 31, 2002, which is held by a custodian, and maintained under the
Company's control. The $28.50 million balance at year-end was comprised of a reverse repurchase agreement
46
obtained in January 2002, which is long-term, and will mature in January 2004. 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 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average interest rate for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
$30,784
48,150
28,500
December 31,
2001
(In thousands)
$34,799
55,412
22,114
2000
$ 70,701
110,145
68,173
3.29%
3.08%
1.01%
3.51%
6.09%
6.25%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January in 2002, February 2001, and October 2000.
Advances from the Federal Home Loan Bank of San Francisco (""FHLB'') amounted to $50.00 million
at December 31, 2002, and $30.00 million at December 31, 2001. Of the Bank's $50.00 million in FHLB
advances outstanding at December 31, 2002, $10.00 million bearing interest at 4.90% was obtained in 1998
and matures on October 28, 2003, $20.00 million bearing interest at 3.48% was obtained in 2002 and matures
on February 27, 2004, and $20.00 million bearing interest 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
$287.96 million was up $41.95 million or 17.05% compared to $246.01 million at December 31, 2001. Our
stockholders' equity equaled 10.46% of total assets at December 31, 2002, compared 10.03% of total assets at
year-end 2001. The increase of $41.95 million or 17.05% in stockholders' equity was due to the following:
‚ an addition of $48.70 million from net income less payments of dividends on common stock of
$9.80 million;
‚ an increase of $2.34 million from issuance of additional common shares through the Dividend
Reinvestment Plan and proceeds from exercise of stock options less the purchase of 27,500 shares of
treasury stock during 2002, at an average price of $34.37, totaling $945,000;
‚ an increase of $1.66 million in accumulated other comprehensive income, including:
‚ a favorable diÅerence of $1.33 million in the net unrealized holding gains on securities available-for-
sale, net of tax; and
‚ an increase of $326,000 from unrealized gains on cash Öow hedging derivatives, net of tax.
On March 22, 2002, our Board of Directors approved and announced a two-for-one stock split of the
Company's common stock, in the form of a 100% stock dividend, payable May 9, 2002, to stockholders of
record on April 19, 2002. The Board of Directors also approved a 12% increase in the quarterly cash dividend
from 12.5 cents per share to 14 cents per share on a post-split basis, payable April 16, 2002, to stockholders of
record on April 1, 2002.
On a post-split basis, we declared cash dividends of 12.5 cents per common share in January 2002 on
17,957,736 shares outstanding, cash dividends of 14 cents in April 2002 on 17,973,720 shares outstanding, cash
dividends of 14 cents in July 2002 on 18,001,002 shares outstanding, and cash dividends of 14 cents in October
2002 on 18,006,544 shares outstanding. Total cash dividends paid in 2002 amounted to $9.80 million.
47
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 2002 and on a post-split basis, the Company repurchased 27,500 shares at an average price
of $34.37 per share. On a post-split basis, cumulatively through December 31, 2002, the Company has
repurchased 305,300 shares of our common stock for $8.29 million.
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. The following information is provided on a post-split basis:
‚ On September 17, 1998, we granted 90,000 shares of common stock options with an exercise price of
$16.50 per share to eligible senior oÇcers and directors.
‚ On January 20, 2000, we granted 110,000 shares of common stock options with an exercise price of
$21.25 per share to eligible oÇcers and directors.
‚ On January 18, 2001, we granted 111,000 shares, and on March 15, 2001, we granted 1,800 shares of
common stock options with an exercise price of $30.10 per share to eligible oÇcers and directors.
‚ On February 21, 2002, we granted 113,440 shares of common stock options with an exercise price of
$32.55 per share to eligible oÇcers and directors.
‚ On January, 16, 2003, we granted 215,000 shares of common stock options with an exercise price of
$39.85 per share to eligible oÇcers and directors.
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.
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, 2002, is restricted to approximately $103,076,000 under this regulation.
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 2002, Tier 1 risk-based capital ratio of 11.93%, total risk-based capital ratio of 13.01%, and
Tier 1 leverage capital ratio of 10.11%, continued to place the Company 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 2001 were 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%.
A table displaying the Company and the Bank's capital and leverage ratios at year-end 2002 and 2001 is
included in Note 10 to the Consolidated Financial Statements.
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 other real estate owned. 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
48
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 $2.24 million or 23.59% to $7.25 million at year-end 2002 compared
to $9.48 million at year-end 2001. The decrease was due to a combination of the following:
‚ An increase of $1.78 million in loans past due 90 days or more and still accruing interest;
‚ A decrease of $3.11 million in non-accrual loans; and
‚ A decrease of $902,000 in other real estate owned.
As a percentage of gross loans plus other real estate owned, our non-performing assets decreased to 0.39%
at year-end 2002 from 0.57% at year-end 2001. The non-performing loan coverage ratio, deÑned as the
allowance for loan losses to non-performing loans, increased to 372.31% at year-end 2002, which was higher
than that of 302.42% at year-end 2001. The increase was primarily due to the reduction of $3.11 million in
non-accrual loans. On January 3, 2003, one accruing commercial mortgage loan past due 90 days or more, in
the amount of $1.10 million was paid oÅ, and on January 31, 2003, one non-accrual construction loan in the
amount of $1.66 million was paid oÅ.
49
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
2002
2001
1999
1998
December 31,
2000
(Dollars in thousands)
Accruing loans past due 90 days or more ÏÏÏÏÏÏÏÏÏ
Non-accrual loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,468
4,124
$
Total non-performing loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6,592
Real estate acquired in foreclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
653
689
7,238
7,927
1,555
$
589
14,696
$ 3,724
13,696
$ 4,683
13,090
15,285
17,420
5,174
4,337
17,773
10,454
Total non-performing assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 7,245
$ 9,482
$20,459
$21,757
$28,227
Troubled debt restructurings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-performing assets as a percentage of gross
$ 5,266
$ 4,474
$ 4,531
$ 4,581
$ 4,642
loans and other real estate owned at year-endÏÏÏÏ
0.39%
0.57%
1.39%
1.71%
2.85%
Allowance for loan losses as a percentage of non-
performing loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
372.31% 302.42% 143.72% 111.95%
89.86%
(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 past Ñve years
is presented below:
Non-accrual Loans
Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$321
34
Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$287
$823
96
$727
$1,408
627
$1,396
234
$1,395
112
$ 781
$1,162
$1,283
2002
2001
2000
1999
1998
(In thousands)
Troubled Debt Restructurings
Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$338
258
Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 80
$409
370
$ 39
$ 422
407
$ 429
414
$ 421
412
$
15
$
15
$
9
2002
2001
2000
1999
1998
(In thousands)
Non-accrual loans
Non-accrual loans were $4.12 million at year-end 2002 and $7.24 million at year-end 2001. Non-accrual
loans at December 31, 2002, consisted mainly of thirteen commercial loans totaling $1.93 million, one
construction loan totaling $1.66 million, two commercial mortgage loans totaling $254,000, and three
residential mortgage loans totaling $264,000. The comparable numbers for 2001 were $4.85 million in sixteen
commercial loans, $1.82 million on one construction loan, $374,000 in two commercial mortgage loans, and
$189,000 in two residential mortgage loans. On January 31, 2003, one non-accrual construction loan in the
amount of $1.66 million was paid oÅ.
50
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, 2002
December 31, 2001
Real
Estate(1)
Commercial
Real
Estate(1)
Other
(In thousands)
Commercial
Other
Type of Collateral
Single/multi-family residence ÏÏÏÏÏÏÏÏÏ
Commercial real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LandÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
UCCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unsecured ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 386
132
1,658
Ì
Ì
Ì
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,176
$ 117
1,099
425
278
Ì
9
$1,928
$Ì
Ì
Ì
Ì
17
3
$20
$ 441
122
1,821
Ì
Ì
Ì
$2,384
$ 266
839
Ì
3,647
Ì
102
$4,854
$Ì
Ì
Ì
Ì
Ì
Ì
$Ì
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential
mortgage loans.
December 31, 2002
December 31, 2001
Real
Estate(1)
Commercial
Real
Estate(1)
Other
(In thousands)
Commercial
Other
Type of Business
Real estate development ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Wholesale/Retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Food/RestaurantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Import ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,658
Ì
Ì
Ì
Ì
518
$
96
1,557
13
127
Ì
135
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,176
$1,928
$Ì
Ì
Ì
Ì
Ì
20
$20
$1,821
122
Ì
Ì
Ì
441
$2,384
$
27
3,421
701
400
Ì
305
$4,854
$Ì
Ì
Ì
Ì
Ì
Ì
$Ì
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential
mortgage loans.
Commercial mortgage, real estate construction, and residential mortgage non-accrual loans
‚ $1.66 million of the balance represented one credit secured by Ñrst trust deed on land, which paid oÅ
on January 31, 2003.
‚ The remaining balance of $518,000 consisted of two credits secured by Ñrst trust deeds on one single-
family-residence and on one commercial property.
Commercial non-accrual loans
‚ UCC-1 Ñlings, mainly accounts receivable and inventories, secured Ñve loans totaling $278,000.
‚ The balance of $1.65 million consisted of six credits secured primarily by Ñrst trust deeds on multi-
family-residences or commercial buildings and warehouses, and one unsecured credit.
51
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, including those on non-accrual status, increased $1.93 million to $6.40 mil-
lion at December 31, 2002, compared to $4.47 million at December 31, 2001. At December 31, 2002, all
trouble debt restructured loans were performing under their revised terms, except for two credits totaling
$1.13 million, which were not delinquent, but management choose to placed both credits on non-accrual
status, due to credit concerns. These two credits are included with other non-accrual loans. The increase from
year-end 2001 was primarily due two credits totaling $5.35 million that were restructured during the year,
partially oÅset by credits that paid-oÅ during the year or were performing for an extended period of time and
removed from troubled debt restructured classiÑcation.
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 $19.59 million at year-end 2002, compared to
$19.35 million at year-end 2001. The average balance of impaired loans was $24.76 million in 2002 and
$23.47 million in 2001. Interest collected on impaired loans totaled $1.22 million in 2002, and $959,000 in
2001. On January 31, 2003, one impaired construction loan on non-accrual status, with a recorded investment
of $1.66 million, was paid oÅ.
The following tables present a breakdown of impaired loans and the related allowances as of the dates
indicated:
At December 31, 2002
At December 31, 2001
Recorded
Investment
Allowance
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real Estate(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 3,883
15,707
1
$ 629
2,356
1
Net
Balance
Recorded
Investment
(In thousands)
$ 3,254
13,351
Ì
$ 6,924
12,426
Ì
Allowance
Net
Balance
$2,143
1,764
Ì
$ 4,781
10,662
Ì
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$19,591
$2,986
$16,605
$19,350
$3,907
$15,443
(1) Real Estate includes commercial mortgage loans, real estate construction loans, and residential mortgage
loans.
In addition, accruing loans past due 90 days or more had an outstanding balance of $2.50 million at year-
end 2002 compared with $689,000 at year-end 2001. On January 3, 2003, one accruing commercial mortgage
loan past due 90 days or more, with a recorded investment of $1.10 million, was paid oÅ.
52
Loan Concentration
We experienced no loan concentrations to multiple borrowers in similar activities which exceeded 10% of
total loans as of December 31, 2002.
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
The Bank's management is committed to managing the risk in its loan portfolio by maintaining the
allowance for loan losses at a level that is considered to be equal to the estimated and known risks in the loan
portfolio. With a risk management objective, the Bank's management has an established monitoring system
that is designed to identify impaired and potential problem loans, and to permit periodic evaluation of
impairment and the adequacy level 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. The nature of
the process by which the Bank determines the appropriate allowance for loan losses requires the exercise of
considerable judgment. Additions to the allowance for loan losses are increased by charges to the provision for
loan losses. IdentiÑed credit exposures that are determined to be uncollectible are charged against the
allowance for loan losses. Recoveries of previously charged oÅ amounts, if any, are credited to 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 materially from forward-looking statements or historical performance.
53
The following table sets forth the information relating to the allowance for loan losses, charge-oÅs, and
recoveries for the past Ñve years:
Allowance for Loan Losses
2002
Amount Outstanding as of December 31,
2000
1999
(Dollars in thousands)
2001
1998
Balance at beginning of year ÏÏÏÏÏÏÏÏÏ
Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans charged-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries of charged-oÅ loansÏÏÏÏÏÏÏ
$
$
$
23,973
6,000
(5,976)
546
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
Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
24,543
$
23,973
$
21,967
$
19,502
$ 15,970
Average net loans outstanding during
year ended ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ratio of net charge-oÅs to average net
loans outstanding during the year ÏÏÏ
Provision for loan losses to average net
loans outstanding during the year ÏÏÏ
Allowance to non-performing loans at
year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance to gross loans at year-end ÏÏ
$1,724,796
$1,519,548
$1,313,177
$1,088,578
$907,639
0.31%
0.29%
0.13%
0.06%
0.33%
0.35%
0.42%
0.32%
0.39%
0.40%
372.31%
1.31%
302.42%
1.44%
143.72%
1.50%
111.95%
1.54%
89.86%
1.63%
Commercial loans accounted for $5.66 million in charge-oÅs during 2002, primarily as a result of one
credit totaling $3.62 million that was identiÑed and reported as a non-accrual loan during the Ñrst quarter
2002. The charge-oÅ of this credit was a direct result of the borrower's Ñling a petition for protection under a
Chapter 7 Bankruptcy. During 2002, total charge-oÅs equaled $5.98 million, an increase of $1.31 million or
28.16% over total charge-oÅs of $4.66 million in 2001. Net charge-oÅs for 2002 amounted to $5.43 million or
0.31% of average net loans outstanding at December 31, 2002. By comparison, the total net charge-oÅs for
2001 were $4.37 million, or 0.29% of average net loans outstanding.
The following tables summarizes loan charge-oÅ and recovery activity by loan type in the allowance for
loan losses for the years indicated:
Loan Charged-oÅ by Loan Type
Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percentage of total commercial loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
$5,663
2001
Year Ended December 31,
2000
(Dollars in thousands)
$ 537
1999
$1,116
$3,465
1998
$2,394
1.00%
0.68%
0.12%
0.28%
0.65%
Real estate loans(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percentage of total real estate loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 163
$1,080
$1,066
$ 388
$ 873
0.01%
0.09%
0.11%
0.05%
0.15%
Installment and other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Percentage of total installment and other loans(1)ÏÏÏÏÏÏÏ
$ 150
$ 118
$ 302
$ 227
$ 252
0.94%
0.56%
1.09%
0.88%
0.86%
Total loans charged-oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,976
$4,663
$1,905
$1,731
$3,519
(1) Percentages were calculated based on year-end balances.
(2) Real estate loans include commercial mortgage loans, real estate construction loans, and residential
mortgage loans.
54
Recoveries by Loan Type
Commercial loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate loans(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Installment and other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
$242
268
36
Year Ended December 31,
2000
1999
2001
(In thousands)
$ 74
3
93
$ 761
181
121
$196
11
89
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$546
$296
$170
$1,063
1998
$188
280
42
$510
(1) Real estate loans include commercial mortgage loans, real estate construction loans, and residential
mortgage loans.
Our allowance for loan losses consists of the following:
‚ SpeciÑc allowance: For impaired loans, we provide speciÑc allowances based on an evaluation of
impairment, and for each criticized 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 total allowance for loan losses consists of the above two components: speciÑc and general. To
determine the adequacy of the allowance in each of these two components, the Bank employs two primary
methodologies, the classiÑcation migration and the individual loan review analysis methodology. These
methodologies support the basis for determining allocations between the various loan categories and the
overall adequacy of the Bank's allowance to provide for probable losses inherent in the loan portfolio. These
methodologies are further supported by additional analysis of relevant factors such as the historical losses in
the portfolio, trends in the non-performing/non-accrual loans, loan delinquencies, the volume of the portfolio,
peer group comparisons, and federal regulatory policy for loan and lease losses. Other signiÑcant factors of
portfolio analysis include changes in lending policies/underwriting standards, portfolio composition, and
concentrations of credit, and trends in the national and local economy.
With these above methodologies, the speciÑc allowance is for those loans internally classiÑed and risk
graded as Special Mention, Substandard, Doubtful, or Loss. Additionally, the Bank's management allocates a
speciÑc allowance for ""Impaired Credits,'' in accordance with SFAS No. 114 ""Accounting by Creditors for
Impairment of a Loan.'' The level of the general allowance is established to provide coverage for
management's estimate of the credit risk in the loan portfolio by various loan segments not covered by the
speciÑc allowance.
55
The table set forth below reÖects management's allocation of the allowance for loan losses by loan
category and the ratio of each loan category to the total loans as of the dates indicated:
Allocation of Allowance for Loan Losses
As of December 31,
2002
2001
2000
1999
1998
Percentage of
Loans in Each
Category
to Average
Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans
Percentage of
Loans in Each
Category
to Average
Percentage of
Loans in Each
Category
to Average
Percentage of
Loans in Each
Category
to Average
Percentage of
Loans in Each
Category
to Average
Type of Loans:
Commercial
(Dollars in thousands)
loans ÏÏÏÏÏÏÏÏ $11,812
29.73% $11,504
29.61% $10,231
30.00% $ 8,546
35.06% $ 7,468
38.58%
Residential
mortgage loans
1,466
13.26
2,181
14.86
808
15.61
1,743
18.15
1,901
18.46
Commercial
mortgage loans
8,458
47.25
7,702
42.19
8,564
45.25
7,781
39.95
5,815
35.16
Real estate
construction
loans ÏÏÏÏÏÏÏÏ
Installment loans
Other loans ÏÏÏÏ
2,610
181
16
8.80
0.92
0.04
2,386
11.73
1,855
197
3
1.57
0.04
380
129
7.11
1.99
0.04
843
464
125
4.30
2.46
0.08
365
414
7
4.77
2.98
0.05
Total ÏÏÏÏÏÏÏÏ $24,543
100.00% $23,973
100.00% $21,967
100.00% $19,502
100.00% $15,970
100.00%
Total commercial loans have grown from $506.13 million at year-end 2001 to $563.68 million at year-end
2002, with the large portion of this growth being in asset-based lending category, including the issuance of
letters of credit through the Bank's International Department. While this segment has been steadily growing
(with the exception of the Ñrst quarter of 2002), the growth rate has been slower during the fourth quarter
with a continued sluggish economic recovery as evidenced by an $11.39 million increase during the fourth
quarter of 2002 compared with $21.68 million growth during the third quarter of 2002. Delinquencies over
90 days in this segment correspondingly peaked in the fourth quarter of 2001, at $15.28 million, before
trending downward to $9.44 million by year-end 2002, as the growth rate subsided. Allocated allowances
increased slightly from $11.50 million at year-end 2001, to $11.81 million at year-end 2002, after applying loan
charge-oÅs of $5.66 million during 2002. However, in view of the recent losses experienced by the Bank in the
asset-based lending category, management has deemed it prudent to increase the minimum loss rate allocation
to 2.25% as compared to the 2.20% on September 30, 2002, since there is a certain degree of continued
economic sluggishness and uncertainty in the direction of the economy.
Residential mortgage loans decreased to $231.37 million at December 31, 2002, from $235.91 million at
year-end 2001, after rising to $232.22 million at September 30, 2002, based on a 1% growth level in
originations, and based on usually low interest rates during the third quarter and fourth quarter from rate
sensitive borrowers. While delinquencies over 90 days have been trending downward from the fourth quarter of
2001, rising unemployment in a sluggish early stage economic recovery in the fourth quarter of 2002, has
caused a corresponding $1.53 million rise in delinquency in the fourth quarter of 2002, compared with
$880,000 at the end of the third quarter 2002. Even though actual charge-oÅs have not occurred in this
segment over the last year, management has nevertheless determined that it is prudent to allocate an
allowance for $1.47 million at year-end 2002 in this loan category, in view of the current origination volume
and the rise in credit risks associated with increases in unemployment during a sluggish recovery in the
economy.
Commercial mortgage loans grew 27.77% or $205.01 million during 2002 while the allowance allocation
increased $756,000 or approximately 9.82% to a level of $8.46 million from $7.70 million in 2001. Most of the
growth in this loan segment during 2002 took place in the third and fourth quarters, and was primarily a direct
result of unusually low interest rates to rate sensitive borrowers. Although the volume has increased,
56
there has been no concentration of hotels or motels, but has consisted primarily of shopping centers,
commercial oÇce buildings, warehouses, apartment structures, and represents approximately 50.25% of the
Bank's gross loans. Delinquencies over 90 days in this loan segment have ranged from a high of $11.19 million
in the Ñrst quarter of 2002, to a low of $3.33 million in the second quarter of 2002, with an average delinquent
amount of $7.26 million. Total delinquency in this segment rose to $9.73 million in the fourth quarter 2002,
but was 8.87% below the year-end 2001 total of $10.68 million. Within this delinquency aggregate, 90° day
delinquent accounts have fallen from $2.83 million at March 31, 2002, to $443,000 at December 31, 2002, a
substantial decrease, while non-accrual loans have also decreased from $374,000 at year-end 2001, to $254,000
by the end of 2002. Loan losses have been nominal during the last nine quarters despite the variance in
delinquencies. However, management expects that the debt service capability of borrowers during 2003 will
depend to some degree on the direction of the economy, which, thus far, has shown only a gradual recovery
from the recent recession. Because of the increased volume in this loan segment coupled with a sluggish
recovery, and an uncertain degree of impact on the real estate variables (such as appreciation, rate sensitivity,
debt service capability, and long-term proÑtability) that drive these types of loans, management has reached
the conclusion to increase the allowance in this segment by a prevailing minimum risk factor allocation rate.
Unlike the commercial mortgage loans, the outstanding construction loans have continued to decrease in
2002, and as of the fourth quarter the balance of this segment was $122.77 million compared to $166.42 mil-
lion at year-end 2001. Delinquency over 90 days in this segment has correspondingly decreased from
$11.49 million at year-end 2001, to $3.97 million by the fourth quarter 2002, with the reduction in loan volume
and the resolution of two of four major delinquent loans. Non-accrual loans also moved downward from the
2001 level of $1.82 million to $1.66 million. However, even though the loan volume and delinquency have
decreased, the allocated allowances have remained approximately $2.61 million for the last two consecutive
quarters of 2002. While the allowance has decreased from the Ñrst quarter of 2002, the Bank believes it to be
prudent to hold the present level of allocation based on the inherent risk nature in this loan segment. More
speciÑcally, the primary rationale by the Bank's management for not correspondingly decreasing the
allowances as of year-end 2002 in this loan segment is based upon the longer-term higher risk nature of
construction projects that have the potential of exceeding the projected interest reserves. Thus far, manage-
ment has not observed borrowers encountering above normal diÇculty in obtaining permanent takeout
Ñnancing, sizable concentration of commercial oÇce building loans, and an increased number of extensions to
the borrower for completion of construction. Management believes that the risk allocation for the construction
portfolio should be viewed from a longer economic view given the current weak leasing market for oÇce
buildings in Southern and Northern California.
Allocated allowances for installment and consumer loans have been gradually declining as the total loan
volume in this segment has declined from $20.32 million at year-end 2001 to $15.57 million at year-end 2002.
The Bank has not actively competed for this type of loan, but has provided such loans, when necessary, as an
accommodation to Bank customers. Delinquencies over 90 days have moved downward nominally from
$122,000 at year-end 2001 to $22,000 at year-end 2002. Loans delinquent over 90 days have been eliminated
for the last two quarters of 2002. Loans on non-accrual have been nominal throughout 2001 and 2002.
Similarly, the charged-oÅ loans have also been nominal with the decreasing loan volume. Management has
therefore correspondingly continued to move the allocated allowances downward with the decrease in loan
volume from $197,000 at year-end 2001 to the present level of $181,000 at year-end 2002.
Allowances for other risks of probable loan losses that amounted to $2.06 million as of December 31,
2002, compared to $1.67 million as of December 31, 2001 have been included in the allocations above. The
components of the other risks that have a potential of aÅecting the Bank's portfolio are comprised of two basic
elements. First, the Bank has set aside funds to cover the risk factors of a recessionary state of the national
economy and the uncertain economic forecast in the short-run. Thus far, the government's eÅorts to stimulate
the economy through various monetary policies such as tax cuts and aggressive lowering of interest rates over
the last one and three-quarter years have only resulted in the early stage of a sluggishly uncertain recovery as
evidenced by eroding consumer conÑdence, weak demand for non-durables, and the lack of business
investment. The September 11th event and the current corporate scandals in various large companies and
discussions of probable war against Iraq have clouded the economic outlook instead of giving clear visibility to
57
the direction of the economy. The economy could experience a second downturn and companies will not be
able to avoid further substantial short falls in sales and earnings, business closures and downsizing, which will
result in increased risk to the Bank's portfolio. The second component of other portfolio risk is the potential
errors in loan classiÑcation and review methodologies. Based on these two above components of other risks,
management has increased the allocation of the allowance. Also, 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
materially from forward-looking statements, or historical performance.
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 FHLB. At year-end 2002, our liquidity
ratio (deÑned as net cash, short-term and marketable securities to net deposits and short-term liabilities)
decreased slightly to 29.14%, compared to 30.76% at year-end 2001.
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 six brokerage Ñrms whereby up to
$280.00 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, 2002, the Bank had a total approved credit line with the FHLB of San Francisco
totaling $643.63 million. The total credit outstanding with the FHLB of San Francisco at December 31, 2002,
was $50.00 million. These advances are non-callable and bear Ñxed interest rates, with $10.00 million
maturing in 2003, $20.00 million maturing in 2004, and $20.00 million maturing in 2005. These borrowings are
secured by residential mortgages. ""See Note 8 to the Consolidated Financial Statements.''
Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold,
securities sold under agreements to repurchase and securities available-for-sale. At December 31, 2002, such
assets at fair value totaled $267.27 million, with $105.91 million pledged as collateral for borrowings and other
commitments. The remaining $161.36 million was available as additional liquidity, of which $142.36 was AFS
securities, available to be pledged as collateral for additional borrowings.
We had a significant portion of our time deposits maturing within one year or less as of December 31, 2002.
Management anticipates that there may be some outflow of these deposits upon maturity due to the keen
competition in the Bank's marketplace. However, based on our historical runoff experience, we expect the
outflow will be minimal and can be replenished through our normal growth in deposits. Management believes all
the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs.
The Bancorp 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 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 11 Commitments and Contingencies of the Notes to Consolidated Financial Statements,
in this Annual Report on Form 10-K.
Recent Accounting Pronouncements
EÅective January 1, 2002, the Company adopted Statement of Financial Accounting Standards
(""SFAS'') No. 142, ""Goodwill and Other Intangible Assets.'' SFAS No. 142 requires that goodwill no longer
be amortized to earnings, but instead be reviewed annually for impairment. Upon adoption of SFAS No. 142,
the Company was 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
58
Ñrst interim period. In addition, to the extent an intangible asset is identiÑed as having an indeÑnite useful life,
the Company was required to test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142. Any impairment loss is 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. Upon adoption, the Company discontinued the amortization of goodwill and
reclassiÑed $2.33 million from goodwill to core deposit intangible, which is classiÑed under other assets in the
Statements of Financial Condition. The Company also reassessed the useful lives and residual value of all
intangible assets acquired in purchase business combinations, and tested goodwill for impairment, and found
no impairment.
In August 2001, the Financial Accounting Standards Board (""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 assets 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 are no longer measured on a net
realizable value basis, and future operating losses are 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 Decem-
ber 15, 2001. The Company adopted SFAS No. 144 eÅective January 1, 2002. Adoption of SFAS No. 144 did
not have any impact on the results of operations or Ñnancial condition of the Company.
In April 2002, the FASB issued SFAS No. 145, ""Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.'' SFAS No. 145 rescinds the
SFAS No. 4 requirement that all gains and losses from extinguishment of debt be aggregated and, if material,
classiÑed as an extraordinary item, net of the related income tax eÅect. Henceforth, those gains and losses
from extinguishment of debt are to be classiÑed in accordance with the criteria in APB Opinion No. 30,
""Reporting the Results of Operations Ì Reporting the EÅects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.'' SFAS No. 64, which amended
SFAS No. 4, is no longer necessary with the rescission of SFAS No. 4. SFAS No. 44 was issued to establish
accounting requirements for the eÅects of transition to the provisions of the Motor Carrier Act of 1980. Since
the transition has been completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13
to require that certain lease modiÑcations that have economic eÅects similar to sale-leaseback transactions to
be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 is eÅective for Ñnancial
statements for periods beginning after May 15, 2002, and earlier adoption is recommended. The Company
adopted SFAS No. 145 eÅective May 15, 2002. Adoption of SFAS No. 145 did not have any impact on the
results of operations or Ñnancial condition of the Company.
In July 2002, FASB issued SFAS No. 146, ""Accounting for Costs Associated with Exit or Disposal
Activities''. SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a
disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under SFAS No. 146, a company will
record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be
measured at fair value. A liability is incurred when an event leaves the company little or no discretion to avoid
transferring or using the assets in the future. Previous accounting guidance was provided by the Emerging
59
Issues Task Force (""EITF'') Issue No. 94-3, ""Liability Recognition for Certain Employee Termination
BeneÑts and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).''
SFAS No. 146 is eÅective for exit or disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 did have a material impact on the Company's results
of operations or Ñnancial condition.
In October 2002, the FASB issued SFAS No. 147, ""Acquisitions of Certain Financial Institutions.''
SFAS No. 147 is an amendment of FASB statements No. 72 and 144 and FASB Interpretation No. 9. The
Statement addresses the Ñnancial accounting and reporting for the acquisition of all or part of a Ñnancial
institution. It also provides guidance on the accounting for the impairment or disposal of acquired long-term
customer relationship intangible assets. The provisions in paragraph 5 of this Statement are eÅective for
acquisitions for which the date of acquisition is on or after October 1, 2002. The adoption of this statement had
no impact on the Company.
In December 2002, the FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensation Ì
Transition and Disclosure,'' an amendment of FASB Statement No. 123. This Statement amends FASB
Statement No. 123, ""Accounting for Stock-Based Compensation,'' to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim Ñnancial statements. Certain of the disclosure modiÑcations are
required for Ñscal years ending after December 15, 2002, and are included in the notes to the consolidated
Ñnancial statements.
In November 2002, the FASB issued Interpretation No. 45, ""Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34.'' This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and annual Ñnancial statements about its
obligations under guarantees issued. The Interpretation also clariÑes that a guarantor is required to recognize,
at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition
and measurement provisions of the Interpretation are applicable to guarantees issued or modiÑed after
December 31, 2002, and are not expected to have a material eÅect on the Company's Ñnancial statements.
The disclosure requirements are eÅective for Ñnancial statements of interim and annual periods ending after
December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, ""Consolidation of Variable Interest Entities,''
an interpretation of Accounting Research Bulletin No. 51. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as deÑned in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For public enterprises, such as the
Company, with a variable interest in a variable interest entity created before February 1, 2003, the
Interpretation applies no later than the beginning of the Ñrst interim or annual reporting period beginning after
June 15, 2003. The application of this Interpretation is not expected to have a material eÅect on the
Company's Ñnancial statements. The Interpretation requires certain disclosures in Ñnancial statements issued
after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes eÅective.
As of December 31, 2002, the Company owned interests in two limited partnerships, for which it is
reasonably possible that the limited partnerships may be construed to be variable interest entities subject to
consolidation under Interpretation No. 46. Both of these investments were formed for the purpose of investing
in low-income housing projects, which qualify for federal low-income housing tax credits and/or California tax
credits, and at December 31, 2002, the carrying amount of those investments in real estate was $4.95 million.
As of December 31, 2002, the Company had fully satisÑed all capital commitments required under these two
investments in real estate, and in addition, under the terms of both limited partnership agreements, the
Company is not liable for the debts, liabilities, contracts, or any other obligation of these limited partnerships.
Application of Interpretation No. 46 for the Company will be the third quarter of 2003. The Company has not
60
completed its analysis to determine the impact to the Company in adopting the application of Interpretation
No. 46. However, the Company expects that the adoption will not have a material impact on the Company's
results of operations or Ñnancial position.
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 in those periods. Management believes that the allowance
for loan losses at December 31, 2002, 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 costs 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 changes 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
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 ""Risks Elements of the Loan Portfolio'' and ""Market
Risk.''
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 operations of the Company is reÖected in increased operating costs. Virtually all of our
assets and liabilities are monetary in nature. As a result, interest rates have a more signiÑcant impact on our
61
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 in Texas, 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. In 2002, we opened a new branch in Brooklyn, New York City, and one in
Sacramento, California. In addition, with China's accession into the World Trade Organization and its
increasing importance in the world economy, we opened a representative oÇce in Shanghai, China. 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 other intangible assets with Ñnite lives.
The Company Could Be Adversely AÅected by Potential Changes in California Tax Law and Delays in
Implementation of Its Strategy.
Our eÅective income tax rate was lower in 2002, 2001, and 2000 due in large part to income tax beneÑts
derived from a registered investment company subsidiary of the Bank. We had relied on the California tax law
related to registered investment companies and on an outside tax opinion. In January 2002, a change to that
law was proposed that would have denied these tax beneÑts retroactively for the earlier years, as well as
prospectively for future years. This proposed change was not enacted, but another proposal was recently
introduced in the California Legislature, which would deny such tax beneÑts from and after January 1, 2003.
In December, 2002, we decided to deregister the registered investment company and, in January, 2003,
we applied to the Securities and Exchange Commission for such deregistration. Also in January, 2003, as an
alternative to the registered investment company, we applied for regulatory approval to create a real estate
investment trust. We received such regulatory approval in February, 2003, and have started operating the real
estate investment trust and building up its assets. While the real estate investment trust should provide some
tax beneÑts in 2003, our eÅective income tax rate for 2003 is expected to be higher than the rate in the past
few years. The actual rate for 2003 will depend to some extent on the timing of the build up in the asset levels
of the trust, as well as on the interest rate and regulatory environment.
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 Nevada, Texas, and New York. 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, such as, the currently unknown impact of the California budged deÑcit. These events could
62
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.
Real estate securing our lending activities 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 risk 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.
63
Adverse Economic Conditions in Asia Could Cause Us to Incur Losses.
It is diÇcult to predict the behavior of the Asian economy. The U.S. economic policies, military tensions,
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.
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 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
64
the fact that interest-earning assets and interest-bearing liabilities do not reprice 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 time frame. 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, 2002. 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 28.99% within three months and 4.40% within one year at year-end 2002, compared with a positive
18.67% within three months and a negative 5.18% within one year at year-end 2001.
Interest Rate Sensitivity
December 31, 2002
Interest Rate Sensitivity Period
Within
3 Months
Over 3 Months
To 1 Year
Over 1 Year
to 5 Years
Over
5 Years
Non-interest
Sensitive
Total
(Dollars in thousands)
Interest-Earning Assets:
Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal funds sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏ
Securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏ
Loans receivable
Commercial loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Residential mortgage loans ÏÏÏÏÏÏÏÏÏÏ
Commercial mortgage loans ÏÏÏÏÏÏÏÏÏ
Real estate construction loansÏÏÏÏÏÏÏÏ
Installment loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total loans, gross(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest-earning assets, net ÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
553
19,000
27,517
Ì
492,768
57,329
728,867
117,237
2,641
443
1,399,285
Ì
$1,446,355
Interest-bearing Liabilities
Deposits:
Demand ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Money market and NOW(2) ÏÏÏÏÏÏÏÏ
Savings(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TCDs under $100 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TCDs $100 and over ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ì
13,660
11,717
227,460
395,102
647,939
$
Ì
Ì
10,201
19,712
55,917
29
5,823
3,878
4,965
Ì
70,612
Ì
$ 100,525
$
Ì
47,938
62,679
183,964
473,247
767,828
65
$
Ì
Ì
178,628
122,642
5,696
6,470
63,593
Ì
7,947
Ì
83,706
Ì
$384,976
$
Ì
124,871
144,401
13,714
118,437
401,423
$
Ì
Ì
31,927
317,098
7,366
167,279
144,854
Ì
Ì
1
319,500
Ì
$668,525
$
Ì
123,196
71,429
Ì
Ì
194,625
$
70,224
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
83,393
$ 153,617
$ 302,828
Ì
Ì
Ì
Ì
302,828
$
70,777
19,000
248,273
459,452
561,747
231,107
943,137
121,115
15,553
444
1,873,103
83,393
$2,753,998
$ 302,828
309,665
290,226
425,138
986,786
2,314,643
December 31, 2002
Interest Rate Sensitivity Period
Within
3 Months
Over 3 Months
To 1 Year
Over 1 Year
to 5 Years
Over
5 Years
Non-interest
Sensitive
Total
(Dollars in thousands)
Securities sold under agreements to
repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Advances from Federal Home Loan
BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-interest-bearing other liabilities ÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and stockholders' equity
Interest sensitivity gap ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative interest sensitivity gap ÏÏÏÏÏÏÏÏ
Gap ratio (% of total assets)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative gap ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
28,500
Ì
Ì
28,500
Ì
Ì
Ì
$ 647,939
$ 798,416
$ 798,416
28.99%
28.99%
10,000
Ì
Ì
$ 777,828
$(677,303)
$ 121,113
(24.59)%
4.40%
40,000
Ì
Ì
$469,923
$(84,947)
$ 36,166
Ì
Ì
Ì
$194,625
$473,900
$510,066
(3.08)%
1.31%
17.21%
18.52%
Ì
72,894
287,961
$ 663,683
$(510,066)
Ì
$
(18.52)%
Ì%
50,000
72,894
287,961
$2,753,998
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
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, 2002, 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 7.00%, 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 increase by 12.72%. 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 7.54%, 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 16.19%.
66
The Company's 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, 2002, 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
16.56%, and conversely, if interest rates were to decrease instantaneously by 200 basis points, the simulation
indicated that the net economic value of our assets and liabilities would increase by 10.59%.
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, 2002, and 2001. 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
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,
2003
2004
2005
2006
2007
Thereafter
Total
(Dollars in thousands)
As of December 31,
2002
2001
Fair
Value
Total
Fair
Value
1.23% $
19,000 $ Ì $ Ì $ Ì $
Ì $
Ì $
19,000 $
19,000 $
13,000 $
13,000
Interest-Sensitive Assets:
Federal funds sold and
securities purchased under
agreements to resellÏÏÏÏÏÏ
Mortgage-backed securities
and collateralized
mortgage obligations ÏÏÏÏÏ
Investment securitiesÏÏÏÏÏÏÏ
Loans
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏ
Residential mortgageÏÏÏÏÏ
Commercial mortgageÏÏÏÏ
Real estate construction ÏÏ
Installment & others ÏÏÏÏÏ
5.64
5.34
4.34
6.39
5.81
5.17
6.16
Ì 1,282
Ì 4,590
3,090
232,222
57,430
28,336
92,174
74,371
97,427
116,803
241,184
466,541
246,019
480,036
171,872
451,442
175,184
456,588
433,666
29,639
14,774
15,443
11,219
46,639
142
365
2,204
1,818
3,214
221,606
75,993
88,029
44,340
49,435
110,812
563,376
108,763
10,781
Ì
Ì
7,961
3,389
2,557
1,395
Ì
517
Ì
Ì
1
Ì
551,380
229,349
931,985
119,544
15,820
2,568
552,070
239,157
944,882
119,784
15,847
2,568
498,280
231,755
725,643
163,591
20,763
1,928
498,486
234,002
726,234
163,906
20,831
1,928
Interest rate swap ÏÏÏÏÏÏÏÏÏ Ì
Ì
Ì 2,568
Ì
Interest-Sensitive Liabilities:
Other interest-bearing
deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Time depositsÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.40
1.97
Securities sold under
135,994
97,061
74,255
57,210
40,746
194,625
599,891
599,912
524,778
524,805
1,265,461
67,685
78,163
214
319
82
1,411,924
1,419,816
1,337,143
1,343,618
agreements to repurchase
3.29
Ì 28,500
Ì
Advances from the Federal
Home Loan Bank ÏÏÏÏÏÏÏ
4.55
10,000
20,000
20,000
OÅ-Balance Sheet Financial
Instruments:
Commitments to extend
credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Standby letters of credit ÏÏÏÏ
Other letters of credit ÏÏÏÏÏÏ
Bill of lading guaranteeÏÏÏÏÏ
Financial Derivatives
606,704
56,358
1,634
15,004
36,667
10,608
225
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
28,500
29,043
22,114
22,114
50,000
52,251
30,000
30,937
180
60,148
725,024
(424)
676,513
(349)
Ì
Ì
Ì
Ì
Ì
Ì
15,229
36,667
10,608
(54)
(196)
(71)
17,595
26,923
12,729
(64)
(91)
(72)
It is the policy of the Company 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
67
structured and managed, may provide a hedge against inherent interest rate risk in the Company's assets or
liabilities and against risk in speciÑc transactions. In such instances, the Company 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,'' 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 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 recognizes 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.
On March 21, 2000, we entered into an interest rate swap agreement with a major Ñnancial institution in
the notional amount of $20.00 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, 2002, was approximately nine quarters. At December 31, 2002, the
fair value of the interest rate swap was $2.27 million, exclusive of accrued interest, or $1.19 million net of tax
compared to $1.68 million, exclusive of accrued interest, or $869,000 net of tax, at December 31, 2001. For the
twelve months ended December 31, 2002, net amounts totaling $1.06 million 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 $1.16 million.
Item 8. Financial Statements and Supplementary Data
For Ñnancial statements, see ""Index to Consolidated Financial Statements'' on page 77.
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'' in our deÑnitive Proxy Statement relating to
our 2003 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
68
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'' in our
Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information under the captions ""Compensation of Directors'', ""Management 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 and Related Stockholder
Matters
The information set forth under the captions ""Principal Holders of Securities,'' ""Equity Compensation
Plan Information,'' and ""Election of Directors'' in our Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the captions ""Election of Directors'' and ""Certain Transactions'' in our Proxy
Statement is incorporated herein by reference.
Item 14. Controls and Procedures
The Company's principal executive oÇcer and principal Ñnancial oÇcer have evaluated the eÅectiveness
of the Company's ""disclosure controls and procedures,'' as such term is deÑned in Rule 13a-14(c) of the
Securities Exchange Act of 1934, as amended, (the ""Exchange Act'') within 90 days of the Ñling date of this
Annual Report on Form 10-K. Based upon their evaluation, the principal executive oÇcer and principal
Ñnancial oÇcer have concluded that the Company's disclosure controls and procedures are eÅective to ensure
that information required to be disclosed by the Company in the reports Ñled or submitted by it under the
Exchange Act is recorded, processed, summarized and reported within the time periods speciÑed in the SEC's
rules and forms, and include controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the Company's management,
including its principal executive oÇcer and principal Ñnancial oÇcer, as appropriate to allow timely decisions
regarding required disclosure.
There were no signiÑcant changes in the Company's internal controls or in other factors that could
signiÑcantly aÅect these controls subsequent to the date of such evaluation.
PART IV
Item 15. 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 77.
(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
69
3.1 Restated CertiÑcate of Incorporation. Previously Ñled with the Securities and Exchange Commis-
sion as an exhibit to Registration Statement No. 33-33767 and reÑled herein.
3.2 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, 2001, and incorporated
herein by reference.
3.3 CertiÑcate of Designation of Series A Junior Participating Preferred Stock. 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, 2001, and incorporated herein by reference.
4.1 Rights Agreement. 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.
10.1 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.
Previously Ñled with the Securities and Exchange Commission as an exhibit to Bancorp's Registra-
tion Statement on Form 10-K for the year ended December 31, 2001 and incorporated herein by
reference.
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.
10.4 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.*
22.1 Subsidiaries of Bancorp. 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, 2001 and
incorporated herein by reference.
23.1 Consent of Independent Auditors
99.1 CEO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSU-
ANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
99.2 CFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
* 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 2002.
70
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.
By:
/s/ DUNSON K. CHENG
Dunson K. Cheng
Chairman and President
Date: February 28, 2003
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
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 28, 2003
February 28, 2003
/s/ RALPH ROY BUON-CRISTIANI
Ralph Roy Buon-Cristiani
Director
February 28, 2003
/s/ KELLY L. CHAN
Kelly L. Chan
/s/ MICHAEL M.Y. CHANG
Michael M.Y. Chang
/s/ GEORGE T.M. CHING
George T.M. Ching
Director
February 28, 2003
Director
February 28, 2003
Director
February 28, 2003
71
Signature
Title
Date
/s/ WING K. FAT
Wing K. Fat
/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
Director
February 28, 2003
Director
February 28, 2003
Director
February 28, 2003
Director
February 28, 2003
Director
February 28, 2003
72
I, Dunson K. Cheng, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of Cathay Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this
annual report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining
disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and
c) presented in this annual report our conclusions about the eÅectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
a) all signiÑcant deÑciencies in the design or operation of internal controls which could adversely
aÅect the registrant's ability to record, process, summarize and report Ñnancial data and have identiÑed
for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the registrant's internal controls; and
6. The registrant's other certifying oÇcers and I have indicated in this annual report whether or not
there were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
signiÑcant deÑciencies and material weaknesses.
Date: February 28, 2003
By
/s/ DUNSON K. CHENG
Dunson K. Cheng
Chairman and President
73
I, Anthony M. Tang, certify that:
1.
I have reviewed this annual report on Form 10-K of Cathay Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this
annual report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining
disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and
c) presented in this annual report our conclusions about the eÅectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
a) all signiÑcant deÑciencies in the design or operation of internal controls which could adversely
aÅect the registrant's ability to record, process, summarize and report Ñnancial data and have identiÑed
for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the registrant's internal controls; and
6. The registrant's other certifying oÇcers and I have indicated in this annual report whether or not
there were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
signiÑcant deÑciencies and material weaknesses.
Date: February 28, 2003
By
/s/ ANTHONY M. TANG
Anthony M. Tang
Chief Financial OÇcer
74
Exhibit 99.1
CEO CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cathay Bancorp, Inc., and Subsidiary (the ""Company'') on
Form 10-K for the period ended December 31, 2002 as Ñled with the Securities and Exchange Commission on
the date hereof (the ""Report''), I, Dunson K. Cheng, chief executive oÇcer of the Company, certify, pursuant
to 18 U.S.C. Û 1350, as adopted pursuant to Û 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the Ñnancial
condition and results of operations of the Company.
Date: February 28, 2003
By
/s/ DUNSON K. CHENG
Dunson K. Cheng
Chairman and President
75
Exhibit 99.2
CFO CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cathay Bancorp, Inc., and Subsidiary (the ""Company'') on
Form 10-K for the period ended December 31, 2002 as Ñled with the Securities and Exchange Commission on
the date hereof (the ""Report''), I, Anthony M. Tang, chief Ñnancial oÇcer of the Company, certify, pursuant
to 18 U.S.C. Û 1350, as adopted pursuant to Û 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the Ñnancial
condition and results of operations of the Company.
Date: February 28, 2003
By
/s/ ANTHONY M. TANG
Anthony M. Tang
Chief Financial OÇcer
76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Condition at December 31, 2002 and 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Income and Comprehensive Income for each of the years ended
December 31, 2002, 2001 and 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Changes in Stockholders' Equity for each of the years ended
December 31, 2002, 2001 and 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 ÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Parent-only condensed Ñnancial information of Cathay Bancorp, Inc. as of December 31, 2002, 2001
and 2000 is included in Note 15 to the Consolidated Financial Statements in this Annual Report
on Form 10-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
78
79
80
81
82
83
109
77
The Stockholders and the Board of Directors of Cathay Bancorp, Inc.:
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of condition of Cathay Bancorp, Inc. and
subsidiary (the Company) as of December 31, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and
the results of their operations and their cash Öows for each of the years in the three-year period ended
December 31, 2002, in conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated Ñnancial statements, the Company changed its method of
accounting for goodwill and other intangible assets in 2002.
Los Angeles, California
January 15, 2003
KPMG LLP
78
CONSOLIDATED STATEMENTS OF CONDITION
As of December 31,
2002
2001
(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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities available-for-sale (amortized cost of $238,740 in 2002 and $241,788
$
70,777
19,000
89,777
$
73,514
13,000
86,514
in 2001) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
248,273
248,958
Securities held-to-maturity (estimated fair value of $477,782 in 2002 and
$382,814 in 2001) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LoansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized deferred loan fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
459,452
1,877,227
(24,543)
(4,606)
1,848,078
653
21,678
29,788
10,608
14,453
6,552
24,686
$2,753,998
374,356
1,667,905
(23,973)
(3,900)
1,640,032
1,555
17,727
29,403
12,729
14,545
6,552
20,743
$2,453,114
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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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, 18,305,255
issued and 17,999,955 outstanding in 2002, and 18,235,538 issued and
17,957,738 outstanding in 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost (305,300 shares in 2002, and 277,800 shares in 2001)
Additional paid-in-capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 302,828
$ 260,427
148,085
161,580
290,226
425,138
986,786
2,314,643
28,500
50,000
10,608
62,286
2,466,037
135,650
136,806
252,322
414,490
922,653
2,122,348
22,114
30,000
12,729
19,912
2,207,103
Ì
Ì
183
(8,287)
70,857
6,719
218,489
287,961
$2,753,998
182
(7,342)
68,517
5,063
179,591
246,011
$2,453,114
See accompanying notes to consolidated Ñnancial statements.
79
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31,
2001
(In thousands, except share and per share data)
2000
2002
INTEREST INCOME
Interest on loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest on securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest on securities held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest on federal funds sold and securities purchased
under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest on deposits with banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
INTEREST EXPENSE
Time deposits of $100 or moreÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other borrowed funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income before provision for loan losses ÏÏÏÏÏÏÏ
Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net interest income after provision for loan losses ÏÏÏÏÏÏÏÏ
NON-INTEREST INCOME
Securities gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Letters of credit commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depository service fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NON-INTEREST EXPENSE
Salaries and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Occupancy expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Computer and equipment expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Professional services expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FDIC and State assessments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Marketing expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other real estate owned (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operations of investments in real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other operating expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total non-interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other comprehensive income, net of tax:
Unrealized holding gains arising during the year ÏÏÏÏÏÏÏÏÏÏ
Cumulative adjustment upon adoption of SFAS No. 133ÏÏÏ
Unrealized gains on cash Öow hedge derivatives ÏÏÏÏÏÏÏÏÏÏ
Less: reclassiÑcation adjustments included in net incomeÏÏÏ
Total other comprehensive income, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏ
Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
107,693
14,847
20,676
813
32
144,061
23,351
13,388
3,181
39,920
104,141
6,000
98,141
1,926
1,947
5,755
6,543
16,171
25,716
3,730
3,225
4,036
501
1,405
(349)
2,038
3,015
43,317
70,995
22,295
48,700
3,290
Ì
326
1,960
1,656
50,356
$
$
120,591
13,762
23,627
1,316
56
159,352
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
Net income per common share
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
2.71
2.69
17,991,333
18,115,119
$
$
2.35
2.35
18,107,790
18,165,260
See accompanying notes to consolidated Ñnancial statements.
80
$
126,337
13,473
24,017
686
40
164,553
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
$
$
$
2.13
2.13
18,113,502
18,147,770
Ì
Ì
Ì
Ì
Ì
Ì
Ì
1,691
48
8
(7,965)
3,309
38,587
214,787
1,811
347
85
(7,342)
(9,057)
2,760
42,620
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
Common Stock
Number
of Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
(In thousands, except share and per share amounts)
Additional
Paid-in-
Capital
Retained
Earnings
Treasury
Stock
Total
Stockholders'
Equity
18,067,166
$180
$64,529
$(1,006)
$115,406
$ Ì $179,109
Balance at December 31,
1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuances of common stock Ì
Dividend Reinvestment
Plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock options exercised ÏÏÏÏÏÏ
Tax beneÑts from stock plans
Cash dividends of $0.440 per
share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in other
comprehensive income ÏÏÏÏ
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31,
78,660
2,904
Ì
Ì
Ì
Ì
1
Ì
Ì
Ì
Ì
Ì
1,690
48
8
Ì
Ì
Ì
Ì
Ì
Ì
Ì
3,309
Ì
Ì
Ì
Ì
(7,965)
Ì
38,587
2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
18,148,730
181
66,275
2,303
146,028
Issuances of common stock Ì
Dividend Reinvestment
Plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock options exercised ÏÏÏÏÏÏ
Tax beneÑts from stock plans
Purchases of treasury stockÏÏÏ
Cash dividends of $0.500 per
share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in other
comprehensive income ÏÏÏÏ
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31,
69,314
17,494
Ì
(277,800)
Ì
Ì
Ì
1
Ì
Ì
Ì
Ì
Ì
Ì
1,810
347
85
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
2,760
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì (7,342)
(9,057)
Ì
42,620
Ì
Ì
Ì
2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,957,738
182
68,517
5,063
179,591
(7,342)
246,011
Issuances of common stock Ì
Dividend Reinvestment
Plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock options exercised ÏÏÏÏÏÏ
Tax beneÑt from stock plans
Purchases of treasury stockÏÏÏ
Cash dividends of $0.545 per
share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in other
comprehensive income ÏÏÏÏ
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31,
54,515
15,202
Ì
(27,500)
Ì
Ì
Ì
1
Ì
Ì
Ì
Ì
Ì
Ì
1,897
294
149
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
1,656
Ì
Ì
Ì
Ì
Ì
(9,802)
Ì
48,700
Ì
Ì
Ì
(945)
Ì
Ì
Ì
1,898
294
149
(945)
(9,802)
1,656
48,700
2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,999,955
$183
$70,857
$ 6,719
$218,489
$(8,287)
$287,961
See accompanying notes to consolidated Ñnancial statements.
81
CONSOLIDATED STATEMENTS OF CASH FLOWS
2002
Year Ended December 31,
2001
(In thousands)
2000
Cash Flows from Operating Activities
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for losses on other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax (beneÑt) liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net gains on sale of loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net gain on sale of other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sales and calls of securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-downs on venture capital investmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of investment security premiums, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax beneÑts from stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (decrease) in deferred loan fees, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Decrease (increase) in accrued interest receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Increase) decrease in other assets, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase in other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Flows from Investing Activities
Purchase of investment securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from maturity and call of investment securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sale of investment securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of mortgage-backed securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from repayment and sale of mortgage-backed securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of investment securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from maturity and call of investment securities held-to-maturityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of mortgage-backed securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from repayment of mortgage-backed securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sale of loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase in loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of premises and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sale of other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase in investments in real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
48,700
$
42,620
$
38,587
6,000
Ì
(1,087)
1,596
(433)
(395)
(2,267)
341
773
198
149
706
92
(4,780)
43,461
44,354
93,054
6,373
Ì
(2,361)
1,472
Ì
(3,376)
(2,222)
65
575
864
85
(239)
1,088
2,200
2,840
7,364
49,984
4,200
71
637
1,500
Ì
(263)
(1,085)
Ì
(926)
815
8
544
(2,483)
(1,372)
9,666
11,312
49,899
(232,361)
221,792
22,036
Ì
4,425
(36,103)
13,226
(140,958)
66,980
15,347
(230,073)
(1,981)
1,704
(3,951)
(952,258)
865,867
22,179
Ì
8,421
(82,313)
60,295
(40,052)
63,155
Ì
(204,516)
(1,152)
6,995
(379)
(660,275)
678,368
21,443
(949)
6,955
(47,824)
17,519
(29,604)
38,802
Ì
(200,298)
(5,924)
3,187
(361)
Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(299,917)
(253,758)
(178,961)
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts, Money market and savings depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase in time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchaseÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (decrease) in borrowing from Federal Home Loan Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from shares issued to Dividend Reinvestment Plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from exercise of stock optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
117,514
74,781
6,386
20,000
(9,802)
1,898
294
(945)
Net cash provided by Ñnancing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
210,126
Increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents, beginning of the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,263
86,514
86,187
159,714
(46,059)
20,000
(9,057)
1,811
347
(7,342)
205,601
1,827
84,687
47,899
106,812
21,183
(20,000)
(7,965)
1,691
48
Ì
149,668
20,606
64,081
Cash and cash equivalents, end of the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
89,777
$
86,514
$
84,687
Supplemental disclosure of cash Öow information
Cash paid during the year for:
InterestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash investing activities:
Transfer to investment securities available-for-sale within 90 days of maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change in unrealized holding gain on securities available-for-sale, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative adjustment upon adoption of SFAS No. 133, net of taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change in unrealized gains on cash Öow hedge derivatives, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transfers to other real estate ownedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans to facilitate the sale of other real estate owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
$
$
$
$
40,440
17,046
$
$
68,020
5,561
10,964
1,330
$
$
Ì $
$
326
$
407
Ì $
11,722
1,891
566
303
1,057
5,400
$
$
$
$
$
$
$
$
72,644
17,411
59,858
3,309
Ì
Ì
5,347
1,515
See accompanying notes to consolidated Ñnancial statements.
82
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.
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., a registered investment company of the Bank. The Company has applied to the Securities and
Exchange Commission to deregister this registered investment company.
There are no operating business activities currently at Bancorp. 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.
Use of Estimates. The preparation of the consolidated Ñnancial statements in accordance with GAAP
requires management of the Company to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated Ñnancial statements and the reported amounts of revenues and expenses during the period.
Actual results could diÅer from those 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 2002 presentation. The following are descriptions of the more signiÑcant of these policies.
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 income,
and interest is subsequently recognized only to the extent cash is received. Interest collected on non-accrual
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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 the Bank 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Building improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture, Ñxtures and equipmentÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shorter of useful lives or the terms of the lease
15 to 45 years
5 to 20 years
3 to 25 years
Improvements are capitalized and amortized to occupancy expense based on the above table.
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
foreclosure. Gains on sales are recognized when certain criteria relating to the buyer's initial and continuing
investment in the property are met.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Investments in Real Estate. At December 31, 2002, the Company is a limited partner in seven diÅerent
partnerships that invest in low-income housing projects that qualify for Federal and/or State income tax
credits. As further discussed in Note 6, 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. Goodwill represents the excess of costs over fair value of assets of businesses acquired.
EÅective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (""SFAS'')
No. 142, ""Goodwill and Other Intangible Assets.'' Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indeÑnite useful life are not amortized, but instead are tested
for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144,
""Accounting for Impairment or Disposal of Long-Lived Assets.''
Upon adoption of SFAS No. 142, the Company was 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 was identiÑed as having an indeÑnite useful life, the Company was required to test the intangible asset
for impairment in accordance with the provisions of SFAS No. 142. Any impairment loss is 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. Upon adoption, the Company
discontinued the amortization of goodwill and reclassiÑed $2.33 million from goodwill to core deposit
intangible, which is classiÑed under other assets in the Statements of Financial Condition. The Company also
reassessed the useful lives and residual value of all intangible assets acquired in purchase business
combinations, and tested goodwill for impairment, and found no impairment.
Prior to 2002, goodwill, was amortized on a straight-line basis over the expected periods to be beneÑted
(generally 15 years). Amortization expense related to goodwill was $661,000 for the year ended December 31,
2001. The following table reconciles previously reported net income as if the provisions of SFAS No. 142 were
in eÅect during the past three years.
2002
2001
(In thousands,
except per share data)
2000
Net income
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add back goodwill amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$48,700
-
$42,620
661
$38,587
661
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$48,700
$43,281
$39,248
Basic net income per share
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2.71
2.71
Diluted net income per share
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.69
2.69
$2.35
2.39
2.35
2.38
$2.13
2.17
2.13
2.16
Core Deposit Premium. Core deposit premium, which represents the purchase price over the fair value
of the deposits acquired from other Ñnancial institutions, is amortized on a straight-line basis over the
expected periods to be beneÑted (generally 15 years). The Company assesses the recoverability of this
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
intangible asset by determining whether the amortization of the premium balance over its remaining life can
be recovered through the remaining deposit portfolio.
At December 31, 2002, the unamortized balance of core deposit premium was $2.13 million. Aggregate
amortization expense for core deposit premium for the year ended December 31, 2002, was $198,000.
Estimated amortization expense for the next Ñve years is: $188,000 in 2003, $188,000 in 2004, $188,000 in
2005, $176,000 in 2006, and $176,000 in 2007.
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.
The Company estimated the fair value of options granted in 2002, 2001, and 2000 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 2002 and 2001, and 33.88% in 2000 based on daily market prices for
the preceding four-year period, (iii) an expected dividend yield of 3.07% per share per annum in 2002, 1.66%
per share per annum in 2001, and 2.1% per share per annum in 2000, and (iv) a risk-free interest rate of 2.34%
in 2002, 3.89% in 2001, and 5.1% in 2000. The fair value of the options was calculated to be $7.75 per share for
options granted in 2002 at the date of grant, $8.78 per share for options granted in 2001 at the date of grant,
and $6.03 per share for options granted in 2000 at the date of grant, on a split-adjusted basis.
If the compensation cost for the Company's stock option plan had been determined with the fair value at
the grant dates, computed using the assumptions above, for awards under the Plan consistent with the method
of SFAS No. 123, ""Accounting for Stock-Based Compensation,'' the Company's net income and earnings per
share for 2002, 2001, and 2000 would have been reduced to the pro forma amounts indicated below.
2002
2001
(In thousands,
except per share data)
2000
Net income
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$48,700
48,490
$42,620
42,276
$38,587
38,457
Basic net income per share
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted net income per share
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.71
2.70
2.69
2.68
2.35
2.34
2.35
2.33
2.13
2.13
2.13
2.12
Stock Split. Earnings per share, dividends per share and average shares outstanding have been restated
for periods prior to the stock split distributed on May 9, 2002, to stockholders of record on April 19, 2002. The
par value of additional shares was capitalized by a transfer from retained earnings to common stock.
Derivative Financial Instruments.
It is the policy of the Company 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 Company's assets or liabilities and against risk in speciÑc transactions. In such
instances, the Company 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
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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
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.
On the date a derivative contract is entered into, the Company designates the derivative as either a hedge
of the fair value of a recognized asset or liability or of an unrecognized Ñrm commitment (fair value hedge), a
hedge of a forecasted transaction or the variability of cash Öows to be received or paid related to a recognized
asset or liability (cash Öow hedge), a foreign-currency fair-value or cash-Öow hedge (foreign currency hedge),
or a hedge of a net investment in a foreign operation. For all hedging relationships, the Company formally
documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge,
the hedging instrument, the item, the nature of the risk being hedged, how the hedging instrument's
eÅectiveness in oÅsetting the hedged risk will be assessed, and a description of the method of measuring
ineÅectiveness. This process includes linking all derivatives that are designated as fair-value, cash-Öow, or
foreign-currency hedges to speciÑc assets and liabilities on the statement of condition or to speciÑc Ñrm
commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly eÅective in
oÅsetting changes in fair values or cash Öows of hedged items. When it is determined that a derivative is not
highly eÅective as a hedge or that it has ceased to be a highly eÅective hedge, the Company discontinues
hedge accounting prospectively.
Upon adoption of SFAS No. 133, the Company recognizes 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.
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
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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. Amounts and share and per share data have been adjusted to reÖect a two-for-one stock split in the
form of a 100 percent stock dividend, eÅective May 9, 2002.
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. Accounting principles generally accepted 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.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (""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 assets 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 are no longer measured on a net
realizable value basis, and future operating losses no longer are 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 Decem-
ber 15, 2001. The Company adopted SFAS No. 144 eÅective January 1, 2002. Adoption of SFAS No. 144 did
not have any impact on the results of operations or Ñnancial condition of the Company.
In April 2002, the FASB issued SFAS No. 145, ""Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.'' SFAS No. 145 rescinds the SFAS
No. 4 requirement that all gains and losses from extinguishment of debt be aggregated and, if material,
classiÑed as an extraordinary item, net of the related income tax eÅect. Henceforth, those gains and losses
from extinguishment of debt are to be classiÑed in accordance with the criteria in APB Opinion No. 30,
""Reporting the Results of Operations Ì Reporting the EÅects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.'' SFAS No. 64, which amended
SFAS No. 4, is no longer necessary with the rescission of SFAS No. 4. SFAS No. 44 was issued to establish
accounting requirements for the eÅects of transition to the provisions of the Motor Carrier Act of 1980. Since
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
the transition has been completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13
to require that certain lease modiÑcations that have economic eÅects similar to sale-leaseback transactions to
be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 is eÅective for Ñnancial
statements for periods beginning after May 15, 2002, and earlier adoption is recommended. The Company
adopted SFAS No. 145 eÅective May 15, 2002. Adoption of SFAS No. 145 did not have any impact on the
results of operations or Ñnancial condition of the Company.
In July 2002, FASB issued SFAS No. 146, ""Accounting for Costs Associated with Exit or Disposal
Activities''. SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a
disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under SFAS No. 146, a company will
record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be
measured at fair value. A liability is incurred when an event leaves the company little or no discretion to avoid
transferring or using the assets in the future. Previous accounting guidance was provided by the Emerging
Issues Task Force (""EITF'') Issue No. 94-3, ""Liability Recognition for Certain Employee Termination
BeneÑts and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).'' SFAS
No. 146 is eÅective for exit or disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 did have a material impact on the Company's results
of operations or Ñnancial condition.
In October 2002, the FASB issued SFAS No. 147, ""Acquisitions of Certain Financial Institutions.''
SFAS No. 147 is an amendment of FASB statements No. 72 and 144 and FASB Interpretation No. 9. The
Statement addresses the Ñnancial accounting and reporting for the acquisition of all or part of a Ñnancial
institution. It also provides guidance on the accounting for the impairment or disposal of acquired long-term
customer relationship intangible assets. The provisions in paragraph 5 of this Statement are eÅective for
acquisitions for which the date of acquisition is on or after October 1, 2002. The adoption of this statement had
no impact on the Company.
In December 2002, the FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensation Ì
Transition and Disclosure,'' an amendment of FASB Statement No. 123. This Statement amends FASB
Statement No. 123, ""Accounting for Stock-Based Compensation,'' to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim Ñnancial statements. Certain of the disclosure modiÑcations are
required for Ñscal years ending after December 15, 2002, and are included in the notes to these consolidated
Ñnancial statements.
In November 2002, the FASB issued Interpretation No. 45, ""Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34.'' This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and annual Ñnancial statements about its
obligations under guarantees issued. The Interpretation also clariÑes that a guarantor is required to recognize,
at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition
and measurement provisions of the Interpretation are applicable to guarantees issued or modiÑed after
December 31, 2002, and are not expected to have a material eÅect on the Company's Ñnancial statements.
The disclosure requirements are eÅective for Ñnancial statements of interim and annual periods ending after
December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, ""Consolidation of Variable Interest Entities,''
an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of
variable interest entities as deÑned in the Interpretation. The Interpretation applies immediately to variable
interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest
entities obtained after January 31, 2003. For public enterprises, such as the Company, with a variable interest
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
in a variable interest entity created before February 1, 2003, the Interpretation applies no later than the
beginning of the Ñrst interim or annual reporting period beginning after June 15, 2003. The application of this
Interpretation is not expected to have a material eÅect on the Company's Ñnancial statements. The
Interpretation requires certain disclosures in Ñnancial statements issued after January 31, 2003, if it is
reasonably possible that the Company will consolidate or disclose information about variable interest entities
when the Interpretation becomes eÅective.
As of December 31, 2002, the Company owned interests in two limited partnerships, for which it is
reasonably possible that the limited partnerships may be construed to be variable interest entities subject to
consolidation under Interpretation No. 46. Both of these investments were formed for the purpose of investing
in low-income housing projects, which qualify for federal low-income housing tax credits and/or California tax
credits, and at December 31, 2002, the carrying amount of those investments in real estate was $4.95 million.
As of December 31, 2002, the Company had fully satisÑed all capital commitments required under these two
investments in real estate, and in addition, under the terms of both limited partnership agreements, the
Company is not liable for the debts, liabilities, contracts, or any other obligation of these limited partnerships.
Application of Interpretation No. 46 for the Company will be the third quarter of 2003. The Company has not
completed its analysis to determine the impact to the Company in adopting the application of Interpretation
No. 46. However, the Company expects that the adoption will not have a material impact on the Company's
results of operations or Ñnancial position.
2. Cash and Cash Equivalents
The Company manages its cash and cash equivalents, which consist of cash on hand, amounts due from
banks, federal funds sold, securities purchased under agreements to resell, and money market accounts, based
upon the Company's operating, investment and Ñnancing activities. For the purpose of reporting cash Öows,
these same accounts are included in cash and cash equivalents.
The Company is required to maintain reserves with the Federal Reserve. Reserve requirements are based
on a percentage of deposit liabilities. The average reserve balances required were $5,874,000 for 2002 and
$3,288,000 for 2001.
Securities purchased under agreements to resell are collateralized by U.S. government agency and
mortgaged-backed securities at December 31, 2002 and 2001. 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.
2002
2001
(In thousands)
Balance, December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Annualized weighted-average interest rate, December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average amount outstanding during the year(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average interest rate for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maximum amount outstanding at any month end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$14,000
$ Ì
1.33%
Ì%
$42,573
$27,897
1.70%
4.12%
$52,000
$36,000
(1) Average balance were computed using daily averages.
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
$724,000 for 2002, $1,149,000 for 2001, and $513,000 for 2000.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following table sets forth information with respect to federal funds sold.
Balance, December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Annualized weighted-average interest rate, December 31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average amount outstanding during the year(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average interest rate for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maximum amount outstanding at any month end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5,000
$13,000
1.01%
1.01%
$ 6,393
$ 4,500
1.40%
3.70%
$22,000
$13,000
2002
2001
(In thousands)
(1) Average balance were computed using daily averages.
3. 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, 2002 and 2001:
Available-For-Sale
2002
U.S. government agencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and municipals securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortized
Cost
$162,287
100
5,767
808
9,997
30,755
29,026
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair
Value
$ 7,896
Ì
380
39
513
2,314
Ì
$ Ì $170,183
100
6,147
847
10,510
33,069
27,417
Ì
Ì
Ì
Ì
Ì
1,609
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$238,740
$11,142
$1,609
$248,273
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
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$113,873
8,336
2,658
9,994
20,000
57,973
28,954
$ 4,500
213
47
401
Ì
2,532
34
$
49
6
Ì
Ì
Ì
171
331
$118,324
8,543
2,705
10,395
20,000
60,334
28,657
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$241,788
$ 7,727
$ 557
$248,958
The amortized cost and fair value of securities available-for-sale, except for mortgage-backed securities,
collateralized mortgage obligations and venture capital investments, at December 31, 2002, 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.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Amortized
Cost
Fair
Value
(In thousands)
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
$ 39,124
168,177
24,864
6,575
$ 37,718
177,691
25,870
6,994
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$238,740
$248,273
(1) Equity securities are reported in this category.
Proceeds from sales and repayments of securities available-for-sale were $26,461,000 during 2002 and
$30,600,000 during 2001. Proceeds from maturities and calls of securities available-for-sale were $221,792,000
during 2002 and $865,867,000 during 2001. Gains realized on securities available-for-sale were $2,252,000,
and losses realized were $341,000 in 2002 compared with $1,057,000 in gains and $65,000 in losses realized in
2001. There were no gains in 2000, and losses realized in 2000 were $18,000.
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, 2002 and 2001:
Held-To-Maturity
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
2002
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
$ 49,996
72,770
66,135
168,055
9,999
72,611
19,886
$ 2,032
5,392
3,231
1,664
349
4,471
1,510
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$459,452
$18,649
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
$ 1,251
2,049
2,726
657
1
1,822
484
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$374,356
$ 8,990
$ Ì
6
Ì
60
Ì
253
Ì
$319
$ Ì
380
14
57
Ì
81
Ì
$532
Estimated
Fair Value
$ 52,028
78,156
69,366
169,659
10,348
76,829
21,396
$477,782
$ 51,268
71,575
113,054
50,882
921
74,772
20,342
$382,814
The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed
securities and collateralized mortgage obligations, at December 31, 2002, by contractual maturities are shown
92
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
$ 19,712
114,617
55,959
34,974
234,190
$ 20,172
119,146
62,073
37,366
239,025
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$459,452
$477,782
Proceeds from repayment of securities held-to-maturity were $66,980,000 during 2002 and $63,155,000
during 2001. Proceeds from the maturities and calls of securities held-to-maturity were $13,226,000 during
2002 and $60,295,000 during 2001. The Company realized gross gains of $14,000 for 2002, $314,000 for 2001,
and less than $1,000 for 2000, on call of securities. No losses were realized for 2002, 2001, or 2000.
Securities having a carrying value of $153,138,000 at December 31, 2002, and $125,250,000 at
December 31, 2001, were pledged to secure public deposits, treasury tax and loan, and securities sold under
agreements to repurchase.
Federal Home Loan Bank (""FHLB'') stock is carried at cost, and included in other assets in the
Consolidated Statements of Condition. The carrying amount of the FHLB stock at December 31, 2002, was
$5.56 million compared to $5.64 million at December 31, 2001. 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.
4. 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,
93
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, 2002 and 2001, 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
2002
2001
(In thousands)
$ 563,675
182,414
943,391
48,957
122,773
15,570
447
$ 506,128
195,562
738,379
40,352
166,417
20,322
745
Gross loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,877,227
1,667,905
Less
Allowance for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized deferred loan fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(24,543)
(4,606)
(23,973)
(3,900)
Net loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,848,078
$1,640,032
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. As of December 31, 2002, the Company had $8,211,000 of these loans in its servicing portfolio,
which included loans sold in 2002, totaling $7,045,000. There were no loan sales in 2001. There were no loans
held for sale as of December 31, 2002 and 2001. The Company pledged approximately $81,183,000 of its
residential mortgage loans as of December 31, 2002, and $96,413,000 as of December 31, 2001, 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, 2002, 2001, and 2000 is as follows:
Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for loan losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans charged-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recoveries of charged-oÅ loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$23,973
6,000
(5,976)
546
2002
2001
(In thousands)
$21,967
6,373
(4,663)
296
2000
$19,502
4,200
(1,905)
170
Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$24,543
$23,973
$21,967
The Company had identiÑed impaired loans with a recorded investment to be approximately $19,591,000
as of December 31, 2002, and $19,350,000 as of December 31, 2001. The average balances of impaired loans
were $24,763,000 for 2002, $23,465,000 for 2001, and $29,516,000 for 2000. Interest collected on impaired
loans totaled $1,223,000 in 2002, $959,000 in 2001, and $2,120,000 in 2000. The Bank recognizes interest
94
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)
2002
CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 3,883
15,707
1
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$19,591
2001
CommercialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 6,924
12,426
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$19,350
$ 629
2,356
1
$2,986
$2,143
1,764
$3,907
$ 3,254
13,351
Ì
$16,605
$ 4,781
10,662
$15,443
(1) Real Estate includes commercial mortgage loans, construction loans, and residential mortgage loans
In addition, accruing loans past due 90 days or more had outstanding balances of $2.50 million at year-
end 2002 compared with $689,000 at year-end 2001. On January 3, 2003, one accruing commercial mortgage
loan past due 90 days or more, with a recorded investment of $1.10 million was paid-oÅ.
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, 2002. An analysis of the activity with respect to loans to Related Parties is as follows:
Balance at December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional loans made ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments receivedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional loans made(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments received(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(In thousands)
$ 12,899
21,060
(15,147)
18,812
81,095
(67,730)
Balance at December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 32,177
(1) The increase loans made to and payments received from related parties is primarily attributable to two
lines of credit made to the spouse of one director, in the amount of $10 million each. Each line is secured
by a separate time deposit of $10 million each. The purpose of the lines is for business investment. The
director is not a party to either credit relationship.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following is a summary of non-accrual loans and troubled debt restructurings as of December 31,
2002, 2001, and 2000 and the related net interest foregone for the years then ended:
Non-accrual Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$4,124
2002
2001
(In thousands)
$7,238
Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 321
34
$ 823
96
2000
$14,696
$ 1,408
627
Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 287
$ 727
$
781
Troubled Debt Restructurings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,266
$4,726
$ 4,531
Contractual interest due ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 338
258
$ 409
370
Net interest foregone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
80
$
39
$
$
422
407
15
As of December 31, 2002, there were no commitments to lend additional funds to those borrowers whose
loans have been restructured, impaired, or in non-accrual status.
5. Other Real Estate Owned
The balance of other real estate owned at December 31, 2002, was $653,000 and at December 31, 2001,
was $1,555,000. The valuation allowance was $131,000 at December 31, 2002, and December 31, 2001. The
following table presents the components of other real estate owned expense (income) for the year ended:
Operating expense (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net gain on disposal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
46
Ì
(395)
2002
2001
(In thousands)
$ (213)
Ì
(3,376)
2000
$
7
71
(263)
Total other real estate owned (income)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(349)
$(3,589)
$(185)
An analysis of the activity in the allowance for other real estate losses for the years ended December 31,
2002, 2001, and 2000 is as follows:
2002
2001
2000
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Charge-oÅs on disposal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$131
Ì
Ì
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$131
$131
Ì
Ì
$131
$ 614
71
(554)
$ 131
6.
Investments in Real Estate
The Company's investments in real estate were $21,678,000 as of December 31, 2002, and $17,727,000 as
of December 31, 2001, consisting of seven 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
eleven years. In addition to the Federal tax credits, the California Corporate Tax Credit Fund, the WNC
Institutional Tax Credit Fund California Ì Series 2, and the WNC Institutional Tax Credit Fund New
York Ì Series 3, also qualiÑed for State tax credits. See Note 9 of the notes to consolidated Ñnancial
statements for income tax eÅects. In 2002, the Company acquired an interest in three additional real estate
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
investment as follows: an interest in Lend Lease ITC XXIII with a contribution of $4,874,000, an interest in
WNC Institutional Tax Credit Fund X New York Ì Series 3, with an initial contribution of $577,000, and an
interest in the WNC Institutional Tax Credit Fund X California Ì Series 2, with an initial contribution of
$415,000, and an additional contribution of $122,000 in October 2002. The following table presents the details
of the seven projects as of December 31, 2002 and 2001:
The following table summarizes the composition of our investments in real estate as of the dates
indicated:
Percentage of
Ownership
Acquisition
Date
(Dollars in thousands)
December 31,
2002
December 31,
2001
Carrying Amount
Las Brisas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Los Robles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
California Corporate Tax Credit Fund III ÏÏ
Wilshire CourtyardÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lend Lease ITC XXIII ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WNC Institutional Tax Credit Fund X New
York Ì Series 3 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WNC Institutional Tax Credit Fund X
49.5%
99.0%
32.5%
99.9%
4.5%
December 1993
August 1995
March 1999
May 1999
March 2002
4.2%
August 2002
California Ì Series 2 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.0%
September 2002
$ Ì
386
11,128
4,568
4,546
529
521
$ Ì
386
12,426
4,915
Ì
Ì
Ì
$21,678
$17,727
The Company's 99.00% and 99.90% interests in the Los Robles and Wilshire Courtyard limited
partnerships were not consolidated as of December 31, 2002 and 2001, because the Company did not have
control over the operation of these limited partnerships. The Company's investments are accounted for by
using the equity method of accounting. The Company recognized a net loss of approximately $2,038,000 in
2002, $2,257,000 in 2001, and $683,000 in 2000, from the limited partnerships' operations.
7. Premises and Equipment
Premises and equipment consisted of the following at December 31, 2002, and 2001:
Land and land improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Building and building improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture, Ñxtures and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Construction in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
2001
(In thousands)
$11,953
17,687
15,536
3,404
70
48,650
18,862
$11,800
17,685
14,414
2,512
291
46,702
17,299
Premises and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$29,788
$29,403
The amount of depreciation included in operating expense was $1,596,000 in 2002, $1,472,000 in 2001,
and $1,500,000 in 2000.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
8. Borrowings
Securities Sold under Agreements to Repurchase. The underlying collateral pledged for the repurchase
agreements consists of U.S. government agency security with a carrying value of $29,972,000 and a fair value
of $31,172,000 as of December 31, 2002, and is held by a custodian and maintained under the Company's
control. In 2001 and 2000, these borrowings generally matured in less than 30 days, however, at December 31,
2002, the $28.50 million balance at year-end was comprised of a long-term reverse repurchase agreement
obtained in January 2002, which will mature in January 2004. The table below provides comparative data for
securities sold under agreements to repurchase:
Average amount outstanding during the year(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maximum amount outstanding at month-end(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balances, December 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average interest rate for the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
$30,784
48,150
28,500
December 31,
2001
(In thousands)
$34,799
55,412
22,114
2000
$70,701
110,145
68,173
3.29%
3.08%
1.01%
3.51%
6.09%
6.25%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January 2002, February 2001, and October 2000.
Advances from the Federal Home Loan Bank. Advances from the Federal Home Loan Bank of San
Francisco (""FHLB'') amounted to $50.00 million at December 31, 2002, and $30.00 million at December 31,
2001. Of the Bank's $50.00 million in FHLB advances outstanding at December 31, 2002, $10.00 million
bearing interest at 4.90% was obtained in 1998 and matures on October 28, 2003, $20.00 million bearing
interest at 3.48% was obtained in 2002 and matures on February 27, 2004, and $20.00 million bearing interest
at 5.45% was obtained in 2001 and matures on March 21, 2005. These advances are non-callable with Ñxed
interest rates.
9.
Income Taxes
For the years ended December 31, 2002, 2001, and 2000, the current and deferred amounts of the income
tax expense are summarized as follows:
2002
2001
(In thousands)
2000
Current
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$21,561
1,821
$19,367
1,814
$19,321
1,904
23,382
21,181
21,225
Deferred
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,196)
109
(1,350)
(1,011)
(1,087)
(2,361)
479
158
637
Total income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$22,295
$18,820
$21,862
98
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 at December 31, 2002 and
2001 are as follows:
2002
2001
(In thousands)
Deferred Tax Assets
DiÅerence between provisions for loan losses for tax and Ñnancial reporting
purposes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 9,865
$ 9,275
DiÅerence between provisions for other real estate owned losses for tax and
Ñnancial reporting purposesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55
1,185
515
71
705
676
Gross deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,620
10,727
Deferred Tax Liabilities
Use of accelerated depreciation for tax purposes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred loan fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FHLB stock dividend ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized holding gain on securities available-for-sale, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gain on cash Öow hedge derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,411)
(1,025)
(4,009)
(956)
(163)
(1,312)
Ì
(1,115)
(3,043)
(706)
(368)
Gross deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(7,564)
(6,544)
Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 4,056
$ 4,183
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 2001 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 Company will realize all beneÑts related to these deductible temporary diÅerences.
Included in other assets in the statements of condition, at December 31, 2002 and 2001, were net deferred
tax assets of $4,056,000 in 2002, and $4,183,000 for 2001. Other assets as of December 31, 2002 and 2001
included a current income tax receivable of $35,000 for 2002 and $996,000 for 2001. Other liabilities as of
December 31, 2002 and 2001 include a current income tax payable $24,745,000 for 2002 and $19,370,000 for
2001.
99
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
2002
2001
(In thousands)
2000
$24,848
35.00% $21,504
35.00% $21,157
35.00%
beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,255
1.77
522
0.85
1,340
2.22
Interest on obligations of state and political
subdivisions, which are exempt from Federal
taxation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low income housing tax creditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-deductible expense Ì
Amortization of goodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(141)
(2,732)
(0.20)
(3.85)
(72)
(2,294)
(0.12)
(3.73)
(1,240)
(947)
(2.05)
(1.57)
Ì
(935)
Ì
(1.32)
236
(1,076)
0.38
(1.75)
231
1,321
0.38
2.19
Total income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$22,295
31.40% $18,820
30.63% $21,862
36.17%
10. 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, 2002, is restricted to approximately $103,076,000 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, 2002, the Bank was in
compliance with the minimum capital requirements and is considered well capitalized.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The Company's and the Bank's capital and leverage ratios as of December 31, 2002, and 2001 are
presented in the tables below:
Company
Bank
Company
Bank
Balance
As of December 31, 2002
Percentage
Balance
Percentage
(Dollars in thousands)
Balance
As of December 31, 2001
Percentage
Balance
Percentage
Tier I Capital (to risk-
weighted assets) ÏÏÏÏ
$ 271,613(1)
11.93% $ 262,874(1)
11.57% $ 231,916(2)
11.15% $ 224,239(2)
10.80%
Tier I Capital minimum
requirement ÏÏÏÏÏÏÏÏ
91,043
4.00
90,876
4.00
83,231
4.00
83,064
ExcessÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 180,570
7.93% $ 171,998
7.57% $ 148,685
7.15% $ 141,175
4.00
6.80%
Total capital (to risk-
weighted assets) ÏÏÏÏ
$ 296,156(1)
13.01% $ 287,417(1)
12.65% $ 255,904(2)
12.30% $ 248,227(2)
11.95%
Total Capital minimum
requirement ÏÏÏÏÏÏÏÏ
182,085
8.00
181,752
8.00
166,462
8.00
166,129
ExcessÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 114,071
5.01% $ 105,665
4.65% $
89,442
4.30% $
82,098
8.00
3.95%
Risk-weighted assets ÏÏÏ
$2,276,063
$2,271,902
$2,080,776
$2,076,608
Tier I Capital (to
average assets)
Leverage ratio ÏÏÏÏÏÏ
Minimum leverage
$ 271,613(1)
10.11% $ 262,874(1)
9.80% $ 231,916(2)
9.48% $ 224,239(2)
9.18%
requirement ÏÏÏÏÏÏÏÏ
107,439
4.00
107,258
4.00
97,843
4.00
97,665
ExcessÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 164,174
6.11% $ 155,616
5.80% $ 134,073
5.48% $ 126,574
4.00
5.18%
Total average assets ÏÏÏ
$2,685,983(3)
$2,681,438(3)
$2,446,084(3)
$2,441,623(3)
(1) Excluding accumulated other comprehensive income of $6,719,000 and intangibles of $8,682,000.
(2) Excluding accumulated other comprehensive income of $5,063,000 and intangibles of $8,880,000.
(3) Average assets represent average balances for the fourth quarter of 2002 and the fourth quarter of 2001.
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, 2002.
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.
101
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 as indicated:
Year Ended
December 31, 2002
Year Ended
December 31, 2001
Year Ended
December 31, 2000
Income
(Numerator)
Per
Share
(Denominator) Amount
Shares
Income
(Numerator)
Per Shares
Share
(Denominator) Amount
Income
(Numerator)
Per
Share
(Denominator) Amount
Shares
Net Income ÏÏÏ
$48,700
$42,620
$38,587
(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
$48,700
17,991,333
$2.71
$42,620
18,107,790
$2.35
$38,587
18,113,502
$2.13
123,786
57,470
34,268
$48,700
18,115,119
$2.69
$42,620
18,165,260
$2.35
$38,587
18,147,770
$2.13
For the years ended December 31, 2002 and 2000, all outstanding options had a dilutive eÅect and were
included in the computation of diluted earnings per share. Options to purchase an additional 51,635 shares of
common stock were outstanding at December 31, 2001, and were not included in the computation of diluted
earnings per share because their inclusion would have had an antidilutive eÅect.
11. 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 statements taken as a whole.
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.
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Financial instruments whose contract amounts represent the amount of credit risk include the following:
Commitments to extend credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Standby letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bill of lading guarantee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$725,000
15,000
37,000
11,000
$676,000
18,000
27,000
13,000
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$788,000
$734,000
2002
2001
(In thousands)
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
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, 2002, 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, 2002, 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, 2002, 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, the Company entered into an interest rate swap agreement with a major Ñnancial
institution in the notional amount of $20.00 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, 2002, was approximately two and an one quarter years.
At December 31, 2002, the fair value of the interest rate swap was $2.27 million, exclusive of accrued interest
or $1.19 million, net of tax compared to $1.68 million, exclusive of accrued interest, or $869,000 net of tax, at
December 31, 2001. For the twelve months ended December 31, 2002, net amounts totaling $1.06 million
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
$1.16 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 $2,507,000 for 2002, $2,269,000 for 2001 and $2,200,000
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
for 2000. The following table shows future minimum payments under operating leases with terms in excess of
one year as of December 31, 2002.
Year Ended December 31,
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments
(In thousands)
$ 1,772(1)
1,562
1,499
1,488
1,148
11,719
Total minimum lease paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$19,188
(1) Includes the annual lease payment of approximately $107,000 to be made to T.C. Realty, Inc., a
corporation owned by Mr. Patrick Lee's spouse. Mr. Lee is a director of the Bancorp and the Bank. The
3-year lease is due to expire in 2003.
Rental income was $515,000 for 2002, $450,000 for 2001, and $437,000 for 2000. The following table
shows future rental payments to be received under operating leases with terms in excess of one year as of
December 31, 2002:
Year Ended December 31,
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments
(In thousands)
$ 468
322
124
59
43
66
Total minimum lease payments to be received ÏÏÏÏÏÏÏÏÏÏÏÏ
$1,082
12. 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.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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.
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.
Derivative Financial Instruments. The fair value of interest rate swap was 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.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Fair Value of Financial Instruments
Financial Assets
Cash and due from banks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal funds sold and securities purchased
under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities available-for-saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest rate swapÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Liabilities
As of December 31, 2002
Carrying
Amount
Fair
Value
As of December 31, 2001
Carrying
Amount
Fair
Value
(In thousands)
$
70,777
$
70,777
$
73,514
$
73,514
19,000
248,273
459,452
1,848,078
2,568
19,000
248,273
477,782
1,871,740
2,568
13,000
248,958
374,356
1,640,032
1,928
13,000
248,958
382,814
1,643,459
1,928
DepositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Securities sold under agreements to repurchase
Advances from Federal Home Loan Bank ÏÏÏÏÏ
2,314,643
28,500
50,000
2,322,556
28,939
52,364
2,122,348
22,114
30,000
2,128,850
22,114
30,397
As of December 31, 2002
Fair
Notional
Value
Amount
(In thousands)
As of December 31, 2001
Notional
Amount
Fair
Value
OÅ-Balance Sheet Financial Instruments
Commitments to extend credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Standby letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bill of lading guarantee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$725,024
15,229
36,667
10,608
$(424)
(54)
(196)
(71)
$676,513
17,595
26,923
12,729
$(349)
(64)
(91)
(72)
13. 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 50,453 shares in 2002,
28,918 shares in 2001, and 37,510 shares in 2000, of the Bancorp's stock at an aggregate cost of $1,694,078 in
2002, $773,163 in 2001, and $812,359 in 2000. The shares purchased in 2002 included 34,200 shares bought on
the open market and 16,253 shares bought through the Dividend Reinvestment Plan. The shares purchased in
2001 included 8,400 shares bought on the open market and 20,518 shares bought through the Dividend
Reinvestment Plan. The shares purchased in 2000 included 15,000 shares bought on the open market and
22,510 shares bought through the Dividend Reinvestment Plan. The Company contributed $694,000 in 2002,
$598,500 in 2001, and $564,800 in 2000 to the trust. The expense was charged to salaries and employee
beneÑts in the accompanying consolidated statements of income and comprehensive income. In 2002,
distribution of beneÑts to participants totaled 112,821 shares. As of December 31, 2002, the ESOP owned
982,120 shares or 5.46% 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
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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 $247,400 in 2002, $227,900 in 2001, and
$198,100 in 2000.
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 Regulation. 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.
14. 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 2,150,000 shares of the Company's common stock on a split adjusted basis. 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
2000 to purchase a total of 110,000 shares, in 2001 to purchase a total of 112,800 shares, and in 2002 to
purchase a total of 113,440 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.
Balance, December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
89,400
110,000
(2,904)
(840)
Balance, December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
195,656
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
112,800
(17,494)
(23,740)
Weighted-Average
Exercise Price
$16.50
21.25
16.50
21.25
$19.15
30.10
17.55
24.94
Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
267,222
$23.36
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
113,440
(15,202)
(1,640)
32.55
19.37
28.71
Balance, December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
363,820
$26.37
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following table shows stock options outstanding and exercisable as of December 31, 2002, the
corresponding exercise prices and the weighted-average contractual life remaining.
Exercise Price
$16.50 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21.25 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
30.10 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
32.55 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
63,600
86,816
100,684
112,720
363,820
Outstanding
Weighted-Average
Remaining Contractual
Life (in Years)
5.8
7.1
8.1
9.2
7.8
Exercisable
Shares
50,512
27,000
13,716
Ì
91,228
No compensation cost has been recognized for its stock option plans in the consolidated Ñnancial
statements.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
15. Condensed Financial Information of Cathay Bancorp, Inc. (Unaudited)
The condensed Ñnancial information of Cathay Bancorp, Inc. as of December 31, 2002 and 2001 and for
the years ended December 31, 2002, 2001, and 2000 were as follows:
Statements of Condition
Year Ended December 31,
2002
2001
(In thousands, except
share and per share data)
Assets
Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment in subsidiary Ì Cathay Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 4,249
4,058
279,222
500
$
3,248
3,999
238,335
500
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$288,029
$246,082
Liabilities
Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none
issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, $0.01 par value; 25,000,000 shares authorized,
18,305,255 issued and 17,999,955 outstanding in 2002, and
18,235,538 issued and 17,957,738 outstanding in 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost (305,300 shares in 2002 and 277,800 shares in
2001) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in-capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
68
68
Ì
71
71
Ì
183
182
(8,287)
70,857
6,719
218,489
(7,342)
68,517
5,063
179,591
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
287,961
246,011
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$288,029
$246,082
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Statements of Income and Comprehensive Income
2002
Year Ended December 31,
2001
(In thousands)
$14,058
(469)
$ 9,801
(573)
2000
$ 7,965
(280)
Cash dividends from Cathay Bank ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before undistributed earnings of subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,228
241
9,469
Equity in undistributed earnings of subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
39,231
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
48,700
Other comprehensive income, net of tax:
Unrealized holding gains arising during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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, net of taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,290
Ì
326
1,960
1,656
13,589
196
13,785
28,835
42,620
2,408
566
303
517
2,760
7,685
118
7,803
30,784
38,587
3,084
Ì
Ì
(225)
3,309
Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$50,356
$45,380
$41,896
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Statements of Cash Flows
2002
Year Ended December 31,
2001
(In thousands)
2000
Cash Öows from Operating Activities
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by operating
activities:
$ 48,700
$ 42,620
$ 38,587
Equity in undistributed earnings of subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Decrease) increase in accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-downs on venture capital investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(39,231)
(3)
341
Ì
(28,835)
(30,784)
8
65
(500)
22
Ì
Ì
Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,807
13,358
7,825
Cash Flows from Investing Activities
Purchase of investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Flows from Financing Activities
Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from shares issued under the Dividend Reinvestment Plan ÏÏÏ
Proceeds from exercise of stock options and tax beneÑts from stock
plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(400)
(400)
(655)
(655)
(3,410)
(3,410)
(9,802)
1,898
(9,057)
1,811
(7,965)
1,691
443
(945)
432
(7,342)
56
Ì
Net cash used in Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(8,406)
(14,156)
(6,218)
Increase (decrease) in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,001
3,248
(1,453)
4,701
(1,803)
6,504
Cash and cash equivalents, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
4,249
$
3,248
$
4,701
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 on securities available-for-
sale, net of taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative adjustment upon adoption of SFAS No. 133, net of
taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change in unrealized gains on cash Öow hedge derivatives, net
of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
150
$
150
1,330
$
1,891
Ì $
566
326
$
303
$
$
$
$
150
3,309
Ì
Ì
16. 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 on a post-split stock basis were 54,515 for $1,896,000 in 2002, 69,314
for $1,811,000 in 2001, and 78,660 for $1,691,000 in 2000.
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
17. Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly Ñnancial data:
Summary of Operations
2002
2001
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
$36,224
9,340
$36,304
10,062
$35,267
9,835
$36,266
10,683
$36,608
13,121
$39,977
15,965
$40,721
17,660
$42,046
19,407
Net interest income ÏÏÏÏÏÏÏÏÏ
Provision for loan lossesÏÏÏÏÏÏ
26,884
1,500
26,242
1,500
25,432
1,500
25,583
1,500
23,487
2,773
24,012
1,200
23,061
1,200
22,639
1,200
Net interest income after
provision for loan losses ÏÏÏÏ
25,384
24,742
23,932
24,083
20,714
22,812
21,861
21,439
Non-interest income ÏÏÏÏÏÏÏÏ
Non-interest expense ÏÏÏÏÏÏÏÏ
3,630
11,560
5,185
10,891
4,022
10,214
3,334
10,652
3,721
8,461
4,154
10,253
3,052
10,340
3,852
11,111
Income before income tax
expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax expense ÏÏÏÏÏÏÏÏÏ
17,454
5,385
19,036
6,031
17,740
5,502
16,765
5,377
15,974
4,437
16,713
5,208
14,573
4,375
14,180
4,800
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
12,069
13,005
12,238
11,388
11,537
11,505
10,198
9,380
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
159
1,939
3,527
(2,334)
(811)
2,201
(730)
1,748
Ì
Ì
(166)
417
Ì
141
Ì
Ì
Ì
Ì
(66)
(316)
511
(148)
566
256
499
550
718
194
127
287
79
24
income (loss), net of taxÏÏÏ
(506)
1,806
2,950
(2,594)
(1,254)
2,425
(957)
2,546
Total comprehensive incomeÏÏ
$11,563
$14,811
$15,188
$ 8,794
$10,283
$13,930
$ 9,241
$11,926
Basic net income per common
share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted net income per
common shareÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.67
0.67
$
$
0.72
0.72
$
$
0.68
0.67
$
$
0.63
0.63
$
$
0.64
0.64
$
$
0.63
0.63
$
$
0.56
0.56
$
$
0.52
0.52
112
administrative information >
Board of Directors
Front Row (left to right)
George T. M. Ching
Vice Chairman of the Board
Cathay Bancorp, Inc.
Dunson K. Cheng
Chairman of the Board
and President
Cathay Bancorp, Inc.
Wilbur K. Woo
Vice Chairman of the Board
Cathay Bancorp, Inc.
Back Row (left to right)
Joseph C. H. Poon
President
Edward Properties, Inc.
Michael M. Y. Chang
Secretary
Cathay Bancorp, Inc.
Ralph Roy Buon-Cristiani
Retired Veterinarian
Anthony M. Tang
Executive Vice President
Cathay Bancorp, Inc.
Thomas G. Tartaglia
Director
Cathay Bancorp, Inc.
Kelly L. Chan
CPA
Vice President
Phoenix Bakery
Patrick S. D. Lee
Retired Real Estate Developer
Wing K. Fat
President
Frank Fat, Inc.
Officers
Cathay Bancorp, Inc.
Cathay Bank
Dunson K. Cheng
Chairman of the Board
and President
George T. M. Ching
Vice Chairman of the Board
Wilbur K. Woo
Vice Chairman of the Board
Michael M.Y. Chang
Secretary
Anthony M. Tang
Executive Vice President
and Chief Financial Officer/
Treasurer/Assistant Secretary
Perry P. Oei
General Counsel
Dunson K. Cheng
Chairman of the Board and President
George T. M. Ching
Vice Chairman of the Board
Wilbur K. Woo
Vice Chairman of the Board
Michael M.Y. Chang
Secretary
Anthony M. Tang
Senior Executive Vice President
and Chief Lending Officer
Irwin Wong
Executive Vice President
Branch Administration
James Brewer
Senior Vice President
Credit 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
Oliver Chen
First Vice President and
Team Manager
Corporate Commercial Loan
Chingying Chu
First Vice President and Manager
Small Business Administration Loan
Angela Hui
First Vice President and Loan Officer
Commercial Real Estate Loan
Dennis Kwok
First Vice President and Manager
Cathay Portfolio Management
and Cathay Global
Investment Services
Pin Tai
General Manager
New York Region
Wilson Tang
Regional Vice President
Branch Administration
Jack Tweedy
First Vice President
Credit Administration
Edward Alvarado
Vice President and Loan Officer
Commercial Real Estate Loan
Weston Barkwill
Chief Internal Auditor
Peggy Chan
Vice President and Loan Officer
New York Region
Jay Cheng
Vice President and Loan Officer
Corporate Commercial Loan
John M. Fox
Vice President and Manager
Collateral Control
Scott Kleinert
Vice President and Manager
Information Systems
Margaret Li
Vice President and Manager
Mortgage Loan
Tony Moya
Vice President
Bank Operations Administration
Javier G. Otoya
Vice President and Controller
Francine Paxson
Vice President
Loan Operations
Louisa Ting
Vice President
Branch Operations Administration
New York Region
Susan Yang
Vice President and Loan Officer
Corporate Commercial Loan
Offices
Corporate Office:
777 North Broadway
Los Angeles, CA 90012
(213) 625-4700
Tel:
Fax: (213) 625-1368
Branch Offices:
California
Los Angeles
777 North Broadway
Los Angeles, CA 90012
Tel:
(213) 625-4700
Fax: (213) 625-1368
Kenneth Chan
Assistant Vice President
and Manager
Monterey Park
250 South Atlantic Boulevard
Monterey Park, CA 91754
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
Tel:
(626) 333-8533
Fax: (626) 336-4227
Shu Lee
Regional Vice President
and Manager
Westminster
9121 Bolsa Avenue
Westminster, CA 92683
Tel:
(714) 890-7118
Fax: (714) 898-9267
Allen Vi
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 Vice President
and Manager
Cerritos
11355 South Street
Cerritos, CA 90701
(562) 860-7300
Tel:
Fax: (562) 860-2296
Henry Yoh
Assistant Vice President
and Manager
City of Industry
1250 South Fullerton Road
City of Industry, CA 91748
Tel:
(626) 810-1088
Fax: (626) 810-2188
Shu Lee
Regional Vice President
and Manager
Cupertino
10480 South De Anza Boulevard
Cupertino, CA 95014
Tel:
(408) 255-8300
Fax: (408) 255-8373
David Lin
Vice President and Manager
Milpitas
1759 North Milpitas Boulevard
Milpitas, CA 95035
Tel:
(408) 262-0280
Fax: (408) 262-0780
Tony Wen
Vice President and Manager
Irvine
15323 Culver Drive
Irvine, CA 92604
Tel:
(949) 559-7500
Fax: (949) 559-7508
Linda Kuo
Vice President and Manager
Millbrae
Millbrae Plaza
1095 El Camino Real
Millbrae, CA 94030
Tel:
(650) 652-0188
Fax: (650) 652-0180
Stanley Wong
Vice President and Manager
Valley-Stoneman
43 East Valley Boulevard
Alhambra, CA 91801
Tel:
(626) 576-7600
Fax: (626) 576-5831
Claudia My Lu
Vice President and Manager
Berkeley-Richmond
3288 Pierce Street
Richmond, CA 94804
(510) 526-8898
Tel:
Fax: (510) 526-0639
Sumiko Wu
Assistant Vice President
and 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
Sacramento
5591 Sky Parkway
Sacramento, CA 95823
Tel:
(916) 428-4890
Fax: (916) 428-4966
Alice Palecek
Assistant Manager
New York
Flushing
40-14/16 Main Street
Flushing, NY 11354
Tel:
(718) 886-5225
Fax: (718) 961-7680
New York Chinatown
45 East Broadway
New York, NY 10002
Tel:
(212) 732-0200
Fax: (212) 732-7389
Francis Wong
Vice President and Manager
Brooklyn
5402 Eighth Avenue
Brooklyn, NY 11220
Tel:
(718) 435-0800
Fax: (718) 633-0128
Francis Wong
Vice President and Manager
Texas
Houston
10375 Richmond Avenue #1600
Houston, TX 77042
Tel:
(713) 278-9599
Fax: (713) 278-9699
Shu Mak
Vice President and
Acting Manager
Overseas
Representative Offices:
Hong Kong
Room 902-3, 9/F
Printing House
6 Duddell Street
Central, Hong Kong
(852) 2522-0071
Tel:
Fax: (852) 2810-1652
Winnie Lau
Representative
Shanghai
Unit 1808,
Shanghai Kerry Centre
1515 Nanjing Road West
Shanghai 200040
People’s Republic of China
Miranda So
Chief Representative
Subsidiary:
Cathay Investment Company
Los Angeles
777 North Broadway
Los Angeles, CA 90012
Tel:
(213) 625-4700
Fax: (213) 625-1368
Dunson K. Cheng
Chief Executive Officer
and President
Taipei
Sixth Floor, Suite 3
146 Sung Chiang Road
Taipei, Taiwan, R.O.C.
(886) (2) 2537-5057
Tel:
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:
Hoefer & Arnett, Inc.
Knight Securities
Wedbush Morgan Securities
Registrar and Transfer Agent
American Stock Transfer and
Trust Company
59 Maiden Lane
New York, NY 10038
(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
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements may include, but are not limited to, such words as “may,” “will,” “should,” “could,” “expects,” “plans,”
“intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminolo-
gy 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, of Cathay Bancorp, Inc. to be materially different from any future results, performance, or
achievements, expressed or implied by such forward-looking statements. Such risks and uncertainties and other factors include, but are not limited to
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, including the formation of a real estate investment trust and the application to the Securities and Exchange Commission
for deregistration of the registered investment company; general economic or business conditions. These and other factors are further described in Cathay
Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002, contained in this Annual Report, its Quarterly Reports on Form
10-Q, and other filings it makes with the Securities and Exchange Commission from time to time. Actual results in any future period may also vary from
the past results discussed in this Annual 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 Annual Report. Cathay Bancorp, Inc. has no intention and undertakes no obligation to update any
forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events.
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