ITEM 1. FINANCIAL STATEMENTS

(Unaudited)

 

3

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CATHAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

(In thousands, except share and per share data)		September 30, 2002			December 31, 2001			% change
Assets
Cash and due from banks		$	65,646		$	73,514		(11	)
Federal funds sold and securities purchased under agreements to resell		30,000			13,000			131
Cash and cash equivalents		95,646			86,514			11
Securities available-for-sale (amortized cost of $253,918 in 2002 and $241,788 in 2001)		264,038			248,958			6
Securities held-to-maturity (estimated fair value of  $396,832 in 2002 and $382,814 in 2001)		378,543			374,356			1
Loans		1,852,497			1,667,905			11
Less:  Allowance for loan losses		(23,132		)	(23,973		)	(4	)
Unamortized deferred loan fees		(4,225		)	(3,900		)	8
Loans, net		1,825,140			1,640,032			11
Other real estate owned, net		653			1,555			(58	)
Investments in real estate, net		22,060			17,727			24
Premises and equipment, net		29,996			29,403			2
Customers’ liability on acceptances		10,050			12,729			(21	)
Accrued interest receivable		12,433			14,545			(15	)
Goodwill		6,552			6,552			—
Other assets		19,973			20,743			(4	)
Total assets		$	2,665,084		$	2,453,114		9
Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits		$	291,222		$	260,427		12
Interest-bearing deposits:
NOW deposits		140,751			135,650			4
Money market deposits		172,353			136,806			26
Savings deposits		281,943			252,322			12
Time deposits under $100		425,278			414,490			3
Time deposits of $100 or more		963,930			922,653			4
Total deposits		2,275,477			2,122,348			7
Securities sold under agreements to repurchase		28,500			22,114			29
Advances from the Federal Home Loan Bank		50,000			30,000			67
Acceptances outstanding		10,050			12,729			(21	)
Other liabilities		21,932			19,912			10
Total liabilities		2,385,959			2,207,103			8
Stockholders’ Equity
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued		—			—			—
Common stock, $0.01 par value, 25,000,000 shares authorized, 18,291,844 issued and 18,006,544 outstanding in 2002 and 18,235,538 issued and 17,957,738 outstanding in 2001		183			182			1
Treasury stock, at cost (285,300 shares in 2002 and 277,800 in 2001)		(7,604		)	(7,342		)	4
Additional paid-in-capital		70,382			68,518			3
Accumulated other comprehensive income, net		7,225			5,063			43
Retained earnings		208,939			179,590			16
Total stockholders’ equity		279,125			246,011			13
Total liabilities and stockholders’ equity		$	2,665,084		$	2,453,114		9

 

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)

 

		Three months ended September 30,						Nine months ended September 30,
(In thousands, except share and per share data)		2002			2001			2002			2001
INTEREST INCOME
Interest on loans		$	27,384		$	30,045		$	79,980		$	93,156
Interest on securities available-for-sale		3,499			3,597			11,553			10,345
Interest on securities held-to-maturity		5,149			5,974			15,621			18,019
Interest on federal funds sold and securities purchased under agreements to resell		265			344			657			1,180
Interest on deposits with banks		7			17			26			44
Total interest income		36,304			39,977			107,837			122,744
INTEREST EXPENSE
Time deposits of $100 or more		5,817			9,513			17,847			31,847
Other deposits		3,432			5,826			10,366			19,438
Other borrowed funds		813			626			2,367			1,747
Total interest expense		10,062			15,965			30,580			53,032
Net interest income before provision for loan losses		26,242			24,012			77,257			69,712
Provision for loan losses		1,500			1,200			4,500			3,600
Net interest income after provision for loan losses		24,742			22,812			72,757			66,112
NON-INTEREST INCOME
Securities gains		1,421			1,063			1,881			1,889
Letters of credit commissions		533			530			1,471			1,645
Depository service fees		1,330			1,209			4,291			3,624
Other operating income		1,901			1,352			4,898			3,900
Total non-interest income		5,185			4,154			12,541			11,058
NON-INTEREST EXPENSE
Salaries and employee benefits		6,374			5,808			18,787			17,315
Occupancy expense		1,009			844			2,757			2,548
Computer and equipment expense		808			698			2,392			2,068
Professional services expense		1,003			1,202			2,857			3,884
FDIC and State assessments		127			121			373			353
Marketing expense		357			667			1,128			1,250
Other real estate owned (income)		—			(284		)	(385		)	(467		)
Operations of investments in real estate		415			327			1,533			1,568
Other operating expense		798			870			2,315			3,185
Total non-interest expense		10,891			10,253			31,757			31,704
Income before income tax expense		19,036			16,713			53,541			45,466
Income tax expense		6,031			5,208			16,910			14,383
Net income		13,005			11,505			36,631			31,083
Other comprehensive income, net of tax
Unrealized holding gains arising during the period		1,939			2,625			3,133			3,634
Cumulative adjustment upon adoption of SFAS 133		—			—			—			566
Unrealized gains on cash flow hedge derivative		417			511			491			619
Less:  reclassification adjustment included in net income		550			711			1,462			805
Total other comprehensive income, net of tax		1,806			2,425			2,162			4,014
Total comprehensive income		$	14,811		$	13,930		$	38,793		$	35,097
Net income per common share:
Basic		$	0.72		$	0.63		$	2.04		$	1.71
Diluted		$	0.72		$	0.63		$	2.02		$	1.71
Cash dividends paid per common share		$	0.140		$	0 .125		$	0.405		$	0.375
Basic average common shares outstanding		18,005,262			18,127,476			17,989,066			18,159,046
Diluted average common shares outstanding		18,133,446			18,180,220			18,113,054			18,215,266

 

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)

 

		For the nine months ended September 30,
(In thousands)		2002			2001
Cash Flows from Operating Activities
Net income		$	36,631		$	31,083
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,500			3,600
Depreciation		1,185			1,094
Gain on sales of other real estate owned		(395		)	(153		)
Gain on sale of loans		(351		)	—
Gain on sale and call of investment securities		(1,881		)	(1,889		)
Amortization of investment security premium, net		509			343
Amortization of goodwill		—			648
Increase (decrease) in deferred loan fees, net		325			(188		)
Decrease in accrued interest receivable		2,112			689
Decrease in other assets, net		49			2,492
Increase in other liabilities		2,020			5,406
Total adjustments		8,073			12,042
Net cash provided by operating activities		44,704			43,125
Cash Flows from Investing Activities
Purchase of investment securities available-for-sale		(187,271		)	(744,416		)
Proceeds from maturity and call of investment securities available-for-sale		164,066			667,283
Proceeds from sale of investment securities available-for-sale		20,143			22,179
Proceeds from repayment of mortgage-backed securities available-for-sale		3,636			7,218
Purchase of investment securities held-to-maturity		(34,003		)	(80,781		)
Proceeds from maturity and call of investment securities held-to-maturity		12,420			46,930
Purchase of mortgage-backed securities held-to-maturity		(38,843		)	(27,657		)
Proceeds from repayment of mortgage-backed securities held-to-maturity		44,840			43,466
Proceeds from sale of loans		13,568			—
Net increase in loans		(203,557		)	(176,392		)
Purchase of premises and equipment		(1,778		)	(772		)
Proceeds from sale of other real estate owned		1,704			1,372
Net increase in investments in real estate		(4,333		)	(1,068		)
Net cash used in investing activities		(209,408		)	(242,638		)
Cash Flows from Financing Activities
Net increase in demand deposits, NOW deposits, money market and savings deposits		101,064			41,913
Net increase in time deposits		52,065			158,180
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		6,386			(44,465		)
Increase in advances from Federal Home Loan Board		20,000			20,000
Cash dividends		(7,281		)	(6,813		)
Proceeds from shares issued to the Dividend Reinvestment Plan		1,431			1,386
Proceeds from exercise of stock options		433			396
Purchase of treasury stock		(262		)	(6,450		)
Net cash provided by financing activities		173,836			164,147
Increase (decrease) in cash and cash equivalents		9,132			(35,366		)
Cash and cash equivalents, beginning of the period		86,514			84,687
Cash and cash equivalents, end of the period		$	95,646		$	49,321
Supplemental disclosure of cash flows information
Cash paid during the period:
Interest		$	31,311		$	54,621
Income taxes		$	16,889		$	4,729
Non-cash investing activities:
Transfers to investment securities available-for-sale within 90 days of maturity		$	10,864		$	6,730
Net change in unrealized holding gains on securities available-for-sale, net of tax		$	1,670		$	2,829
Cumulative adjustment upon adoption of SFAS No. 133, net of  tax		$	—		$	566
Net change in unrealized gains on cash flow hedge derivatives, net of tax		$	492		$	619
Transfers to other real estate owned		$	407		$	660

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CATHAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS< /a>

Business

Cathay Bancorp, Inc. (the “Bancorp”) is the one-bank holding company for Cathay Bank (the “Bank” and together the “Company” or “we”, “us,” or “our”).  The Bank was founded in 1962 and offers a wide range of financial 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 a representative office in Hong Kong, and in Shanghai, China.  In addition, the Bank’s subsidiary, Cathay Investment Company, maintains an office in Taiwan.  The Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located.

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 September 30, 2002 presentation.  For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.

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 impairment 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 reclassified $2.33 million from goodwill to core deposit intangible, which is classified 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.

7

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 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 assets 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, 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 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.  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.  Upon adoption, the Company is required to reclassify prior period items that do not meet the extraordinary classification criteria in APB 30.  The Company adopted SFAS No. 145 effective May 15, 2002.  Adoption of SFAS No. 145 did not have any impact on the results of operations or financial 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,

8

“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged.  The Company expects that adoption of SFAS No. 146 will not have a material impact on the Company’s results of operations or financial 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 financial accounting and reporting for the acquisition of all or part of a financial 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 shall be effective for acquisitions for which the date of acquisition is on or after October 1, 2002.  Other provisions are effective October 1, 2002, some of which permit earlier application.  The adoption of this statement has no impact on the Company.

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,” 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 September 30, 2002 was less than two and one half 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 $790,000 that were reclassified into earnings during the nine months ended September 30, 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 $1.07 million.

9

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 adjusted for the two-for-one stock split payable on May 9, 2002, to stockholders of record on April 19, 2002.

For the three and nine months ended September 30, 2002, all outstanding options had a dilutive effect and were included in the computation of diluted earnings per share.  Options to purchase an additional 52,421 shares of common stock were outstanding for the three and nine months ended September 30, 2001, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

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

10

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 wholly-owned 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 “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology 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 in California and other regions where the Bank has operations such as the currently unknown impact of the recent West Coast port closures.

•                  War and terrorism; and

•                  Other factors discussed in the section entitled “Factors that May Affect Future Results” in 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/

11

THIRD QUARTER HIGHLIGHTS:

•                  Return on average stockholders’ equity (“ROE”) was 18.94% and return on average assets (“ROA”) was 1.96% for the quarter ended September 30, 2002.

•                  Loan production grew by 7.30% or $124.24 million in the 3^rd quarter, while core deposits grew by 5.10% or $63.61 million, and total deposits grew by 3.12% or $68.83 million.

•                  Diluted earnings per share increased 14.29% to $0.72 compared to earnings per share of $0.63 a year ago.

•                  3^rd quarter 2002 net income increased 13.04% to $13.01 million compared to $11.51 million during the same quarter a year ago.

•                  The efficiency ratio improved to 34.65% from 36.40% a year ago.

•                  An increase of 24.82% in non-interest income, which totaled $5.19 million compared to $4.15 million in the year ago quarter.

•                  Non-performing assets (“NPAs”) dropped to $11.78 million from $19.50 million in the 3^rd quarter 2001.

•                  Tier 1 risk-based capital ratio of 11.81%, total risk-based capital ratio of 12.86%, and Tier 1 leverage capital ratio of 10.01%.

•                  Sacramento Branch opened for business on September 9, 2002.

•                  September 27^th marked the grand opening ceremony of the Brooklyn Branch, which opened for business on June 27, and which became our third branch in the New York area.

Consolidated Income Statement Review

Net Income

Consolidated net income of $13.01 million for the third quarter of 2002, was up 13.04% from third quarter 2001 net income of $11.51 million.  On an earnings-per-share basis, third quarter 2002 net income was $0.72 per diluted share, an increase of 14.29%, over the $0.63 per diluted share one year ago.

Pretax income

For the third quarter 2002 our pretax income increased by $2.32 million to $19.04 million, up 13.90%, from the corresponding quarter of last year.  The increase to pretax income was the net result of the following changes in income and expenses:

•                  An increase of $2.23 million in net interest income before provision for loan losses.

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

•                  An increase of $1.03 million or 24.82% in non-interest income.

•                  An increase of $638,000 or 6.22% in non-interest expense.

Net Interest Income Before Provision for Loan Losses

During the third quarter 2002, our net interest income increased by $2.23 million over the comparable quarter of a year ago, reflecting a $35.74 million growth in the excess of average interest-earning assets over average deposits and other borrowings.  Net interest income for the third quarter 2002 was $26.24 million compared to $24.01 million during the third quarter 2001.

The increase in average interest-earning assets from last year’s third quarter reflected the growth in average gross loans totaling $216.61 million.  This increase was funded primarily by increases in

12

average deposits and other borrowings totaling $203.36 million.  The overall change to interest income and interest expense related to volume resulted in $2.99 million of additional net interest income.

As a result of the ongoing slow economic recovery, interest rates have remained relatively flat during 2002, in contrast to the declining interest rate environment we experienced throughout 2001.  A year ago, the Federal Open Market Committee target Fed funds rate was 3.00% compared to 1.75% for the first nine months of 2002.  This lower interest rate environment generated lower interest income and interest expense from changes in interest rate.  The overall change to interest income and interest expense related to changes in interest rates resulted in a decrease of $755,000 to net interest income from last year’s third quarter.  Also see “Quantitative and Qualitative Disclosures About Market Risk” on this 3^rd Quarter 2002 report on Form 10-Q for a discussion of the impact to the net interest income of the Bank due to the November 7, 2002, decision by the Federal Open Market Committee to lower its federal funds interest rate by 50 basis points.

Our net interest margin for the third quarter equaled 4.24% compared to 4.30% a year ago, and 4.31% for the second quarter 2002.  The interest rate earned on our interest-earning assets was 5.86% during the third quarter 2002 compared to 7.15% during the third quarter a year ago, and our average cost of funds on deposits and other borrowed funds equaled 1.72% for the third quarter 2002 compared to 2.99% during the third quarter 2001.

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:

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Net interest income on a taxable-equivalent basis was $26.78 million in the third quarter of 2002 compared with $25.96 million in the second quarter of 2002 and $24.55 million in the third quarter of 2001.  The increase of $2.22 million in the net taxable-equivalent interest income before provision for loan losses from last year’s third quarter was primarily the result of a net increase of $35.74 million in average interest-earning assets over average deposits and other borrowed funds.

Our taxable-equivalent net interest margin was 4.32% in the third quarter of 2002, compared with 4.40% in the second quarter of 2002 and 4.39% one year ago.

Provision for Loan Losses

The provision for loan losses represents the charge against current earnings that is determined by management, through a disciplined credit review process, as the amount needed to maintain an allowance that is sufficient to absorb loan losses inherent in the Company’s loan portfolio.  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 to $1.50 million in the third quarter of 2002 compared to $1.20 million for the third quarter of 2001.  Also see “Allowance for Loan Losses” on this 3^rd Quarter 2002 report on Form 10-Q.

Non-Interest Income

Non-interest income was $5.19 million for the third quarter of 2002, an increase of $1.03 million or 24.82%, when compared with $4.15 million during the same quarter a year ago.

During the third quarter 2002, we sold $15.00 million of securities available-for-sale, resulting in securities gains totaling $1.42 million.  The comparable numbers for the year ago quarter were securities gains of $1.06 million and no write-downs during the quarter.  The proceeds from sales were used to fund our increasing loan demand during the third quarter 2002, and to take advantage of the current interest rate environment.

Reflecting our higher customer volumes and an increase in the number of transaction accounts, our depository service fees for the third quarter 2002 increased 10.01% to $1.33 million, compared to $1.21 million during the like period a year ago.  Letters of credit commissions were relatively flat at $533,000, most 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.

Other operating income increased by $549,000, up 40.61%, to $1.90 million compared to $1.35 million in the year ago quarter.  The increase in other operating income was primarily due to increases in wire transfer fees, loan related fees, gain on sale of SBA loans, foreign exchange fees, and an increase in safe deposit fees primarily related to our new branch in Brooklyn, New York.

Non-Interest Expense

Non-interest expense increased $638,000, or 6.22%, to $10.89 million in the third quarter of 2002, and our efficiency ratio improved to 34.65% compared to 36.40% in the year ago quarter.

Annual salary adjustments, additional employees and salary expense for our new branches in Union City — California, which opened for business on October 5, 2001, Brooklyn - New York, Sacramento - California, and our new representative office in Shanghai - China drove the increase of $566,000 in salaries and employee benefits in the third quarter 2002.  Also, as a result of these three new branches and the new representative office, our occupancy, and computer and equipment expense increased by

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$275,000.  Marketing expense, which includes charitable donations and contributions made by the Company, was down $310,000, primarily because the prior year’s third quarter included a $250,000 contribution towards relief efforts in response to the tragic events of September 11.  In addition, the quarterly goodwill amortization of $165,000 was discontinued upon the adoption of SFAS No. 142 on January 1, 2002.

Income taxes

The provision for income taxes was $6.03 million or an effective income tax rate of 31.68% for the third quarter 2002 compared with $5.21 million or an effective income tax rate of 31.16% 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 continues to be under review and may result in a decision to deregister this subsidiary in the near future.  Depending on the results of the review and other factors, the effective tax rate for 2002 may increase.  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.

YEAR-TO-DATE REVIEW – CONSOLIDATED INCOME STATEMENT

The first nine months of this year saw a 17.85% increase in our net income to $36.63 million compared to $31.08 million over the same period a year ago.  Our earnings per diluted share for the nine months ended September 30, 2002, increased by 18.13% to $2.02 over the $1.71 per diluted share for the same period a year ago.

This earnings performance produced a return on average stockholders’ equity of 18.81% and a return on average assets of 1.91% for the nine months of 2002 compared to a return on average stockholders’ equity of 18.29% and a return on average assets of 1.81%, for the nine months ended September 30, 2001.  The net interest margin for the nine months ended September 30, 2002, decreased 5 basis points to 4.33% compared to 4.38% during the like period a year ago.  On a taxable-equivalent basis, the net interest margin equaled 4.46% compared to 4.47% a year ago.

Non-interest income was up 13.41% to $12.54 million for the first nine months of 2002, compared to $11.06 million in the like period a year ago.  The increase in 2002 was primarily attributable to increases in depository services fees and other operating income.

For the nine months ended September 30, 2002, non-interest expense was relatively flat.  Total non-interest expense during 2002 equaled $31.76 million compared to $31.70 million during the same period a year ago.  The increase in non-interest income coupled with a relatively flat non-interest expense during 2002 drove the decrease in the efficiency ratio for the nine months ended September 30, 2002, to 35.36% compared to 39.25% during the same period a year ago.

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Financial Condition Review

Assets

Total assets were $2.67 billion at September 30, 2002, up 8.64% from year-end 2001 of $2.45 billion, primarily reflecting the growth in commercial mortgage loans and commercial loans.  Our investment securities portfolio increased 3.09% to $642.58 million at September 30, 2002, up $19.27 million, from the $623.31 million at December 31, 2001.  As a percentage of total assets, the investment securities portfolio decreased to 24.11% compared to 25.41% at year-end 2001.  Cash and cash equivalents increased by $9.13 million from December 31, 2001.

Securities

Securities available-for-sale represented 11.76% of average interest-earning assets for the first nine months of 2002 compared with 9.93% for the first nine months of 2001.  The fair value of securities available-for-sale (“AFS”) at September 30, 2002 was $264.04 million compared to $248.96 million at December 31, 2001.  This increase of $15.08 million for the nine months ended September 30, 2002, represented primarily purchases of US Government agency securities.  During the first nine months of 2002, the Bank sold AFS securities with a net book value of $20.14 million.  This AFS securities sales resulted in gains of $1.89 million, exclusive of gains on calls of securities of $233,000 and $245,000 in write-downs on available-for-sale venture capital investments.  The gain on sale from AFS securities was related to the sale of US Government agency notes and corporate bonds.

Market expectations of a “decrease” to a “no change” in the federal funds interest rate by the Federal Reserve, flattened the yield curve during the third quarter 2002 from the steeper levels during the first quarter 2002, and as a result the net unrealized gain on securities available-for-sale, which represented the difference between fair value and amortized cost, increased to $10.12 million compared to a net unrealized gain of $2.88 million at March 31, 2002, and $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.

Securities held-to-maturity represented 15.34% of average interest-earning assets for the first nine months of 2002 compared with 18.69% for the first nine months of 2001.  Securities held-to-maturity at September 30, 2002 increased $4.19 million to $378.54 million compared to $374.36 million at December 31, 2001.  The increase in securities held-to-maturity during the first nine months of 2002 was primarily the result of purchases of collateralized mortgage obligations, partially offset by calls and maturities of securities held-to-maturity.

The average taxable-equivalent yield on investment securities decreased 60 basis points to 5.95% for the nine months ended September 30, 2002, compared with 6.55% for the same period in 2001.  For the three months ended September 30, 2002, the average taxable-equivalent yield on investment securities decreased 60 basis points to 5.78% compared with 6.38% for the same period in 2001.

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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 September 30, 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 September 30, 2002 and December 31, 2001: