UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended                                         March 31, 2002

OR

For the transition period from                    to                   

Commission file number      0-18630

CATHAY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes       ý         No       o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.01 par value, 17,991,940 shares outstanding as of May 3, 2002

CATHAY BANCORP, INC. AND SUBSIDIARY

1^ST QUARTER 2002 REPORT ON FORM 10-Q

TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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CATHAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CATHAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CATHAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CATHAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Business

Cathay Bancorp, Inc. (the “Company”) is the one-bank holding company for Cathay Bank (the “Bank”).  Cathay Bank was founded in 1962 and offers a wide range of financial services.  The Bank now operates 12 branches in Southern California, seven branches in Northern California, two branches in New York State, one branch in Houston, Texas, and a representative office in Hong Kong.  In addition, the Bank’s subsidiary, Cathay Investment Company, maintains an office 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 Bank has received regulatory approval for and expects to open a new branch in Brooklyn, New York, in May 2002, a representative office in Shanghai, China, in the second quarter 2002, and a branch in Sacramento, California, in the third quarter 2002.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.  Certain reclassifications have been made to the prior year’s financial statements to conform to the March 31, 2002 presentation.  For further information, refer to the consolidated financial statements and footnotes included in Cathay Bancorp’s annual report on Form 10-K for the year ended December 31, 2001.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements.  Actual results may differ from these estimates under difference assumptions or conditions.

Accounting for the allowance for loan losses involves significant 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.”

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Recent Accounting Pronouncements

Effective 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 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 first interim period.  In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company was required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142.  Any impair ment loss is measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.  The Company adopted SFAS No. 142 effective January 1, 2002.  Upon adoption, the Company discontinued the amortization of goodwill, and reclassed $2.33 million from goodwill to core deposit intangible, which is classified under other assets in the Statement of Financial Condition.  The Company also reassessed the useful lives and residual value of all intangible assets acquired in purchase business combinations, and tested the intangible asset identified with an indefinite useful life for impairment, and found no impairment.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  For long-lived assets to be held and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference 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 flow 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 flows, and establishes a “primary-asset” approach to determine the cash flow estimation period.  For long-lived asset to be disposed of by sale, SFAS No. 144 retains the requirements of SFAS No. 121 to measure a long-lived asset classified as held-for-sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation.  Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would be no longer recognized before they occur.  SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held-for-sale, prohibits retroactive reclassification 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 financial statements, and provides accounting guidance for the reclassification of an asset from “held-for-sale” to “held-and-used.”  The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001.  The Company adopted SFAS No. 144 effective January 1, 2002.  Adoption of SFAS No. 144 did not have any impact on the results of operations or financial condition of the Company.

In April 2002, the Financial Accounting Standards Board (“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”).  SFAS No.145 rescinds SFAS No. 4 that required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Henceforth, those gains and losses from extinguishment of debt are to be classified in accordance with the criteria in APB Opinion No. 30, Reporting the Results of Operations — Reporting the Effects 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 effects 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.

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SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions.  SFAS No. 145 is effective for financial statements for periods beginning after May 15, 2002, and earlier adoption is recommended, which for the Company will be January 1, 2003.  Upon adoption, the Company is required to reclassify prior period items that do not meet the extraordinary classification criteria in APB 30.  The Company does not expect a material impact on the Company’s results of operations or financial condition in adopting of SFAS No. 145.

Financial Derivatives

The Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks related to its interest-earning assets and interest-bearing liabilities.  For periods prior to January 1, 2001, for those qualifying financial derivatives that altered the interest rate characteristics of assets or liabilities, the net differential to be paid or received on the financial derivative was treated as an adjustment to the yield on the underlying assets or liabilities.  Interest rate financial derivatives that did not qualify for the accrual method, were recorded at fair value, with gains and losses recorded in earnings.

Effective 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 financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities.  It requires the recognition of all financial derivatives as assets or liabilities in the Company’s statement of financial condition and measurement of those financial derivatives at fair value.  The accounting treatment of changes in fair value is dependent upon whether or not a financial 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 financial derivatives designated for hedging activities as cash flow hedges.  For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings.

On March 21, 2000, the Company hedged a portion of its floating interest rate loans through an interest rate swap agreement with a $20.00 million notional amount.  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 March 31, 2002 was approximately three years.  Amounts to be paid or received on the interest rate swap will be reclassified into earnings upon the receipt of interest payments on the underlying hedged loans, including amounts totaling $265,000 that were reclassified into earnings during the three months ended March 31, 2002.  The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to be reclassified into earnings within the next 12 months is approximately $1.04 million.

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Earnings per Share

Basic earnings per share 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 earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings.  All share and per share amounts included herein have been retroactively restated to reflect the impact of a two-for-one stock split payable on May 9, 2002, to stockholders of record on April 19, 2002.

The following table sets forth basic and diluted earnings per share calculations:

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is given based on the assumption that the reader has access to and read the Annual Report on Form 10-K for the year ended December 31, 2001 of Cathay Bancorp, Inc. (“Bancorp”) and its subsidiary Cathay Bank (the “Bank” and together the “Company” or “we”, “us,” or “our”).

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”, “anticipates”, “intends”, “plans”, “estimates,” or similar expressions.  Forward-looking statements are not guarantees.  They involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among other things, adverse developments, or conditions related to or arising from:

•             Our expansion into new market areas.

•             Fluctuations in interest rates.

•             Demographic changes.

•             Increases in competition.

•             Deterioration in asset or credit quality.

•             Changes in the availability of capital.

•             Adverse regulatory developments.

•             Changes in business strategy or development plans, including plans regarding the registered investment company.

•             General economic or business conditions; and

•             Other factors discussed in the section entitled “Factors that May Affect Future Results” on our Annual Report on Form 10-K for the year ended December 31, 2001.

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 in any forward-looking statements, which speak as of the date of the report.  We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events.

Cathay Bank’s web page is found at http://www.cathaybank.com/

FIRST QUARTER HIGHLIGHTS:

•      1st quarter 2002 net income increased 21.41% to $11.39 million compared to $9.38 million during the same quarter a year ago.

•      Return on average stockholders’ equity was 18.45% and return on average assets was 1.85% for the quarter ended March 31, 2002.

•      A substantially improved net interest margin of 4.43% compared to 4.09% during the fourth quarter 2001.

•      An operating efficiency ratio of 36.84%.

•      Tier 1 risk-based capital ratio of 11.41%, total risk-based capital ratio of 12.56%, and Tier 1 leverage capital ratio of 9.58%.

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•                  On March 22, 2002, Bancorp, announced a two-for-one stock split of its common stock.  On the same day, Bancorp also declared an increase of 12% on a pre-stock split basis in the cash dividend from 25 cents to 28 cents.

•                  Based on third quarter 2001 return on average assets, a well-known bankers national newspaper ranked our institution as number 25th out of the 300 best-performing publicly traded banking companies, and the same newspaper ranked our Company the 11th most efficient U.S. bank holding company among the largest 500 in the nation.  In both categories, our institution was ranked ahead of other bank holding companies serving primarily the Chinese American market.

Consolidated Income Statement Review

Net Income

Consolidated net income of $11.39 million for the first quarter of 2002, was up 21.41% from net income of $9.38 million during the corresponding quarter of 2001.  On an earnings-per-share basis, first quarter 2002 net income was $0.63 per diluted share, an increase of 21.15%, over the $0.52 per diluted share one year ago.

Pretax income

Pretax income for the first quarter 2002 increased $2.59 million to $16.77 million, up 18.23%, from the corresponding quarter of last year.  The growth in pretax income was driven by the following changes:

•             An increase of $2.94 million in net interest income before provision for loan losses, which included the recapture of $861,000 in interest income on three non-accrual loans that paid off in February 2002.

•             An increase in the provision for loan losses of $300,000.

•             A decrease of $518,000 in non-interest income as securities gains decreased by $906,000 as a result of a premium of $851,000 on a Forward Rate Agreement, recognized as securities gains during last year’s first quarter.

•             Non-interest expense totaled $10.65 million, a decrease of $459,000 from the corresponding quarter of last year, which included goodwill amortization of $165,000, which was discontinued upon adoption of SFAS No. 142, as of January 1, 2002.

Net Interest Income Before Provision for Loan Losses

Net interest income of $25.58 million for the first quarter of 2002 increased $2.94 million or 13.00%, compared to $22.64 million during the like quarter a year ago.  The increase in net interest income was two-folded; an increase of $39.37 million in the excess of average interest-earning assets over total average deposits and other borrowed funds, and a significant improvement in the net interest margin from the last year’s declining trend.  The net interest margin equaled 4.43% for the first quarter of 2002, compared with 4.09% for the fourth quarter of 2001, and 4.47% in last year’s first quarter.  The increase of 34 basis points in the interest margin from the fourth quarter 2001 was primarily due to the repricing of our interest-bearing liabilities in a lower interest rate environment, and the recapture of $861,000 in interest income on three non-accrual loans that paid off in February 2002.  The recaptured interest income contributed 15 basis points to the increase of 34 basis points on the interest margin.

Average interest-earning assets increased $290.71 million over last year’s first quarter and provided an additional $5.45 million of interest income during the first quarter 2002.  The majority of this growth was funded by a 12.79% increase in total average deposits and borrowings, resulting in $2.07 million of additional interest expense.  Quarter-over-quarter, overall changes in volume resulted

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in $3.38 million of additional net interest income.  The interest rate earned on our interest-earning assets decreased by 203 basis points to 6.28%, and as a result, the amount of interest earned decreased $11.23 million from the year ago quarter.  As a result of the repricing of our interest-bearing liabilities in a lower interest rate environment the average interest paid on interest-bearing liabilities decreased by 228 basis points to 2.21%, reducing interest expense by $10.80 million.  The net change related to interest rates earned and paid was a decrease of $436,000 in net interest income.  Quarter-to-quarter, the net interest income before provision for loan losses increased by $2.94 million.  Our average cost of funds on deposits and other borrowed funds equaled 1.95% during the first quarter 2002 compared to 4.00% during the year ago quarter.

Net Interest Income — Taxable-Equivalent Basis

The following table reflects changes, on a taxable-equivalent basis, on net interest income and margin resulting from the interaction between the volume and composition of earning assets, related yields, and associated funding costs.  Portfolio size, composition, and yields earned and funding costs can have a significant impact on net interest income and margin.  Average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income, and interest expense and the weighted-average interest rate and net interest margin were as follows:

Net interest income on a taxable-equivalent basis was $26.13 million in the first quarter of 2002 compared with $24.03 million in the fourth quarter of 2001 and $23.07 million in the first quarter of 2001.  The increase of $3.06 million in the net taxable-equivalent interest income before provision for loan losses from last year’s first quarter was primarily the result of a net increase of $39.37 million in average interest-earning assets over average interest-bearing liabilities.

Our taxable-equivalent net interest margin was 4.52% in the first quarter of 2002, compared with 4.19% in the fourth quarter of 2001 and 4.56% one year ago.

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Provision for Loan Losses

The provision for loan losses was $1.50 million in the first quarter of 2002 and $1.20 million for the first quarter of 2001.  In view of the still uncertain economic picture, and the additional inherent risk resulting from the overall increase of our loan portfolio, we increased the provision for loan losses by $300,000 from the quarter ended March 31, 2001.  For the first quarter 2002, net charge-offs were $1.44 million or 0.36% of average net loans(1) compared to $577,000 or 0.16% during the like quarter a year ago.

(1)  The term “net loans” is defined in this document as loans net of allowance for loan losses and unamortized deferred loan fees.

Non-Interest Income

Non-interest income was $3.33 million in the first quarter of 2002 compared with $3.85 million in the same period of 2001.  The higher non-interest income in 2001 was primarily attributable to an $851,000 premium on a Forward Rate Agreement, recognized as securities gains during the first quarter 2001.  Depository service fees for the first quarter 2002 increased by $269,000 or 22.19% to $1.48 million, compared to $1.21 million during the same period last year.  The increase in depository service fees during the first quarter 2002 was predominantly due to an increase in wire transfer fees.  Letters of credit commissions were down 12.59%, to $472,000, likely as a result of a continuing uncertainty associated with the sustainability of our economic recovery from the point of view of some of our importing customers.  Other operating income increased by $187,000, up 15.13%, to $1.42 million compared to $1.24 million in the year ago quarter.  The increase in other operating income was predominantly due to an increase in commercial and commercial real estate loan fees and gain on sale of SBA loans.

Non-Interest Expense

Non-interest expense decreased $459,000 to $10.65 million in the first quarter of 2002 compared to $11.11 million in the same quarter a year ago.  The decrease during the first quarter 2002 was primarily attributable to a decrease of $299,000 in operations losses in investments in real estate to $616,000 for the first quarter of 2002 compared to $915,000 in last year’s first quarter.  These operations losses were from low income housing investments that qualify for tax credits.  Also contributing to the decrease in non-interest expense was an increase of $128,000 on other real estate owned income.  Salaries and employee benefits increased by $271,000 to $6.17 million during the first quarter 2002 compared to $5.89 million during the first quarter of 2001, primarily due to annual salary adjustments for non-exempt employees during the fourth quarter of 2001, and salary expense for our new branch in Union City, California.  In addition, upon adoption of SFAS No. 142 at January 1, 2002, quarterly goodwill amortization of $165,000 recognized in the first quarter 2001 was eliminated from other operating expense in the first quarter of 2002.

The efficiency ratio improved to 36.84% in the first quarter of 2002, compared to 41.94% in the like quarter of 2001.

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Income taxes

The provision for income taxes was $5.38 million or 32.07% for the first quarter 2002 compared with $4.80 million or 33.85% in the year ago quarter.  The effective income tax rate during both quarters reflects the income tax benefits of a registered investment company subsidiary of the Bank, which provides flexibility to raise additional capital in a tax efficient manner, and tax credits earned from qualified low income housing investments.  The long-term plan for the registered investment company is currently under review.  Depending on the results of the review and other factors, the effective tax rate for 2002 may change.  There can be no assurance that the subsidiary will continue as a registered investment company, or that any tax benefits will continue, or as to our ability to raise capital through this subsidiary.  A proposed change to California tax law introduced on February 21, 2002, related to registered investment companies that could have negatively impacted the Company’s effective tax rate in future periods, was withdrawn on April 3, 2002.  However, there can be no assurance that a similar bill will not be introduced at a future time, or that any tax benefits will continue.

Financial Condition Review

Assets

Total assets were up 2.56% to $2.52 billion at March 31, 2002.  Gross loans increased slightly to $1.68 billion at March 31, 2002 compared to $1.67 billion at year-end 2001.  The majority of the growth was in commercial mortgage loans, which grew by $28.77 million to $767.15 million at March 31, 2002 compared to $738.38 million at year-end 2001.  Our investment securities portfolio increased 6.65% to $664.78 million during the quarter, up $41.46 million, from the $623.31 million at December 31, 2001.

Securities

The fair value of securities available-for-sale at March 31, 2002 was $308.17 million compared to $248.96 million at December 31, 2001.  Securities available-for-sale represented 12.25% of total assets compared to 10.15% at December 31, 2001.  Securities held-to-maturity at March 31, 2002 decreased $17.75 million to $356.61 million compared to $374.36 million at December 31, 2001.  As a percentage of total assets, securities-held-to-maturity decreased to 14.17% compared to 15.26% of total assets at December 31, 2001.

As interest rates stabilized and we experienced a steeper treasury yield curve during the first quarter 2002, the net unrealized gain on securities available-for-sale, which represented the difference between fair value and amortized cost, decreased to $2.88 million compared to a net unrealized gain of $7.17 million at year-end 2001.  Net unrealized gains and losses in the securities available-for-sale are included in accumulated other comprehensive income or loss, net of tax.

The average taxable-equivalent yield on investment securities decreased 62 basis points to 6.07% for the three months ended March 31, 2002, compared with 6.69% for the same quarter in 2001.  The decrease in yield was primarily the result of calls on higher-yielding securities during the twelve month period.

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The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale, as of March 31, 2002 and December 31, 2001:

The following tables summarize the composition, carrying value, gross unrealized gains, gross unrealized losses and estimated fair values of securities held-to-maturity, as of March 31, 2002 and December 31, 2001:

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Loans

In view of the slow economic recovery, and seasonal factors, gross loans increased slightly to $1.68 billion at March 31, 2002 compared to $1.67 billion at year-end 2001.  The majority of the growth was in commercial mortgage loans, which grew by $28.77 million to $767.15 million at March 31, 2002 compared to $738.38 million at year-end 2001.  Commercial loans decreased by $8.01 million to $498.12 million at period-end compared to $506.13 million at year-end 2001.  As of March 31, 2002, we had approximately $66.84 million in undisbursed construction loan commitments.

The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated:

Other Real Estate Owned

Other Real Estate Owned (“OREO”) of $1.23 million, net of a valuation allowance of $131,000, decreased $325,000 at March 31, 2002, compared to $1.56 million at year-end 2001.

As of March 31, 2002, there were four outstanding OREO properties, which included one parcel of land, one commercial building, and two single-family-residences (“SFR”).  All four properties are located in Southern California.  During the first quarter of 2002, we acquired one SFR property and sold two SFR properties, one of which was the property acquired during the first quarter 2002.  The carrying value of the two SFR properties sold was approximately $480,000, and the sale resulted in gains on sale of OREO of $173,000.

To reduce the carrying value of OREO to the estimated fair value of the properties, we maintain a valuation allowance for OREO properties.  We perform periodic evaluations on each property and make corresponding adjustments to the valuation allowance, if necessary.  Any decline in value is recognized by a corresponding increase to the valuation allowance in the current period.  Management did not make any provision for OREO losses in the first quarter of 2002.

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Investments in Real Estate

As of March 31, 2002, our investments comprised of five limited partnerships, one of which was acquired in March 2002.  The limited partnerships are formed for the purpose of investing in low income housing projects, which qualify for federal low income housing tax credits and/or California tax credit.

As of March 31, 2002, investments in real estate increased $4.26 million to $21.99 million from $17.73 million at year-end 2001.  During 2002, we recognized $616,000 in net operation losses from the five limited partnerships.  In addition, in March 2002 we acquired an interest in the Lend Lease Investment Tax Credits XXIII, a limited partnership for $4.87 million.

The following table summarizes the composition of our investments in real estate as of the dates indicated:

Deposits

During the first quarter 2002, customer deposits grew by $34.60 million, up 1.63%, to $2.16 billion, led by increases in time certificates of deposit and non-interest-bearing demand deposit accounts.  Time certificates of deposit increased by $14.60 million to $1.35 billion, and non-interest-bearing demand deposit accounts increased by $10.81 million to $271.24 million.

The following tables display the deposit mix as of the dates indicated:

As interest rate spreads widened between Jumbo CDs and other types of interest-bearing deposits under the prevailing interest rate environment, our Jumbo CD portfolio continues to grow faster than other types of deposits.  Management believes our Jumbo CDs are generally less volatile primarily due to the following reasons:

•      approximately 60.95% of the Bank’s total Jumbo CDs have stayed with the Bank for more than two years;

•                  the Jumbo CD portfolio continued to be diversified with 4,593 individual accounts averaging approximately $187,000 per account owned by 3,163 individual depositors as of January 9, 2002;

•                  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.

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Management continues to monitor the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the patrons the Bank is servicing.  To discourage the concentration in Jumbo CDs, management has continued to make efforts in the following areas:

1)     to offer only retail interest rates on Jumbo CDs;

2)     to offer new transaction-based products, such as the tiered money market accounts;

3)     to promote transaction-based products from time to time, such as demand deposits;

4)     to seek to diversify the customer base by branch expansion and/or acquisition as opportunities arise.

Borrowings

Our borrowings mostly take the form of repurchase agreements and advances from the Federal Home Loan Bank of San Francisco (“FHLB”).  Advances from the FHLB were $50.00 million at March 31, 2002, an increase of $20.00 million over the $30.00 million at December 31, 2001.  Securities sold under agreements to repurchase increased by $8.78 million to $30.90 million compared to $22.11 million at December 31, 2001.

Capital Resources

Stockholders’ equity of $250.53 million at March 31, 2002 was up $4.52 million compared to $246.01 million at December 31, 2001.  Stockholders’ equity equaled 9.96% of total assets at March 31, 2002.  The increase of $4.52 million in stockholders’ equity was due to the following:

•                  an addition of $11.39 million from net income, less dividends paid on common stock of $2.24 million and dividends declared on common stock on March 22, 2002, and payable on April 16, 2002, of $2.52 million;

•                  an increase of $481,000 from issuance of additional common shares through the Dividend Reinvestment Plan and proceeds from exercise of stock options;

•                  a decrease of $2.59 million in accumulated other comprehensive income, including:

•      a decrease of $2.33 million in the net unrealized holding gains on securities available-for-sale, net of tax;

•      a decrease of $66,000 from unrealized gains on cash flow hedging derivatives, net of tax;

•      a decrease of $194,000 in reclassifications adjustments included in net income.

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 25 cents per share to 28 cents per share on a pre-split basis, payable April 16, 2002, to stockholders of record on April 1, 2002.

We declared cash dividends of 25 cents per common share in January 2002 on 8,978,868 shares outstanding, and cash dividends of 28 cents per common share on a pre-stock split basis in March 2002 on 8,986,860 shares outstanding.  Total cash dividends paid in 2002, including the $2.52 million paid in April, amounted to $4.76 million.

Under the Equity Incentive Plan adopted by the Board of Directors in 1998, we granted 56,720 options to purchase 56,720 shares of common stock with an exercise price of $65.10 per share to eligible officers and directors on February 21, 2002.

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Return on average stockholders’ equity was 18.45% and return on average assets was 1.85% for the first quarter of 2002 compared with a return on stockholders’ equity of 17.47% and a return on average assets of 1.71%, for the first quarter of 2001.

Asset Quality Review

Non-performing Assets

Total non-performing assets which include accruing loans past due 90 days or more, non-accrual loans, and OREO were up $4.44 million to $13.92 million from year-end 2001, and down $3.30 million from the Company’s first quarter 2001 total of $17.22 million.  As a percentage of gross loans plus OREO, non-performing assets were 0.83% at March 31, 2002, compared to 0.57% at year-end 2001 and 1.15% at March 31, 2001.

Accruing loans 90 days past due or more on March 31, 2002, were $3.28 million, up $2.59 million from year-end 2001, and up $3.24 million from March 31, 2001.  The increase from year-end 2001 is due primarily to one borrower with six commercial real estate loans totaling $2.63 million.  Non-accrual loans were $9.40 million, up $2.17 million from year-end 2001, and down $2.60 million from March 31, 2001.  The increase of $2.17 million from December 31, 2001 was primarily due to one credit totaling $3.60 million.  OREO assets were $1.23 million, down $325,000 from year-end 2001, and down $3.94 million from March 31, 2001.

The following table sets forth the breakdown of non-performing assets by categories as of the dates indicated:

(2) Excludes $4.85 million of  non-performing trouble debt restructurings loans, of which $2.63 million is included with accruing loans past due 90 days or more, and $2.22 million is included with non-accrual loans.

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Non-accrual Loans

Non-accrual loans of $9.40 million at March 31, 2002 consisted mainly of $6.43 million in commercial loans and $2.21 million in commercial mortgage loans.  The following table presents non-accrual loans by type of collateral securing the loans, as of the dates indicated:

The following table presents nonaccrual loans by type of businesses the borrowers engaged in, as of the dates indicated:

Troubled Debt Restructurings

A troubled debt restructuring (“TDR”) is a formal restructure of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower.  The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date.

Troubled debt restructurings performing under their revised terms were $6.06 million at March 31, 2002 compared to $4.47 million at December 31, 2001.  The increase of $1.59 million was primarily due to two commercial real estate loans added during the quarter totaling $4.22 million, and the exclusion of $2.63 million from one borrower with six commercial real estate loans, which are included with accruing loans past due 90 days or more.

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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 evaluate all classified and restructured loans for impairment.  The classified loans are stratified by size, and loans less than our defined selection criteria are treated as a homogenous portfolio.  If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate.  If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral.  If the measurement of the impaired loan is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses.

We identified impaired loans with a recorded investment of $33.41 million at March 31, 2002, compared to $19.35 million at year-end 2001.  The increase of $14.06 million was due in part to a slow economic recovery, and the recessionary environment during the fourth quarter 2001.  During the first quarter 2002, we classified one commercial mortgage loan, a pre-development land parcel project, with a recorded investment of $6.78 million, which had been a slow-paying loan during the first quarter 2002, as impaired loan.  As of April 30, 2002 this loan was performing and we expect this loan to continue performing under its contractual terms, and may pay-off during the third quarter 2002.  In addition, two impaired commercial loans, with a common guarantor, totalling $4.22 million at March 31, 2002, was restructured (TDR) at the beginning of the first quarter 2002, and is now performing under the revised terms.

The following tables present a breakdown of impaired loans and the related allowances as of the dates indicated:

Loan Concentration

There were no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of March 31, 2002.

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Allowance for Loan Losses

The following table sets forth information relating to the allowance for loan losses for the periods indicated:

Commercial loans accounted for the $1.55 million in charge-offs during the first quarter 2002.  For the three months ended March 31, 2002, annualized net charge-offs were 0.36% of average net loans compared to 0.16% during the like period a year ago, and 0.72% for the fourth quarter 2001.

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 affect collectibility when determining the appropriate level for the allowance for loan losses.  A sustained weakness or further weakening of the economy or other factors that adversely affect 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-offs, and provision for loan losses in future periods.

Our allowance for loan losses consists of the following:

•             Specific allowances: For impaired loans, we provide specific allowances based on an evaluation of impairment, and for each classified 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 classification, the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral, charge-off history, management’s knowledge of the portfolio and general economic conditions.

•             General allowance: The unclassified 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 significant factors, such as national and local economy, trends and conditions, strength of management and loan staff, underwriting standards and the concentration of credit.

Based on our evaluation process and the methodology to determine the level of the allowance for loan losses mentioned previously, management believes the allowance level at March 31, 2002 to be adequate to absorb estimated probable losses identified through its analysis.

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Capital Adequacy Review

Management seeks to retain the Company’s capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.

Both Bancorp’s and the Bank’s regulatory capital continued to well exceed the regulatory minimum requirements as of March 31, 2002.  In addition, the capital ratios of the Bank place it in the “well capitalized” category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal to or greater than 6.0% and Tier 1 leverage capital ratio equal to or greater than 5.0%.

The following table presents the Company’s capital and leverage ratios as of March 31, 2002 and December 31, 2001:

(4)  Risk-weighted assets exclude the net valuation gains on debt securities available-for-sale of $3.74 million, and includes $859,000 of valuation losses on equity securities available-for-sale.  Tier 1 Capital and Total Capital excludes goodwill and other intangible assets of $8.83 million, and accumulated other comprehensive income of $2.47 million.

(5)  Risk-weighted assets exclude the net valuation gains on debt securities available-for-sale of $7.47 million, and includes $298,000 of valuation losses on equity securities available-for-sale.   Tier 1 Capital and Total Capital excludes goodwill of $8.88 million, and accumulated other comprehensive income of $5.06 million.

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The following table presents the Bank’s capital and leverage ratios as of March 31, 2002 and December 31, 2001: