Cathay Bancorp, Inc. - Form 10-K for 12/31/01

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 þ No o

Indicate by check mark if disclosure of delinquent filers 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

The aggregate market value of the voting stock held by non-affiliates of Registrant as of February 26, 2002 was $477,272,693 (computed on the basis of $65.50 per share, which was the closing price of our Common Stock reported by the Nasdaq National Market on February 26, 2002).*

The number of shares outstanding as of February 26, 2002: Common Stock, $.01 par value — 8,985,667 shares.


•	Portions of Registrant’s definitive proxy statement relating to Registrant’s 2002 Annual Meeting of Stockholders to be held April 15, 2002, as filed, 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, officers, and Employee Stock Ownership Plan have been excluded.

In this annual report on Form 10-K, “Bancorp“refers to Cathay Bancorp, Inc. and the “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements in this report include forward-looking statements regarding management’s beliefs, projections, and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, also include words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially 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

	•	other factors discussed in Part II — Item 7 — “Factors that May Affect 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 reflect future developments or events.

Cathay Bancorp, Inc. is a business corporation organized under the laws of the State of Delaware on March 1, 1990. Our only office, and our principal place of business, is located at the main office 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.

Our primary business is the business of the Bank. Therefore, the competitive conditions to be faced by us are expected to continue to include those faced by the Bank. See “Business of the Bank — Competition.” In addition, many banks and financial 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

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 Officer, and the General Counsel. In the future, if we acquire other financial institutions or pursue other lines of business, we may hire additional employees. See “Business of the Bank — Employees” below.

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 office is located in the Chinatown area of Los Angeles, at 777 North Broadway, Los Angeles, California 90012.


	•	Monterey Park

	•	Alhambra (2 locations)

	•	City of Industry (2 locations)

	•	Westminster

	•	San Gabriel

	•	Torrance

	•	Cerritos

	•	Irvine

	•	Diamond Bar


	•	San Jose

	•	Oakland

	•	Cupertino

	•	Milpitas

	•	Millbrae

	•	Richmond

	•	Union City


	•	Texas — One branch located in the city of Houston

	•	Hong Kong — One representative office.

Our primary market area is defined by the Community Reinvestment Act delineation, which includes the contiguous areas surrounding each of the Bank’s branch offices. It is the Bank’s policy to reach out and actively offer 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.


	•	letters of credit

	•	wire transfers

	•	spot and forward contracts

	•	traveler’s checks

	•	safe deposit

	•	night deposit

	•	social security payment deposit

	•	collection

	•	bank-by-mail

	•	drive-up and walk-up windows

	•	automatic teller machines (“ATM”)

	•	Internet banking services

	•	other customary bank services.

To accommodate those customers who cannot conduct banking business during normal banking hours, the Bank has extended its banking hours to include Saturday hours for most branches and Sunday hours at its New York branches. In addition, the operations of the drive-up and walk-up facilities are extended past normal banking hours.

Since its inception, the Bank’s policy has been to attract business from, and to focus its primary services for the benefit of, individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located. The three general areas to which the Bank has directed its lendable assets are:


	•	residential mortgage loans, commercial mortgage loans, construction loans, mortgage warehousing loans

	•	commercial loans, trade financing loans

	•	home equity lines of credit, installment loans to individuals for automobile, household, and other consumer expenditures.

Beginning in 1999, the Bank launched a program under the name of Cathay Global Investment Services, which allows its customers to purchase mutual funds, annuities, equities, bonds, and short-term money market

instruments through Prime Vest Financial Services. In 2001, UVest Financial Services Group, Inc. replaced Prime Vest Financial Services. In February 2001, Cathay Bank, in conjunction with Trade.com, became one of the first Chinese-American banks to offer Internet stock trading services. However, Trade.com ceased operations in July 2001, and online trading is now made available through UVest Financial Services Group, Inc.

The Bank’s securities portfolio is managed by the Vice President and Investment Officer in accordance with a comprehensive written Investment Policy which addresses strategies, types, and levels of allowable investments, and which is reviewed and approved by the Board of Directors of the Company.

Information concerning the carrying value and the maturity distribution and yield analysis of the Company’s securities available-for-sale and securities held-to-maturity portfolios is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in “Note 4 to the Consolidated Financial Statements.” A summary of the amortized cost and estimated fair value of the Bank’s securities by contractual maturity is included in Part II — Item 7 — “Management Discussion and Analysis of Financial Condition and Results of Operations,” and in “Note 4 to the Consolidated Financial Statements.”

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, financial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower’s business or project, and prevailing economic trends and conditions. In the case of mortgage loans, our lending policy requires an independent appraisal on real estate property in accordance with applicable regulatory guidelines. Loan originations are obtained by a variety of sources, including existing customers, walk-in customers, referrals from brokers, and advertising. In its present marketing efforts, the Bank emphasizes its community ties, customized personal service, competitive rates, and an efficient underwriting and approval process, with loan applications taken at all of the Bank’s branch offices. The Bank’s centralized documentation department supervises the obtaining of credit reports, appraisals, and other documentation involved with a loan.

Distribution and maturity of loans. Information concerning loan type and mix, distribution of loans and maturity of loans is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in “Note 5 to the Consolidated Financial Statements.”

Non-performing Loans and Allowance for Loan Losses. Information concerning non-performing loans, allowance for loan losses, loans charged-off, loan recoveries, and other real estate owned is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in “Note 5 to the Consolidated Financial Statements.”

The Company monitors its asset quality with lending and credit policies, which require the regular review of its loan portfolio. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under closer supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off.

The Company’s policy is to place loans on a non-accrual status if interest and principal or either interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any interest collected or accrued in the previous three months, is generally reversed against current income. Thereafter, any payment is generally first 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 — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in “Note 5 to the Consolidated Financial Statements.”

The Bank attempts to price its deposits in order to promote deposit growth and offers 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, certificates of deposit, individual retirement accounts, college certificates 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 offering 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 — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Borrowings include securities sold under agreements to repurchase, the purchase of federal funds, and funds obtained as advances from the Federal Home Loan Bank (“FHLB”) of San Francisco. Information concerning the types, amounts, and maturity of our borrowings is included in “Note 9 to the Consolidated Financial Statements.”

Information concerning the return on average assets, return on average stockholders’ equity, average equity to assets ratio and dividend payout ratio is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Information concerning interest-earning asset mix, average interest-earning assets, average interest-bearing liabilities and the yields on interest-earning assets and interest-bearing liabilities is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

An analysis of changes in net interest income due to changes in rate and volume is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Information concerning the Bank’s outstanding loan commitments and letters of credit is included in “Note 12 to the Consolidated Financial Statements.”

Cathay Investment Company. Cathay Investment Company is a wholly owned subsidiary of Cathay Bank that was formed in 1984 to invest in real property. In 1987, Cathay Investment Company opened an

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 office is located at 777 North Broadway, Los Angeles, California 90012. The long-term plan for the registered investment company is currently under review.

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 financial institutions to diversify its customer base in order to compete for new deposits and loans, and to be able to serve its customers more effectively. On October 5, 2001, we opened a new branch in Union City, Northern California. We have obtained regulatory approval to open a new branch in Brooklyn, New York, and we have applied for regulatory approval to open a new branch in Sacramento, California. We anticipate both branches will be opened in the early part of the second quarter 2002. In addition, with China’s accession into the World Trade Organization and its increasing importance in the world economy, we applied and received approval to open a representative office in Shanghai, China. We expect this office to be opened in the second quarter 2002.

The banking business in California, and specifically in the market areas served by most of Cathay Bank’s branch offices, 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 financial and non-financial 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 offer services that are not offered directly by the Bank and have substantially greater financial resources than does the Bank.

The direction of federal legislation in recent years seems to favor increased competition between different types of financial institutions and to foster new entrants into the financial services market. Competitive conditions are expected to continue to intensify as legislation is enacted which has the effect of dissolving historical barriers that limit participation in certain markets, increasing the cost of doing business for banks, or affecting the competitive balance between banks and other financial and non-financial 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 financial institutions in its primary service areas, the Bank relies principally upon the following:


	•	local promotional activities

	•	personal contacts by its officers, directors, employees, and stockholders

	•	extended hours on weekdays, Saturday banking, and in certain locations Sunday banking

	•	Internet banking

	•	an Internet website, located at “www.cathaybank.com”

	•	certain other specialized services.

For customers whose loan demands exceed the Bank’s lending limit, the Bank has arranged in the past, and intends in the future, to arrange for such loans on a participation basis with correspondent banks. The Bank also assists customers requiring other services not offered by the Bank to obtain such services from its correspondent banks.

In Southern California, at least three other Chinese-American banks of comparable size compete for loans and deposits with us and two super-regional banks also compete for deposits. In Northern California, one of these Chinese-American banks competes for loans and deposits and the same two super-regional banks compete for deposits as well.

In addition, there are many other Chinese-American banks in both Southern and Northern California. Banks from the Pacific 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.

As of December 31, 2001, Bancorp and Bank (including subsidiaries) employed approximately 555 persons, including 126 officers. None of the employees are represented by a union. Management believes that its relations with employees are excellent.

The table below sets forth the names, ages, and positions of all executive officers of the Company. See Part III, Item 10 — “Directors and Executive Officers of the Registrant,” below for further information regarding the executive officers of Bancorp and Cathay Bank.

As a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended and as revised by the Gramm-Leach-Bliley Act of 1999, Bancorp’s primary regulatory authority is the Board of Governors of the Federal Reserve System (or the Federal Reserve Board). The Bank Holding Company Act requires Bancorp to file annual reports of its operations with the Federal Reserve Board. Bancorp is also subject to examination by the Federal Reserve Board.

Cathay Bank, as a California state-chartered commercial bank, is regulated by the Federal Deposit Insurance Corporation (or FDIC) and by the State of California Department of Financial Institutions. The Bank’s deposits are insured, up to the legal maximum, by the FDIC. Although not a member of the Federal Reserve System, the Bank is subject to Federal and State rules and regulations.

Regulatory authorities review key operational areas of Bancorp and the Bank, including asset quality, capital adequacy, liquidity, management and administrative ability, compliance with consumer protection laws and security of confidential 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 — Interstate Banking” and “Federal Limits on the Activities and Investments of State-Chartered Banks” below.

Bancorp also files periodic reports, proxy statements, and other information with the Securities and Exchange Commission.

The following summary describes some of the more significant laws, regulations, and policies that affect 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 qualified in its entirety by reference to such provisions.

The banking and financial services industry is heavily regulated. Regulations, statutes and policies affecting 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 financial institutions. Generally, the regulatory framework is not intended to protect our stockholders.

We expect that changes in the banking and financial services industry will continue to occur in the future. Some of the changes may create opportunities for us to compete in financial markets with less regulation. However, these changes also may create new competitors in geographic and product markets which have historically been limited by law to banking institutions, such as Cathay Bank. We cannot predict how changes in regulations, statutes, or policies will impact us. These changes may have a material adverse effect on our business and earnings.

The operations of bank holding companies and their subsidiaries are affected by the fiscal and monetary policies of the Federal Reserve Bank. An important function of the Federal Reserve Bank is to regulate the national supply of bank credit.

The Federal Reserve Bank uses the following instruments of monetary policy, among others, as a means to implement its objectives:


	•	open market purchases and sales of U.S. government securities

	•	changes in the discount rate on bank borrowings

	•	changes in reserve requirements on bank deposits and borrowings by banks and their affiliates.

The Federal Reserve Bank uses these instruments of monetary policy in varying combinations to seek to influence 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 inflation. The Federal Reserve Bank’s fiscal and monetary policies will continue to have a significant effect on Bancorp and the Bank.

As a bank holding company, Bancorp is subject to regulation, supervision, and examination by the Federal Reserve Board. It is required to file reports with the Federal Reserve Board and furnish such other information as may be required by the Federal Reserve Board under the Bank Holding Company Act.

The Federal Reserve Board has a policy that bank holding companies must serve as a source of financial and managerial strength to their subsidiary banks and may not conduct their operations in an unsafe or unsound manner. It is the Federal Reserve Bank’s position that bank holding companies should stand ready to use their available resources to provide adequate capital to their subsidiary banks during periods of financial stress or adversity. Bank holding companies should also maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting their subsidiary banks. If a bank holding company fails in these requirements, the Federal Reserve Board will generally consider such failure to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations or both.

The Federal Reserve Board also has the authority to regulate bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Federal Reserve Board may require Bancorp to file written notice and obtain its approval prior to purchasing or redeeming Bancorp’s equity securities.

Bancorp must also obtain the prior approval of the Federal Reserve Board if it acquires more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of a bank or bank holding company. The Federal Reserve Board must also give prior approval to any merger or consolidation with another bank holding company.

In addition, under the Bank Holding Company Act, Bancorp cannot acquire direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company. It cannot engage directly or indirectly in activities other than banking, managing or controlling banks or furnishing services to its subsidiaries. However, there are some statutory exceptions. Subject to prior approval of the Federal Reserve Board, Bancorp can acquire shares of companies engaged in activities that the Federal Reserve Board deems to be closely related to banking or managing or controlling banks. In addition, as discussed below under “Financial Services Modernization Legislation,” if Bancorp becomes a “Financial Holding Company,” certain restrictions on acquiring ownership or control of certain non-banking companies will no longer apply.

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


	•	Section 20 of the Glass-Steagall Act, which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities, and

	•	Section 33 of the Glass-Steagall Act, which restricted officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities.

In addition, the Modernization Act expressly preempted any state law restricting the establishment of financial affiliations, primarily related to insurance. The law established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial 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 financial activities provided that it became a “Financial Holding Company” under the Modernization Act.

Such financial activities include banking, insurance, and securities activities; merchant banking; and additional activities incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

To affiliate with other financial service providers, we would have to become a “Financial Holding Company.” We would have to file a declaration with the Federal Reserve Board, electing to engage in activities permissible for Financial Holding Companies and certify that we are eligible to do so because the Bank is “well-capitalized” and “well-managed.” The Federal Reserve Board must also determine that the Bank, as the insured depository institution subsidiary, has at least a “satisfactory” rating under the Community Reinvestment Act. We have not sought to become a Financial Holding Company. We will continue to monitor our strategic business plan, market conditions, and other factors to determine whether we will elect to become a Financial Holding Company and take advantage of the expanded powers provided in the Modernization Act.

Under the Modernization Act, securities firms and insurance companies that become Financial Holding Companies may acquire banks and other financial 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 financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. Prior Federal Reserve Board approval is required before a Financial Holding Company acquires the beneficial 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 firms, and insurance companies to affiliate, the financial 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 financial subsidiary. It expressly preserved a state bank’s right to retain all existing subsidiaries. California permits state chartered commercial banks to engage in any activity permissible for national banks. Under the Modernization Act, a national bank subsidiary may engage in any financial activity which may be conducted through a Financial Holding Company subsidiary, except for insurance underwriting, insurance investments, real estate investment or development or merchant banking. Therefore, Cathay Bank can form subsidiaries to engage in the activities authorized by the Modernization Act to the same extent as a national bank. To form a financial subsidiary, the Bank must be “well-capitalized” and meet other regulatory requirements. See “Other Banking Regulations — Federal Limits on the Activities and Investments of State-Chartered Banks” below.

The Modernization Act may have the result of increasing the amount of competition that Bancorp and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial 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 financial institutions. The Office of the Comptroller of the


	•	initial notices to customers about their privacy policies (including a description of the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates)

	•	annual notices of such privacy policies to current customers

	•	subject to certain exceptions, a reasonable method for customers to “opt out” of disclosure to nonaffiliated third parties.

The rules became effective November 13, 2000, with compliance being optional until July 1, 2001. These federal privacy protections do not prohibit state governments from imposing more protective rules, and a variety of such bills are currently pending in the California state legislature.

Consumer Protection Rules — Sale of Insurance Products. On December 4, 2000, the federal bank and thrift regulatory agencies adopted consumer protection rules for the sale of insurance products by depository institutions as required by the Modernization Act. The effective date was originally April 1, 2001, but on March 19, 2001, the federal agencies postponed the effective date until October 1, 2001. The rules apply to any depository institution or any person selling, soliciting, advertising, or offering insurance products or annuities to a customer at an office 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 affiliate

	•	is not insured by the FDIC or any other agency of the United States, the depository institution or its affiliates

	•	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 affiliates; on the consumer’s agreement not to obtain an insurance product or annuity from an unaffiliated entity; or by prohibiting a consumer from obtaining an insurance product or annuity from an unaffiliated 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 Confidential Customer Information. In February 2001, the federal bank and thrift regulatory agencies published guidelines requiring financial institutions to establish an information security program to:


	•	identify and assess the risks that may threaten customer information

	•	develop a written plan containing policies and procedures to manage and control these risks

	•	implement and test the plan

	•	adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information, and internal or external threats to information security.

Each institution may implement a security program appropriate to its size and complexity and the nature and scope of its operations.

The guidelines outline specific security measures that institutions should consider in implementing a security program. A financial institution must adopt those security measures determined to be appropriate. The guidelines require the Board of Directors to oversee an institution’s efforts to develop, implement and

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 effective 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.

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 financing of terrorism and, among other things, requires or will require financial institutions to do the following (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures, and controls with respect to private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. Regulations interpreting the Patriot Act have not been finalized and the Company is not yet able to determine the impact of the Patriot Act on its financial condition or results of operations.

Cathay Bank, as a California state-chartered commercial bank, the Bank is subject to primary supervision, periodic examination, and regulation by the FDIC and by the State of California Department of Financial Institutions. The Bank’s deposits are insured by the FDIC up to the legal maximum and the Bank is subject to FDIC rules applicable to insured banks. Although not a member of the Federal Reserve System, the Bank is subject to Federal and State rules and regulations.

Capital Requirements. The Federal Reserve Board and the FDIC have established risk-based minimum capital guidelines that seek to ensure that banking organizations are appropriately capitalized. The guidelines are intended to provide a measure of capital that reflects 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 off-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 off-balance sheet items are multiplied by one of several risk-adjusted percentages. The risk-adjusted percentages range from 0% for assets with low credit risk, such as U.S. Treasury Securities, to 100% for assets with high credit risk, such as commercial loans.

The federal regulators require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% (10% to be well capitalized) and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (6% to be well capitalized). In addition, the federal regulators require a minimum Tier 1 leverage ratio of 4% (5% to be well capitalized). The Company was well capitalized as of December 31, 2001 with a total risk-based capital ratio of 12.30%, a Tier 1 risk-based capital ratio of 11.15% and Tier 1 leverage ratio of 9.48%.

The tables presenting our risk-based capital and leverage ratios as of December 31, 2001 are included in Note 11 to the Consolidated Financial Statements of Cathay Bancorp, which are included in this Annual Report on Form 10-K.

Prompt Corrective Action. In December 1991, the Federal Deposit Insurance Corporation Improvement 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,” “significantly undercapitalized” or “critically undercapitalized.” It prescribes standards for safety and soundness of all insured depository

An institution that, based on its capital levels, is classified 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 affected institution must receive proper notice and have an opportunity for a hearing. At each successive lower capital category, an insured bank is subject to more restrictions, including restrictions on the bank’s activities, operational practices, and ability to pay dividends.

In addition to measures taken under the prompt corrective action provision, commercial banking organizations may be subject to potential enforcement actions by federal regulators for, among other things, unsafe or unsound practices in conducting their businesses, or violations of any law, rule, regulation, or any condition imposed in writing by the relevant regulatory agency or any written agreement with a regulatory agency.

Premiums for Deposit Insurance. The Bank’s deposit accounts are insured by the Bank Insurance Fund, as administered by the FDIC, up to the maximum permitted by law. The amount of FDIC assessments paid by each Bank Insurance Fund member institution is based on its capitalization risk level and its supervisory subgroup category. The supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required.

The Bank Insurance Fund assessment rate as of December 31, 2001, ranged from zero to 27 basis points per $100 of insured deposits. At December 31, 2001, the Bank’s assessment rate was zero. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. An increase in the Bank Insurance Fund assessment rate could have a material adverse effect on our earnings.

The FDIC is authorized to terminate a depository institution’s deposit insurance if it finds among other things that:


	•	the institution’s condition is unsafe or unsound

	•	the institution has engaged in unsafe or unsound practices

	•	the institution has violated any applicable law, rule, regulation, order or condition imposed in writing by the relevant regulating agency or any written agreement with a regulating agency.

Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, on January 1, 1997, banks began paying an annual assessment towards the retirement of U.S. government issued Financing Corporation bonds. The bonds were issued in the 1980s to capitalize the Federal Savings and Loan Insurance Corporation to assist in the recovery of the savings and loan industry. FDIC insured institutions paid approximately 1.90 cents per $100 of Bank Insurance Fund-assessable deposits in 2001.

Dividends. As a California corporation and a state-chartered bank, the Bank may not pay dividends to Bancorp in excess of certain statutory and regulatory limits. As of December 31, 2001, the maximum dividend that the Bank could have declared, subject to regulatory approval, was $87,228,000.

The California Commissioner of Financial Institutions and the Federal Reserve Board may also prohibit a bank from paying dividends to its bank holding company if they determine that such payment would constitute an unsafe or unsound banking practice. In addition, if Cathay Bank fails to comply with its minimum capital requirements, its regulators may restrict its ability to pay dividends using prompt corrective action or other enforcement powers.

Community Reinvestment Act and Fair Lending. The Bank is subject to certain fair lending requirements and reporting obligations involving its home mortgage lending operations and Community Reinvestment 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 specific lending requirements or programs, nor does it limit a bank’s discretion to develop the types of products and services that it believes are best suited to its community. However, the Community Reinvestment Act does require that federal regulators, when examining an institution, assess the institution’s record of meeting the credit needs of its community and take such record into account in evaluating certain applications, including an application to become a Financial Holding Company under the Modernization Act.

Federal regulators are required to provide a written examination of an institution’s Community Reinvestment Act performance. The regulators rate an institution’s performance using a four tiered rating system. The ratings are: outstanding record of meeting community credit needs; satisfactory record of meeting community credit needs; needs to improve record of meeting community credit needs; and substantial noncompliance of meeting community credit needs. The ratings are available to the public. Based upon an examination by the FDIC in January 2001, the Bank’s Community Reinvestment Act rating was “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 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 significant risk to the affected 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 financial subsidiary, subject to certain conditions. Under the Modernization Act, in January 2001, the FDIC adopted final rules to streamline the certification 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 financial 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 financial 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 satisfied in order for a financial subsidiary of a state nonmember insured bank to conduct securities underwriting. Securities activities are subject to a variety of general and specific safety and soundness restrictions. Further, state banks wishing to engage in activities prohibited to national

Interstate Banking. The Federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 were signed into law on September 29, 1994. The Riegle-Neal Act significantly relaxed or eliminated many restrictions on interstate banking. Effective September 29, 1995, the Riegle-Neal Act permitted a bank holding company to acquire banks in states other than its “home state,” even if applicable state law would not permit that acquisition. Such acquisitions continue to require Federal Reserve Board approval and remain subject to certain state laws.

Effective 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 effective 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 effective on October 2, 1995. It required out-of-state institutions, which did not own a California bank to acquire an existing whole five-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 first enacted in 1986 that permitted interstate banking with other states on a reciprocal basis.

Banks and bank holding companies contemplating acquisitions must comply with the following Acts, as applicable:


	•	the competitive standards of the Bank Holding Company Act

	•	the Change in Bank Control Act

	•	the Bank Merger Act.

The crucial test under each Act is whether the proposed acquisition will “result in a monopoly” or will “substantially” lessen competition in the relevant geographic market. Both the Bank Holding Company Act and the Bank Merger Act preclude granting regulatory approval for any transaction that will “result in” a monopoly or is in furtherance of a plan to create a monopoly. However, where a proposed transaction is likely to cause a substantial reduction in competition, or tends to create a monopoly or otherwise restrain trade, these Acts permit the granting of regulatory approval under certain circumstances. The applicable regulator may approve the transaction if it concludes that the perceived anti-competitive effects are clearly outweighed by the probable beneficial effects 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 financial 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 effect 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 defined by the amount of stock purchased. Stock is purchased and redeemed at par. The Bank’s investment in Federal Home Loan Bank stock totaled 56,417 shares or $5,641,700 as of December 31, 2001.

All credit extended by the district bank requires full collateralization. Eligible collateral includes the following:


	•	residential first 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.

Cathay Bancorp. Cathay Bancorp currently neither owns nor leases any real or personal property. We use the premises, equipment, and furniture of the Bank without the payment of any rental fees to the Bank.

Cathay Bank. The Bank’s main corporate office and headquarters branch is located in the Chinatown district of Los Angeles. The offices are in a spacious three-story structure containing 26,527 square feet and constructed of glass and concrete. The Bank owns both the building and the land upon which the building is situated.


	•	a platform area for consumer loans and certain commercial and commercial mortgage loans

	•	a platform area for Cathay Global Investments Services

	•	a new accounts area

	•	24 teller stations (including 16 regular tellers, seven commercial tellers, and one ATM)

	•	four pneumatic drive-up teller stations

	•	one walk-up teller station

	•	an operations area

	•	a vault area


	•	The second floor contains executive offices and the Bank’s Board Room

	•	The third floor houses the Bank’s corporate lending department

Parking for approximately 126 automobiles is provided on three lots adjacent to the Bank’s building, two of which are owned by the Bank. The third lot is leased under a 55-year term with a 30-year option commencing in January 1987 at a current monthly rent of approximately $14,700.

Furthermore, the Bank owns properties in the following cities where certain of its branch offices are located:


	•	Monterey Park

	•	Alhambra

	•	Westminster

	•	San Gabriel

	•	Torrance

	•	Cerritos

	•	City of Industry

	•	Cupertino

	•	Flushing, New York

In addition to the bank-owned properties, the parking lot lease and the lease for the Cathay Investment Company’s Taipei office described below, the Bank leases certain other premises. The following table lists the location, square footage, purpose, lease term, and monthly payment of each lease.


*	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 fifth year upon the payment of $55,500 in consideration.

***	The Houston branch office lease is being renegotiated for a term ranging between one to three years.

The Bank currently operates 22 domestic branch offices, one branch office of Cathay Investment Company in Taiwan, and one representative office in Hong Kong. Each branch office has loan approval rights subject to the branch manager’s authorized lending limits. Activities of Cathay Investment Company’s Taiwan office and Hong Kong representative office are limited to coordinating the transportation of documents to the Bank’s main office and performing liaison services.

As of December 31, 2001, the Bank’s investment in premises and equipment totaled $29,403,000. See also Note 8 to the Consolidated Financial Statements of Cathay Bancorp, which is included in this Annual Report on Form 10-K.

Cathay Investment Company. The office in Taipei is located at Sixth Floor, Suite 3, 146 Sung Chiang Road, Taipei, Taiwan, and consists of 1,812 square feet. The lease was renewed for three years from October 5, 1999 to October 4, 2002. The lease contains an option to renew the lease for an additional period ranging from one to three years, after October 4, 2002. As of December 31, 2001, Cathay Investment Company did not own any properties.

Cathay Securities Fund, Inc. Its office is located at 777 North Broadway, Los Angeles, California 90012. The long-term plan for the registered investment company is currently under review.

Management is not currently aware of any litigation that is expected to have material adverse impact on our consolidated financial condition or the results of operations.

There were no matters submitted to a vote of security holders during the fourth quarter of 2001.

Item 5. Market for Cathay Bancorp’s Common Equity and Related Stockholder Matters

Cathay Bancorp trades on the Nasdaq National Market under the symbol “CATY.” The closing price of the Company’s common stock on February 26, 2002 was $65.50 per share, as reported by the Nasdaq National Market. The Company does not represent that the outstanding shares may be either bought or sold at a certain price.

As of February 26, 2002, there were approximately 1,700 holders of record of our Common Stock.

The following table presents selected historical consolidated financial data for Cathay Bancorp, and is derived in part from the audited Consolidated Financial Statements of the Company. The selected historical consolidated financial 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.


(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.

The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition of Cathay Bancorp, Inc. (“Bancorp”) and its subsidiary Cathay Bank (the “Bank” and together the “Company,” “we,” “us,” or “our”) and their consolidated results of operations. It should be read in conjunction with the audited consolidated financial statements and footnotes appearing elsewhere in this report. Cathay Bank offers a wide range of financial services. Cathay Bank now operates twelve branches in Southern California, seven branches in Northern California, two branches in New York State, one branch in Houston, Texas, and two overseas offices (one in Taiwan and one in Hong Kong). The Bank is a commercial bank, servicing primarily the individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located. The Bank has obtained regulatory approval to open a new branch in Brooklyn, New York, and has applied for regulatory approval to open a new branch in Sacramento, California. We expect to open both branches for business in the early part of the second quarter 2002. In addition, with China’s accession into the World Trade Organization and its increasing importance in the world economy, we decided to open our third overseas office, in Shanghai, China. The People’s Bank of China has approved our application, and we expect this office to be open in the second quarter 2002.

The following discussion and other sections of this report, include forward-looking statements regarding management’s beliefs, projections, and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, also include words such as “believes,” “expects”, “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 the 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.

	•	Other factors discussed in the section entitled “Factors that May Affect Future Results” later in this report.

Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, we caution readers not to place undue reliance on any forward-looking statements, which speak as of the date 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 reflect future developments or events.

The financial information presented herein includes the accounts of the Corporation, the Bank, and the Bank’s wholly owned subsidiaries. All material transactions between these entities are eliminated.

Consolidated net income for the year 2001 was $42.62 million or $4.69 per diluted share, a 10.45% increase in net income compared to net income of $38.59 million or $4.25 per diluted share for 2000, and an increase of 40.70% in net income, when compared to net income of $30.29 million or $3.36 per diluted share for 1999.

The return on average assets and return on average stockholders’ equity are presented below for the three years indicated:

Interest income decreased $5.20 million or 3.16% to $159.35 million in 2001, largely as a result of actions taken by the Federal Open Market Committee (“FOMC”), which lowered the target Federal funds rate by 475 basis points during the year. The $5.20 million decrease in interest income was due to a combination of the following:


	•	Increase in volume: Average interest-earning assets increased $239.83 million, to $2.17 billion at December 31, 2001, an increase of 12.45% over interest-earning assets of $1.93 billion at December 31, 2000. The increase in volume was primarily attributable to the increase in average net loans of $206.37 million, which contributed an additional $18.12 million to interest income.

	•	Decrease in rate: The non-taxable-equivalent yield on interest-earning assets decreased 118 basis points from 8.54% in 2000 to 7.36% in 2001. As a result of this lower interest rate environment, the interest yield earned on average net loans decreased 168 basis points from 9.62% to 7.94%, decreasing interest income on net loans by $23.86 million. The decrease in yield of average interest-earning assets was primarily due to eleven consecutive drops in interest rates by the FOMC.

	•	A change in the mix of interest earning assets: Average net loans of $1.52 billion, which yield higher than other types of investments, increased by $206.37 million in 2001 and comprised 70.14% of total average interest-bearing assets compared to 68.16% in 2000. Conversely, total average securities declined by $9.97 million and comprised 28.21% of total average interest-earning assets in 2001 compared to 31.21% in 2000.

	•	The taxable-equivalent yield on earning assets was 7.45% in 2001 compared to 8.63% in 2000.

Interest expense decreased by $8.00 million to $66.15 million in 2001 compared to $74.16 million in 2000, primarily due to a combination of the following:


	•	Increase in volume: Average interest-bearing liabilities increased $149.05 million in 2001, and added $6.76 million of additional interest expense in 2001.

	•	Decrease in rate: As a result of the lower interest rate environment during 2001, the average cost of interest-bearing liabilities decreased 79 basis points to 3.60% in 2001 compared to 4.39% in 2000, decreasing interest expense by $14.76 million. The average cost of funds on deposits and borrowings, which includes non-interest-bearing demand deposits, decreased by 70 basis points to 3.20% in 2001 compared to 3.90% in 2000.

	•	A change in the mix of deposits and borrowings: Average time deposits of $1.29 billion increased by $169.62 million and comprised 62.21% of total deposits and borrowings in 2001 compared to 58.74% of total deposits and borrowings in 2000. Other borrowed funds decreased by $41.22 million to


		$3.08 million in 2001. Average savings deposits, which include savings accounts, NOW accounts and money market accounts increased by $33.25 million to $496.94 million in 2001, average non-interest-bearing demand deposits increased by $17.62 million to $229.59 million in 2001 compared to $211.98 million in 2000, and securities sold under agreements to repurchase decreased by $7.49 million to $32.34 million in 2001.


	•	As a result of the eleven consecutive drops in interest rates during 2001, the taxable-equivalent net interest margin, defined 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.

Interest income increased $31.51 million or 23.68% to $164.55 million in 2000 primarily due to an increase of $32.56 million from interest income on loans to $126.34 million. The $31.51 million increase in interest income was attributable to the following:


	•	Increase in volume: the increase of $224.60 million or 20.63% in average net loans from $1.09 billion in 1999 to $1.31 billion in 2000 contributed an additional $20.76 million to interest income. The increase in average loans were funded primarily by growth in deposits, and secondarily by Federal funds purchased and securities sold under agreements to repurchase, and proceeds from matured securities.

	•	Increase in rate: the increase of 101 basis points in average loan yield from 8.61% to 9.62% contributed $11.80 million to interest income. The increase in average loan yield was mainly a result of six consecutive interest rate increases by the Federal Reserve Board from the third quarter of 1999 to the second quarter of 2000, which led to a 124 basis point increase in our average reference rate from 8.24% to 9.48%. A majority of the Bank’s loans reprice immediately.

	•	A change in the mix of interest-earning assets: as loan demand remained strong in 2000, average net loans, which yield higher than other types of investments, rose from 62.10% to 68.16% as a percentage of total interest-earning assets. Conversely, total average securities declined from 35.71% to 31.21% and average Federal funds sold and securities purchased under agreements to resell decreased from 2.17% to 0.57%.

	•	Consequently, the average taxable-equivalent yield on interest-earning assets increased 95 basis points from 7.68% to 8.63%.

Interest expense increased $16.75 million or 29.17% to $74.16 million, which was primarily attributable to an increase of $13.23 million in interest expense on time deposits.


	•	Increase in volume: Average time deposits grew $115.47 million or 11.53% to $1.12 billion, of which, $78.3 million were from time deposits over $100,000. The increase in average time deposits added $5.77 million to interest expense.

	•	Increase in rate: The increase of 70 basis points in average rate on time deposits from 4.69% to 5.39% added $7.47 million to interest expense. This was primarily due to the repricing of time deposits in response to the market rate changes. Interest expense on Federal funds purchased and securities sold under agreements to repurchase decreased $651,000 in 2000 as the average volume decreased $15.66 million and the average rate climbed 32 basis points from 4.99% to 5.31%.

	•	Accordingly, the average cost of funds, which includes non-interest-bearing demand deposits, increased 49 basis points from 3.41% in 1999 to 3.90% in 2000.


	•	As a result of the factors noted above, the taxable-equivalent net interest margin increased 37 basis points from 4.41% in 1999 to 4.78% in 2000.

Net interest income before provision for loan losses for 2001, 2000, and 1999 are summarized below:

Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)


(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 effective federal income tax rate of 35%.

(3)	Amounts are net of allowance for loan losses of $23,973,000 in 2001, $21,967,000 in 2000, and $19,502,000 in 1999, and net of unamortized deferred loan fees of $3,900,000 in 2001, $4,139,000 in 2000, and $3,593,000 in 1999.

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.


	(1) Nonaccrual loans are included in the average balance.

	(2) The average yield has been adjusted to a fully taxable-equivalent basis for certain securities of states and political subdivisions and other securities held using an effective 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 off 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 effective Federal income tax rate of 35%.

The provision for loan losses was $6.37 million in 2001 compared to $4.20 million in 2000 and in 1999. Due to the current recessionary environment, management believes the increase is prudent to cover additional inherent risk resulting from the overall increase of our loan portfolio, and the impact of a weaker economy. Management continues to recognize these pressures and is committed to maintaining an adequate allowance for loan losses. Net charge-offs for 2001 were $4.37 million or 0.29% of average net loans compared to charge-offs of $1.74 million or 0.13% of average net loans during 2000, and charge-offs of $668,000 or 0.06% of average net loans during 1999. Also see “Allowance for Loan Losses” on this 2001 Annual Report on Form 10-K.

Non-interest income totaled $14.78 million in 2001, $12.76 million in 2000, and $8.86 million in 1999. The increase of $2.02 million or 15.86% from 2000 to 2001, was primarily due to the following items:


	•	An increase of $539,000 in depository service fee income, up 11.83%, to $5.10 million compared to $4.56 million in 2000.

	•	An increase of $1.07 million in securities gains. The increase was the result of a gain of $1.06 million on investment securities sold during the third quarter 2001. These securities were sold during the third quarter 2001 and were either callable or scheduled to mature within the 21 months following the end of the third quarter 2001. In addition, we had a gain of $851,000 on a forward rate agreement (“FRA”).The FRA settled on March 5, 2001.

	•	Letters of credit commissions decreased by $287,000 or 11.77%, to $2.15 million in 2001, as a result of a slowdown of overseas purchases from some of our importing customers.

	•	Other operating income, which includes primarily loan fees, wire transfer fees, safe deposit fees, and foreign exchange fees were $5.37 million, up $699,000, compared to $4.67 million in 2000.

The increase of $3.90 million or 44.05% from 1999 to 2000, was the result of the following items:


	•	Recognition of $1.10 million premium on a FRA contract as of December 31, 2000 under securities gains. The FRA contract was entered into on August 31, 2000 and settled on March 5, 2001, at which time the Company recognized an additional premium in 2001.

	•	Fee income from wire transfers increased $1.08 million due to increased transaction volume, primarily from our New York branches.

	•	Other notable increases in non-interest income items included, among others, safe deposit box income, fees income related to loans, letters of credit commissions and fee income from Cathay Global Investment Services’ alternative investment program.

Non-interest expense totaled $40.17 million in 2001, compared to $38.50 million in 2000, and $30.28 million in 1999. The increase of $1.66 million or 4.31% in non-interest expense in 2001, was primarily a combination of the following:


	•	an increase of $954,000 in salaries and employee benefits. 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-profit organization and fund to help with relief efforts in response to the terrible events of September 11, 2001.

	•	an increase of $1.77 million in professional services. Primarily due to legal fees in connection with litigation and corporate matters.

	•	an increase of $1.57 million in investments in real estate. Primarily due to operational losses from low income housing investments that qualify for investments tax credits.

	•	a decrease of $3.40 million in real estate operations. Primarily due to a $3.38 million gain on the sale of other real estate owned (“OREO”).

The efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, decreased to 37.20% in 2001 compared with 37.33% in 2000. The decrease in the efficiency ratio for 2001 was primarily the result of the increase in our net interest income before provision for loan losses, coupled with the increase in non-interest income.

Non-interest expense amounted to $38.50 million in 2000, compared to $30.28 million in 1999. The $8.22 million or 27.15% increase in 2000 non-interest expense was substantially attributable to the operations of the two new New York branches acquired in December 1999, and the new Diamond Bar branch, which opened for business in January 2000. Other significant items are discussed below:


	•	an increase of $3.59 million in salaries and employee benefits. In addition to the payroll expense for the three new branches mentioned above and annual salary adjustments for employees, the Bank incurred higher year-end bonus expense of $670,000 in 2000.

	•	an increase of $1.23 million in net other real estate owned (“OREO”) expense. The Bank recorded $1.55 million in net gains on sales of OREO properties in 1999 versus $263,000 in net gains on sales of OREO in 2000.

	•	an increase of $1.08 million in other operating expense. Other operating expense includes primarily operating supplies, communications, postage, travel, administrative, amortization of goodwill and general insurance expenses. The increase in these expenses was partially related to the operations of the three new branches mentioned above.

	•	an increase of $757,000 in operations of investments in real estate. This was due to higher expense in operations of investments in real estate arising from passive operation losses on low income housing.

	•	an increase of $460,000 in professional services expense. Professional services expense consists of, among other things, bank paid appraisal fees, delivery service, armored service, legal fees, accounting and tax fees, consulting fees, computer related expense and facility management expense.

Due to the foregoing, the efficiency ratio, defined as non-interest expense divided by net interest income before provision for loan losses plus non-interest income, increased to 37.33% in 2000 compared with 35.84% in 1999.

The effective tax rate in 2001 was 30.63% compared to 36.17% in 2000, and 39.43% in 1999. The decline in the effective tax rate in 2001 was the result of a registered investment company subsidiary of the Bank, which provides flexibility to raise additional capital in a tax efficient manner, and additional 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 past tax benefits will continue, or as to our ability to raise capital through this subsidiary. In addition, a proposed change to California’s tax law introduced on February 21, 2002, related to registered investment companies could negatively impact the Company’s effective tax rates in future periods. See discussion below under the heading “Adverse Effects of Changes in California Tax Law Could Cause Us to

The Company’s total assets increased by $246.28 million, up 11.16%, to $2.45 billion at December 31, 2001, compared to $2.21 billion at December 31, 2000. During 2001, we continued our growth. The major changes in the Statement of Financial Condition during 2001 are listed below:


	•	Total net loans grew 14.10% to $1.64 billion.

	•	Securities available-for-sale increased 40.02% to $248.96 million.

	•	Securities held-to-maturity decreased 3.32% to $374.36 million.

	•	Total deposits increased 13.10% to $2.12 billion.

	•	Federal funds purchased & securities sold under agreements to repurchase decreased 67.56% to $22.11 million.

	•	Stockholders’ equity rose 14.54% to $246.01 million.

Under our investment policy, we classify the Company’s investment securities portfolio as follows:


	•	Those securities, which we have the positive intent and ability to hold until maturity, are classified 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 classified as securities available-for-sale, and carried at estimated fair value, with unrealized gains or losses, net of deferred taxes, reflected in stockholders’ equity.

	•	Securities held-to-maturity are transferred to the available-for-sale category when those securities are within 90 days to maturity, to further enhance the Company’s liquidity.

Securities available-for-sale increased $71.16 million or 40.02% to $248.96 million at year-end 2001 from $177.77 million at year-end 2000. The portfolio is comprised primarily of US Government Agency securities, corporate bonds, and trust preferred equity securities. Securities available-for-sale are carried at fair value and had a net unrealized gain of $7.17 million at December 31, 2001 compared to $3.96 million at December 31, 2000. The increase in unrealized holding gains at year-end 2001 resulted from the decreasing interest rate environment during 2001. See Note 4 to the Consolidated Statements of Financial Condition. These unrealized gains do not impact net income and are recorded as adjustments to stockholders’ equity, net of related deferred income taxes.

Securities held-to-maturity decreased $12.84 million or 3.32% to $374.36 million at year-end 2001 from $387.20 million at year-end 2000. The portfolio is comprised primarily of US agencies mortgage-backed-securities, corporate bonds, state and municipal securities, US Government Agency securities, and collaterized mortgage obligations. Securities held-to-maturity is carried at cost and at December 31, 2001 had a fair value of $382.81 million.

The average taxable-equivalent yield on our total investment securities dropped 7 basis points to 6.45% in 2001, compared to 6.52% in 2000 as some matured securities were replaced at lower prevailing interest rates.

The following table summarizes the carrying value of our portfolio of securities for each of the past three years:

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:


(1)	Securities reflect stated maturities and not anticipated prepayments.

(2)	Average yield has been adjusted to a fully-taxable equivalent basis.

Securities Held-to-Maturity Portfolio Maturity Distribution and Yield Analysis


(1)	Securities reflect stated maturities and not anticipated prepayments.

(2)	Average yield has been adjusted to a fully-taxable equivalent basis.

Our Board of Directors establishes the basic lending policy for the Bank. Each loan is generally considered in terms of, among other things, character, repayment ability, financial condition of the borrower, secondary repayment source, collateral, capital, leverage capacity of the borrower, market conditions for the borrower’s business or project, and prevailing economic trends and conditions. In case of real estate loans, our lending policy requires an independent appraisal on real estate property in accordance with Regulatory guidelines.

Gross loans increased by $204.49 million, up 13.97%, to $1.67 billion at year-end 2001 compared to $1.46 billion at year-end 2000.


	•	Commercial mortgage loans increased $107.72 million or 17.08% to $738.38 million at year-end 2001, compared to $630.66 million at year-end 2000. Total commercial mortgage loans accounted for 44.27% of gross loans at year-end 2001 compared to 43.10% at year-end 2000. These loans are typically secured by first deeds of trust of the respective commercial properties, including primarily commercial retail properties, shopping center and owner-occupied industrial facilities, and secondarily office buildings, multiple-unit apartments, hotels, and motels. The Company’s underwriting policy for commercial mortgage loans generally requires that the loan-to-value ratio at the time of origination not exceed 70 percent of the appraised value of the property, and that there be an adequate debt service coverage ratio, typically exceeding 1.25:1. In view of the recent general economic slowdown, management has


		tightened the lending standards for commercial mortgage loans as well as construction loans to be more conservative.

	•	Commercial loans were up $63.95 million or 14.46% to $506.13 million at December 31, 2001, compared to $442.18 at December 31, 2000. The Company is continuing to focus primarily on commercial lending to small-to-medium size businesses, within the Company’s geographic market area. The purpose of these loans is for general business purposes, or to provide working capital to business in the form of lines of credit to finance trade-finance loans. General business loans are made based on the financial strength of the borrowers. Trade-finance loans are typically secured by the borrower’s accounts receivables and inventories.

	•	Real estate construction loans increased $24.37 million or 17.16% to $166.42 million at year-end 2001 compared to $142.05 million at year-end 2000. Our construction loan projects are located primarily in California, Texas, Nevada, and New York. The construction loan projects in California totaled $192.87 million, of which $145.27 had been disbursed at December 31, 2001. The construction loan projects in Texas, Nevada, and New York totaled approximately $32.08 million, of which $21.15 had been disbursed at December 31, 2001. Despite the recessionary economy, projects requiring construction-financing still exhibit a strong demand, and we expect this trend to continue into 2002.

	•	Residential mortgage loans grew by $15.19 million or 6.88% to $235.91 million at year-end 2001, compared to $220.72 million at year-end 2000. Included with our residential mortgage loans are our home equity lines. At December 31, 2001, the portfolio of home equity lines was $40.35 million, up 19.41%, from $33.79 million at year-end 2000. The growth in residential mortgage loans in 2001 was largely due to refinances, which accounted for 70.97% of residential mortgage loan fundings.

	•	Installment loans decreased $7.01 million, down 25.64% to $20.32 million at December 31, 2001, compared to $27.33 million at December 31, 2000. These consumer-oriented loans are funded primarily for the purpose of financing the purchase of automobiles, recreational vehicles, boats, and other personal use of the borrower.

The classification of loans by type as of December 31 for each of the past five years, as well as the changes in loan portfolio composition for the past two years and the contractual maturity of the loan portfolio as of December 31, 2001 are presented below:


(1)	In the normal course of business, loans are renewed, extended, or prepaid from time to time; therefore, the above should not be viewed as an indication of future cash flows.

(2)	Loans are net of unamortized deferred loan fees.

Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. The Company’s policy is to place loans on a non-accrual status if interest and principal or either interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any interest accrued in the previous three months, is generally reversed against current income. Thereafter, any payment is generally first 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-off.

Our non-performing assets decreased $10.98 million or 53.65% to $9.48 million at year-end 2001 compared to $20.46 million at year-end 2000. The decrease was due to a combination of the following:


	•	A increase of $100,000 in loans past due 90 days or more and still accruing interest

	•	An decrease of $7.46 million in non-accrual loans

	•	An decrease of $3.62 million in OREO.

As a percentage of gross loans plus OREO, our non-performing assets decreased to 0.57% at year-end 2001 from 1.39% at year-end 2000. The non-performing loan coverage ratio, defined as the allowance for loan losses to non-performing loans, increased to 302.42% at year-end 2001, which was considerably higher than that of 143.72% at year-end 2000. The increase was primarily due to the reduction of $7.46 million in the non-accrual loans from $14.70 million in 2000 to $7.24 million in 2001.

The following table presents the breakdown of total non-accrual, past due, and restructured loans for the past five years:


	(1) Troubled debt restructurings are accruing interest at their restructured terms.

The effect of non-accrual loans and troubled debt restructurings on interest income for the years 2001, 2000, 1999, 1998, and 1997 is presented below:

Non-accrual loans were $7.24 million at year-end 2001 and $14.70 million at year-end 2000. They consisted mainly of $4.85 million in commercial loans and $2.20 million in commercial mortgage loans at year-end 2001, and $9.52 million in commercial loans and $4.85 million in commercial mortgage loans at year-end 2000.

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:


	•	The balance of $1.82 million represented one credit secured by first trust deed on land.

	•	The remaining balance of $374,000 consisted of two credits secured by first trust deeds on a single-family-residence and on one commercial property.


	•	The balance of $3.65 million comprised six credits secured by company assets, mainly accounts receivables and inventories, through UCC-1 filings.

	•	The balance of $1.20 million consisted of eight credits secured primarily by first trust deeds on single-family-residences or commercial buildings and warehouses, and one unsecured credit.

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

Troubled debt restructurings decreased slightly to $4.47 million at December 31, 2001 compared to $4.53 million at December 31, 2000. With the exception of one borrower with loans totaling $2.63 million, which were 41 days past due, all other accruing troubled debt restructurings were performing under their revised terms as of December 31, 2001.

A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events.

We consider all loans classified and restructured in our evaluation of loan impairment. The classified loans are stratified by size, and loans less than our defined selection criteria are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. If the measurement of the impaired loan is less than the recorded amount of the loan, we then 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 $19.35 million at year-end 2001, compared to $27.82 million at year-end 2000. The average balance of impaired loans was $23.46 million in 2001 and $29.52 in 2000. Interest collected on impaired loans totaled $959,000 in 2001, and $2.12 million in 2000.

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

We experienced no loan concentrations to multiple borrowers in similar activities, which exceeded 10% of total loans as of December 31, 2001.

See “Factors That May Affect Future Results” below for a discussion of some of the factors that may affect the matters discussed in this Section.

We have established a monitoring system for our loans in order to identify impaired loans, and potential problem loans and to permit periodic evaluation of impairment and the adequacy of the allowance for loan losses in a timely manner.

In addition, our Board of Directors has established a written loan policy that includes an effective 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 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. See “Factors That May Affect Future Results,” in this Annual Report on Form 10-K, for additional factors that could cause actual results to differ


	•	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.

The allowance for loan losses amounted to $23.97 million and represented 1.44% of year-end gross loans and 302.42% of non-performing loans at December 31, 2001. The comparable ratios were 1.50% of year-end gross loans and 143.72%, of non-performing loans at December 31, 2000.

The increase in the allowance for loan losses ratio to non-performing loans at year-end 2001 was due primarily to the decrease in non-performing loans. During the year, $6.37 million was added to the allowance for loan losses. The net charge-off ratio was 0.29% of average net loans for the twelve months ended December 31, 2001, and 0.13% for the like period in 2000.

The tables below present information relating to the allowance for loan losses, charge-offs, and recoveries by loan type for the past five years:

We allocate the allowance for loan losses to the major loan categories as set forth in the following table. These allocations are estimates based on historical loss experience and management’s judgment. The allocation of the allowance for loan losses is not necessarily an indication that the charge-offs will occur, or if they do occur, that they will be in the proportion indicated in the following table:

Based on our evaluation process and the methodology to determine the level of the allowance for loan losses mentioned previously, management believes the allowance for loan losses to be adequate as of December 31, 2001 to absorb estimated probable losses identified through its analysis. See “Factors That May Affect Future Results” below for a discussion of some of the factors that may affect the matters discussed in this Section.

Other Real Estate Owned (“OREO”), net of a valuation allowance of $131,000, decreased to $1.56 million at December 31, 2001, compared to $5.17 million at year-end 2000.

As of December 31, 2001, there were five outstanding OREO properties, which included one parcel of land, one commercial building, and three single-family-residences (“SFR”). All five properties are located in California. During 2001, we acquired five SFR properties, and sold four SFR properties, and one commercial real estate property. The carrying value of the five properties sold was approximately $5.19 million and the OREO sales resulted in gains on sale of OREO of $3.38 million.

To reduce the carrying value of OREO to the estimated fair value of the properties, we maintain a valuation allowance for OREO properties. We perform periodic evaluations on each property and make corresponding adjustments to the valuation allowance, if necessary. Any decline in value is recognized by a corresponding increase to the valuation allowance in the current period. Management did not make any provision for OREO losses in 2001.

We recognized net income of $3.59 million from operating OREO properties in 2001 compared to $185,000 in 2000 and $1.42 million in 1999. In addition to the $3.38 million net gains on sales of OREO properties, we received $325,000 in rental income. These amounts were partially offset by operating expenses of $135,000.

Although the California real estate market continued to show strength in 2001, the future performance of the market is unpredictable. See “Factors That May Affect Future Results” below for a discussion of some of the factors that may affect the matters discussed in this Section.

The following table shows the components of OREO expense (income) for the years ended:

As of December 31, 2001, our investments comprised of four limited partnerships formed for the purpose of investing in low income housing projects, which qualify for federal low income housing tax credits and/or California tax credit.

As of December 31, 2001, investments in real estate increased $379,000 to $17.72 million from $17.35 million at year-end 2000. During 2001, we recognized $2.26 million in net losses from the limited partnerships operations. In addition, we contributed $2.64 million to the Wilshire Courtyard investment.

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

The Company uses primarily customer deposits to fund its operations, and to a lesser extent borrowings in the form of securities sold under agreements to repurchase, and advances from the Federal Home Loan Bank. The Bank’s deposits are generally obtained from residents within the Company’s geographic market area. The Bank utilizes traditional marketing methods to attract new customers and deposits, by offering a wide variety of products and services and utilizing various forms of advertising media. The Company’s vast majority of its deposits are retail in nature, however the Company does engage in certain wholesale activities, primarily accepting time deposits from political subdivisions and public agencies. The Company considers wholesale deposits to be an alternative borrowing source rather than a customer relationship, and as such, their levels are determined by management’s decisions as to the most economic funding sources. At December 31, 2001, the Company had no brokered-deposits and public deposits totaled $73.30 million or 3.45% of total deposits.

The Company’s total deposits increased $245.90 million or 13.10% from $1.88 billion at year-end 2000 to $2.12 billion at December 31, 2001.


	•	Core deposits increased $120.87 million or 11.20%. The increase in core deposits, defined as total deposits less time deposits of $100,000 or more, was attributable to increases of $38.62 million in non-interest-bearing demand deposits, up 17.41%, to $260.43 million at year-end 2001 compared to $221.81 at year-end 2000, and time deposits under $100,000, which increased by 9.13% or $34.68 million to $414.49 million at December 31, 2001 compared to $379.81 million at year-end 2000. Other core deposit accounts increased by $47.57 million.

	•	Time deposits of $100,000 or more (“Jumbo CDs”) increased $125.03 million or 15.68% to $922.65 million in 2001 compared to $797.62 million in 2000.

The following table displays the deposit mix for the past three years and average deposits and rates for the past five years:

Average deposits grew $220.49 million or 12.30% from $1.79 billion in 2000 to $2.01 billion in 2001.


	•	Average core deposits increased $86.45 million or 8.23%.

	•	Average Jumbo CDs increased $133.82 million or 18.01%.

The following table displays average deposits and rates for the past five years:

As interest rate spreads broadened between Jumbo CDs and other types of interest-bearing deposits under the prevailing interest rate environment, our Jumbo CD portfolio maintained its faster growth than other types of deposits. Nevertheless, management considers our Jumbo CDs generally less volatile primarily due to the following reasons:


	(1)	approximately 60.95% of the Bank’s Jumbo CDs have stayed with the Bank for more than two years;

	(2)	the Jumbo CD portfolio continued to be diversified with 4.593 individual accounts averaging approximately $187,000 per account owned by 3,163 individual depositors as of January 9, 2002;

	(3)	this phenomenon of having a relatively higher percentage of Jumbo CDs to total deposits exists in most of the Asian American banks in our California market due to the fact that the customers in this market tend to have a higher savings rate.

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

Almost 97.69% of our Jumbo CDs mature within one year as of year-end 2001. The following tables display time deposits of $100,000 or more by maturity and time deposits with remaining term of more than one year at December 31, 2001:

Maturities of Time Deposits with a Remaining Term of More Than One Year for Each of the Five Years Following December 31, 2001

Borrowings include securities sold under agreements to repurchase (“reverse repurchase agreements”), the purchase of federal funds, and funds obtained as advances from the Federal Home Loan Bank (“FHLB”) of San Francisco.

Securities Sold under Agreements to Repurchase at December 31, 2001 equaled $22.11 million a decrease of $46.06 million or 67.56% from $68.17 million at December 31, 2000. The weighted average interest rate during 2001 was 3.51% compared to 6.25% during 2000. The decrease in yield of average interest-earning assets was primarily due to eleven consecutive drops in interest rates by the FOMC. The underlying collateral pledged for the repurchase agreements consists of U.S. government agency and mortgage-backed securities with a carrying value of $37,894,000, and a fair value of $38,295,000 as of December 31, 2001, and are held by a custodian and maintained under the Company’s control. These borrowings generally mature in less than 30 days. The table below provides comparative data for securities sold under agreements to repurchase:


(1)	Average balances were computed using daily averages.

(2)	Highest month-end balances were at February in 2001, October in 2000 and February in 1999.

Advances from the Federal Home Loan Bank (“FHLB”) amounted to $30 million at December 31, 2001, and $10 million at December 31, 2000. Of the Bank’s $30 million in FHLB advances outstanding at December 31, 2001, $10 million at 4.90% was obtained in 1998, and matures on October 28, 2003, and $20 million at 5.45% was obtained in 2001, and matures on March 21, 2005. These advances are non-callable with fixed interest rates.

We obtain capital primarily from retained earnings and to a lesser extent, the issuance of additional common stock through our Dividend Reinvestment Plan, and options exercised. Stockholders’ equity of $246.01 million was up $31.22 million or 14.54% compared to $214.79 at December 31, 2000. Our stockholders’ equity equaled 10.03% of total assets, compared to 9.73% of total assets at year-end 2000. The increase of $31.22 million or 14.54% in stockholders’ equity was due to the following:


	•	an addition of $42.62 million from net income less payments of dividends on common stock of $9.06 million;

	•	an increase of $2.24 million from issuance of additional common shares through the Dividend Reinvestment Plan and proceeds from exercise of stock options less the purchase of 138,900 shares of treasury stock during 2001, at an average price of $52.86, totaling $7.34 million;

	•	an increase of $2.76 million in accumulated other comprehensive income, including:


	•	a favorable difference of $1.89 million in the net unrealized holding gains on securities available-for-sale, net of tax;

	•	an increase in unrealized gains totaling $566,000, net of tax, in cumulative adjustment upon adoption of SFAS No. 133;

	•	an increase of $302,600 from unrealized gains on cash flow hedging derivatives, net of tax;

We declared cash dividends of $0.25 per common share in January 2001 on 9,074,365 shares outstanding, in April 2001 on 9,086,323 shares outstanding, in July 2001 on 9,093,576 shares outstanding, and in October 2001 on 8,970,131 shares outstanding. Total cash dividends paid in 2001 amounted to $9.06 million.

On April 6, 2001, the Board of Directors approved a stock repurchase program of up to $15 million of our common stock. The Company intends to repurchase shares under the program, from time to time, in the open market or through negotiated purchases, under conditions which allow such repurchases to be accretive to earnings, while maintaining capital ratios that exceed the guidelines for a “well capitalized” financial institution. During 2001, the Company repurchased 138,900 shares at an average price of $52.86 per share.

On February 19, 1998 our Board of Directors adopted an “Equity Incentive Plan” (“the Plan”) which was approved by stockholders at the April 20, 1998 Annual Meeting of Stockholders. The Plan will expire on February 18, 2008.


	•	On September 17, 1998, we granted 45,000 shares of common stock options with an exercise price of $33.00 per share to eligible senior officers and directors.

	•	On January 20, 2000, we granted 55,000 shares of common stock options with an exercise price of $42.50 per share to eligible officers and directors.

	•	On January 18, 2001, we granted 55,500 shares, and on March 15, 2001, we granted 900 shares of common stock options with an exercise price of $60.19 per share to eligible officers and directors.

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

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.

The primary measure of capital adequacy is based on the ratio of risk-based capital to risk-weighted assets. At year-end 2001, Tier 1 risk-based capital ratio of 11.15%, total risk-based capital ratio of 12.30%, and Tier 1 leverage capital ratio of 9.48%, continued to place Cathay Bancorp in the “well capitalized” category, which is defined 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 five percent, and total risk-based capital ratio equal to or greater than ten percent. The comparable ratios for 2000 were Tier 1 risk-based capital ratio of 11.05%, total risk-based capital ratio of 12.25%, and Tier 1 leverage capital ratio of 9.28%.

A table displaying the Company and the Bank’s capital and leverage ratios at year-end 2001 and 2000 is included in Note 11 to consolidated financial statements.

Liquidity is our ability to maintain sufficient cash flow to meet maturing financial 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 financial instruments, repayments from securities and loans, Federal funds purchased and securities sold under agreements to repurchase and advances from Federal Home Loan Bank (“FHLB”). At year-end 2001, our liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) remained relatively flat at 30.40%, compared to 30.76% at year-end 2000.

To supplement its liquidity needs, the Bank maintains a total credit line of $52.50 million for federal funds with three correspondent banks, and master agreements with five brokerage firms whereby up to $230.00 million would be available through the sale of securities subject to repurchase. The Bank is also a shareholder of the FHLB, which enables the Bank to have access to lower cost FHLB financing when necessary. At December 31, 2001, the Bank had a total approved credit with the FHLB of San Francisco totaling $600.88 million. The total credit outstanding with the FHLB of San Francisco at December 31, 2001 was $30.00 million. These advances are non-callable, bear fixed interest rates with $10.00 million maturing in 2003 and $20.00 million maturing in 2005. These borrowings are generally secured by securities available-for-sale or by residential mortgages. “See Note 9 to the Consolidated Financial Statements.”

Liquidity can also be provided through the sale of liquid assets, which consists of short-term investments, and securities available-for-sale. At December 31, 2001, such assets at fair value totaled $261.96 million, with $64.21 million pledged as collateral for borrowings and other commitments. The remaining $197.75 million was available to be pledged as collateral for additional borrowings.

We had a significant portion of our time deposits maturing within one year or less as of December 31, 2001. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Company’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 Company to meet its daily operating needs.

Bancorp, on the other hand, obtains funding for its activities primarily through dividend income contributed by the Bank and proceeds from investments in the Dividend Reinvestment Plan and exercise of stock options. Dividends paid to Bancorp by the Bank are subject to regulatory limitations. The business

Also, see Note 12 Commitments and Contingencies of the Notes to Consolidated Financial Statements, on this Annual Report on Form 10-K.

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.”

In July 2001, the Financial Accounting Standards Board issued Statement No. 141, “Business Combinations” (“SFAS No. 141”) and Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001.

SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142, which for the Company was January 1, 2002. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. The Company adopted SFAS No. 142 effective January 1, 2002. Assuming no impairment adjustments are necessary, the Company expects non-interest expense to decrease by approximately $661,000 in 2002, resulting from the cessation of goodwill amortization.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accrued at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. Management does not expect that adoption of SFAS No. 143 will have a material impact on the results of operations or financial condition of the Company.

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. Management does not expect that adoption of SFAS No. 144 will have a material impact on the results of operations or financial condition of the Company.

The allowance for loan losses is based on management’s estimate of the estimable and probable losses from our loan portfolio. If actual losses exceed the estimate, the excess losses could adversely affect our net income and capital. Such excess could also lead to larger allowances for loan losses in future periods, which could in turn adversely affect net income and capital. Management believes that the allowance for loan losses at December 31, 2001 is adequate to cover estimable and probable losses from its loan portfolio as of that date. If economic conditions differ 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.

The interest rate risk inherent in our lending, investing, and deposit taking activities is a significant market risk to us and our business. Income associated with interest-earning assets and cost associated with interest-bearing liabilities may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in interest rates, events over which we have no control, may have an adverse effect on net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can significantly affect our assets and liabilities. Increases in interest rates may adversely affect the ability of our floating rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-offs.

Generally, the interest rates on 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 different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. Certain assets, such as fixed and adjustable rate mortgage loans, have features that limit change in interest rates on a short-term basis and over the life of the asset.

We seek to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition to obtain the maximum spread. We use interest rate sensitivity analysis and a simulation model to

assist us in estimating the optimal asset-liability composition. However, such management tools have inherent limitations that impair their effectiveness. There can be no assurance that we will be successful in minimizing the adverse effects of changes in interest rates. See also, “Loan Portfolio Risk Elements” and “Market Risk” below.

The consolidated financial statements and related financial 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 financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operation of the Company is reflected in increased operating cost. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.

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 office, which was subsequently converted into a full-service branch in 2000. In addition, on October 5, 2001, we opened a new branch in Union City, Northern California. We have obtained regulatory approval to open a new branch in Brooklyn, New York City, and we have applied for regulatory approval to open a new branch in Sacramento, California. We expect both branches will be ready to open in the early part of the second quarter 2002. In addition, with China’s accession into the World Trade Organization and its increasing importance in the world economy, we decided to open a new representative office in Shanghai, China. We expect this office to be open in the second quarter 2002. In the course of this expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations. These risks and uncertainties include increased operational difficulties arising from, among other things, our ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas and to anticipate events or differences in markets in which we have no current experience.

To the extent that we expand through acquisitions, such acquisitions may also adversely harm our business, if we fail to adequately address the financial and operational risks associated with such acquisitions. For example, risks can include difficulties in assimilating the operations, technology and personnel of the acquired company; diversion of management’s attention from other business concerns; inability to maintain uniform standards, controls, procedures and policies; potentially dilutive issuances of equity securities; incurrence of additional debt and contingent liabilities; use of cash resources; large write-offs; and amortization expenses related to goodwill and other intangible assets.

Our banking operations are concentrated primarily in Southern and Northern California, and secondarily in Houston, Texas, and New York City. Adverse economic conditions in these regions could impair borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, and erode the value of loan collateral. These events could increase the amount of our non-performing assets and have an adverse effect on our efforts 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 activity is also principally located in Southern and Northern California, and to a lesser extent, in Houston, Texas and New York City. The value of such collateral depends upon conditions in the relevant real estate markets. These include general or local economic conditions and neighborhood characteristics, real estate tax rates, the cost of operating the properties, governmental regulations and fiscal policies, acts of nature including earthquakes, flood and hurricanes (which may result in uninsured losses), and other factors beyond our control.

The risks inherent in construction lending may adversely affect our net income. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risk because such properties have no operating history. In these loans, loan funds are advanced upon the security of the project under construction, which is of uncertain value prior to completion of construction, and the estimated operating cash flow to be generated by the completed project. There is no assurance that such properties will be sold or leased so as to generate the cash flow anticipated by the borrower. Such consideration can affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral.

In considering whether to make a loan on or secured by real property, we generally require an appraisal of such property. However, the appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.

We face substantial competition for deposits and loans, as well as other banking services throughout our market area from the major banks and financial institutions that dominate the commercial banking industry. This may cause our cost of funds to exceed that of our competitors. Such banks and financial institutions have greater resources than us, including the ability to finance advertising campaigns and allocate their investment assets to regions of higher yield and demand. By virtue of their larger capital bases, such institutions have substantially greater lending limits than us and perform certain functions, including trust services, which are not presently offered by us. We also compete for loans and deposits, as well as other banking services with savings and loan associations, finance companies, money market funds, brokerage houses, credit unions and non-financial institutions.

We are governed by significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of our stockholders. In the past, our business has been materially affected by such regulation and supervision. This trend is likely to continue in the future. Laws, regulations, or policies currently affecting us may change at any time. Regulatory authorities may also change their interpretation of existing laws and regulations. Such changes may, among other things, increase the cost of doing business, limit permissible activities, or affect the competitive balance between banks and other financial institutions. It is impossible to predict the competitive impact that any such changes would have on commercial banking in general or on our business in particular.

A proposed change to California’s tax law introduced on February 21, 2002, related to registered investment companies could negatively impact the Company’s effective tax rates in future periods. As currently drafted, the change would have retroactive application to earlier years. The Company, relying on existing tax laws and an outside tax opinion, reflected California tax benefits relating to its registered investment company subsidiary in 2000 and 2001, respectively. Management cannot predict the ultimate outcome of this proposed legislation, including whether this proposed bill will be enacted in its present form, whether the final effective date of the proposed tax law will be prior to 2000 or after 2001 or whether the proposed bill will be enacted at all. If enacted in its present form, and if enacted with its current effective date of application, the Company could be required to pay additional California taxes related to earlier years, which would increase the Company’s tax expense in a future period. Further, absent a replacement tax efficient capital raising vehicle, the Company’s effective tax rate applied to current period earnings in future periods would increase.

Management continues to evaluate long-term plans for its registered investment company subsidiary. If efforts to raise capital through this wholly owned subsidiary were discontinued, management believes the Company currently has adequate alternative sources of capital available to it and has the ability to raise sufficient funds to fund its operations in future periods and does not believe that the impact of the de-discontinuance of the registered investment company will have a material impact on the Company’s financial condition or liquidity.

While Asian economic conditions, at least outside of Japan, were reasonably satisfactory in 2001, it is difficult to predict the behavior of the Asian economy in the future. The U.S. fiscal policy and an unfavorable global economic condition may adversely impact the Asian economy. If the Asian economic conditions should deteriorate, we could be exposed to economic and transfer risk, and could experience an outflow of deposits by our Asian-American customers. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of investments with or loans made to such entities. Adverse economic conditions may also negatively impact asset values and the profitability and liquidity of companies operating in this region.

A substantial portion of our cash flow comes from dividends that the Bank pays to us. Various statutory provisions restrict the amount of dividends that the Bank can pay without regulatory approval. In addition, if the Bank were to liquidate, the Bank’s creditors would be entitled to receive distributions from the assets of the Bank to satisfy their claims against the Bank before we, as a holder of an equity interest in the Bank, would be entitled to receive any of the assets of the Bank.

As we begin to offer 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 significant capital expenditures. In addition, our success will depend, among other things, on our ability to provide secure and reliable services, anticipate changes in technology and efficiently develop and introduce services that are accepted by our customers and cost effective for us to provide. Systems failures, delays, breaches of confidentiality and other problems could harm our reputation and business.

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 difficult. 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 offer 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.

The impact of the September 11th terrorist attacks or any future terrorist attacks and responses to such activities cannot be predicted at this time with respect to severity or duration. The impact could adversely affect 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-offs, and provision for loan losses.

Market risk is the risk of loss from adverse changes in market prices and rates. The principal market risk to the Company is the interest rate risk inherent in our lending, investing, and deposit taking activities, due to the fact that interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent, or on the same basis.

We actively monitor and manage our interest rate risk through analyzing the repricing characteristics of our loans, securities, and deposits on an on-going basis. The primary objective is to minimize the adverse effects 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 profitability 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 specified timeframe. A positive gap exists when rate sensitive assets which reprice over a given time period exceed rate sensitive liabilities. During periods of increasing interest rates, net interest margin may be enhanced with a positive gap. A negative gap exists when rate sensitive liabilities which reprice over a given time period exceed rate sensitive assets. During periods of increasing interest rates, net interest margin may be impaired with a negative gap.

The following table indicates the maturity or repricing and rate sensitivity of our interest-earning assets and interest-bearing liabilities as of December 31, 2001. Our exposure as reflected in the table, represents the estimated difference between the amount of interest-earning assets and interest-bearing liabilities repricing during future periods based on certain assumptions. The interest rate sensitivity of our assets and liabilities presented in the table may vary if different assumptions were used or if actual experience differs from the assumptions used. As reflected in the table below, we were asset sensitive with a cumulative gap ratio of a positive 18.67% within three months, and liability sensitive with a cumulative gap ratio of a negative 5.18%


(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 runoff.

Since interest rate sensitivity analysis does not measure the timing differences in the repricing of assets and liabilities, we use a net interest income simulation model to measure the extent of the differences 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 financial conditions, movements in interest rates and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to

Although the modeling is very helpful in managing interest rate risk, it does require significant 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 effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rates changes, the differences 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 significant decrease in net interest income caused by a change in interest rates

We establish a tolerance level in our policy to define and limit interest income volatility to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. When the 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 profitability. At December 31, 2001, if interest rates were to increase instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would increase by 0.69%, and if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 0.13%. Conversely, if interest rates were to decrease instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 1.52%, and if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 8.43%.

The Company’s net interest income simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level to value the net economic value of our portfolio of assets and liabilities in our policy to a change of plus or minus 30% when the hypothetical rate change is plus or minus 200 basis points. At December 31, 2001, if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that the net economic value of our portfolio of assets and liabilities would decrease by 24.92%, and conversely, if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that the net economic value of our assets and liabilities would increase by 24.54%.

The following table shows our financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments’ fair values at December 31, 2001, and 2000. For assets, expected maturities are based on contractual maturity. For liabilities, we use our historical experience and decay factors to estimate the deposit runoffs of interest-bearing transactional deposits. We use certain assumptions to estimate fair values and expected maturities. Off-balance sheet commitments to extend credit, letters of credit, and bill of lading guarantees represent the contractual unfunded amounts. Off-balance sheet

It is the policy of the Bank not to speculate on the future direction of interest rates. However, the Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the assets or liabilities and against risk in specific transactions. In such instances, the Bank may protect its position through the purchase or sale of interest rate futures contracts for a specific cash or interest rate risk position. Other hedge transactions may be implemented using interest rate swaps, interest rate caps, floors, financial futures, forward rate agreements, and options on futures or bonds. Prior to considering any hedging activities, we seek to analyze the costs and benefits 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 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

Upon adoption of SFAS No. 133, the Company recognized all derivatives on the balance sheet at fair value. Fair value is based on dealer quotes, or quoted prices from instruments with similar characteristics. The Company uses 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.

The Company entered into a forward rate agreement with a notional amount of $100 million that was recorded at fair value, with gains recorded as securities gains in the accompanying consolidated statements of income and comprehensive income. The agreement expired in March 2001.

On March 21, 2000, we entered into an interest rate swap agreement with a major financial institution in the notional amount of $20 million for a period of five years. The interest rate swap was for the purpose of hedging the cash flows from a portion of our floating rate loans against declining interest rates. The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at December 31, 2001, was approximately three years. At December 31, 2001 the fair value of the interest rate swap was $1.93 million ($869,000, net of tax) compared to $977,000 ($566,000, net of tax) at December 31, 2000. For the twelve months ended December 31, 2001, amounts totaling $557,000 were reclassified into earnings. The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to reclassify into earnings within the next 12 months is approximately $1.06 million.

For financial statements, see “Index to Consolidated Financial Statements on page 64.

Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure

The information under the caption “Election of Directors” on our definitive Proxy Statement relating to our 2002 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

The term of office of each officer is from the time of appointment until the next annual organizational meeting of the Board of Directors of Bancorp or Cathay Bank (or action in lieu of a meeting) and until the appointment of his or her successor unless, before that time, the officer resigns or is removed or is otherwise disqualified from serving as an officer of Bancorp or Cathay Bank.

The information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” on our Proxy Statement is incorporated herein by reference.

The information under the captions “Compensation of Directors”, “Information Concerning Management Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report on Executive Compensation” in our Proxy Statement is incorporated herein by reference.

The information under the captions “Principal Holders of Securities” and “Election of Directors” of our Proxy Statement is incorporated herein by reference.

The information under the captions “Election of Directors” and “Certain Transactions” of our Proxy Statement is incorporated herein by reference.


	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.

The Company did not file any reports on Form 8-K during the last quarter of 2001.

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.

Date: February 26, 2002


	By:	/s/ DUNSON K. CHENG



	Dunson K. Cheng
	Chairman and President

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 file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming 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.

We have audited the accompanying consolidated statements of condition of Cathay Bancorp, Inc. and subsidiary (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cathay Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements include the accounts of Cathay Bancorp, Inc. (“Bancorp”), a Delaware corporation and its wholly-owned subsidiary, Cathay Bank (“Bank”), a California state-chartered bank (together, the “Company”). All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from these estimates. The most significant estimate subject to change relates to the allowance for loan losses. Certain reclassifications have been made to the prior years’ financial statements to conform to the 2001 presentation. The following are descriptions of the more significant of these policies.

Organization and Background. The business activities of Bancorp consist primarily of the operations of the Bank and its wholly owned subsidiaries, Cathay Investment Company (“CIC”) and Cathay Securities Fund, Inc. There are no operating business activities currently at Bancorp. Bancorp may, from time to time, explore various acquisition possibilities. Bancorp currently does not employ any persons other than its management, which includes the President, the Chief Financial Officer and the General Counsel, and does not own or lease any real or personal property. Bancorp uses the employees, premises, equipment and furniture of the Bank without the payment of any service or rental fees to the Bank. It is expected that for the near future the primary business of the Bancorp will be the ongoing business of the Bank.

The Bank is a commercial bank, servicing primarily the individuals, professionals and small to medium-sized businesses in the local markets in which its branches are located. Its operations include the acceptance of checking, savings, and time deposits, and the making of commercial, real estate and consumer loans. The Bank also offers trade financing, letter of credit, wire transfer, spot and forward contracts, internet banking, investment services, and other customary banking services to its customers.

Securities. Securities are classified as held-to-maturity when management has the ability and intent to hold these securities until maturity. Securities are classified as available-for-sale when management intends to hold the securities for an indefinite period of time, or when the securities may be utilized for tactical asset/liability purposes, and may be sold from time to time to manage interest rate exposure and resultant prepayment risk and liquidity needs. Securities purchased are designated as held-to-maturity or available-for-sale at the time of acquisition.

Securities held-to-maturity are stated at cost, adjusted for the amortization of premiums and the accretion of 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 specific identification method. Premium and discounts are amortized or accreted as adjustment of yield on a level-yield basis.

The cost basis of an individual security is written down, if the decline in its fair value below the amortized cost basis is other than temporary. The write-down is accounted for as a realized loss, and is included in net income. The new cost basis is not changed for subsequent recoveries in fair value.

Loans. Loans are carried at amounts advanced, less principal payments collected and net deferred loan fees. Interest is accrued and earned daily on an actual or 360-day basis. Interest accruals on business loans and non-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 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, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as a yield adjustment. If a loan is placed on non-accrual status, the amortization of the loan fees and the accretion of discounts discontinue until such time when the loan is reverted back to accruing status.

Allowance for Loan Losses. Management believes the allowance for loan losses is being maintained at a level considered adequate to provide for estimable and probable losses. Additions to the allowance for loan losses are made monthly by charges to operating expense in the form of a provision for loan losses. All loans judged to be un-collectible are charged against the allowance while any recoveries are credited to the allowance.

Management monitors changing economic conditions, the loan mix by category, the industry segregation and geographic distribution of the portfolio and the type of borrowers in determining the adequacy of the allowance for loan losses. Management also closely reviews its past, present and expected overall net loan losses in comparison to the existing level of the allowance. In addition, the Bank’s regulators, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to make additions to its allowance for loan losses based on the judgments of the information available to them at the time of their examination.

Impaired Loans. A loan is considered impaired when it is “probable” that a creditor will be unable to collect all amounts due (i.e. both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to the provision for loan losses. The Company stratifies its loan portfolio by size and treats smaller performing loans with an outstanding balance less than the Company’s defined 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:

Improvements are capitalized and amortized to occupancy expense over the shorter of the estimated useful life of the improvement or the term of the lease.

Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded and, subsequently is carried at fair value, less estimated costs to sell. Specific valuation allowances on other real estate owned are recorded through charges to operations to recognize declines in fair value subsequent to

foreclosure. Gains on sales are recognized when certain criteria relating to the buyer’s initial and continuing investment in the property are met.

Investments in Real Estate. At December 31, 2001, the Company is a limited partner in four different partnerships that invest in low income housing projects that qualify for Federal and/or State income tax credits. As further discussed in Note 7, the partnership interests are accounted for utilizing the equity method of accounting. The costs related directly to the development or the improvement of real estate are capitalized. Gains on sales are recognized when certain criteria relating to the buyer’s initial and continuing investment in the property are met.

Goodwill. During 2001, Goodwill, which represents the excess of purchase price over fair value of net assets acquired and the related acquisition costs, was amortized on a straight-line basis over the expected periods to be benefited (generally 15 years). The amortization of goodwill ceases upon adoption of SFAS No. 142, which for the Company was January 1, 2002. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. The Company adopted SFAS No. 142 effective January 1, 2002. Assuming no impairment adjustments are necessary, the Company expects non-interest expense to decrease by approximately $661,000 in 2002, resulting from the cessation of goodwill amortization.

Core Deposit Premium. Core deposit premium, which represents the purchase price over the fair value of the deposits acquired from other financial institutions are amortized on a straight-line basis over the expected periods to be benefited (generally 15 years). The Company assesses the recoverability of this intangible asset by determining whether the amortization of the premium balance over its remaining life can be recovered through the remaining deposit portfolio.

Stock-Based Compensation. The Company applies the intrinsic value method to account for stock-based compensation whereby expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pro forma net income and pro forma net income per share disclosures for employee stock option grants are based on the recognition as expense, over the vesting period, of the fair value on the date of grant of all stock-based awards.

Derivative Financial Instruments. It is the policy of the Bank not to speculate on the future direction of interest rates. However, the Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the assets or liabilities and against risk in specific transactions. In such instances, the Bank may protect its position through the purchase or sale of interest rate futures contracts for a specific cash or interest rate risk position. Other hedge transactions may be implemented using interest rate swaps, interest rate caps, floors, financial futures, forward rate agreements, and options on futures or bonds. Prior to considering any hedging activities, we seek to analyze the costs and benefits 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 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.

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.

Income Taxes. The provision for income taxes is based on income reported for financial statement purposes and differs from the amount of taxes currently payable, since certain income and expense items are reported for financial statement purposes in different periods than those for tax reporting purposes.

The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is established, when necessary, to reduce the deferred tax assets to the amount that is more likely than not to be realized.

Foreign Exchange Operations. The Company engages in foreign exchange transactions on behalf of its customers. Stated trading limits are maintained and monitored to ensure efficient operations. The majority of all transactions are settled on the transaction date to minimize settlement risk to the Company. The Company requires cash collateral or an approved line of credit on all forward transactions.

Comprehensive Income. Comprehensive income is defined 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 flow hedges. Comprehensive income and its components are reported and displayed in the Company’s consolidated statements of income and comprehensive income. Comprehensive income is a financial reporting concept and does not affect the Company’s financial 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 reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shares in the earnings of the Company.

Statement of Cash Flows. Cash and cash equivalents include short-term, highly liquid investments that generally have an original maturity of three months or less.

Segment Information and Disclosures. Generally accepted accounting principles in the United States of America establish standards to report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim reports to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has concluded it has one segment.

SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142, which for the Company was January 1, 2002. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. The Company adopted SFAS No. 142 effective January 1, 2002. Assuming no impairment adjustments are necessary and no other changes to goodwill, the Company expects non-interest expense to decrease by approximately $661,000 in 2002, resulting from the cessation of goodwill amortization.

In 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. Management does not expect that adoption of SFAS No. 144 will have a material impact on the results of operations or financial condition of the Company.

On December 10, 1999, the Bank entered into a Purchase and Assumption Agreement (“P&A Agreement”) with the Federal Deposit Insurance Corporation (“FDIC”), as the Receiver of Golden City Commercial Bank to purchase certain assets and to assume certain deposits and other liabilities of Golden City as of close of business on December 10, 1999 for $5.5 million in cash. The loans, securities, cash, Federal funds sold and deposits assumed by the Bank as of the closing on December 10, 1999 were $31.2 million, $22.1 million, $8.4 million, $22.0 million, and $80.6 million, respectively. Immediately upon acquisition, the branch operations of Golden City were merged into the Bank, and the two branches of Golden City were made branches of the Bank. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of Golden City subsequent to the closing on December 10, 1999 have been included in the Company’s consolidated financial statements. The excess of the purchase price over the fair value of the net identifiable assets acquired totaled approximately $2.65 million has been recorded as core deposits intangible to be amortized over 15 years.

The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserve balances required were $3,288,000 for 2001 and $2,500,000 for 2000.

Securities purchased under agreements to resell are collateralized by U.S. government agency and mortgaged-backed securities at December 31, 2001 and 2000. These agreements generally mature in one business day. The counter-parties to these agreements are nationally recognized investment banking firms 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.

For those securities obtained under the resale agreements, the collateral is either held by a third party custodian or by the counter-party and segregated under written agreements that recognize the Company’s interest in the securities. Interest income associated with securities purchased under resale agreements totaled $1,149,000 for 2001, $513,000 for 2000 and $1,860,000 for 1999.

Securities Available-for-Sale. The following table reflects the amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities available-for-sale as of December 31, 2001 and 2000:

The amortized cost and fair value of securities available-for-sale, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 2001, by contractual maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.

Proceeds from sales and repayments of securities available-for-sale were $30,600,000 during 2001 and $28,398,000 during 2000. Proceeds from maturities and calls of securities available-for-sale were $865,867,000 during 2001 and $678,638,000 during 2000. Gains realized in securities available-for-sale were $1,057,000, and losses realized were $65,000 in 2001 compared to no gains and losses realized of $18,000 in 2000. There were no gains in 1999 and losses realized in 1999 were $34,000.

Securities Held-to-Maturity. The carrying value, gross unrealized gains, gross unrealized losses and estimated fair values of securities held-to-maturity are as follows at December 31, 2001 and 2000:

The carrying value and estimated fair value of securities held-to-maturity, except for mortgage-backed securities and collateralized mortgage obligations, at December 31, 2001, by contractual maturities are shown

below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.

Proceeds from repayment of securities held-to-maturity were $63,155,000 during 2001 and $38,802,000 during 2000. Proceeds from the maturities and calls of securities held-to-maturity were $60,295,000 during 2001 and $17,519,000 during 2000. The Company realized gross realized gains of $314,000 for 2001, less than $1,000 for 2000 and $31,000 for 1999. No losses were realized for 2001, 2000 and 1999.

Securities having a carrying value of $125,250,000 at December 31, 2001 and $209,537,000 at December 31, 2000 were pledged to secure public deposits, treasury tax and loan, securities sold under agreements to repurchase, and a line of credit with the Federal Home Loan Bank.

Federal Home Loan Bank (“FHLB”) stock is carried at cost, and included in other assets in the Statements of Financial Condition. The carrying amount of the FHLB stock at December 31, 2001 was $5.64 million compared to $5.61 million at December 31, 2000. The Federal Home Loan Bank Act currently governs the level of stock ownership, and the stock is purchased and redeemed at par. The amount of Federal Home Loan Bank stock required is based on the member’s year-end outstanding mortgage-backed securities, residential mortgages and advances from the FHLB.

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 specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid-off from the operating profits of the borrowers,

refinancing by another lender or through sale by the borrowers of the secured collateral. The components of loans in the consolidated statements of condition as of December 31, 2001 and 2000 were as follows:

The Company previously sold participations in certain residential mortgage loans to buyers in the secondary market. These participations covered substantially all of the loan balances and were sold without recourse. No such sales have been made since 1998. As of December 31, 2001, the Company had $3,580,000 of these loans in its servicing portfolio. There were no loans held for sale as of December 31, 2001 and 2000. The Company pledged approximately $96,413,000 of its residential mortgage loans as of December 31, 2001 and $76,463,000 as of December 31, 2000 to secure a line of credit with the Federal Home Loan Bank.

The allowance for loan losses is a significant estimate that can and does change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers and applicable economic and environmental conditions, among other factors. An analysis of the activity in the allowance for loan losses for the years ended December 31, 2001, 2000 and 1999 is as follows:

The Company had identified impaired loans with a recorded investment to be approximately $19,350,000 as of December 31, 2001 and $27,818,000 as of December 31, 2000. The average balances of impaired loans were $23,465,000 for 2001, $29,516,000 for 2000, and $26,707,000 for 1999. Interest collected on impaired loans totaled $959,000 in 2001, $2,120,000 in 2000 and $2,047,000 in 1999. The Bank recognizes interest

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 specific allowance:

The Company has entered into transactions with its directors, significant stockholders and their affiliates (“Related Parties”). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers. In management’s opinion, these transactions did not involve more than normal credit risk or present other unfavorable features. All loans to Related Parties were current as of December 31, 2001. An analysis of the activity with respect to loans to Related Parties is as follows:

The following is a summary of non-accrual loans and troubled debt restructurings as of December 31, 2001, 2000 and 1999 and the related net interest foregone for the years then ended:

As of December 31, 2001, there were no commitments to lend additional funds to those borrowers whose loans have been restructured, impaired or in non-accrual status.

The balance of other real estate owned at December 31, 2001 was $1,555,000 and at December 31, 2000 was $5,174,000. The valuation allowance was $131,000 at December 31, 2001 and December 31, 2000. The following table presents the components of other real estate owned expense (income) for the year ended:

An analysis of the activity in the allowance for other real estate losses for the years ended December 31, 2001, 2000, and 1999 is as follows:

The Company’s investments in real estate were $17,727,000 as of December 31, 2001 and $17,348,000 as of December 31, 2000, consisting of four investments in limited partnerships formed for the purpose of investing in low income housing projects, qualified for Federal low income housing tax credits. The limited partnerships are expected to generate tax credits over a weighted average remaining period of approximately eight years. In addition to the Federal tax credits, the California Corporate Tax Credit Fund also qualified for State tax credits. See Note 10 of the notes to consolidated financial statements for income tax effects. In 2001, the Company contributed approximately $2,637,000 to Wilshire Courtyard, the senior housing construction

project, completed in 2001. The following table presents the details of the four projects as of December 31, 2001 and 2000:

The Company’s 99.0% and 99.90% interest in the Los Robles and Wilshire Courtyard limited partnerships were not consolidated as of December 31, 2001 and 2000 because the Company did not have ability to exercise significant influence over the operation of the partnerships. The Company’s investments are accounted for utilizing the equity method of accounting. The Company recognized a net loss of approximately $2,257,000 in 2001, $683,000 in 2000 and $334,000 in 1999 from the partnerships’ operations. The Company recognized a gain of $394,000 from the sale of a strip mall in 1999 and a net gain of $409,000 for 1999 from the operations.

Premises and equipment consisted of the following at December 31, 2001 and 2000:

The amount of depreciation included in operating expense was $1,472,000 in 2001, $1,500,000 in 2000, and $1,331,000 in 1999.

Securities Sold under Agreements to Repurchase. The underlying collateral pledged for the repurchase agreements consists of U.S. government agency and mortgage-backed securities with a carrying value of $37,894,000, and a fair value of $38,295,000 as of December 31, 2001, and are held by a custodian and

maintained under the Company’s control. These borrowings generally mature in less than 30 days. The table below provides comparative data for securities sold under agreements to repurchase:


(1)	Average balances were computed using daily averages.

(2)	Highest month-end balances were at February in 2001, October in 2000 and February in 1999.

Advances from the Federal Home Loan Bank. As of December 31, 2001, the Bank had obtained two advances from the Federal Home Loan Bank of San Francisco totaling $30,000,000. These advances are non-callable with fixed interest rates. The advance for $10,000,000 at 4.90% was obtained in 1998, and matures on October 28, 2003. The advance for $20,000,000 at 5.45% was obtained in 2001, and matures on March 21, 2005.

For the years ended December 31, 2001, 2000 and 1999, the current and deferred amounts of the income tax expense are summarized as follows:

Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities give rise to deferred taxes. Deferred tax assets and liabilities for the years ended December 31, 2001 and 2000 are as follows:

Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 2000 are primarily the result of adjustments to conform to the tax returns as filed.

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 differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Bank will realize all benefits related to these deductible temporary differences.

Included in other assets in the statements of conditions, at December 31, 2001 and 2000 were net deferred tax assets of $4,183,000 for 2001 and $3,901,000 for 2000. Other assets as of December 31, 2001 and 2000 included a current income tax receivable of $996,000 for 2001 and $1,675,000 for 2000. Other liabilities as of December 31, 2001 and 2000 include a current income tax payable $19,370,000 for 2001 and $4,429,000 for 2000.

Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years indicated as follows:

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 significant 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 fiscal years, less any cash distributions made during that period. The amount of retained earnings available for cash dividends as of December 31, 2001 is restricted to approximately $87,228,000 under this regulation.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Federal Deposit Insurance Corporation has established five capital ratio categories: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized.” A well capitalized institution must have a Tier 1 capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. At December 31, 2001, the Bank was in compliance with the minimum capital requirements and is considered well capitalized.

The Company’s and the Bank’s capital and leverage ratios as of December 31, 2001 and 2000 are presented in the tables below:

(1) Excluding accumulated other comprehensive income of $5,063,000 and goodwill of $8,880,000.

(2) Excluding accumulated other comprehensive income of $2,303,000 and goodwill of $9,744,000.

(3) Average assets represent average balances for the fourth quarter of 2001 and the fourth quarter of 2000.

The Board of Directors of Bancorp is authorized to issue preferred stock in one or more series and to fix the voting powers, designations, preferences or other rights of the shares of each such class or series and the qualifications, limitations and restrictions thereon. Any preferred stock issued by Bancorp may rank prior to Bancorp common stock as to dividend rights, liquidation preferences, or both, may have full or limited voting rights, and may be convertible into shares of Bancorp common stock. No preferred stock has been issued as of December 31, 2001.

On November 16, 2000, Bancorp’s Board of Directors adopted a Rights Agreement between Bancorp and American Stock Transfer and Trust Company, as Rights Agent, and declared a dividend of one preferred share purchase right for each outstanding share of Bancorp common stock. The dividend was payable on January 19, 2001 to stockholders of record at the close of business on the record date, December 20, 2000. Each preferred share purchase right entitles the registered holder to purchase from Bancorp one one-thousandth of a share of Bancorp’s series A junior participating preferred stock at a price of $200, subject to adjustment. In general, the rights become exercisable if, after December 20, 2000, a person or group acquires 15% or more of Bancorp’s common stock or announces a tender offer for 15% or more of the common stock. The Board of Directors is entitled to redeem the rights at one cent per right at any time before any such person acquires 15% or more of the outstanding common stock. The rights will expire in ten years. The complete terms and conditions of the rights are contained in the Rights Agreement, between Bancorp and the Rights Agent, which was filed as an exhibit to Bancorp’s Form 8-A on December 20, 2000. The Rights Agreement is a successor to Bancorp’s prior rights agreement, which expired at the close of business on December 20, 2000.

The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years indicated.

Litigation. The Company is involved in various litigation concerning transactions entered into during the normal course of business. Management, after consultation with legal counsel, does not believe that the resolution of such litigation will have a material effect upon its financial condition or results of operations.

Lending. In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments included commitments to extend credit in the form of loans or through commercial or standby letters of credit and financial 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 financial instrument and is not a reflection of the level of expected losses, if any.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial 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 financial instruments with credit risk.

Financial instruments whose contract amounts represent the amount of credit risk include the following:

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment agreement. These commitments generally have fixed expiration

dates and are expected to expire without being drawn upon. The total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the borrowers.

As of December 31, 2001, the Company does not have fixed-rate or variable-rate commitments with characteristics similar to options, which provide the holder, for a premium paid at inception to the Company, the benefits of favorable movements in the price of an underlying asset or index with limited or no exposure to losses from unfavorable price movements.

The Company’s exposure to credit risk from this financial guarantee is essentially the same as if the Company was the owner of the corporation debt. At December 31, 2001 the Company has no outstanding financial guarantees.

Letters of credit and bill of lading guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in making loans to customers.

As of December 31, 2001, the Company had available credit lines with other financial institutions in the amount of $332,500,000.

Derivative Financial Instruments. The Company entered into a forward rate agreement with a notional amount of $100 million that was recorded at fair value, with gains recorded as securities gains in the accompanying consolidated statements of income and comprehensive income. The agreement expired in March 2001.

On March 21, 2000, we entered into an interest rate swap agreement with a major financial institution in the notional amount of $20 million for a period of five years. The interest rate swap was for the purpose of hedging the cash flows from a portion of our floating rate loans against declining interest rates. The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at December 31, 2001, was approximately three years. At December 31, 2001 the fair value of the interest rate swap was $1.93 million ($869,000, net of tax) compared to $977,000 ($566,000, net of tax) at January 1, 2001. For the twelve months ended December 31, 2001, amounts totaling $557,000 were reclassified into earnings. The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to reclassify into earnings within the next 12 months is approximately $1.06 million.

Leases. The Company is obligated under a number of operating leases for premises and equipment with terms ranging from 1 to 55 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. Rental expense was $2,269,000 for 2001, $2,200,000 for 2000 and $1,823,000 for 1999. The following table shows future minimum payments under operating leases with terms in excess of one year as of December 31, 2001.

Rental income was $450,000 for 2001, $437,000 for 2000, and $443,000 for 1999. The following table shows future rental payments to be received under operating leases with terms in excess of one year as of December 31, 2001:

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Short-term Instruments. For cash and short-term instruments, the carrying amount was assumed to be a reasonable estimate of fair value.

Investment Securities. For securities (which include securities available-for-sale, and securities held-to-maturity), fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities.

Loans. Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.

The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.

Fair value for non-performing real estate loans was based on recent external appraisals of the underlying collateral of the loan. If appraisals were not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are determined judgmentally using available market information and specific borrower information.

Deposit Liabilities. The fair value of demand deposits, savings accounts, and certain money market deposits was assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities.

Other Borrowings. This category includes Federal funds purchased and securities sold under repurchase 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 flows using the U.S. Treasury curve adjusted to approximate current entry-value interest rates applicable and similar obligations issued by the Bank.

Off-Balance-Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit, and financial 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 creditworthiness of the counter-parties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter-parties at the reporting date.

The fair value of interest rate swap and forward rate agreements were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities.

Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Employee Stock Ownership Plan. Under the Company’s Amended and Restated Cathay Bank Employee Stock Ownership Plan (“ESOP”), the Company makes annual contributions to a trust in the form of either cash or common stock of the Company for the benefit of eligible employees. Employees are eligible to participate in the ESOP after completing two years of service for salaried full-time employees or 1,000 hours for each of two consecutive years for salaried part-time employees. The amount of the annual contribution is discretionary except that it must be sufficient to enable the trust to meet its current obligations. The Company also pays for the administration of this plan and of the trust. The ESOP purchased 14,459 shares in 2001, 18,755 shares in 2000, and 33,163 shares in 1999 of the Bancorp’s stock at an aggregate cost of $773,163 in 2001, $812,359 in 2000, and $1,162,829 in 1999. The shares purchased in 2001 included 4,200 shares bought on the open market and 10,259 shares bought through the Dividend Reinvestment Plan. The shares purchased in 2000 included 7,500 shares bought on the open market and 11,255 shares bought through the Dividend Reinvestment Plan. The shares purchased in 1999 included 20,160 shares bought on the open market and 13,003 shares bought through the Dividend Reinvestment Plan. The Company contributed $598,500 in 2001, $564,800 in 2000, and $537,200 in 1999 to the trust. The expense was charged to salaries and employee benefits in the accompanying consolidated statements of income and comprehensive income. In 2001, distribution of benefits to participants totaled 43,851 shares. As of December 31, 2001, the ESOP owned 552,244 shares or 6.15% of the Company’s outstanding common stock.

Cathay Bancorp, Inc. 401(k) Plan. In 1997, the Board approved the Cathay Bancorp, Inc. 401(k) Profit Sharing Plan, which began on March 1, 1997. Salaried employees who have completed three months of service and have attained the age of 21 are eligible to participate. Enrollment dates are on January 1st, April 1st, July 1st and October 1st of each year.

Participants may contribute up to 15% of their compensation for the year but not to exceed the dollar limit set by the Internal Revenue 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 five years of service. The Company’s contribution amounted to $227,879 in 2001, $198,119 in 2000, and $186,736 in 1999.

The Plan allows participants to withdraw all or part of their vested amount in the Plan due to certain financial hardship as set forth in the Internal Revenue Code and Treasury Regulations. Participants may also borrow up to 50% of the vested amount, up to a maximum of $50,000. The minimum loan amount is $1,000.

In 1998, the Board adopted the Cathay Bancorp, Inc. Equity Incentive Plan. Under the Equity Incentive Plan, directors and eligible employees may be granted incentive or non-statutory stock options, or awarded restricted stock, for up to 1,075,000 shares of the Company’s common stock. The Equity Incentive Plan currently expires on February 2008.

The Company granted non-statutory stock options to selected bank officers and non-employee directors in 1998 to purchase a total of 45,000 shares, in 2000 to purchase a total of 55,000 shares, and in 2001 to purchase a total of 56,400 shares of the Company’s common stock. The exercise price per share of these non-statutory stock options is equal to the fair market value of a share of the Company’s common stock on the date of grant. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events). If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards.

The following table shows stock options outstanding and exercisable as of December 31, 2001, the corresponding exercise prices and the weighted-average contractual life remaining.

No compensation cost has been recognized for its stock option plans in the consolidated financial statements.

The Company estimated the fair value of options granted in 2001, 2000, and 1998 using the Black-Scholes option-pricing model with following assumptions: (i) an expected life of the option of four years, (ii) a stock price volatility of 35.80% in 2001, 33.88% in 2000 and 33.5% in 1998 based on daily market prices for the preceding four-year period, (iii) an expected dividend yield of 1.66% per share per annum in 2001, 2.1% per share per annum in 2000, and 1.9% per share per annum in 1998, and (iv) a risk-free interest rate of 3.89% in 2001, 5.1% in 2000 and 4.5% in 1998. The fair value of the options was calculated to be $17.56 per share for options granted in 2001 at the date of grant, $12.05 per share for options granted in 2000 at the date of grant and $9.21 per share for options granted in 1998 at the date of grant.

If the compensation cost for the Company’s stock option plan had been determined with the fair value at the grant dates, computed using the assumptions above, for awards under the Plan consistent with the method

of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share for 2001, 2000, and 1999 would have been reduced to the pro forma amounts indicated below.

The condensed financial information of Cathay Bancorp, Inc. as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000, and 1999 were as follows:

The Company has a dividend reinvestment plan which allows for participants’ reinvestment of cash dividends and certain additional optional investments in the Company’s common stock. Shares issued under the plan and the consideration received were 34,657 for $1,811,507 in 2001, 39,330 for $1,690,664 in 2000 and 44,523 for $1,600,173 for 1999.

97 EX-3.2 3 a79485ex3-2.txt EXHIBIT 3.2 Exhibit 3.2 RESTATED BYLAWS OF CATHAY BANCORP, INC. (A DELAWARE CORPORATION) RESTATED BYLAWS OF CATHAY BANCORP, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. Registered Office. The registered office of the Corporation shall be located at 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware, and the name of the registered agent at such address is The Corporation Trust Company. SECTION 2. Other Offices. The Corporation may also have offices at such other places, either within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. Place of Meetings. Meetings of stockholders shall be held at such time and place, within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. SECTION 2. Annual Meeting. An annual meeting of stockholders for the election of Directors and for the transaction of such other business as may properly come before the meeting shall be held at such date and time as may be designated by resolution of the Board of Directors from time to time. SECTION 3. Business To Be Conducted At Meetings. At an annual meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon as shall have been brought before the annual meeting (a) by, or at the direction of, a majority of the Board of Directors, or (b) by any stockholder of the Corporation who complies with the notice procedures set forth in this Section. For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the scheduled annual meeting; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the stockholder, to be timely, must be so delivered or received not later than the close of business on the 10th day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books or as set forth on the stockholder's stock certificates, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the Corporation's stock which are beneficially owned by the stockholder on the date of such stockholder notice and by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder notice, and (d) any financial interest of the stockholder in such proposal. A majority of the Board of Directors may reject any stockholder proposal not timely made in accordance with the terms of this Section. If a majority of the Board of Directors determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section in any material respect, the Secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five business days from the date such deficiency notice is given to the stockholder, as a majority of the Board of Directors shall reasonably determine. If the deficiency is not cured within such period, or if a majority of the Board of Directors determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Section in any material respect, then a majority of the Board of Directors may reject such stockholder's proposal. The Secretary of the Corporation shall notify a stockholder in writing whether his proposal has been made in accordance with the time and information requirements of this Section. Notwithstanding the procedures set forth in this paragraph, if the majority of the Board of Directors does not make a determination as to the compliance of any stockholder proposal with the requirements of this Section, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the stockholder proposal was made in accordance with the terms of this Section. If the presiding officer determines that a stockholder proposal was not made in accordance with the terms of this Section, he shall so declare at the annual meeting and such proposal shall not be acted upon at the annual meeting. SECTION 4. Stockholders List. The officer who has charge of the stock transfer books of the Corporation shall prepare and make, in the time and manner required by applicable law, a list of stockholders entitled to vote and shall make such list available for such purposes, at such places, at such times and to such persons as required 2 by applicable law. The stock transfer books shall be the only evidence as to the identity of the stockholders entitled to examine the stock transfer books or to vote in person or by proxy at any meeting of stockholders. SECTION 5. Special Meetings. Special meetings of stockholders for any purpose or purposes, unless otherwise prescribed by applicable law or by the Restated Certificate of Incorporation, may be called by the Chairman of the Board, the President, or a majority of the Board of Directors. Special meetings of stockholders may not be called by any other person or persons. The business transacted at any such special meeting of stockholders shall be limited to the purposes set forth in the notice of the meeting. SECTION 6. Notice of Meetings. Written notice of each meeting of stockholders, whether annual or special, stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meting not less than ten or more than sixty days before the date of the meeting. In the case of a special meeting, such notice shall state the purpose or purposes for which such special meeting is called. SECTION 7. Quorum and Adjournment. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of stockholders for the transaction of business except as otherwise provided by applicable law or by the Restated Certificate of Incorporation. The stockholders entitled to vote present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders entitled to vote to leave less than a quorum then present and represented. Any stockholders' meeting, annual or special, whether or not a quorum is present or represented, may be adjourned from time to time by the vote of the holders of a majority of the stock entitled to vote thereat, the holders of which are either present in person or represented by proxy, but in the absence of a quorum no other business may be transacted at such meeting. At any adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified, except for such business as was duly transacted at any earlier meeting. If an adjournment is for more than thirty days, or if after an adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given as in the case of an original meeting to each stockholder of record entitled to vote at the meeting. SECTION 8. Voting. Unless otherwise provided by applicable law, by the Restated Certificate of Incorporation, or in any resolution or resolutions of the Board of Directors providing for the issuance of a class or series of the preferred stock of the Corporation, each holder of stock having voting power shall be entitled to one vote for each share of such stock held by such stockholder. At all meetings of stockholders for the election of directors a plurality of the votes cast shall be sufficient to elect. All other 3 elections and questions shall, unless otherwise provided by law, the Restated Certificate of Incorporation or these Bylaws be decided by the vote of the holders of shares of stock having a majority of the votes which could be cast by the holders of all shares of stock entitled to vote thereon which are present in person or represented by proxy at the meeting. SECTION 9. Proxies. At each meeting of the stockholders of the Corporation, every stockholder having the right to vote shall be entitled to vote in person or proxy. Any stockholder may authorize another person to act for him by proxy. A proxy must be in writing and executed by the stockholder or his or her duly authorized attorney. In lieu thereof, to the extent permitted by law, a proxy may be transmitted in a telegram, cablegram or other means of electronic transmission provided that the telegram, cablegram or electronic transmission either sets forth or is submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. A copy, facsimile transmission or other reliable reproduction of a written or electronically-transmitted proxy authorized by this Section 9 may be substituted for or used in lieu of the original writing or electronic transmission. No proxy authorized by this Section 9 shall be voted or acted upon more than three years from its date, unless the proxy provides for a longer period. No ballot, proxies or vote, nor any revocations thereof or changes thereto shall be accepted after the time set for the closing of the polls pursuant to Section 12 of Article II of these By-laws. Each proxy shall be delivered to the inspectors of election prior to or at the meeting. The vote for directors shall be by ballot. SECTION 10. Action by Written Consent. The stockholders of the Corporation shall not take action by written consent in lieu of taking such action at an annual or special meeting of stockholders. SECTION 11. Judges of Election. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the Corporation 4 represented at the meeting and such inspectors' count all votes and ballots. Such certification shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as if permitted by applicable law. No person who is a candidate for office at an election may serve as an inspector of such election. SECTION 12. Conduct of Meetings. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at such meeting by the person presiding over the meeting. The Board of Directors of the Corporation may adopt by resolution such rules or regulations for the conduct of meetings of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chair of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chair, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chair of the meeting, may include, without limitation, the following: (1) the establishment of an agenda or order of business for the meeting; (2) rules and procedures for maintaining order at the meeting and the safety of those present; (3) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chair shall permit; (4) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (5) the limitations on the time allotted to questions or comments by participants. Unless, and to the extent determined by the Board of Directors or the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE III DIRECTORS SECTION 1. Powers. The Board of Directors shall have the power to manage the property, business and affairs of the Corporation, and except as expressly limited by law, the Restated Certificate of Incorporation or these Bylaws, to exercise all of its corporate powers. SECTION 2. Number and Qualifications. The Board of Directors shall initially consist of 12 members. The number of directors may be changed from time to time by resolution of the Board of Directors, but in no event may the number of directors be fewer than 3 nor greater than 25. Directors need not be stockholders. SECTION 3. Election, Term and Nominations. 5 (a) The Board of Directors shall be classified as set forth in Article FIFTH of the Restated Certificate of Incorporation. The initial Class I, Class II and Class III Directors shall be those persons named as such by the Incorporator. Each Director so named shall serve for the term set forth in Article FIFTH of the Restated Certificate of Incorporation and until his or her successor is duly elected and qualified. (b) Nominations of candidates for election as directors at any annual meeting of stockholders may be made by the Board of Directors or by any stockholder entitled to vote at such annual meeting. Only persons nominated in accordance with procedures set forth in this Section 3(b) shall be eligible for election as directors at an annual meeting. Nominations of candidates for election as directors by any stockholder shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section 3(b). To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the date of the scheduled annual meeting; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of the date on which such notice of the date of the scheduled annual meeting was mailed or the date on which such public disclosure was made. Such stockholder's notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election as a director (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the Corporation's stock which are beneficially owned by such person on the date of such stockholder notice and (d) any other information relating to such person that would be required to be disclosed pursuant to Regulation 13D-G under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), in connection with the acquisition of shares, and pursuant to Regulation 14A under the Exchange Act, in connection with the solicitation of proxies with respect to nominees for election as directors, regardless of whether such person is subject to the provisions of such regulations, including, but not limited to, information required to be disclosed by Items 4(b) and 6 of Schedule A of Regulation 14A and information which would be required to be filed on Schedule B of Regulation 14A with the Securities and Exchange Commission; and (ii) as to the stockholder giving the notice (a) the name and address, as they appear on the Corporation's books or as set forth on the holder's stock certificates, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees, and (b) the class and number of shares of the Corporation's stock which are beneficially owned by such stockholder on the date of such stockholder notice and beneficially owned by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. No person shall be elected as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3(b). Ballots bearing the names of all the persons who have been nominated for election as directors at an annual meeting in accordance 6 with the procedures set forth in this Section 3(b) shall be provided for use at the annual meeting. A majority of the Board of Directors may reject any nomination by a stockholder not timely made in accordance with the requirements of this Section 3(b). If a majority of the Board of Directors determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 3(b) in any material respect, the Secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five business days, from the date such deficiency notice is given to the stockholder, as the majority of the Board of Directors shall reasonably determine. If the deficiency is not cured with such period, or if a majority of the Board of Directors reasonably determines that the additional information provided by the stockholder, together with the information previously provided, does not satisfy the requirements of this Section 3(b) in any material respect, then the Board of Directors may reject such stockholder's nomination. The Secretary of the Corporation shall notify a stockholder in writing whether his nomination has been made in accordance with the time and informational requirements of this Section 3(b). Notwithstanding the procedures set forth in this Section 3(b), if a majority of the Board of Directors does not make a determination as to the compliance of any nominations by a stockholder with the requirements of this Section, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether a nomination was not made in accordance with the terms of this Section 3(b). If the presiding officer determines that a nomination was not made in accordance with the terms of this Section 3(b), he shall so declare at the annual meeting and the defective nomination shall be disregarded. SECTION 4. Newly Created Directorships and Vacancies. Except as otherwise provided for or fixed by or pursuant to the provisions of Article FOURTH of the Restated Certificate of Incorporation or any resolution or resolutions of the Board of Directors providing for the issuance of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors; provided, however, that in the event that at the time of such vacancy or newly created directorship there is an Interested Stockholder (as defined in Article NINTH of the Restated Certificate of Incorporation), then, in addition to the vote of a majority of the remaining directors then in office, the filling of such vacancy or newly created directorship shall require the approval of a majority of the Continuing Directors (as defined in Article NINTH of the Restated Certificate of Incorporation) then in office. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall 7 have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. If the number of Directors is changed, any increase or decrease shall be apportioned among the three classes so as to make all classes as nearly equal in number as possible. If, consistent with the preceding requirement, the increase or decrease may be allocated to more than one class, the increase or decrease may be allocated to any such class the Board of Directors selects in its discretion. SECTION 5. Resignation and Removal. Any Director may resign at any time upon written notice to the Corporation. A Director may be removed only for cause and only by the affirmative vote of the holders of at least 80% of the shares then entitled to vote in an election of Directors, which vote may only be taken at a meeting of stockholders called expressly for that purpose. SECTION 6. Regular Meetings. Regular meetings of the Board of Directors may be held without call or notice at such time and place either within or without the State of Delaware as shall from time to time be fixed by resolution of the Board of Directors. SECTION 7. Special Meetings. Special meetings of the Board of Directors may be called at any time, and for any purpose permitted by law, by the President, or by the Secretary on the written request of a majority of the members of the Board of Directors, which meetings shall be held at the time and place either within or without the State of Delaware designated by the person or persons calling the meeting. SECTION 8. Notice. Notice of the time, place and purpose of any special meeting shall be given to the Directors by the Secretary, or in case of his absence, refusal or inability to act, by any other officer. Any such notice may be given by mail, by telegraph, by telephone, by facsimile or by personal service, to each of the Directors. If the notice is by mail, it shall be deposited in a United States Post Office at least forty-eight hours before the time of the meeting; if by facsimile, transmitted at least twelve hours before the time of the meeting; and if by telegraph, by deposit of the message with the telegraph company at least twelve hours before the time of the meeting; if by telephone or by personal service, given at least twelve hours before the time of the meeting. SECTION 9. Quorum. At all meetings of the Board of Directors, one-third of the total number of directors, shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by applicable law or by the Restated Certificate of Incorporation or by these Bylaws. Any meeting of the Board of Directors may be adjourned to meet again at a stated day and hour. Even though no quorum is 8 present a majority of the Directors present at any meeting of the Board of Directors, whether initial, regular or special, may adjourn from time to time until a quorum be had, but no later than the time fixed for the next regular meeting of the Board of Directors. Notice of any adjourned meeting need not be given. SECTION 10. Fees. Each Director shall receive such fees and other compensation, along with reimbursement of expenses incurred on behalf of the Corporation or in connection with attendance at meetings, as the Board of Directors may from time to time determine. No such payment of fees or other compensation shall preclude any Director from serving the Corporation in any other capacity and receiving fees and compensation for such services. SECTION 11. Action Without Meetings. Unless otherwise restricted by applicable law or by the Restated Certificate of Incorporation or by these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee. SECTION 12. Meetings by Telephonic Communication. Unless otherwise restricted by the Restated Certificate of Incorporation, by applicable law or these Bylaws, members of the Board of Directors or any committee thereof may participate in any meeting of the Board of Directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 12 shall constitute presence in person at such meeting. ARTICLE IV COMMITTEES SECTION 1. Appointment. The Board of Directors may, by resolution passed by a majority of the Directors, designate one or more committees, each committee to be composed of members of the Board of Directors of the Corporation. The Board of Directors may designate one or more Directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Each committee shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. 9 SECTION 2. Powers. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors unless expressly limited by law in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Notwithstanding the preceding sentence, no such committee shall have any power or authority in reference to amending the Restated Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders entitled to vote the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders entitled to vote a dissolution of the Corporation or a revocation of a dissolution, or amending these Bylaws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of any securities of the Corporation. SECTION 3. Proceedings. Each such committee shall keep regular minutes of its meetings and report the same upon request of the Board of Directors. SECTION 4. Fees. Members of the various committees shall receive such fees and other compensation, along with reimbursement of expenses incurred on behalf of the Corporation or in connection with attendance of meetings, as the Board of Directors may from time to time determine. No such payment of fees or compensation shall preclude any member of a committee from serving the Corporation in any other capacity and receiving fees and compensation for such services. ARTICLE V OFFICERS SECTION 1. Appointment and Compensation. The Board of Directors shall appoint and fix the compensation of the officers of the Corporation who shall include a Chairman of the Board, a President, a Vice President, a Secretary, and a Treasurer. The Chairman of the Board must be appointed from among the Directors. The Board of Directors may appoint and fix the compensation of all such other officers (in-clouding additional Vice Presidents, Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers) as the Board of Directors may deem necessary or desirable. The Board of Directors, or if it fails to do so, the President, may appoint and fix the compensation of such other agents as either of them deem necessary or desirable, who shall have such powers and duties as may be assigned from time to time by either of them. Unless prohibited by applicable law or by the Restated Certificate of Incorporation or by these Bylaws, one person may be elected or appointed to serve in more than one official capacity. 10 SECTION 2. Removal and Resignation. The officers shall hold office for such terms as the Board of Directors shall determine until their respective successors are appointed and qualified, except in the event of earlier removal or resignation. Any officer may be removed, either with or without cause, by the Board of Directors. Any other agents of the Corporation may be similarly removed by the Board of Directors or by the President. Any officer may resign at any time by giving notice to the Board of Directors or to the Chairman of the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein; and, unless otherwise specified in such notice, the acceptance of the resignation shall not be necessary to make it effective. SECTION 3. The Chairman of the Board. The Chairman of the Board (if there is such an officer) shall, if present, preside at all meetings of the stockholders and at all meetings of the Board of Directors. The Board of Directors may designate the Chairman of the Board to be the chief executive officer of the Corporation. The Chairman of the Board shall exercise and perform such other powers and duties as are usually vested in a chairman of the board and (if so designated) in a chief executive officer or as may be from time to time prescribed or assigned by the Board of Directors or as may be prescribed by these Bylaws. SECTION 4. The President. Subject to the control of the Board of Directors, the President shall have general supervision, management and control of the business, affairs and officers of this Corporation and shall, in the absence of the Chairman of the Board or in the event of his inability or refusal to act, preside at all meetings of the stockholders and of the Board of Directors. The President shall be the chief executive officer or, in the event that the Chairman of the Board has been designated to be the chief executive officer, the chief operating officer of the Corporation. The President shall exercise and perform such other powers and duties as are usually vested in a president and in a chief executive or operating officer (as the case may be) or as may be from time to time prescribed or assigned by the Board of Directors or as may be prescribed by these Bylaws. SECTION 5. The Vice President. In the absence of the President or in the event of his inability or refusal to act, the Vice President (or if there be more than one Vice President, the Vice Presidents in the order of their rank or if of equal rank, then in the order designated by the Board of Directors or the President, or in the absence of any designation, then in the order of their appointment) shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice President shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe. 11 SECTION 6. The Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the committees when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board of Directors, to the extent and in the manner required by applicable law or by these Bylaws. The Secretary shall have custody of the corporate seal of the Corporation and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary, or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by the signature of such officer. The Secretary shall perform such other duties and have such other powers as the Board of Directors or the president may from time to time prescribe. SECTION 7. The Assistant Secretary. The Assistant Secretary (if there be more than one Assistant Secretary, the Assistant Secretaries in the order designated by the Board of Directors or the President or, in the absence of any designation, then in the order of their appointment), shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors or the President or the Secretary may from time to time prescribe. SECTION 8. The Treasurer. The Treasurer shall have both the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer may disburse the funds of the Corporation as may be ordered by the Board of Directors or the President, taking proper vouchers for such disbursements, and shall render to the Board of Directors and the President an account of transactions and of the financial condition of the Corporation. The Treasurer shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe. SECTION 9. The Assistant Treasurer. The Assistant Treasurer (or if there be more than one Assistant Treasurer, the Assistant Treasurers in the order designated by the Board of Directors or the President or if there be no such designation, then in the order of their appointment) shall in the absence of the Treasurer or in the event of the Treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer. The Assistant Treasurer shall perform such other duties and have such other powers as the Board of Directors or the Treasurer may from time to time prescribe. 12 ARTICLE VI SHARES OF STOCK SECTION 1. Form of Certificate. Every holder of stock in the Corporation shall be entitled to have a certificate in form approved by the Board of Directors signed by, or in the name of the Corporation by the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Any or all signatures on the certificate may be a facsimile. The corporate seal may, but need not, be placed upon the certificates representing the Corporation's shares. In case any officer, transfer agent or registrar who has signed or countersigned, or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. SECTION 2. Transfer Agents and Registrars. The Corporation may have one or more transfer agents and one or more registrars of its shares, whose respective duties shall be defined by the Board of Directors. Unless the Board of Directors specifically directs otherwise with respect to a particular certificate, if the Board of Directors has appointed one or more transfer agents and registrars, certificates for shares shall be countersigned by a transfer agent and registered by a registrar. SECTION 3. Transfers of Stock. Upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue or direct the issuance of a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 4. Lost, Stolen or Destroyed Certificates. The Board of Directors may issue or direct the issuance of a new certificate or certificates in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed. 13 SECTION 5. Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the owner in fact to receive dividends, to vote, if entitled and for all other purposes and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by applicable law. ARTICLE VII RECORD DATES In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall not be more than sixty nor less than ten days before the date of such meeting; and (2) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (2) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 14 ARTICLE VIII GENERAL PROVISIONS SECTION 1. Seal. It shall not be necessary to the validity of any instrument executed by any authorized officer or officers of the Corporation, that the execution of such instrument be evidenced by the corporate seal, and all documents, instruments, contracts and writings of all kinds signed on behalf of the Corporation by any authorized officer or officers thereof shall be as effectual and binding on the Corporation without the corporate seal, as if the execution of the same had been evidenced by affixing the corporate seal thereto. SECTION 2. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SECTION 3. Manner of Notice. Whenever under the provisions of applicable law or of the Restated Certificate of Incorporation or of these Bylaws notice is required to be given to any Director, committee member, officer or stockholder and except as otherwise provided therein, it shall not be construed to mean personal notice, but such notice may be given, in the case of stockholders, in writing, by mail, by depositing the same in the post office or letterbox, in a postpaid, sealed wrapper, addressed to such stockholder, at such address as appears in the record books of the Corporation, and, in the case of Directors, committee members and officers, by telephone, by mail, by facsimile or by telegram to the last address known to the Secretary of the Corporation, and such notice shall be deemed to be given at the time when the same shall be thus mailed, telegraphed, transmitted or telephoned. SECTION 4. Waiver of Notice. Whenever any notice is required to be given under the provisions of applicable law or of the Restated Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted, nor the purpose of any regular or special meeting of the stockholders, Directors, or members of a committee of Directors need be specified in any written waiver of notice. SECTION 5. Voting of Shares in Other Corporations. Shares in other corporations which are held by the Corporation may be represented and voted by the Chairman of the Board or the President or a Vice President or the Secretary of the Corporation or by proxy or proxies appointed by one of them. The Board of Directors 15 may, however, direct the appearance or vote thereof and may appoint some other person to vote such shares generally or in respect of any particular matter. SECTION 6. Dividends. Dividends upon stock of the Corporation, subject to the provisions of the Restated Certificate of Incorporation, if any, may be declared by the Board of Directors, out of funds lawfully available therefore, at any initial, regular or special meeting, pursuant to applicable law. Dividends may be paid in cash, in property, or in shares of stock, subject to the provisions of the Restated Certificate of Incorporation. SECTION 7. Reserves. There may be set aside at any time out of any funds of the Corporation such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or to equalize dividends, or to repair, maintain or improve any property of the Corporation, or for any other proper purpose as the Board of Directors shall determine and the Board of Directors may, to the same extent, modify or abolish any such reserve which has been established. ARTICLE IX INDEMNIFICATION SECTION 1. Actions, Suits or Proceedings Other than by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was or has agreed to become a Director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a Director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation. SECTION 2. Actions or Suits by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the 16 Corporation to procure a judgment in its favor by reason of the fact that he is or was or has agreed to become a Director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a Director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. Indemnification for Costs, Charges and Expenses of Successful Party. Notwithstanding the other provisions of this Article IX, to the extent that a Director or officer of the Corporation has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article IX, or in defense of any claim, issue or matter therein, he shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection therewith. SECTION 4. Determination of Right to Indemnification. Any indemnification under Sections 1 and 2 of this Article IX (unless ordered by a court) shall be paid by the Corporation unless a determination is made (i) by a majority of the members of the Board of Directors who were not parties to such action, suit or proceeding even if less than a quorum, or (ii) if such a majority of the disinterested members of the Board of Directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders, that indemnification of the Director or officer is not proper in the circumstances because he has not met the applicable standard of conduct set forth in Sections 1 and 2 of this Article IX. SECTION 5. Advance of Costs, Charges and Expenses. Costs, charges and expenses (including attorneys' fees) incurred by a person referred to in Sections 1 or 2 of this Article IX in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding; provided, however, that the payment of such costs, charges and expenses (including attorneys' fees) incurred by a Director or officer in his capacity as a Director or officer (and not in any other capacity in which 17 service was or is rendered by such person while a Director or officer) in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by or on behalf of the Director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such Director or officer is not entitled to be indemnified by the Corporation as authorized in this Article IX. Such costs, charges and expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the majority of the Board of Directors deems appropriate. The majority of the Board of Directors may, in the manner set forth above, and upon approval of such Director, officer, employer, employee or agent of the Corporation, authorize the Corporation's counsel to represent such person, in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. SECTION 6. Procedure for Indemnification. Any indemnification under Sections 1, 2 and 3, or advance of costs, charges and expenses (including attorneys' fees) under Section 5 of this Article IX, shall be made promptly, and in any event within 60 days, upon the written request of the Director or officer. The right to indemnification or advances as granted by this Article IX shall be enforceable by the Director or officer in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's costs and expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 5 of this Article IX where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Sections 1 or 2 of this Article IX, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 or 2 of this Article IX, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. SECTION 7. Other Rights; Continuation of Right to Indemnification. The indemnification provided by this Article IX shall not be deemed exclusive of any other rights to which any director, officer, employee or agent seeking indemnification may be entitled under any law (common or statutory), agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office or while employed by or acting as agent 18 for the Corporation, and shall continue as to a person who has ceased to be a Director, officer, employee or agent, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. All rights to indemnification under this Article IX shall be deemed to be a contract between the Corporation and each Director, officer, employee or agent of the Corporation who serves or served in such capacity at any time while this Article IX is in effect. Any repeal or modification of this Article IX or any repeal or modification of relevant provisions of the General Corporation Law of the State of Delaware or any other applicable laws shall not in any way diminish any rights to indemnification of such Director, officer, employee or agent or the obligations of the Corporation arising hereunder. This Article IX shall be binding upon any successor corporation to this Corporation, whether by way of acquisition, merger, consolidation or otherwise. SECTION 8. Insurance. The Corporation shall purchase and maintain insurance on behalf of any person who is or was or has agreed to become a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him or on his behalf in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article IX; provided, however, that such insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the Board of Directors. SECTION 9. Savings Clause. If this Article IX or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation (i) shall nevertheless indemnify each Director and officer of the Corporation, and (ii) may nevertheless indemnify each employee and agent of the Corporation, as to costs, charges and expenses (including attorneys' fees), judgments, fine and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article IX that shall not have been invalidated and to the full extent permitted by applicable law. SECTION 10. Subsequent Amendment. No amendment, modification or repeal of this Article IX shall affect or impair in any way the rights of any Director or officer of the Corporation to indemnification under the provisions hereof with respect to any action, suit or proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or appeal. SECTION 11. Subsequent Legislation. If the General Corporation Law of the State of Delaware is amended to further expand the indemnification permitted to Directors, officers, employees or agents of the Corporation, then the Corporation shall 19 indemnify such persons to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. ARTICLE X AMENDMENTS These Bylaws may be amended or repealed (i) by the affirmative vote of the holders of at least 80% of the total Voting Power of the Corporation (as defined in Article FIFTH of the Restated Certificate of Incorporation) at a meeting of stockholders or (ii) by a resolution adopted by a majority of the Board of Directors then in office provided, however, that in the event that at the time of such action of the Board of Directors to amend or repeal these Bylaws there exists an Interested Stockholder (as defined in Article NINTH of the Restated Certificate of Incorporation), then, before such amendment or repeal shall become effective, it shall require the approval of a majority of the Continuing Directors (as defined in Article NINTH of the Restated Certificate of Incorporation) then in office. 20 TABLE OF CONTENTS

SECTION 11. Action Without Meetings 9 SECTION 12. Meetings by Telephonic Communication 9 ARTICLE IV - COMMITTEES 9 SECTION 1. Appointment 9 SECTION 2. Powers 10 SECTION 3. Proceedings 10 SECTION 4. Fees 10 ARTICLE V - OFFICERS 10 SECTION 1. Appointment and Compensation 10 SECTION 2. Removal and Resignation 11 SECTION 3. The Chairman of the Board 11 SECTION 4. The President 11 SECTION 5. The Vice President 11 SECTION 6. The Secretary 12 SECTION 7. The Assistant Secretary 12 SECTION 8. The Treasurer 12 SECTION 9. The Assistant Treasurer 12 ARTICLE VI - SHARES OF STOCK 13 SECTION 1. Form of Certificate 13 SECTION 2. Transfer Agents and Registrars 13 SECTION 3. Transfers of Stock 13 SECTION 4. Lost, Stolen or Destroyed Certificates 13 SECTION 5. Registered Stockholders 14 ARTICLE VII - RECORD DATES 14 ARTICLE VIII - GENERAL PROVISIONS 15 SECTION 1. Seal 15 SECTION 2. Fiscal Year 15 SECTION 3. Manner of Notice 15 SECTION 4. Waiver of Notice 15 SECTION 5. Voting of Shares in Other Corporations 15

SECTION 6. Dividends 16 SECTION 7. Reserves 16 ARTICLE IX - INDEMNIFICATION 16 SECTION 1. Actions, Suits or Proceedings Other than by or in the Right of the Corporation 16 SECTION 2. Actions or Suits by or in the Right of the Corporation 16 SECTION 3. Indemnification for Costs, Charges and Expenses of Successful Party 17 SECTION 4. Determination of Right to Indemnification 17 SECTION 5. Advance of Costs, Charges and Expenses 17 SECTION 6. Procedure for Indemnification 18 SECTION 7. Other Rights; Continuation of Right to Indemnification 18 SECTION 8. Insurance 19 SECTION 9. Savings Clause 19 SECTION 10. Subsequent Amendment 19 SECTION 11. Subsequent Legislation 19 ARTICLE X - AMENDMENTS 20

EX-3.3 4 a79485ex3-3.txt EXHIBIT 3.3 Exhibit 3.3 CERTIFICATE OF DESIGNATION of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of CATHAY BANCORP, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware Cathay Bancorp, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority vested in the Board of Directors in accordance with the provisions of the Certificate of Incorporation of the said Corporation, the said Board of Directors on November 16, 2000 adopted the following resolution creating a series of 100,000 shares of Preferred Stock designated as "Series A Junior Participating Preferred Stock": RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Certificate of Incorporation, a series of Preferred Stock, par value $.01 per share, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows: SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 1. Designation and Amount. There shall be a series of Preferred Stock that shall be designated as "Series A Junior Participating Preferred Stock," and the number of shares constituting such series shall be 100,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Junior Participating Preferred Stock to less than the number of shares then issued and outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. Dividends and Distribution. (A) Subject to the prior and superior rights of the holders of any shares of any class or series of stock of the Corporation ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock, in preference to the holders of shares of any class or series 1 of stock of the Corporation ranking junior to the Series A Junior Participating Preferred Stock in respect thereof, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December, in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) the Adjustment Number (as defined below) times the aggregate per share amount of all cash dividends, and the Adjustment Number times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. The "Adjustment Number" shall initially be 1000. In the event the Corporation shall at any time after November 16, 2000 (i) declare and pay any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. 2 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (A) Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to a number of votes equal to the Adjustment Number on all matters submitted to a vote of the stockholders of the Corporation. (B) Except as required by law, by Section 3(C) and by Section 10 hereof, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (C) If, at the time of any annual meeting of stockholders for the election of directors, the equivalent of six quarterly dividends (whether or not consecutive) payable on any share or shares of Series A Junior Participating Preferred Stock are in default, the number of directors constituting the Board of Directors of the Corporation shall be increased by two. In addition to voting together with the holders of Common Stock for the election of other directors of the Corporation, the holders of record of the Series A Junior Participating Preferred Stock, voting separately as a class to the exclusion of the holders of Common Stock, shall be entitled at said meeting of stockholders (and at each subsequent annual meeting of stockholders), unless all dividends in arrears on the Series A Junior Participating Preferred Stock have been paid or declared and set apart for payment prior thereto, to vote for the election of two directors of the Corporation, the holders of any Series A Junior Participating Preferred Stock being entitled to cast a number of votes per share of Series A Junior Participating Preferred Stock as is specified in paragraph (A) of this Section 3. Each such additional director shall not be a member of Class I, Class II or Class III of the Board of Directors of the Corporation, but shall serve until the next annual meeting of stockholders for the election of directors, or until his successor shall be elected and shall qualify, or until his right to hold such office terminates pursuant to the provisions of this Section 3(C). Until the default in payments of all dividends which permitted the election of said directors shall cease to exist, any director who shall have been so elected pursuant to the provisions of this Section 3(C) may be removed at any time, without cause, only by the affirmative vote of the holders of the shares of Series A Junior Participating Preferred Stock at the time entitled to cast a majority of the votes entitled to be cast for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. If and when such default shall cease to exist, the holders of the Series A Junior Participating Preferred Stock shall be divested of the foregoing special voting rights, subject to revesting in the event of each and every subsequent like default in payments of dividends. Upon the termination of the foregoing special voting rights, the terms of office of all persons who may have been elected directors pursuant to said special voting rights shall forthwith terminate, and the number of directors constituting the Board of Directors shall be reduced by two. The voting rights granted by this Section 3(C) shall be in addition to any other voting rights granted to the holders of the Series A Junior Participating Preferred Stock in this Section 3. 3 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Junior Participating Preferred Stock, or to such holders and holders of any such shares ranking on a parity therewith, upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired promptly after the acquisition thereof. All such shares shall upon their retirement become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to any conditions and restrictions on issuance set forth herein. 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation, dissolution or winding up of the Corporation, voluntary or otherwise, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received 4 an amount per share (the "Series A Liquidation Preference") equal to the greater of (i) $10.00 plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) the Adjustment Number times the per share amount of all cash and other property to be distributed in respect of the Common Stock upon such liquidation, dissolution or winding up of the Corporation. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other classes and series of stock of the Corporation, if any, that rank on a parity with the Series A Junior Participating Preferred Stock in respect thereof, then the assets available for such distribution shall be distributed ratably to the holders of the Series A Junior Participating Preferred Stock and the holders of such parity shares in proportion to their respective liquidation preferences. (C) Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6. 7. Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the outstanding shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to the Adjustment Number times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. 8. No Redemption. Shares of Series A Junior Participating Preferred Stock shall not be subject to redemption by the Corporation. 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, unless the terms of any such series shall provide otherwise, and shall rank senior to the Common Stock as to such matters. 10. Amendment. At any time that any shares of Series A Junior Participating Preferred Stock are outstanding, the Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. 5 IN WITNESS WHEREOF, the undersigned has executed this Certificate this 7th day of December, 2000. CATHAY BANCORP, INC. By: /s/ DUNSON K CHENG -------------------------------- Name: Dunson K. Cheng Title: Chairman and President 6 EX-10.2 5 a79485ex10-2.txt EXHIBIT 10.2 Exhibit 10.2 AMENDED AND RESTATED CATHAY BANK EMPLOYEE STOCK OWNERSHIP PLAN TABLE OF CONTENTS
Page ---- ARTICLE I NAME, DEFINITIONS & FUNDING POLICY........................................1 Section 1.1: Full Name...............................................................1 Section 1.2: Definitions.............................................................1 Section 1.3: Other Definitions......................................................11 Section 1.4: Funding Policy.........................................................12 ARTICLE II PARTICIPATION............................................................12 Section 2.1: Eligibility Requirements...............................................12 Section 2.2: Application For Participation And Beneficiary Designation..............12 Section 2.3: Participation..........................................................13 Section 2.4: Break In Service Rules For Eligibility Purposes........................13 ARTICLE III CONTRIBUTIONS............................................................14 Section 3.1: Company Contributions..................................................14 Section 3.2: Payment Of Contributions To The Trustee................................14 Section 3.3: Participant Contributions..............................................14 Section 3.4: No Requirement For Profits.............................................14 ARTICLE IV ALLOCATIONS TO PARTICIPANTS' ACCOUNTS....................................14 Section 4.1: Stock Account..........................................................14 Section 4.2: Cash Account...........................................................15 Section 4.3: Unallocated Stock Account..............................................15 Section 4.4: Allocation Of Gains And Losses.........................................15 Section 4.5: Allocation Of Company Contributions....................................15 Section 4.6: Allocation Of Cash Dividends On Stock..................................16 Section 4.7: Allocation Of Stock Dividends..........................................16 Section 4.8: Release And Allocation Of Leveraged Stock..............................16 Section 4.9: Notice Of Allocations..................................................17 Section 4.10: Miscellaneous Allocation Rules.........................................18 Section 4.11: Valuation Of Stock.....................................................19 Section 4.12: Accounts In General....................................................19 Section 4.13: Limitation On Annual Additions.........................................19 ARTICLE V VESTING...................................................................22 Section 5.1: Vesting In Accounts....................................................22 ARTICLE VI DISTRIBUTION OF BENEFITS.................................................23 Section 6.1: Distribution Of Benefits...............................................23 Section 6.2: Methods Of Distribution................................................23 Section 6.3: Timing Of Distributions................................................25 Section 6.4: Postponed Retirement...................................................27
-i- Section 6.5: Distributions Due Missing Persons......................................27 Section 6.6: Transfers To Another Qualified Plan....................................28 ARTICLE VII SALE OF STOCK.............................................................29 Section 7.1: Option To Sell Shares Of Stock.........................................29 Section 7.2: Right Of First Refusal.................................................30 ARTICLE VIII TOP-HEAVY PLAN LIMITATIONS................................................31 Section 8.1: Application Of Top-Heavy Rules.........................................31 Section 8.2: Definitions............................................................31 Section 8.3: 60% Test - Special Rules...............................................34 Section 8.4: Minimum Vesting Requirement............................................36 Section 8.5: Minimum Contribution Requirement.......................................36 ARTICLE IX INVESTMENTS...............................................................37 Section 9.1: Investment Of Company Contributions....................................37 Section 9.2: Leveraged Stock Authorized.............................................37 Section 9.3: Certain Nonterminable Provisions.......................................40 Section 9.4: Diversification Of Stock...............................................40 Section 9.5: Voting Of Stock........................................................41 ARTICLE X THE COMMITTEE.............................................................42 Section 10.1: Members................................................................42 Section 10.2: Committee Action.......................................................42 Section 10.3: Rights And Duties......................................................43 Section 10.4: Information............................................................44 Section 10.5: Compensation, Indemnity And Liability..................................45 Section 10.6: Administrative Expenses Of The Plan....................................45 ARTICLE XI AMENDMENT AND TERMINATION................................................45 Section 11.1: Amendments.............................................................45 Section 11.2: Discontinuance Of Plan.................................................46 Section 11.3: Failure To Contribute..................................................47 ARTICLE XII CLAIMS PROCEDURE.........................................................47 Section 12.1: Presentation Of Claim..................................................47 Section 12.2: Notification Of Decision...............................................47 Section 12.3: Review Of A Denied Claim...............................................48 Section 12.4: Decision On Review.....................................................49 ARTICLE XIII MISCELLANEOUS............................................................50 Section 13.1: Contributions Not Recoverable..........................................50 Section 13.2: Limitation On Participants' Rights.....................................50 Section 13.3: Receipt Or Release.....................................................51 Section 13.4: Nonassignability.......................................................51 Section 13.5: Governing Law..........................................................51

-ii- Section 13.6: Headings.............................................................51 Section 13.7: Counterparts.........................................................51 Section 13.8: Successors And Assigns...............................................52 Section 13.9: Gender And Number....................................................52 Section 13.10: Merger, Consolidation Or Transfer Of Plan Assets.....................52 Section 13.11: Joinder Of Parties...................................................52 Section 13.12: The Trust............................................................52 Section 13.13: Participation By Affiliated Companies................................52 Section 13.14: Special Requirements For USERRA......................................52

-iii- AMENDED AND RESTATED CATHAY BANK EMPLOYEE STOCK OWNERSHIP PLAN CATHAY BANCORP, INC. has adopted the following complete amendment and restatement of its employee stock ownership plan that evidences the plan portion of an employee stock ownership plan and trust for the benefit of the qualified employees of the Company. The terms of the Plan are as follows: ARTICLE I NAME, DEFINITIONS & FUNDING POLICY Section 1.1: Full Name. This plan shall be known as the: CATHAY BANK EMPLOYEE STOCK OWNERSHIP PLAN It is hereby designated as constituting a defined contribution plan intended to qualify as a stock bonus plan under Code Section 401 and to constitute an employee stock ownership plan as described in ERISA Section 407(d)(6)(A) and Code Section 4975(e)(7). The Plan is designed to invest primarily in qualifying employer securities as defined in Code Section 409(l). The Trust established in connection with the Plan shall be known as the: CATHAY BANK EMPLOYEE STOCK OWNERSHIP TRUST Section 1.2: Definitions. As used in this document and in the Trust, the following words and phrases shall have the following meanings, unless a different meaning is specified or clearly indicated by the context: "Accounts" shall mean, collectively, the Stock Account and the Cash Account that may be established under the Plan for a Participant. If both of such Accounts are not established for a Participant, then, as to such a Participant, "Accounts" shall mean the one of such Accounts that is established for such Participant. "Adjustment Factor" shall mean the cost of living adjustment factor prescribed by the Secretary of the Treasury under Code Section 415(d) for years beginning after December 31, 1987, as applied to such items and in such manner as the Secretary of the Treasury shall provide. -1- "Affiliated Company" shall mean: (a) a member of a controlled group of corporations of which the Company is a member; (b) an unincorporated trade or business that is under common control with the Company, as determined in accordance with Code Section 414(c) and the applicable Regulations; (c) a member of an affiliated service group of which the Company is a member, as determined in accordance with Code Section 414(m) and the applicable Regulations; or (d) any other entity required to be aggregated with the Company pursuant to the Regulations under Code Section 414(o). For these purposes, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Code Section 1563(a), determined without regard to Code Sections 1563(a)(4) and 1563(e)(3)(C). "Anniversary Date" shall mean the last day of each Plan Year. "Article" shall mean an Article of the Plan. "Beneficiary" shall mean the person or persons, as the context requires, last designated by a Participant to receive any benefit specified in the Plan that is payable upon such Participant's death. If there is no designated Beneficiary or surviving Beneficiary, the Beneficiary shall be the Participant's surviving spouse; or, if none, the Participant's surviving descendants (including adopted persons), who shall take on the principle of representation; or, if none, the Participant's estate; or, if there is no legal representative appointed to represent the Participant's estate and if the Participant's vested interest does not exceed $2,000, a person (or the persons) selected by the Committee who is related to the Participant by blood, adoption or marriage. "Board of Directors" shall mean the Board of Directors of the Company. "Break in Service" shall mean a computation period in which an Employee has failed to complete more than 500 Hours of Service (unless due to an authorized, unpaid leave of absence granted by the Company in a nondiscriminatory manner). The computation period shall be, for eligibility and vesting purposes, the same computation period used in determining an Employee's Years of Service. Solely for purposes of determining whether a Break in Service has occurred in any -2- computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence (or, in any case in which such Hours of Service cannot be determined, eight Hours of Service per work day of such absence). An absence from work for maternity or paternity reasons means an absence (a) by reason of the pregnancy of the individual, (b) by reason of a birth of a child of the individual, (c) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this provision shall in no event exceed 501 hours, and they shall be credited (1) in the computation period in which the absence begins if such crediting is necessary to prevent a Break in Service in that period, or (2) in all other cases, in the following computation period. "Cash Account" shall mean the Account maintained by the Committee for each Participant that is to be credited with such Participant's share of the Trust's assets (other than Stock) that are allocated to Participants. "Code" shall mean the Internal Revenue Code of 1986, as amended, and its successors. "Committee" shall mean the Committee appointed pursuant to ARTICLE X. "Company" shall mean CATHAY BANCORP, INC. "Compensation" shall mean a Participant's Earnings during the Plan Year, plus, for Plan Years beginning before January 1, 1998, any amount that is contributed by the Company pursuant to a salary reduction agreement and that is not includable in such Participant's gross income under Code Sections 125, 402(e)(3), 402(h) or 403(b). In addition to other applicable limitations set forth in the Plan, and despite any other provision of the Plan, the Compensation of each Participant shall not exceed the Compensation Limitation (defined below). The Compensation Limitation is $150,000, as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined beginning in such calendar year. If such a determination period consists of fewer than 12 months, the Compensation Limitation will be multiplied by a fraction, the numerator of which is the number of months in such determination period, and the denominator of which is 12. If Compensation for any prior determination period is taken into account in determining a Participant's benefits accruing in the current Plan Year, the Compensation for such prior -3- determination period is subject to the Compensation Limitation in effect for such prior determination period. "Current Obligation" shall mean any obligation of the Trust arising from the extension of credit to the Trust in connection with the purchase by the Trust of Stock and that is either (a) payable in cash within one year from the date of reference pursuant to the terms of the applicable credit agreement, or (b) designated by the Committee as subject to current payment with Trust assets available therefore pursuant to the terms of the Plan. "Defined Benefit Plan" and "Defined Contribution Plan" shall have the same meanings as given these terms under ERISA. "Earnings" shall mean a Participant's annual "compensation", as that term is defined in Code Section 415, that is actually paid or made available to the Participant within the Plan Year. A Participant's Earnings shall include such Participant's wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Company or any Affiliated Company to the extent that the amounts are includable in gross income under the Code (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements, and expense allowances). "Earnings" shall not include: (a) Any contribution made by the Company to a plan of deferred compensation to the extent that, before the application of the Code Section 415 limitations to that plan, the contributions are not includable in the gross income of the Participant for the taxable year in which contributed. In addition, the Company's contributions, if any, made on behalf of a Participant to a simplified employee pension plan described in Code Section 408(k) are not considered Earnings for the taxable year in which contributed to the extent such contributions are deductible by the Participant under Code Section 219(b)(7). Additionally, any distributions from a plan of deferred compensation are not considered Earnings, regardless of whether such amounts are includable in the gross income of the Participant when distributed. However, any amount received by a Participant pursuant to an unfunded non-qualified plan may be considered Earnings in the year such amounts are includable in the gross income of the Participant. (b) Any amount realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by a Participant either becomes freely transferable or is no longer subject to a substantial risk of forfeiture. -4- (c) Any amount realized from the sale, exchange or other disposition of stock acquired under a qualified stock option. (d) Any other amount that receives special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includable in the gross income of the Participant), or contributions made by the Company (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are excludable from the gross income of the Participant). (e) Despite the foregoing, "Earnings" with respect to a Participant who is a non-resident alien (within the meaning of Section 7701(b) of the Code) shall mean wages within the meaning of Section 3401(a) of the Code, but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed. For Plan Years beginning after December 31, 1997, Earnings paid or made available during any Plan Year shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount that is contributed or deferred by the Company at the election of the Participant and that is not includable in the gross income of the Participant by reason of Code Section 125, 132(f)(4) (effective for Plan Years beginning after December 31, 2000) or 457. "Effective Date" shall mean, except as otherwise expressly provided, January 1, 1997. "Eligibility Computation Period" for each Employee shall mean a 12 consecutive month period beginning on such Employee's Employment Commencement Date. "Eligible Participant" shall mean, as of any Anniversary Date, (a) each Participant who has completed at least 1,000 Hours of Service on such Anniversary Date, and (b) each Participant who ceased to be an Employee during the Plan Year ending with such Anniversary Date by reason of his or her retirement on or after his or her Normal Retirement Date, death, or Total Disability. "Employee" shall mean every common law employee of the Company and any Affiliated Company that has adopted the Plan with the permission of the Board of Directors who is classified in the payroll records of the Company or any such Affiliated Company as a salaried employee. The term "Employee" shall not include any person who is (a) employed by or through a leasing, temporary, or similar agency or company, or (b) classified by the Company as a leased employee (within -5- the meaning of Code Section 414(n)(2)) of the Company or any such Affiliated Company. If any person described in the preceding sentence is determined to be a common law employee of the Company by court decision or otherwise, such person shall nonetheless continue to be treated as not being an Employee. "Employer" shall mean, with respect to an Employee, the Company, any Predecessor Employer, and any Affiliated Company. "Employment Commencement Date" for each Employee shall mean the date such Employee is first credited with an Hour of Service. "Entry Date" shall mean the first day of the first month or the first day of the seventh month (whichever applies) of each Plan Year. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and its successors. "Fiduciary" shall mean a person who: (a) exercises any discretionary authority, discretionary control, or discretionary responsibility respecting the management or administration of the Plan; (b) exercises any authority or control respecting management or disposition of the Plan's assets; or (c) renders investment advice for a fee or other compensation, direct or indirect, with respect to any asset of the Plan, or has any authority or responsibility to do so. "Financial Institution" shall mean a bank, trust company, or other financial institution that is regulated by the United States or any State. "Freely Tradable Stock" shall mean Stock that, at the time of reference, is readily tradable on an established market. "Hour of Service" shall mean: (a) Each hour for which an Employee was paid by, or entitled to payment from, an Employer. Hours under this SUBSECTION (a) shall be credited to an Employee for the computation period or periods in which the -6- services were performed. Generally, Hours of Service shall be determined from the Employer's employment records. Despite the foregoing, if an Employee's Compensation is not determined on the basis of certain amounts for each hour worked (such as salaried, commission or piece-work employees) and if his or her hours are not required to be counted and recorded by any federal law (such as the Fair Labor Standards Act), such Employee's Hours of Service need not be determined from employment records. Instead, such Employee may be credited with 190 Hours of Service for each month in which he or she would be credited with at least one Hour of Service pursuant to this SUBSECTION (a); (b) Each hour for which an Employee was paid by, or entitled to payment from, an Employer on account of a period during which no services were performed (irrespective of whether the employment relationship had terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service shall be credited under this SUBSECTION (b) for any single continuous period (whether or not such period occurs in a single computation period); (c) Each hour for which back pay (irrespective of mitigation of damages) is either awarded against, or agreed to by, an Employer. The same Hours of Service shall not be credited under either SUBSECTION (a) or (b), whichever is applicable, and under this SUBSECTION (c). Hours of Service under this subsection (c) shall be credited for the computation period(s) to which the award or agreement pertains, rather than the computation period in which the award, agreement or payment is made; and (d) Hours under SUBSECTIONS (a) through (c) above shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations, which is incorporated here by reference. "Individual Medical Benefit Account" shall have the same meaning as is given that term under Code Section 415(l)(2). "Investment Manager" shall mean a person or entity who (that) is (a) registered as an investment advisor under the Investment Adviser's Act of 1940, (b) defined as a bank under that Act, or (c) an insurance company qualified under the laws of more than one state to manage, acquire and dispose of trust assets, and who has acknowledged in writing that he (she or it) is a Fiduciary with respect to the Plan. "Leveraged Stock" shall mean any Stock that is acquired by the Trustee on an installment contract from, or with the proceeds of a loan made or guaranteed by, the Company or other disqualified person within the meaning of Code Section 4975(e)(2). -7- "Named Fiduciary" shall have the same meaning as under Section 402(a) of ERISA and shall be determined as provided in SECTION 10.3. "Net Profits" shall mean, with respect to any Plan Year, the Company's net income or profit for such Plan Year, as determined on the basis of the Company's books of account in accordance with generally accepted accounting principles, before reduction for income taxes or contributions made by the Company to the Plan. "Non-allocation Period" shall mean, with respect to a transaction for which an election under Code Section 1042(a) is made, the period beginning on the date of the sale of the Stock and ending on the later of (a) the date that is ten years after the date of the purchase of the Company Stock, or (b) the date of the Plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with such sale. "Normal Retirement Age" shall mean a Participant's 65th birthday. "Normal Retirement Date" shall mean the first day of the month that coincides with or immediately follows a Participant's Normal Retirement Age. "Participant" shall mean any Employee who becomes eligible for participation in accordance with the provisions of the Plan, and, unless the context indicates otherwise, includes former Participants. "Plan" shall mean this document and the plan created by this document (including, unless the context indicates to the contrary, the Trust established in connection with the Plan), as it may be amended from time to time. "Plan Year" shall mean the 12-month period that ends on December 31. The Plan Year shall be the "limitation year" for the Plan as defined in the Code. "Predecessor Employer" shall mean any predecessor employer of an Employee that maintained the Plan. "Prohibited Allocation Group" shall mean all persons who, with respect to a transaction for which an election under Code Section 1042(a) is made, are within any one or more of the following categories: (a) During the Non-allocation Period, the seller of the Stock. -8- (b) During the Non-allocation Period, any person who is related to such seller (within the meaning of Section 267(b) of the Code), except that it shall not include any lineal descendant of such seller if 5% or less of the shares of Stock (or other assets of the Plan in lieu thereof) attributable to such shares is allocated to all such lineal descendants. If the allocation provisions of ARTICLE IV would result in more than such 5% being so allocated, the Committee may limit such allocation to such 5% so that such lineal descendants are not included in the Prohibited Allocation Group. (c) Any other person who owns (after the application of Section 318(a) of the Code) more than 25% of (i) any class of outstanding stock of the Company or any Affiliated Company, or (ii) the total value of any class of outstanding stock of the Company or any Affiliated Company. For this purpose, such person shall be deemed to own all Stock allocated to him or her in this or any other qualified employee benefit plan. Such person shall be included in the Prohibited Allocation Group if he or she meets such test either (i) at any time during the one-year period ending on the date of purchase of the Company Stock by the Trust, or (ii) on the date as of which such Stock is allocated to Participants. "Qualified Holder" shall mean (a) any Participant or any Beneficiary(ies) or personal representative of a deceased Participant who has received a distribution of Stock from the Plan), (b) any other party to whom such Stock is transferred by gift or by reason of death, and (c) any trustee of an individual retirement account (as defined under Code Section 408) to which all or any portion of such distributed Stock is transferred pursuant to a Rollover Contribution. "Regulations" shall mean the regulations issued under the Code or ERISA, or both of them, as well as under any other legislation that applies to the Plan. "Rollover Contribution" shall mean a qualified rollover contribution as defined (before January 1, 1993) in Code Sections 402(a)(5), 402(a)(6), 402(a)(7), 403(a)(4), 408(d)(3) and 409(b)(3)(C), or (after December 31, 1992) in Code Sections 402(c), 403(a)(4), and 408(d)(3), but shall not include a rollover contribution that is attributable to contributions made on behalf of a Key Employee in a Top-heavy Plan, unless such a rollover contribution is permissible under the Code or applicable Regulations. "Section" shall mean, when used in conjunction with some other reference (such as the Code or ERISA), a section of such other reference. When not used in conjunction with some other reference, Section shall refer to a section of the Plan or Trust, as the context requires. References to a Section include future amendments, and successors, to it. -9- "Secretary" shall mean the Secretary or an Assistant Secretary of the Committee. "Secretary of the Treasury" shall mean the Secretary of the Treasury, as defined in Code Section 7701(a)(11). "Signature Page" shall mean the page(s) at the end of the Plan entitled "Signature Page." "Stock" shall mean common stock issued by the Company (or by a corporation that is a member of the same controlled group of corporations) having a combination of voting power and dividend rights equal to or in excess of: (a) that class of common stock of the Company (or of any other such corporation) having the greatest voting power, and (b) that class of common stock of the Company (or of any other such corporation) having the greatest dividend rights. "Stock Account" shall mean the account maintained by the Committee for each Participant that is to be credited which such Participant's share of the Stock held in the Trust that is allocated to Participants. "Total Disability" or "Totally Disabled" shall each refer to a physical or mental impairment that, in the Committee's opinion, (a) is expected to be either of indefinite duration or result in death, and (b) renders a Participant unable to satisfactorily perform his or her duties for the Company or the duties of such other position or job that the Company makes available to such Participant and for which such Participant is qualified by reason of his or her training, education or experience. The Committee's opinion must be supported by the opinion of a qualified physician designated or approved by the Committee. "Trust" shall mean the trust established in connection with the Plan, as it may be amended from time to time. "Trustee" shall mean the person(s) or entity, or combination of them, serving from time to time as the trustee(s) of the Trust. "Unallocated Stock Account" shall mean the account maintained by the Committee for the purpose of holding any Leveraged Stock (until such Stock is released and allocated pursuant to the applicable provisions of the Plan). -10- "Welfare Benefit Fund" shall have the same meaning as is given that term in Code Section 419(e). "Year of Service" shall mean a computation period in which an Employee has completed at least 1,000 Hours of Service. The initial computation period shall be an Employee's Eligibility Computation Period, and shall thereafter be the 12 consecutive month period beginning on the annual anniversary date of such Employee's Employment Commencement Date. "1% Owner" shall be determined in the same manner as a 5% Owner, defined below. "5% Owner" shall mean a Participant who (a) owns more than 5% of the outstanding stock (or owns stock possessing more than 5% of the total combined voting power of all classes of stock) of the Company (or any Affiliated Company), if the Company (or the Affiliated Company, whichever applies) is a corporation; or (b) owns more than 5% of the capital or profit interest in the Company (or the Affiliated Company, whichever applies), if the Company (or the Affiliated Company, whichever applies) is not a corporation. A similar rule shall apply to the determination of a "1% Owner." Section 1.3: Other Definitions. As used in this document and in the Trust, the following words and phrases shall have the meanings set forth in the indicated Sections, unless a different meaning is specified or clearly indicated by the context:
Term Section ---- ------- "Aggregate Account"...........................................8.2 "Aggregation Group"...........................................8.2 "Annual Addition"............................................4.13 "Claimant"...................................................12.1 "Committee"..................................................10.1 "Defined Benefit Plan Fraction"..............................4.13 "Defined Contribution Plan Fraction".........................4.13 "Determination Date"..........................................8.2 "Eligible Retirement Plan"....................................6.6 "Eligible Rollover Distribution...............................6.6 "Key Employee"................................................8.2 "Non-Key Employee"............................................8.2 "Present Value of Accrued Benefit"............................8.2 "Qualified Election Period"...................................9.4 "Qualified Participant".......................................9.4 "Relevant Time"...............................................5.2
-11- "Top-heavy Group".............................................8.2 "Top-heavy Plan"..............................................8.2 "Total Distribution"`.........................................7.1 "Valuation Date"..............................................8.2 "USERRA"....................................................13.14 "1.0 Rule"...................................................4.13

Section 1.4....: Funding Policy. The Plan is to be funded primarily through the Company's contributions as provided for in the Plan. The Trust's assets shall be invested as provided for in the trust document in an effort to safely maximize potential retirement benefits (consistent with the Plan's designation as an employee stock ownership plan), which shall be paid to Participants and Beneficiaries as provided for in the Plan. ARTICLE II PARTICIPATION Section 2.1: Eligibility Requirements. (a) Each Employee shall become eligible to participate in the Plan on the Entry Date coincident with or next following the date on which such Employee shall have completed two Years of Service, provided that he or she is still an Employee on such Entry Date. (b) Despite any other provision of the Plan, any Participant who is included in a unit of employees covered by a collective bargaining agreement wherein retirement benefits were the subject of good faith bargaining (within the meaning of Code Section 410(b)(3)(A)) shall for the Plan Year(s) of such inclusion, cease to share in future contributions to the Plan, unless such collective bargaining agreement expressly provides for participation in the Plan; provided, however, that as to any benefits already earned, such Participant shall remain a Participant, subject to all the terms of the Plan. Section 2.2: Application For Participation And Beneficiary Designation. (a) Each Employee who becomes eligible to participate in the Plan shall be given an application for participation. That application shall (i) specify the beginning date of such Employee's participation, (ii) contain such Employee's acceptance of the benefits of the Plan and Trust and his or her agreement to be bound by the terms of the Plan and Trust, and (iii) allow such Employee to designate the Beneficiary whom he or she desires to receive benefits in the event of his or her death. A Participant may, from time to time, change his or her designated Beneficiary by filing a new written designation with the Committee. The Company, -12- the Trustee, and the Committee may rely upon the designation of a Beneficiary that was last filed in accordance with the Plan. (b) Despite the provisions of SUBSECTION (a) above, a married Participant's Beneficiary shall in all events be such Participant's surviving spouse, unless such spouse consents to such Participant's designation of a Beneficiary other than such spouse. A spouse's consent to such a designation must satisfy the following requirements: (i) it must be in writing; (ii) it must acknowledge the effect of the Participant's designation of a Beneficiary other than the spouse; and (iii) it must be witnessed by a designated Plan representative or a notary public. Section 2.3: Participation. The participation of a Participant in the Plan shall begin as of his or her Entry Date and shall continue until the Participant's entire benefit has been distributed in accordance with the Plan's terms. A Participant (or his or her Beneficiary) may not receive any distribution of benefits except as provided for in the Plan. Section 2.4: Break In Service Rules For Eligibility Purposes. (a) Except as otherwise provided in this Section, all Years of Service of an Employee shall be counted in determining such Employee's eligibility to participate in the Plan. (b) In the case of any Employee who has incurred a Break in Service, such Employee's Years of Service that were completed before such Break in Service shall not be counted until he or she has completed a Year of Service after such Break in Service. (c) This subsection shall apply to any Participant who does not have any nonforfeitable right to any accrued benefit that is attributable to the Company's contributions. Such a Participant's Years of Service before any period of consecutive Breaks in Service shall not be counted if the number of such consecutive Breaks in Service within such period equals or exceeds the greater of (i) five or (ii) the aggregate number of such Participant's Years of Service before such period. Such aggregate number of Years of Service shall not include any Year of Service that is disregarded under the preceding sentence by reason of such Participant's prior Breaks in Service. (d) In addition to the foregoing, in the case of any Employee who incurs a Break in Service before satisfying the Plan's eligibility requirements, such Employee's Years of Service that were completed before such Break in Service shall not be counted. Further, a Participant who is re-employed shall participate immediately upon the date of his or her re-employment. -13- ARTICLE III CONTRIBUTIONS Section 3.1: Company Contributions. The Company has previously made substantial contributions to the Trust. Subject to the Plan's other provisions, for each Plan Year in which the Plan is in effect, the Company shall contribute to the Trust, out of its current or accumulated Net Profits, such amount, if any, as shall be determined by the Company. Despite the foregoing, the Company shall be obligated to contribute such amount as shall be necessary to provide the Trust with funds sufficient to pay any Current Obligation (including principal, interest, and any acquisition charges) incurred for the purpose of acquiring Stock. The Company's contribution shall be paid in cash, Stock, or such other assets as the Company may determine; provided, however, that the Company shall contribute sufficient cash assets to the extent necessary to pay any Current Obligation. Furthermore, despite the foregoing, the Company's contributions are conditioned upon their deductibility under the Code. Section 3.2: Payment Of Contributions To The Trustee. All payments of the Company's contributions shall be made directly to the Trustee and may be made on any date(s) selected by the Company. Despite the foregoing, the Company's total contribution for each Plan Year must be paid on or before the date on which the Company's federal income tax return is due, including any extensions of time obtained for the filing of such return. Section 3.3: Participant Contributions. A Participant may not make nondeductible, voluntary contributions to the Plan. Similarly, a Participant may not make a Rollover Contribution to the Plan or a trustee-to-trustee transfer described in Code Section 401(a)(31). Section 3.4: No Requirement For Profits. Despite any other provision of the Plan, the Company may make all contributions to the Plan for any Plan Year without regard to whether the Company has any Net Profits for the taxable year or years ending with or within such Plan Year. ARTICLE IV ALLOCATIONS TO PARTICIPANTS' ACCOUNTS Section 4.1: Stock Account. The Committee shall open and maintain a Stock Account in the name of each Participant, and it shall be credited or charged with any Stock allocable to such Participant as set forth below. -14- Section 4.2: Cash Account. The Committee shall open and maintain a Cash Account in the name of each Participant, and it shall be credited or charged with any amount allocable to such Participant (other than Stock) as set forth below. Section 4.3: Unallocated Stock Account. At such time as any Leveraged Stock is held in the Trust, the Committee shall open and maintain an Unallocated Stock Account, and it shall be credited with any unallocated Leveraged Stock until such Stock is released and allocated as set forth below. Section 4.4: Allocation Of Gains And Losses. Subject to SECTION 4.5(a)(i) below, as of each Anniversary Date (but before any allocation is made of the Company's contributions, if any, for the Plan Year ending on such Anniversary Date, if, and to the extent, made prior to such date), the Committee shall credit any income and investment gains (whether realized or unrealized) of the Trust other than with respect to Stock, and shall charge any losses (whether realized or unrealized) from such assets and unallocated expenses of the Trust, to the Participants' Cash Accounts in the same proportion that the balance in each such Cash Account as of such Anniversary Date bears to the total balance in all Cash Accounts as of such Anniversary Date. In determining the unrealized investment gains and losses to be credited or charged as of each Anniversary Date pursuant to this Section, the Trustee shall value the assets of the Trust at their fair market value as of each such Anniversary Date. Section 4.5: Allocation Of Company Contributions. (a) Subject to the limitations contained elsewhere in the Plan, as of each Anniversary Date, the Company's contribution (if any) made on account of the Plan Year ending on such Anniversary Date shall be allocated as follows: (i) Any cash contribution shall be applied first to pay any Current Obligation of the Trust (as it becomes due) incurred for the purpose of acquiring Stock, and any excess remaining after such application (and any other asset contributed that is not Stock) shall, at the election of the Committee, either (A) be used to prepay any loan obligation of the Trust that arose in connection with the Trust's purchase of Stock, or (B) be allocated to the Cash Accounts of the Eligible Participants in accordance with the allocation formula set forth in SUBSECTION (b) below. Subject to SECTION 4.6 below, for the purpose of determining the method of allocation of the excess, the Current Obligation shall be deemed to have been paid first with cash dividends, and, if any portion of the Current Obligation shall remain unpaid after the application of all the cash dividends, the balance due shall be deemed paid with Company cash contributions for the Plan Year. -15- (ii) Any contribution of Stock shall be allocated to the Stock Accounts of the Eligible Participants in accordance with the allocation formula set forth in SUBSECTION (b) below. (b) For purposes of this Article, any item to be allocated pursuant to the formula set forth in this SUBSECTION (b) shall be allocated to the Cash Accounts, or Stock Accounts, as the case may be, of the Eligible Participants in the same ratio as each Eligible Participant's number of Units bears to the total number of Units of all such Eligible Participants. For purposes of this SUBSECTION (b), each Eligible Participant shall be credited with one Unit for each full $100 of Compensation and with one Unit for each Year of Service. Section 4.6: Allocation Of Cash Dividends On Stock. Any cash dividends received by the Trustee on account of the Stock shall, at the discretion of the Committee, either (a) be used to make any payment on any installment contract or loan used to acquire Leveraged Stock, or (b) be allocated to the Participants' Cash Accounts and the Unallocated Stock Account in proportion to the shares of Stock held in the Participants' Stock Accounts and the Unallocated Stock Account, respectively, as of the record date of such dividend. The Committee may not elect to use method (a) above unless the Stock is allocated in a manner in compliance with Code Section 404(k)(2)(B). Section 4.7: Allocation Of Stock Dividends. Any Stock received by the Trustee as a stock dividend (or stock split or as a result of a reorganization or other recapitalization of the Company) shall be credited to the Participants' Stock Accounts and to the Unallocated Stock Account in proportion to the shares of Stock held therein as of the record date of such dividend. Any cash received by the Trustee in lieu of fractional shares in connection with such a stock dividend shall be allocated as provided in SECTION 4.6(b) above. Section 4.8: Release And Allocation Of Leveraged Stock. (a) All Leveraged Stock acquired by the Trust shall be held in the Unallocated Stock Account until released and allocated in accordance with the provisions of this Section. As of each Anniversary Date, Leveraged Stock acquired in a particular transaction shall be released from the Unallocated Stock Account as follows: (i) Subject to the requirements of Treasury Regulation Section 54.4975-7(b)(8)(ii) and SUBSECTION (ii) below, for each Plan Year until any loan or installment obligation that was incurred to purchase Leveraged Stock (a "loan") is fully repaid, the number of shares of Leveraged Stock released from the Unallocated Stock Account shall equal the number of unreleased shares immediately before such release for the then current Plan Year multiplied by a fraction, the numerator of which is the amount of principal -16- paid on such loan for such Plan Year and the denominator of which is the sum of such numerator plus the principal to be paid on such loan for all future years during the duration of the term of such loan (determined without reference to any possible extensions of renewals thereof). Despite the foregoing, in the event such loan shall be repaid with the proceeds of a subsequent loan, such repayment shall not operate to release all such Leveraged Stock but rather such release shall be effected pursuant to the foregoing provisions of this Section on the basis of payments of principal on such substitute loan. (ii) To the extent that SUBSECTION (i) is not applicable by reason of Treasury Regulation Section 54.4975-7(b)(8)(ii), or if the Committee irrevocably so elects at the time of the first payment on any loan, then SUBSECTION (i) shall be applied with respect to all payments on such loan by deeming all references to "principal" therein to be references to "principal and interest." (b) The Committee shall specify, and advise the Trustee with respect to: (i) the amount (if any) of the Company's contribution that is to be applied (together with the earnings thereon) to pay any Current Obligation, and (ii) the amount (if any) of cash dividends held pursuant to SECTION 4.6 that is to be applied to pay any Current Obligation. (c) Subject to the last sentence of SECTION 4.6, as of each Anniversary Date, the value of any Leveraged Stock released from the Unallocated Stock Account for such Plan Year shall be allocated among the Eligible Participants in the same proportion as such Participants would have received allocations pursuant to SECTION 4.5, as if such released Stock had been contributed during such Plan Year. (d) It is intended that the preceding provisions shall be applied and construed in a manner consistent with the requirements and provisions of Treasury Regulation Section 54.4975-7(b)(8). Section 4.9: Notice Of Allocations. (a) After the close of each Plan Year, the Committee shall notify each Participant as to the allocations made during the Plan Year pursuant to this ARTICLE IV, which notice shall include the information set forth below. (b) The balance in the Participant's Cash Account and the number of shares held in the Participant's Stock Account as of the most recent Anniversary Date; -17- (c) The amount of Company Contributions and Leveraged Stock (if any) allocated to the Participant's Accounts for that Plan Year; (d) The adjustment to the Participant's Accounts to reflect the Participant's share of undistributed dividends held at year end (if any) and the net income (or loss) of the Trust for that Plan Year; (e) The new balance in the Participant's Cash Accounts and the number of shares held in the Participant's Stock Account, as of the Anniversary Date of that Plan Year; and (f) Such other information as may be required by the applicable Regulations. Section 4.10: Miscellaneous Allocation Rules. (a) Allocations of all assets other than Stock shall be made on the basis of, and expressed in terms of, dollar value. Allocations of Stock shall be made on the basis of the number of shares of Stock (including fractional shares). (b) The Committee may establish accounting procedures for the purpose of making the allocations, valuations and adjustments to Participants' Accounts provided for in this Article IV. From time to time, the Committee may modify such accounting procedures for the purpose of achieving equitable, nondiscriminatory, and administratively feasible allocations among the Accounts of Participants in accordance with the general concepts of the Plan and the provisions of this Article IV. (c) Despite any other provision of the Plan, if shares of Stock are purchased by the Trust in a transaction for which an election pursuant to Code Section 1042(a) is made, none of such shares, nor any other assets of the Plan in lieu thereof, shall accrue for the benefit of or be allocated, directly or indirectly, under this Plan or any other qualified employee benefit plan of the Company or any Affiliated Company, to the Accounts of any member of the Prohibited Allocation Group. In the event that any member of the Prohibited Allocation Group is a Participant in the Plan, (i) if there are no Company contributions to be allocated as of an Anniversary Date other than shares of Stock and/or other assets which are subject to this provision, such Participant shall receive no allocation thereof, (ii) no portion of the Cash Account balance of such Participant may be used to acquire shares of Stock and/or other assets which are subject to this provision, and (iii) if there are Company contributions to be allocated as of an Anniversary Date and such includes both shares of Stock and/or other assets which are subject to this provision and share and/or other assets which are not subject to this provision, the allocation shall be made so that such Participant receives no allocation of Stock or other assets whatsoever to the extent of the percentage of Compensation received by the other Participants attributable to Stock and/or other assets which are subject to this provision, provided that if there is additional Stock and/or other assets to be -18- allocated, then such additional allocations shall be made to all Participants as otherwise provided in the Article IV. All allocations of Stock and other assets shall in all respects comply with the provisions of Section 409(n) of the Code and the Regulations thereunder, all of which are incorporated herein by reference. Section 4.11: Valuation Of Stock. (a) If, on any Anniversary Date or other valuation date required under the terms of the Plan, Trust, or Regulation Section 54.4975-11(d)(5), the Stock is not Freely Tradable Stock, the Company shall furnish the Committee with a certificate of value setting forth the fair market value of the Stock as of such date. Such valuation shall be made (i) in good faith and in accordance with Regulation Section 54.4975-11(d)(5) and ERISA Section 3(18); and (ii) by an independent appraiser who satisfies the requirements of the Regulations under Code Section 170(a)(1). The Committee shall use such value for all purposes under the Plan until a new certificate of value is furnished to the Committee, or until the Stock becomes Freely Tradable Stock. If the Stock is Freely Tradable Stock, the Committee shall use the market price of the Stock as its value. This certificate of value shall be furnished to Qualified Holders of Stock that has been distributed to a terminated Participant or a Beneficiary. (b) Any Stock acquired by the Trust with cash shall be valued initially at the purchase price paid by the Trust. All such initial valuations are subject to revaluation as of any subsequent date of valuation that may apply pursuant to the terms of this Plan and/or applicable law. Section 4.12: Accounts In General. (a) The credits made to a Participant's Accounts shall not vest in such Participant any right, title or interest in the Trust, except to the extent, at the time or times, and upon the terms and conditions set forth in the Plan. Neither the Company, the Trustee, nor the Committee, to any extent, warrant, guarantee or represent that the value of any Participant's Accounts at any time will equal or exceed the amount previously allocated or contributed to such Accounts. (b) If at any time there shall be allocated to a Participant's Stock Accounts more than one class of Stock, the Committee shall direct the Trustee with respect to whether sub-accounts for each such class of stock shall be maintained, and if so, all references in this Plan to Stock Accounts shall include and refer to all such sub-accounts. Section 4.13: Limitation On Annual Additions. (a) The following limitations shall apply to the allocations to each Participant's Accounts in any Plan Year: -19- (i) As used in the Plan, a Participant's "Annual Addition" shall mean the sum for any Plan Year of: (A) Such Participant's share of the Company's contributions; plus (B) Such Participant's share of any forfeiture; plus (C) Such Participant's allocable share of the Company's contributions to any Individual Medical Benefit Account; and plus (D) With respect to any Participant who is a Key Employee, any amount derived from the Company's contributions paid or accrued after December 31, 1985 in taxable years ending after such date, and that is attributable to post-retirement medical benefits allocated to such Participant's account under a Welfare Benefit Fund maintained by the Company. (ii) Despite the forgoing, if, for any Plan Year, (A) there is Leveraged Stock and (B) no more than one-third of the Company's contributions are allocated to highly compensated employees (as defined in Code Section 414(q)), then the Annual Addition of a Participant shall not include (A) his or her share of the Company's contributions for such Plan Year that are deductible under Code Section 404(a)(9)(B), (B) his or her share of forfeitures of Stock acquired with the proceeds of a loan or installment obligation described in Code Section 404(a)(9)(A), or (C) Leveraged Stock that is released from the Unallocated Stock Account in accordance with SECTION 4.8. (iii) Any excess amount applied under SUBSECTION (c) below in a Plan Year to reduce the Company's contributions on behalf of any Participant shall be considered to be an Annual Addition for such Participant for such Plan Year. (iv) Subject to the adjustments set forth below, during any Plan Year the maximum Annual Addition for any Participant shall in no event exceed the lesser of: (A) $30,000, as adjusted by the Adjustment Factor; or (B) 25% of the Participant's Earnings for such Plan Year. (v) The earnings limitation referred to in SUBSECTION (a)(iv)(B) above shall not apply to (A) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service -20- that is otherwise treated as an Annual Addition, or (B) any amount otherwise treated as an Annual Addition under Code Section 415(l)(1). (b) For Plan Years beginning before January 1, 2000, the following additional limitations shall apply to any Participant when such Participant, in addition to his or her participation in the Plan (and any Welfare Benefit Fund), is also a participant in a Defined Benefit Plan maintained by the Company or an Affiliated Company: (i) The amount of (A) the Annual Additions to such Participant's account(s) or (B) such Participant's normal retirement benefit in any such plan(s) shall be reduced by each such plan's committee to the extent necessary to prevent the sum of the Defined Benefit Plan Fraction (defined below) and the Defined Contribution Plan Fraction (defined below) for any such year from exceeding 1.0 (the "1.0 Rule") (benefits under Welfare Benefit Funds shall be reduced first, then benefits under profit sharing plans, then benefits under other Defined Contribution Plans, and, finally, benefits under Defined Benefit Plans). (ii) For the purpose of applying the 1.0 Rule, the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction shall be applied in a manner consistent with the provisions of Code Section 415 and the Regulations under it. (iii) As used above, "Defined Benefit Plan Fraction" shall mean a fraction, the numerator of which is the Participant's projected annual benefit under the Defined Benefit Plan (determined as of the end of the plan year for such plan), and the denominator of which is the lesser of: (A) 1.25 multiplied by the dollar limitation in effect for such plan year (determined under Code Section 415(b)(1)(A)); or (B) 1.4 multiplied by 100% of such Participant's average Earnings for his or her highest three consecutive years, including such plan year (determined under Code Section 415(b)(1)(B)). (iv) As used above, "Defined Contribution Plan Fraction" shall mean a fraction, the numerator of which is the sum of the annual additions to the Participant's account(s) as of the end of the Plan Year, and the denominator of which is the sum of the lesser of the following amounts determined for such Plan Year and for each of such Participant's prior years of service with the Company: (A) 1.25 multiplied by the dollar limitation in effect for such Plan Year (determined under Code Section 415(c)(1)(A), but without regard to Code Section 415(c)(6)); or -21- (B) 1.4 multiplied by 25% of such Participant's Earnings for such Plan Year (determined under Code Section 415(c)(1)(B), or Code Section 415(c)(7), if applicable). (c) If, for any Plan Year, it is necessary to limit the Annual Addition of any Participant pursuant to SUBSECTIONS (a) or (b) above, the following reallocations shall be made: (i) First, the amount of such Participant's nondeductible, voluntary contributions for that Plan Year that are included in his or her Annual Addition shall be refunded to him or her; (ii) Second, the amount of the Company's contributions, inclusive of forfeitures, that is allocable to such Participant and that cause such Participant's Annual Addition to exceed the applicable limitation shall, instead, be allocated to all other Participants who are not subject to this limitation, in proportion to their Compensation for such Plan Year; and (iii) Third, if the amount of the Company's contributions, inclusive of forfeitures, is so great as to cause all Participants for such Plan Year to be subject to the limitations of this Section, then the excess of the Company's contributions that cannot be allocated for such Plan Year shall be held unallocated in a suspense account and applied against and reduce the Company's future contributions. (d) If a suspense account is in existence at any time during a Plan Year pursuant to SUBSECTION (c)(iii) above, it shall not participate in the Trust's income, gains and losses. (e) The limitations of this Section with respect to any Participant who, at any time, has been a participant in any other Defined Contribution Plan (whether or not terminated) or in more than one Defined Benefit Plan (whether or not terminated) maintained by the Company or by an Affiliated Company shall apply as if all such Defined Contribution Plans or all such Defined Benefit Plans in which the Participant has been a participant were one plan. ARTICLE V VESTING Section 5.1: Vesting In Accounts. Each Participant shall at all times be 100% vested in his or her Accounts. -22- ARTICLE VI DISTRIBUTION OF BENEFITS Section 6.1: Distribution Of Benefits. (a) Benefits become distributable to a Participant or to the Beneficiary of a deceased Participant upon the first to occur of (i) the Anniversary Date that coincides with or first follows such Participant's Normal Retirement Date, Total Disability, or death, or (ii) the third Anniversary Date that follows the date a Participant ceases to be an Employee prior to his or her Normal Retirement Date for a reason other than Total Disability or death. Such benefits shall be the vested amounts credited to his or her Accounts as of the Anniversary Date that coincides with or immediately precedes the first distribution of his or her benefits, adjusted as of such Anniversary Date if required by ARTICLE IV. However, a Participant (or the Beneficiary of a deceased Participant) must make a claim for such Participant's benefits prior to any distribution. Despite the foregoing, the Committee, in its sole discretion, may waive the claim requirement if such Participant or Beneficiary is unable to submit a claim. (b) Despite the foregoing provisions, the Committee may, in its sole discretion, elect to pay a Participant who ceases to be an Employee prior to his or her Normal Retirement Date for a reason other than his or her death or Total Disability an immediate lump sum distribution of the amount specified in SUBSECTION (a) above. The Participant's consent to such a distribution is required if the portion of such distribution representing the vested portion in his or her Accounts is (or ever has been) in excess of $3,500 (or $5,000, for Plan Years beginning after August 5, 1997). Section 6.2: Methods Of Distribution. (a) When a Participant's benefits become distributable, the Committee shall with reasonable promptness direct the Trustee to distribute such Participant's benefit as follows: (i) If a Participant's benefits become distributable by reason of his or her death, the benefit shall be distributed to such deceased Participant's Beneficiary as an immediate lump sum. (ii) If a Participant's benefits become distributable for a reason other than his or her death, the benefit shall be distributed with such Participant's consent as an immediate lump sum or in installments as set forth below. (A) The Participant may elect, by completing an appropriate form furnished by the Committee, that his or her benefits be distributed as follows: -23- (1) The Participant may elect that his or her benefits be distributed in up to five equal or nearly equal annual installments, paid monthly, quarterly, or annually. (2) If the fair market value of a Participant's Stock Account exceeds $500,000 multiplied by the Adjustment Factor as of the date distribution is required to begin under SECTION 6.3 below, the Participant may elect that his or her benefits be distributed in substantially equal annual payments over a period of five years plus an additional one year (up to an additional five years) for each $100,000 increment (or fraction of such increment) by which the value of the Participant's Stock Account exceeds $500,000. (3) In addition, the Participant may elect that his or her benefits shall be paid in equal or nearly equal monthly, quarterly, semi-annual, or annual installments over a period not exceeding the life expectancy of the Participant, or the joint life and last survivor expectancy of the Participant and his or her Beneficiary. The expected return multiples of Section 1.72-9 of the Regulations under the Code shall be used to determine such life expectancy. (B) Despite the foregoing, if the vested amount credited to such Participant's Accounts is not (nor ever has been) in excess of $3,500 (or $5,000, for Plan Years beginning after August 5, 1997), the Committee may direct the Trustee to distribute such benefit as an immediate lump sum, without such Participant's consent. (iii) If a Participant's benefits become distributable for a reason other than his or her death, and if such Participant dies before his or her entire benefits have been distributed, his or her Beneficiary shall receive a death benefit equal to the balance of the remaining installments (if any) or deferred lump sum (if any) due such deceased Participant. (iv) Despite any other provision of the Plan, the benefits in the Participant's Stock Account shall be distributed in the form of Stock. (v) Despite the foregoing provisions, the Committee may at any time, with the consent of a Participant or his or her Beneficiary, direct the Trustee to accelerate any installment payment to such Participant or Beneficiary or to reduce the period over which future installments are to be made, in which latter event the Trustee shall adjust the amount of such installments accordingly. In addition, a Participant may at any time withdraw any or all of his or her undistributed benefit, and a Participant's Beneficiary shall, unless such Participant provided otherwise, have a similar withdrawal -24- right. If less than all of the undistributed benefit is withdrawn, the remaining installment payments shall be adjusted accordingly. (vi) Notwithstanding any other provision in this Section, if a distribution of a Participant's benefit consists of more than one class of Leveraged Stock, the Participant must receive substantially the same proportion of each such class. (b) The complete distribution of a Participant's benefit as provided for above shall constitute full payment and satisfaction of any obligation of the Company, the Trustee or the Committee to such Participant or to the Beneficiary of a deceased Participant. (c) If a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence fewer than 30 days after the notice required under Section 1.411(a)-11(c) of the Regulations under the Code is given, provided that: (i) the Committee clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. Section 6.3: Timing Of Distributions. (a) The following provisions shall govern the timing of the distribution of a Participant's benefit. (b) If a Participant's benefits become distributable because of his or her death or Total Disability, such benefits shall begin to be distributed as soon as is administratively practical following the Committee's receipt of written proof of such Participant's death or Total Disability. If a Participant's benefits become distributable for a reason other than his or her death or Total Disability, such Participant's benefits shall begin to be distributed as soon as is administratively practical after the date on which such Participant's benefits became distributable. Despite the foregoing, and subject to SUBSECTIONS (c) and (d) below, a Participant's benefit must begin to be distributed no later than 60 days after the latest of the close of the Plan Year in which: (i) the Participant attained age 65 (or Normal Retirement Age, if earlier); (ii) occurred the tenth anniversary of the year in which the Participant began participation in the Plan; or -25- (iii) the Participant ceased to be an Employee. Despite the foregoing, a Participant may elect a later date on which the distribution of his or her benefit is to begin, in a manner consistent with the applicable Regulations. Any failure by a Participant (or, if he or she is married, such Participant's spouse in the event of such Participant's death) to consent to an immediate distribution of his or her benefit (provided that such benefit is otherwise then immediately distributable pursuant to the foregoing provisions) shall be deemed to be an election to defer distribution to the later of age 62 or such Participant's Normal Retirement Age. (c) Despite any other provision of the Plan, one of the following provisions shall apply: (i) A Participant's benefit shall be distributed to him or her not later than April 1 of the calendar year following the later of (A) the calendar year in which the Participant attains age 70 1/2, or (B) the calendar year in which the Participant retires, if such Participant is not a 5% Owner with respect to the Plan Year ending in the calendar year in which he or she attains age 70 1/2; or (ii) Alternatively, distributions to a Participant must begin no later than the date determined under SUBSECTION (c)(i) above and must be made, in accordance with the applicable Regulations, over the life of the Participant or over the lives of such Participant and his or her designated Beneficiary (or over a period not extending beyond the life expectancy of the Participant or the life expectancy of the Participant and his or her designated Beneficiary). (d) If a Participant dies before his or her entire interest has been distributed to him or her, the remaining portion of such Participant's interest must be distributed at least as rapidly as under the method of distribution being used as of the date of the Participant's death. (e) If a Participant dies before distribution of his or her benefit has begun, the entire benefit of such Participant must be distributed within five years after his or her death. (f) For purposes of SUBSECTION (e) above, any portion of a Participant's benefit that is payable to or for the benefit of his or her Beneficiary shall be treated as distributed on the date on which such distribution begins if: (i) such portion will be distributed in accordance with the applicable Regulations over such Beneficiary's life (or over a period not extending beyond such Beneficiary's life expectancy), and (ii) such distribution must begin not later than the date that is one year after the date of such Participant's death (or such later date as the Secretary of the Treasury may by Regulations prescribe). However, if such -26- Beneficiary is the Participant's surviving spouse, then the date on which the distribution is required to begin shall be not later than the date on which the Participant would have attained age 70 1/2, and if such spouse dies before the distribution to him or her begins, this subsection shall be applied as if such spouse were the Participant. (g) For purposes of SUBSECTION (f) above, the life expectancy of a Participant and his or her spouse (other than in the case of life annuity) may be redetermined on an annual or less frequent basis, and under Regulations prescribed by the Secretary of the Treasury, any amount paid to a child of a Participant shall be treated as if it had been paid to such Participant's surviving spouse if such amount will become payable to such spouse upon such child attaining majority (or any other designated event permitted under the applicable Regulations). (h) Despite the foregoing provisions, the Committee shall not permit any Participant to receive his or her benefits under a method of distribution that violates the Regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirements of proposed Regulation 1.401(a)(9)-2, or any successor or final Regulation. (i) With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the regulations under Section 401(a)(9) that were proposed on January 17, 2001, notwithstanding any provision of the Plan to the contrary. This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final regulations under Section 401(a)(9) or such other date as may be specified in guidance published by the Internal Revenue Service. Section 6.4: Postponed Retirement. If a Participant continues to be an Employee beyond his or her Normal Retirement Date, his or her corresponding participation in the Plan shall likewise continue. In such a case, to the extent permitted by law and the applicable Regulations, the distribution of such Participant's benefits will be postponed until he or she actually ceases to be an Employee. Such Participant's benefits will become payable as of the first day of the month next following his or her actually ceasing to be an Employee. Section 6.5: Distributions Due Missing Persons. If the Trustee is unable to distribute any benefit due to a missing Participant or Beneficiary, the Trustee shall (a) so advise the Committee and (b) hold such benefit as a segregated part of the Trust, in which event such benefit shall participate in the income, gains and losses realized by such segregated Trust fund. The Committee shall then send a written notice to such Participant or Beneficiary at his or her last known address, as reflected in the Company's or Committee's records. If such Participant or Beneficiary shall not have presented himself or herself to the Company or to the Committee -27- within three years of the date of such written notice, any undistributed benefit (and any income, gains and losses realized by such segregated part) may be applied against and reduce the Company's future contributions to the Plan. Despite the foregoing, if at any subsequent time a valid claim for any undistributed benefit is presented to the Committee, such benefit that was so applied (and any income, gains and losses realized by such segregated part) shall be paid directly by the Company to such claimant. Section 6.6: Transfers To Another Qualified Plan. (a) If a Participant who is a distributee of any Eligible Rollover Distribution (as defined below) elects to have such distribution paid directly to an Eligible Retirement Plan and who specifies the Eligible Retirement Plan to which such distribution is to be paid (in such form and at such time as the Committee may prescribe), then such distribution shall be made in the form of a direct trustee-to-trustee transfer to such Eligible Retirement Plan, provided that such Eligible Retirement Plan accepts such a transfer. The foregoing sentence shall apply only to the extent that such Eligible Rollover Distribution would be includable in gross income if not transferred as provided in such sentence (determined without regard to Code Sections 402(c) and 403(a)(4)). (b) "Eligible Rollover Distribution" shall mean any distribution of all or any portion of the balance to the credit of the distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; any hardship distribution described in Code Section 401(k)(2)(B)(i)(IV) received after December 31, 1998; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (c) "Eligible Retirement Plan" shall mean an individual retirement account described in Section 408(a) of the Code, and individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (d) A Participant's (i) surviving spouse and (ii) spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the surviving spouse, spouse, or former spouse and shall have the same rights as a -28- Participant to make a transfer in accordance with this SECTION 6.6 as to the interest of the surviving spouse, spouse, or former spouse. ARTICLE VII SALE OF STOCK Section 7.1: Option To Sell Shares Of Stock. (a) If a Qualified Holder receives a distribution consisting in whole or in part of Stock that is not Freely Tradable Stock at the time of distribution, then such distributed Stock shall be subject to a put option in the hands of the Qualified Holder, according to the provisions set forth below. (b) During the 60-day period following any distribution of such Stock, a Qualified Holder shall have the right to require the Company to purchase all or any portion of such distributed Stock held by such Qualified Holder. A Qualified Holder shall exercise such right by giving written notice to the Company of the number of shares of distributed Stock that the Qualified Holder intends to sell to the Company. Such notice must be given within such 60-day period. The purchase price to be paid for any such option Stock shall be its fair market value determined as of the most recent valuation according to the valuation rules specified in ARTICLE IV. (c) If a Qualified Holder fails to exercise his or her put option right under SUBSECTION (b), he or she shall have an additional right to exercise such option in the first 60-day period of the next following Plan Year. If a Qualified Holder fails to exercise his or her put option in this 60-day period, such option right shall expire and the Qualified Holder shall have no further right to require the Company to purchase such distributed Stock. (d) In the application of SUBSECTION (b) and (c), the period during which a put option is exercisable does not include any time when a distributee is unable to exercise it because the party bound by the put option is prohibited from honoring it by applicable federal or state law. (e) In the event that a Qualified Holder shall exercise a put option under this Section, then the Company shall pay the purchase price of such Stock as follows: (i) If Stock is distributed to a Qualified Holder as part of a Total Distribution, then the Company shall pay the purchase price of such Stock in substantially equal installment payments made no less frequently than annually for no more than five years. The first such payment shall be made within 30 days after the date such put option is exercised. If the purchase price of the Stock is paid under this installment method, then the Company shall, at a minimum, (A) provide adequate security, and (B) state a -29- reasonable rate of interest (at least equal to the imputed compound rate in effect as of the Exercise Date pursuant to the Regulations under Code Section 483 or 1274, whichever shall be applicable) for the full unpaid balance of the option price. (ii) If Stock is distributed to a Qualified Holder other than as a Total Distribution (i.e., on an installment basis), then the Company shall pay the purchase price of such Stock within 30 days after the date the put option is exercised. (iii) "Total Distribution" shall mean a distribution to a Participant or a Beneficiary, within one taxable year, of the Participant's entire Account balance to the credit of the Participant. (f) The protections and rights provided in this Section are nonterminable and continue to exist despite (i) the repayment of any loan, the proceeds of which are used to purchase Leveraged Stock, and (ii) the cessation of the Plan's status as an employee stock ownership plan. (g) The foregoing put options under SUBSECTIONS (b) and (c) shall be effective solely against the Company and shall not obligate the Plan or the other Company in any manner; provided, however, that with the Company's consent, the Plan or the other Company may elect to purchase any Stock that otherwise must be purchased by the Company pursuant to a Qualified Holder's exercise of any such option. (h) At the time of distribution of Stock that is not Freely Tradable Stock to a Qualified Holder, the Company shall furnish to such Qualified Holder the most recent certificate of value prepared by the Company with respect to such Stock. In addition, the Company shall furnish to such Qualified Holder a copy of each subsequent certificate of value until the put options provided for in this Section with respect to such distributed Stock expire. (i) Except as is expressly provided above with respect to any distributed Stock that is not Freely Tradable Stock, no Participant shall have any put option rights with respect to Stock distributed under this Plan, and neither the Company nor this Plan shall have any obligation whatsoever to purchase any such distributed Stock from any Participant or other Qualified Holder. Section 7.2: Right Of First Refusal. (a) In the event a Qualified Holder holds Stock that is not Freely Tradable Stock, the Qualified Holder may not transfer, assign or otherwise dispose of any Stock unless the Qualified Holder has given the Company and the Trustee of the Trust the right of first refusal in accordance with the provisions set forth below. -30- (b) The Qualified Holder must give written notice to the Company that the Qualified Holder has received an offer by a third party to purchase the Stock or that the Qualified Holder desires to transfer the Stock by gift, bequest or otherwise. The Company's right of first refusal shall lapse seven days after the Qualified Holder gives such notice to the Company. (c) After the Company's right of first refusal lapses, the Trustee of the Trust shall have a right of first refusal, which will lapse seven days after the Company's right of first refusal lapses. (d) If the Company and the Trustee do not exercise the right of first refusal within the respective seven-day periods, then on the 30th day following the expiration of the Trustee's seven-day period to purchase the Stock, the Qualified Holder may transfer the stock to a donee, or in the case of a sale, to a bona fide purchaser in the same quantity, and at the same price and terms that the Stock was offered to the Company and the Trustee. (e) The selling price of the Stock and other terms under the right of first refusal must not be less favorable to the Qualified Holder than the greater of (i) the value of the security as determined under Regulation Section 54.4975-11(d)(5), or (ii) if applicable, the purchase price and other terms offered by a buyer (other than the Company or the Plan) making a good faith offer to purchase the Stock. (f) The Company may require that a Participant or Beneficiary entitled to a distribution of Stock sign an appropriate stock transfer agreement (that evidences the right of first refusal) prior to receiving a certificate for Stock. ARTICLE VIII TOP-HEAVY PLAN LIMITATIONS Section 8.1: Application Of Top-Heavy Rules. If the Plan is or becomes a Top-heavy Plan, the limitations and requirements contained in this Article shall apply and shall supersede any conflicting provision of the Plan. Section 8.2: Definitions. (a) Top-heavy Plan. A "Top-heavy Plan" shall mean, with respect to any plan year, (i) any Defined Benefit Plan maintained by the Company or an Affiliated Company if, as of the Determination Date, the total Present Value of Accrued Benefits under such plan for Key Employees exceeds 60% of the total Present Value of Accrued Benefits under such plan for all participants in such plan; and (ii) any Defined Contribution Plan maintained by the Company or an Affiliated Company if, as of the Determination Date, the total Aggregate Accounts of Key Employees under the plan exceeds 60% of the total Aggregate Accounts of all -31- participants under such plan. Each plan of the Company required to be included in an Aggregation Group shall be treated as a Top-heavy Plan if the Aggregation Group is a Top-heavy Group. (b) Top-heavy Group. A "Top-heavy Group" shall mean any Aggregation Group if the sum of (i) the total Present Value of Accrued Benefits for Key Employees under all Defined Benefit Plans included in the Aggregation Group (determined as of the Determination Date for each such plan), and (ii) the total of the Aggregate Accounts of Key Employees under all Defined Contribution Plans included in the Aggregation Group (determined as of the Determination Date for each such plan) exceeds 60% of a similar sum determined for all participants in such plans. For purposes of determining whether the plans in a Top-heavy Group exceed the foregoing 60% test, the plans shall be aggregated by adding together the results for each plan as of the Determination Dates for such plans that fall within the same calendar year. (c) Aggregation Group. An "Aggregation Group" shall mean each plan of the Company or of an Affiliated Company in which a Key Employee is a participant, and each plan of the Company or of an Affiliated Company that enables the plan(s) containing a Key Employee to meet the antidiscrimination requirements of Code Sections 401(a)(4) or 410, including terminating or terminated plans maintained within the last five years ending on the Determination Date that would, but for such termination, be part of the Aggregation Group. The Company can elect to include in the Aggregation Group any plan not otherwise required to be included, if such group, after such election, would continue to meet the antidiscrimination requirements of Code Sections 401(a)(4) and 410; provided, however, that any such plan will not be otherwise deemed a Top-heavy Plan by reason of such election. (d) Determination Date. With respect to any plan year, "Determination Date" shall mean the last day of the preceding plan year or, in the case of the first plan year of any plan, the last day of such plan year. (e) Present Value of Accrued Benefit: A participant's "Present Value of Accrued Benefit" as of any Determination Date shall be calculated: (i) as of the most recent valuation date ("Valuation Date") which is within the 12-month period ending on such Determination Date; (ii) for the first plan year, as if (A) the participant terminated service as of the Determination Date, or (B) the participant terminated service as of the Valuation Date, but taking into account the estimated Present Value of Accrued Benefit as of the Determination Date; (iii) for any other plan year, as if the participant terminated service as of the Valuation Date; and (iv) using the interest rate and mortality assumptions set forth in the Defined Benefit Plan. -32- (v) solely for the purposes of determining if the Plan, or any other plan included in the Aggregation Group, is a Top-heavy Plan, the accrued benefit of a Non-Key Employee shall be determined under (A) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Company and all Affiliated Companies, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code Section 411(b)(1)(C). For the foregoing purposes, the Valuation Date must be the same valuation date used for computing the defined benefit plan minimum funding costs, regardless of whether a valuation is performed that year. (f) Aggregate Account: A participant's "Aggregate Account" shall be determined as follows: (i) For Defined Contribution Plans not subject to the minimum funding requirements of Code Section 412, a participant's Aggregate Account as of any Determination Date shall be the sum of: (A) such participant's account balance as of the most recent valuation date ("Valuation Date") occurring within the 12-month period ending on such Determination Date; plus (B) an adjustment for contributions due as of such Determination Date. Such adjustment is generally the amount of any contributions actually made after the Valuation Date but before the Determination Date. In the first plan year, such adjustment shall also reflect any contributions actually made after the Determination Date that are allocated as of a date in that first plan year. (ii) For Defined Contribution Plans subject to the minimum funding requirements of Code Section 412, a participant's Aggregate Account as of any Determination Date shall be the sum of: (A) such participant's account balance as of the most recent valuation date ("Valuation Date") occurring within the 12-month period ending on such Determination Date, including contributions that would be allocated as of a date not later than such Determination Date; plus (B) an adjustment for contributions due as of such Determination Date. Such adjustment shall reflect the amount of any contribution actually made (or due to be made) after the Valuation Date but before the expiration of the extended payment period described in Code Section 412(c)(10). -33- (g) Key Employee. "Key Employee" shall mean any participant of any plan maintained by the Company or an Affiliated Company who, at any time during the plan year or any of the four preceding plan years, was: (i) an officer of the Company or an Affiliated Company whose annual Compensation exceeds 50% of the amount in effect under Code Section 415(b)(1)(A) for any such plan year (provided, however, that no more than 50 employees (or, if lesser, the greater of three employees or 10% of all employees) shall be treated as officers; provided further, however, that if the total number of officers exceeds this numerical limitation, only the highest compensated officers shall be included); (ii) one of the ten employees who (A) has annual Compensation for a plan year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such plan year ends, and (B) owns (or is considered to own under Code Section 318) both more than a 1/2% interest and the largest interests in the Company or an Affiliated Company; (iii) 5% Owner of the Company or an Affiliated Company; or (iv) 1% Owner of the Company or an Affiliated Company whose annual Compensation exceed $150,000, or such other amount as may be allowed under Code Section 416(i) and the applicable Regulations. In making this determination of a 5% Owner and a 1% Owner for purposes of this Section, (i) the Code Section 318(a)(2) corporate attribution rules, as modified by Code Section 416(i)(1)(B)(iii), shall apply, and (ii) the business aggregation rules of Code Section 414 shall not apply. For purposes of the foregoing definition, (i) the beneficiary of a Key Employee shall be treated as a Key Employee, and (ii) the beneficiary of a former Key Employee shall be treated as a former Key Employee. Inherited benefits will retain the character of the benefits of the Key Employee who performed the services for the Company. For purposes of the foregoing, the identification of the Key Employee will be determined in accordance with Code Section 416(i). (h) Non-Key Employee. "Non-Key Employee" shall mean any Participant who is not a Key Employee, including any Participant who is a former Key Employee. Section 8.3: 60% Test - Special Rules. For purposes of applying the 60% test described in SECTION 8.2(a), the following special rules shall apply: (a) Participant Contributions. Benefits derived from both participant contributions (whether voluntary or mandatory, but not deductible contributions) and the Company's contributions shall be considered. -34- (b) Previous Distributions. In determining the Present Value of Accrued Benefit or the Aggregate Account of any participant under any plan (or plans that form the Aggregation Group), such present value or account shall be increased by the aggregate of distributions made to such participant from such plan (or plans forming the Aggregation Group) during the five-year period ending on the Determination Date. For this purpose, "participant" shall include an employee who is no longer employed by the Company or an Affiliated Company. Despite the foregoing, any distribution to a participant that is made after the Valuation Date and before the Determination Date for any plan year shall not be considered a distribution to the extent it is already included in such participant's Present Value of Accrued Benefit or Aggregate Account as of such Valuation Date. (c) Rollover Contributions. Rollover contributions shall be treated as follows: (i) The following rules shall apply to related rollovers and plan-to-plan transfers (ones either not initiated by the participant or made to a plan maintained by the Company or any Affiliated Company). If the plan provides such rollover or plan-to-plan transfer, it shall not be counted as a distribution for purposes of this SECTION 8.3. If the plan receives such rollover or plan-to-plan transfer, it shall consider such rollover or plan-to-plan transfer as part of the participant's Present Value of Accrued Benefit or Aggregate Account, regardless of the date on which such rollover or plan-to-plan transfer was received. (ii) The following rules apply to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by a participant and made from a plan maintained by one employer to a plan maintained by another employer). If the plan provides such rollover or plan-to-plan transfer, it shall always consider such rollover or plan-to-plan transfer as a distribution for purposes of this SECTION 8.3. If the plan receives such rollover or plan-to-plan transfer, it shall not consider such rollover or plan-to-plan transfer as part of the participant's Present Value of Accrued Benefit or Aggregate Account if it was accepted after December 31, 1983. (d) Change Of Status. The accrued benefit or account of a participant who was formerly a Key Employee, but who ceased to be a Key Employee in any plan year, will not be taken into account for such plan year. (e) No Service For Last Five Years. If any individual has not performed services for any employer maintaining the plan during the five-year period ending on the Determination Date, the accrued benefit or account of such individual shall not be taken into account. -35- Section 8.4: Minimum Vesting Requirement. As the Plan's normal vesting schedule equals or exceeds the top-heavy vesting schedule, the normal vesting schedule shall continue to apply if the Plan becomes a Top-heavy Plan. Section 8.5: Minimum Contribution Requirement. (a) If the Plan is a Top-heavy Plan, then in no event shall the Company's annual contribution on behalf of any Non-Key Employee be less than 3% of such Participant's Earnings. This minimum contribution shall be made even though, under the other provisions of the Plan, the Participant would not otherwise be entitled to a contribution on his or her behalf, or would have received a lesser contribution for the Plan Year, because of (i) the Participant's failure to complete 1,000 Hours of Service, (ii) the Participant's failure to make mandatory employee contributions to the Plan, or (iii) the Participant's exclusion from the Plan because such Participant's Earnings is less than the Plan's stated amount. Despite the foregoing, no minimum contribution needs to be made under this Section on behalf of a Participant who was not an Employee on the last day of the Plan Year. (b) For Plan Years beginning on or after January 1, 1985, any Company contribution that is attributable to a salary reduction or similar arrangement shall be considered for purposes of satisfying the minimum contribution required by this Section. For Plan Years beginning on or after January 1, 1989, elective contributions under Code Section 401(k) on behalf of Key Employees are taken into account in determining the minimum required contribution under Code Section 416(c)(2), but such contributions on behalf of Non-Key Employees may not be treated as employer contributions for purposes of the minimum contribution or benefit requirements of Code Section 416. (c) If the Company maintains one or more qualified plans in addition to the Plan, and if the Plan is a Top-heavy Plan, then in accordance with the applicable Regulations, only one such plan need be designated by the Company to provide the minimum benefit provided for in this Section. However, if for Plan Years beginning before January 1, 2000, such multiple plans, including the Plan, include a Defined Benefit Plan and a Defined Contribution Plan, the 1.0 Rule (as it may be modified by the top-heavy plan transitional rule under Code Section 416(h)(3)) shall be in effect if, and only if, the following two requirements are satisfied: (i) Minimum Benefit Requirement. The "3%" set forth in this Section shall be replaced by "4%". (ii) The 90% Test. The sum of the Present Value of Accrued Benefits plus the Aggregate Accounts held for all Key Employees under the plans cannot exceed 90% of a similar sum determined for all participants. For purposes of the 1.0 Rule, all references to "1.25" shall be replaced by "1.0," if either of the above additional requirements is not met. -36- (d) Despite the foregoing, if (i) the total annual contribution allocated to the Accounts of each Key Employee is less than 3% of each Key Employee's Earnings and (ii) this Plan is not required to be included in an Aggregation Group to enable a Defined Benefit Plan to meet the requirements of Code Section 401(a)(4) or 410, then the total minimum annual contribution on behalf of each Non-Key Employee shall be equal to the largest percentage contribution on behalf of any Key Employee. ARTICLE IX INVESTMENTS Section 9.1: Investment Of Company Contributions. The Plan is designed to invest primarily in Stock, and the Trustee is specifically authorized to invest up to 100% of the Trust's assets in Stock. All purchases of Stock shall be made at prices that, in the Committee's judgment, do not exceed the fair market value of the Stock, determined as required by SECTION 4.11 above. The Trustee may purchase Stock for cash or on terms, as directed by the Committee. Despite the foregoing, sufficient liquidity shall be maintained to meet the reasonably anticipated requirements of the Trust for payment of expenses of administration, investment and management and for distribution of benefits to Participants and Beneficiaries. To the extent the Trustee is not directed to acquire Stock, the Trustee may, subject to the direction of the Committee, invest and reinvest the Trust's assets, together with the income therefrom, in assets other than Stock to the extent consistent with preserving the Plan's status as an employee stock ownership plan as defined under Code Section 4975(e)(7). Section 9.2: Leveraged Stock Authorized. (a) The Committee shall have the power to direct the Trustee to borrow or raise money, in such amounts and under such conditions and terms as directed by the Committee, for the purpose of purchasing or otherwise acquiring Stock. Any such borrowing may be made from the Company, any shareholder in the Company, or from any other party. In connection with any such borrowing, and subject to any applicable margin requirement rule, regulation or statute, the Committee may direct the Trustee to issue its promissory note on behalf of the Trust. No person lending money to the Trustee shall be obligated to see to the application of the money lent or to inquire into the validity, expediency or propriety of such borrowing. Any such borrowing from the Company, or from any other "disqualified person" (as defined in Code Section 4975(e)(2)), or any other "party in interest" (as defined in ERISA Section 3(14)), shall be subject to the provisions set forth below. (b) The proceeds of the loan shall be used (within a reasonable period of time after receipt) only to acquire Stock, to pay any charges or fees incurred -37- in connection with the stock acquisition or loan, and/or to make payments under any such loan (including prior loans). (c) Other than the categories of assets specified in SUBSECTION (d) below, the loan shall be without recourse against the Plan or Trust. The only Trust assets which may be used as collateral for the loan shall be the Stock acquired with the proceeds of the loan or Stock used as collateral on a prior loan that was repaid with the current outstanding loan. (d) No person entitled to payment under the loan shall have any recourse, for any payments due under the loan, against any Plan assets other than the following categories of assets: (i) Unallocated Leveraged Stock (whether or not collateralized) acquired with the proceeds of the loan and held in the Unallocated Stock Account (but only prior to the release therefrom and allocation to Participants' Accounts as provided under this Plan); (ii) Company contributions (other than contributions of Stock) made to meet obligations under the loan; (iii) Earnings attributable to the unallocated Leveraged Stock while held in the Unallocated Stock Account (including dividends thereon while held in the Unallocated Stock Account); and (iv) Earnings attributable to the investment of the Company Contributions made to meet obligations under the loan. Recourse against such assets shall be permissible to the extent allowed under applicable law governing creditor's remedies, but in no event to an extent greater than permitted under SUBSECTION (e) below or such other applicable limitations as may be required in order for such loan transaction to qualify for the prohibited transaction exemption provided under Code Section 4975(d)(3). (e) The provisions of this SUBSECTION (e) shall apply in case of a default in the repayment of the loan: (i) In the event of a default, the value of Plan assets transferred to the lender in satisfaction of such loan shall not exceed the amount of the default. (ii) If the lender is a disqualified person (as defined in Code Section 4975(e)(2)), a transfer of Plan assets upon default shall be made only upon and to the extent of the failure of the Plan to meet the payment schedule of the loan. (iii) For purposes of this SUBSECTION (e), the making of a guarantee by the Company shall not be deemed to make the Company a -38- lender; provided, however, that this provision shall not impose any personal liability on the Trustee. (f) The terms of the loan must provide that shares of Stock purchased with the proceeds of the loan shall be placed in the Unallocated Stock Account. The shares in the Unallocated Stock Account shall be released from the Unallocated Stock Account (and allocated to the Stock Accounts) as set forth above. Despite the foregoing, in addition to or in lieu of pledging the acquired Stock as collateral for the repayment of any loan, the Company may guarantee the repayment and/or may use Company assets to secure the repayment, and nothing herein shall require that the repayment of the loan be secured by Stock acquired with the proceeds thereof. (g) If the proceeds of a loan are used to acquire Leveraged Stock, the following items shall be accounted for separately in the books of account of the Plan until the loan is repaid: (i) The contributions (other than contributions of Stock) that are made under the Plan to meet obligations under the loan; (ii) The earnings attributable to unallocated Leveraged Stock (purchased with the proceeds of the loan) while held in the Unallocated Stock Account (including dividends thereon); and (iii) Earnings attributable to the investment of the contributions made to meet obligations under the loan. (h) In the event that there shall be more than one class of Stock, the class or classes of Leveraged Stock acquired by the Trustee with the proceeds of the loan, and the relative proportions of the classes of Stock held by the Trustee, shall comply with any applicable requirements established pursuant to Regulations under Code Section 4975 so as to insure that the loan and/or the acquisition of Leveraged Company does not constitute a prohibited transaction within the meaning of the applicable provisions of the Code and ERISA. (i) The loan shall be primarily for the benefit of Participants and their Beneficiaries and shall bear no more than a reasonable rate of interest. (j) The Committee shall determine, and advise the Trustee with respect to, the amount of interest charges that are due from time to time by reason of any variable interest rate (or other similar provision) under any loan used by the Trustee to acquire Leveraged Stock. The Trustee may rely on the Committee's determination and directions with respect to the amount of the interest charges, and the Trustee shall be released from any and all liability attributable to its reliance thereon. (k) Any loan entered into by the Plan to purchase Stock shall be for a definite term, and shall not be payable upon demand of any person, except where -39- there has been a default. Any such payment upon default shall be subject to the rules of SUBSECTION (e) above. Section 9.3: Certain Nonterminable Provisions. Except as is expressly provided in the Plan with respect to any distributed Leveraged Stock that is not Freely Tradeable Stock, no such Leveraged Stock shall be subject to a put, call, or other option, or buy-sell or similar arrangement while held by and when distributed from the Plan, whether or not at such time the Plan constitutes an employee stock ownership plan. The provisions of this Section shall not terminate notwithstanding that the loan used to acquire such Leveraged Stock shall be repaid or that the Plan ceases at any time to constitute an employee stock ownership plan. Section 9.4: Diversification Of Stock. (a) Election By Qualified Participant. Despite any other provision of the Plan, each Participant who is a Qualified Participant may direct the Committee to distribute 25% of the value of the Participant's Stock Account balance, reduced by the amount of assets for which a prior election under this Section has been made. Such direction must be made within 90 days after the last day of each Plan Year during the Participant's Qualified Election Period. Within 90 days after the close of the last Plan Year in the Participant's Qualified Election Period, a Qualified Participant may direct the Committee to distribute 50% of the value of such account balance, reduced by the amount of assets for which a prior election under this Section has been made. The Qualified Participant's direction (i) shall be provided to the Committee in writing, and (ii) shall be effective no later than 180 days after the close of the Plan Year to which the direction applies. (b) Definitions. For the purposes of this Section, the following definitions shall apply: (i) "Qualified Participant" shall mean a Participant who has attained age 55 and who has completed at least ten years of participation in the Plan. (ii) "Qualified Election Period" shall mean, with respect to any Participant, the six Plan Year period beginning with the first Plan Year in which the Participant first becomes a Qualified Participant. (c) Timing Of Distributions. At the election of the Qualified Participant, the Committee shall direct the Trustee to distribute the portion of the Participant's account that is covered by the election within 90 days after the last day of the period during which the election can be made. Such distribution shall be subject to the put option and right of first refusal requirements set forth in Article VII. This SUBSECTION (c) shall apply despite any other provision of the Plan; provided, however, that if any distribution pursuant to this Section is in excess of $3,500 (or -40- $5,000 for Plan Years beginning after August 5, 1997), the Participant must consent to such distribution as set forth in the Plan. Section 9.5: Voting Of Stock. (a) Effective January 18, 1991, if the Trustee holds any Stock with voting rights, the Trustee shall vote such stock as follows: (i) When notice of a stockholders' meeting must be mailed to stockholders, the Committee shall cause to be prepared and delivered to each Participant and Beneficiary who has Stock allocated to his or her Account, a notice that: (A) states the full number of shares of Stock allocated to the Participant's Account, and (B) instructs the Trustee as to how the Trustee shall vote the shares at the meeting or adjournment concerning each such matter. The Committee shall instruct each Participant and Beneficiary to complete and return the notice to the Trustee. (ii) The Trustee shall vote all shares of Company stock allocated to the Accounts of Participants as instructed in the notice. (iii) Regarding Stock for which the Trustee has not received a notice that sets forth a Participant's or Beneficiary's instructed votes within five days prior to such meeting, including all fractional shares of Stock and all shares of Stock held in the Unallocated Stock Account, the Trustee shall vote such shares as directed by the Committee. (b) The Committee shall in no event make any recommendation to any Participant regarding the exercise of the Participant's voting rights or any other rights under the provisions of this Section, nor shall the Committee make any recommendation as to whether any such rights should or should not be exercised by the Participant. (c) All rights (other than voting rights) of Stock, such as tender rights, held in the Trust shall be exercised in the same manner and to the same extent as provided above with respect to the voting rights of the Stock. -41- ARTICLE X THE COMMITTEE Section 10.1: Members. (a) The Committee shall consist of one or more members as determined by the Board of Directors. Its members shall serve at the pleasure of the Board of Directors. A person so appointed shall become a member by filing a written notice of acceptance with the Board of Directors. A member of the Committee may resign by delivering a written notice of resignation to the Board of Directors. The Board of Directors may remove any member of the Committee by delivering a written notice of such removal to him or her. A resignation or removal shall be effective on the date specified in such notice or resolution. The Trustee shall be promptly notified by the Board of Directors of any change in the membership of the Committee, and shall be supplied with specimen signatures of each Committee member. (b) Vacancies in the membership of the Committee shall be filled promptly by the Board of Directors. If the Company is not in existence when a vacancy in the Committee membership arises, such vacancy shall be filled as follows, in the indicated order of priority: 1st: The remaining member(s) of the Committee shall appoint new member(s) to fill all vacancies. 2nd: A majority of the adults then entitled to benefits from the Plan shall appoint new member(s) to fill all vacancies. If such an adult is not able to participate in such appointment, then his or her spouse, if any, shall act for him or her. If there is no such spouse, then such adult's guardian or conservator shall act for him or her. 3rd: If vacancies on the Committee are not filled pursuant to the foregoing, then a court of competent jurisdiction shall fill such vacancies. The Trust shall pay the expenses incurred in connection with such court appointment. Section 10.2: Committee Action. (a) The Committee shall choose a Secretary and an Assistant Secretary (either of whom is referred to below as the "Secretary") who shall keep minutes of the Committee's proceedings and all records and documents pertaining to the Committee's administration of the Plan. Any action of the Committee shall be taken pursuant to the vote of a majority, or pursuant to the written consent of a majority, of its members. A quorum of the Committee shall consist of two members. The Secretary may sign any certificate or other document on behalf of the Committee. The Trustee and all other persons dealing with the Committee may -42- conclusively rely upon any certificate or other document that is signed by the Secretary and that purports to have been duly authorized by the Committee. (b) A member of the Committee shall not vote or act upon any matter that relates solely to himself or herself as a Participant. If a matter arises affecting one member of the Committee as a Participant and the other members of the Committee are unable to agree on the disposition of such matter, the Board of Directors shall appoint a substitute member of the Committee in the place and stead of the affected member, for the sole purpose of passing upon and deciding that particular matter. If the Company is not in existence then, such substitute member of the Committee shall be appointed in the manner provided for in this Article when there is a vacancy in the Committee's membership. Section 10.3: Rights And Duties. (a) Except as otherwise set forth in SUBSECTIONS (b), (c) and (d) below, all fiduciary responsibility respecting the management or administration of the Plan and its assets are vested in the Committee, and the Committee shall be the Named Fiduciary with respect to the Plan's assets, and the "administrator" of the Plan as defined in Section 3(16)(A) of ERISA. (b) The Trustee shall (i) have custody of the Plan's assets, (ii) have the powers designated in the trust document, and (iii) be the Named Fiduciary with respect to the custody of the Plan's assets. (c) The Committee may designate one or more Investment Managers (including the Trustee, if the Trustee is authorized to be an Investment Manager) to manage the investment of the Plan's assets, and such Investment Manager(s) shall be the Named Fiduciary with respect to the management and investment of the Plan's assets. (d) The Committee may designate one or more persons or entities to carry out any of its functions under the Plan, other than those of managing and controlling the Plan's assets, which may only be done pursuant to SUBSECTIONS (b) or (c) immediately above. (e) The Committee, on behalf of the Participants and their Beneficiaries, shall enforce the Plan in accordance with its terms, and shall be charged with the general administration of the Plan, except to the extent that powers are retained by the Company. The Committee shall have the discretion and authority to interpret the Plan. The Committee's powers shall include (without limitation) the power: (i) to determine all questions relating to the eligibility of Employees to participate in the Plan; -43- (ii) to determine, compute and certify to the Trustee the amount and kind of benefits payable to the Participants and their Beneficiaries; (iii) to authorize all disbursements by the Trustee from the Trust; (iv) to direct the Trustee with respect to all investments of the principal or income of the Trust and with respect to other matters concerning the Trust's assets; (v) to maintain all the necessary records for the administration of the Plan, other than those maintained by the Trustee; and (vi) to adopt, amend and interpret rules for the regulation of the Plan that are not inconsistent with its terms and the applicable law and Regulations. (f) Members of the Committee and other Fiduciaries shall discharge their duties with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of a like character and with like aims. Subject to any right of Participants to direct how their Accounts will be invested and other provisions of the Plan, the Committee shall diversify the Plan's investments so as to minimize the risk of large losses, unless, under the circumstances, it is clearly prudent not to do so, or unless the Plan specifically provides for the acquisition and holding of qualifying employer real property or securities, as defined in Sections 407(d)(4) and (5) of ERISA. (g) A member of the Committee or other Fiduciary shall be liable for a breach of fiduciary responsibility of another member or another Fiduciary only if: (i) such member or Fiduciary participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other member or Fiduciary, knowing that such act or omission is a breach; (ii) such member or Fiduciary has enabled such other member or Fiduciary to commit a breach by virtue of his or her failure to comply with the duty of care set forth above in the administration of such member's or Fiduciary's own responsibilities as a Fiduciary; or (iii) such member or Fiduciary has knowledge of a breach by such other member or Fiduciary, unless such member or Fiduciary makes reasonable efforts under the circumstances to remedy such breach. Section 10.4: Information. To enable the Committee to perform its functions, the Company shall supply complete and timely information to the Committee on all matters relating to the compensation of all Participants, their -44- employment, their retirement, death, or the cause for termination of employment, and such other pertinent information as the Committee may require. The Committee shall advise the Trustee of such of the foregoing information as may be pertinent to the Trustee's administration of the Trust. Section 10.5: Compensation, Indemnity And Liability. (a) The members of the Committee shall serve without compensation for their services. No member of the Committee or other Fiduciary need be bonded, except as required by federal or state law or regulation. The Committee is authorized to employ such legal counsel or other persons as it may deem advisable to assist it in the performance of its duties under the Plan. (b) The Company shall indemnify and hold each member of the Committee harmless against any and all expenses and liabilities arising out of membership on the Committee, excepting only expenses and liabilities arising out of such member's own willful misconduct or gross negligence. Section 10.6: Administrative Expenses Of The Plan. All expenses of administering the Plan shall by paid by the Trustee and shall be a charge against the trust estate, except to the extent that such expenses may be paid by the Company. The expense of maintaining errors and omissions liability insurance, if any, covering members of the Committee, the Trustee, or any other Fiduciary shall be paid by the Company. ARTICLE XI AMENDMENT AND TERMINATION Section 11.1: Amendments. The Company, through its Board of Directors, may amend the Plan from time to time, and may amend or cancel any such amendment. Each amendment must be set forth in a document that is signed by the Company, and the Plan shall be deemed to have been amended in the manner and at the time set forth in such document, and all Participants shall be bound by it. Despite the foregoing, any such amendment shall be subject to the following provisions: (a) No amendment shall be effective that attempts to cause any asset of the Plan to be used for, or diverted to, purposes other than for the exclusive benefit of the Participants or their Beneficiaries, except for such changes, if any, that are required to permit the Plan to meet the applicable requirements of the Code, or as may be made to assure the deductibility for tax purposes of any contribution by the Company. -45- (b) No amendment shall have any retroactive effect that would deprive any Participant of any benefit already vested, nor shall the vesting provisions of the Plan be amended, unless each Participant with at least three Years of Service is permitted to elect to continue to have the prior vesting provisions apply to him or her, except for such changes, if any, that are required to permit the Plan to meet applicable requirements of the Code, or as may be made to assure the deductibility for tax purposes of any contribution by the Company. Any such election must be made during the period beginning with the date the amendment is adopted and ending 60 days after the latest of: (i) the date the amendment is adopted; (ii) the date the amendment becomes effective; or (iii) the date on which the Participant receives written notice of the amendment from the Company or the Committee. (c) No amendment shall create or effect any discrimination in favor of Participants who are highly compensated Employees. (d) No amendment shall increase the duties or liabilities of the Trustee without the Trustee's written consent. (e) No amendment shall decrease any Participant's account balance or eliminate an optional form of distribution. Section 11.2: Discontinuance Of Plan. (a) The Company expects that the Plan and the contributions under it will be continued indefinitely, and the Trust is irrevocable. However, continuance of the Plan is not assumed as a contractual obligation of the Company, and the Company, through their respective boards of directors, reserve the right to reduce, temporarily suspend, or discontinue contributions under the Plan if, and to the extent, permitted under ERISA or the Code. Upon a complete discontinuance of contributions, the interest of each Participant in each of his or her Accounts shall become 100% vested, if it is not already fully vested. In addition, upon a partial termination (within the meaning of Code Section 411(d)(3)), the interest of each affected Participant in each of his or her Accounts shall become 100% vested, if it is not already fully vested. (b) The Company, through its Board of Directors, may terminate the Plan at any time upon delivering a written notice to the Trustee. Upon the Plan's termination, the interest of each Participant in each of his or her Accounts shall become 100% vested, if it is not already fully vested. Then the Trustee, at the direction of the Committee, shall, as is necessary, liquidate the Stock in the Unallocated Stock Account and use the net proceeds of such liquidation to pay any loan or installment obligation that was incurred to purchase Leveraged Stock. The -46- net proceeds in excess of the amount used to repay such loan shall be allocated to the Participants' Cash Accounts as set forth in Section 4.5(a)(i). The Trustee, at the direction of the Committee, shall also liquidate the Trust's assets other than Stock and allocate the net proceeds of such liquidated assets to the Participants' Cash Accounts, as set forth in Section 4.5(a)(i). (c) The Plan shall automatically terminate upon the happening of any of the following events: (i) adjudication of the Company as a bankrupt; (ii) general assignment by the Company to or for the benefit of creditors; or (iii) dissolution of the business of the Company, provided, however, that the Plan may be continued by any successor business organization or any business organization into which the Company is merged or consolidated that employs some or all of the Participants, if such business organization agrees with the Trustee in writing to accept the obligations of the Plan and to continue it in full force and effect in accordance with Section 13.10. Section 11.3: Failure To Contribute. The Company's failure to contribute to the Trust for any Plan Year shall not, of itself, be a discontinuance of contributions to the Plan. ARTICLE XII CLAIMS PROCEDURE Section 12.1: Presentation Of Claim. Any Participant or Beneficiary of a deceased Participant or duly authorized representative of either (such Participant or Beneficiary or duly authorized representative being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts (i) credited to (or deducted from) such Claimant's Accounts, or (ii) distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. The claim must state with particularity the benefit determination desired by the Claimant. Section 12.2: Notification Of Decision. The Committee shall consider a Claimant's claim within a reasonable time, but not later than 90 days after receipt of the claim by the Plan, unless the Committee determines that special circumstances -47- require an extension of time for processing the claim. If the Committee determines that an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. Once the benefit determination is made in accordance with the foregoing, the Committee shall notify the Claimant in writing: (a) that the Claimant's requested benefit determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion adverse, in whole or in part, to the Claimant's requested benefit determination. The Committee's notice of adverse benefit determination must be written in a manner calculated to be understood by the Claimant, and it must contain: (i) the specific reason(s) for the adverse benefit determination; (ii) reference to the specific provisions of the Plan upon which such adverse benefit determination was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) a description of the Plan's claim review procedures set forth in Section 12.3 and the time limits applicable to such procedures, including a statement of the Claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. Section 12.3: Review Of A Denied Claim. Within 60 days after receiving a notice from the Committee of an adverse benefit determination, a Claimant may file with the Board of Directors a written request for a review of such adverse determination. Thereafter, but not later than 30 days after the review procedure began, the Claimant: (a) may submit written comments, documents, records, and other information relating to the claim for benefits; (b) shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits; and/or (c) may request a hearing, which the Board of Directors, in its discretion, may grant. -48- The Board of Directors shall take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. Section 12.4: Decision On Review. The Board of Directors shall render its decision on review within a reasonable time, and not later than 60 days after the receipt of the Claimant's review request, unless a hearing is held or other special circumstances require additional time, in which case the Board of Directors' decision must be rendered within 120 days after the receipt of the Claimant's review request. If the Board of Directors determines that an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 60-day period. In no event shall such extension exceed a period of 60 days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Board of Directors expects to render the benefit determination on review. The Board of Directors' decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) reference to the specific Plan provisions upon which the decision was based; (c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits; (d) a statement of the Claimant's right to bring an action under ERISA Section 502(a) concerning an adverse benefit determination; and (e) such other matters as the Board of Directors deems relevant. For purposes of this Article, a document, record, or other information shall be considered "relevant" to a Claimant's claim if such document, record, or other information was relied upon in making the benefit determination; was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record, or other information was relied upon in making the benefit determination; or demonstrates compliance with the administrative processes and safeguards required under ERISA in making the benefit determination. -49- ARTICLE XIII MISCELLANEOUS Section 13.1: Contributions Not Recoverable. Subject to the next two sentences, it shall be impossible for any part of the Trust's principal or income to be used for, or diverted to, purposes other than the exclusive benefit of the Participants or their Beneficiaries. Despite any other provision of the Plan, the Company shall be entitled to recover (within one year of the specified event): (a) any contribution made to the Trust if (i) the Commissioner of Internal Revenue, or his delegate, determines that the Plan and the Trust do not meet the applicable requirements of the Code upon their initial qualification, with the result that the Trust is not exempt from federal income tax, (ii) such contribution was conditioned on such initial qualification of the Plan and Trust, (iii) the application for determination of such initial qualification was made within the time prescribed by law for filing the Company's tax return for the taxable year in which the Plan and Trust was adopted, or such later date as the Secretary of the Treasury may prescribe, and (iv) such contribution is returned to the Company within one year after the date the initial qualification is denied; (b) any contribution by the Company that was made by a mistake of fact, provided that such a contribution is returned to the Company within one year of the contribution; (c) any contribution by the Company (or any portion of it) that was disallowed by the Internal Revenue Service as a deduction, provided that such contribution (or such portion of it), to the extent disallowed, is returned to the Company within one year of the disallowance of the deduction; and (d) upon termination of the Plan, any assets held in a suspense account pursuant to SECTION 4.13(c)(iii). SUBSECTIONS (b) and (c) above shall be operative only if, and to the extent, expressly authorized by the applicable Regulations, or a Revenue Ruling, Revenue Procedure, or other official promulgation of the Internal Revenue Service. Section 13.2: Limitation On Participants' Rights. Participation in the Plan and Trust shall not give any Employee the right to be retained in the Company's employ or any right or interest in the Trust other than as provided in the Plan. The Company reserves the right to dismiss any Employee without any liability for any claim against the Trust (except to the extent provided in the Plan) or against the Company. All benefits payable under the Plan shall be provided solely from the assets of the Trust. -50- Section 13.3: Receipt Or Release. Any payment to any Participant or Beneficiary pursuant to the Plan shall, to the extent of it, be in full satisfaction of all claims against the Trustee, the Committee, the Board of Directors, and the Company, and the Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to sign a receipt and release to such effect. Section 13.4: Nonassignability. (a) None of the benefits, payments, proceeds or claims of any Participant or Beneficiary shall be subject to any claim of any creditor and, in particular, they shall not be subject to attachment or garnishment or other legal process by any creditor. In addition, no Participant or Beneficiary shall have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds that he or she may expect to receive, contingently or otherwise, under the Plan. (b) Any restriction or prohibition against the assignment or alienation of benefits under the Plan shall not apply to (i) a "qualified domestic relations order" ("QDRO"), as that term is defined in Code Section 414(p), or (ii) a benefit reduction or offset in accordance with Code Section 401(a)(13)(C). To the extent provided in any QDRO, a former spouse of a Participant shall be treated as the spouse or surviving spouse of such Participant for all purposes under the Plan. Notwithstanding any other provision in this Plan, a lump sum distribution may be made to an alternate payee under a QDRO at any time after the Committee has determined that such QDRO satisfies the requirements of Code Section 414(p) and Section 206(d) of ERISA, and regardless of whether or not the Participant who is a party to such QDRO is then eligible to receive a distribution under the Plan. Section 13.5: Governing Law. The Plan and the Trust shall be construed, administered, and governed in all respects under and by applicable federal law and, if they are not inconsistent with federal law, the laws of the State of California. If any provision is susceptible to more than one interpretation, the controlling interpretation shall be the one that is consistent with the Plan being a qualified plan under Code Section 401. If any provision of the Plan is held by a court of competent jurisdiction to be invalid or unenforceable, the other provisions shall continue to be fully effective. Section 13.6: Headings. Headings and subheadings in the Plan are inserted for convenience of reference only, and they are not to be considered in construing the provisions of the Plan. Section 13.7: Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original, and all such counterparts -51- shall constitute but one and the same document, which may be sufficiently evidenced by any one counterpart. Section 13.8: Successors And Assigns. This Agreement shall inure to the benefit of, and be binding upon, the parties to it, and their successors and assigns. Section 13.9: Gender And Number. As used in the Plan, the masculine, feminine and neuter gender, and the singular and plural number, each include the other(s), unless the context indicates otherwise. Section 13.10: Merger, Consolidation Or Transfer Of Plan Assets. The Plan shall not be merged or consolidated with, nor shall its assets or liabilities be transferred to, any other plan (the "new plan") unless each Participant would receive in such new plan a benefit immediately after such merger, consolidation or transfer, if such new plan were then terminated, that is equal to, or greater than, the benefit he or she would have been entitled to receive immediately before such merger, consolidation or transfer, if the Plan had been terminated then. Section 13.11: Joinder Of Parties. In any action or other judicial proceeding affecting the Plan, it shall be necessary to join as parties only the Trustee, the Committee and the Company, and no Participant or other person having an interest in the Plan shall be entitled to any notice or service of process. Section 13.12: The Trust. This Plan and the Trust are both part of and constitute a single integrated employee benefit plan and trust and shall be construed together. Section 13.13: Participation By Affiliated Companies. Upon the written consent of the Board of Directors, any Affiliated Company may adopt the Plan. Any Affiliated Company that executes the Signature Page of the Plan shall, without the need for any further act, be deemed to have adopted the Plan with the consent of the Board of Directors. Section 13.14: Special Requirements For USERRA. (a) Despite any other provision of the Plan, an Employee re-employed under Chapter 43 of Title 38, United States Code ("USERRA") shall not incur a Break in Service by reason of such Employee's period of Qualified Military Service. -52- (b) Each period of Qualified Military Service served by an Employee shall, upon reemployment under USERRA with the Company, constitute service with the Company for the purpose of determining the nonforfeitability of the Employee's accrued benefits under the Plan and for the purpose of determining the accrual of benefits under the Plan. (c) An Employee re-employed under USERRA shall be entitled to accrued benefits that are contingent on the making of, or derived from, employee contributions or elective deferrals only to the extent the Employee makes payment to the Plan with respect to such contributions or deferrals. No such payment may exceed the amount the Employee would have been permitted or required to contribute had the Employee remained continuously employed by the Company throughout the period of Qualified Military Service. Any payment to the Plan shall be made during the period beginning on the date of reemployment and whose duration is three times the period of the Qualified Military Service (but not greater than five years). (d) For purposes of this Section, "Qualified Military Service" shall mean any service in the uniformed services (as defined in USERRA) by any Employee if such Employee is entitled to reemployment rights under USERRA with respect to such service. * * * * * * * * * [Signature Page Follows] -53- Signature Page The Company has signed the Plan on the date indicated below, to be effective as of the Effective Date. "Company" Dated: ___________, 2001 CATHAY BANCORP, INC. By _________________________________ Its _____________________________ Dated: ___________, 2001 CATHAY BANK By _________________________________ Its _____________________________ -54- EX-22.1 6 a79485ex22-1.txt EXHIBIT 22.1 EXHIBIT 22.1 Subsidiaries of Bancorp - - CATHAY BANK A California Corporation, 100% owned by Cathay Bancorp, Inc. - CATHAY INVESTMENT COMPANY A California Corporation, 100% owned by Cathay Bank - CATHAY SECURITIES FUND, INC. A Maryland Corporation, 100% owned by Cathay Bank EX-23.1 7 a79485ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Cathay Bancorp, Inc. We consent to the incorporation by reference in the registration statement (No. 033-33767) on Form S-3 and the registration statement (No. 33-87225) on Form S-8 of our report dated January 16, 2002, relating to the consolidated statements of condition of Cathay Bancorp, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of Cathay Bancorp, Inc. /s/ KPMG LLP Los Angeles, California March 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2001

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware		95-4274680
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


				Page

PART I					3
	ITEM 1. BUSINESS				3
		Business of Bancorp			3
			Overview		3
			Competition		3
			Employees		4
		Business of the Bank			4
			General		4
		Securities			6
		Loans			6
		Asset Quality			6
		Deposits			7
		Borrowings			7
		Return on Equity and Assets			7
		Interest Rates and Differentials			7
		Analysis of Changes in Net Interest Income			7
		Commitments and Lines of Credit			7
		Subsidiaries of Cathay Bank			7
		Expansion			8
		Competition			8
		Employees			9
		Principal Officers			9
		Regulation			10
			Regulation of Bancorp and the Bank		10
			Regulatory Environment		10
			Fiscal and Monetary Policies		11
			Bank Holding Company Regulation		11
			Financial Services Modernization Legislation		11
			USA Patriot Act		14
			Other Banking Regulations		14
	ITEM 2. PROPERTIES				18
	ITEM 3. LEGAL PROCEEDINGS				20
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS				20
PART II					20
	ITEM 5. MARKET FOR CATHAY BANCORP’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS				20
	ITEM 6. SELECTED FINANCIAL DATA				22


				Page

	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS				23
		General			23
		Results of Operations			24
		Review of Financial Condition			32
		Risk Elements of the Loan Portfolio			38
		Capital Resources			48
		Liquidity			49
		Critical Accounting Policies			50
		Recent Accounting Pronouncements			50
		Factors That May Affect Future Results			51
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK				55
		Market Risk			55
		Quantitative Information About Interest Rate Risk			57
		Financial Derivatives			58
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA				59
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE				59
PART III					59
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT				59
	ITEM 11. EXECUTIVE COMPENSATION				59
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT				59
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS				60
PART IV					61
	ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K				61
	SIGNATURES				62
			Index To Consolidated Financial Statements		64


			Present Position and Principal Occupation
Name	Age		During the Past Five Years

Dunson K. Cheng		57	Chairman of the Board of Directors of each of Bancorp, Cathay Bank and Cathay Investment Company since 1994. President of Bancorp since 1990. President of Cathay Bank since 1985 and director of Cathay Bank since 1982. Secretary of Cathay Investment Company from 1985 until 1994; President of Cathay Investment Company since 1999; Chief Executive Officer 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.
Anthony M. Tang		48	Executive Vice President of Bancorp since 1994; Assistant Secretary of Bancorp from 1991 to April, 2001; Chief Financial Officer and Treasurer of Bancorp since 1990; and Senior Vice President of Bancorp from 1990 until 1994. Chief Lending Officer of Cathay Bank since 1985; director of Cathay Bank since 1986; Assistant Secretary of Cathay Bank from 1994 to April, 2001; Senior Executive Vice President of Cathay Bank since December 1998; Senior Vice President of Cathay Bank from 1990 until 1994; and Executive Vice President of Cathay Bank from 1994 to December 1998. Vice President and director of Cathay Securities Fund, Inc. since July 2000.
Irwin Wong		53	Executive Vice President-Branch Administration for Cathay Bank since 1999; Senior Vice President-Branch Administration of Cathay Bank from 1989 until 1999; and Vice President-Branch Administration for Cathay Bank from 1988 until 1989. Vice President and director of Cathay Securities Fund, Inc. since July 2000.
Elena Chan		51	Senior Vice President and Chief Financial Officer of Cathay Bank since 1992; Internal Auditor of Cathay Bank from 1985 to 1992. Secretary and director of Cathay Securities Fund, Inc. since July 2000.


	•	Southern California — 11 branches located in the cities of:


	•	Northern California — Seven branches located in the cities of:


Location		Sq. ft.		Purpose	Lease term

767 N. Hill Street			8,912	Administrative offices	2/01-1/04
	Los Angeles, CA (Rm 305-306, 308-309, 313-315, 320)*
767 N. Hill Street			1,800	Administrative offices	2/01-1/04
	Los Angeles, CA (Rm 301-302)
16025 E. Gale Ave.			4,483	Hacienda Heights	7/99-6/04 with one
	Ste. B-1			branch office	more 5-year option
	City of Industry, CA
2010 Tully Road			4,800	San Jose branch office	3/96-4/06 with two
	San Jose, CA				5-year options**
710 Webster Street			5,000	Oakland branch office	9/01-9/06 with one
	Oakland, CA				5-year option
1759 N. Milpitas Blvd.			3,121	Milpitas branch office	10/00-10/05 with
	Milpitas, CA				two 5-year options
15323 Culver Drive			4,450	Irvine branch office	10/94-4/09 with two
	Irvine, CA				5-year options
1095 El Camino Real			3,441	Millbrae branch office	1/00-12/04 with one
	Millbrae, CA				more 5-year option
800 N. Hill Street			8,707	Administrative offices	2/99-2/04
	Los Angeles, CA
43 E. Valley Blvd.			1,976	Valley/ Stoneman	11/01-11/06 with
	Alhambra, CA			branch office	three 5-year options
3288 Pierce Street			2,535	Berkeley/ Richmond	10/97-10/03 with
	Suite D-101			branch office	two 5-year options
	Richmond, CA
1195 S. Diamond Bar Blvd.			2,500	Diamond Bar branch	9/99-9/07
	Diamond Bar, CA			office
1701 Decoto Road			2,100	Union City branch	04/01-04/06
	Union City, CA			office
45 E. Broadway			6,450	New York Chinatown	1/97-12/06 with two
	New York, NY			branch office	five year option
10375 Richmond Avenue			1,797	Houston branch office	5/99-4/02
	Suite 1600, Houston, TX***
5402 Eight Avenue			2,700	Brooklyn branch office	09/01-08/11 with
	Brooklyn, NY				five year option
Room 902-3, 9/ F			700	Hong Kong	1/00-1/03 with one
	Printing House			representative office	2-year option
	6 Duddell Street, Central Hong Kong



	Years Ended December 31,


	2001				2000

	High		Low		High		Low

First quarter	$	64.50	$	45.13	$	80.00	$	38.50
Second quarter		59.72		43.63		49.00		40.75
Third quarter		58.00		45.65		50.00		43.00
Fourth quarter		66.94		52.80		59.38		47.00



	Year Ended
	December 31,

	2001		2000

First quarter	$	0.25	$	0.25
Second quarter		0.25		0.21
Third quarter		0.25		0.21
Fourth quarter		0.25		0.21



		Year Ended December 31,

		2001			2000			1999			1998			1997


		(Dollars in thousands, except share and per share data)
Selected Consolidated Financial Data
Income Statement(1)
Interest income		$	159,352		$	164,553		$	133,046		$	123,309		$	111,978
Interest expense			66,153			74,156			57,408			57,225			50,874

Net interest income before provision for loan losses			93,199			90,397			75,638			66,084			61,104
Provision for loan losses			6,373			4,200			4,200			3,600			3,600

Securities gains (losses)			2,157			1,085			(3	)		43			41
Other non-interest income			12,622			11,671			8,858			8,093			6,734
Non-interest expense			40,165			38,504			30,282			30,065			30,928

Income before income tax expense			61,440			60,449			50,011			40,555			33,351
Income tax expense			18,820			21,862			19,720			15,976			13,243

Net income		$	42,620		$	38,587		$	30,291		$	24,579		$	20,108

Net income per common share
	Basic	$	4.71		$	4.26		$	3.36		$	2.74		$	2.26
	Diluted	$	4.69		$	4.25		$	3.36		$	2.74		$	2.26
Cash dividends paid per common share		$	1.00		$	0.88		$	0.81		$	0.70		$	0.63
Weighted-average common shares
	Basic		9,053,895			9,056,751			9,013,428			8,967,188			8,915,936
	Diluted		9,082,630			9,073,885			9,017,760			8,968,230			8,915,936
Statement of Condition
Securities available-for-sale		$	248,958		$	177,796		$	160,991		$	239,928		$	216,158
Securities held-to-maturity			374,356			387,200			426,332			418,156			350,336
Net loans(2)			1,640,032			1,437,307			1,245,585			961,876			846,151
Total assets			2,453,114			2,206,834			1,995,924			1,780,898			1,622,462
Deposits			2,122,348			1,876,447			1,721,736			1,560,402			1,449,121
Securities sold under agreements to repurchase			22,114			68,173			46,990			16,436			23,419
Advances from Federal Home Loan Bank			30,000			10,000			30,000			30,000			—
Stockholders’ equity			246,011			214,787			179,109			156,652			135,877
Common Stock Data
Shares of common stock outstanding			8,978,869			9,074,365			9,033,583			8,988,760			8,941,743
Book value per share		$	27.40		$	23.67		$	19.83		$	17.43		$	15.20
Profitability Ratios
Return on average assets			1.82	%		1.81	%		1.63	%		1.44	%		1.29	%
Return on average stockholders’ equity			18.36			20.09			18.31			17.00			15.63
Dividend payout ratio			21.23			20.66			23.95			25.55			27.65
Average equity to average assets ratio			9.03			9.03			8.89			8.47			8.25
Efficiency ratio			37.20			37.33			35.84			40.51			45.20


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



		2001-2000									2000-1999
		Increase Decrease in									Increase Decrease in
		Net Interest Income Due to:									Net Interest Income Due to:

		Changes in			Changes in			Total			Changes in			Changes in			Total
		Volume			Rate			Change			Volume			Rate			Change


		(In thousands)
Interest-Earning Assets
	Federal funds sold and securities purchased under agreements to resell	$	938		$	(308	)	$	630		$	(1,584	)	$	389		$	(1,195	)
	Securities available-for-sale (Taxable)		(12	)		(487	)		(499	)		598			2,085			2,683
	Securities available-for-sale (Nontaxable)(2)		14			(3	)		11			14			1			15
	Securities held-to-maturity (Taxable)		(371	)		34			(337	)		(2,985	)		150			(2,835	)
	Securities held-to-maturity (Nontaxable)(2)		(29	)		(7	)		(36	)		60			(47	)		13
	Agency preferred stock(2)		1,169			(93	)		1,076			314			—			314
	Deposits with other banks		45			(29	)		16			23			4			27
	Loans(3)		18,119			(23,865	)		(5,746	)		20,756			11,801			32,557

Total increase (decrease) in interest income			19,873			(24,758	)		(4,885	)		17,196			14,383			31,579


Interest-Bearing Liabilities
	Savings deposits, NOW accounts, and others		524			(2,700	)		(2,176	)		606			943			1,549
	Time deposits		8,441			(10,346	)		(1,905	)		5,766			7,468			13,234
	Securities sold under agreements to repurchase		(564	)		(423	)		(987	)		(820	)		169			(651	)
	Other borrowed funds		(1,379	)		(1,361	)		(2,740	)		2,874			—			2,874
	Advances from Federal Home Loan Bank		(251	)		70			(181	)		(251	)		3			(248	)
	Mortgage indebtedness		(14	)		—			(14	)		(3	)		(7	)		(10	)

Total increase (decrease) in interest expense			6,757			(14,760	)		(8,003	)		8,172			8,576			16,748

Changes in net interest income		$	13,116		$	(9,998	)	$	3,118		$	9,024		$	5,807		$	14,831



	As of December 31, 2001					As of December 31, 2000

			Percentage of					Percentage of			Amount			Percentage
			Total Interest-					Total Interest-			Changed			Changed
			Earning					Earning			From			From
	Amount		Assets			Amount		Assets			2000 to 2001			2000 to 2001


	(Dollars in thousands)
Types of Interest-Earning Assets
Federal funds sold and securities purchased under agreements to resell	$	13,000		0.57	%	$	19,000		0.94	%	$	(6,000	)		(31.58	%)
Securities available-for-sale		248,958		10.93			177,796		8.79			71,162			40.02
Securities held-to-maturity		374,356		16.44			387,200		19.15			(12,844	)		(3.32	)
Deposits with other banks		1,399		0.06			899		0.04			500			55.62
Loans (net of allowance for loans losses and unamortized deferred loan fees)		1,640,032		72.00			1,437,307		71.08			202,725			14.10

Total interest-earning assets	$	2,277,745		100.00	%	$	2,022,202		100.00	%	$	255,543			12.64	%



			As of December 31,

			2001		2000		1999


			(In thousands)
Securities Available-for-Sale:
	U.S. Treasury securities		$	—	$	—	$	25
	U.S. government agencies			118,324		78,317		40,218
	State and municipal securities			—		1,277		540
	Mortgage-backed securities			8,543		13,207		14,634
	Collateralized mortgage obligations			2,705		5,804		7,823
	Asset-backed securities			10,395		10,370		16,448
	Money market fund			20,000		—		—
	Commercial paper			—		—		40,076
	Corporate bonds			60,334		60,370		34,376
	Equity stock			28,657		8,451		—

		Total	$	248,958	$	177,796	$	154,140

Securities Held-to-Maturity
	U.S. Treasury securities		$	—	$	—	$	24,998
	U.S. government agencies			50,017		64,689		64,373
	State and municipal securities			69,906		68,820		68,834
	Mortgage-backed securities			110,342		135,494		133,282
	Collateralized mortgage obligations			50,282		48,694		63,397
	Asset-backed securities			920		13,156		19,999
	Corporate bonds			73,031		56,347		51,449
	Other securities			19,858		—		—

		Total	$	374,356	$	387,200	$	426,332


	*Overview*


	*Competition*


	*Employees*


	*General*



			As of December 31, 2001

						After One			After Five
			One Year			Year to			Years to			Over Ten
			or Less			Five Years			Ten Years			Years			Total


			(Dollars in thousands)
Maturity Distribution:
	U.S. government agencies		$	—		$	45,762		$	72,562		$	—		$	118,324
	Mortgage-backed securities(1)			—			270			1,293			6,980			8,543
	Collateralized mortgage obligations(1)			—			—			1,498			1,207			2,705
	Asset-backed securities(1)			—			10,395			—			—			10,395
	Money market fund			20,000			—			—			—			20,000
	Corporate bonds			12,067			37,551			10,716			—			60,334
	Equity securities			28,657			—			—			—			28,657

		Total	$	60,724		$	93,978		$	86,069		$	8,187		$	248,958

Weighted-Average Yield:
	U.S. government agencies			—	%		4.94	%		6.96	%		—	%		6.16	%
	Mortgage-backed securities(1)			—			5.94			6.57			7.14			7.02
	Collateralized mortgage obligations(1)			—			—			5.92			6.01			5.96
	Asset-backed securities(1)			—			5.70			—			—			5.70
	Money market fund			2.02			—			—			—			2.02
	Corporate bonds			6.18			6.83			7.17			—			6.75
	Equity securities(2)			5.10			—			—			—			5.10

		Total		4.25	%		5.77	%		6.96	%		6.97	%		5.85	%



	Amount Outstanding as of December 31,

	2001			2000			1999			1998			1997


	(In thousands)
Type of Loans:
Commercial loans	$	506,128		$	442,181		$	395,138		$	370,539		$	338,285
Residential mortgage loans		235,914			220,720			207,725			184,158			154,692
Commercial mortgage loans		738,379			630,662			577,384			356,608			303,725
Real estate construction loans		166,417			142,048			62,516			40,738			41,736
Installment loans		20,322			27,329			25,498			29,165			26,611
Other loans		745			473			419			269			267

Gross loans		1,667,905			1,463,413			1,268,680			981,477			865,316

Less:
Allowance for loan losses		(23,973	)		(21,967	)		(19,502	)		(15,970	)		(15,379	)
Unamortized deferred loan fees		(3,900	)		(4,139	)		(3,593	)		(3,631	)		(3,786	)

Net loans	$	1,640,032		$	1,437,307		$	1,245,585		$	961,876		$	846,151


		Within One Year		One to Five Years		Over Five Years		Total


		(In thousands)
Commercial Loans
Floating rate		$	314,326	$	58,309	$	25,154	$	397,789
Fixed rate			84,210		19,851		3,714		107,775
Residential Mortgage Loans
Floating rate			—		451		51,793		52,244
Fixed rate			902		10,747		171,249		182,898
Commercial Mortgage Loans
Floating rate			74,906		170,965		296,182		542,053
Fixed rate			5,874		78,346		109,977		194,197
Real Estate Construction Loans
Floating rate			30,067		2,631		—		32,698
Fixed rate			95,624		37,660		—		133,284
Installment Loans
Floating rate			39		—		—		39
Fixed rate			6,725		13,545		13		20,283
Other Loans
Floating rate			—		—		—		—
Fixed rate			743		—		2		745

	Total loans	$	613,416	$	392,505	$	658,084	$	1,664,005

Floating rate		$	419,338	$	232,356	$	373,129	$	1,024,823
Fixed rate			194,078		160,149		284,955		639,182

	Total loans		613,416		392,505		658,084		1,664,005

Allowance for loan losses									(23,973	)

	Net loans							$	1,640,032



			December 31, 2001						December 31, 2000

			Commercial						Commercial
			Mortgage		Commercial		Other		Mortgage		Commercial		Other


			(In thousands)
Type of Collateral
	Single/multi-family residence		$	252	$	266	$	189	$	174	$	531	$	252
	Commercial real estate			122		839		—		2,277		1,139		—
	Land			1,821		—		—		2,403		—		—
	UCC			—		3,647		—		—		7,083		—
	Other			—		—		—		—		540		59
	Unsecured			—		102		—		—		231		7

		Total	$	2,195	$	4,854	$	189	$	4,854	$	9,524	$	318

Type of Business
	Real estate development		$	1,821	$	27	$	—	$	2,648	$	166	$	—
	Wholesale/ Retail			122		3,421		—		174		4,798		—
	Food/ Restaurant			—		701		—		—		2,005		—
	Import			—		400		—		—		2,092		—
	Investments			—		—		—		2,032		—		—
	Other			252		305		189		—		463		318

		Total	$	2,195	$	4,854	$	189	$	4,854	$	9,524	$	318



		At December 31, 2001						At December 31, 2000

		Recorded				Net		Recorded				Net
		Investment		Allowance		Balance		Investment		Allowance		Balance


		(In thousands)
Commercial		$	6,924	$	2,143	$	4,781	$	13,868	$	3,682	$	10,186
Commercial mortgage			12,426		1,764		10,662		13,208		1,881		11,327
Other			—		—		—		742		133		609

	Total	$	19,350	$	3,907	$	15,443	$	27,818	$	5,696	$	22,122



					Carrying Amount

	Percentage of				December 31,		December 31,
	Ownership		Acquisition Date		2001		2000


	(Dollars in thousands)
Las Brisas		49.50%		December 1993	$	—	$	189
Los Robles		99.00%		August 1995		386		393
California Corporate Tax Credit Fund III		32.50%		March 1999		12,426		14,127
Wilshire Courtyard		99.90%		May 1999		4,915		2,639

					$	17,727	$	17,348


		At December 31,
		2001

		(In thousands)
Less than three months		$	482,248
Three to six months			264,620
Six to twelve months			154,454
Over one year			21,331

	Total	$	922,653


		(In thousands)
2002		$	28,443
2003			10,023
2004			202
2005			117
2006			6

	Total	$	38,791


	*The Allowance for Loan Losses is an Estimate of Estimable and Probable Loan Losses. Actual Loan Losses in Excess of the Estimate Could Adversely Affect Our Net Income and Capital.*


	*Fluctuations in Interest Rates Could Adversely Affect Our Business.*


	*Inflation May Adversely Affect Our Financial Performance.*


	*As We Expand Our Business Outside of California Markets, We Will Encounter Risks That Could Adversely Affect Us.*


	*Adverse Economic Conditions in California and Other Regions Where the Bank Has Operations, Could Cause Us to Incur Losses.*


	*The Risks Inherent in Construction Lending May Adversely Affect Our Net Income.*


	*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.*


	*We Face Substantial Competition From Larger Competitors.*


	*Adverse Effects of Banking Regulations or Changes in Banking Regulations Could Adversely Affect Our Business.*


	*Adverse Effects of Changes in California Tax Law Could Cause Us to Incur Losses.*


	*Adverse Economic Conditions in Asia Could Cause Us to Incur Losses.*


	*Statutory Restrictions on Dividends and Other Distributions From the Bank May Adversely Impact Us.*