777 North Broadway, Los Angeles, CA 90012
T: (213) 625-4700 F: (213) 625-1368
www.cathaygeneralbancorp.com
www.cathaybank.com
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Continuing Growth
2012 Annual Report
60492_A.indd 1
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Forward-Looking StatementsOur annual report includes forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Words such as “aims,” “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “optimistic,” “plans,” “predicts,” “possible,” “potential,” “projects,” “pursue,” “seeks,” “shall,” “should,” and “will,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These and other factors are described in our Annual Report on Form 10-K (at Item 1A in particular) for the year ended December 31, 2012, which with a more detailed disclaimer under the caption “Forward-Looking Statements” is included with this annual report; in other reports filed with the Securities and Exchange Commission (the “SEC”); and in other filings we make with the SEC from time to time. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this annual report. We have no intention and undertake no obligation to update any forward-looking statements or to publicly announce any revision of any forward-looking statements to reflect future developments or events, except as required by law.Cathay General Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and other filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations, (626) 279-3286. These reports and filings are also available at http://www.cathaygeneralbancorp.com. The information contained on the websites at Cathay General Bancorp and Cathay Bank is not part of this annual report.Cathay Bank, Member FDIC, is an Equal Housing Lender.FDIC insurance coverage is limited to deposit accounts at Cathay Bank’s U.S. domestic branch locations.Non-Deposit Investment Products are NOT A DEPOSIT | NOT FDIC INSURED | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NO BANK GUARANTEE | MAY LOSE VALUE.in 2013Cathay Bank has been serving customers since 1962. With over 50 years of experience, we have learned that our customers value exceptional service, proactive relationship-building, and innovative banking solutions. Our vision is to do our best to build roads that lead our customers to success and continuous growth. 60492_A.indd 23/29/13 2:20 PM Cathay General Bancorp | 2012 Annual Report
pg. 1
60492_B.indd 1
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Cathay General Bancorp | 2012 Annual Report
pp. 2–3
60492_B.indd 2
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Online | MobileCathay Bank understands that time is valuable. That’s why we want to make it possible for our customers to bank conveniently and safely—anytime, anywhere. Our eBanking service allows our customers to manage their finances from the convenience of their computers or smartphone devices, and since transactions are completed via the Internet on a secure connection, our customers can have the peace of mind they deserve. Whether they are out of town or just on the go, with our eBanking service, our customers can see their account balances, review their transaction history, transfer funds, and even pay bills. 60492_B.indd 33/28/13 4:29 PM International Banking With over 40 years of international trade finance experience, Cathay Bank prides itself on having one of the most knowledgeable and experienced trade finance groups in the West. Our seasoned team of Trade Finance Specialists is supported by an extensive network of over 600 correspondent relationships with global banks. We are com-mitted to providing foreign exchange services to help our customers manage their foreign currency risks and facilitate their trade finance transactions.60492_B.indd 43/26/13 5:59 PM Cathay General Bancorp | 2012 Annual Report
pp. 4–5
60492_B.indd 5
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To see more of our locations, visit us at:
www.cathaybank.com
China: Shanghai
China: Hong Kong
Taiwan: Taipei
Cathay General Bancorp | 2012 Annual Report
pp. 6–7
60492_B.indd 6
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Northern California: Berkeley-Richmond Cupertino Dublin Millbrae Milpitas Oakland Sacramento San Francisco San Jose Union CityLocated for our clientsCathay Bank currently operates 31 branches in California, 8 branches in New York, 1 in Massachusetts, 2 in Texas, 3 in Washington State, 3 in the Chicago, Illinois area, 1 in New Jersey, 1 in Hong Kong, and a representative office in Shanghai and in Taipei.Washington: Bellevue Kent SeattleIllinois: Chicago Broadway Chicago Chinatown WestmontTexas: Houston PlanoNew York: Brooklyn Chatham Square Chinatown Flushing Midtown SoHoMassachusetts: BostonNew Jersey: EdisonSouthern California:Alhambra Arcadia Cerritos Valley City of Industry Diamond Bar El Monte Fountain Valley Irvine Los Angeles Monterey Park Northridge Ontario Orange Rowland Heights San Diego San Gabriel Torrance Westminster60492_B.indd 73/26/13 5:59 PM Supporting the communityThe American Red Cross | Prepare San Gabriel Valley Campaign Title SponsorAs part of our continuous commitment to assisting and bettering local communities, Cathay Bank has signed on with the American Red Cross to become the Title Sponsor for the Prepare San Gabriel Valley Campaign. Our goal is to provide financial and staff support over the next three years towards the success of this community-based preparedness initiative. We contributed $40,000 in 2012 and plan to contribute $50,000 in 2013 and $60,000 in 2014. Also, donation collections for the Red Cross at each branch location will be initiated during times of catastrophic disasters. Hurricane Sandy Relief Fund In an effort to aid customers residing in New York, New Jersey, and Massachusetts following the devastation of Hurricane Sandy, Cathay Bank offered immediate assis-tance by waiving or reimbursing account-related fees incurred during that stressful and difficult time. Cathay Bank also donated $25,000 to the American Red Cross as direct aid for those on the East Coast and offered to match employee contributions, dollar for dollar, raising a total of $36,508.98. Junior Achievement Finance Park | Los AngelesSince 2005, Cathay Bank has supported Junior Achievement’s financial literacy, entrepreneurship, and work-readiness programs. Our volunteers receive training and teach middle and high school students real-world lessons in financial responsi-bility, money management, and saving for the future. In 2012, the Cathay Bank Foundation donated $100,000 to Junior Achievement in support of these impactful and educational programs. As a result, the Cathay Bank Volunteer Lounge was developed and offers a comfortable space for all volunteers to convene and relax throughout their time spent at Finance Park, Los Angeles. Financial Literacy and Education in the Hispanic CommunityAs part of our service to the Hispanic community, free financial workshops conducted in Spanish were held throughout Southern California in the spring and winter of 2012. In collaboration with Operation HOPE and the Ontario Hispanic Chamber of Commerce (OHCC), we conducted a First Time Home Buyers seminar, aimed to provide information to those who were interested in obtaining a home loan for the first time. Addi tionally, we worked with the SBA Santa Ana District Office and the OHCC on a SBA Guaranteed Loan Programs seminar, focused on assisting small businesses, and taught classes to the students of Centro Latino for Literacy as part of our dedication to financial literacy. 60492_B.indd 83/28/13 4:29 PM Cathay General Bancorp | 2012 Annual Report
pp. 8–9
60492_B.indd 9
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As a consequence of the last severe recession, Cathay
Bank has been operating under regulatory actions that
restricted us from expansion. With much improved
performance, we are now able to open additional
branches. In 2013, we are planning to open a number of
new branches to extend our service to new markets.
In recent years, we have been working to provide our
customers with the latest advances in banking technol-
ogy. Along with Internet banking, we also offer mobile
banking that provides our customers with the conven-
ience of managing their accounts whenever and wher-
ever they choose. Currently, customers can use text
messaging to access account balances and transactions
from their mobile phones, as well as mobile web bank-
ing to view account balances and transaction histories,
transfer funds between their Cathay Bank accounts,
and pay bills. In 2013, we plan to upgrade our core data
processing system to a newer system that we expect
could enhance our customers’ experience with a range
of new capabilities and increase our operating efficiency.
In December 2012, we were pleased to announce that
Mr. Felix Fernandez became a director of both Cathay
General Bancorp and Cathay Bank. Mr. Fernandez has
over 30 years of banking experience, including serving
as a leader at Wells Fargo in various capacities for over
15 years until his recent retirement as Corporate Executive
Vice President and Regional President of Community
Banking for the Northern California region. Mr. Fernandez’s
invaluable experience in the banking industry and his
leadership skills should add to our Board’s capacity to
guide our future growth and development.
In closing, we are deeply saddened by the loss of our
Vice Chairman Emeritus, Mr. Wilbur K. Woo. During his
years at Cathay Bank, Mr. Woo served as a Vice President,
Senior Vice President, Administrative Vice President,
and Executive Vice President. He also served as a direc-
tor, corporate secretary, and Vice Chairman of Cathay
Bank and Cathay General Bancorp. Mr. Woo was instru-
mental in helping build and guide the growth of Cathay
Bank over the decades and was known for his leader-
ship in the Chinese-American community. His ability to
reach across cultures helped to open many doors for us
and to make Cathay Bank and Cathay General Bancorp
what we are today. We will greatly miss him.
We thank you for your support and look forward to
moving ahead together towards our centennial jubilee!
Dunson K. Cheng
Chairman of the Board,
President, and
Chief Executive Officer
Peter Wu
Executive Vice Chairman
of the Board and
Chief Operating Officer
Dear Fellow Stockholders:
The year 2012 marked our 50th year in business! We
celebrated this happy occasion with many of our stock-
holders, customers, and employees, past and present,
in a series of banquets across our service areas. While
reflecting on our long history together over the past 50
years, we used this opportunity to thank our stockhold-
ers for their support, our customers for their business,
and our employees for their dedication.
One particularly memorable event in 2012 was NASDAQ’s
invitation for our Board to participate in the ringing of
the closing bell of the NASDAQ Stock Market in New
York City on April 20. On that day, Cathay Bank’s logo
was prominently displayed on NASDAQ’s huge electronic
board overlooking Times Square. The ceremony was
broadcast on many national television channels and
reported on by various news media.
We also celebrated the year with net income of $117.4
million, an increase of 17.3% from $100.2 million in 2011.
The improved profitability came from healthy loan
growth, better margins, and continuing reduction in
non-performing assets. Commercial loans increased
$258.8 million, or 13.9%, to $2.1 billion, and residential
mortgages grew $174.0 million, or 17.9%, to $1.1 billion.
Our core deposits grew 13.9%, from $3.6 billion to $4.1
billion, and the net interest margin improved from 3.21%
to 3.28%. In 2012, our non-performing assets decreased
$149.7 million, or 49.8%, to $150.9 million, from $300.6
million in 2011, and net charge-offs were reduced by
77.9% to $14.7 million.
We continue to build on our strong capital base. As of
December 31, 2012, our Tier 1 risk-based capital ratio
was 17.36%, our total risk-based capital ratio was 19.12%,
and our Tier 1 leverage capital ratio was 13.82%. All ratios
far exceeded the well-capitalized minimum ratios under
all regulatory guidelines. As such, we were able to repur-
chase in March of this year for a purchase price of $129
million, plus accrued and unpaid dividends, 129,000,
or 50% of the 258,000 shares of our Series B Preferred
Stock that we had issued and sold in December 2008 to
the U.S. Treasury under the TARP Capital Pur chase Pro-
gram. It is our intention, subject to regulatory approval,
to repurchase the remaining 129,000 shares of our
Series B Preferred Stock later in 2013.
Cathay General Bancorp | 2012 Annual Report
pp. 10–11
60492_B.indd 11
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Board of Directors
Kelly L. Chan
Certified Public Accountant
Michael M.Y. Chang
Retired Attorney and former
Secretary of Cathay General
Bancorp and Cathay Bank
Dunson K. Cheng
Chairman of the Board,
President, and Chief Executive
Officer of Cathay General
Bancorp and Cathay Bank
Thomas C.T. Chiu
Medical Doctor
Nelson Chung
President of Pacific Communities
Builder, Inc.
Felix S. Fernandez
Retired Banker
Jane Jelenko
Retired Financial Services Partner
of KPMG LLP
Patrick S.D. Lee
Retired Real Estate Developer
Ting Y. Liu
Retired Investor
Joseph C.H. Poon
President of Edward
Properties, LLC
Anthony M. Tang
Executive Vice President of
Cathay General Bancorp,
Senior Executive Vice President
and Chief Lending Officer of
Cathay Bank
Peter Wu
Executive Vice Chairman
of the Board and Chief Operating
Officer of Cathay General
Bancorp and Cathay Bank
Cathay General Bancorp | 2012 Annual Report
pg. 12
60492_B.indd 12
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Financial Highlights
Net Income (in millions)
Assets (in billions)
Stockholders’ Equity (in billions)
$11.6
$100.2
$117.4
$10.8
$10.6
$10.7
$1.4
$1.5
$1.6
’10
’11
’12
’10
’11
’12
’10
’11
’12
(Dollars in thousands, except per share data)
2012
2011
Amount
Percentage
Increase/(Decrease)
For the Year
Net income
Net income attributable to common
$
117,438
$
100,150
$ 17,288
17.3 %
stockholders
100,950
83,713
17,237
20.6 %
Net income attributable to common
stockholders per common share
Cash dividends paid per common share
1.28
0.04
1.06
0.04
0.22
—
20.8 %
— %
At Year-End
Investment securities
Loans held-for-sale
Loans, net
Assets
Deposits
Stockholders’ equity
Book value per common share
Profitability Ratios
Return on average assets
Return on average stockholders’ equity
Capital Ratios
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Cathay General Bancorp | 2012 Annual Report
$ 2,065,248
$ 2,447,982
$(382,734)
(15.6) %
—
760
(760)
(100.0) %
7,235,587
6,844,483
391,104
10,694,089
10,644,864
7,383,225
1,621,057
17.12
7,229,131
1,507,186
15.75
49,225
154,094
113,871
1.37
5.7 %
0.5 %
2.1 %
7.6 %
8.7 %
1.11%
7.48%
17.36%
19.12%
13.82%
0.94%
6.78%
15.97%
17.85%
12.93%
locations
Corporate
Headquarters
777 N. Broadway
Los Angeles, CA 90012
Tel: (213) 625-4700
Fax: (213) 625-1368
Corporate
Center
9650 Flair Dr.
El Monte, CA 91731
Tel: (626) 279-3298
Fax: (626) 279-3295
soutHern
California
BranCHes
AlhAmbrA
601 N. Atlantic Blvd.
Alhambra, CA 91801
Tel: (626) 284-6556
Fax: (626) 282-3496
ArcAdiA
1139 W. Huntington Dr.
Arcadia, CA 91007
Tel: (626) 574-7767
Fax: (626) 574-3075
cerritos VAlley
18643 S. Pioneer Blvd.
Artesia, CA 90701
Tel: (562) 809-1300
Fax: (562) 809-1415
cit y of industry
1250 S. Fullerton Rd.
City of Industry,
CA 91748
Tel: (626) 810-1088
Fax: (626) 810-2188
diAmond bAr
1195 S. Diamond Bar Blvd.
Diamond Bar, CA 91765
Tel: (909) 860-8299
Fax: (909) 861-0920
el monte
9650 Flair Dr.
El Monte, CA 91731
Tel: (626) 279-3298
Fax: (626) 279-3295
fountAin VAlley
17860 Newhope St.,
Ste. 104
Fountain Valley,
CA 92708
Tel: (714) 619-0268
Fax: (714) 619-0278
irVine
15323 Culver Dr.
Irvine, CA 92604
Tel: (949) 559-7500
Fax: (949) 559-7508
irVine-bArrAncA
4010 Barranca Pkwy.,
Ste. 150
Irvine, CA 92604
Tel: (949) 551-1991
Fax: (949) 551-2438
los Angeles
777 N. Broadway
Los Angeles, CA 90012
Tel: (213) 625-4791
Fax: (213) 625-1368
cuPertino
10480 S. De Anza Blvd.
Cupertino, CA 95014
Tel: (408) 255-8300
Fax: (408) 255-8373
flushing
40-14/16 Main St.
Flushing, NY 11354
Tel: (718) 886-5225
Fax: (718) 961-7680
monterey PArk
250 S. Atlantic Blvd.
Monterey Park,
CA 91754
Tel: (626) 588-1911
Fax: (626) 281-2956
northridge
9045 Corbin Ave.,
Ste. 100
Northridge, CA 91324
Tel: (818) 886-3578
Fax: (818) 886-8057
ontArio
2000A S. Grove Ave.,
Ste. 103
Ontario, CA 91761
Tel: (909) 923-8081
Fax: (909) 923-5378
orAnge
2263 N. Tustin St.
Orange, CA 92865
Tel: (714) 283-8688
Fax: (714) 283-1988
rowlAnd heights
17432 Colima Rd.
Rowland Heights,
CA 91748
Tel: (626) 333-8533
Fax: (626) 336-4227
sAn diego
4688 Convoy St.
San Diego, CA 92111
Tel: (858) 277-2030
Fax: (858) 277-3339
sAn gAbriel
825 E. Valley Blvd.
San Gabriel, CA 91776
Tel: (626) 573-1000
Fax: (626) 573-0983
torrAnce
23211 Hawthorne Blvd.,
Ste. 108
Torrance, CA 90505
Tel: (310) 373-9070
Fax: (424) 212-5091
VAlley-stonemAn
43 E. Valley Blvd.
Alhambra, CA 91801
Tel: (626) 576-7600
Fax: (626) 576-5831
westminster
9121 Bolsa Ave.
Westminster, CA 92683
Tel: (714) 890-7118
Fax: (714) 898-9267
nortHern
California
BranCHes
berkeley-
richmond
3288 Pierce St.,
Ste. D-101
Richmond, CA 94804
Tel: (510) 526-8898
Fax: (510) 526-0639
dublin
7190 Regional St.
Dublin, CA 94568
Tel: (925) 551-8300
Fax: (925) 551-8310
millbrAe
1095 El Camino Real
Millbrae, CA 94030
Tel: (650) 652-0188
Fax: (650) 652-0180
milPitAs
1759 N. Milpitas Blvd.
Milpitas, CA 95035
Tel: (408) 262-0280
Fax: (408) 262-0780
oAklAnd
710 Webster St.
Oakland, CA 94607
Tel: (510) 208-3700
Fax: (510) 208-3727
sAcrAmento
5591 Sky Pkwy., Ste. 411
Sacramento, CA 95823
Tel: (916) 428-4890
Fax: (916) 428-4966
sAn frAncisco
540 Montgomery St.
San Francisco, CA 94111
Tel: (415) 398-3122
Fax: (415) 398-3117
sAn Jose
2010 Tully Rd.
San Jose, CA 95122
Tel: (408) 238-8880
Fax: (408) 238-2302
sAn Jose-brok Aw
1708 Oakland Rd.,
Ste. 400
San Jose, CA 95131
Tel: (408) 437-6188
Fax: (408) 437-6180
union cit y
1701 Decoto Rd.
Union City, CA 94587
Tel: (510) 675-9190
Fax: (510) 675-9312
new York
BranCHes
brooklyn
5402 8th Ave.
Brooklyn, NY 11220
Tel: (718) 435-0800
Fax: (718) 633-0128
chAthAm squAre
16-18 E. Broadway
New York, NY 10002
Tel: (212) 941-8500
Fax: (212) 941-8493
chinAtown
45 E. Broadway
New York, NY 10002
Tel: (212) 732-0200
Fax: (212) 732-7389
flushing (north)
36-54 Main St.
Flushing, NY 11354
Tel: (718) 683-3800
Fax: (718) 460-4509
flushing (south)
41-48 Main St.
Flushing, NY 11355
Tel: (718) 886-7500
Fax: (718) 886-6938
midtown
235 5th Ave.
New York, NY 10016
Tel: (212) 725-3800
Fax: (212) 683-7822
soho
129 Lafayette St.
New York, NY 10013
Tel: (646) 307-8300
Fax: (646) 613-8025
illinois
BranCHes
broAdwAy
4928 N. Broadway St.
Chicago, IL 60640
Tel: (773) 561-2300
Fax: (773) 561-3003
chicAgo
chinAtown
222 W. Cermak Rd.
Chicago, IL 60616
Tel: (312) 225-5991
Fax: (312) 225-2627
westmont
665 Pasquinelli Dr.,
#B104
Westmont, IL 60559
Tel: (630) 325-7988
Fax: (630) 325-7442
chicAgo
chinAtown
driVe-uP
250 W. Cermak Rd.
Chicago, IL 60616
wasHington
BranCHes
belleVue
13238 N.E. 20th St.,
Ste. 200
Bellevue, WA 98005
Tel: (425) 644-8822
Fax: (425) 644-6818
kent
18030 E. Valley Hwy.
Kent, WA 98032
Tel: (425) 656-0278
Fax: (425) 656-0687
seAttle
621 S. Lane St.
Seattle, WA 98104
Tel: (206) 223-2890
Fax: (206) 223-3735
texas
BranCHes
houston
9440 Bellaire Blvd.,
Ste. 118
Houston, TX 77036
Tel: (713) 278-9599
Fax: (713) 278-9699
PlAno
4100 Legacy Dr.,
Ste. 403
Plano, TX 75024
Tel: (972) 618-2000
Fax: (972) 618-7345
MassaCHusetts
BranCH
boston mAin
621 Washington St.
Boston, MA 02111
Tel: (617) 338-4700
Fax: (617) 338-1674
new JerseY
BranCH
edison
1775 Rte. 27
Edison, NJ 08817
Tel: (732) 985-8880
Fax: (732) 985-6689
edison wAlk-uP
1775 Rte. 27
Edison, NJ 08817
overseas
BranCH
hong kong
503 Central Tower
No. 28 Queen’s Rd.
Central, Hong Kong
Tel: (852) 3710-1333
Fax: (852) 2810-1652
overseas
representative
offiCes
tAiPei
6/F, Ste. 3
146 Sung Chiang Rd.
Taipei, Taiwan, R.O.C.
Tel: (886-2) 2537-5057
Fax: (886-2) 2537-5059
shAnghAi
Room 2610-A
Shanghai Kerry Centre
1515 Nanjing West Rd.
Shanghai 200040
People’s Republic
of China
Tel: (86-21) 5298-5656
Fax: (86-21) 5298-6161
registrar and
transfer
agent
American stock
transfer and
trust company
6201 15th Avenue
Brooklyn, NY 11219
Tel: (800) 937-5449
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-18630
Cathay General Bancorp
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
777 North Broadway,
Los Angeles, California
(Address of principal executive offices)
95-4274680
(I.R.S. Employer
Identification No.)
90012
(Zip Code)
Registrant’s telephone number, including area code:
(213) 625-4700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.01 par value
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes Í No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes ‘ No Í
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 Í No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Í No ‘
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. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer Í Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No Í
The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the
price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second
fiscal quarter (June 30, 2012) was $1,186,791,731. This value is estimated solely for the purposes of this cover page. The
market value of shares held by Registrant’s directors, executive officers, and Employee Stock Ownership Plan have been
excluded because they may be considered to be affiliates of the Registrant.
As of February 15, 2013, there were 78,785,472 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
•
Portions of Registrant’s definitive proxy statement relating to Registrant’s 2013 Annual Meeting of Stockholders
which will be filed within 120 days of the fiscal year ended December 31, 2012, are incorporated by reference into
Part III.
CATHAY GENERAL BANCORP
2012 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4. Mine Safety Disclosures.
Executive Officers of the Registrant.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Selected Financial Data.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
. . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Financial Statements and Supplementary Data.
Item 8.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. . . . . .
Item 9.
Item 9A. Controls and Procedures.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information.
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers and Corporate Governance.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14.
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services.
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15. Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Forward-Looking Statements
In this Annual Report on Form 10-K, the term “Bancorp” refers to Cathay General Bancorp and the term
“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 within the meaning of the
applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs,
projections, and assumptions concerning future results and events. We intend such forward-looking statements to
be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other
than statements of historical fact are “forward-looking statements” for purposes of federal and state securities
laws, including statements about anticipated future operating and financial performance, financial position and
liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities,
business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive
outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and
statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,”
“anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,”
“projects,” “seeks,” “shall,” “should,” “will,” “predicts,” “potential,” “continue,” “possible,” “optimistic,”
and variations of these words and similar expressions are intended to identify these forward-looking statements.
Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management
and are not guarantees of future performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from our historical experience and our present
expectations or projections. Such risks and uncertainties and other factors include, but are not limited to,
adverse developments or conditions related to or arising from:
• U.S. and international business and economic conditions;
•
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•
•
•
•
•
•
•
•
•
•
•
•
•
credit risks of lending activities and deterioration in asset or credit quality;
current and potential future supervisory action by bank supervisory authorities;
increased costs of compliance and other risks associated with changes in regulation and the current
regulatory environment, including the requirements of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), and the potential for substantial changes in the
legal, regulatory, and enforcement framework and oversight applicable to financial institutions in
reaction to recent adverse financial market events, including changes pursuant to the Dodd-Frank Act;
potential goodwill impairment;
liquidity risk;
fluctuations in interest rates;
inflation and deflation;
risks associated with acquisitions and the expansion of our business into new markets;
real estate market conditions and the value of real estate collateral;
environmental liabilities;
our ability to compete with larger competitors;
the possibility of higher capital requirements, including implementation of the Basel III capital
standards of the Basel Committee;
our ability to retain key personnel;
successful management of reputational risk;
natural disasters and geopolitical events;
1
•
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general economic or business conditions in California, Asia, and other regions where the Bank has
operations;
restrictions on compensation paid to our executives as a result of our participation in the TARP Capital
Purchase Program;
failures, interruptions, or security breaches of our information systems;
our ability to adapt our systems to technological changes, including successfully implementing our core
system conversion;
adverse results in legal proceedings;
changes in accounting standards or tax laws and regulations;
• market disruption and volatility;
•
•
•
restrictions on dividends and other distributions by laws and regulations and by our regulators and our
capital structure;
successfully raising additional capital, if needed, and the resulting dilution of interests of holders of our
common stock; and
the soundness of other financial institutions.
These and other factors are further described in this Annual Report on Form 10-K (at Item 1A in
particular), the Company’s other reports filed with the Securities and Exchange Commission (the “SEC”) and
other filings the Company makes with the SEC from time to time. Actual results in any future period may also
vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not
to place undue reliance on any forward-looking statements, which speak to the date of this report. We have no
intention and undertake no obligation to update any forward-looking statement or to publicly announce any
revision of any forward-looking statement to reflect future developments or events, except as required by law.
2
PART I
Item 1. Business.
Business of Bancorp
Overview
Cathay General Bancorp is a corporation that was organized in 1990 under the laws of the State of
Delaware. We are the holding company of Cathay Bank, a California state-chartered commercial bank (“Cathay
Bank” or the “Bank”), six limited partnerships investing in affordable housing investments in which the Bank is
the sole limited partner, and GBC Venture Capital, Inc. We also own 100% of the common stock of five statutory
business trusts created for the purpose of issuing capital securities. In the future, we may become an operating
company or acquire savings institutions, other 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 principal
place of business is currently located at 777 North Broadway, Los Angeles, California 90012, and our telephone
number at that location is (213) 625-4700. In addition, certain of our administrative offices are located in El
Monte, California, and our address there is 9650 Flair Drive, El Monte, California 91731. Our common stock is
traded on the NASDAQ Global Select Market and our trading symbol is “CATY”.
We are regulated as a bank holding company by the Board of Governors of the Federal Reserve System
(“Federal Reserve”). Cathay Bank is regulated as a California commercial bank by the California Department of
Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation (“FDIC”).
Subsidiaries of Bancorp
In addition to its wholly-owned bank subsidiary, the Bancorp has the following subsidiaries:
Cathay Capital Trust I, Cathay Statutory Trust I, Cathay Capital Trust II, Cathay Capital Trust III and
Cathay Capital Trust IV. The Bancorp established Cathay Capital Trust I in June 2003, Cathay Statutory Trust I
in September 2003, Cathay Capital Trust II in December 2003, Cathay Capital Trust III in March 2007, and
Cathay Capital Trust IV in May 2007 (collectively, the “Trusts”) as wholly-owned subsidiaries. The Trusts are
statutory business trusts. The Trusts issued capital securities representing undivided preferred beneficial interests
in the assets of the Trusts. The Trusts exist for the purpose of issuing the capital securities and investing the
proceeds thereof, together with proceeds from the purchase of the common securities of the Trusts by the
Bancorp, in Junior Subordinated Notes issued by the Bancorp. The Bancorp guarantees, on a limited basis,
payments of distributions on the capital securities of the Trusts and payments on redemption of the capital
securities of the Trusts. The Bancorp is the owner of all the beneficial interests represented by the common
securities of the Trusts. The purpose of issuing the capital securities was to provide the Company with a cost-
effective means of obtaining Tier 1 Capital for regulatory purposes. Because the Bancorp is not the primary
beneficiary of the Trusts, the financial statements of the Trusts are not included in our Consolidated Financial
Statements.
GBC Venture Capital, Inc. The business purpose of GBC Venture Capital, Inc. is to hold equity interests
(such as options or warrants) received as part of business relationships and to make equity investments in
companies and limited partnerships subject to applicable regulatory restrictions.
Competition
Our primary business is to act as the holding company for the Bank. Accordingly, we face the same
competitive pressures as those expected by the Bank. For a discussion of those risks, see “Business of the
Bank—Competition” below under this Item 1.
3
Employees
Due to the limited nature of the Bancorp’s activities as a bank holding company, the Bancorp currently does
not employ any persons other than Bancorp’s management, which includes the Chief Executive Officer and
President, the Chief Operating Officer, the Chief Financial Officer, Executive Vice Presidents, the Secretary,
Assistant Secretary, and the General Counsel. See also “Business of the Bank — Employees” below under this
Item 1.
Business of the Bank
General
Cathay Bank was incorporated under the laws of the State of California on August 22, 1961, was licensed by
the DFI (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 by the FDIC, but it is not a member of the Federal Reserve.
The Bank’s head office is located in the Chinatown area of Los Angeles, at 777 North Broadway, Los
Angeles, California 90012. In addition, as of December 31, 2012, the Bank had branch offices in Southern
California (20 branches), Northern California (11 branches), New York (eight branches), Massachusetts (one
branch), Texas (two branches), Washington (three branches), Illinois (three branch locations and one drive-
through location), New Jersey (one branch), and Hong Kong (one branch) and a representative office in Shanghai
and in Taipei. Deposit accounts at the Hong Kong branch are not insured by the FDIC. Each branch has loan
approval rights subject to the branch manager’s authorized lending limits. Current activities of the Shanghai and
Taipei representative offices are limited to coordinating the transportation of documents to the Bank’s head
office and performing liaison services.
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.
As a commercial bank, the Bank 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
agency securities, state and municipal securities, mortgage-backed securities, asset-backed securities, corporate
bonds, and other security investments. The Bank also provides letters of credit, wire transfers, forward currency
spot and forward contracts, traveler’s checks, safe deposit, night deposit, Social Security payment deposit,
collection, bank-by-mail, drive-up and walk-up windows, automatic teller machines (“ATM”), Internet banking
services, and other customary bank services.
The Bank primarily services individuals, professionals, and small to medium-sized businesses in the local
markets in which its branches are located and provides commercial mortgage loans, commercial loans, Small
Business Administration (“SBA”) loans, residential mortgage loans, real estate construction loans, equity lines of
credit, and installment loans to individuals for automobile, household, and other consumer expenditures.
Through Cathay Wealth Management, the Bank provides its customers the ability to trade securities online
and to purchase mutual funds, annuities, equities, bonds, and short-term money market instruments. All securities
and insurance products provided by Cathay Wealth Management are offered by, and all Financial Consultants are
registered with, Cetera Financial Services, a registered securities broker/dealer and licensed insurance agency
and member of the Financial Industry Regulatory Authority and Security Investor Protection Corporation. Cetera
Financial Services and Cathay Bank are independent entities. These products are not insured by the FDIC.
4
Securities
The Bank’s securities portfolio is managed in accordance with a written Investment Policy which addresses
strategies, types, and levels of allowable investments, and which is reviewed and approved by our Board of
Directors on an annual basis.
Our investment portfolio is managed to meet our liquidity needs through proceeds from scheduled
maturities and is also utilized for pledging requirements for deposits of state and local subdivisions, securities
sold under repurchase agreements, and Federal Home Loan Bank (“FHLB”) advances. The portfolio is
comprised of U.S. government agency securities, mortgage-backed securities, collateralized mortgage
obligations, obligations of states and political subdivisions, corporate debt instruments, asset-backed securities,
mutual funds, and equity securities.
Information concerning the carrying value, maturity distribution, and yield analysis of the Company’s
securities portfolio as well as 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’s Discussion and Analysis of Financial
Condition and Results of Operations,” and in Note 4 to the Consolidated Financial Statements.
Loans
The Bank’s Board of Directors and senior management establish, review, and modify the Bank’s lending
policies. These policies include (as applicable) an evaluation of a potential borrower’s financial condition, ability
to repay the loan, character, existence of secondary repayment source (such as guaranties), quality and
availability of collateral, capital, leverage capacity of the borrower, regulatory guidelines, market conditions for
the borrower’s business or project, and prevailing economic trends and conditions. Loan originations are
obtained through a variety of sources, including existing customers, walk-in customers, referrals from brokers or
existing customers, and advertising. While loan applications are accepted at all branches, the Bank’s centralized
document department supervises the application process including documentation of loans, review of appraisals,
and credit reports.
Commercial Mortgage Loans. Commercial mortgage loans are typically secured by first deeds of trust on
commercial properties. Our commercial mortgage portfolio includes primarily commercial retail properties,
shopping centers, and owner-occupied industrial facilities, and, secondarily, office buildings, multiple-unit
apartments, hotels, and multi-tenanted industrial properties.
The Bank also makes medium-term commercial mortgage loans which are generally secured by commercial
or industrial buildings where the borrower uses the property for business purposes or derives income from
tenants.
Commercial Loans. The Bank provides financial services to diverse commercial and professional businesses
in its market areas. Commercial loans consist primarily of short-term loans (normally with a maturity of up to
one year) to support general business purposes, or to provide working capital to businesses in the form of lines of
credit to finance trade. The Bank continues to focus primarily on commercial lending to small-to-medium size
businesses within the Bank’s geographic market areas. The Bank participates or syndicates loans, typically more
than $20 million in principal amount, with other financial institutions to limit its credit exposure. Commercial
loan pricing is generally at a rate tied to the prime rate, as quoted in The Wall Street Journal, or the Bank’s
reference rate.
SBA Loans. The Bank originates U.S. Small Business Administration (“SBA”) loans under the national
“preferred lender” status. Preferred lender status is granted to a lender which has made a certain number of SBA
loans and which, in the opinion of the SBA, has staff qualified and experienced in small business loans. As a
preferred lender, the Bank’s SBA Lending Group has the authority to issue, on behalf of the SBA, the SBA
guaranty on loans under the 7(a) program which may result in shortening the time it takes to process a loan. In
addition, under this program, the SBA delegates loan underwriting, closing, and most servicing and liquidation
authority and responsibility to selected lenders.
5
The Bank utilizes both the 504 program, which is focused toward long-term financing of buildings and other
long-term fixed assets, and the 7(a) program, which is the SBA’s primary loan program and which can be used
for financing of a variety of general business purposes such as acquisition of land and buildings, equipment,
inventory and working capital needs of eligible businesses generally over a 5- to 25-year term. The collateral
position in the SBA loans is enhanced by the SBA guaranty in the case of 7(a) loans, and by lower loan-to-value
ratios under the 504 program. The Bank has sold, and may in the future sell, the guaranteed portion of certain of
its SBA 7(a) loans in the secondary market. SBA loan pricing is generally at a rate tied to the prime rate, as
quoted in The Wall Street Journal.
Residential Mortgage Loans. The Bank originates single-family-residential mortgage loans. The single-
family-residential mortgage loans are comprised of conforming, nonconforming, and jumbo residential mortgage
loans, and are secured by first or subordinate liens on single (one-to-four) family residential properties. The
Bank’s products include a fixed-rate residential mortgage loan and an adjustable-rate residential mortgage loan.
Mortgage loans are underwritten in accordance with the Bank’s and regulatory guidelines, on the basis of the
borrower’s financial capabilities, independent appraisal of value of the property, historical loan quality, and other
relevant factors. As of December 31, 2012, approximately 63% of the Bank’s residential mortgages were for
properties located in California. It is the current practice of the Bank to sell all conforming fixed rate residential
first mortgages that meet Government Sponsored Agency guidelines to the Federal Home Loan Mortgage
Corporation on a cash basis as they are originated. The Bank retains all other mortgage loans it originates in its
portfolio. As such, the Bank doesn’t expect to be impacted by the expected regulations pertaining to risk
retention, since the Bank doesn’t securitize any of the loans it sells or retains.
Real Estate Construction Loans. The Bank’s real estate construction loan activity focuses on providing
short-term loans to individuals and developers, primarily for the construction of multi-unit projects. Residential
real estate construction loans are typically secured by first deeds of trust and guarantees of the borrower. The
economic viability of the projects, borrower’s credit worthiness, and borrower’s and contractor’s experience are
primary considerations in the loan underwriting decision. The Bank utilizes approved independent licensed
appraisers and monitors projects during the construction phase through construction inspections and a
disbursement program tied to the percentage of completion of each project. The Bank also occasionally makes
unimproved property loans to borrowers who intend to construct a single-family residence on their lots generally
within twelve months. In addition, the Bank makes commercial real estate construction loans to high net worth
clients with adequate liquidity for construction of office and warehouse properties. Such loans are typically
secured by first deeds of trust and are guaranteed by the borrower.
Home Equity Lines of Credit. The Bank offers variable-rate home equity lines of credit that are secured by
the borrower’s home. The pricing on the variable-rate home equity line of credit is generally at a rate tied to the
prime rate, as quoted in The Wall Street Journal, or the Bank’s reference rate. Borrowers may use this line of
credit for home improvement financing, debt consolidation and other personal uses.
Installment Loans. Installment loans tend to be fixed rate and longer-term (one-to-six year maturities).
These loans are funded primarily for the purpose of financing the purchase of automobiles and other personal
uses of the borrower.
Distribution and Maturity of Loans. Information concerning types, distribution, 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.
6
Asset Quality
The Bank’s lending and credit policies require management to review regularly the Bank’s loan portfolio so
that the Bank can monitor the quality of its assets. If during the ordinary course of business, management
becomes aware that a borrower may not be able to meet the contractual payment obligations under a loan, then
that loan is supervised more closely 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.
Under the Bank’s current policy, a loan will generally be placed on a non-accrual status if interest or
principal is past due 90 days or more, or in cases where management deems the full collection of principal and
interest unlikely. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed
and charged against current income, and subsequent payments received are generally first applied towards the
outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue
the accrual of interest on certain past due loans if partial payment is received 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. A non-accrual loan may
also be returned to accrual status if all principal and interest contractually due are reasonably assured of
repayment within a reasonable period and there has been a sustained period of payment performance, generally
six months.
Information concerning non-performing loans, restructured loans, allowance for credit 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 and Note 6 to the
Consolidated Financial Statements.
Deposits
The Bank offers a variety of deposit products in order to meet its customers’ needs. As of December 31,
2012, the Bank offered passbook accounts, checking accounts, money market deposit accounts, certificates of
deposit, individual retirement accounts, college certificates of deposit, and public funds deposits. These products
are priced in order to promote growth of deposits.
The Bank’s deposits are generally obtained from residents within its 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. From time to time, the Bank may offer
special deposit promotions. 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,” and in Note 9 to the Consolidated Financial
Statements.
Borrowings
Borrowings from time to time include securities sold under agreements to repurchase, the purchase of
federal funds, funds obtained as advances from the FHLB, borrowing from other financial institutions,
subordinated debt, and Junior Subordinated Notes. Information concerning the types, amounts, and maturity of
borrowings is included in Note 10 and Note 11 to the Consolidated Financial Statements.
7
Return on Equity and Assets
Information concerning the return on average assets, return on average stockholders’ equity, the average
equity to assets ratio and the dividend payout ratio is included in Part II—Item 7—“Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
Interest Rates and Differentials
Information concerning the interest-earning asset mix, average interest-earning assets, average interest-
bearing liabilities, and the yields on interest-earning assets and interest-bearing liabilities is included in
Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Analysis of Changes in Net Interest Income
An analysis of changes in net interest income due to changes in rate and volume is included in
Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Commitments and Letters of Credit
Information concerning the Bank’s outstanding loan commitments and letters of credit is included in
Note 14 to the Consolidated Financial Statements.
Expansion
We have engaged in expansion through acquisitions and may consider acquisitions in the future in order to
compete for new deposits and loans, and to be able to serve our customers more effectively
Subsidiaries of Cathay Bank
Cathay Real Estate Investment Trust (“CB REIT”) is a real estate investment trust subsidiary of the Bank
that was formed in January 2003 to provide the Bank with flexibility in raising capital. During 2003, the Bank
contributed $1.13 billion in loans and securities to CB REIT in exchange for 100% of the common stock of CB
REIT. CB REIT sold $4.4 million in 2003 and $4.2 million in 2004 of its 7.0% Series A Non-Cumulative
preferred stock to accredited investors. During 2005, CB REIT repurchased $131,000 of its preferred stock. At
December 31, 2012, total assets of CB REIT were consolidated with the Company and totaled approximately
$1.47 billion.
Cathay Community Development Corporation (“CCDC”) is a wholly-owned subsidiary of the Bank and was
incorporated in September 2006. The primary mission of CCDC is to help in the development of low-income
neighborhoods in the Bank’s California and New York service areas by providing or facilitating the availability
of capital to businesses and real estate developers working to renovate these neighborhoods. In October 2006,
CCDC formed a wholly-owned subsidiary, Cathay New Asia Community Development Corporation
(“CNACDC”), for the purpose of assuming New Asia Bank’s pre-existing New Markets Tax Credit activities in
the greater Chicago area by providing or facilitating the availability of capital to businesses and real estate
developers working to renovate these neighborhoods. CNACDC has been certified as a community development
entity and is seeking to participate in the U.S. Treasury Department's New Markets Tax Credit program.
Cathay Holdings LLC (“CHLLC”) was incorporated in December 2007, Cathay Holdings 2 LLC
(“CHLLC2”) was incorporated in January 2008, and Cathay Holdings 3 LLC (“CHLLC3”) was incorporated in
December 2008. They are wholly-owned subsidiaries of the Bank. The purpose of these subsidiaries is to hold
other real estate owned in the state of Texas that was transferred from the Bank. Since February 2011, CHLLC,
CHLLC2, and CHLLC3 have not owned any real estate.
8
Competition
We face substantial competition for deposits, loans and other banking services, as well as acquisitions,
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. These banks and financial
institutions have greater resources than we do, including the ability to finance advertising campaigns and allocate
their investment assets to regions of higher yield and demand and make acquisitions. By virtue of their larger
capital bases, they have substantially greater lending limits than we do 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, brokerage houses, insurance companies, mortgage
companies, credit unions, credit card companies and other financial and non-financial institutions and entities.
The recent consolidation of certain competing financial institutions and the conversion of certain investment
banks to bank holding companies have increased the level of competition among financial services companies
and may adversely affect our ability to market our products and services. Significant increases in the costs of
monitoring and ensuring compliance with new banking regulations and the necessary costs of upgrading
information technology and data processing capabilities can have a disproportionate impact on our ability to
compete with larger institutions.
To compete with other financial institutions in its primary service areas, the Bank relies principally upon
local promotional activities, personal contacts by its officers, directors, employees, and stockholders, extended
hours on weekdays, Saturday banking in certain locations, Internet banking, an Internet website
(www.cathaybank.com), and certain other specialized services. The content of our website is not incorporated
into and is not part of this Annual Report on Form 10-K.
If a proposed loan exceeds the Bank’s internal lending limits, the Bank has, in the past, and may in the
future, arrange the loan on a participation or syndication basis with correspondent banks. The Bank also assists
customers requiring other services not offered by the Bank to obtain these services from its correspondent banks.
In California, one larger Chinese-American bank competes for loans and deposits with the Bank and at least
two super-regional banks compete with the Bank for deposits. 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. See discussion below in Part I—Item 1A—“Risk Factors.”
Employees
As of December 31, 2012, the Bank and its subsidiaries employed approximately 1,092 persons, including
480 banking officers. None of the employees are represented by a union. We believe that our employer-employee
relations are good.
Available Information
We invite you to visit our website at www.cathaygeneralbancorp.com, to access free of charge the
Bancorp’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, all of which are made available as soon as reasonably practicable after we
electronically file such material with or furnish it to the Securities and Exchange Commission (the “SEC”). In
addition, you can write to us to obtain a free copy of any of those reports at Cathay General Bancorp, 9650 Flair
Drive, El Monte, California 91731, Attn: Investor Relations. These reports are also available through the SEC’s
Public Reference Room, located at 100 F Street NE, Washington, DC 20549 and online at the SEC’s website,
located at www.sec.gov. Investors can obtain information about the operation of the SEC’s Public Reference
Room by calling 800-SEC-0300.
9
Regulation and Supervision
General
The Bancorp and the Bank are subject to significant regulation and restrictions by federal and state laws and
regulatory agencies. This regulation is intended primarily for the protection of depositors and the deposit
insurance fund, and secondarily for the stability of the U.S. banking system. It is not intended for the benefit of
stockholders of financial institutions. The following discussion of statutes and regulations is a summary and does
not purport to be complete nor does it address all applicable statutes and regulations. This discussion is also
qualified in its entirety by reference to the full text and to the implementation and enforcement of the statutes and
regulations referred to in this discussion.
Additional initiatives may be proposed or introduced before Congress, the California Legislature, and other
governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation, and
competitive relationship among financial institutions and may subject us to increased supervision and disclosure
and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and
regulations and policies to implement and enforce existing legislation. It cannot be predicted whether, or in what
form, any such legislation or regulatory changes in policy may be enacted or the extent to which the business of
the Bank would be affected thereby. In addition, the outcome of examinations, any litigation, or any
investigations initiated by state or federal authorities may result in necessary changes in our operations and
increased compliance costs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act financial reform legislation (the “Dodd-
Frank Act”) significantly revised and expanded the rulemaking, supervisory and enforcement authority of the
federal bank regulatory agencies. The numerous rules and regulations that have been promulgated and are yet to
be promulgated and finalized under the Dodd-Frank Act are likely to significantly impact our operations and
compliance costs. The Dodd-Frank Act followed the Emergency Economic Stabilization Act of 2008 (“EESA”)
and the American Recovery and Reinvestment Act of 2009 (“ARRA”) in response to the economic downturn and
financial industry instability.
The Dodd-Frank Act impacts many aspects of the financial industry and, in many cases, will impact larger
and smaller financial institutions and community banks differently over time. Many of the following key
provisions of the Dodd-Frank Act affecting the financial industry are now either effective or are in the proposed
rule or implementation stage:
•
•
•
•
•
the creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve
interagency cooperation;
expanded the authority of the Federal Deposit Insurance Corporation (“FDIC”) to conduct the orderly
liquidation of certain systemically significant non-bank financial companies in addition to depository
institutions;
the establishment of strengthened capital and liquidity requirements for banks and bank holding
companies, including minimum leverage and risk-based capital requirements no less than the strictest
requirements in effect for depository institutions as of the date of enactment;
the requirement by statute that bank holding companies serve as a source of financial strength for their
depository institution subsidiaries;
limitations, or significant burdens and compliance and other costs, on activities traditionally conducted
by banking organizations, such as originating and securitizing mortgage loans and other financial assets,
arranging and participating in swap and derivative transactions and proprietary trading and investing in
private equity and other funds (the “Volcker Rule”);
10
•
•
•
•
•
•
•
•
the termination of investments by the U.S. Treasury under the Troubled Asset Relief Program
(“TARP”);
the elimination and phase out of trust preferred securities from Tier 1 capital with certain exceptions;
a permanent increase of FDIC deposit insurance to $250,000 and an extension of federal deposit
coverage through 2012 for the full net amount held by depositors in business checking and other non-
interesting bearing transaction accounts;
changes in the calculation of FDIC deposit insurance assessments, such that the assessment base will no
longer be the institution’s deposit base, but instead, will be its average consolidated total assets less its
average tangible equity;
the elimination of remaining barriers to de novo interstate branching by banks;
expanded restrictions on transactions with affiliates and insiders under Section 23A and 23B of the
Federal Reserve Act and lending limits for derivative transactions, repurchase agreements, and
securities lending and borrowing transactions;
provisions that affect corporate governance and executive compensation at most United States publicly
traded companies, including (i) stockholder advisory votes on executive compensation, (ii) executive
compensation “clawback” requirements for companies listed on national securities exchanges in the
event of materially inaccurate statements of earnings, revenues, gains or other criteria, (iii) enhanced
independence requirements for compensation committee members, and (iv) giving the SEC authority to
adopt proxy access rules which would permit stockholders of publicly traded companies to nominate
candidates for election as director and have those nominees included in a company’s proxy statement;
and
the establishment of the Consumer Finance Protection Bureau (“CFPB”) with responsibility for
promulgating regulations designed to protect consumers’ financial interests and prohibit unfair,
deceptive, and abusive acts and practices by financial institutions, and with authority to directly examine
those financial institutions with $10 billion or more in assets for compliance with consumer laws and
regulations.
In general, more stringent capital, liquidity and leverage requirements are expected to impact our business
as the Dodd-Frank Act is fully implemented. The federal agencies have issued proposed rules which will apply
directly to larger institutions with more than $10 billion in assets, such as regulations of the Board of Governors
of the Federal Reserve for financial institutions deemed systemically significant, Federal Reserve and FDIC rules
requiring stress tests and Federal Reserve rules to implement the Volcker Rule. However, requirements and
policies imposed on larger institutions may, in some cases, become “best practice” standards for smaller
institutions. Therefore, as a result of the changes required by the Dodd-Frank Act, the profitability of our
business activities may be impacted and we may be required to make changes to certain of our business practices.
These changes may also require us to devote significant management attention and resources to evaluate and
make any changes necessary to comply with new statutory and regulatory requirements.
We participated in TARP, which was designed to bolster eligible healthy institutions by injecting capital
into these institutions, so that we could continue to lend and support our current and prospective clients. Under
the terms of our participation, we received $258 million in exchange for the issuance of preferred stock (the
“Series B Preferred Stock”) and a warrant to purchase common stock and thereby became subject to various
requirements, including certain restrictions on paying dividends on our common stock and repurchasing our
equity securities, unless the U.S. Treasury has consented.
11
In order to participate in TARP, financial institutions were required to adopt certain standards for executive
compensation and corporate governance. ARRA also included a wide variety of programs intended to stimulate the
economy and provide for extensive infrastructure, energy, health, and education needs. ARRA imposes certain stringent
executive compensation and corporate expenditure limits on all TARP recipients until the U.S. Treasury is repaid. We
have complied with the compensation provisions of TARP and ARRA and have certified as to such compliance in the
exhibits attached to this report pursuant to Section 111(b) of EESA. We contemplate that we may be able to partially or
fully redeem the Series B Preferred Stock in 2013 depending on our earnings and receipt of approval by our regulators to
receive dividends from the Bank that would be used to repurchase our Series B Preferred Stock.
Bank Holding Company and Bank Regulation
The Bancorp is a bank holding company within the meaning of the Bank Holding Company Act and is registered as such
with the Federal Reserve. The Bancorp is also a bank holding company within the meaning of Section 3700 of the
California Financial Code and is subject to examination by, and may be required to file reports with, the California
Department of Financial Institutions (“DFI”). As a California commercial bank the deposits of which are insured by the
FDIC, the Bank is subject to regulation, supervision, and regular examination by the DFI and by the FDIC, as the Bank’s
primary federal regulator, and must additionally comply with certain applicable regulations of the Federal Reserve.
Bank holding companies and their bank and non-bank subsidiaries are subject to significant regulation and
restrictions by federal and state laws and regulatory agencies. These laws, regulations and restrictions, which may affect
the cost of doing business, limit permissible activities and expansion or impact the competitive balance between banks
and other financial services providers, are intended primarily for the protection of depositors and the FDIC’s Deposit
Insurance Fund, and secondarily for the stability of the U.S. banking system. They are not intended for the benefit of
stockholders of financial institutions. The following discussion of key statutes and regulations to which the Bancorp and
the Bank are subject is a summary and does not purport to be complete nor does it address all applicable statutes and
regulations. This discussion is qualified in its entirety by reference to the full statutes and regulations.
The wide range of requirements and restrictions contained in both federal and state banking laws include:
• Requirements that bank holding companies and banks file periodic reports.
• Requirements that bank holding companies and banks meet or exceed minimum capital requirements. See Part
1—Item 1—“Business—Capital Requirements.”
• Requirements that bank holding companies serve as a source of financial and managerial strength for their
banking subsidiaries. In addition, the regulatory agencies have “prompt corrective action” authority to limit
activities and require a limited guaranty of a required bank capital restoration plan by a bank holding company if
the capital of a bank subsidiary falls below capital levels required by the regulators.
•
•
•
Limitations on dividends payable to stockholders. The Bancorp’s ability to pay dividends on both its common
and preferred stock are subject to legal and regulatory restrictions. A substantial portion of the Bancorp’s funds
to pay dividends or to pay principal and interest on our debt obligations is derived from dividends paid by the
Bank.
Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and
regulatory restrictions. The federal banking agencies have indicated that paying dividends that deplete a
depositary institution’s capital base to an inadequate level would be an unsafe and unsound banking practice.
Moreover, the federal agencies have issued policy statements that provide that bank holding companies and
insured banks should generally only pay dividends out of current operating earnings.
Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet standards
applicable to internal controls, information systems, internal audit, loan documentation, credit underwriting,
interest rate exposure, asset growth, and compensation, as well as other operational and management standards.
These safety and soundness requirements give bank regulatory agencies significant latitude in exercising their
supervisory authority and their authority to initiate informal or formal enforcement action.
12
• Requirements for notice, application and approval, or non-objection of acquisitions and activities
conducted directly or in subsidiaries of the Bancorp or the Bank.
• Compliance with the Community Reinvestment Act (“CRA”). The CRA requires that banks help meet
the credit needs in their communities, including the availability of credit to low and moderate income
individuals. If the Bank fails to adequately serve its communities, penalties may be imposed, including
denials of applications for branches, for adding subsidiaries and affiliates, or for the merger with or
purchase of other financial institutions. In its last reported examination by the FDIC in March, 2011, the
Bank received a CRA rating of “Satisfactory.”
• Compliance with the Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws.
These laws and regulations require financial institutions to assist U.S. government agencies in detecting
and preventing money laundering and other illegal acts by maintaining policies, procedures and controls
designed to detect and report money laundering, terrorist financing, and other suspicious activity.
•
•
Limitations on the amount of loans to one borrower and its affiliates and to executive officers and
directors.
Limitations on transactions with affiliates.
• Restrictions on the nature and amount of any investments in, and ability to underwrite, certain securities.
• Requirements for opening of intra- and interstate branches.
•
•
Truth in lending and other consumer protection and disclosure laws to ensure equal access to credit and
to protect consumers in credit transactions.
Provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and state laws
dealing with privacy for nonpublic personal information of customers.
Additional Restrictions on Bancorp and Bank Activities
Subject to prior notice or Federal Reserve approval, bank holding companies may generally engage in, or
acquire shares of companies engaged in, activities determined by the Federal Reserve to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies which elect
and retain “financial holding company” status pursuant to the GLB Act may engage in these nonbanking
activities and broader securities, insurance, merchant banking and other activities that are determined to be
“financial in nature” or are incidental or complementary to activities that are financial in nature without prior
Federal Reserve approval. Pursuant to the GLB Act and the Dodd-Frank Act, in order to elect and retain financial
holding company status, a bank holding company and all depository institution subsidiaries of a bank holding
company must be well capitalized and well managed, and, except in limited circumstances, depository
subsidiaries must be in satisfactory compliance with the CRA, which requires banks to help meet the credit needs
of the communities in which they operate. Failure to sustain compliance with these requirements or correct any
non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to
conform to those permissible for a bank holding company. The Bancorp has not elected financial holding
company status and has not engaged in any activities determined by the Federal Reserve to be financial in nature
or incidental or complementary to activities that are financial in nature.
Pursuant to the Federal Deposit Insurance Act (“FDI Act”) and the California Financial Code, California
state chartered commercial banks may generally engage in any activity permissible for national banks. Therefore,
the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking”
activities commonly conducted by national banks in operating subsidiaries or subsidiaries of bank holding
companies. Further, pursuant to the GLB Act, California banks may conduct certain “financial” activities in a
subsidiary to the same extent as may a national bank, provided the bank is and remains “well-capitalized,”
“well-managed” and in satisfactory compliance with the CRA. The Bank currently has no financial subsidiaries.
13
Enforcement Authority
The Bank operates branches and/or loan production offices in California, New York, Illinois, Massachusetts,
Texas, Washington, and New Jersey. While the DFI remains the Bank’s primary state regulator, the Bank’s
operations in these jurisdictions are subject to examination and supervision by local bank regulators, and
transactions with customers in those jurisdictions are subject to local laws, including consumer protection laws.
The Bank also operates a branch in Hong Kong and a representative office in Taipei and in Shanghai. The
operations of these foreign offices and branches (and limits on the scope of their activities) are subject to local
law and regulatory authorities in those jurisdictions in addition to regulation and supervision by the DFI and the
Federal Reserve.
The federal and California regulatory structure gives the bank regulatory agencies extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and
soundness concerns before an institution’s capital becomes impaired. The guidelines establish operational and
managerial standards generally relating to: (i) internal controls, information systems, and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) interest-rate exposure; (v) asset growth and asset quality;
and (vi) compensation, fees, and benefits. Further, the regulatory agencies have adopted safety and soundness
guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for
the maintenance of adequate capital and reserves. If, as a result of an examination, the DFI or the FDIC should
determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity,
or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has
violated any law or regulation, the DFI and the FDIC, and separately the FDIC as insurer of the Bank’s deposits,
have residual authority to:
• Require affirmative action to correct any conditions resulting from any violation or practice;
• Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may
preclude the Bank from being deemed well capitalized and restrict its ability to accept certain brokered
deposits;
• Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;
•
Enter into or issue informal or formal enforcement actions, including required Board resolutions,
memoranda of understanding, written agreements and consent or cease and desist orders or prompt
corrective action orders to take corrective action and cease unsafe and unsound practices;
• Require prior approval of senior executive officer or director changes; remove officers and directors,
and assess civil monetary penalties; and
•
Terminate FDIC insurance, revoke the Bank’s charter, take possession of and close and liquidate the
Bank, or appoint the FDIC as receiver.
The Federal Reserve has similar enforcement authority over bank holding companies and commonly takes
parallel action in conjunction with actions taken by a subsidiary bank’s regulators.
On December 17, 2009, the Bancorp entered into a memorandum of understanding with the Federal Reserve
Bank of San Francisco (the “FRB SF”) under which the Bancorp agreed, among other things, to limitations on
payment of and receipt of dividends and on senior executive officer and director changes, and to submit a plan to
maintain sufficient capital, a plan to improve management of our liquidity position and funds management
practices, and a liquidity policy and contingency funding plan for the Bancorp.
14
Until it was terminated as of November 7, 2012, the Bank was subject to a memorandum of understanding
with the DFI and the FDIC that was entered into on March 1, 2010, by which the Bank agreed to undertake
certain steps to strengthen its operations. This included, among other things, the submission of satisfactory plans
to reduce commercial real estate concentrations, to enhance and to improve the quality of our stress testing of the
Bank’s loan portfolio, to address improved profitability and capital ratios and reduce the Bank’s overall risk
profile, to improve asset quality, and to reduce dependence on wholesale funding. In addition, we were required
to maintain management and a board acceptable to the DFI and FDIC.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of
federally insured banks and savings institutions and safeguards the safety and soundness of the banking and
savings industries. The FDIC insures our customer deposits through the Deposit Insurance Fund (the “DIF”) up
to prescribed limits for each depositor. Pursuant to the Dodd-Frank Act, the maximum deposit insurance amount
was permanently increased to $250,000 and unlimited insurance coverage for non-interest-bearing transaction
accounts was provided through December 31, 2012, but the latter coverage was not extended by Congress. The
amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as
measured by regulatory capital ratios and other supervisory factors. All FDIC-insured institutions are also
required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation
(“FICO”), an agency of the federal government established to recapitalize the predecessor to the DIF. These
assessments will continue until the FICO bonds mature in 2017.
We are generally unable to control the amount of assessments that we are required to pay for FDIC
insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, we
may be required to pay even higher FDIC assessments than the recently increased levels. These increases in
FDIC insurance assessments may have a material and adverse affect on our earnings and could have a material
adverse effect on the value of, or market for, our common stock.
Capital Adequacy Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by
state and federal banking agencies. Increased capital requirements have also been proposed as a result of
expanded authority set forth in the Dodd-Frank Act. Capital adequacy guidelines and, additionally for banks,
prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance
sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject
to qualitative judgments by regulators about components, risk weighting, and other factors. At December 31,
2012, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage
requirements of the federal banking agencies for “well capitalized” institutions. See
Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Capital Resources—Capital Adequacy.”
The current risk-based capital guidelines for bank holding companies and banks adopted by the federal
banking agencies are expected to provide a measure of capital that reflects the degree of risk associated with a
banking organization’s operations for both transactions reported on the balance sheet as assets, such as loans, and
those recorded as off-balance sheet items, such as commitments, letters of credit, and recourse arrangements. The
risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into
weighted categories, with higher levels of capital being required for those categories perceived as representing
greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Bank
holding companies and banks engaged in significant trading activity may also be subject to the market risk
capital guidelines and be required to incorporate additional market and interest rate risk components into their
risk-based capital standards.
15
Qualifying capital is classified depending on the type of capital:
•
•
•
“Tier I capital” currently includes common equity and trust preferred securities, subject to certain
criteria and quantitative limits. The capital received from the sale of the Series B Preferred Stock also
qualifies as Tier I capital. Under the Dodd-Frank Act, depository institution holding companies with
more than $15 billion in total consolidated assets as of December 31, 2009, will no longer be able to
include trust preferred securities as Tier 1 regulatory capital as of the end of a phase-out period in 2016,
and will be obligated to replace any outstanding trust preferred securities issued prior to May 19, 2010,
with qualifying Tier 1 regulatory capital during the phase-out period.
“Tier II capital” includes hybrid capital instruments, other qualifying debt instruments, a limited amount
of the allowance for loan and lease losses, and a limited amount of unrealized holding gains on equity
securities. Following the phase-out period under the Dodd-Frank Act, trust preferred securities will be
treated as Tier II capital.
“Tier III capital” consists of qualifying unsecured debt. The sum of Tier II and Tier III capital may not
exceed the amount of Tier I capital.
Under the current capital guidelines, there are three fundamental capital ratios: a total risk-based capital
ratio, a Tier 1 risk-based capital ratio, and a Tier 1 leverage ratio. To be deemed “well capitalized” a bank must
have a total risk-based capital ratio of at least 10.00%, a Tier 1 risk-based capital ratio of at least at 6.00%, and a
Tier 1 leverage ratio of at least 5.00%. There is currently no Tier 1 leverage requirement for a holding company
to be deemed well-capitalized. At December 31, 2012, the respective capital ratios of the Bancorp and the Bank
exceeded the minimum percentage requirements to be deemed “well-capitalized.” As of December 31, 2012, the
Bank’s total risk-based capital ratio was 17.08% and its Tier 1 risk-based capital ratio was 15.33%. As of
December 31, 2012, the Bancorp’s total risk-based capital ratio was 19.12% and its Tier 1 risk-based capital ratio
was 17.36%.
The Bancorp and the Bank are also required to maintain a leverage capital ratio designed to supplement the
risk-based capital guidelines. Banks and bank holding companies that have received the highest rating of the five
categories used by regulators to rate banks and that are not anticipating or experiencing any significant growth
must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets of at least 3.00%. All other
institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3.00%
minimum, for a minimum of 4.00% to 5.00%. As of December 31, 2012, the Bank’s leverage capital ratio was
12.22%, and the Bancorp’s leverage capital ratio was 13.82%, both of which exceeded regulatory minimums.
Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to
which they are exposed, including the volume and severity of problem loans. Federal regulators may, however,
set higher capital requirements when a bank’s particular circumstances warrant and have required many banks
and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum
ratios otherwise required to be deemed well capitalized, in which case institutions may no longer be deemed well
capitalized and may therefore be subject to restrictions on taking brokered deposits.
The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord
(“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a
committee of central banks and bank supervisors/regulators from the major industrialized countries that develops
broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply.
In 2004, the Basel Committee published a new capital accord (“Basel II”) to replace Basel I. Basel II provides
two approaches for setting capital standards for credit risk – an internal ratings-based approach tailored to
individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit
assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also sets
capital requirements for operational risk and refines the existing capital requirements for market risk exposures.
16
In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity
regulation, now officially identified as “Basel III.” If and when implemented by the U.S. banking agencies and fully phased-in, it
would require bank holding companies and their bank subsidiaries to maintain substantially more capital than currently required,
with a greater emphasis on common equity. The Dodd-Frank Act also required the Federal Reserve, the Office of the Controller of
the Currency, and the FDIC to adopt regulations imposing a continuing “floor” of the Basel I-based capital requirements in cases
where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III otherwise would
permit lower requirements. In December 2010, the federal bank regulatory agencies issued a joint notice of proposed rulemaking
not yet finalized that would implement this requirement.
On June 7, 2012, the federal bank regulatory agencies issued a series of proposed rules that would revise their risk-based and
leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements
that were reached by the Basel Committee in Basel III and certain provisions of the Dodd-Frank Act. The proposed rules, which
would be fully phased in by January 1, 2019, would apply to all depository institutions, top-tier bank holding companies with total
consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among
other things, the proposed rules establish a new Common Equity Tier 1 minimum capital requirement of 4.5% and a higher
minimum Tier 1 capital requirement of 6.0% and assign higher risk weightings (150%) to exposures that are more than 90 days
past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or
construction of real property. Additionally, the U.S. implementation of Basel III contemplates that, for banking organizations with
less than $15 billion in assets, the ability to treat trust preferred securities as Tier 1 capital would be phased out over a ten-year
period. The proposed rules also require unrealized gains and losses on certain securities holdings to be included for purposes of
calculating regulatory capital requirements. The proposed rules limit a banking organization’s capital distributions and certain
discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of a
specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital
requirements. The proposed rules indicated that the final rule would become effective on January 1, 2013, and the changes set forth
in the final rules will be phased in from January 1, 2013, through January 1, 2019. However, the agencies have recently indicated
that, due to the volume of public comments received, the final rule would not become effective on January 1, 2013.
While the proposed regulatory capital requirements, when finalized, will likely result in generally higher regulatory capital
standards for the Bancorp and the Bank, it is difficult at this time to predict when or how many of the proposed provisions will
ultimately be adopted or whether broader exemptions may be provided for community banks. In addition, bank regulators may also
continue their past policies of expecting banks to maintain yet additional capital beyond the new minimum requirements. The
implementation of more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets
could adversely impact the Bancorp’s net income and return on equity, restrict the ability to pay dividends and require the raising
of additional capital.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial
institution could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations
on the rates of interest that the institution may pay on its deposits and other restrictions on its business. Significant additional
restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements under the
regulatory agencies’ prompt corrective action authority.
Prompt Corrective Action Provisions
The FDI Act provides a framework for regulation of depository institutions and their affiliates, including parent holding
companies, by their federal banking regulators. It requires the relevant federal banking regulator to take “prompt corrective action”
with respect to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the
prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate federal banking regulator under
the prompt corrective action rules generally depend upon an institution’s classification within five capital categories as defined in
the regulations. The relevant capital measures are the capital ratio, the Tier 1 capital ratio, and the leverage ratio. However, the
federal banking agencies have also adopted non-capital safety and soundness standards to assist examiners in identifying and
addressing potential safety and soundness concerns before capital becomes impaired. These include operational and managerial
standards relating to: (i) internal controls, information systems, and internal audit systems, (ii) loan documentation, (iii) credit
underwriting, (iv) asset quality and growth, (v) earnings, (vi) risk management, and (vii) compensation and benefits.
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A depository institution’s capital tier under the prompt corrective action regulations will depend upon how
its capital levels compare with various relevant capital measures and the other factors established by the
regulations. A bank will be: (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.00%
or greater, a Tier 1 risk-based capital ratio of 6.00% or greater, and a leverage ratio of 5.00% or greater and is not
subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital
level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of
8.00% or greater, a Tier 1 risk-based capital ratio of 4.00% or greater, and a leverage ratio of 4.00% or greater
and is not “well capitalized;” (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is
less than 8.00%, a Tier 1 risk-based capital ratio of less than 4.00%, or a leverage ratio of less than 4.0%;
(iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.00%, a Tier
1 risk-based capital ratio of less than 3.00%, or a leverage ratio of less than 3.00%; and (v) “critically
undercapitalized” if the institution’s tangible equity is equal to or less than 2.00% of average quarterly tangible
assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated
by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory
examination rating with respect to certain matters.
The FDI Act generally prohibits a depository institution from making any capital distributions (including
payment of a dividend) or paying any management fee to its parent holding company if the depository institution
would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are
required to submit a capital restoration plan. The regulatory agencies may not accept such a plan without
determining that the plan is based on realistic assumptions and is likely to succeed in restoring the depository
institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent
holding company must guarantee that the institution will comply with the plan. The bank holding company must
also provide appropriate assurances of performance with potential liability of up to 5% of the depository
institution’s total assets at the time it became undercapitalized.
Dividends
Holders of the Bancorp’s common stock and preferred stock are entitled to receive dividends as and when
declared by the board of directors out of funds legally available therefore under the laws of the State of
Delaware. Delaware corporations such as the Bancorp may make distributions to their stockholders out of their
surplus, or in case there is no surplus, out of their net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. However, dividends may not be paid out of a corporation’s net profits if, after
the payment of the dividend, the corporation’s capital would be less than the capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution of assets.
Our capital management and dividend policy as part of our Three-Year Capital and Strategic Plan includes a
policy to refrain from paying dividends in excess of $.01 per share per quarter, except when covered by operating
earnings. The amount of future dividends will depend on our earnings, financial condition, capital requirements
and other factors, and will be determined by our board of directors in accordance with the capital management
and dividend policy.
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common
stock only out of income available over the past year, and only if prospective earnings retention is consistent with
the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank
holding companies should not maintain dividend levels that undermine their ability to be a source of strength to
their banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the
Federal Reserve has indicated that bank holding companies should carefully review their dividend policies and
has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are
very strong.
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Further, it is the Federal Reserve’s policy that bank holding companies participating in the TARP and other
government capital programs must comply on an ongoing basis with the pertinent capital and other requirements
established by the U.S. Treasury (including those explicitly set forth in EESA) and related Federal Reserve
supervisory policy. Moreover, a recipient of taxpayer funds through such capital programs should consider and
communicate reasonably in advance to Federal Reserve supervisory staff how the bank holding company’s proposed
dividends, capital redemptions, and capital repurchases are consistent with the requirements applicable to its receipt
of capital under the program and related Federal Reserve supervisory policy, as well as its ability to redeem
securities issued to the government prior to any contractual increase in the dividend rate without affecting safety and
soundness.
The terms of our Series B Preferred Stock and Junior Subordinated Notes also limit our ability to pay dividends
on our common stock. If we are not current in our payment of dividends on our Series B Preferred Stock or in our
payment of interest on our Junior Subordinated Notes, we may not pay dividends on our common stock.
We have agreed under the memorandum of understanding with the FRB SF that Bancorp will not, without the
FRB SF’s prior written approval, declare or pay any dividends, make any payments on trust preferred securities, or
make any other capital distributions. In February, 2013, Bancorp received Federal Reserve approval to make
payments on our Series B Preferred Stock and Junior Subordinated Notes. There can be no assurance that our
regulators will approve such payments or dividends in the future.
The Bank is a legal entity that is separate and distinct from its holding company. The Bancorp receives income
through dividends paid by the Bank. The powers of the board of directors of the Bank to declare a cash dividend to
the Bancorp are subject to California law, which restricts the amount available for cash dividends to the lesser of a
bank’s retained earnings or net income for its last three fiscal years (less any distributions to stockholders made
during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the
DFI in an amount not exceeding the greatest of (i) retained earnings of the Bank; (ii) the net income of the Bank for
its last fiscal year; or (iii) the net income of the bank for its current fiscal year. Future cash dividends by the Bank
will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other
factors.
Under the memorandum of understanding entered into with the FRB SF, the Bancorp also agreed that it would
not, without the FRB SF’s prior written approval, receive any dividends or any other form of payment or
distribution representing a reduction of capital from the Bank. The Bank did not pay a dividend to the Bancorp in
2010 or 2011, but paid dividends of $154.7 million to Bancorp following regulatory approval in 2012, and will pay
additional dividends with regulatory approval in 2013 to maintain Bancorp’s cash balance equal to at least two years
of Bancorp’s operating expenses and to be in a position, subject to regulatory approval, to repurchase in installments
during 2013 the Series B Preferred Stock issued to the U.S. Treasury under the TARP Capital Purchase Program.
Operations and Consumer Compliance Laws
The Bank must comply with numerous federal anti-money laundering and consumer protection statutes and
implementing regulations, including the USA Patriot Act, the Bank Secrecy Act, the Foreign Account Tax
Compliance Act (effective 2013), the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate
Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the
Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, and
various federal and state privacy protection laws. The Bank and the Company are also subject to federal and state
laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.
These laws and regulations also mandate certain disclosure and reporting requirements and regulate the manner
in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and
providing other services. Failure to comply with these laws and regulations can subject the Bank to lawsuits and
penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive
damages to consumers, and the loss of certain contractual rights.
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The Dodd-Frank Act provided for the creation of the CFPB as an independent entity within the Federal Reserve and
as a new regulatory agency for United States banks. The CFPB has broad rulemaking, supervisory, and enforcement
authority over consumer financial products and services, including deposit products, residential mortgages, home-equity
loans and credit cards. The CFPB’s functions include investigating consumer complaints, conducting market research,
rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer financial
products and services. The CFPB examines banks (such as the Bank) with over $10 billion in assets. Banks with less than
$10 billion in assets are examined for compliance with the consumer laws and regulations by their primary federal
banking agency.
Under the Dodd-Frank Act, regulators were required to mandate specific underwriting criteria to support a
reasonable, good faith determination by lenders of a consumer's ability to repay a mortgage. The CFPB by amendment to
Regulation Z, which implements the Truth in Lending Act and takes effect January 10, 2014, has defined what would be
considered a “qualified mortgage.” Another Dodd-Frank provision requires banks and other mortgage lenders to retain a
minimum 5% economic interest in mortgage loans sold through securitizations unless the loans meet a definition of a
“qualified residential mortgage” yet to be promulgated. Banks will have to reevaluate their underwriting standards and the
extent and type of their mortgage lending as a result of these regulations implementing the Dodd-Frank Act.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. Among other benefits, each
FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily
from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its
members in compliance with the policies and procedures established by the board of directors of the individual FHLB.
Each member of the FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a
membership stock requirement with an initial cap of $25 million (100% of “membership asset value” as defined), or
(ii) an activity based stock requirement (based on a percentage of outstanding advances). There can be no assurance that
the FHLB will pay dividends at the same rate it has paid in the past, or that it will pay any dividends in the future.
Impact of Monetary Policies
The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or
spread between the yield on its interest-earning assets and the rates paid on its deposits and other interest-bearing
liabilities. As a result, the Bank’s performance is influenced by general economic conditions, both domestic and foreign,
the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies. The Federal
Reserve implements national monetary policies (such as seeking to curb inflation and combat recession) by its open-
market operations in U.S. government securities, by adjusting the required level of reserves for financial institutions
subject to its reserve requirements and by varying the discount rate applicable to borrowings by banks from the Federal
Reserve Banks. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments, and
deposits, and also affect interest rates charged on loans and deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
Securities and Corporate Governance
The Bancorp is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended, both as administered by the SEC. As a company listed on the
NASDAQ Capital Market, the Company is subject to NASDAQ listing standards for listed companies. The Bancorp is
also subject to the Sarbanes-Oxley Act of 2002, provisions of the Dodd-Frank Act, and other federal and state laws and
regulations which address, among other issues, required executive certification of financial presentations, corporate
governance requirements for board audit committees and their members, and disclosure of controls and procedures and
internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely
disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are intended to allow
stockholders and investors to more easily and efficiently monitor the performance of companies and their directors.
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Audit Requirements
The Bank is required to have an annual independent audit, alone or as a part of its bank holding company’s
audit, and to prepare all financial statements in accordance with U.S. generally accepted accounting principles.
The Bank and the Bancorp are also each required to have an audit committee comprised entirely of independent
directors. As required by NASDAQ, the Bancorp has certified that its audit committee has adopted formal
written charters and meets the requisite number of directors, independence, and qualification standards. As such,
among other requirements, the Bancorp must maintain an audit committee that includes members with banking
or related financial management expertise, has access to its own outside counsel, and does not include members
who are large customers of the Bank. In addition, because the Bank has more than $3 billion in total assets, it is
subject to the FDIC requirements for audit committees of large institutions.
Under the Sarbanes-Oxley Act, management and the Bancorp’s independent registered public accounting
firm are required to assess the effectiveness of the Bancorp’s internal control over financial reporting as of
December 31, 2012. These assessments are included in Part II—Item 9A—“Controls and Procedures.”
Regulation of Non-Bank Subsidiaries
Non-bank subsidiaries are subject to additional or separate regulation and supervision by other state, federal
and self-regulatory bodies. Additionally, any foreign-based subsidiaries would also be subject to foreign laws and
regulations.
Item 1A. Risk Factors.
Difficult business and economic conditions can adversely affect our industry and business.
Our financial performance generally, and the ability of borrowers to pay interest on and repay the principal
of outstanding loans and the value of the collateral securing those loans, is highly dependent upon the business
and economic conditions in the markets in which we operate and in the United States as a whole. Although the
U.S. economy has recently showed signs of improvement, certain sectors, such as real estate, remain soft, and
unemployment remains high in general and in the markets in which we operate. Local governments and many
businesses are still experiencing serious difficulties due to the lack of consumer spending and liquidity in the
credit markets. There is also uncertainty over the federal budget and taxation. In addition, concerns about the
performance of international economies, including the potential impact of the European debt crises and economic
conditions in Asia, particularly the economies of China and Taiwan, can impact the economy here in the United
States. Concerns about the economy have also resulted in decreased lending by financial institutions to their
customers and to each other. These economic pressures on consumers and businesses may continue to adversely
affect our business, financial condition, results of operations and stock price. In particular, we may face the
following risks in connection with these events:
• We face increased regulation of our industry, including changes by Congress or federal regulatory
agencies to the banking and financial institutions regulatory regime and heightened legal standards and
regulatory requirements that may be adopted in the future. Compliance with such regulation may
increase our costs and limit our ability to pursue business opportunities.
•
The process we use to estimate losses inherent in our credit exposure requires difficult, subjective, and
complex judgments, including forecasts of economic conditions and how these economic conditions
might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning
economic conditions may adversely affect the accuracy of our estimates which may, in turn, impact the
reliability of the process.
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Our banking operations are concentrated primarily in California, and secondarily in New York, Texas,
Massachusetts, Washington, Illinois, New Jersey, and Hong Kong. Adverse economic conditions in these regions
in particular 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 conditions include the effects of the general decline in
real estate sales and prices in many markets across the United States from their recent highs, the economic
recession of recent years, and higher rates of unemployment. These conditions 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, if at all, and
could also cause a decline in demand for our products and services, or a lack of growth or a decrease in deposits,
any of which may cause us to incur losses, adversely affect our capital, and hurt our business.
We may be required to make additional provisions for loan losses and charge off additional loans in the
future, which could adversely affect our results of operations.
At December 31, 2012, our allowance for loan losses totaled $183.3 million and we had total charge-offs of
$32.8 million for 2012. Although economic conditions in the real estate market in portions of Los Angeles, San
Diego, Riverside, and San Bernardino counties and the Central Valley of California where many of our
commercial real estate and construction loan customers are based, have improved, the economic recovery in
these areas of California is still slow. This slow recovery has resulted in weak pricing and relatively elevated
inventories of homes to be sold, which could contribute to financial strain on home builders and suppliers. As of
December 31, 2012, we had approximately $4.0 billion in commercial real estate and construction loans. Any
deterioration in the real estate market generally and in the commercial real estate and residential building
segments in particular could result in additional loan charge offs and provisions for loan losses in the future,
which could have a material adverse effect on our financial condition, net income, and capital.
The allowance for credit losses is an estimate of probable credit losses. Actual credit losses in excess of the
estimate could adversely affect our results of operations and capital.
A significant source of risk arises from the possibility that we could sustain losses because borrowers,
guarantors, and related parties may fail to perform in accordance with the terms of their loans and leases. The
underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not
prevent unexpected losses that could have a material adverse effect on our business, financial condition, results
of operations, and cash flows. The allowance for credit losses is based on management’s estimate of the probable
losses from our credit portfolio. If actual losses exceed the estimate, the excess losses could adversely affect our
results of operations and capital. Such excess losses could also lead to larger allowances for credit losses in
future periods, which could in turn adversely affect results of operations and capital in those periods. If economic
conditions differ substantially from the assumptions used in the estimate or adverse developments arise with
respect to our credits, 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 credit
losses in excess of present or future levels of the allowance for credit losses.
We are currently subject to a memorandum of understanding with the Federal Reserve Bank of San
Francisco, and the Bank was previously subject to a memorandum of understanding with the California
Department of Financial Institutions and the Federal Deposit Insurance Corporation, and we may be subject
to further supervisory action by bank supervisory authorities that could have a material adverse effect on our
business, financial condition, and the value of our common stock.
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Under federal and state laws and regulations pertaining to the safety and soundness of financial institutions, the FRB SF has
authority over Bancorp and separately the DFI and FDIC have authority over the Bank to compel or restrict certain actions if the
Bancorp's or the Bank’s capital should fall below adequate capital standards as a result of operating losses, or if these regulators
otherwise determine that the Bancorp or the Bank have insufficient capital or has engaged in unsafe or unsound practices. These
regulators, as well as the CFPB, also have authority over the Bancorp and the Bank over compliance with various statutes and
consumer protection and other regulations. Among other matters, the corrective actions may include, but are not limited to,
requiring the Bancorp and/or the Bank to enter into informal or formal enforcement orders, including board resolutions,
memoranda of understanding, written agreements, supervisory letters, commitment letters, and consent or cease and desist orders
to take corrective action and refrain from unsafe and unsound practices; removing officers and directors; assessing civil monetary
penalties; and taking possession of and closing and liquidating the Bank. On December 17, 2009, the Bancorp entered into a
memorandum of understanding with the FRB SF (the “MOU”) under which the Bancorp agreed, among other things, to limitations
on payment of and receipt of dividends and senior executive officer and director changes, and to submit a plan to maintain
sufficient capital, a plan to improve management of our liquidity position and funds management practices, and a liquidity policy
and contingency funding plan for the Bancorp.
Until it was terminated as of November 7, 2012, the Bank was subject to a memorandum of understanding with the DFI and
the FDIC that was entered into on March 1, 2010, by which the Bank agreed to undertake certain steps to strengthen its operations.
This included, among other things, the submission of satisfactory plans to reduce commercial real estate concentrations, to enhance
and to improve the quality of our stress testing of the Bank’s loan portfolio, to address improved profitability and capital ratios and
reduce the Bank’s overall risk profile, to improve asset quality, and to reduce dependence on wholesale funding. In addition, we
were required to maintain management and a board acceptable to the DFI and FDIC.
If we are unable to meet the requirements of, any such memoranda or other corrective actions, we could become subject to
additional supervisory action, including a cease and desist order. If our banking supervisors were to take such additional
supervisory action, we could, among other things, become subject to significant restrictions on our ability to develop any new
business, as well as restrictions on our existing business, and we could be required to raise additional capital, dispose of certain
assets and liabilities within a prescribed period of time, or both. The terms of any such supervisory action could have a material
negative effect on our business, our financial condition, and the value of our common stock. Additionally, there can be no
assurance that we will not be subject to further supervisory action or regulatory proceedings that could have a material negative
impact on our business.
Additional requirements imposed by the Dodd-Frank Act could adversely affect us.
Recent government efforts to strengthen the U.S. financial system have resulted in the imposition of additional regulatory
requirements, including expansive financial services regulatory reform legislation. The Dodd-Frank Act provided for sweeping
regulatory changes including the establishment of strengthened capital and liquidity requirements for banks and bank holding
companies, including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for
depository institutions as of the date of enactment; the requirement by statute that bank holding companies serve as a source of
financial strength for their depository institution subsidiaries; enhanced regulation of financial markets, including the derivative
and securitization markets, and the elimination of certain proprietary trading activities by banks; additional corporate governance
and executive compensation requirements; enhanced financial institution safety and soundness regulations, revisions in FDIC
insurance assessment fees and a permanent increase in FDIC deposit insurance coverage to $250,000; authorization for financial
institutions to pay interest on business checking accounts through 2012; and the establishment of new regulatory bodies, such as
the CFPB and the Financial Services Oversight Counsel, to identify emerging systemic risks and improve interagency
cooperation. Many of the provisions remain subject to final rulemaking and/or study. Accordingly, we cannot fully assess its
impact on our operations and costs until final regulations are adopted and implemented.
Current and future legal and regulatory requirements, restrictions, and regulations, including those imposed under the Dodd-
Frank Act, may adversely impact our profitability and may have a material and adverse effect on our business, financial condition,
and results of operations, may require us to invest significant management attention and resources to evaluate and make any
changes required by the legislation and related regulations and may make it more difficult for us to attract and retain qualified
executive officers and employees.
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We may become subject to more stringent capital requirements.
The U.S. federal bank regulators have jointly proposed new capital requirements on banks and bank holding companies as
required by the Dodd-Frank Act that incorporate the elements of Basel Committee’s Basel III accords and which, may have the
effect of raising our capital requirements and imposing new capital requirements beyond those required by current law. Increased
regulatory capital requirements (and the associated compliance costs) whether due to the adoption of new laws and regulations,
changes in existing laws and regulations, or more expansive or aggressive interpretations of existing laws and regulations, may
impact our ability to pay dividends and may have a material adverse effect on our business, liquidity, financial condition and
results of operations.
We are subject to extensive laws and regulations and supervision, and may become subject to future laws and regulations and
supervision, if any, that may be enacted, that could limit or restrict our activities, may hamper our ability to increase our assets
and earnings, and could adversely affect our profitability.
We operate in a highly regulated industry and are or may become subject to regulation by federal, state, and local
governmental authorities and various laws, regulations, regulatory guidelines, and judicial and administrative decisions imposing
requirements or restrictions on part or all of our operations, capitalization, payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We also must comply with
numerous federal anti-money laundering and consumer protection statutes and regulations. A considerable amount of management
time and resources have been devoted to the oversight of, and the development and implementation of controls and procedures
relating to, compliance with these laws and regulations, and we expect that significant time and resources will be devoted to
compliance in the future. These laws and regulations mandate certain disclosure and reporting requirements and regulate the
manner in which we must deal with our customers when taking deposits, making loans, collecting loans, and providing other
services. We also are, or may become subject to, examination, supervision, and additional comprehensive regulation by various
federal, state, and local authorities with regard to compliance with these laws and regulations.
Because our business is highly regulated, the laws, rules, regulations, and supervisory guidance and policies applicable to us
are subject to regular modification and change. Perennially, various laws, rules and regulations are proposed, which, if adopted,
could impact our operations, increase our capital requirements or substantially restrict our growth and adversely affect our ability
to operate profitably by making compliance much more difficult or expensive, restricting our ability to originate or sell loans or
further restricting the amount of interest or other charges or fees earned on loans or other products. In addition, further regulation
could increase the assessment rate we are required to pay to the FDIC, adversely affecting our earnings. Furthermore, recent
changes to Regulation Z promulgated by the CFPB may make it more difficult for us to underwrite consumer mortgages and to
compete with large national mortgage service providers. It is impossible to predict the competitive impact that any such changes
would have on the banking and financial services industry in general or on our business in particular. 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. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory
regimes in light of the recent performance of and government intervention in the financial services sector. Other changes to
statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or
policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of
financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and
products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies,
civil money penalties, and/or reputation damage, which could have a material adverse effect on our business, financial condition,
and results of operations. See Part I—Item 1—“Business—Regulation and Supervision.”
We may experience goodwill impairment.
Goodwill is initially recorded at fair value and is not amortized, but is reviewed at least annually or more frequently if events
or changes in circumstances indicate that the carrying value may not be fully recoverable. If our estimates of goodwill fair value
change, we may determine that impairment charges are necessary. Estimates of fair value are determined based on a complex
model using cash flows and company comparisons. If management’s estimates of future cash flows are inaccurate, the fair value
determined could be inaccurate and impairment may not be recognized in a timely manner.
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Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of
loans, and other sources could have a material adverse effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial
services industry in general. Factors that could detrimentally impact our access to liquidity sources include a
decrease in the level of our business activity due to a market downturn or adverse regulatory action against us.
Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a
severe disruption of the financial markets or negative views and expectations about the prospects for the financial
services industry as a whole.
Our business is subject to interest rate risk and fluctuations in interest rates could reduce our net interest
income and adversely affect our business.
A substantial portion of our income is derived from the differential, or “spread,” between the interest earned
on loans, investment securities and other interest-earning assets, and the interest paid on deposits, borrowings and
other interest-bearing liabilities. 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
costs 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 our interest-earning assets and interest-bearing liabilities 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 re-pricing 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 changes 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.
We have engaged in expansion through acquisitions and may consider additional acquisitions in the future,
which could negatively affect our business and earnings.
We have engaged in expansion through acquisitions and may consider acquisitions in the future. There are
risks associated with any such expansion. These risks include, among others, incorrectly assessing the asset
quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating
acquired businesses, facing resistance from customers or employees, and being unable to profitably deploy assets
acquired in the transaction. Additional country- and region-specific risks are associated with transactions outside
the United States, including in China. To the extent we issue capital stock in connection with additional
transactions, if any, these transactions and related stock issuances may have a dilutive effect on earnings per
share and share ownership.
25
Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully
integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve expected
cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings.
In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial institutions
with respect to proposed acquisitions. We cannot predict if or when we will be able to identify and attract acquisition candidates or
make acquisitions on favorable terms.
We may in the future engage in FDIC-assisted transactions, which could present additional risks to our business.
In the current economic environment, and subject to any requisite regulatory consent, we may potentially be presented with
opportunities to acquire the assets and liabilities of failed banks in FDIC-assisted transactions. These acquisitions involve risks
similar to acquiring existing banks even though the FDIC might provide assistance to mitigate certain risks such as sharing in
exposure to loan losses and providing indemnification against certain liabilities of the failed institution. However, because these
acquisitions are structured in a manner that would not allow us the time normally associated with preparing for and evaluating an
acquisition, including preparing for integration of an acquired institution, we may face additional risks if we engage in FDIC-
assisted transactions. These risks include the loss of customers, strain on management resources related to collection and
management of problem loans and problems related to integration of personnel and operating systems. If we engage in FDIC-
assisted transactions, we may not be successful in overcoming these risks or any other problems encountered in connection with
these transactions. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy
and maintain our market value and profitability.
Moreover, even if we were inclined to participate in an FDIC-assisted transaction, there are no assurances that the FDIC
would allow us to participate or what the terms of such a transaction might be or whether we would be successful in acquiring the
bank or assets that we are seeking. We may be required to raise additional capital as a condition to, or as a result of, participation in
an FDIC-assisted transaction. Any such transactions and related issuances of stock may have a dilutive effect on earnings per share
and share ownership.
Furthermore, to the extent we are allowed to, and choose to, participate in FDIC-assisted transactions, we may face
competition from other financial institutions with respect to the proposed FDIC-assisted transactions. To the extent that our
competitors are selected to participate in FDIC-assisted transactions, our ability to identify and attract acquisition candidates and/or
make acquisitions on favorable terms may be adversely affected.
Inflation and deflation may adversely affect our financial performance.
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 or deflation. The primary impact of inflation on our operations is reflected in increased operating costs.
Conversely, deflation will tend to erode collateral values and diminish loan quality. 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
or deflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and
services.
As we expand our business outside of California markets, we will encounter risks that could adversely affect us.
We primarily operate in California markets with a concentration of Chinese-American individuals and businesses; however,
one of our strategies is to expand beyond California into other domestic markets that have concentrations of Chinese-American
individuals and businesses. We currently have operations in six other states (New York, Texas, Washington, Massachusetts,
Illinois, and New Jersey) and in Hong Kong. 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 expenses and
operational difficulties arising from, among other things, our ability to attract sufficient business in new markets, to manage
operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and to anticipate events or
differences in markets in which we have no current experience.
26
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; the incurring of
additional debt and contingent liabilities; use of cash resources; large write-offs; and amortization expenses
related to other intangible assets with finite lives.
Our loan portfolio is largely secured by real estate, which has adversely affected and may continue to
adversely affect our results of operations.
The downturn in the real estate markets in recent years hurt our business because many of our loans are
secured by real estate. The real estate collateral securing our borrowers’ obligations is principally located in
California, and to a lesser extent, in New York, Texas, Massachusetts, Washington, Illinois, and New Jersey. The
value of such collateral depends upon conditions in the relevant real estate markets. These include general or
local economic conditions and neighborhood characteristics, unemployment rates, real estate tax rates, the cost of
operating the properties, governmental regulations and fiscal policies, acts of nature including earthquakes,
floods, and hurricanes (which may result in uninsured losses), and other factors beyond our control. The
continuing low volume of real estate sales and unpredictability of prices in many markets across the United
States could reduce the value of our collateral, in which case we may have to foreclose on the properties. If we
are not able to realize a satisfactory amount upon foreclosure sales, we may have to own the properties,
subjecting us to exposure to the risks and expenses associated with ownership. Continued declines in real estate
sales and prices coupled with any weakness in the economy and continued high unemployment will result in
higher than expected loan delinquencies or problem assets, a decline in demand for our products and services, or
a lack of growth or a decrease in deposits, which may cause us to incur losses, adversely affect our capital, and
hurt our business.
The risks inherent in construction lending may continue to affect adversely our results of operations. 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 they 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.
The current general decline in real estate sales and prices across the United States, the decline in demand for
residential real estate, economic weakness, high rates of unemployment, and reduced availability of mortgage
credit, are all factors that can adversely affect the borrowers’ ability to repay their obligations to us and the value
of our security interest in collateral, and thereby adversely affect our results of operations and financial results.
Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the
value of the real property collateral.
In considering whether to make a loan secured by real property, we require an appraisal of the property.
However, an 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.
27
Liabilities from environmental regulations could materially and adversely affect our business and financial condition.
In the course of the Bank’s business, the Bank may foreclose and take title to real estate, and could be subject to
environmental liabilities with respect to these properties. The Bank may be held liable to a governmental entity or to third parties
for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clear up hazardous or toxic substances, or chemical releases at a property. The
costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of any
contaminated site, the Bank may be subject to common law claims by third parties based on damages, and costs resulting from
environmental contamination emanating from the property. If the Bank ever becomes subject to significant environmental
liabilities, its business, financial condition, liquidity, and results of operations could be materially and adversely affected.
We face substantial competition from our competitors.
We face substantial competition for deposits, loans, and for other banking services, as well as acquisitions, 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. These banks and financial institutions have greater resources than we do, including
the ability to finance advertising campaigns and allocate their investment assets to regions of higher yield and demand and make
acquisitions. By virtue of their larger capital bases, they have substantially greater lending limits than we do 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, brokerage houses, insurance companies, mortgage companies, credit unions,
credit card companies and other financial and non-financial institutions and entities. The recent consolidation of certain competing
financial institutions and the conversion of certain investment banks to bank holding companies has increased the level of
competition among financial services companies and may adversely affect our ability to market our products and services.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our
prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of
qualified persons with knowledge of, and experience in, the communities that we serve. The process of recruiting personnel with
the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant
degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing, and
technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and
continues to be highly dependent upon the abilities of key executives and certain other employees, including, but not limited to, our
Chief Executive Officer, Dunson K. Cheng, our Chief Financial Officer, Heng W. Chen, and our Chief Operating Officer, Peter
Wu.
Managing reputational risk is important to attracting and maintaining customers, investors, and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally,
unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and
questionable, illegal, or fraudulent activities of our customers. We have policies and procedures in place that seek to protect our
reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding
our business, employees, or customers, with or without merit, may result in the loss of customers, investors, and employees, costly
litigation, a decline in revenues and increased governmental regulation.
Natural disasters and geopolitical events beyond our control could adversely affect us.
Natural disasters such as earthquakes, wildfires, extreme weather conditions, hurricanes, floods, and other acts of nature and
geopolitical events involving civil unrest, changes in government regimes, terrorism, or military conflict could adversely affect our
business operations and those of our customers and cause substantial damage and loss to real and personal property. These natural
disasters and geopolitical events could impair our borrowers’ ability to service their loans, decrease the level and duration of
deposits by customers, erode the value of loan collateral, and result in an increase in the amount of our non-performing loans and a
higher level of non-performing assets (including real estate owned), net charge-offs, and provision for loan losses, which could
adversely affect our earnings.
28
Adverse conditions in Asia and elsewhere could adversely affect our business.
A substantial number of our customers have economic and cultural ties to Asia and, as a result, we are likely to
feel the effects of adverse economic and political conditions in Asia, including the effects of rising inflation or slowing
growth in China and other regions. Additionally, we maintain a branch in Hong Kong. U.S. and global economic
policies, military tensions, and unfavorable global economic conditions may adversely impact the Asian economies.
This could include an actual or perceived default of certain European Union (“EU”) member states on their debt
obligations, the continued uncertainty of the EU’s financial support programs, the possibility that other EU member
states may experience similar financial troubles, and any resulting slowdown in the economies of the EU member
states. In addition, pandemics and other public health crises or concerns over the possibility of such crises could create
economic and financial disruptions in the region. A significant deterioration of economic conditions in Asia could
expose us to, among other things, economic and transfer risk, and we could experience an outflow of deposits by those
of our customers with connections to Asia. 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 in Asia, and in China or Taiwan in
particular, may also negatively impact asset values and the profitability and liquidity of our customers who operate in
this region.
Because of our participation in the TARP Capital Purchase Program, we are subject to several restrictions
including restrictions on compensation paid to our executives.
Pursuant to the terms of the Purchase Agreement between us and the U.S. Treasury (the “Purchase Agreement”),
under which we sold $258 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B, with a liquidation
preference of $1,000 per share (“Series B Preferred Stock”), we adopted certain standards for executive compensation
and corporate governance. These standards generally apply to our Chief Executive Officer, Chief Financial Officer,
and the three next most highly compensated executive officers. The standards include (i) ensuring that incentive
compensation for senior executive officers does not encourage unnecessary and excessive risks that threaten the value
of the financial institution; (ii) requiring clawback of any bonus or incentive compensation paid to a senior executive
officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (iii) a
prohibition on making golden parachute payments to senior executives; and (iv) agreement not to deduct for tax
purposes executive compensation in excess of $500,000 for each senior executive. In particular, the change to the
deductibility limit on executive compensation will likely increase the overall cost of our compensation programs in
future periods.
The adoption of the ARRA on February 17, 2009, and interim final regulations thereunder effective June 15,
2009, have imposed certain executive compensation and corporate expenditure limits on all current and future TARP
recipients, including the Company, until the institution has repaid the U.S. Treasury or, in certain instances, until the
U.S. Treasury no longer holds our securities, which is now permitted under the ARRA without penalty and without the
need to raise new capital, subject to the U.S. Treasury’s consultation with the recipient’s appropriate regulatory agency.
The ARRA executive compensation standards are in many respects more stringent than those that continue in effect
under TARP and those previously proposed by the U.S. Treasury. The standards include (but are not limited to)
(i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock or restricted
stock unit grants for up to one-third of an employee’s total annual compensation, which grants cannot vest for a period
of at least two years and can be liquidated during the TARP period only in proportion to the repayment of the TARP
investment at 25% increments, (ii) prohibitions on golden parachute payments for departure from a company or change
in control of the company, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if
payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on
compensation plans that encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention
awards, and other compensation previously provided by TARP recipients if found by the U.S. Treasury to be
inconsistent with the purposes of TARP or otherwise contrary to the public interest, (vi) required establishment of a
company-wide policy regarding “excessive or luxury expenditures,” and (vii) inclusion in a participant’s proxy
statements for annual shareholder meetings of a nonbinding “Say on Pay” shareholder vote on the compensation of
executives.
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Our information systems may experience failures, interruptions, or breaches in security, which could have a
material adverse effect on our business, financial condition, and results of operations.
We rely heavily on communications and information systems to conduct our business. Any failure,
interruption, or breach in security of these systems could result in failures or disruptions in our customer
relationship management, general ledger, deposit, loan, and other systems. In the course of providing financial
services, we store personally identifiable data concerning customers or employees of customers. While we have
policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breaches of
our information systems, there can be no assurance that any such failures, interruptions, or security breaches will
not occur or, if they do occur, that they will be adequately addressed. Privacy laws and regulations are matters of
growing public concern and are continually changing in the states in which we operate.
In recent periods, there has been a rise in electronic fraudulent activity, security breaches, and cyber attacks
within the financial services industry, especially in the commercial banking sector. Some financial institutions
have reported breaches of their security of their websites and systems, some of which have involved
sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy
data, disable or degrade service, or sabotage systems. The secure maintenance and transmission of confidential
information, as well as execution of transactions over our systems, are essential to protect us and our customers
against fraud and security breaches and to maintain our customers’ confidence. Increases in criminal activity
levels and sophistication, advances in computer capabilities, or other developments could result in a compromise
or breach of the technology, processes, and controls that we use to prevent fraudulent transactions or to protect
data about us, our customers, and underlying transactions, as well as the technology used by our customers to
access our systems. These risks may increase in the future as we continue to increase our offerings of mobile
services and other Internet or web-based products.
The occurrence of any failures, interruptions, or security breaches could damage our reputation, result in a
loss of customers, cause us to incur additional expenses, disrupt our business, affect our ability to grow our
online and mobile banking services, subject us to additional regulatory scrutiny, or expose us to civil litigation
and possible financial liability, any of which could have a material adverse effect on our business, financial
condition, and results of operations.
Our need to continue to adapt our information technology systems to allow us to provide new and expanded
service and to successfully implement the core system conversion we are currently undergoing, could present
operational issues, require significant capital spending, and disrupt our business.
As we continue to offer Internet banking and other on-line and mobile 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 and regulatory standards. This
can be very expensive and may require significant capital expenditures. In addition, our success will depend on,
among other things, 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.
We are also in the process of undergoing a core system conversion to a new third party provider. If we are not
able to successfully implement the core system conversion in the time frame we currently anticipate and with
minimal interruption to our systems and customers, our business could be harmed.
30
Our business and financial results could be impacted materially by adverse results in legal proceedings.
Various aspects of our operations involve the risk of legal liability. We have been, and expect to continue to be, named or
threatened to be named as defendants in legal proceedings arising from our business activities. We establish accruals for legal
proceedings when information related to the loss contingencies represented by those proceedings indicates both that a loss is
probable and that the amount of the loss can be reasonably estimated, but we do not have accruals for all legal proceedings where
we face a risk of loss. In addition, amounts accrued may not represent the ultimate loss to us from those legal proceedings. Thus,
our ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for loss contingencies arising
from legal proceedings.
Certain provisions of our charter and bylaws could make the acquisition of our company more difficult.
Certain provisions of our restated certificate of incorporation, as amended, and our restated bylaws, as amended, 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; special requirements for
stockholder proposals and nominations for director; and super-majority voting requirements in certain situations including certain
types of business combinations.
Our financial results could be adversely affected by changes in accounting standards or tax laws and regulations.
From time to time, the Financial Accounting Standards Board and the SEC will change the financial accounting and reporting
standards that govern the preparation of our financial statements. In addition, from time to time, federal and state taxing authorities
will change the tax laws and regulations, and their interpretations. These changes and their effects can be difficult to predict and
can materially and adversely impact how we record and report our financial condition and results of operations.
The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common
stock owned by you at times or at prices you find attractive.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our
control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices
of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock.
Among the factors that could affect our stock price are:
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actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
acquisitions of other banks or financial institutions, through FDIC-assisted transactions or otherwise;
actions by institutional stockholders;
fluctuations in the stock price and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings, or litigation that involve or affect us;
successful management of reputational risk; and
domestic and international economic factors unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. As a
result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate
more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value
of our other securities will depend on many factors, which may change from time to time, including, without limitation, our
financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other
factors identified above in “Forward-Looking Statements,” and in this Item 1A—“Risk Factors.” The capital and credit markets
can experience volatility and disruption. Such volatility and disruption can reach unprecedented levels, resulting in downward
pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. A
significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and
disruptive securities litigation.
31
Statutory restrictions and restrictions by our regulators on dividends and other distributions from the Bank
may adversely impact us by limiting the amount of distributions the Bancorp may receive. Statutory and
contractual restrictions and our regulators may also restrict the Bancorp’s ability to pay dividends.
The ability of the Bank to pay dividends to us is limited by various regulations and statutes, including
California law, and our ability to pay dividends on our outstanding stock is limited by various regulations and
statutes, including Delaware law.
A substantial portion of Bancorp’s cash flow has in earlier years come from dividends that the Bank pays to
us. Various statutory provisions restrict the amount of dividends that the Bank can pay to us without regulatory
approval.
The Federal Reserve Board has previously issued Federal Reserve Supervision and Regulation Letter SR-
09-4 that states that bank holding companies are expected to inform and consult with the Federal Reserve
supervisory staff prior to taking any actions that could result in a diminished capital base, including any payment
or increase in the rate of dividends. In addition, we have agreed under the memorandum of understanding with
the FRB SF that we will not, without the FRB SF’s prior written approval, (i) receive any dividends or any other
form of payment or distribution representing a reduction of capital from the Bank, or (ii) declare or pay any
dividends, make any payments on trust preferred securities, or make any other capital distributions. There can be
no assurance that our regulators will approve the payment of such dividends. Further, if we are not current in our
payment of dividends on our Series B Preferred Stock or interest on our Junior Subordinated Notes, we may not
pay dividends on our common stock.
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 Bancorp, as a holder of the equity interest in the Bank,
would be entitled to receive any of the assets of the Bank as a distribution or dividend.
The restrictions described above, together with the potentially dilutive impact of the Warrant, described
below, could have a negative effect on the value of our common stock. Moreover, holders of our common stock
are entitled to receive dividends only when, as and if declared by our Board of Directors. Although we have
historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors
could reduce or eliminate our common stock dividend in the future.
Our outstanding preferred stock impacts net income available to our common stockholders and earnings per
common share, and the Warrant as well as other potential issuances of equity securities may be dilutive to
holders of our common stock.
The dividends declared and the accretion on discount on our outstanding preferred stock will reduce the net
income available to common stockholders and our earnings per common share. Our outstanding preferred stock
is perpetual and currently bears a dividend rate of 5% per annum. If we do not redeem or otherwise retire our
preferred stock, this dividend rate increases to 9% per annum commencing in December 2013. Our outstanding
preferred stock will also receive preferential treatment in the event of our liquidation, dissolution, or winding up.
Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the
Warrant is exercised. The 1,846,374 shares of common stock underlying the Warrant represent approximately
2.3% of the shares of our common stock outstanding as of December 31, 2012 (including the shares issuable
upon exercise of the Warrant in total shares outstanding). Although the U.S. Treasury has agreed not to vote any
of the shares of common stock it receives upon exercise of the Warrant, a transferee of any portion of the
Warrant or of any shares of common stock acquired upon exercise of the Warrant is not bound by this restriction.
In addition, to the extent options to purchase common stock under our stock option plans are exercised, holders
of our common stock will incur additional dilution.
32
We are not restricted from issuing additional common stock or preferred stock, including any securities that
are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock
or any substantially similar securities. If we sell additional equity or convertible debt securities, these sales could
result in increased dilution to our stockholders. See “We may need to raise additional capital which may dilute
the interests of holders of our common stock or otherwise have an adverse effect on their investment” below.
The issuance of additional shares of preferred stock could adversely affect holders of common stock, which
may negatively impact their investment.
Our Board of Directors is authorized to issue additional classes or series of preferred stock without any
action on the part of the stockholders. The board of directors also has the power, without stockholder approval, to
set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend
rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution, or
winding up of our business and other terms. If we issue preferred stock in the future that has a preference over
the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding up, or if
we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of
holders of the common stock or the market price of the common stock could be adversely affected.
Our outstanding debt securities restrict our ability to pay dividends on our capital stock.
We have issued an aggregate of $121.1 million in trust preferred securities (collectively, the “Trust
Preferred Securities).” Payments to investors in respect of the Trust Preferred Securities are funded by
distributions on certain series of securities issued by us, with similar terms to the relevant series of Trust
Preferred Securities, which we refer to as the “Junior Subordinated Notes.” In addition, in September 2006, the
Bank issued $50.0 million in subordinated debt in a private placement (the “Bank Subordinated Debt”). If we are
unable to pay interest in respect of the Junior Subordinated Notes (which will be used to make distributions on
the Trust Preferred Securities), or if any other event of default occurs, then we will generally be prohibited from
declaring or paying any dividends or other distributions, or redeeming, purchasing or acquiring, any of our
capital securities, including the common stock, during the next succeeding interest payment period applicable to
any of the Junior Subordinated Notes.
If the Bank is unable to pay interest in respect of the Bank Subordinated Debt, or if any other event of
default has occurred and is continuing on the Bank Subordinated Debt, then the Bank will be prohibited from
declaring or paying dividends or other distributions, or redeeming, purchasing or acquiring, any of its capital
stock, during the next succeeding interest payment applicable to the Bank Subordinated Debt. As a result, the
Bank will be prohibited from making dividend payments to us, which, in turn could affect our ability to pay
dividends on our capital securities, including the common stock.
Moreover, any other financing agreements that we enter into in the future may limit our ability to pay cash
dividends on our capital stock, including the common stock. In the event that any other financing agreements in
the future restrict our ability to pay such dividends, we may be unable to pay dividends in cash on the common
stock unless we can refinance amounts outstanding under those agreements.
We may need to raise additional capital which may dilute the interests of holders of our common stock or
otherwise have an adverse effect on their investment.
Should economic conditions deteriorate, particularly in the California commercial real estate and residential
real estate markets where our business is concentrated, we may need to raise more capital to support any
additional provisions for loan losses and loan charge-offs. In addition, we may need to raise more capital to meet
other regulatory requirements, including new required capital standards, if our losses are higher than expected, if
we are unable to meet our capital requirements or if additional capital is required for our growth. There can be no
assurances that we would succeed in raising any such additional capital, and any capital we obtain may dilute the
interests of holders of our common stock, or otherwise have an adverse effect on their investment.
33
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other
relationships. We have exposure to many different industries and counterparties, and we routinely execute
transactions with counterparties in the financial industry, including brokers and dealers, commercial banks,
investment banks, and other institutions. Many of these transactions expose us to credit risk in the event of
default of our counterparty. In addition, our credit risk may be exacerbated when the collateral held by us cannot
be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument
exposure due us. The failure of financial institutions can also result in increased FDIC assessments for the
Deposit Insurance Fund. Any such losses or increased assessments could have a material adverse effect on our
financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
The Company has not received written comments regarding its periodic or current reports from the staff of
the Securities and Exchange Commission that were issued not less than 180 days before the end of its 2012 fiscal
year and that remain unresolved.
Item 2. Properties.
Cathay General Bancorp
The Bancorp currently neither owns nor leases any real or personal property. The Bancorp uses the
premises, equipment, and furniture of the Bank at 777 North Broadway, Los Angeles, California 90012 and at
9650 Flair Drive, El Monte, California 91731 in exchange for payment of a management fee to the Bank.
Cathay Bank
The Bank’s head office is located in a 36,727 square foot building in the Chinatown area of Los Angeles.
The Bank owns both the building and the land upon which the building is situated. The Bank maintains certain of
its administrative offices at a seven-story 102,548 square foot office building located at 9650 Flair Drive, El
Monte, California 91731. The Bank also owns this building and land in El Monte.
The Bank owns its branch offices in Monterey Park, Alhambra, Westminster, San Gabriel, City of Industry,
Cupertino, Artesia, New York City, Flushing (2 locations), and Chicago. In addition, the Bank has certain
operating and administrative departments located at 4128 Temple City Boulevard, Rosemead, California, where
it owns the building and land with approximately 27,600 square feet of space.
The other branch and representative offices and other properties are leased by the Bank under leases with
expiration dates ranging from June 2013 to March 2023, exclusive of renewal options. As of December 31, 2012,
the Bank’s investment in premises and equipment totaled $102.6 million, net of accumulated depreciation. See
Note 8 and Note 14 to the Consolidated Financial Statements.
Item 3. Legal Proceedings.
The Company and its subsidiaries and their property are not currently a party or subject to any material
pending legal proceeding.
34
Item 4. Mine Safety Disclosures.
Not Applicable.
Executive Officers of the Registrant.
The table below sets forth the names, ages, and positions at the Bancorp and the Bank of all executive
officers of the Company as of February 15, 2013.
Name
Age
Present Position and Principal Occupation During the Past Five Years
Dunson K. Cheng . . . . . . . . . . .
68 Chairman of the Board of Directors of Bancorp and the Bank since
1994; Director, President, and Chief Executive Officer of Bancorp since
1990; President of the Bank since 1985; Director of the Bank since
1982.
Peter Wu . . . . . . . . . . . . . . . . . .
64 Director, Executive Vice Chairman, and Chief Operating Officer of
Bancorp and the Bank since October 20, 2003.
Anthony M. Tang . . . . . . . . . . .
59 Director of Bancorp since 1990; Executive Vice President of Bancorp
since 1994; Chief Lending Officer of the Bank since 1985; Director of
the Bank since 1986; Senior Executive Vice President of the Bank since
December 1998.
Heng W. Chen . . . . . . . . . . . . . .
60 Executive Vice President, Chief Financial Officer, and Treasurer of
Bancorp since June 2003; Executive Vice President of the Bank since
June 2003; Chief Financial Officer of the Bank since January 2004.
Irwin Wong . . . . . . . . . . . . . . . .
64 Executive Vice President-Branch Administration of the Bank from 1999
to February 2011; Executive Vice President and Chief Risk Officer of
the Bank since February 2011.
Kim R. Bingham . . . . . . . . . . . .
56 Executive Vice President and Chief Credit Officer of the Bank since
August 2004.
Perry P. Oei . . . . . . . . . . . . . . . .
50
Senior Vice President of Bancorp and the Bank since January 2004;
General Counsel of Bancorp and the Bank since July 2001; Secretary of
Bancorp and the Bank since August 2010.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “CATY.” The closing
price of our common stock on February 15, 2013, was $20.14 per share, as reported by the NASDAQ Global
Select Market.
35
The following table sets forth the high and low closing prices as reported on the NASDAQ Global Select
Market for the periods presented:
Year Ended December 31,
2012
2011
High
Low
High
Low
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18.19
18.16
18.14
19.82
$14.93
15.18
15.71
16.61
$18.87
17.90
17.06
15.19
$15.63
14.81
10.21
10.69
Holders
As of February 15, 2013, there were approximately 1,639 holders of record of our common stock.
Dividends
The cash dividends per share declared by quarter were as follows:
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2012
$0.01
0.01
0.01
0.01
$0.04
2011
$0.01
0.01
0.01
0.01
$0.04
For information concerning restrictions on the payment of dividends, see Part II—Item 7—“Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources—Dividend
Policy,” and Note 13 to the Consolidated Financial Statements.
Performance Graph
The graph and accompanying information furnished below shows the cumulative total stockholder return
over the past five years assuming the investment of $100 on December 31, 2007 (and the reinvestment of
dividends thereafter) in each of our common stock, the S&P 500 Index and the SNL Western Bank Index. The
SNL Western Bank Index is a market-weighted index comprised of publicly traded banks and bank holding
companies (including the Company) most of which are based in California and the remainder of which are based
in eight other western states, including Oregon, Washington, and Nevada. We will furnish, without charge, on the
written request of any person who is a stockholder of record as of the record date for the 2013 annual meeting of
stockholders, a list of the companies included in the SNL Western Bank Index. Requests for this information
should be addressed to Perry Oei, Secretary, Cathay General Bancorp, 777 North Broadway, Los Angeles,
California 90012.
NOTE: The comparisons in the graph below are based upon historical data and are not indicative of, nor
intended to forecast, the future performance of, or returns on, our common stock. Such information furnished
herewith shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not be deemed to be “soliciting
material” or to be “filed” under the Securities Act or the Securities Exchange Act with the Securities and
Exchange Commission except to the extent that the Company specifically requests that such information be
treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or
the Securities Exchange Act.
36
Total Return Performance
125
100
75
50
25
l
e
u
a
V
x
e
d
n
I
Cathay General Bancorp
SNL Western Bank
S & P 500
0
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
Index
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
Cathay General Bancorp . . . . . . . . . . . . . . . . . . . . . . . . .
SNL Western Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
92.02
97.37
63.00
29.70
89.41
79.68
65.93
101.31
91.68
59.10
91.53
93.61
77.50
115.50
108.59
Period Ending
Source: SNL Financial LC, Charlottesville, VA © 2012
Unregistered Sales of Equity Securities
There were no sales of any equity securities by the Company during the period covered by this Annual
Report on Form 10-K that were not registered under the Securities Act.
Issuer Purchases of Equity Securities
As of December 31, 2012, Bancorp may repurchase up to 622,500 shares of common stock under the
November 2007 stock repurchase program, subject to regulatory limitations. No shares were repurchased from
2008 through 2012.
Item 6. Selected Financial Data.
The following table presents our selected historical consolidated financial data, and is derived in part from
our audited Consolidated Financial Statements. The selected historical consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein and
with Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
37
Selected Consolidated Financial Data
Income Statement
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net interest income before provision for credit losses . . . . . . . . .
(Reversal)/Provision for credit losses . . . . . . . . . . . . . . . . . . . . .
Net interest income/(loss) after provision for credit losses . . . . .
Securities gains/(losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss)/income before income tax expense . . . . . . . . . . . . . . . . . .
Income tax (benefit)/expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net income attributable to noncontrolling interest
. . .
Net income/(loss) attributable to Cathay General Bancorp . . . . .
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2012
2011
2010
2009
2008
(Dollars in thousands, except share and per share data)
$
429,744
108,491
321,253
(9,000)
330,253
18,026
28,481
192,589
184,171
66,128
118,043
605
117,438
(16,488)
$
453,571
139,881
313,690
27,000
286,690
21,131
29,761
185,566
152,016
51,261
100,755
605
100,150
(16,437)
$
$
489,594
191,688
297,906
156,900
141,006
18,695
13,556
175,711
(2,454)
(14,629)
12,175
610
11,565
(16,388)
528,731
246,039
282,692
307,000
(24,308)
55,644
23,010
183,037
(128,691)
(61,912)
(66,779)
611
(67,390)
(16,338)
589,951
294,804
295,147
106,700
188,447
(5,971)
24,878
136,676
70,678
19,554
51,124
603
50,521
(1,140)
Net income/(loss) attributable to common stockholders . . . . . . .
$
100,950
$
83,713
$
(4,823) $
(83,728) $
49,381
Net income/(loss) attributable to common stockholders per
common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per common share . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares
$
$
$
1.28
1.28
0.040
$
$
$
1.06
1.06
0.040
$
$
$
(0.06) $
(0.06) $
$
0.040
(1.59) $
(1.59) $
$
0.205
1.00
1.00
0.420
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,719,133
78,723,297
78,633,317
78,640,652
77,073,954
77,073,954
52,629,159
52,629,159
49,414,824
49,529,793
Statement of Condition
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from the Federal Home Loan
$ 2,065,248
7,235,587
—
10,694,089
7,383,225
$ 2,447,982
6,844,483
760
10,644,864
7,229,131
$ 2,843,669
6,615,769
2,873
10,801,986
6,991,846
$ 3,550,114
6,678,914
54,826
11,588,232
7,505,040
$ 3,083,817
7,340,181
—
11,582,639
6,836,736
1,250,000
1,400,000
1,561,000
1,557,000
1,662,000
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from other financial institutions . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
146,200
18,713
171,136
1,629,504
225,000
19,800
171,136
1,515,633
550,000
27,576
171,136
1,436,105
929,362
26,532
171,136
1,312,744
1,449,362
19,500
171,136
1,301,387
Common Stock Data
Shares of common stock outstanding . . . . . . . . . . . . . . . . . . . . . .
Book value per common share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profitability Ratios
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average stockholders’ equity . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets ratio . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,778,288
17.12
$
78,652,557
15.75
$
78,531,783
14.80
$
63,459,590
16.49
$
49,508,250
20.90
$
1.11%
7.48
2.68
14.87
52.37
0.94%
6.78
3.14
13.98
50.90
0.10%
0.81
27.16
12.45
53.22
(0.58%)
(5.20)
n/m
11.29
50.65
0.47%
4.91
42.02
9.58
43.52
n/m, not meaningful
*
(1) Net loans represent gross loans net of loan participations sold, allowance for loan losses, and unamortized deferred loan fees.
38
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
The following discussion is intended to provide information to facilitate the understanding and assessment
of the consolidated financial condition and results of operations of the Bancorp and its subsidiaries. It should be
read in conjunction with the audited Consolidated Financial Statements and Notes appearing elsewhere in this
Annual Report on Form 10-K.
The Bank offers a wide range of financial services. It currently operates 20 branches in Southern California,
11 branches in Northern California, eight branches in New York State, one branch in Massachusetts, two
branches in Texas, three branches in Washington State, three branches in Illinois, one branch in New Jersey, one
branch in Hong Kong and two representative offices (one in Shanghai, China, and one in Taipei, Taiwan). The
Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses
in the local markets in which its branches are located.
The financial information presented herein includes the accounts of the Bancorp, its subsidiaries, including
the Bank, and the Bank’s consolidated subsidiaries. All material transactions between these entities are
eliminated.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our
Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these Consolidated Financial Statements requires
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 Consolidated Financial
Statements. Actual results may differ from these estimates under different assumptions or conditions.
Certain accounting policies involve significant judgments and assumptions by management which have a
material impact on the carrying value of certain assets and liabilities; management considers such accounting
policies to be critical accounting policies. The judgments and assumptions used by management are based on
historical experience and other factors, which are believed to be reasonable under the circumstances.
Management believes the following are critical accounting policies that require the most significant
judgments and estimates used in the preparation of the Consolidated Financial Statements:
Allowance for Credit Losses
The determination of the amount of the provision for credit losses charged to operations reflects
management’s current judgment about the credit quality of the loan portfolio and takes into consideration
changes in lending policies and procedures, changes in economic and business conditions, changes in the nature
and volume of the portfolio and in the terms of loans, changes in the experience, ability, and depth of lending
management, changes in the volume and severity of past due, non-accrual, and adversely classified or graded
loans, changes in the quality of the loan review system, changes in the value of underlying collateral for
collateral-dependent loans, the existence and effect of any concentrations of credit and the effect of competition,
legal and regulatory requirements, and other external factors. The nature of the process by which we determine
the appropriate allowance for loan losses requires the exercise of considerable judgment. The allowance is
increased by the provision for loan losses and decreased by charge-offs when management believes the
uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. A 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.
39
The total allowance for credit losses consists of two components: specific allowances and general
allowances. To determine the adequacy of the allowance in each of these two components, we employ two
primary methodologies, the individual loan review analysis methodology and the classification migration
methodology. These methodologies support the basis for determining allocations between the various loan
categories and the overall adequacy of our allowance to provide for probable losses inherent in the loan portfolio.
These methodologies are further supported by additional analysis of relevant factors such as the historical losses
in the portfolio, and environmental factors which include trends in delinquency and non-accrual, and other
significant factors, such as the national and local economy, the volume and composition of the portfolio, strength
of management and loan staff, underwriting standards, and the concentration of credit.
The Bank’s management allocates a specific allowance for “Impaired Credits,” in accordance with
Accounting Standard Codification (“ASC”) Section 310-10-35. For non-Impaired Credits, a general allowance is
established for those loans internally classified and risk graded Pass, Minimally Acceptable, Special Mention, or
Substandard based on historical losses in the specific loan portfolio and a reserve based on environmental factors
determined for that loan group. The level of the general allowance is established to provide coverage for
management’s estimate of the credit risk in the loan portfolio by various loan segments not covered by the
specific allowance. The allowance for credit losses is discussed in more detail in “Risk Elements of the Loan
Portfolio—Allowance for Credit Losses” below.
Investment Securities
The classification and accounting for investment securities are discussed in detail in Note 1 to the
Consolidated Financial Statements. Under ASC Topic 320, formerly SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-
for-sale, or trading. The appropriate classification is based partially on our ability to hold the securities to
maturity and largely on management’s intentions with respect to either holding or selling the securities. The
classification of investment securities is significant since it directly impacts the accounting for unrealized gains
and losses on securities. Unrealized gains and losses on trading securities flow directly through earnings during
the periods in which they arise, whereas available-for-sale securities are recorded as a separate component of
stockholders’ equity (accumulated other comprehensive income or loss) and do not affect earnings until realized.
The fair values of our investment securities are generally determined by reference to quoted market prices and
reliable independent sources. We are obligated to assess, at each reporting date, whether there is an “other-than-
temporary” impairment to our investment securities. ASC Topic 320 requires us to assess whether we have the
intent to sell the debt security or more likely than not will be required to sell the debt security before its
anticipated recovery. Other-than-temporary impairment related to credit losses will be recognized in earnings.
Other-than-temporary impairment related to all other factors will be recognized in other comprehensive income.
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. Taxes are discussed in more detail
in Note 12 to the Consolidated Financial Statements. Accrued taxes represent the net estimated amount due or to
be received from taxing authorities. In estimating accrued taxes, we assess the relative merits and risks of the
appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance in the
context of our tax position.
40
We account 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 our 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.
Goodwill and Goodwill Impairment
Goodwill represents the excess of costs over fair value of assets of businesses acquired. ASC Topic 805,
formerly SFAS No. 141, Business Combinations (Revised 2007), requires an entity to recognize the assets,
liabilities and any non-controlling interest at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the
amount of that consideration may be determinable beyond a reasonable doubt. ASC Topic 805 also requires an
entity to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and
liabilities assumed. Contingent considerations are to be recognized at fair value on the acquisition date in a
business combination and would be subject to the probable and estimable recognition criteria of ASC Topic 450,
“Accounting for Contingencies.” Goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least
annually in accordance with the provisions of ASC Topic 350, formerly SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360,
formerly SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”
Our policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between
annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the
carrying amount of goodwill exceeds its implied fair value. Accounting standards require management to
estimate the fair value of each reporting unit in making the assessment of impairment at least annually.
The Company first assesses qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to
perform the two-step goodwill impairment test described in ASC Topic 350. The two-step impairment testing
process conducted by us, if needed, begins by assigning net assets and goodwill to our three reporting units-
Commercial Lending, Retail Banking, and East Coast Operations. We then complete “step one” of the
impairment test by comparing the fair value of each reporting unit (as determined in Note 1 to the Consolidated
Financial Statements below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill
included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying
amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not
necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is
performed to determine the amount of impairment. Step two of the impairment test compares the carrying
amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair value of
goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the current
fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value
used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill
exceeds its implied fair value.
41
Valuation of Other Real Estate Owned (OREO)
Real estate acquired in the settlement of loans is initially recorded 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.
Results of Operations
Overview
For the year ended December 31, 2012, we reported net income attributable to common stockholders of
$101.0 million, or $1.28 per diluted share, compared to net income attributable to common stockholders of $83.7
million, or $1.06 per share, in 2011, and net loss attributable to common stockholders of $4.8 million, or $0.06
per share, in 2010. The $17.3 million increase in net income from 2011 to 2012 was primarily the results of a
decrease of $36.0 million in the provision for credit losses, a decrease of $8.1 million in costs associated with
debt redemptions, a $7.6 million increase in net interest income, a decrease of $4.2 million in FDIC assessments,
and a decrease of $1.8 million in operation expenses of affordable housing investment offset by an increase of
$14.9 million in income tax expense, an increase of $6.5 million in salaries and incentive compensation, an
increase of $5.6 million in litigation accrual expense, an increase of $4.5 million in other real estate owned
(“OREO”) expenses, and a decrease of $3.1 million in gains on sale of securities. The return on average assets in
2012 was 1.11%, improving from 0.94% in 2011, and from 0.10% in 2010. The return on average stockholders’
equity was 7.48% in 2012, improving from 6.78% in 2011, and from 0.81% in 2010.
Highlights
• Net income increased $17.2 million, or 17.3%, to $117.4 million for the year ended December 31, 2012,
compared to net income of $100.2 million for the year ended December 31, 2011.
• Memorandum of Understanding of Cathay Bank lifted by the CDFI and FDIC as of November 7, 2012.
• Commercial loans increased $258.8 million, or 13.9%, during 2012, to $2.1 billion at December 31,
2012, compared to $1.9 billion at December 31, 2011. Residential mortgage loans increased $174.0
million, or 17.9%, to $1.1 billion at December 31, 2012, from $972.3 million at December 31, 2011.
• Non-performing assets decreased $149.7 million, or 49.8%, to $150.9 million at December 31, 2012,
from $300.6 million at December 31, 2011.
• Net charge-offs decreased $51.5 million, or 77.9%, to $14.7 million for the year ended December 31,
2012, from $66.2 million for the year ended December 31, 2011.
42
Net income/(loss) available to common stockholders and key financial performance ratios are presented
below for the three years indicated:
2012
2011
2010
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income/(loss) available to common stockholders . . . . . . . .
Basic earnings/(loss) per common share . . . . . . . . . . . . . . . . . .
Diluted earnings/(loss) per common share . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average stockholders’ equity . . . . . . . . . . . . . . . . . . .
Total average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income
(Dollars in thousands, except share and per share data)
11,565
$
(16,388)
100,150
(16,437)
117,438
(16,488)
$
$
$
$
$
$
$
$
100,950
1.28
1.28
1.11%
7.48%
$
$
$
83,713
1.06
1.06
0.94%
6.78%
(4,823)
(0.06)
(0.06)
0.10%
0.81%
$10,617,004
$ 1,579,195
$10,629,217
$ 1,485,545
$11,489,165
$ 1,430,433
52.37%
36.02%
50.90%
33.86%
53.22%
477.45%
Net interest income increased $7.6 million, or 2.4%, from $313.7 million in 2011 to $321.3 million in 2012.
Taxable-equivalent net interest income, using a statutory Federal income tax rate of 35%, totaled $323.5 million
in 2012, compared with $316.0 million in 2011, an increase of $7.5 million, or 2.4%. Interest income on tax-
exempt securities was $4.2 million, or $6.4 million on a tax-equivalent basis, in 2012 compared to $4.2 million,
or $6.5 million on a tax-equivalent basis, in 2011. The increase in net interest income was due primarily to the
decreases in interest expense paid for time deposits and the prepayment of Federal Home Loan Bank advances
and securities sold under agreements to repurchase.
Average loans for 2012 were $7.10 billion, a $134.5 million, or a 1.9%, increase from $6.96 billion in 2011.
Compared with 2011, average commercial loans increased $284.0 million, or 17.1%, and average residential
mortgage loans increased $91.6 million, or 8.0%. Offsetting the above increases was a decrease of $121.1
million, or 3.2%, in average commercial mortgage loans and a decrease of $118.0 million, or 37.3%, in average
real estate construction loans. Average investment securities were $2.35 billion in 2012, a decrease of $270.5
million, or 10.3%, from 2011, due primarily to decreases of U.S. agency securities of $325.7 million.
Average interest bearing deposits were $6.23 billion in 2012, an increase of $83.7 million, or 1.4%, from
$6.14 billion in 2011 primarily due to increases of $238.9 million in all deposit types, offset primarily by
decreases of $155.2 million in brokered time deposits. Average FHLB advances and other borrowings decreased
$280.9 million, or 88.2%, to $37.7 million in 2012 from $318.6 million in 2011 primarily due to prepayments of
FHLB advances in 2012. Average securities sold under agreements to repurchase decreased $86.9 million, or
6.0%, to $1.36 billion in 2012 from $1.45 billion in 2011 primarily due to prepayments of securities sold under
agreements to repurchase in 2012.
Taxable-equivalent interest income decreased $23.9 million, or 5.2%, to $432.0 million in 2012 primarily
due to decline in volume on investment securities and decreases in loan yields and by a change in the mix of
interest-earning assets as discussed below:
•
Increase in volume: Average interest-earning assets increased $37.1 million, or 0.4%, to $9.87 billion in
2012, compared with the average interest-earning assets of $9.84 billion in 2011. The increase in
average loans balance of $134.5 million in 2012 and increase in average interest bearing deposits of
$253.6 million, offset by decreases in average investment securities of $270.4 million and decreases in
average Federal funds sold and securities purchased under agreements to resell of $69.5 million,
contributed to the slight increase in interest income.
43
• Decrease in rate: The average yield of interest bearing assets decreased 25 basis points to 4.38% in 2012 from
4.63% in 2011. Rate on taxable investment securities decreased 53 basis points from 3.34% in 2011 to 2.81% in
2012. The decrease in taxable investment securities yields caused a $12.3 million decline in interest income. Rate
on loans decreased 16 basis points from 5.24% in 2011 to 5.08% in 2012. The decrease in loan yield caused a
$10.9 million decline in interest income.
• Change in the mix of interest-earnings assets: Average gross loans, which generally have a higher yield than
other types of investments, comprised 71.9% of total average interest-earning assets in 2012, an increase from
70.8% in 2011. Average securities comprised 23.8% of total average interest-bearing assets in 2012, a decrease
from 26.6% in 2011.
Interest expense decreased by $31.4 million to $108.5 million in 2012 compared with $139.9 million in 2011
primarily due to decreased cost from time deposits, FHLB advances and securities sold under agreements to repurchase.
The overall decrease in interest expense was primarily due to a net decrease in rate and a net decrease in volume as
discussed below:
• Decrease in volume: Average interest-bearing liabilities decreased $284.1 million in 2012, due primarily to the
decrease in brokered time deposits, the decrease in FHLB advances, and the decrease in securities sold under
agreements to repurchase. The decrease in volume caused interest expense to decline by $10.5 million.
• Decline in rate: The average cost of interest bearing liabilities decreased 34 basis points to 1.39% in 2012 from
1.73% in 2011 due primarily to a decrease of 25 basis points in the average cost of interest bearing deposits to
0.76% in 2012 from 1.01% in 2011 and a decrease of 306 basis points in average cost of FHLB advances and
other borrowings to 0.72% in 2012 from 3.78% in 2011. The decline in rate caused interest expense to decline by
$20.9 million.
• Change in the mix of interest-bearing liabilities: Average interest bearing deposits of $6.23 billion increased to
79.9% of total interest-bearing liabilities in 2012 compared to 76.0% in 2011. Offsetting the increases, average
FHLB advances and other borrowing decreased to 0.5% of total interest-bearing liabilities in 2012 compared to
3.9% in 2011.
Our taxable-equivalent net interest margin, defined as taxable-equivalent net interest income to average interest-
earning assets, increased 7 basis points to 3.28% in 2012 from 3.21% in 2011. The increase in net interest margin from the
prior year primarily resulted from increases in loans, decreases in the rate on interest bearing deposits, and the prepayment
of FHLB advances and securities sold under agreements to repurchase contributed to the increase in the net interest
margin.
Net interest income increased $15.8 million, or 5.3%, from $297.9 million in 2010 to $313.7 million in 2011.
Taxable-equivalent net interest income, using a statutory Federal income tax rate of 35%, totaled $316.0 million in 2011,
compared with $298.4 million in 2010, an increase of $17.6 million, or 5.9%. Interest income on tax-exempt securities
was $4.2 million, or $6.5 million on a tax-equivalent basis, in 2011 compared to $854,000, or $1.3 million on a tax-
equivalent basis, in 2010. The increase in net interest income was due primarily to the decreases in interest expense paid
for time deposits and the prepayment of Federal Home Loan Bank advances and securities sold under agreements to
repurchase.
Average loans for 2011 were $6.96 billion, a $61.7 million, or 0.9%, increase from $6.90 billion in 2010. Compared
with 2010, average commercial loans increased $306.6 million, or 22.6%, and average residential mortgage loans
increased $181.8 million, or 19.0%. Offsetting the above increases was a decrease of $202.1 million, or 5.0%, in average
commercial mortgage loans and a decreased of $223.8 million, or 41.4%, in average real estate construction loans.
Average investment securities were $2.62 billion in 2011, a decrease of $884.6 million, or 25.3%, from 2010, due
primarily to decreases of U.S. agency securities of $812.6 million.
Average interest bearing deposits were $6.14 billion in 2011, a decrease of $357.9 million, or 5.5%, from $6.50
billion in 2010 primarily due to decreases of $442.9 million in brokered time deposits offset primarily by increases of
$42.8 million in saving deposits. Average FHLB advances and other borrowings decreased $524.7 million, or 62.2%, to
$318.6 million in 2011 from $843.3 million in 2010 primarily due to prepayments of FHLB advances in 2011. Average
securities sold under agreements to repurchase decreased $111.9 million, or 7.2%, to $1.45 billion in 2011 from $1.56
billion in 2010 primarily due to prepayments of securities sold under agreements to repurchase in 2011.
44
Taxable-equivalent interest income decreased $34.2 million, or 7.0%, to $455.8 million in 2011 primarily
due to decline in volume on investment securities and decreases in loan yields and by a change in the mix of
interest-earning assets as discussed below:
• Decrease in volume: Average interest-earning assets decreased $942.1 million, or 8.7%, to $9.84 billion
in 2011, compared with the average interest-earning assets of $10.78 billion in 2010. The decrease in
average investment securities balance of $884.6 million in 2011 caused primarily the $26.3 million
decline in interest income.
• Decrease in yield on loans: Yield on loans decreased 28 basis points from 5.52% in 2010 to 5.24% in
2011. The decrease in loan yield caused a $19.5 million decline in interest income.
• Change in the mix of interest-earnings assets: Average gross loans, which generally have a higher yield
than other types of investments, comprised 70.8% of total average interest-earning assets in 2011, an
increase from 64.0% in 2010. Average securities comprised 26.6% of total average interest-bearing
assets in 2011, a decrease from 32.5% in 2010.
Interest expense decreased by $51.8 million to $139.9 million in 2011 compared with $191.7 million in
2010 primarily due to decreased cost from time deposits and FHLB advances. The overall decrease in interest
expense was primarily due to a net decrease in rate and a net decrease in volume as discussed below:
• Decrease in volume: Average interest-bearing liabilities decreased $994.4 million in 2011, due primarily
to the decrease in brokered time deposits, the decrease in FHLB advances, and the decrease in securities
sold under agreements to repurchase. The decrease in volume caused interest expense to decline by
$31.4 million.
• Decline in rate: The average cost of interest bearing liabilities decreased 38 basis points to 1.73% in
2011 from 2.11% in 2010 due primarily to a decrease of 28 basis points in the average cost of interest
bearing deposits to 1.01% in 2011 from 1.29% in 2010 and a decrease of 67 basis points in average cost
of FHLB advances and other borrowings to 3.78% in 2011 from 4.45%. The decline in rate caused
interest expense to decline by $20.4 million.
• Change in the mix of interest-bearing liabilities: Average interest bearing deposits of $6.14 billion
increased to 76.0% of total interest-bearing liabilities in 2011 compared to 71.6% in 2010. Offsetting the
increases, average FHLB advances and other borrowing decreased to 3.9% of total interest-bearing
liabilities in 2011 compared to 9.3% in 2010.
Our taxable-equivalent net interest margin, defined as taxable-equivalent net interest income to average
interest-earning assets, increased 44 basis points to 3.21% in 2011 from 2.77% in 2010. The increase in net
interest margin from the prior year primarily resulted from decreases in the rate on interest bearing deposits, and
the prepayment of FHLB advances and securities sold under agreement to repurchase contributed to the increase
in the net interest margin.
45
The following table sets forth information concerning average interest-earning assets, average interest-bearing
liabilities, and the yields and rates paid on those assets and liabilities. Average outstanding amounts included in the
table are daily averages.
Interest-Earning Assets and Interest-Bearing Liabilities
2012
Average
Balance
Interest
Income/
Expense (4)
Average
Yield/
Rate
(1)(2)
2011
Average
Balance
Interest
Income/
Expense (4)
Average
Yield/
Rate
(1)(2)
2010
Average
Balance
Interest
Income/
Expense (4)
Average
Yield/
Rate
(1)(2)
(Dollars in thousands)
Interest-Earning Assets:
Commercial loans . . . . . . . . . . . . . $ 1,946,986 $ 81,684
60,644
Residential mortgages . . . . . . . . . .
207,541
Commercial mortgages . . . . . . . . .
10,440
Real estate construction loans . . . .
334
Other loans . . . . . . . . . . . . . . . . . .
1,232,573
3,701,613
198,363
15,541
4.20% $ 1,662,937 $ 72,188
57,541
1,140,936
4.92
220,070
3,822,757
5.61
14,352
316,323
5.26
429
17,583
2.15
4.34% $ 1,356,368 $ 63,124
49,823
959,112
5.04
240,747
4,024,863
5.76
26,334
540,151
4.54
634
18,382
2.44
Loans (1) . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . .
Tax-exempt securities (3) . . . . . . . . . . .
FHLB stock . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold & securities
purchased under agreements to
resell
. . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . .
7,095,076
2,216,857
131,530
47,938
360,643
62,395
6,401
485
14,986
367,138
18
2,042
Total interest-earning assets . . . . . . . . . $ 9,873,525 $431,984
Non-interest Earning Assets:
Cash and due from banks . . . . . . . . . . .
Other non-earning assets . . . . . . . . . . . .
126,476
819,986
Total non-interest earning assets . . . . . .
Less: Allowance for loan losses . . . . . .
Deferred loan fees . . . . . . . . .
946,462
(194,385)
(8,598)
5.08
2.81
4.87
1.01
0.12
0.56
4.38
6,960,536
2,484,629
134,245
58,999
364,580
83,083
6,489
177
84,493
113,566
83
1,430
$ 9,836,468 $455,842
5.24
3.34
4.83
0.30
0.10
1.26
4.63
6,898,876
3,476,259
27,258
68,780
380,662
106,568
1,314
237
6,932
300,471
14
1,259
$10,778,576 $490,054
161,711
872,638
1,034,349
(233,744)
(7,856)
95,996
876,771
972,767
(254,420)
(7,758)
Total Assets . . . . . . . . . . . . . . . . . . $10,617,004
$10,629,217
$11,489,165
4.65%
5.19
5.98
4.88
3.45
5.52
3.07
4.82
0.34
0.20
0.42
4.55
Interest-Bearing Liabilities:
Interest-bearing demand
deposits . . . . . . . . . . . . . . . . . . . $
516,246 $
Money market deposits . . . . . . . . .
Savings deposits . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . . . . . .
Federal funds purchased . . . . . . . . . . . .
Securities sold under agreements to
1,059,841
451,022
4,197,906
6,225,015
—
792
5,938
365
40,278
47,373
—
0.15
0.56
0.08
0.96
0.76
—
426,252
979,253
411,953
4,323,833
6,141,291
27
756
7,351
482
53,625
62,214
0
0.18
0.75
0.12
1.24
1.01
1.29
397,434
966,888
369,190
4,765,632
6,499,144
—
927
8,733
694
73,808
84,162
—
0.23
0.90
0.19
1.55
1.29
—
repurchase . . . . . . . . . . . . . . . . . . . . .
1,361,475
55,699
4.09
1,448,363
60,733
4.19
1,560,215
66,141
4.24
FHLB advances and other
borrowings . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Long-term debt
37,717
171,136
270
5,149
Total interest-bearing liabilities . . . . . .
Non-interest Bearing Liabilities:
Demand deposits . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . .
Stockholders' equity . . . . . . . . . . . . . . .
Total liabilities and stockholders’
7,795,343
108,491
1,157,343
85,123
1,579,195
0.72
3.01
1.39
318,606
171,136
12,044
4,890
8,079,423
139,881
3.78
2.86
1.73
843,321
171,136
37,533
3,852
9,073,816
191,688
4.45
2.25
2.11
996,215
68,034
1,485,545
911,351
73,565
1,430,433
equity . . . . . . . . . . . . . . . . . . . . . . . . . $10,617,004
$10,629,217
$11,489,165
Net interest spread (4) . . . . . . . . . . . . . .
Net interest income (4) . . . . . . . . . . . . .
Net interest margin (4)
. . . . . . . . . . . . .
$323,493
2.99%
3.28%
$315,961
2.90%
3.21%
$298,366
2.44%
2.77%
(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.
(2) Calculated by dividing net interest income by average outstanding interest-earning assets.
(3) 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 a statutory Federal income tax rate of 35%.
(4) Net interest income, net interest spread, and net interest margin on interest-earning assets have been adjusted to a fully taxable-
equivalent basis using a statutory Federal income tax rate of 35%.
46
Taxable-Equivalent Net Interest Income—Changes Due to Rate and Volume(1)
2012 - 2011
Increase/(Decrease) in
Net Interest Income Due to:
2011 - 2010
Increase/(Decrease) in
Net Interest Income Due to:
Change in
Volume
Change in
Rate
Total
Change
Change in
Volume
Change in
Rate
Total
Change
(In thousands)
Interest-Earning Assets
Deposits with other banks . . . . . . . . . . . . . . . $ 1,767
Federal funds sold and securities purchased
$ (1,155) $
612
$ (1,155) $ 1,326
$
171
under agreements to resell . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities (2) . . . . . . . . . . . . . . .
FHLB Stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(80)
(8,380)
(132)
(39)
6,965
15
(12,308)
44
347
(10,902)
(65)
(20,688)
(88)
308
(3,937)
(1,179)
(32,493)
5,171
(31)
3,376
1,248
9,008
4
(29)
(19,458)
69
(23,485)
5,175
(60)
(16,082)
Total increase (decrease) in interest
income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101
(23,959)
(23,858)
(26,311)
(7,901)
(34,212)
Interest-Bearing Liabilities
Interest-bearing demand deposits . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreemensts to
repurchase . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances and other borrowings . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
146
567
42
(1,521)
(3,580)
(6,134)
—
(110)
(1,980)
(159)
(11,826)
36
(1,413)
(117)
(13,347)
63
110
73
(6,410)
(234)
(1,492)
(285)
(13,773)
(171)
(1,382)
(212)
(20,183)
(1,454)
(5,640)
259
(5,034)
(11,774)
259
(4,697)
(20,521)
—
(711)
(4,968)
1,038
(5,408)
(25,489)
1,038
Total decrease in interest expense . . . . . . . . .
(10,480)
(20,910)
(31,390)
(31,382)
(20,425)
(51,807)
Change in net interest income . . . . . . . . . . . . $ 10,581
$ (3,049) $ 7,532
$ 5,071
$ 12,524
$ 17,595
(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 has been adjusted to a fully tax-equivalent basis for certain securities of states
and political subdivisions and other securities held using a statutory Federal income tax rate of 35%.
Provision for Credit Losses
The provision for credit losses represents the charge against current earnings that is determined by
management, through a credit review process, as the amount needed to maintain an allowance for loan losses and
an allowance for off-balance sheet unfunded credit commitments that management believes to be sufficient to
absorb credit losses inherent in the Bank’s loan portfolio and credit commitments. The Bank recorded a negative
$9.0 million provision for credit losses in 2012 compared with $27.0 million in 2011, and $156.9 million in 2010.
Net charge-offs for 2012 were $14.7 million, or 0.2% of average loans, compared to net charge-offs for 2011 of
$66.2 million, or 1.0% of average loans, and compared to net charge-offs for 2010 of $126.4 million, or 1.8% of
average loans. The decreases in provision for credit losses and net charge-offs in 2012 were primarily due to
decreases in non-performing loans.
47
Non-interest Income
Non-interest income decreased $4.4 million, or 8.6%, to $46.5 million for 2012, from $50.9 million for 2011, and compared to
$32.3 million for 2010. Non-interest income includes depository service fees, letters of credit commissions, securities gains
(losses), gains (losses) from loan sales, gains from sale of premises and equipment, and other sources of fee income. These other
fee-based services include wire transfer fees, safe deposit fees, fees on loan-related activities, fee income from our Wealth
Management division, and foreign exchange fees.
The decrease in non-interest income of $4.4 million, or 8.6%, from 2011 to 2012 was primarily due to a combination of the
following:
• A $3.1 million decrease in securities gains. We sold securities of $544.2 million and recorded net gains on sale of
securities of $18.0 million in 2012 compared to security sales of $1.3 billion with $21.1 million net gains on sale of
securities in 2011.
• A $2.6 million decrease in gains on sale of loans.
• A $1.2 million decrease in foreign exchange income.
The increase in non-interest income of $18.6 million, or 57.8%, from 2010 to 2011 was primarily due to a combination of the
following:
• A $9.6 million decrease in loss on the value of interest rate swap agreements due to higher unrealized losses recognized
during 2010.
• A $2.4 million increase in securities gains. We sold securities of $1.3 billion and recorded net gains on sale of securities
of $21.1 million in 2011 compared to security sales of $1.1 billion with $19.3 million net gains on sale of securities in
2010.
• A $2.3 million increase in gains on sale of loans.
• A $1.2 million increase in wealth management commissions.
• A $1.2 million increase in letters of credit commissions.
• A $1.1 million increase in venture capital income mainly due to venture capital investment distributions.
• A $1.1 million increase in commissions from foreign currency and exchange transactions.
Non-interest Expense
Non-interest expense includes expenses related to salaries and benefits of employees, occupancy expenses, marketing
expenses, computer and equipment expenses, amortization of core deposit intangibles, and other operating expenses. Non-interest
expense totaled $192.6 million in 2012 compared with $185.6 million in 2011. The increase of $7.0 million, or 3.8%, in non-
interest expense in 2012 compared to 2011 was primarily due to a combination of the following:
•
Salaries and employee benefits increased $6.5 million, or 9.1%, primarily due to the hiring of new employees as well as
the addition of temporary employees related to the upcoming core system conversion in July 2013.
• An accrual of $5.8 million related to a jury verdict in a lender liability case on a construction loan where Cathay Bank
owns a 50% interest.
• OREO expenses increased $4.5 million, or 43%, primarily due to decreases of $4.9 million in gains on OREO
transactions.
•
Professional service expense increased $1.6 million, or 7.7%, and computer and equipment expenses increased $1.1
million, or 12.7%, due primarily to the upcoming core system conversion.
• Marketing expenses increased $1.4 million primarily due to special events celebrating the 50th anniversary of the Bank.
• Offsetting the above increases were a $8.1 million decrease in costs associated with debt redemptions due to prepayment
penalties on prepayment of FHLB advances and securities sold under agreements to repurchase, a $4.2 million decrease in
FDIC and state assessments, and a $1.8 million decrease in operating expenses of affordable housing investments.
48
The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before
provision for loan losses plus non-interest income, increased to 52.37% in 2012 compared to 50.90% in 2011 due
primarily to higher non-interest expenses as explained above.
Non-interest expense totaled $185.6 million in 2011 compared with $175.7 million in 2010. The increase of
$9.9 million, or 5.6%, in non-interest expense in 2011 compared to 2010 was primarily due to a combination of
the following:
•
Salaries and employee benefits increased $13.0 million, or 22.1%, primarily due to increases in
incentive compensation and the hiring of new employees.
• Costs associated with debt redemption increased $6.0 million, 41.9%, primarily due to prepayment
penalties on prepaying FHLB advances.
•
Professional service expense increased $2.6 million, or 14.6%, due primarily to increases in legal
expenses, collection expenses, and consulting expenses.
• Occupancy expense increased $2.0 million, or 16.7%, primarily due to a correction in the depreciation
life for certain components of our administrative office building made in 2010.
• Offsetting the above increases were a $7.1 million decrease in FDIC and state assessments, a $5.4
million decrease in OREO expenses, and a $3.2 million decrease in write-down on loans held for sale.
The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before
provision for loan losses plus non-interest income, decreased to 50.90% in 2011 compared to 53.22% in 2010.
Income Tax Expense
Income tax expense was $66.1 million in 2012, compared to an income tax expense of $51.3 million in
2011, and income tax benefit of $14.6 million in 2010. The effective tax rate was 36.0% for 2012, 33.9% for
2011, and 477% for 2010. The effective tax rate differed from the composite statutory composite rate of 42%
primarily as a result of low income housing and other tax credits totaling $9.4 million recognized in 2012, $10.1
million recognized in 2011, and $11.2 million recognized in 2010. The income tax benefit in 2010 was primarily
due to the net loss.
Our tax returns are open for audits by the Internal Revenue Service back to 2010 and by the California
Franchise Tax Board (“FTB”) of the State of California back to 2003. We are currently under audit by the FTB
for the years 2003 to 2007. From time to time, there may be differences in opinion with respect to the tax
treatment accorded transactions. When, and if, such differences occur and the related tax effects become probable
and estimable, such amounts will be recognized.
Financial Condition
Total assets were $10.7 billion at December 31, 2012, an increase of $49.2 million, or 0.5%, from $10.6
billion at December 31, 2011, primarily due to increases of $369.9 million in gross loans, increases of $117.0
million in short-term investments, and increases of $27.0 million in cash and due from banks, offset by decreases
of $382.7 million in investment securities, decreases of $46.3 million in OREO, and decreases of $37.5 million
from income tax receivable and deferred tax assets
49
Investment Securities
Investment securities were $2.1 billion and represented 19.3% of total assets at December 31, 2012,
compared with $2.4 billion, or 23.0%, of total assets at December 31, 2011. The following table summarizes the
carrying value of our portfolio of securities for each of the past two years:
As of December 31,
2012
2011
(In thousands)
Securities Held-to-Maturity:
U.S. government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
129,037
634,757
9,974
$
99,966
129,577
913,990
9,971
Total securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 773,768
$1,153,504
Securities Available-for-Sale:
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock of government sponsored entities . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 509,971
—
—
416,694
10,168
141
335,977
6,079
2,335
10,115
—
$
—
501,226
1,928
337,631
16,486
166
380,429
6,035
1,654
45,963
2,960
Total securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,291,480
$1,294,478
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,065,248
$2,447,982
ASC Topic 320 requires an entity to assess whether it has the intent to sell the debt security or more likely
than not will be required to sell the debt security before its anticipated recovery. If either of these conditions is
met, an entity must recognize an other-than-temporary impairment (“OTTI”) to its investment securities. If an
entity does not intend to sell the debt security and will not be required to sell the debt security, the entity must
consider whether it will recover the amortized cost basis of the security. If the present value of expected cash
flows is less than the amortized cost basis of the security, OTTI shall be considered to have occurred. OTTI is
then separated into the amount of the total impairment related to credit losses and the amount of the total
impairment related to all other factors. An entity determines the impairment related to credit losses by comparing
the present value of cash flows expected to be collected from the security with the amortized cost basis of the
security. OTTI related to the credit loss is thereafter recognized in earnings. OTTI related to all other factors is
recognized in other comprehensive income. OTTI not related to the credit loss for a held-to-maturity security
should be recognized separately in a new category of other comprehensive income and amortized over the
remaining life of the debt security as an increase in the carrying value of the security only when the entity does
not intend to sell the security and it is not more likely than not that the entity will be required to sell the security
before recovery of its remaining amortized cost basis. The Company has both the ability and the intent to hold
and it is not more likely than not that the Company will be required to sell those securities with unrealized losses
before recovery of their amortized cost basis.
50
The Company’s unrealized loss on investments in corporate bonds relates to a number of investments in bonds of
financial institutions, all of which were investment grade at the date of acquisition and as of December 31, 2012. The
unrealized losses were primarily caused by the widening of credit and liquidity spreads since the dates of acquisition. The
contractual terms of those investments do not permit the issuers to settle the security at a price less than the amortized cost
of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due
according to the contractual terms of the investments. Therefore, it is expected that these bonds would not be settled at a
price less than the amortized cost of the investment. Because the Company does not intend to sell and would not be
required to sell these investments until a recovery of fair value, which may be maturity, it does not consider its
investments in these corporate bonds to be other-than-temporarily impaired at December 31, 2012.
The temporarily impaired securities represent 16.9% of the fair value of investment securities as of December 31,
2012. Unrealized losses for securities with unrealized losses for less than twelve months represent 2.4%, and securities
with unrealized losses for twelve months or more represent 4.4%, of the historical cost of these securities. Unrealized
losses on these securities generally resulted from increases in interest rate spreads subsequent to the date that these
securities were purchased. At December 31, 2012, 34 issues of securities had unrealized losses for 12 months or longer
and seven issues of securities had unrealized losses of less than 12 months.
At December 31, 2012, management believed the impairment was temporary and, accordingly, no impairment loss
has been recognized in our consolidated statements of operations. We expect to recover the amortized cost basis of our
debt securities, and have no intent to sell and will not be required to sell available-for-sale debt securities that have
declined below their cost before their anticipated recovery. The table below shows the fair value, unrealized losses, and
number of issuances of the temporarily impaired securities in our investment securities portfolio as of December 31, 2012,
and December 31, 2011:
Less than 12 months
As of December 31, 2012
Temporarily Impaired Securities
12 months or longer
Total
Fair
Value
Unrealized
Losses
No. of
Issuances
Fair
Value
Unrealized
Losses
No. of
Issuances
Fair
Value
Unrealized
Losses
No. of
Issuances
(Dollars in thousands)
Securities Held-to-Maturity
Total securities held-to-
maturity . . . . . . . . . . . . $ — $ —
— $ — $ —
— $ — $ —
—
Securities Available-for-Sale
U.S. treasury securities . . . . . . $ 49,969 $
Mortgage-backed securities . .
Mortgage-backed securities-
231
5
1
Non-agency . . . . . . . . . . . . .
—
—
Collateralized mortgage
obligations . . . . . . . . . . . . . .
Asset-backed securities . . . . . .
Corporate debt securities . . . . .
—
—
52,468
—
—
2,532
Total securities available-
for-sale . . . . . . . . . . . . $102,668 $2,538
Total investment securities . . . $102,668 $2,538
—
—
—
1
2
4
7
7
170
96
1
2
439
141
253,430
35
4
11,570
$254,276 $11,612
$254,276 $11,612
$ 49,969 $
401
96
5
2
2
439
141
305,898
35
4
14,102
$356,944 $14,150
$356,944 $14,150
6
1
4
1
22
34
34
1
8
1
4
1
26
41
41
51
Less than 12 months
As of December 31, 2011
Temporarily Impaired Securities
12 months or longer
Total
Fair
Value
Unrealized
Losses
No. of
Issuances
Fair
Value
Unrealized
Losses
No. of
Issuances
Fair
Value
Unrealized
Losses
No. of
Issuances
(Dollars in thousands)
Securities Held-to-Maturity
Corporate debt securities . . . $
9,635 $
337
Total securities held-to-
maturity . . . . . . . . . . . $
9,635 $
337
Securities Available-for-
Sale
U.S. government sponsored
entities . . . . . . . . . . . . . . . . $ 49,993 $
Mortgage-backed
securities . . . . . . . . . . . . . .
564
Mortgage-backed securities-
7
4
1
1
1
8
Collateralized mortgage
obligations . . . . . . . . . . . .
Asset-backed securities . . . . .
Corporate debt securities . . . 185,577
1,987
Mutual funds . . . . . . . . . . . . .
5,674
Trust preferred securities . . .
—
—
— —
— —
14,201
13
24
17
1
2
Total securities
$ — $ —
— $
9,635 $
337
$ — $ — — $
9,635 $
337
$ — $ — — $ 49,993 $
35
1
599
7
5
2
2
4
1
19
6,719
431
570
166
358,434
1,987
5,674
238
6
31,729
13
24
570
166
172,857
238
6
17,528
—
—
— —
— —
1
1
1
10
2
4
1
36
1
2
Non-agency . . . . . . . . . . . .
—
— —
6,719
431
available-for-sale . . . $243,795 $14,249
29
$180,347 $18,204
28
$424,142 $32,453
57
Total investment
securities . . . . . . . . . . . . . . $253,430 $14,586
30
$180,347 $18,204
28
$433,777 $32,790
58
52
The scheduled maturities and taxable-equivalent yields by security type are presented in the following tables:
Securites Portfolio Maturity Distribution and Yield Analysis:
As of December 31, 2012
One Year
or Less
After One
Year to
Five Years
After Five
Years to
Ten Years
Over Ten
Years
Total
(Dollars in thousands)
Maturity Distribution:
Securities Held-to-Maturity:
State and municipal securities . . . . . . . . . . . . . . . . . . $ — $ — $ 52,261 $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . .
—
9,974
—
—
—
—
76,776 $ 129,037
634,757
634,757
9,974
—
Total securities held-to-maturity . . . . . . . . . . . . $ — $ — $ 62,235 $ 711,533 $ 773,768
Securities Available-for-Sale:
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . . $349,880 $160,091 $ — $
Mortgage-backed securities (1) . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations (1) . . . . . . . . . . .
Asset-backed securities (1)
. . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock of government sponsored
141
60
—
—
—
—
— 210,009
—
—
55,633
8,446
—
125,968
—
— $ 509,971
416,694
10,168
141
335,977
6,079
360,860
1,722
141
—
6,079
entities (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
2,335
10,115
—
2,335
10,115
—
Total securities available-for-sale . . . . . . . . . . . $349,940 $370,241 $190,047 $ 381,252 $1,291,480
Total investment securities . . . . . . . . . . . . . . . . . . . . . $349,940 $370,241 $252,282 $1,092,785 $2,065,248
Weighted-Average Yield:
Securities Held-to-Maturity:
State and municipal securities . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
Total securities held-to-maturity . . . . . . . . . . . .
0.00%
0.00%
Securities Available-for-Sale:
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities (1) . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations (1) . . . . . . . . . . .
Asset-backed securities (1)
. . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . .
Total securities available-for-sale . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . .
0.16%
4.92
—
—
—
—
—
0.17%
0.17%
0.30%
6.70
—
—
2.02
—
—
1.28%
1.28%
4.60%
—
2.45
4.26%
—
4.45
4.70
—
2.25
—
—
3.00%
3.31%
4.89%
3.83
—
3.95%
—
2.73
7.56
2.25
—
2.42
5.63
2.81%
3.55%
4.77%
3.83
2.45
3.97%
0.21%
2.96
5.18
2.25
2.12
2.42
5.63
1.69%
2.55%
(1) Securities reflect stated maturities and do not reflect the impact of anticipated prepayments.
(2) There is no stated maturity for equity securities.
(3) Weighted average yield has been adjusted to a fully-taxable equivalent basis.
53
Loans
Loans represented 71.9% of average interest-earning assets during 2012, compared with 70.8% during 2011.
Gross loans, excluding loans held for sale, increased by $369.9 million, or 5.2%, to $7.43 billion at December 31,
2012, compared with $7.06 billion at December 31, 2011. The increase in gross loans was primarily attributable
to the following:
• Commercial loans increased $258.8 million, or 13.9%, to $2.13 billion at December 31, 2012, compared
to $1.87 billion at December 31, 2011. Commercial loans consist primarily of short-term loans
(typically with a maturity of one year or less) to support general business purposes, or to provide
working capital to businesses in the form of lines of credit, trade-finance loans, loans for commercial
purposes secured by cash, and SBA loans.
•
Total residential mortgage loans increased by $174.0 million, or 17.9%, to $1.15 billion at
December 31, 2012, compared to $972.3 million at December 31, 2011, primarily due to the low level
of interest rates.
• Commercial mortgage loans increased $19.6 million, or 0.5%, to $3.77 billion at December 31, 2012,
compared to $3.75 billion at December 31, 2011. Total commercial mortgage loans accounted for
50.7% of gross loans at December 31, 2012, compared to 53.1% at December 31, 2011. Commercial
mortgage loans include primarily commercial retail properties, shopping centers, and owner-occupied
industrial facilities, and, secondarily, office buildings, multiple-unit apartments, hotels, and multi-
tenanted industrial properties, and are typically secured by first deeds of trust on such commercial
properties. In addition, the Bank provides medium-term commercial real estate loans secured by
commercial or industrial buildings where the borrower either uses the property for business purposes or
derives income from tenants.
• Real estate construction loans decreased $56.4 million, or 23.8%, to $181.0 million at December 31,
2012, compared to $237.4 million at December 31, 2011.
Our lending relates predominantly to activities in the states of California, New York, Texas, Washington,
Massachusetts, Illinois, and New Jersey, although we have some loans to domestic clients who are engaged in
international trade. Loans outstanding in our branch in Hong Kong were $166.9 million as of December 31,
2012, compared to $160.5 million as of December 31, 2011.
54
The classification of loans by type and amount outstanding as of December 31 for each of the past five years
is presented below:
Commercial loans . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans and equity
lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . .
Installment and other loans . . . . . . . . . . . . . .
Loan Type and Mix
As of December 31,
2012
2011
2010
2009
2008
$2,127,107
$1,868,275
(In thousands)
$1,441,167
$1,307,880
$1,620,438
1,340,082
3,768,452
180,950
12,556
1,186,969
3,748,897
237,372
17,699
1,061,330
3,940,061
409,986
16,077
878,266
4,065,155
626,087
21,754
791,497
4,132,850
913,168
14,415
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . .
7,429,147
7,059,212
6,868,621
6,899,142
7,472,368
Less:
Allowance for loan losses . . . . . . . . . . . . . . .
Unamortized deferred loan fees . . . . . . . . . .
(183,322)
(10,238)
(206,280)
(8,449)
(245,231)
(7,621)
(211,889)
(8,339)
(122,093)
(10,094)
Total loans and leases, net . . . . . . . . . . . . . . .
$7,235,587
$6,844,483
$6,615,769
$6,678,914
$7,340,181
Loans held for sale . . . . . . . . . . . . . . . . . . . .
$
— $
760
$
2,873
$
54,826
$
—
The loan maturities in the table below are based on contractual maturities. As is customary in the banking
industry, loans that meet underwriting criteria can be renewed by mutual agreement between us and the
borrower. Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is
based on contractual maturities. As a result, the data shown below should not be viewed as an indication of future
cash flows.
55
Contractual Maturity of Loan Portfolio
Commercial loans
Floating rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans and equity lines
Floating rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage loans
Floating rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans
Floating rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other loans
Floating rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Within One Year One to Five Years Over Five Years
Total
(In thousands)
$1,237,743
413,410
$ 396,300
33,886
$
39,540
6,228
$1,673,583
453,524
487
5,475
459,619
189,113
124,229
17,198
5,953
6,330
1,125
17,871
231,744
1,083,380
233,356
1,106,726
1,372,634
631,017
838,298
277,771
2,670,551
1,097,901
39,523
—
—
273
—
—
—
—
163,752
17,198
5,953
6,603
Total Loans . . . . . . . . . . . . . . . . . . . . . . . .
$2,459,557
$2,492,629
$2,476,961
$7,429,147
Floating rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,828,031
631,526
$1,809,582
683,047
$1,109,582
1,367,379
$4,747,195
2,681,952
Total Loans . . . . . . . . . . . . . . . . . . . . . . . .
2,459,557
2,492,629
2,476,961
7,429,147
Allowance for loan losses . . . . . . . . . . . . . . . . . .
Unamortized deferred loan fees . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits
(183,322)
(10,238)
$7,235,587
The Bank primarily uses customer deposits to fund its operations, and to a lesser extent borrowings in the
form of securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and other
borrowings. The Bank’s deposits are generally obtained from the Bank’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. Although the vast majority of the Bank’s
deposits are retail in nature, the Bank does engage in certain wholesale activities, primarily accepting time
deposits from political subdivisions and public agencies. The Bank considers wholesale deposits to be an
alternative borrowing source rather than a customer relationship and, as such, their levels are determined by
management’s decisions as to the most economic funding sources. Brokered-deposits totaled $65.0 million, or
0.9% of total deposits, at December 31, 2012, compared to $138.9 million, or 1.9%, at December 31, 2011.
The Company’s total deposits increased $154.1 million, or 2.1%, to $7.38 billion at December 31, 2012,
from $7.23 billion at December 31, 2011, primarily due to a $235.3 million, or 24.7%, increase in money market
deposits, a $194.7 million, or 18.1%, increase in non-interest bearing demand deposits, a $141.6 million, or
31.4%, increase in NOW deposits, and a $53.8 million, or 12.8%, increase in savings deposits, offset by a $188.8
million, or 22.7%, decrease in time deposits under $100,000 and a $282.5 million, or 8.1%, decrease in time
deposits of $100,000 or more.
56
The following table displays the deposit mix for the past three years:
Deposit Mix
2012
Year Ended December 31,
2011
2010
Amount
Percentage
Amount
Percentage
Amount
Percentage
(Dollars in thousands)
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,269,455
593,133
NOW deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,186,771
Money market deposits . . . . . . . . . . . . . . . . . . . . . . .
473,805
Saving deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
644,191
Time deposits under $100,000 . . . . . . . . . . . . . . . . . .
3,215,870
Time deposits of $100,000 or more . . . . . . . . . . . . . .
17.2% $1,074,718
451,541
8.0
951,516
16.1
420,030
6.4
832,997
8.7
3,498,329
43.6
14.9% $ 930,300
418,703
6.2
982,617
13.2
385,245
5.8
1,081,266
11.5
3,193,715
48.4
13.3%
6.0
14.0
5.5
15.5
45.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,383,225
100.0% $7,229,131
100.0% $6,991,846
100.0%
Average total deposits increased $244.8 million, or 3.4%, to $7.38 billion in 2012 compared with average total deposits
of $7.14 billion in 2011.
The following table displays average deposits and rates for the past five years:
Average Deposits and Average Rates
2012
2011
2010
2009
2008
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in thousands)
Demand deposits . . . $1,157,343 — % $ 996,215 — % $ 911,351 — % $ 781,391 — % $ 772,982 — %
NOW deposits . . . . .
0.61
Money market
426,252
397,434
295,770
516,246
255,185
0.36
0.15
0.23
0.18
deposits . . . . . . . .
Saving deposits . . . .
Time deposits . . . . .
1,059,841
451,022
4,197,906
0.56
0.08
0.96
979,253
411,953
4,323,833
0.75
0.12
1.24
966,888
369,190
4,765,632
0.90
0.19
1.55
890,427
338,781
5,084,309
1.49
0.24
2.33
736,739
334,222
4,530,923
1.84
0.36
3.56
Total
. . . . . . . . $7,382,358
0.64% $7,137,506
0.87% $7,410,495
1.14% $7,390,678
1.81% $6,630,051
2.68%
Management considers the Bank’s time deposits of $100,000 or more (Jumbo CDs) to be generally less volatile than
other wholesale funding sources primarily because:
•
•
•
approximately 67.4% of the Bank’s Jumbo CDs have been on deposit with the Bank for two years or more;
the Jumbo CD portfolio is widely-held with 14,716 individual accounts averaging approximately $219,000 per
account owned by 9,619 individual depositors as of December 31, 2012; and
the ratio of relatively higher percentage of Jumbo CDs to total deposits exists in most of the Asian-American banks
in our California market because of a higher savings rate within the communities we serve.
Management monitors the Jumbo CD portfolio to identify any changes in the deposit behavior in the market and of the
customers the Bank is serving.
57
Of our Jumbo CDs, approximately 90.0% mature within one year as of December 31, 2012. The following tables display time
deposits of $100,000 or more by maturity:
Time Deposits of $100,000 or More by Maturity
Less than three months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three to six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Six to twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2012
(In thousands)
$1,079,519
646,497
1,169,696
320,158
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,215,870
The following table displays time deposits with a remaining term of more than one year at December 31, 2012:
Maturities of Time Deposits with a Remaining Term
of More Than One Year for Each
of the Five Years Following December 31, 2012
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$263,847
67,735
1,499
20,901
3
Borrowings
Borrowings include securities sold under agreements to repurchase, Federal funds purchased, funds obtained as advances from
the Federal Home Loan Bank (“FHLB”) of San Francisco, and borrowings from other financial institutions.
At December 31, 2012, there were no borrowings from other financial institutions compared to $880,000 with a weighted
average rate of 0.55% at December 31, 2011.
Securities sold under agreements to repurchase were $1.3 billion with a weighted average rate of 3.84% at December 31,
2012, compared to $1.4 billion with a weighted average rate of 4.14% at December 31, 2011. In May 2011, the Company prepaid a
security sold under an agreement to repurchase of $50 million with a rate of 4.83% and incurred a prepayment penalty of $1.7
million. In 2012, the Company modified $200.0 million of securities sold under agreements to repurchase by extending the term by
an additional four years on average, reducing the rate of these agreements by an average of 168 basis points and removing the
callable feature of these borrowings. In 2012, the Company prepaid three securities sold under an agreement to repurchase for the
total of $150 million with a weighted average rate of 4.43% and incurred prepayment penalties of $9.4 million. Seven floating-to-
fixed rate agreements totaling $400.0 million have initial floating rates for a period of time ranging from six months to one year,
with floating rates ranging from the three-month LIBOR minus 200 basis points to three-month LIBOR minus 340 basis points.
Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.52% to 5.07%. After the initial
floating rate term, the counter parties have the right to terminate the transaction at par at the fixed rate reset date and quarterly
thereafter. Thirteen fixed-to-floating rate agreements totaling $650.0 million have initial fixed rates ranging from 1.00% to 3.50%
with initial fixed rate terms ranging from six months to 18 months. For the remainder of the seven year term, the rates float at 8%
minus the three-month LIBOR rate with a maximum rate ranging from 3.25% to 3.79% and minimum rate of 0.0%. After the initial
fixed rate term, the counter parties have the right to terminate the transaction at par at the floating rate reset date and quarterly
thereafter. The table below provides summary data for the $1.05 billion of callable securities sold under agreements to repurchase
as of December 31, 2012:
58
(Dollars in millions)
Fixed-to-floating
Floating-to-fixed
Total
Rate type . . . . . . . . . . . . . . . . . . .
Rate index . . . . . . . . . . . . . . . . . .
Float Rate
8% minus 3 month LIBOR
Fixed Rate
Maximum rate . . . . . . . . . . . . . . .
Minimum rate . . . . . . . . . . . . . . .
No. of agreements . . . . . . . . . . . .
Amount
Weighted average rate . . . . . . . . .
Final maturity . . . . . . . . . . . . . . .
20
. . . . . . . . . . . . . . . . . . . . $150.0 $ 50.0 $200.0 $150.0 $ 50.0 $ 50.0 $200.0 $200.0 $1,050.0
4
3
1
4
1
3
1
3
3.78% 3.53% 3.50% 3.50% 3.53% 3.25% 4.69% 5.00%
2014
2014
2014
2015
2015
2015
2017
2014
4.04%
3.79% 3.53% 3.50% 3.50% 3.53% 3.25%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
The table below provides summary data for non-callable fixed rate securities sold under agreements to
repurchase as of December 31, 2012:
Maturity
3 years to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No. of
Agreements
Amount
(In thousands)
2
2
4
$100,000
100,000
$200,000
Weighted
Average
Interest Rate
2.71%
2.86%
2.78%
These transactions are accounted for as collateralized financing transactions and recorded at the amount at
which the securities were sold. We may have to provide additional collateral for the repurchase agreements, as
necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities,
U.S. government agency security debt, and mortgage-backed securities with a fair value of $1.4 billion as of
December 31, 2012, and $1.6 billion as of December 31, 2011.
The table below provides comparative data for securities sold under agreements to repurchase for the years
indicated:
2012
2011
2010
(Dollars in thousands)
Average amount outstanding during the year (1) . . . . . . . . . . . . . . . . . . . . $1,361,475 $1,448,363 $1,560,215
1,566,000
Maximum amount outstanding at month-end (2) . . . . . . . . . . . . . . . . . . . .
1,561,000
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rate for the year . . . . . . . . . . . . . . . . . . . . . . . .
1,400,000
1,250,000
1,559,000
1,400,000
3.84%
4.09%
4.14%
4.19%
4.18%
4.24%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January 2012, January 2011, and September 2010.
59
Advances from the FHLB were $146.2 million with a weighted average rate of 0.44% at December 31,
2012, compared to $225.0 million with weighted average rate of 2.08% at December 31, 2011. The Company
prepaid an advance from the FHLB of $100.0 million at a rate of 4.60% and incurred prepayment penalties of
$2.8 million in 2012, and prepaid advances from the FHLB totaling $450.0 million with a weighted average rate
of 4.39% and incurred prepayment penalties of $18.5 million in 2011.
Long-term Debt
On September 29, 2006, the Bank issued $50.0 million in subordinated debt in a private placement
transaction (the “Bank Subordinated Debt”). The debt had an original maturity term of 10 years, was unsecured
and bore interest at a rate of three-month LIBOR plus 110 basis points, payable on a quarterly basis. In March
2011, the maturity term was extended for an additional year. As part of the extension agreement, the rate was
increased from LIBOR plus 110 basis points to LIBOR plus 330 basis points for 2011 and 2012, after which time
it reverts back to LIBOR plus 110 basis points. At December 31, 2012, the per annum interest rate on the
subordinated debt was 3.61% compared to 3.88% at December 31, 2011. The Bank Subordinated Debt was
issued through the Bank and qualifies as Tier 2 capital for regulatory reporting purposes and is included in long-
term debt in the accompanying Consolidated Balance Sheets.
We established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing Guaranteed
Preferred Beneficial Interests in their Subordinated Debentures to outside investors (“Capital Securities”). The
proceeds from the issuance of the Capital Securities as well as our purchase of the common stock of the special
purpose trusts were invested in Junior Subordinated Notes of the Company (“Junior Subordinated Notes”). The
trusts exist for the purpose of issuing the Capital Securities and investing in Junior Subordinated Notes. Subject
to some limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of
the trusts, or the redemption of the Capital Securities, are guaranteed by the Company to the extent the trusts
have funds on hand at such time. The obligations of the Company under the guarantees and the Junior
Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the Company and will
be structurally subordinated to all liabilities and obligations of the Company’s subsidiaries. The Company has the
right to defer payments of interest on the Junior Subordinated Notes at any time or from time to time for a period
of up to twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior
Subordinated Notes, the Company may not, with certain exceptions, declare or pay any dividends or distributions
on its capital stock or purchase or acquire any of its capital stock if it has deferred payment of interest on any
Junior Subordinated Notes.
At December 31, 2012, Junior Subordinated Notes totaled $121.1 million with a weighted average interest
rate of 2.47% compared to $121.1 million with a weighted average rate of 2.72% at December 31, 2011. The
Junior Subordinated Notes have a stated maturity term of 30 years. The Junior Subordinated Notes issued qualify
as Tier 1 capital for regulatory reporting purposes. The trusts are not consolidated with the Company in
accordance with an accounting pronouncement that took effect in December 2003.
Off-Balance-Sheet Arrangements, Commitments, Guarantees, and Contractual Obligations
The following table summarizes our contractual obligations and commitments to make future payments as
of December 31, 2012. Payments for deposits and borrowings do not include interest. Payments related to leases
are based on actual payments specified in the underlying contracts. Loan commitments and standby letters of
credit are presented at contractual amounts; however, since many of these commitments are expected to expire
unused or only partially used, the total amounts of these commitments do not necessarily reflect future cash
requirements.
60
Contractual obligations:
Securities sold under agreements to repurchase (1) . . . $
Securities sold under agreements to repurchase (2) . . .
Advances from the Federal Home Loan Bank . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits with stated maturity dates . . . . . . . . . . . . . . . .
Total contractual obligations and other
Payment Due by Period
1 year
or less
More than
1 year but
less than
3 years
3 years or
more but
less than
5 years
(In thousands)
5 years
or more
Total
— $ 850,000 $200,000 $ — $1,050,000
200,000
—
146,200
125,000
18,713
—
171,136
—
17,338
6,084
3,860,061
3,506,075
— 100,000
21,200
—
—
—
50,000
—
2,645
7,948
22,400
331,583
100,000
—
18,713
121,136
661
3
commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,637,159 $1,189,531 $396,245 $240,513 $5,463,448
Other commitments:
. . . . . . . . . . . . . . .
Commitments to extend credit
. . . . . . . . . . . . . . . . . . . .
Standby letters of credit
Commercial letters of credit
. . . . . . . . . . . . . . . . .
Bill of lading guarantees . . . . . . . . . . . . . . . . . . . .
1,105,138
44,060
71,073
77
310,586
593
—
—
132,279
19
—
—
192,460
—
—
—
1,740,463
44,672
71,073
77
Total contractual obligations and other
commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,220,348 $ 311,179 $132,298 $192,460 $1,856,285
(1) These repurchase agreements have a final maturity of 5-year, 7-year and 10-year from origination date but
are callable on a quarterly basis after six months, one year, or 18 months for the 7-year term and one year
for the 5-year and 10-year term.
(2) These repurchase agreements are non-callable.
In the normal course of business, we enter into various transactions, which, in accordance with U.S.
generally accepted accounting principles, are not included in our Consolidated Balance Sheets. We enter into
these transactions to meet the financing needs of our customers. These transactions include commitments to
extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest
rate risk in excess of the amounts recognized in the Consolidated Balance Sheets.
Loan Commitments. We enter into contractual commitments to extend credit, normally with fixed expiration
dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to
extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We
minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring
procedures. Management assesses the credit risk associated with certain commitments to extend credit in
determining the level of the allowance for credit losses.
Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by us to
secure the obligations of a customer to a third party. In the event the customer does not perform in accordance
with the terms of an agreement with the third party, we would be required to fund the commitment. The
maximum potential amount of future payments we could be required to make is represented by the contractual
amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the
customer. Our policies generally require that standby letter of credit arrangements contain security and debt
covenants similar to those contained in loan agreements.
61
Capital Resources
Stockholders’ Equity
In 2010, the Company sold $132.3 million of new common stock consisting of 15,028,409 shares at an
average price of $8.80 per share. Net of issuance costs and fees, this issuance added $124.9 million to common
stockholders’ equity. The Company did not sell any common stock in 2012 or in 2011.
Total equity of $1.63 billion at December 31, 2012, was up $113.9 million, or 7.5%, compared to $1.52
billion at December 31, 2011. The increase in stockholders’ equity was due to a $118.0 million increase from net
income, an increase of $9.2 million in unrealized gains on securities, amortization of unearned compensation of
$2.1 million, option exercise of $764,000, and reinvestment of dividends of $291,000, offset by payments of
dividends on preferred stock of $13.5 million, payments of dividends on common stock of $3.1 million, and a tax
short-fall of $620,000 mainly from the expiration of stock options. The Company paid common stock cash
dividends of $0.04 per common share in 2012 and in 2011.
We have participated in the U.S. Treasury TARP Capital Purchase Program under the Emergency Economic
Stabilization Act of 2008. Pursuant to this program, on December 5, 2008, the U.S. Treasury purchased 258,000
shares of our Series B Preferred Stock in the amount of $258.0 million. The Series B Preferred Stock pays
cumulative compounding dividends at a rate of 5% per year for the first five years, and thereafter at a rate of
9% per year. The shares are non-voting, other than class voting rights on matters that could adversely affect the
shares. They are callable at par after three years. In conjunction with the purchase of senior preferred shares, the
U.S. Treasury received warrants to purchase 1,846,374 shares of common stock at the exercise price of $20.96
with an aggregate market price equal to $38.7 million, 15% of the senior preferred stock amount that U.S.
Treasury invested. The exercise price of $20.96 was calculated based on the average of closing prices of our
common stock on the 20 trading days ending on the last trading day prior to November 17, 2008, the date that we
received the preliminary approval for the capital purchase from the U.S. Treasury. The Company also adopted
the U.S. Treasury’s standards for executive compensation and corporate governance for the period during which
the U.S. Treasury holds securities issued under this program. See Part I — Item 1A — “Risk Factors” for a
discussion of some of the factors that may affect us.
As of December 31, 2012, we remained authorized to purchase up to 622,500 shares of our common stock
under our November 2007 stock repurchase program. No shares were repurchased during the years from 2008 to
2012. As long as the U. S. Treasury owns any of our Series B Preferred Stock, we are precluded from any
repurchase of our common stock unless we are current in our dividend payments on our Series B Preferred Stock.
As discussed below under “Capital Resources- Regulatory Matters,” we are also subject to other restrictions on
the repurchase of our common stock.
Capital Adequacy
Management seeks to retain our 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 December 31, 2012, Tier 1 risk-based capital
ratio of 17.36%, total risk-based capital ratio of 19.12%, and Tier 1 leverage capital ratio of 13.82%, continued to
place the Bancorp in the “well capitalized” category, which is defined as institutions with Tier 1 risk-based
capital ratio equal to or greater than 6.00%, total risk-based capital ratio equal to or greater than 10.00%, and
Tier 1 leverage capital ratio equal to or greater than 5.00%. The comparable ratios for the Bancorp at
December 31, 2011, were Tier 1 risk-based capital ratio of 15.97%, total risk-based capital ratio of 17.85%, and
Tier 1 leverage capital ratio of 12.93%.
62
Cathay Real Estate Investment Trust, of which 100% of the common stock is owned by the Bank, sold $4.4
million during 2003 and $4.2 million during 2004 of its 7.0% Series A Non-Cumulative preferred stock to
accredited investors. During 2005, the Trust repurchased $131,000 of its preferred stock. This preferred stock
qualifies as Tier 1 capital under current regulatory guidelines.
A table displaying the Bancorp’s and the Bank’s capital and leverage ratios at December 31, 2012, and
2011, is included in Note 22 to the Consolidated Financial Statements.
Dividend Policy
Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of
funds legally available for the payment of dividends. Although we have historically paid cash dividends on our
common stock, we are not required to do so. Commencing with the second quarter of 2009, our Board of
Directors reduced our common stock dividend to $.08 per share and to $.01 per share thereafter. In January 2010,
we adopted a capital management and dividend policy as part of our Three-Year Capital and Strategic Plan which
included a policy to refrain from paying dividends in excess of $.01 per share per quarter, except when covered
by operating earnings. On November 17, 2010, the Federal Reserve issued guidance that bank holding companies
with U. S. Government investments still outstanding should not increase dividend payouts. The amount of future
dividends will depend on earnings, financial condition, approval by our regulators, the repayment of our Series B
Preferred Stock, capital requirements, and other factors, and will be determined by our Board of Directors in
accordance with the capital management and dividend policy.
Substantially all of the revenues of the Company available for payment of dividends derive from amounts
paid to it by the Bank. The terms of the Bank Subordinated Debt limit the ability of the Bank to pay dividends to
us if the Bank is not current in paying interest on the Bank Subordinated Debt or another event of default has
occurred. Under the memorandum of understanding we entered into with the Federal Reserve Bank of San
Francisco (FRB SF), we agreed that we will not, without the FRB SF’s prior written approval, receive any
dividends or any other form of payment or distribution representing a reduction of capital from the Bank. The
Bank did not pay dividends to Bancorp in both 2010 and 2011. In our February 27, 2012 three-year capital and
strategic plan submitted to our regulators, we indicated that, subject to regulatory approval, the Bank expected to
pay a dividend of $23.9 million to Bancorp during the second quarter of 2012 to increase Bancorp’s cash balance
to equal at least two years of Bancorp’s operating expenses and then additional quarterly dividends beginning in
the third quarter of 2012 in an amount which would maintain cash balances at Bancorp equal to at least two years
of Bancorp’s operating expenses. In addition, on December 27, 2012 after receipt of regulatory approvals, the
Bank paid a special dividend of $125.0 million to Bancorp to provide funding for a partial repayment of the
Series B Preferred Stock. The Bank paid dividends totaling $154.7 million to Bancorp during 2012.
The terms of our Series B Preferred Stock and Junior Subordinated Notes also limit our ability to pay
dividends on our common stock. If we are not current in our payment of dividends on our Series B Preferred
Stock or in our payment of interest on our Junior Subordinated Notes, we may not pay dividends on our common
stock. The Federal Reserve Board has previously issued Federal Reserve Supervision and Regulation Letter SR-
09-4 that states that bank holding companies are expected to inform and consult with the Federal Reserve
supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the
dividend is being paid. As a result of losses incurred in 2009, we were expected to so inform and consult with the
Federal Reserve supervisory staff prior to declaring or paying any dividends in the future. Bancorp received
Federal Reserve approval to make payments on our Series B Preferred Stock and Junior Subordinated Notes.
There can be no assurance that our regulators will approve the payment of such dividends.
63
Under California State banking law, the Bank may not without regulatory approval pay a cash dividend 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. Under this regulation, the amount of retained earnings available for cash
dividends to the Company immediately after December 31, 2012, was restricted to approximately $80.8 million.
Regulatory Matters
On December 17, 2009, the Bancorp entered into a memorandum of understanding with the Federal Reserve
Bank of San Francisco (“FRB SF”) under which we agreed that we will not, without the FRB SF’s prior written
approval, (i) receive any dividends or any other form of payment or distribution representing a reduction of capital
from the Bank, or (ii) declare or pay any dividends, make any payments on trust preferred securities, or make any
other capital distributions. We do not believe that this agreement regarding dividends from the Bank will have a
material adverse effect on our operations. We had retained a portion of the proceeds from our common stock
offerings to be used, for among other things, payments of future dividends on our common and preferred stock and
payments on trust preferred securities. At December 31, 2012, our cash on hand totaled $161.9 million which is
sufficient to cover future dividends on our common stock at the current quarterly rate of $.01 per share, on our
preferred stock, and interest on our Trust Preferred Securities, subject to FRB SF approval, for the next twelve
months.
Under the memorandum, we also agreed to submit to the FRB SF for review and approval a plan to maintain
sufficient capital at the Company on a consolidated basis and at the Bank, a dividend policy for the Bancorp, a plan
to improve management of our liquidity position and funds management practices, and a liquidity policy and
contingency funding plan for the Bancorp. As part of our compliance with the memorandum, on January 22, 2010,
we submitted to the FRB SF a Three-Year Capital and Strategic Plan that updates a previously submitted plan and
establishes, among other things, targets for our Tier 1 risk-based capital ratio, total risk-based capital ratio, Tier 1
leverage capital ratio and tangible common risk-based ratio, each of which, where applicable, are above the
minimum requirements for a well-capitalized institution. In addition, we agreed to notify the FRB SF prior to
effecting certain changes to our senior executive officers and board of directors and we are limited and/or
prohibited, in certain circumstances, in our ability to enter into contracts to pay and to make golden parachute
severance and indemnification payments. We also agreed in the memorandum that we will not, without the prior
written approval of the FRB SF, directly or indirectly, (i) incur, renew, increase or guaranty any debt, (ii) issue any
trust preferred securities, or (iii) purchase, redeem, or otherwise acquire any of our stock. The target, actual, and any
excess or deficiency capital levels of the Three-Year Capital and Strategic Plan submitted to the FRB SF are as
follows as of December 31, 2012:
Tier 1 risk-based
capital ratio
Total risk-based
capital ratio
Tier 1 leverage
capital ratio
Tangible common
risk-based ratio *
. . . . . . . . . . . . . . . . . . . . . . . . .
Actual
Target Levels . . . . . . . . . . . . . . . . . . . .
Excess . . . . . . . . . . . . . . . . . . . . . . . . .
17.36%
11.50%
5.86%
19.12%
13.50%
5.62%
13.82%
9.50%
4.32%
12.68%
5.00%
7.68%
*
Tier 1 risk-based capital excluding preferred stock, trust preferred stock and REIT preferred stock divided by
total risk-weighted assets.
The Bancorp has taken appropriate steps to comply with the terms of its memorandum of understanding with
the FRB SF and we believe we are in compliance with the memorandum. We do not believe that the memorandum
or our compliance activities will have a material adverse effect on our operations or financial condition, including
liquidity. If we fail to comply with the terms of the memorandum, that failure could lead to additional enforcement
action by the FRB SF that could have a material adverse effect on our operations or financial condition. At
December 31, 2012, we are in compliance with the applicable target ratios.
64
Until it was terminated as of November 7, 2012, the Bank was subject to a memorandum of understanding
with the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation
(“FDIC’) that was entered into on March 1, 2010, by which the Bank agreed to undertake certain steps to
strengthen its operations. The Bank was required to develop and implement, within specified time periods, plans
satisfactory to the DFI and the FDIC to reduce commercial real estate concentrations, to enhance and to improve
the quality of our stress testing of the Bank’s loan portfolio, and to revise our loan policy in connection
therewith; to develop and adopt a strategic plan addressing improved profitability and capital ratios and to reduce
the Bank’s overall risk profile; to develop and adopt a capital plan; to develop and implement a plan to improve
asset quality, including the methodology for calculating the loss reserve allocation and evaluating its adequacy;
and to develop and implement a plan to reduce dependence on wholesale funding. In addition, we are required to
report our progress to the DFI and FDIC on a quarterly basis. As part of our compliance with the Bank
memorandum, on April 30, 2010, we submitted to the DFI and the FDIC a Three-Year Capital Plan that updated
the Three-Year Capital and Strategic Plan previously submitted to the FRB SF on January 22, 2010, and
established, among other things, targets for our Tier 1 risk-based capital ratio and total risk-based capital ratio,
each of which are above the minimum requirements for a well-capitalized institution and effective June 30, 2010,
a target Tier 1 to total tangible assets ratio. We were in compliance with the applicable target ratios through the
date of termination of the memorandum.
Risk Elements of the Loan Portfolio
Non-performing Assets
Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans,
and OREO. Our policy is to place loans on 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 previously accrued but unpaid interest is
reversed and charged against current income and subsequent payments received are generally first applied
towards the outstanding principal balance of the loan. 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.
Total non-performing portfolio assets, excluding non-accrual loans held for sale, decreased $149.7 million,
or 49.8%, to $150.9 million at December 31, 2012, compared to $300.6 million at December 31, 2011, primarily
due to a $97.3 million decrease in non-accrual loans, a $46.3 million decrease in OREO, and a $6.1 million
decrease in accruing loans past due 90 days or more
As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets
decreased to 2.02% at December 31, 2012, from 4.20% at December 31, 2011. The non-performing portfolio
loan coverage ratio, defined as the allowance for credit losses to non-performing loans, increased to 176.7% at
December 31, 2012, from 100.2% at December 31, 2011.
65
The following table presents the breakdown of total non-accrual, past due, and restructured loans for the past five years:
Non-accrual, Past Due and Restructured Loans
December 31,
2012
2011
2010
2009
2008
(Dollars in thousands)
Accruing loans past due 90 days or more . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
630 $
6,726 $
5,006 $ — $
103,902
201,197
242,319
280,643
6,733
181,202
Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104,532
207,923
247,325
280,643
187,935
Real estate acquired in foreclosure and other assets . . . . . . . . . . . . . . . . . . .
46,384
92,713
77,740
71,014
63,892
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,916 $300,636 $325,065 $351,657 $251,827
Accruing troubled debt restructurings (TDRs) . . . . . . . . . . . . . . . . . . . . . . . $144,695 $120,016 $136,800 $ 54,992 $
924
Non-accrual TDRs (included in non-accrual loans) . . . . . . . . . . . . . . . . . . . $ 47,731 $ 50,870 $ 28,146 $ 41,609 $ 11,614
2,873 $ 54,826 $ —
Non-accrual loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
Non-performing assets as a percentage of gross loans and other real estate
owned at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses as a percentage of gross loans . . . . . . . . . . . . .
Allowance for credit losses as a percentage of non-performing loans . . . . .
3.34%
4.68%
1.73%
3.60%
176.68% 100.20% 100.10% 77.36% 68.87%
5.05%
3.15%
2.02%
2.49%
4.20%
2.95%
760 $
The effect of non-accrual loans on interest income for the past five years is presented below:
Non-accrual Loans
Contractual interest due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,621
1,006
$13,049
71
$17,304
4,853
$23,746
9,830
$14,043
8,782
Net interest foregone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,615
$12,978
$12,451
$13,916
$ 5,261
2012
2011
2010
2009
2008
(In thousands)
As of December 31, 2012, there were no commitments to lend additional funds to those borrowers whose loans had been
restructured, were considered impaired, or were on non-accrual status.
Non-accrual Loans
At December 31, 2012, total non-accrual portfolio loans of $103.9 million decreased $97.3 million, or 48.4%, from $201.2
million at December 31, 2011. The allowance for the collateral-dependent impaired loans is calculated by the difference between
the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contract, or other available
market price information. The allowance for collateral-dependent impaired loans varies from loan to loan based on the collateral
coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, based on recent
appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.
Non-accrual portfolio loans at December 31, 2012, consisted of two residential construction loans totaling $3.0 million, three
non-farm non-residential construction loans totaling $33.3 million, 35 commercial real estate loans totaling $29.6 million, five land
loans totaling $6.1 million, 31 commercial loans totaling $20.0 million, and 49 residential mortgage loans totaling $11.9 million.
Non-accrual loans also include those troubled debt restructurings that do not qualify for accrual status. The comparable numbers
for 2011 were five residential construction loans totaling $25.3 million, three non-farm non-residential construction loans totaling
$20.7 million, 46 commercial real estate loans totaling $96.8 million, 11 land loans totaling $11.0 million, 46 commercial loans
totaling $30.7 million, and 56 residential mortgage loans totaling $16.7 million.
66
No loans were held for sale at December 31, 2012, compared to $760,000 at December 31, 2011. In 2012, we
added three new loans of $16.0 million, sold four loans of $16.2 million for a net loss on sale of $26,000, and
transferred a loan of $500,000 to held for investment. At December 31, 2011, non-accrual loans held for sale of
$760,000 decreased $2.1 million from $2.9 million at December 31, 2010. In 2011, we added six new loans of $4.4
million, transferred one loan of $2.9 million to OREO, and sold four loans of $3.6 million for a net gain on sale of
$88,000. At December 31, 2011, loans held for sale were comprised of a commercial construction loan of $500,000
and a residential mortgage loan of $260,000. The following tables present the type of properties securing the non-
accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated:
December 31, 2012
December 31, 2011
Real
Estate (1)
Commercial
Real
Estate (1)
Commercial
(In thousands)
Type of Collateral
Single/Multi-family residence . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Personal Property (UCC)
$20,996
56,895
6,053
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$83,944
$ 2,073
1,433
—
16,452
$19,958
$ 52,896
106,665
10,975
—
$170,536
$ 3,078
1,929
—
25,654
$30,661
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and
equity lines.
December 31, 2012
December 31, 2011
Real
Estate (1)
Commercial
Real
Estate (1)
Commercial
(In thousands)
Type of Business
Real estate development . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale/Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Food/Restaurant
Import/Export
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$56,995
15,398
562
—
10,989
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$83,944
$ 2,387
3,908
341
13,309
13
$19,958
$120,623
33,675
—
—
16,238
$170,536
$ 1,518
5,833
817
22,493
—
$30,661
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and
equity lines.
Other Real Estate Owned
At December 31, 2012, the net carrying value of other real estate owned (“OREO”) decreased $46.3 million, or
50.0%, to $46.4 million from $92.7 million at December 31, 2011. OREO located in California was $12.2 million and
was comprised primarily of six parcels of land zoned for residential purpose of $9.1 million, three office and
commercial use buildings of $1.7 million, one commercial building construction project of $740,000, one residential
construction project of $530,000, and one single family residential property of $179,000. OREO located in Texas was
$29.6 million and was comprised of four office and commercial use buildings of $14.4 million, four parcels of land
zoned for residential purposes of $12.6 million, two commercial building construction projects of $1.3 million, one
parcel of land zoned for non-residential purposes of $1.1 million, and one single family residential property of
$169,000. OREO located in the state of Washington was $1.6 million and was comprised one parcel of land zoned for
residential purpose of $733,000 and one commercial construction project of $870,000. OREO located in the state of
New York was a retail store of $1.2 million. OREO located in the state of Nevada was $1.1 million and was comprised
of a commercial use building. OREO in all other states was $752,000 and was comprised of a commercial use property
of $376,000 and one retail store of $376,000.
67
For 2011, OREO located in California was $32.3 million and was comprised primarily of five parcels of
land zoned for residential purpose of $9.9 million, four parcels of land zoned for commercial purposes of $4.8
million, two commercial building construction projects of $3.5 million, one residential construction project of
$588,000, twelve office and commercial use buildings of $13.2 million, and two single family residential
properties of $395,000. OREO located in Texas was $48.6 million and was comprised of eight commercial use
buildings of $33.5 million, three parcels of land zoned for residential purposes of $11.7 million, three
commercial building construction projects of $2.4 million, and three single family residential properties of
$959,000. OREO located in the state of Washington was $3.9 million and was comprised of two retail stores $1.6
million, three parcels of land zoned for residential purposes of $1.2 million, one commercial construction project
of $658,000, and three single family residential properties of $531,000. OREO located in the state of Nevada was
$4.8 million and was comprised of a parcel of land zoned for residential purposes of $3.5 million and one
commercial use building of $1.3 million. OREO in all other states was $3.0 million and was comprised of three
commercial use properties of $2.1 million and four single family residential properties of $878,000.
Troubled Debt Restructurings
A troubled debt restructuring (“TDR”) is a formal modification of the terms of a loan when the Bank, 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
amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of
the maturity date. Although these loan modifications are considered under ASC Subtopic 310-40, formerly SFAS
15, to be troubled debt restructurings, the loans must have, pursuant to the Bank’s policy, performed under the
restructured terms and have demonstrated sustained performance under the modified terms for six months before
being returned to accrual status. The sustained performance considered by management pursuant to its policy
includes the periods prior to the modification if the prior performance met or exceeded the modified terms. This
would include cash paid by the borrower prior to the restructure to set up interest reserves.
Troubled debt restructurings on accrual status totaled $144.7 million at December 31, 2012, and were
comprised of 61 loans, an increase of $24.7 million, compared to 32 loans totaling $120.0 million at
December 31, 2011. TDRs at December 31, 2012, were comprised of sixteen retail shopping and commercial use
building loans of $68.1 million, fifteen office and commercial use building loans of $40.4 million, two hotel
loans of $12.4 million, seventeen single family residential loans of $19.1 million, two land loans of $2.3 million,
six commercial loans of $1.3 million, and three multi-family residential loans of $1.1 million. We expect that the
troubled debt restructuring loans on accruing status as of December 31, 2012, which are all performing in
accordance with their restructured terms, will continue to comply with the restructured terms because of the
reduced principal or interest payments on these loans. The comparable TDRs at December 31, 2011, were
comprised of eleven retail shopping and commercial use building loans of $74.4 million, seven office and
commercial use building loans of $23.8 million, one hotel loan of $7.9 million, ten single family residential loans
of $13.3 million, one land loan of $635,000 and two commercial loans of $39,000. A summary of TDRs by type
of loans and by accrual/non-accrual status is shown below:
68
December 31, 2012
Principal
Deferral
Rate
Reduction
Rate Reduction
and Forgiveness
of Principal
Rate Reduction
and Payment
Deferral
Total
(In thousands)
Accruing TDRs
Commercial loans . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . .
$
531
—
27,003
1,461
$ 3,020
—
16,656
1,024
Total accruing TDRs . . . . . . . . . . . . . . . . . . . . .
$28,995
$20,700
$ —
—
739
—
$ 739
$
413
5,834
85,783
2,231
$94,261
$
3,964
5,834
130,181
4,716
$144,695
December 31, 2012
Interest
Deferral
Principal
Deferral
Rate
Reduction
Rate Reduction
and Forgiveness
of Principal
Rate Reduction
and Payment
Deferral
Total
Non-accrual TDRs
Commercial loans . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . .
Commercial mortgage loans . . . . . . . . .
Residential mortgage loans . . . . . . . . .
$ — $
—
1,685
275
912
16,767
2,817
2,010
$ —
9,579
5,746
586
Total non-accrual TDRs . . . . . . . . . . . .
$1,960
$22,506
$15,911
(In thousands)
$1,518
—
—
—
$1,518
$ —
—
5,076
760
$5,836
$ 2,430
26,346
15,324
3,631
$47,731
December 31, 2011
Principal
Deferral
Rate
Reduction
Rate Reduction
and Forgiveness
of Principal
Rate Reduction
and Payment
Deferral
Total
(In thousands)
Accruing TDRs
Commercial loans . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . .
$12,933
16,820
471
1,294
$ 1,756
9,659
37,796
587
Total accruing TDRs . . . . . . . . . . . . . . . . . . . . .
$31,518
$49,798
$ —
—
2,071
—
$2,071
$
431
5,776
28,935
1,487
$36,629
$ 15,120
32,255
69,273
3,368
$120,016
December 31, 2011
Interest
Deferral
Principal
Deferral
Rate
Reduction
Rate Reduction
and Forgiveness
of Principal
Rate Reduction
and Payment
Deferral
Total
Non-accrual TDRs
Commercial loans . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . .
Commercial mortgage loans . . . . . . . . .
Residential mortgage loans . . . . . . . . .
$ — $
—
2,633
311
616
13,579
9,727
2,427
$ 1,859
12,376
—
449
Total non-accrual TDRs . . . . . . . . . . . .
$2,944
$26,349
$14,684
(In thousands)
$1,506
—
—
—
$1,506
$ —
—
5,076
311
$5,387
$ 3,981
25,955
17,436
3,498
$50,870
69
The activity within our TDR loans for 2012 and 2011 are shown below:
Accruing TDRs
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans restored to accrual status . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans placed on non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of loan concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
(In thousands)
$120,016
53,958
8,356
(251)
(5,159)
(32,225)
—
$136,800
60,863
709
(2,341)
(46,313)
(28,969)
(733)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,695
$120,016
Non-accrual TDRs
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans placed on non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans restored to accrual status . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
(In thousands)
$ 50,870
12,304
32,225
(4,182)
(33,931)
(1,199)
(8,356)
$28,146
13,269
28,969
(7,303)
(3,355)
(8,147)
(709)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47,731
$50,870
Impaired Loans
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement based on current circumstances and events. The
assessment for impairment occurs when and while such loans are on non-accrual as a result of delinquency status
of over 90 days or receipt of information indicating that full collection of principal is doubtful, or when the loan
has been restructured in a troubled debt restructuring. Those loans with a balance less than our defined selection
criteria, generally a loan amount is $500,000 or less, 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. We obtain an appraisal to determine the amount of impairment at the date that the loan becomes
impaired. The appraisals are based on “as is” or bulk sale valuations. To ensure that appraised values remain
current, we generally obtain an updated appraisal every six months from qualified independent appraisers.
Furthermore, if the most current appraisal is dated more than three months prior to the effective date of the
impairment test, we validate the most current value with third party market data appropriate to the location and
property type of the collateral. If the third party market data indicates that the value of our collateral has declined
since the most recent valuation date, we adjust downward the value of the property to reflect current market
conditions. If the fair value of the collateral 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. If an impaired loan is expected to be collected through liquidation of the collateral, the amount of
impairment, excluding disposal costs, which range between 3% to 6% of the fair value, depending on the size of
impaired loan, is charged off against the allowance for loan losses. Non-accrual impaired loans are not returned
to accruing status unless the unpaid interest has been brought current and full repayment of the recorded balance
is expected or if the borrower has made six consecutive monthly payments of the scheduled amounts due, and are
continued to be reviewed for impairment until they are no longer reported as troubled debt restructurings.
70
We identified impaired loans with a recorded investment of $248.6 million at December 31, 2012, compared
to $322.0 million at December 31, 2011. The average balance of impaired loans was $277.8 million in 2012 and
$361.4 million in 2011. We considered all non-accrual loans to be impaired. Interest recognized on impaired
loans totaled $8.2 million in 2012 and $5.3 million in 2011. As of December 31, 2012, $83.9 million, or 80.8%,
of the $103.9 million of non-accrual portfolio loans was secured by real estate. As of December 31, 2011,
$170.5 million, or 84.8%, of the $201.2 million of non-accrual loans was secured by real estate. In light of
declining property values in the current economic downturn affecting the real estate markets, the Bank has
obtained current appraisals, sales contract, or other available market price information which provides updated
factors in evaluating potential loss.
At December 31, 2012, $12.2 million of the $183.3 million allowance for loan losses was allocated for
impaired loans and $171.1 million was allocated to the general allowance. At December 31, 2011, $7.6 million of
the $206.3 million allowance for loan losses was allocated for impaired loans and $198.7 million was allocated to
the general allowance. The amount of the allowance for loan losses allocated to impaired loans increased from
2011 to 2012 as a result of the addition of two impaired construction loans. In 2012, net loan charge-offs were
$14.7 million, or 0.21%, of average loans, compared to $66.2 million, or 0.95%, of average loans in 2011.
The allowance for credit losses to non-accrual loans increased to 177.8% at December 31, 2012, from
103.6% at December 31, 2011. Non-accrual loans also include those troubled debt restructurings that do not
qualify for accrual status.
The following table presents impaired loans and the related allowance and charge-off as of the dates
indicated:
Impaired Loans
At December 31, 2012
At December 31, 2011
Unpaid
Principal
Balance
Recorded
Investment Allowance
Unpaid
Principal
Balance
Recorded
Investment Allowance
(Dollars in thousands)
$ 29,359
9,304
189,871
$ 18,963
7,277
152,957
$ — $ 46,671
134,837
187,580
—
—
$ 38,194
78,767
149,034
$ —
—
—
With no allocated allowance
Commercial loans . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . .
Commercial mortgage loans . . . . . . . .
Residential mortgage and equity
lines . . . . . . . . . . . . . . . . . . . . . . . .
4,303
4,229
—
8,555
7,987
—
Subtotal . . . . . . . . . . . . . . . . . . . .
$232,837
$183,426
$ — $377,643
$273,982
$ —
With allocated allowance
Commercial loans . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . .
Commercial mortgage loans . . . . . . . .
Residential mortgage and equity
$
7,804
54,718
14,163
$
4,959
34,856
12,928
$ 1,467
8,158
1,336
$ 11,795
—
29,722
$
7,587
—
28,023
$3,336
—
2,969
lines . . . . . . . . . . . . . . . . . . . . . . . .
14,264
12,428
1,222
13,813
12,381
1,249
Subtotal . . . . . . . . . . . . . . . . . . . . $ 90,949
$ 65,171
$12,183
$ 55,330
$ 47,991
$7,554
Total impaired loans . . . . . . . . . . . . . . . .
$323,786
$248,597
$12,183
$432,973
$321,973
$7,554
71
Loan Interest Reserves
In accordance with customary banking practice, construction loans and land development loans are originated where
interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our
construction and land development loans generally include optional renewal terms after the maturity of the initial loan
term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest
reserve to be established for the new loan term. Loans with interest reserves are underwritten to the same criteria,
including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves.
Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest
reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy
maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and
range from 65% in the case of land to 85% in the case of 1- to 4-family residential construction projects.
As of December 31, 2012, construction loans of $51.8 million were disbursed with pre-established interest reserves
of $9.7 million compared to $16.8 million of such loans disbursed with pre-established interest reserves of $3.2 million at
December 31, 2011. The balance for construction loans with interest reserves which have been extended was $4.0 million
with pre-established interest reserves of $314,000, at December 31, 2012, and zero at December 31, 2011. Land loans of
$11.2 million were disbursed with pre-established interest reserves of $978,000 at December 31, 2012, compared to $10.8
million land loans disbursed with pre-established interest reserves of $223,000 at December 31, 2011. The balance for
land loans with interest reserves which have been extended was zero at December 31, 2012, compared to $9.5 million at
December 31, 2011.
At December 31, 2012, the Bank had no loans on non-accrual status with available interest reserves. At
December 31, 2012, $3.0 million of non-accrual residential construction loans, $33.3 million of non-accrual non-
residential construction loans, and $4.2 million of non-accrual land loans had been originated with pre-established interest
reserves. At December 31, 2011, $13.4 million of non-accrual residential construction loans, $20.7 million of non-accrual
non-residential construction loans, and $7.9 million of non-accrual land loans had been originated with pre-established
interest reserves. While loans with interest reserves are typically expected to be repaid in full according to the original
contractual terms, some loans require one or more extensions beyond the original maturity. Typically, these extensions are
required due to construction delays, delays in sales or lease of property, or some combination of these two factors.
Loan Concentration
Most of our business activity is with customers located in the predominantly Asian areas of California; New York
City; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; and New Jersey. We
have no specific industry concentration, and generally our loans are collateralized with real property or other pledged
collateral. 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. We experienced no loan concentrations to multiple
borrowers in similar activities that exceeded 10% of total loans as of December 31, 2012.
The Federal banking regulatory agencies issued final guidance on December 6, 2006, regarding risk management
practices for financial institutions with high or increasing concentrations of commercial real estate (“CRE”) loans on their
balance sheets. The regulatory guidance reiterates the need for sound internal risk management practices for those
institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are
approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to
be construed as a limit for CRE exposure. The supervisory criteria are: (1) total reported loans for construction, land
development, and other land represent 100% of the institution's total risk-based capital, and (2) both total CRE loans
represent 300% or more of the institution’s total risk-based capital and the institution’s CRE loan portfolio has increased
50% or more within the last thirty-six months. Since January 2010, the Bank’s internal limit for CRE loans has been 300%
of total capital. Total loans for construction, land development, and other land represented 19% of total risk-based capital
as of December 31, 2012, and 23% as of December 31, 2011. Total CRE loans represented 228% of total risk-based
capital as of December 31, 2012, and 236% as of December 31, 2011. See Part I—Item 1A—“Risk Factors” for a
discussion of some of the factors that may affect us.
72
Allowance for Credit Losses
The Bank maintains the allowance for credit losses at a level that is considered adequate to cover the
estimated and known inherent risks in the loan portfolio and off-balance sheet unfunded credit commitments.
Allowance for credit losses is comprised of allowances for loan losses and for off-balance sheet unfunded credit
commitments. With this risk management objective, the Bank’s management has an established monitoring
system that is designed to identify impaired and potential problem loans, and to permit periodic evaluation of
impairment and the adequacy level of the allowance for credit losses in a timely manner.
In addition, the Board of Directors of the Bank has established a written credit policy that includes a credit
review and control system which it believes should be effective in ensuring that the Bank maintains an adequate
allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process,
including quarterly evaluations, and determines whether the allowance is adequate to absorb losses in the credit
portfolio. The determination of the amount of the allowance for credit losses and the provision for credit 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 credit losses. The nature of the process by which the Bank determines the
appropriate allowance for credit losses requires the exercise of considerable judgment. Additions to the
allowance for credit losses are made by charges to the provision for credit losses. Identified credit exposures that
are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously
charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other
factors that adversely affect asset quality can result in an increase in the number of delinquencies, bankruptcies,
and defaults, and a higher level of non-performing assets, net charge-offs, and provision for loan losses. See Part
I—Item 1A—“Risk Factors” for additional factors that could cause actual results to differ materially from
forward-looking statements or historical performance.
The allowance for loan losses was $183.3 million and the allowance for off-balance sheet unfunded credit
commitments was $1.4 million at December 31, 2012, and represented the amount that the Company believes to
be sufficient to absorb credit losses inherent in the Company’s loan portfolio including unfunded commitments.
The allowance for credit losses, the sum of allowance for loan losses and for off-balance sheet unfunded credit
commitments, $184.7 million at December 31, 2012, compared to $208.3 million at December 31, 2011, a
decrease of $23.6 million, or 11.4%. The allowance for credit losses represented 2.49% of period-end gross
loans, excluding loans held for sale, and 176.7% of non-performing portfolio loans at December 31, 2012. The
comparable ratios were 2.95% of period-end gross loans, excluding loans held for sale, and 100.2% of non-
performing portfolio loans at December 31, 2011.
73
The following table sets forth the information relating to the allowance for loan losses, charge-offs, recoveries, and the
reserve for off-balance sheet credit commitments for the past five years:
Allowance for Credit Losses
2012
Amount Outstanding as of December 31,
2010
2011
2009
2008
Allowance for Loan Losses
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
(Reversal)/provision for credit losses . . . . . . . . . . . . . . . . . .
Reversal of/(transfer to) reserve for off-balance sheet credit
commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs :
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction loans-residential . . . . . . . . . . . . . . . . . . . . . . . .
Construction loans-other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate land loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans and other loans . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction loans-residential . . . . . . . . . . . . . . . . . . . . . . . .
Construction loans-other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate land loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans and other loans . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in thousands)
$ 206,280
(9,000)
$ 245,231
27,000
$ 211,889
156,900
$ 122,093
307,000
$
64,983
106,700
706
268
2,870
2,125
(2,756)
(17,707)
(391)
(774)
(13,616)
(278)
(25)
(32,791)
(11,745)
(20,801)
(16,699)
(27,327)
(1,054)
—
(77,626)
(21,609)
(14,889)
(30,432)
(47,765)
(24,060)
—
(138,755)
(59,370)
(71,147)
(22,128)
(52,931)
(16,967)
(4)
(222,547)
1,949
3,788
2,365
8,820
1,202
3
18,127
$ 183,322
1,774
3,808
665
4,539
621
—
11,407
$ 206,280
4,712
5,448
553
933
668
13
12,327
$ 245,231
904
1,140
—
461
692
21
3,218
$ 211,889
(12,932)
(20,653)
—
(5,291)
(9,553)
(254)
(48,683)
1,750
83
—
—
—
16
1,849
$ 122,093
Reserve for off-balance sheet credit commitments
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (reversal)/transfer for credit losses . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,069
(706)
1,363
$
$
2,337
(268)
2,069
$
$
5,207
(2,870)
2,337
$
$
7,332
(2,125)
5,207
$
$
4,576
2,756
7,332
Average loans outstanding during the year (1) . . . . . . . . . . .
Ratio of net charge-offs to average loans outstanding during
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
the year (1)
(Reversal)/provision for credit losses to average loans
outstanding during the year (1) . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to non-performing portfolio
loans at year-end (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to gross loans at year-end (1) . .
(1) Excluding loans held for sale
(2) Excluding non-accrual loans held for sale
Our allowance for loan losses consists of the following:
$7,094,197
$6,959,331
$6,879,457
$7,262,831
$7,214,689
0.21%
0.95%
(0.13)%
0.39%
1.84%
2.28%
3.02%
4.23%
0.65%
1.48%
176.68%
2.49%
100.20%
2.95%
100.10%
3.60%
77.36%
3.15%
68.87%
1.73%
•
Specific allowance: For impaired loans, we provide specific allowances for loans that are not collateral dependent
based on an evaluation of the present value of the expected future cash flows discounted at the loan’s effective interest
rate and for loans that are collateral dependent based on the fair value of the underlying collateral, which is determined
based on the most recent valuation information received, which may be adjusted based on factors such as changes in
market conditions from the time of valuation. If the measure of the impaired loan is less than the recorded investment
in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific
allocation will be established.
74
• General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is
determined by loan type and common risk characteristics. The non-impaired loans are grouped into 23
segments: two commercial segments, ten commercial real estate segments, three residential construction
segments, three non-residential construction segments, one SBA segment, one installment loans
segment, one residential mortgage segment, one equity lines of credit segment, and one overdrafts
segment. The allowance is provided for each segmented group based on the group’s historical loan loss
experience aggregated based on loan risk classifications which takes into account the current financial
condition of the borrowers and guarantors, the prevailing value of the underlying collateral if collateral
dependent, charge-off history, management’s knowledge of the portfolio, general economic conditions,
and environmental factors which include the trends in delinquency and non-accrual, and other
significant factors, such as the national and local economy, volume and composition of the portfolio,
strength of management and loan staff, underwriting standards, and concentration of credit. In addition,
management reviews reports on past-due loans to ensure appropriate classifications. During the second
quarter of 2009, in light of the continued deterioration in the economy and the increases in non-accrual
loans and charge-offs, and based in part on regulatory considerations, we shortened the period used in
the migration analysis from five years to four years to better reflect the impact of the most recent
charge-offs, which increased the allowance for loan losses by $3.9 million; we increased the general
allowance to reflect the higher loan delinquency trends, the weaker national and local economy and the
increased difficulty in assigning loan grades, which increased the allowance for loan losses by $13.2
million, and we also applied the environmental factors described above to loans rated Minimally
Acceptable, Special Mention and Substandard, which increased the allowance for loan losses by $11.8
million. During the fourth quarter of 2009, we changed our migration loss analysis to reduce the
weighting of the first two years of the four-year migration analysis by half to better reflect the impact of
more recent losses, and further segmented the construction loan portfolios into three geographic
segments. The changes made during the fourth quarter of 2009 did not have a significant impact on the
allowance for loan losses. During the first quarter of 2010, we increased the number of segments for
commercial real estate loans from one to ten. In addition, we changed our migration loss analysis to use
as the reserve factor for loans rated Pass the total weighted average losses during the last four years for
each loan segment as well as the weighting for the four-year migration so that the first two years are
weighted one-third and the most recent two years are weighted two-thirds. The changes made during the
first quarter of 2010 increased the allowance for loan losses by $10.4 million. During the second quarter
of 2010, we further refined our methodology to give greater weighting to the most recent twelve months
of charge-offs in the calculation of the loan loss reserve percentage for Pass rated loans, which increased
the allowance for loan losses by $10.4 million; we discontinued the weighting in the four-year migration
analysis for loans rated lower than Pass, which increased the allowance for loan losses by $7.1 million,
and we increased the environmental factors for purchased syndicated loans, which increased the
allowance for loan losses by $2.0 million. During the first quarter of 2011, we combined the number of
segments for construction loans from nine to two by consolidating the previous three geographic groups
of East Coast, Texas and all other regions into one bankwide region in light of the convergence of credit
quality for construction loans of the three separate regions, which increased the allowance for loan
losses by $4.8 million.
75
Type of Loans:
Commercial
Residential
mortgage loans
and equity
lines . . . . . . . . .
Commercial
mortgage
loans . . . . . . . . .
Real estate
construction
loans . . . . . . . . .
Installment and
The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the
ratio of each loan category to the total loans as of the dates indicated:
Allocation of Allowance for Loan Losses
As of December 31,
2012
2011
2010
2009
2008
Percentage
of Loans in
Each
Category to
to Average
Gross Loans Amount
Percentage
of Loans in
Each
Category to
to Average
Gross Loans Amount
Percentage
of Loans in
Each
Category to
to Average
Gross Loans Amount
Percentage
of Loans in
Each
Category to
to Average
Gross Loans Amount
Percentage
of Loans in
Each
Category to
to Average
Gross Loans
Amount
(Dollars in thousands)
loans . . . . . . . . . $ 66,101
27.4% $ 65,658
23.9% $ 63,919
19.7% $ 57,815
20.2% $ 44,508
21.7%
11,703
17.4
10,795
16.4
9,668
13.9
8,480
11.4
2,678
10.2
82,473
52.2
108,021
54.9
128,347
58.3
100,494
56.8
35,060
55.7
23,017
2.8
21,749
4.5
43,261
7.8
45,086
11.3
39,820
12.1
other loans . . . .
28
Total . . . . . . . $183,322
0.2
57
100.0% $206,280
0.3
36
100.0% $245,231
0.3
14
100.0% $211,889
0.3
27
100.0% $122,093
0.3
100.0%
The increase of $443,000 in the allowance allocated to commercial loans to $66.1 million at December 31, 2012,
from $65.7 million at December 31, 2011, is due primarily to the growth of commercial loans. Commercial loans
increased $258.8 million, or 13.9%, from $1.9 billion at December 31, 2011 to $2.1 billion at December 31, 2012. At
December 31, 2012, thirty-one commercial loans totaling $20.0 million were on non-accrual status. At December 31,
2011, forty-six commercial loans totaling $30.7 million were on non-accrual status. Commercial loans comprised 9.6% of
impaired loans and 19.2% of non-accrual portfolio loans at December 31, 2012, compared to 14.2% of impaired loans and
15.2% of non-accrual portfolio loans at December 31, 2011.
The allowance allocated to residential mortgage loans and equity lines increased $908,000, to $11.7 million at
December 31, 2012, from $10.8 million at December 31, 2011, primarily due to an increase in residential mortgage loans
of $174.0 million, or 17.9%, to $1.1 billion at December 31, 2012, from $972.3 million at December 31, 2011.
The allowance allocated to commercial mortgage loans decreased from $108.0 million at December 31, 2011, to
$82.5 million at December 31, 2012, which was primarily due to the decrease in classified commercial mortgage loans to
$261.2 million at December 31, 2012, from $403.5 million at December 31, 2011. The overall allowance for total
commercial mortgage loans was 2.2% at December 31, 2012, compared to 2.9% at December 31, 2011. At December 31,
2012, 40 commercial mortgage loans, excluding non-accrual loans held for sale, totaling $35.7 million were on non-
accrual status. At December 31, 2011, 57 commercial mortgage loans, excluding non-accrual loans held for sale, totaling
$107.8 million were on non-accrual status. Commercial mortgage loans comprised 66.7% of impaired loans and 34.4% of
non-accrual portfolio loans at December 31, 2012, compared to 55.0% of impaired loans and 53.6% of non-accrual
portfolio loans at December 31, 2011.
The allowance allocated for construction loans increased $1.3 million to $23.0 million, or 12.7%, of construction
loans at December 31, 2012, compared to $21.7 million, or 9.2%, of construction loans at December 31, 2011, primarily
due to increases in reserves based on prior loss experience from construction loans. Five construction loans totaling $36.3
million were on non-accrual status at December 31, 2012, compared to eight loans totaling $46.0 million at December 31,
2011. Construction loans comprised 17.0% of impaired loans and 34.9% of non-accrual portfolio loans at December 31,
2012, compared to 24.5% of impaired loans and 22.9% of non-accrual portfolio loans at December 31, 2011.
76
Also, see Part I—Item 1A—“Risk Factors” for additional factors that could cause actual results to differ
materially from forward-looking statements or historical performance.
Liquidity
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, securities sold under
agreements to repurchase, and advances from the FHLB. At December 31, 2012, our liquidity ratio (defined as
net cash and short-term and marketable securities to net deposits and short-term liabilities) decreased to 15.3%
primarily due to lower securities balances, compared to 15.8% at December 31, 2011.
The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB
financing when necessary. At December 31, 2012, the Bank had an approved credit line with the FHLB of
San Francisco totaling $1.23 billion. Total advances from the FHLB of San Francisco were $146.2 million at
December 31, 2012. These borrowings bear fixed rates and are secured by loans. See Note 10 to the Consolidated
Financial Statements. At December 31, 2012, the Bank pledged $211.6 million of its commercial loans to the
Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program. The Bank had borrowing
capacity of $193.9 million from the Federal Reserve Bank Discount Window at December 31, 2012.
Liquidity can also be provided through the sale of liquid assets, which consist of Federal funds sold,
securities purchased under agreements to resell, and securities available-for-sale. At December 31, 2012,
investment securities totaled $2.07 billion, with $1.45 billion pledged as collateral for borrowings and other
commitments. The remaining $618.4 million was available as additional liquidity or to be pledged as collateral
for additional borrowings.
Approximately 90.8% of our time deposits mature within one year or less as of December 31, 2012.
Management anticipates that there may be some outflow of these deposits upon maturity due to the keen
competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect the
outflow will not be significant and can be replenished through our normal growth in deposits. Management
believes all the above-mentioned sources will provide adequate liquidity for the next twelve months to the Bank
to meet its operating needs.
The business activities of the Bancorp consist primarily of the operation of the Bank and limited activities in
other investments. Under the memorandum of understanding the Bancorp entered into with the FRB SF, we
agreed that we will not, without the FRB SF’s prior written approval, receive any dividends or any other form of
payment or distribution representing a reduction of capital from the Bank. The Bank did not pay a dividend to the
Bancorp in 2010 or 2011, but paid dividends of $154.7 million to Bancorp following regulatory approval in
2012, and will pay additional dividends with regulatory approval in 2013 to maintain Bancorp’s cash balance
equal to at least two years of Bancorp’s operating expenses and to be in a position, subject to regulatory approval,
to repurchase in installments during 2013 the Series B Preferred Stock issued to the U.S. Treasury under the
TARP Capital Purchase Program.
Also, see Note 14 to the Consolidated Financial Statements regarding commitments and contingencies.
77
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for details of recent accounting pronouncements and
their expected impact, if any, on the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The principal market risk to
the Company is the interest rate risk inherent in our lending, investing, deposit taking and borrowing activities,
due to the fact that interest-earning assets and interest-bearing liabilities do not re-price at the same rate, to the
same extent, or on the same basis.
We monitor and manage our interest rate risk through analyzing the re-pricing characteristics of our loans,
securities, deposits, and borrowings 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 a simulation model to measure and quantify
the impact to our profitability as well as to estimate changes to the market value of our assets and liabilities.
We use a net interest income simulation model to measure the extent of the differences in the behavior of
the lending, investing, 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 traditional business
activities of extending loans, investing securities, accepting deposits, and borrowings. 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 measure the volatility of net interest income and net portfolio value, defined as net present value of
assets and liabilities, under immediate rising or falling interest rate scenarios in 25 basis points increments.
Although the modeling is 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 rate 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 15% 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, 2012, 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 2.3%, and if interest rates
were to increase instantaneously by 200 basis points, the simulation indicated that our net interest income over
the next twelve months would increase by 7.2%. 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 0.2%, 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 0.2%.
78
Our simulation model also projects the net market value of our portfolio of assets and liabilities. We have
established a tolerance level to value the net market value of our portfolio of assets and liabilities in our policy to
a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. At
December 31, 2012, if interest rates were to increase instantaneously by 200 basis points, the simulation
indicated that the net market value of our portfolio of assets and liabilities would increase by 6.6%, and
conversely, if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that the
net market value of our assets and liabilities would increase by 0.4%.
Quantitative Information About Interest Rate Risk
The following table shows the carrying value of our financial instruments that are sensitive to changes in
interest rates, categorized by expected maturity, as well as the instruments’ total fair values at December 31,
2012, and 2011. 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 which are described in Note 17 to the
Consolidated Financial Statements. Off-balance sheet commitments to extend credit, letters of credit, and bill of
lading guarantees represent the contractual unfunded amounts. Off-balance sheet financial instruments represent
fair values. The results presented may vary if different assumptions are used or if actual experience differs from
the assumptions used.
79
Average
Interest
Rate
Expected Maturity Date at December 31,
2013
2014
2015
2016
2017
Thereafter
Total
(Dollars in thousands)
December 31,
2012
2011
Fair
Value
Total
Fair
Value
Interest-Sensitive Assets:
Mortgage-backed securities and
9,855
—
160,091
—
349,879
—
collateralized mortgage
3.50% $ 223,273 $146,222 $113,371 $
obligations . . . . . . . . . . . . . . . . .
Other investment securities . . . . . .
1.53
Loans held-for-sale . . . . . . . . . . . . . —
Gross loans receivable:
Commercial
. . . . . . . . . . . . . .
Residential mortgage . . . . . . .
Commercial mortgage . . . . . .
Real estate construction . . . . .
. . . . . . . .
Installment & other
Trading securities . . . . . . . . . . . . . .
Interest Sensitive Liabilities:
Other interest-bearing deposits . . .
Time deposits . . . . . . . . . . . . . . . . .
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . .
1,651,153
5,962
648,732
141,427
12,283
—
254,557
1,932
393,793
39,523
273
4,703
84,227
6,575
459,963
—
—
3.99
4.68
5.16
5.36
2.42
1.35
351,485
3,506,076
347,886
263,847
228,025
67,735
— 600,000
0.67
0.83
250,000
3.84
Advances from the Federal
Home Loan Bank . . . . . . . . . .
0.44
125,000
90,323 $ 77,948 $ 410,482 $1,061,619 $1,102,421 $1,268,107 $1,310,456
1,187,999
760
— 200,155
—
—
1,012,965
—
1,179,877
760
1,003,628
283,648
—
—
45,838
3,253
519,761
—
—
—
1,326,313
1,499
45,564
7,236
630,134
—
—
—
—
20,901
45,768
1,315,124
1,116,069
—
—
—
2,127,107
1,340,082
3,768,452
180,950
12,556
4,703
2,122,877
1,351,638
3,695,865
180,559
11,863
4,703
1,868,275
1,186,969
3,748,897
237,372
17,699
4,542
1,863,018
1,208,911
3,715,144
237,210
17,682
4,542
— 2,253,709
3,860,061
3
2,253,709
3,865,851
1,823,088
4,331,326
1,823,088
4,343,232
—
—
—
—
—
—
—
—
—
—
—
1,105,138
44,060
71,073
77
281,710
442
—
—
28,876
151
—
—
50,000
250,000
100,000
1,250,000
1,361,585
1,400,000
1,547,900
—
21,200
—
146,200
146,789
225,000
227,825
—
—
50,000
91,748
19
—
—
—
—
—
—
18,713
121,136
—
18,713
171,136
14,573
98,392
880
18,920
171,136
881
18,920
98,676
40,531
—
—
—
192,460
—
—
—
1,740,463
44,672
71,073
77
(1,875) 1,626,523
62,076
64,233
187
(204)
(34)
—
(1,253)
(367)
(38)
—
Other borrowings from financial
institutions . . . . . . . . . . . . . . . . . —
2.95
2.80
Other borrowings . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . .
Off-Balance Sheet Financial
Instruments:
Commitments to extend credit . . . .
Standby letters of credit . . . . . . . . .
Other letters of credit . . . . . . . . . . .
Bill of lading guarantees . . . . . . . .
Country Risk Exposures
The Company’s total assets were $10.7 billion and total foreign country risk net exposures were $844.6 million at
December 31, 2012, compared to total assets of $10.6 billion and total foreign country risk net exposures of $751.3
million at December 31, 2011. Total foreign country risk net exposures at December 31, 2012, were comprised
primarily of $274.7 million from Hong Kong, $209.0 million from England, $149.0 million from China, $60.8 million
from Switzerland, $60.0 million from France, $50.0 million from Australia, $17.9 million from Taiwan, $10.0 million
from Luxembourg, $8.4 million from Canada, $2.5 million from Singapore, and $1.6 million from Macau. Total
foreign country risk net exposures at December 31, 2011, were comprised primarily of $209.4 million from China,
$164.5 million from Hong Kong, $149.6 million from England, $62.0 million from Australia, $57.4 million from
France, $45.4 million from Switzerland, $30.1 million from Taiwan, $28.1 million from Canada, and $3.8 million from
Singapore.
All foreign country risk net exposures were to non-sovereign counterparties except $16.2 million due from the
Hong Kong Monetary Authority at December 31, 2012.
80
Unfunded exposures were $40.4 million at December 31, 2012, and were comprised of $40.0 million of
unfunded loans to two financial institutions in China, a $250,000 unfunded loan to a corporation in Canada, and a
$190,000 of unfunded loan to a borrower in Taiwan. Unfunded exposures were $30.2 million at December 31,
2011, and were comprised of $19.3 million of unfunded loans to two financial institutions in China, a $10.0
million unfunded loan to a corporation in Canada, and $919,000 of unfunded loans to two borrowers in Taiwan.
Financial Derivatives
It is our policy not to speculate on the future direction of interest rates. However, we enter 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 our assets or liabilities and against risk in specific
transactions. In such instances, we may protect our 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.
We follow ASC Topic 815, which established 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 our Consolidated Balance Sheets 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.
As of December 31, 2011, we had five interest rate swap agreements with two major financial institutions in
the notional amount of $300.0 million for a period of three years. These interest rate swaps were not structured to
hedge against inherent interest rate risks related to our interest-earning assets and interest-bearing liabilities.
These five interest rate swap agreements all matured in the third quarter of 2012. The net amount accrued on
these interest rate swaps and the changes in the market value of these interest rate swaps were recorded as a
reduction to other non-interest income in the amount of $288,000 in 2012 compared to $4.9 million in the same
period a year ago.
The Company enters into foreign exchange forward contracts and foreign currency option contracts with
various counter parties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign
exchange certificates of deposit, foreign exchange contracts, or foreign currency option contracts entered into
with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our
Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange
certificates of deposit, foreign exchange contracts or foreign currency option contracts are recognized
immediately in net income as a component of non-interest income. Period end gross positive fair values are
recorded in other assets and gross negative fair values are recorded in other liabilities. At December 31, 2012, the
notional amount of option contracts totaled $209,000 with a net negative fair value of $2,000. Spot and forward
contracts in the total notional amount of $188.1 million had a positive fair value of $2.9 million at December 31,
2012. Spot and forward contracts in the total notional amount of $133.7 million had a negative fair value of $1.6
million at December 31, 2012. At December 31, 2011, the notional amount of option contracts totaled $4.3
million with a net positive fair value of $29,000. Spot and forward contracts in the total notional amount of
$238.6 million had a positive fair value, in the amount of $2.2 million, at December 31, 2011. Spot and forward
contracts in the total notional amount of $128.2 million had a negative fair value, in the amount of $486,000, at
December 31, 2011.
81
Item 8. Financial Statements and Supplementary Data.
For financial statements, see “Index to Consolidated Financial Statements” on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s principal executive officer and principal financial officer have evaluated the effectiveness
of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of the end of the period covered by this
Annual Report on Form 10-K. Based upon their evaluation, the principal executive officer and principal financial
officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and
forms, and include controls and procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company’s management, including its
principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
There have not been any changes in the Company’s disclosure controls and procedures that occurred during
its fourth fiscal quarter of 2012 that have materially affected or are reasonably likely to materially affect these
controls and procedures.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s
internal control over financial reporting is a process designed under the supervision of the Company’s Chief
Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s financial statements for external purposes in accordance
with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As of December 31, 2012, under the supervision and with the participation of the Company’s management,
including the Company’s principal executive officer and principal financial officer, the Company assessed the
effectiveness of its internal control over financial reporting based on the criteria for effective internal control
over financial reporting established in “Internal Control—Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management
determined that the Company maintained effective internal control over financial reporting as of December 31,
2012, based on those criteria.
82
KPMG LLP, the independent registered public accounting firm that audited the Company’s Consolidated
Financial Statements included in this Annual Report on Form 10-K, has also issued an audit report on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. The report,
which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2012, is included in this Item under the heading “Report of Independent Registered
Public Accounting Firm” below.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting, as such term is
defined in Rule 13a-15(f) under the Exchange Act, that occurred during the fourth fiscal quarter of 2012 that
have materially affected, or are reasonably likely to materially effect, the Company’s internal control over
financial reporting.
83
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cathay General Bancorp:
We have audited Cathay General Bancorp’s (the Company) internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cathay General Bancorp’s
management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Cathay General Bancorp maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Consolidated Balance Sheets of Cathay General Bancorp and subsidiaries as of December 31,
2012 and 2011, and the related consolidated statements of operations and comprehensive income, changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and
our report dated March 1, 2013 expressed an unqualified opinion on those Consolidated Financial Statements.
/s/ KPMG LLP
Los Angeles, California
March 1, 2013
84
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item concerning our executive officers, directors, compliance with
Section 16 of the Securities and Exchange Act of 1934, the code of ethics that applies to our principal executive
officer, principal financial officer and principal accounting officer, and matters relating to corporate governance
is incorporated herein by reference from the information set forth under the captions “Proposal One—Election of
Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board of Directors and Corporate
Governance” and “Code of Ethics” in our Definitive Proxy Statement relating to our 2013 Annual Meeting of
Stockholders (the “Proxy Statement”).
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference from the information set forth
under the captions “Board of Directors and Corporate Governance—Compensation of Directors,” “Executive
Compensation,” and “Potential Payments Upon Termination or Change in Control,” in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2012, with respect to compensation
plans under which equity securities of the Company were authorized for issuance.
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants,
and Rights
Weighted-average
Exercise Price of
Outstanding
Options,
Warrants, and
Rights
Number of Securities
Remaining Available For
Future Issuance Under
Equity Compensation Plans
[Excluding Securities
Reflected in Column (a)]
Plan Category
(a)
(b)
(c)
Equity Compensation Plans Approved by Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plans Not Approved by
3,996,630
Security Holders . . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,996,630
$29.45
—
$29.45
2,364,947
—
2,364,947
Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference from the information set forth
under the captions “Security Ownership of Certain Beneficial Owners” and “Proposal One—Election of
Directors—Security Ownership of Nominees, Continuing Directors, and Named Executive Officers” in our
Proxy Statement.
85
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference to the information set forth under
the captions “Transactions with Related Persons, Promoters and Certain Control Persons” and “ Board of
Directors and Corporate Governance—Director Independence” in our Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated herein by reference from the information set forth
under the caption “Principal Accounting Fees and Services” in our Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Documents Filed as Part of this Report
(a)(1) Financial Statements
See “Index to Consolidated Financial Statements” on page F-1.
(a)(2) Financial Statement Schedules
Schedules have been omitted since they are not applicable, they are not required, or the information required
to be set forth in the schedules is included in the Consolidated Financial Statements or Notes thereto.
(b) Exhibits
3.1
3.1.1
3.2
3.2.1
Restated Certificate of Incorporation. Previously filed with the Securities and Exchange
Commission on March 16, 2010, as an exhibit to Bancorp’s Annual Report on Form 10-K for the
year ended December 31, 2009, and incorporated herein by reference.
Amendment to Restated Certificate of Incorporation. Previously filed with the Securities and
Exchange Commission on March 16, 2010, as an exhibit to Bancorp’s Annual Report on Form 10-
K for the year ended December 31, 2009, and incorporated herein by reference.
Restated Bylaws. Previously filed with the Securities and Exchange Commission on March 16,
2010, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December 31,
2009, and incorporated herein by reference.
Amendment to Restated Bylaws, effective October 20, 2003. Previously filed with the Securities
and Exchange Commission on March 16, 2010, as an exhibit to Bancorp’s Annual Report on Form
10-K for the year ended December 31, 2009, and incorporated herein by reference.
3.2.2
Amendment to Restated Bylaws, effective October 18, 2007. +
86
3.3
3.4
4.1
4.1.1
4.1.2
Certificate of Designation of Series A Junior Participating Preferred Stock. Previously filed with
the Securities and Exchange Commission on February 28, 2012, as an exhibit to Bancorp’s Annual
Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference.
Certificate of Designation of Fixed Rate Cumulative Perpetual Preferred Stock, Series B.
Previously filed with Securities and Exchange Commission on December 5, 2008, as an exhibit to
Bancorp’s Current Report on Form 8-K, and incorporated herein by reference.
Indenture, dated as of March 30, 2007, between Cathay General Bancorp and LaSalle Bank
National Association (including form of debenture). +
Amended and Restated Declaration of Trust of Cathay Capital Trust III, dated as of March 30,
2007. +
Guarantee Agreement, dated as of March 30, 2007, between Cathay General Bancorp and LaSalle
Bank National Association. +
4.1.3
Form of Capital Securities of Cathay Capital Trust III (included within Exhibit 4.1.1). +
4.2
4.3
4.4
4.5
4.6
4.7
Warrant to purchase up to 1,846,374 shares of Common Stock, issued on December 5, 2008.
Previously filed with Securities and Exchange Commission on December 5, 2008, as an exhibit to
Bancorp’s Current Report on Form 8-K, and incorporated herein by reference.
Form of Preferred Share Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series B.
Previously filed with Securities and Exchange Commission on December 5, 2008, as an exhibit to
Bancorp’s Current Report on Form 8-K, and incorporated herein by reference.
Distribution Agreement, dated as of September 9, 2009, between Cathay General Bancorp and J.P.
Morgan Securities Inc. Previously filed with the Securities and Exchange Commission on
September 23, 2009, as an exhibit to Bancorp’s Current Report on Form 8-K/A, and incorporated
herein by reference.
Distribution Agreement, dated as of September 9, 2009, between Cathay General Bancorp and
Deutsche Bank Securities Inc. Previously filed with the Securities and Exchange Commission on
September 23, 2009, as an exhibit to Bancorp’s Current Report on Form 8-K/A, and incorporated
herein by reference.
Purchase Agreement, dated as of October 13, 2009, between Cathay General Bancorp and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. Previously filed with the Securities and Exchange
Commission on October 14, 2009, as an exhibit to Bancorp’s Current Report on Form 8-K, and
incorporated herein by reference.
ATM Equity Offering SM Sales Agreement, dated November 23, 2009, between Cathay General
Bancorp and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Previously filed with the
Securities and Exchange Commission on November 23, 2009, as an exhibit to Bancorp’s Current
Report on Form 8-K, and incorporated herein by reference.
87
10.1
10.2
10.2.1
10.3
10.4
10.4.1
10.5
10.6
10.7
10.7.1
10.7.2
10.7.3
10.7.4
10.7.5
Form of Indemnity Agreements between Bancorp and its directors and certain officers. Previously
filed with the Securities and Exchange Commission on February 28, 2012, as an exhibit to
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated
herein by reference.
Cathay Bank Employee Stock Ownership Plan, as amended and restated effective January 1, 2010.
Previously filed with the Securities and Exchange Commission on February 28, 2011, as an
exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010, and
incorporated herein by reference.**
Amendment No. 7 effective July 1, 2007, January 1, 2007, January 1, 2008, December 31, 2009,
January 1, 2009, and January 1, 2010 to the Amended and Restated Cathay Bank Employee Stock
Ownership Plan effective January 1, 1997. Previously filed with the Securities and Exchange
Commission on March 16, 2010, as an exhibit to Bancorp’s Annual Report on Form 10-K for the
year ended December 31, 2009, and incorporated herein by reference.**
Dividend Reinvestment Plan of Bancorp. Previously filed with the Securities and Exchange
Commission on April 30, 1997, as an exhibit to Registration Statement No. 33-33767, and
incorporated herein by reference.
Equity Incentive Plan of Bancorp effective February 19, 1998. Previously filed with the Securities
and Exchange Commission on February 28, 2012, as an exhibit to Bancorp’s Annual Report on
Form 10-K for the year ended December 31, 2011, and incorporated herein by reference.**
First Amendment to Cathay Bancorp, Inc. Equity Incentive Plan. Previously filed with the
Securities and Exchange Commission on March 2, 2009, as an exhibit to Bancorp’s Annual
Report on Form 10-K for the year ended December 31, 2008, and incorporated herein by
reference.**
GBC Bancorp 1999 Employee Stock Incentive Plan. Previously filed with the Securities and
Exchange Commission on February 28, 2012, as an exhibit to Bancorp’s Annual Report on Form
10-K for the year ended December 31, 2011, and incorporated herein by reference.**
Cathay Bank Bonus Deferral Agreement (Amended and Restated). +**
Cathay General Bancorp 2005 Incentive Plan (Amended and Restated). +**
Form of Cathay General Bancorp 2005 Incentive Plan Restricted Stock Award Agreement. +**
Form of Cathay General Bancorp 2005 Incentive Plan Stock Option Agreement (Nonstatutory).
+**
Form of Cathay General Bancorp 2005 Incentive Plan Stock Option Agreement (Nonstatutory)
(Nonemployee Director). +**
Form of Cathay General Bancorp 2005 Incentive Plan Restricted Stock Unit Agreement. +**
Form of Cathay General Bancorp 2005 Incentive Plan Stock Award Agreement to be used for the
purposes of granting certain salary awards. Previously filed with the Securities and Exchange
Commission on June 8, 2012, as an exhibit to Bancorp’s Current Report on Form 8-K and
incorporated herein by reference. +**
88
10.8
10.9
10.9.1
10.9.2
10.10
10.10.1
10.10.2
10.10.3
Letter Agreement, dated December 5, 2008, including the Securities Purchase Agreement—
Standard Terms incorporated by reference therein, between the Company and the U.S. Treasury.
Previously filed with Securities and Exchange Commission on December 5, 2008, as an exhibit
to Bancorp’s Current Report on Form 8-K and incorporated herein by reference.
Form of Waiver, executed by each of Messrs. Dunson K. Cheng, Peter Wu, Anthony M. Tang,
Heng W. Chen, Irwin Wong, Kim R. Bingham, and Perry P. Oei. Previously filed with Securities
and Exchange Commission on December 5, 2008, as an exhibit to Bancorp’s Current Report on
Form 8-K, and incorporated herein by reference.**
Form of Consent, executed by each of Messrs. Dunson K. Cheng, Peter Wu, Anthony M. Tang,
Heng W. Chen, Irwin Wong, Kim R. Bingham, and Perry P. Oei as to adoption of amendments
to Benefit Plans as required by Section 111(b) of EESA. Previously filed with Securities and
Exchange Commission on December 5, 2008, as an exhibit to Bancorp’s Current Report on Form
8-K, and incorporated herein by reference.**
Form of Consent, executed by each of Messrs. Dunson K. Cheng, Peter Wu, Anthony M. Tang,
Heng W. Chen, Irwin Wong, Kim R. Bingham, and Perry P. Oei as to adoption of amendments
to Benefit Plans as required by Section 111(b) of EESA, as amended by the American Recovery
Reinvestment Act of 2009. Previously filed with the Securities and Exchange Commission on
March 16, 2010, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended
December 31, 2010, and incorporated herein by reference.**
Amended and Restated Change of Control Employment Agreement for Dunson K. Cheng dated
as of December 18, 2008. Previously filed with the Securities and Exchange Commission on
March 2, 2009, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.**
Amended and Restated Change of Control Employment Agreement for Peter Wu dated as of
December 18, 2008. Previously filed with the Securities and Exchange Commission on March 2,
2009, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December 31,
2008, and incorporated herein by reference.**
Amended and Restated Change of Control Employment Agreement for Anthony M. Tang dated
as of December 18, 2008. Previously filed with the Securities and Exchange Commission on
March 2, 2009, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.**
Amended and Restated Change of Control Employment Agreement for Heng W. Chen dated as
of December 18, 2008. Previously filed with the Securities and Exchange Commission on March
2, 2009, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December
31, 2008, and incorporated herein by reference.**
89
10.10.4
10.10.5
10.10.6
12.1
21.1
23.1
24.1
31.1
31.2
32.1
32.2
99.1
99.2
Amended and Restated Change of Control Employment Agreement for Irwin Wong dated as of
December 18, 2008. Previously filed with the Securities and Exchange Commission on
March 2, 2009, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.**
Amended and Restated Change of Control Employment Agreement for Kim Bingham dated as
of December 18, 2008. Previously filed with the Securities and Exchange Commission on
March 2, 2009, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended
December 31, 2008, and incorporated herein by reference.**
Amended and Restated Change of Control Employment Agreement for Perry P. Oei dated as of
December 18, 2008. Previously filed with the Securities and Exchange Commission on March
2, 2009, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December
31, 2008, and incorporated herein by reference.**
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. +
Subsidiaries of Bancorp.+
Consent of Independent Registered Public Accounting Firm.+
Power of Attorney.+
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.+
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.+
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.++
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.++
Certification for Years Following First Fiscal Year of the Principal Executive Officer Pursuant
to Section 111(b) of the Emergency Economic Stabilization Act of 2008.+
Certification for Years Following First Fiscal Year of the Principal Financial Officer Pursuant
to Section 111(b) of the Emergency Economic Stabilization Act of 2008.+
101.INS
XBRL Instance Document ***
101.SCH
XBRL Taxonomy Extension Schema Document ***
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document***
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document***
101.LAB
XBRL Taxonomy Extension Label Linkbase Document***
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document***
** Management contract or compensatory plan or arrangement.
90
*** XBRL (Extensible Business Reporting Language) information shall not be deemed to be filed or part of a
registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, shall not
be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise shall
not be subject to liability under these sections, and shall not be incorporated by reference into any
registration statement or other document filed under the Securities Act of 1933, except as expressly set forth
by specific reference in such filing.
+
Filed herewith.
++ Furnished herewith.
91
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Cathay General Bancorp
By:
/s/ Dunson K. Cheng
Dunson K. Cheng
Chairman, President, and Chief Executive Officer
Date: March 1, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ DUNSON K. CHENG
Dunson K. Cheng
/s/ HENG W. CHEN
Heng W. Chen
/s/ PETER WU
Peter Wu
/s/ ANTHONY M. TANG
Anthony M. Tang
/s/ KELLY L. CHAN
Kelly L. Chan
/s/ MICHAEL M.Y. CHANG
Michael M.Y. Chang
/s/ THOMAS C.T. CHIU
Thomas C.T. Chiu
*
Nelson Chung
/s/ FELIX S. FERNANDEZ
Felix S. Fernandez
President, Chairman of the
Board, Director, and Chief
Executive Officer
(principal executive officer)
Executive Vice President,
Chief Financial Officer/Treasurer
(principal financial officer)
(principal accounting officer)
March 1, 2013
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
92
/s/
JANE JELENKO
Jane Jelenko
/s/ PATRICK S.D. LEE
Patrick S.D. Lee
/s/ TING LIU
Ting Liu
/s/
JOSEPH C.H. POON
Joseph C.H. Poon
Director
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
Director
March 1, 2013
* By:
/s/ HENG W. CHEN
Heng W. Chen
Attorney-in-Fact**
** By authority of the power of attorney filed herewith.
93
[THIS PAGE INTENTIONALLY LEFT BLANK]
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-3
Consolidated Statements of Operations and Comprehensive Income for each of the years ended
December 31, 2012, 2011, and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 31,
2012, 2011, and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Consolidated Statements of Cash Flows for each of the years ended December 31, 2012, 2011, and
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
F-8
Parent-only condensed financial information of Cathay General Bancorp is included in Note 20 to the
Consolidated Financial Statements in this Annual Report on Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . F-52
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cathay General Bancorp:
We have audited the accompanying Consolidated Balance Sheets of Cathay General Bancorp and subsidiaries
(the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations and
comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2012. 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 the standards of the Public Company Accounting Oversight Board
(United States). 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 General Bancorp and subsidiaries as of December 31, 2012 and 2011, and the results
of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012 in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Cathay General Bancorp’s internal control over financial reporting as of December 31, 2012,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 1, 2013 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
March 1, 2013
F-2
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments and interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity (market value of $823,906 in 2012 and $1,203,977 in 2011) . . . . . . . . . . . . . . .
Securities available-for-sale (amortized cost of $1,290,676 in 2012 and $1,309,521 in 2011)
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized deferred loan fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned, net
Affordable housing investments, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customers’ liability on acceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2012
2011
(In thousands, except share
and per share data)
$
144,909
411,983
$
773,768
1,291,480
4,703
—
7,429,147
(183,322)
(10,238)
7,235,587
41,272
46,384
85,037
102,613
41,271
26,015
316,340
6,132
166,595
117,888
294,956
—
1,153,504
1,294,478
4,542
760
7,059,212
(206,280)
(8,449)
6,844,483
52,989
92,713
78,358
105,961
37,300
32,226
316,340
11,598
206,768
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,694,089
$10,644,864
Deposits
Liabilities and Stockholders’ Equity
Non-interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits:
NOW deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits under $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings from financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings for affordable housing investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acceptances outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ Equity
Preferred stock, 10,000,000 shares authorized, 258,000 issued and outstanding in 2012 and 2011 . . .
Common stock, $0.01 par value, 100,000,000 shares authorized, 82,985,853 issued and 78,778,288
outstanding at December 31, 2012, and 82,860,122 issued and 78,652,557 outstanding at
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income/(loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (4,207,565 shares at December 31, 2012, and at December 31, 2011) . . . . . . .
$ 1,269,455
$ 1,074,718
593,133
1,186,771
473,805
644,191
3,215,870
7,383,225
1,250,000
146,200
—
18,713
171,136
41,271
54,040
9,064,585
—
451,541
951,516
420,030
832,997
3,498,329
7,229,131
1,400,000
225,000
880
18,920
171,136
37,300
46,864
9,129,231
—
254,580
250,992
830
768,925
465
721,993
(125,736)
829
765,641
(8,732)
624,192
(125,736)
Total Cathay General Bancorp stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,621,057
1,507,186
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,447
8,447
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,629,504
1,515,633
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,694,089
$10,644,864
See accompanying notes to Consolidated Financial Statements.
F-3
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended December 31,
2012
2011
2010
(In thousands, except share and
per share data)
$
INTEREST AND DIVIDEND INCOME
Loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities- taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities- nontaxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and securities purchased under agreement to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE
Time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income before provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Reversal)/provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income/(loss) after provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST INCOME
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depository service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC and State assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operations of investments in affordable housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of core deposit premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost associated with debt redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income/(loss) before income tax (benefit)/expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net income attributable to noncontrolling interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Cathay General Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
360,643
62,395
4,161
485
18
2,042
429,744
33,441
13,932
55,699
270
5,149
—
108,491
321,253
(9,000)
330,253
18,026
6,316
5,453
16,712
46,507
78,377
14,608
9,591
21,768
8,339
4,607
15,116
6,306
5,663
12,120
16,094
192,589
184,171
66,128
118,043
605
117,438
(16,488)
$
364,580
83,083
4,218
177
83
1,430
453,571
42,204
20,010
60,733
12,033
4,890
11
139,881
313,690
27,000
286,690
21,131
5,644
5,420
18,697
50,892
71,849
14,225
8,508
20,209
12,494
3,175
10,583
8,153
5,859
20,231
10,280
185,566
152,016
51,261
100,755
605
100,150
(16,437)
380,662
106,568
854
237
14
1,259
489,594
54,219
29,943
66,141
37,527
3,852
6
191,688
297,906
156,900
141,006
18,695
4,466
5,220
3,870
32,251
58,835
12,188
8,230
17,630
19,549
3,160
16,011
7,611
5,958
14,261
12,278
175,711
(2,454)
(14,629)
12,175
610
11,565
(16,388)
Net income/(loss) attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
100,950
$
83,713
$
(4,823)
Other comprehensive loss, net of tax:
Unrealized holding gains arising during the year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: reclassification adjustment for gains included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income/(loss) attributable to common stockholders per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,645
10,448
9,197
126,635
1.28
1.28
78,719,133
78,723,297
$
$
$
$
$
$
4,538
12,248
(7,710)
92,440
1.06
1.06
78,633,317
78,640,652
7,714
7,860
(146)
11,419
(0.06)
(0.06)
77,073,954
77,073,954
$
$
$
See accompanying notes to Consolidated Financial Statements.
F-4
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2012, 2011, and 2010
(In thousands, except number of shares)
Accumulated
Other
Comprehensive
Income
Additional
Paid-in
Capital
Number of
Shares
Number of
Shares
Treasury
Stock
Retained
Earnings
Preferred Stock
Common Stock
Amount
Amount
Noncontrolling
Interest
Total
Stockholders'
Equity
Balance at December 31,
2009 . . . . . . . . . . . . . . . . . . . . 258,000 $ 243,967 63,459,590 $ 677 $ 634,623
$ (875)
$ 551,588 $ (125,736)
$ 8,500
$1,312,744
Issuances of common stock —
Common stock issuance
Dividend Reinvestment Plan . . . . .
Restricted stock units vested . . . . .
Tax short-fall from stock
options . . . . . . . . . . . . . . . . . . . .
Stock -based compensation . . . . . .
Cash dividends of $0.04 per
share . . . . . . . . . . . . . . . . . . . . . .
Discount accretion and other
adjustment on preferred
stock . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock . . . . .
Redemption of noncontrolling
interest . . . . . . . . . . . . . . . . . . . .
Change in other comprehensive
loss . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Balance at December 31,
—
—
—
—
—
—
—
—
—
—
—
— 15,028,409
—
—
150
28,778 —
15,006 —
124,778
310
—
—
—
—
3,488
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(539)
3,337
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(147)
—
—
—
—
—
—
(3,140)
(3,488)
(12,900)
—
—
11,565
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(610)
(53)
—
610
124,928
310
—
(539)
3,337
(3,140)
—
(13,510)
(53)
(147)
12,175
2010 . . . . . . . . . . . . . . . . . . . . 258,000
247,455 78,531,783
827
762,509
(1,022)
543,625
(125,736)
8,447
1,436,105
Dividend Reinvestment Plan . . . . .
Restricted stock units vested . . . . .
Stock options exercised . . . . . . . . .
Tax short-fall from stock
options . . . . . . . . . . . . . . . . . . . .
Stock -based compensation . . . . . .
Cash dividends of $0.04 per
share . . . . . . . . . . . . . . . . . . . . . .
Discount accretion and other
adjustment on preferred
stock . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock . . . . .
Change in other comprehensive
loss . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Balance at December 31,
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,537
—
—
—
21,281
1
12,633 —
86,860
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
286
—
1,306
(218)
1,758
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,146)
(3,537)
(12,900)
(7,710)
—
—
100,150
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(605)
—
605
287
—
1,307
(218)
1,758
(3,146)
—
(13,505)
(7,710)
100,755
2011 . . . . . . . . . . . . . . . . . . . . 258,000
250,992 78,652,557
829
765,641
(8,732)
624,192
(125,736)
8,447
1,515,633
Dividend Reinvestment Plan . . . . .
Restricted stock units vested . . . . .
Stock salary . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . .
Tax benefits from stock options . .
Stock -based compensation . . . . . .
Cash dividends of $0.04 per
share . . . . . . . . . . . . . . . . . . . . . .
Discount accretion and other
adjustment on preferred
stock . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock . . . . .
Change in other comprehensive
loss . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Balance at December 31,
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,588
—
—
—
17,956 —
11,814 —
45,937 —
50,024
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
291
—
788
763
(620)
2,062
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,197
—
—
—
—
—
—
—
(3,149)
(3,588)
(12,900)
117,438
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(605)
—
605
291
—
788
764
(620)
2,062
(3,149)
—
(13,505)
9,197
118,043
2012 . . . . . . . . . . . . . . . . . . . . 258,000 $ 254,580 78,778,288 $ 830 $ 768,925
$
465
$ 721,993 $ (125,736)
$ 8,447
$1,629,504
See accompanying notes to Consolidated Financial Statements.
F-5
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal)/Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sale and transfers of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sale of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease)/increase in unrealized loss from interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down on venture capital and other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down on impaired securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales and calls of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of security premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax short-fall from stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock issued to officers as compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease/(increase) in other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease)/increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Investing Activities
(Increase)/decrease in short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease/(increase) in securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . .
Purchase of investment securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturity and call of investment securities available-for-sale . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investment securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of mortgage-backed securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from repayment and sale of mortgage-backed securities available-for-sale . . . . . . . . . . . .
Purchase of investment securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of mortgage-backed securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturity and call of investment securities held-to-maturity . . . . . . . . . . . . . . . . . . . .
Redemption of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of premises and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in investment in affordable housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2012
2011
2010
(In thousands)
$ 118,043
$
100,755
$
12,175
(9,000)
10,668
4,784
5,939
(369)
(633)
—
59,589
(58,930)
—
(2,634)
(163)
309
181
(18,025)
(200)
5,306
5,798
620
2,062
788
6,211
(605)
37,093
(2,256)
27,000
10,385
13,808
6,079
(5,243)
(3,354)
(88)
46,377
(14,027)
—
(3,874)
(745)
379
200
(21,131)
(480)
4,233
5,965
290
1,758
—
3,156
(605)
(534)
3,746
164,576
174,050
156,900
20,139
(38,504)
4,619
(9,977)
(149)
(779)
7,481
(7,332)
3,160
5,814
(3,795)
515
492
(19,253)
(794)
6,667
6,034
539
3,337
—
600
(610)
34,594
(13,368)
168,505
(117,027)
—
(517,513)
552,099
60,951
(680,388)
619,169
—
—
376,981
11,717
(395,743)
(3,108)
47,866
(1,540)
(88,634)
110,000
(571,093)
435,000
524,958
(541,356)
868,023
—
(480,083)
163,855
10,884
(362,054)
(2,888)
61,406
(968)
48,404
(110,000)
(3,366,780)
2,876,414
65,139
—
1,351,018
(150,164)
(165,527)
108,067
7,918
(151,054)
(4,979)
91,154
(3,015)
Net cash (used in)/provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(46,536)
127,050
596,595
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts, money market and saving deposits . . . . . . . . . . .
Net (decrease)/increase in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease)/increase in federal funds purchased and securities sold under agreement to
repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of Federal Home Loan Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from shares issued to Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax short-fall from share-based payment arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
625,360
(471,085)
(150,000)
531,200
(610,000)
(16,049)
—
—
(880)
291
764
(620)
180,940
56,828
(161,000)
4,734,000
(5,059,000)
(16,046)
—
—
(7,584)
287
1,306
(290)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(91,019)
(270,559)
Increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of the year
27,021
117,888
30,541
87,347
224,122
(736,549)
4,000
528,000
(907,362)
(16,040)
124,928
1,253
—
310
—
(539)
(777,877)
(12,777)
100,124
Cash and cash equivalents, end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 144,909
$
117,888
$
87,347
See accompanying notes to Consolidated Financial Statements.
F-6
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$112,411
$ 36,083
$142,644
$ 53,148
$197,762
$ 13,369
Year Ended December 31,
2012
2011
(In thousands)
2010
Non-cash investing and financing activities:
Net change in unrealized holding gain on securities available-for-sale, net of tax . . . . . . . . . . . .
Transfers to other real estate owned from loans held for investment . . . . . . . . . . . . . . . . . . . . . .
Transfers to other real estate owned from loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred to loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred to loans held for investment from held for sale . . . . . . . . . . . . . . . . . . . . . . . .
Loans to facilitate the sale of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to facilitate the sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (7,710) $
$ 83,941
2,874
4,399
(147)
$
9,197
$ 98,653
$ 14,389
$ 21,473
$ — $
$
$ 15,986
4,332
$
$ — $ —
500
$
$ 12,204
$
$
1,785
$ 23,500
$ — $
7,472
6,094
See accompanying notes to Consolidated Financial Statements.
F-7
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The accompanying Consolidated Financial Statements include the accounts of Cathay General Bancorp (the
“Bancorp”), a Delaware corporation, its wholly-owned subsidiaries, Cathay Bank (the “Bank”), a California
state-chartered bank, six limited partnerships investing in affordable housing projects, and GBC Venture Capital,
Inc. (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.
Organization and Background. The business activities of the Bancorp consist primarily of the operations of
the Bank, which owns 100% of the common securities of the following subsidiaries: Cathay Real Estate
Investment Trust, GBC Real Estate Investments, Inc., Cathay Holdings LLC, Cathay Holdings 2, LLC, Cathay
Holdings 3, LLC, Cathay Community Development Corporation and its wholly owned subsidiary, Cathay New
Asia Community Development Corporation.
There are limited operating business activities currently at the Bancorp. The Bank is a commercial bank,
servicing primarily the individuals, professionals, and small to medium-sized businesses in the local markets in
which its branches are located. Its operations include the acceptance of checking, savings, and time deposits, and
the making of commercial, real estate, and consumer loans. The Bank also offers trade financing, letters of credit,
wire transfer, foreign currency spot and forward contracts, Internet banking, investment services, and other
customary banking services to its customers.
Use of Estimates. The preparation of the Consolidated Financial Statements in accordance with GAAP
requires management of the Company to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates. The significant estimates subject to change relate to the allowance for
loan losses, goodwill impairment assessment, other-than-temporary impairment analysis on investments, fair
value disclosures, and the fair value of options granted. The more significant of these policies are described
below.
Concentrations. The Bank was incorporated in California and started its business from California.
Therefore, loans originated and deposits solicited were mainly from California. As of December 31, 2012, gross
loans were primarily comprised of 50.7% of commercial mortgage loans and 28.6% of commercial loans. As of
December 31, 2012, approximately 63% of the Bank’s residential mortgages were for properties located in
California. Total deposits were comprised of 43.6% of time deposit of $100,000 or more (Jumbo CDs) at
December 31, 2012, and approximately 67.4% of the Company’s Jumbo CDs have been on deposit with the
Company for two years or more.
Allowance for Loan Losses. The determination of the amount of the provision for loan losses charged to
operations reflects management’s current judgment about the credit quality of the loan portfolio and takes into
consideration changes in lending policies and procedures, changes in economic and business conditions, changes
in the nature and volume of the portfolio and in the terms of loans, changes in the experience, ability and depth of
lending management, changes in the volume and severity of past due, non-accrual and adversely classified or
graded loans, changes in the quality of the loan review system, changes in the value of underlying collateral for
collateral-dependent loans, the existence and effect of any concentrations of credit and the effect of competition,
legal and regulatory requirements, and other external factors. The nature of the process by which loan losses is
determined the appropriate allowance for loan losses requires the exercise of considerable judgment. The
allowance is increased by the provision for loan losses and decreased by charge-offs when management believes
the uncollectibility of a loan is confirmed.
F-8
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Subsequent recoveries, if any, are credited to the allowance. A 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.
The total allowance for loan losses consists of two components: specific allowances and general allowances.
To determine the adequacy of the allowance in each of these two components, two primary methodologies are
employed, the individual loan review analysis methodology and the classification migration methodology. These
methodologies support the basis for determining allocations between the various loan categories and the overall
adequacy of our allowance to provide for probable losses inherent in the loan portfolio. These methodologies are
further supported by additional analysis of relevant factors such as the historical losses in the portfolio, and
environmental factors which include trends in delinquency and non-accrual, and other significant factors, such as
the national and local economy, the volume and composition of the portfolio, strength of management and loan
staff, underwriting standards, and the concentration of credit.
The Bank’s management allocates a specific allowance for “Impaired Credits,” in accordance with
Accounting Standard Codification (“ASC”) Section 310-10-35. For non-Impaired Credits, a general allowance is
established for those loans internally classified and risk graded Pass, Minimally Acceptable, Special Mention, or
Substandard based on historical losses in the specific loan portfolio and a reserve based on environmental factors
determined for that loan group. The level of the general allowance is established to provide coverage for
management’s estimate of the credit risk in the loan portfolio by various loan segments not covered by the
specific allowance.
Securities Purchased Under Agreements to Resell. The Company purchases securities under agreements to
resell with various terms. These agreements are collateralized by agency securities and mortgage backed
securities that are generally held by a third party custodian. The purchases are over-collateralized to ensure
against unfavorable market price movements. In the event that the fair market value of the securities decreases
below the collateral requirements under the related repurchase agreements, the counterparty is required to deliver
additional securities. The counterparties to these agreements are nationally recognized investment banking firms
that meet credit eligibility criteria and with whom a master repurchase agreement has been duly executed.
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 are classified as trading securities when management intends to sell the securities in
the near term. Securities purchased are designated as held-to-maturity, available-for-sale, or trading securities 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. Premiums and discounts
are amortized or accreted as adjustment of yield on a level-yield basis.
F-9
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ASC Topic 320 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not
will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an entity must
recognize an other-than-temporary impairment (“OTTI”). If an entity does not intend to sell the debt security and will not be
required to sell the debt security, the entity must consider whether it will recover the amortized cost basis of the security. If the
present value of expected cash flows is less than the amortized cost basis of the security, OTTI shall have considered to have
occurred. OTTI is then separated into the amount of the total impairment related to credit losses and the amount of the total
impairment related to all other factors. An entity determines the impairment related to credit losses by comparing the present value
of cash flows expected to be collected from the security with the amortized cost basis of the security. OTTI related to the credit
loss is then recognized in earnings. OTTI related to all other factors is recognized in other comprehensive income. OTTI not
related to the credit loss for a held-to-maturity security should be recognized separately in a new category of other comprehensive
income and amortized over the remaining life of the debt security as an increase in the carrying value of the security only when the
entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before
recovery of its remaining amortized cost basis. The Company has both the ability and the intent to hold and it is not more likely
than not that the Company will be required to sell those securities with unrealized losses before recovery of their amortized cost
basis.
Trading securities are reported at fair value, with unrealized gains or losses included in income.
Investment in Federal Home Loan Bank (“FHLB”) Stock. As a member of the FHLB system the Bank is required to maintain
an investment in the capital stock of the FHLB. The amount of investment is also affected by the outstanding advances under the
line of credit the Bank maintains with the FHLB. FHLB stock is carried at cost and is pledged as collateral to the FHLB. FHLB
stock is periodically evaluated for impairment based on ultimate recovery of par value. The carrying amount of the FHLB stock
was $41.3 million at December 31, 2012, and $53.0 million at December 31, 2011. As of December 31, 2012, 68,714 shares of
FHLB stock was the minimum stock requirement based on outstanding FHLB borrowings of $146.2 million. As of December 31,
2012, the Company owned 412,716 shares of FHLB stock.
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, based on contractual terms. 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 income, and subsequent payments received are generally first applied toward the outstanding principal
balance of the loan. 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. A non-accrual loan may also be returned to accrual status if all principal and interest
contractually due are reasonably assured of repayment within a reasonable period and there has been a sustained period of payment
performance, generally six months. 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. The amortization utilizes the interest method. If
a loan is placed on non-accrual status, the amortization of the loan fees and the accretion of discounts are discontinued until the
loan is returned to accruing status.
Loans held for sale are carried at the lower of aggregate cost or fair value. Gains and losses are recorded in non-interest
income based on the difference between sales proceeds, net of sales commissions, and carrying value.
Loans Acquired Through Transfer. Loans acquired through the completion of a transfer, including loans acquired in a
business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at
acquisition, that the Company will be unable to collect all contractually required payment receivables are initially recorded at fair
value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the
undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest
income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the
undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a
loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized
prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized
as impairment. Valuation allowance on these impaired loans reflect only losses incurred after the acquisition.
F-10
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Impaired Loans. A loan is considered impaired when it is probable that the Bank will be unable to collect all
amounts due (i.e. both principal and interest) according to the contractual terms of the loan agreement. The
measurement of impairment may be based on (1) the present value of the expected future cash 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 non-performing loans with an outstanding balance based on the Company’s defined
criteria, generally where the loan amount is $500,000 or less, as a homogenous portfolio. Once a loan has been
identified as a possible problem loan, the Company conducts a periodic review of such loan in order to test for
impairment. When loans are placed on an impaired status, previously accrued but unpaid interest is reversed
against current income and subsequent payments received are generally first applied toward the outstanding
principal balance of the loan.
Troubled Debt Restructured Loan (“TDR”.) A TDR is a formal modification of the terms of a loan when the
lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the
borrower. The concessions may be granted in various forms, including reduction in the stated interest rate,
reduction in the loan balance or accrued interest, or extension of the maturity date. Although these loan
modifications are considered TDRs, accruing TDR loans have, pursuant to the Bank’s policy, performed under
the restructured terms and have demonstrated sustained performance under the modified terms for six months
before being returned to accrual status. The sustained performance considered by management pursuant to its
policy includes the periods prior to the modification if the prior performance met or exceeded the modified terms.
This would include cash paid by the borrower prior to the restructure to set up interest reserves. Loans classified
as TDRs are reported as impaired loans.
Unfunded Loan Commitments. Unfunded loan commitments are generally related to providing credit
facilities to clients of the Bank, and are not actively traded financial instruments. These unfunded commitments
are disclosed as off-balance sheet financial instruments in Note 14 in the Notes to Consolidated Financial
Statements.
Letter of Credit Fees. Issuance and commitment fees received for the issuance of commercial or standby
letters of credit are recognized over the term of the instruments.
Premises and Equipment. Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed on the straight-line method based on the following estimated useful lives of the assets:
Type
Estimated Useful Life
Buildings (years) . . . . . . . . . . . . . . . . . . . .
Building improvements (years)
. . . . . . . .
Furniture, fixtures, and equipment
15 to 45
5 to 20
(years) . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . .
3 to 25
Shorter of useful lives or the terms of the leases
Improvements are capitalized and amortized to occupancy expense based on the above table. Construction
in process is carried at cost and includes land acquisition cost, architectural fees, general contractor fees,
capitalized interest and other costs related directly to the construction of a property.
F-11
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded 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 Affordable Housing. The Company is a limited partner in limited 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. As of December 31, 2012, six of the limited
partnerships in which the Company has an equity interest were determined to be variable interest entities for which the
Company is the primary beneficiary. The Company therefore consolidated the financial statements of these six limited
partnerships into its Consolidated Financial Statements.
Investments in Venture Capital. The Company invests in limited partnerships that invest in nonpublic companies. These
partnerships are commonly referred to as venture capital investments. These limited partnership interests represent ownership
of less than 5% and are carried under the cost method with other-than-temporary impairment charged against net income.
Goodwill and Goodwill Impairment. Goodwill represents the excess of costs over fair value of assets of businesses
acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of ASC
Topic 350. ASC Topic 350 also requires that intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360,
formerly, SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”
The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between
annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value
of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill
exceeds its implied fair value. Accounting standards require management to estimate the fair value of each reporting unit in
making the assessment of impairment at least annually.
The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test described in ASC Topic 350. The two-step impairment testing process conducted by us, if needed,
begins by assigning net assets and goodwill to our three reporting units- Commercial Lending, Retail Banking, and East
Coast Operations. The Company then completes “step one” of the impairment test by comparing the fair value of each
reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net
assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not
necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to
determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit’s
goodwill to the “implied fair value” of that goodwill. The implied fair value of goodwill is computed by assuming that all
assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to
goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for
the amount by which the carrying amount of goodwill exceeds its implied fair value.
The Commercial Lending unit did not have any goodwill allocated to the unit and accordingly no goodwill impairment
testing was performed for that unit. The reporting unit fair values for the Retail Banking unit and the East Coast Operations
were determined based on an equal weighting of (1) the fair value determined using a market approach using a combination
of price to earnings multiples determined based on a representative peer group applied to 2012 and forecasted 2013 and 2014
earnings, and a price to book multiple and (2) the fair value determined using a dividend discount model with the discount
rate determined using the same representative peer group. A control premium was then applied to the unit fair values so
determined as of December 31, 2012.
F-12
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In determining the forecasted earnings for the Retail Banking unit and the East Coast Operations, the financial
forecasts assume muted growth during the forecast period. The principal driver of the Company’s negative operating
results has been the Commercial Lending reporting unit where the vast majority of the Company’s loan losses have
been incurred. A summary of the respective unit fair value, carrying amounts and unit goodwill as well as the
percentage by which fair value exceed carrying value of each reporting unit as of December 31, 2012, is shown below:
Reporting Units
Carrying
Amount
Fair Value
Fair Value in
Excess of
Carrying
Amount
Commercial Lending Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail Banking Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
East Coast Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 797,702
361,589
203,766
(Dollars in thousands)
—
86.8%
101.5%
$ 363,601
675,580
410,489
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,363,057
$1,449,670
Allocated
Goodwill
—
235,195
81,145
$316,340
If economic conditions were to worsen instead of improve as assumed in the key assumptions, then the forecasted
earnings for the Retail Banking unit and the East Coast Operations could be significantly lower than projected. In
addition, a worsening of economic conditions could potentially reduce the price to earnings multiples and price to book
multiples of peer groups for Retail Banking and East Coast Operations and result in a reduction in the fair value of
these units even if the forecasted earnings were achieved.
Core Deposit Premium. Core deposit premium, which represents the purchase price over the fair value of the
deposits acquired from other financial institutions, is amortized over its estimated useful life to its residual value in
proportion to the economic benefits consumed. If a pattern of consumption cannot be reliably determined, straight-line
amortization is used. 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
and amortizes core deposit premium over its estimated useful life.
At December 31, 2012, the unamortized balance of core deposit premium was $4.9 million, which was net of
accumulated amortization of $55.3 million. Aggregate amortization expense for core deposit premium was $5.7 million
for 2012, $5.9 million for 2011, and $6.0 million for 2010. At December 31, 2012, the estimated aggregate
amortization of core deposit premiums is $4.5 million for 2013 and $0.4 million for 2014. At December 31, 2011, the
unamortized balance of core deposit premium was $10.6 million, which was net of accumulated amortization of $49.8
million.
Securities Sold Under Agreements to Repurchase. The Company sells certain securities under agreements to
repurchase. The agreements are treated as collateralized financing transactions and the obligations to repurchase
securities sold are reflected as a liability in the accompanying Consolidated Balance Sheets. The securities underlying
the agreements remain in the applicable asset accounts.
Stock-Based Compensation. Stock-based compensation expense for stock options is calculated based on the fair
value of the award at the grant date for those options expected to vest, and is recognized as an expense over the vesting
period of the grant using the straight-line method. The Company uses the Black-Scholes option pricing model to
estimate the value of granted options. This model takes into account the option exercise price, the expected life, the
current price of the underlying stock, the expected volatility of the Company’s stock, expected dividends on the stock
and a risk-free interest rate. The Company estimates the expected volatility based on the Company’s historical stock
prices for the period corresponding to the expected life of the stock options. Option compensation expense totaled
$762,000 in 2012, $1.0 million in 2011, and $3.0 million in 2010. Stock-based compensation is recognized ratably over
the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options
totaled $129,000 at December 31, 2012, and is expected to be recognized over the next 2 months.
F-13
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Foreign Exchange Forwards and Foreign Currency Option Contracts. We enter into foreign exchange
forward contracts and foreign currency option contracts with correspondent banks to mitigate the risk of
fluctuations in foreign currency exchange rates for foreign currency certificates of deposit, foreign exchange
contracts or foreign currency option contracts entered into with our clients. These contracts are not designated as
hedging instruments and are recorded at fair value in our Consolidated Balance Sheets. Changes in the fair value
of these contracts as well as the related foreign currency certificates of deposit, foreign exchange contracts or
foreign currency option contracts, are recognized immediately in net income as a component of non-interest
income. Period end gross positive fair values are recorded in other assets and gross negative fair values are
recorded in other liabilities.
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.
Comprehensive Income/(loss). Comprehensive income/(loss) is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner sources. Comprehensive income/
(loss) generally includes net income/(loss), foreign currency translation adjustments, minimum pension liability
adjustments, unrealized gains and losses on investments in securities available-for-sale, and cash flow hedges.
Comprehensive income/(loss) and its components are reported and displayed in the Company’s consolidated
statements of operations and comprehensive income/(loss).
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.
Potential dilution is excluded from computation of diluted per-share amounts when a net loss from operations
exists.
Foreign Currency Translation. The Company considers the functional currency of its foreign operations to
be the United States dollar. Accordingly, the Company remeasures monetary assets and liabilities at year-end
exchange rates, while nonmonetary items are remeasured at historical rates. Income and expense accounts are
remeasured at the average rates in effect during the year, except for depreciation, which is remeasured at
historical rates. Foreign currency transaction gains and losses are recognized in income in the period of
occurrence.
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.
F-14
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Segment Information and Disclosures. Accounting principles generally accepted in the United States of America
establish standards to report information about operating segments in annual financial statements and require 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
operating segment.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standard Board (“FASB”) issued ASU 2011-04 “Amendments to Achieve
Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic
820, “Fair Value Measurements and Disclosures,” to improve fair value measurement consistency in U.S. generally accepted
accounting principles and International Financial Reporting Standards (“IFRS”). The amendments also clarity the application
of existing fair value measurement and disclosure requirements, change certain principles and requirements in Topic 820,
and requires additional fair value disclosures. ASU 2011-04 became effective on January 1, 2012. Adoption of ASU 2011-04
did not have a significant impact on the Company’s Consolidated Financial Statements.
In September 2011, FASB issued ASU 2011-08 “Intangible- Goodwill and other.” ASU 2011-08 permits an entity to
first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than
its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test
described in ASC Topic 350. ASU 2011-08 became effective for interim and annual goodwill impairment tests performed
after December 15, 2011. Adoption of ASU 2011-08 did not have a significant impact on the Company’s Consolidated
Financial Statements.
2. Cash and Cash Equivalents
The Company manages its cash and cash equivalents, which consist of cash on hand, amounts due from banks, federal
funds sold, and short-term investments with original maturity of three months or less, based upon the Company’s operating,
investment, and financing activities. For the purpose of reporting cash flows, these same accounts are included in cash and
cash equivalents.
The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a
percentage of deposit liabilities. The average reserve balances required were $12.9 million for 2012 and $12.2 million for
2011. There were no federal funds sold in 2012 or in 2011.
3. Securities Purchased under Agreements to Resell
Securities purchased under agreements to resell are usually collateralized by U.S. government agency and mortgage-
backed securities. 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. There were no
resale agreements at December 31, 2012, and at December 31, 2011.
The following table sets forth information with respect to securities purchased under agreements to resell.
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annualized weighted-average interest rate, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daily average amount outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
(In thousands)
$ —
$ —
0.00%
0.00%
$14,986
$ 84,493
0.12%
0.10%
$50,000
$255,000
For those securities obtained under the resale agreements, the collateral is either held by a third party custodian or by the
counter party and is segregated under written agreements that recognize the Company’s interest in the securities. Interest
income associated with securities purchased under resale agreements was $18,000 for 2012, $83,000 for 2011, and $14,000
for 2010.
F-15
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Investment Securities
Investment Securities. The following table reflects the amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of investment securities as of December 31, 2012, and December 31, 2011:
Amortized
Cost
At December 31, 2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Securities Held-to-Maturity
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 129,037
634,757
9,974
$ 9,268
40,801
69
Total securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 773,768
$50,138
Securities Available-for-Sale
U.S. treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock of government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 509,748
404,505
9,772
145
349,973
6,000
569
9,964
$
228
12,194
430
—
106
79
1,766
151
$ —
—
—
$ —
$
5
5
34
4
14,102
—
—
—
Fair Value
$ 138,305
675,558
10,043
$ 823,906
$ 509,971
416,694
10,168
141
335,977
6,079
2,335
10,115
Total securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,290,676
$14,954
$14,150
$1,291,480
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,064,444
$65,092
$14,150
$2,115,386
Securities Held-to-Maturity
U.S. government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
At December 31, 2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
$
99,966
129,577
913,990
9,971
$ 1,406
7,053
42,351
—
$ —
—
—
337
$ 101,372
136,630
956,341
9,634
Total securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,153,504
$50,810
Securities Available-for-Sale
U.S. government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock of government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 500,007
1,869
325,706
16,184
172
412,045
6,000
569
45,501
1,468
$ 1,226
59
12,361
540
—
113
48
1,085
486
1,492
$
$
7
—
436
238
6
31,729
13
—
24
—
$ 501,226
1,928
337,631
16,486
166
380,429
6,035
1,654
45,963
2,960
337
$1,203,977
Total securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,309,521
$17,410
$32,453
$1,294,478
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,463,025
$68,220
$32,790
$2,498,455
The amortized cost and fair value of investment securities at December 31, 2012, 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.
F-16
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Securities Available-for-Sale
Securities Held-to-Maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
(In thousands)
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . .
Due after ten years (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 349,899
375,041
194,901
370,835
$ 349,940
370,241
190,047
381,252
$ —
—
62,235
711,533
$ —
—
66,523
757,383
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,290,676
$1,291,480
$773,768
$823,906
(1) Equity securities are reported in this category
Proceeds from sales of mortgage-backed securities were $501.1 million and repayments, maturities and calls
of mortgage-backed securities were $118.1 million during 2012 compared to proceeds from sales of $759.7
million and repayments, maturities and calls of $108.4 million during 2011, and proceeds from sales of $1.04
billion and repayments, maturities and calls of $308.2 million during 2010. Proceeds from sales of other
investment securities were $61.0 million during 2012 compared to $525.0 million during 2011 and $65.1 million
during 2010. Proceeds from maturity and calls of investment securities were $552.1 million during 2012
compared to $435.0 million during 2011 and $2.88 billion in 2010. In 2012, gains of $18.6 million and losses of
$607,000 were realized on sales and calls of investment securities compared with $21.1 million in gains and no
losses realized in 2011, and $19.3 million in gains and $67,000 in losses realized in 2010.
The Company's unrealized loss on investments in corporate bonds relates to a number of investments in
bonds of financial institutions, all of which were investment grade at the date of acquisition and as of
December 31, 2012. The unrealized losses were primarily caused by the widening of credit spreads since the
dates of acquisition. The contractual terms of those investments do not permit the issuers to settle the security at a
price less than the amortized cost of the investment. The Company currently does not believe it is probable that it
will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is
expected that these bonds would not be settled at a price less than the amortized cost of the investment. Because
the Company does not intend to sell and would not be required to sell these investments until a recovery of fair
value, which may be maturity, it does not consider its investments in these corporate bonds to be other-than-
temporarily impaired at December 31, 2012.
The temporarily impaired securities represent 16.9% of the fair value of investment securities as of
December 31, 2012. Unrealized losses for securities with unrealized losses for less than twelve months represent
2.4%, and securities with unrealized losses for twelve months or more represent 4.4%, of the historical cost of
these securities. Unrealized losses on these securities generally resulted from increases in interest rate spreads
subsequent to the date that these securities were purchased. At December 31, 2012, 34 issues of securities had
unrealized losses for 12 months or longer and 7 issues of securities had unrealized losses of less than 12 months.
At December 31, 2012, management believed the impairment was temporary and, accordingly, no
impairment loss has been recognized in our consolidated statements of operations. We expect to recover the
amortized cost basis of our debt securities, and have no intent to sell and will not be required to sell available-for-
sale debt securities that have declined below their cost before their anticipated recovery. The table below shows
the fair value, unrealized losses, and number of issuances of the temporarily impaired securities in our investment
securities portfolio as of December 31, 2012, and December 31, 2011:
F-17
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Less than 12 months
Unrealized
Losses
Fair
Value
No. of
Issuances
As of December 31, 2012
Temporarily Impaired Securities
12 months or longer
Unrealized
Losses
No. of
Issuances
Fair
Value
Total
Unrealized
Losses
No. of
Issuances
Fair
Value
Securities Held-to-Maturity
(Dollars in thousands)
Total securities held-to-maturity . . $
— $ —
—
$ — $ —
—
$ — $ —
—
Securities Available-for-Sale
U.S. treasury securities . . . . . . . . . . . . . $ 49,969
231
Mortgage-backed securities . . . . . . . . . .
Mortgage-backed securities-Non-
agency . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . .
Asset-backed securities . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . .
—
—
—
52,468
—
—
—
2,532
Total securities available-for-
sale . . . . . . . . . . . . . . . . . . . . $ 102,668
Total investment securities . . . . . . . . . . $102,668
$ 2,538
$ 2,538
$
5
1
1
2
$ — $ —
1
170
—
6
$ 49,969
401
$
5
2
—
—
—
4
7
7
96
439
141
253,430
2
35
4
11,570
$254,276
$11,612
$254,276
$11,612
1
4
1
22
34
34
96
439
141
305,898
2
35
4
14,102
$356,944
$14,150
$356,944
$14,150
1
8
1
4
1
26
41
41
Less than 12 months
As of December 31, 2011
Temporarily Impaired Securities
12 months or longer
Total
Fair
Value
Unrealized No. of
Losses
Issuances
Fair
Value
Unrealized No. of
Losses
Issuances
Fair
Value
Unrealized No. of
Losses
Issuances
Securities Held-to-Maturity
Corporate debt securities . . . . . . . . . . . . $
9,635
Total securities held-to-maturity . . . . . . $
9,635
Securities Available-for-Sale
U.S. government sponsored entities . . . . $ 49,993
Mortgage-backed securities . . . . . . . . . .
564
Mortgage-backed securities-Non-
agency . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . .
Asset-backed securities . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . .
—
—
—
185,577
1,987
5,674
$
$
$
337
337
7
4
—
—
—
14,201
13
24
Total securities
available-for-sale . . . . . . . . . . . . $243,795
$14,249
Total investment securities
$ 253,430
$14,586
(Dollars in thousands)
1
1
1
8
—
—
—
17
1
2
29
30
$ — $ —
$ — $ —
$ — $ —
35
1
6,719
570
166
172,857
—
—
431
238
6
17,528
—
—
$180,347
$18,204
$180,347
$18,204
—
—
—
2
2
4
1
19
—
—
28
28
$
$
9,635
9,635
$ 49,993
599
$
$
$
337
337
7
5
6,719
570
166
358,434
1,987
5,674
431
238
6
31,729
13
24
$424,142
$32,453
$433,777
$32,790
1
1
1
10
2
4
1
36
1
2
57
58
Investment securities having a carrying value of $1.45 billion at December 31, 2012, and $1.68 billion at December 31,
2011, were pledged to secure public deposits, other borrowings, treasury tax and loan, Federal Home Loan Bank advances,
securities sold under agreements to repurchase, and foreign exchange transactions.
F-18
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Loans
Most of the Company’s business activity is predominately with Asian customers located in Southern and Northern
California; New York City; Houston and Dallas, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois;
Edison, New Jersey; and Hong Kong. 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 Balance Sheets as of December 31, 2012, and December 31, 2011, were as
follows:
Type of Loans:
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
(In thousands)
$2,127,107
180,950
3,768,452
1,146,230
193,852
12,556
$1,868,275
237,372
3,748,897
972,262
214,707
17,699
7,429,147
7,059,212
(183,322)
(10,238)
(206,280)
(8,449)
Total loans and leases, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,235,587
$6,844,483
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$
760
No loans were held for sale at December 31, 2012, compared to $760,000 at December 31, 2011. In 2012, we added
three new loans of $16.0 million, sold four loans of $16.2 million for a net loss on sale of $26,000, and transferred a loan of
$500,000 to held for investment. At December 31, 2011, non-accrual loans held for sale of $760,000 decreased $2.1 million
from $2.9 million at December 31, 2010. In 2011, we added six new loans of $4.4 million, transferred one loan of $2.9
million to OREO, and sold four loans of $3.6 million for a net gain on sale of $88,000. At December 31, 2011, loans held for
sale were comprised of a commercial construction loan of $500,000 and a residential mortgage loan of $260,000.
The Company pledged real estate loans of $1.6 billion at December 31, 2012, and $2.0 billion at December 31, 2011, to
the Federal Home Loan Bank of San Francisco under its specific pledge program. In addition, the Bank pledged $211.6
million at December 31, 2012, and $250.9 million at December 31, 2011, of its commercial loans to the Federal Reserve
Bank’s Discount Window under the Borrower-in-Custody program.
Loans serviced for others as of December 31, 2012, totaled $201.4 million and were comprised of $42.1 million of
commercial loans, $62.2 million of commercial real estate loans, $3.6 million in construction loans, and $93.5 million of
residential mortgages.
The Company has entered into transactions with its directors, executive officers, or principal holders of its equity
securities, or the associates of such persons (“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 customers who are not related parties. 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, 2012. In July 2011, the Bank sold a participation in a substandard real estate loan to a
Related Party for $24.5 million, which represented 98% of the contractual balance. In March 2012, the Bank sold
participations in two substandard real estate loans to the same Related Party for $7.9 million, which represented 92.5% of the
contractual balance. An analysis of the activity with respect to loans to Related Parties for the years indicated is as follows:
F-19
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31,
2012
2011
(In thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional loans made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$160,069
92,249
(79,734)
$134,161
89,985
(64,077)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$172,584
$160,069
At December 31, 2012, recorded investment in impaired loans totaled $248.6 million and was comprised of
nonaccrual loans of $103.9 million and accruing TDR’s of $144.7 million. At December 31, 2011, recorded
investment in impaired loans totaled $322.0 million and was comprised of nonaccrual loans of $201.2 million,
nonaccrual loans held for sale of $760,000, and accruing TDR’s of $120.0 million. The average balance of
impaired loans was $277.8 million in 2012 and $361.4 million in 2011. We considered all non-accrual loans and
troubled debt restructurings ("TDR") to be impaired. Interest recognized on impaired loans totaled $9.3 million in
2012 and $5.3 million in 2011. The Bank recognizes interest income on impaired loans based on its existing
method of recognizing interest income on non-accrual loans except accruing TDRs. For impaired loans, the
amounts previously charged off represent 23.2% at December 31, 2012, and 25.6% at December 31, 2011, of the
contractual balances for impaired loans. The following table presents impaired loans and the related allowance
and charge-off as of the dates indicated:
Impaired Loans
At December 31, 2012
At December 31, 2011
Unpaid Principal
Balance
Recorded
Investment Allowance
Unpaid Principal
Balance
Recorded
Investment Allowance
(Dollars in thousands)
$ 29,359
$ 18,963
$ —
$ 46,671
$ 38,194
$ —
With no allocated allowance
Commercial loans . . . . . . .
Real estate construction
loans . . . . . . . . . . . . . . .
Commercial mortgage
9,304
7,277
loans . . . . . . . . . . . . . . .
189,871
152,957
Residential mortgage and
equity lines . . . . . . . . . .
4,303
4,229
—
—
—
134,837
78,767
187,580
149,034
8,555
7,987
—
—
—
Subtotal . . . . . . . . . . .
$232,837
$183,426
$ —
$377,643
$273,982
$ —
With allocated allowance
Commercial loans . . . . . . .
Real estate construction
$
7,804
$
4,959
$ 1,467
$ 11,795
$
7,587
$3,336
loans . . . . . . . . . . . . . . .
54,718
34,856
8,158
—
—
—
Commercial mortgage
loans . . . . . . . . . . . . . . .
14,163
12,928
1,336
29,722
28,023
2,969
Residential mortgage and
equity lines . . . . . . . . . .
14,264
12,428
1,222
13,813
12,381
1,249
Subtotal . . . . . . . . . . .
$ 90,949
$ 65,171
$12,183
$ 55,330
$ 47,991
$7,554
Total impaired loans . . . . . . . .
$323,786
$248,597
$12,183
$432,973
$321,973
$7,554
F-20
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents the average balance and interest income recognized related to impaired loans for the period
indicated:
For the year ended December 31,
2012
2011
2012
2011
Average Recorded
Investment
Interest Income
Recognized
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage and equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal
$ 31,798
49,094
178,822
18,062
$277,776
(In thousands)
$ 48,349
82,529
212,555
17,920
$361,353
$ 580
265
8,221
239
$9,305
$1,053
940
3,101
236
$5,330
The following is a summary of non-accrual loans as of December 31, 2012, 2011, and 2010 and the related net interest
foregone for the years then ended:
Non-accrual portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accrual loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual interest due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest foregone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
$103,902
—
$103,902
$
$
6,621
1,006
5,615
(In thousands)
$201,197
760
$201,957
$ 13,049
71
$ 12,978
$242,319
2,873
$245,192
$ 17,304
4,853
$ 12,451
The following table presents the aging of the loan portfolio by type as of December 31, 2012, and as of December 31, 2011:
30-59 Days
Past Due
60-89 Days
Past Due
Greater
than 90
Days Past Due
Non-accrual
Loans
Total Past Due
Loans Not
Past Due
Total
As of December 31, 2012
Type of Loans:
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,832 $ 1,610
1,471
Real estate construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,627
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,972
—
Installment and other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,726 $ 8,680
—
21,570
5,324
—
(In thousands)
$
$
630
—
—
—
—
630
$ 19,958
36,299
35,704
11,941
—
$103,902
$ 39,030
37,770
60,901
19,237
—
$156,938
As of December 31, 2011
143,180
$2,088,077 $2,127,107
180,950
3,707,551 3,768,452
1,320,845 1,340,082
12,556
$7,272,209 $7,429,147
12,556
30-59 Days
Past Due
60-89 Days
Past Due
Greater
than 90
Days Past Due
Non-accrual
Loans
Total Past Due
Loans Not
Past Due
Total
Type of Loans:
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,683 $ — $ —
—
—
Real estate construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,277
6,726
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
$ 6,726
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,507 $ 20,277
20,326
13,627
5,871
—
(In thousands)
$ 30,661
46,012
107,784
16,740
—
$201,197
$ 32,344
66,338
148,414
22,611
—
$269,707
171,034
$1,835,931 $1,868,275
237,372
3,600,483 3,748,897
1,164,358 1,186,969
17,699
$6,789,505 $7,059,212
17,699
The determination of the amount of the allowance for credit losses for problem loans 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 credit losses. The nature of the process by which
the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. This allowance
evaluation process is also applied to TDRs since TDRs are considered to be impaired loans. As a result of adopting the
amendments in ASU 2012-02, the Company reassessed all restructurings that occurred on or after January 1, 2011, for
identification as TDRs.
F-21
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At December 31, 2012, accruing TDRs were $144.7 million and non-accrual TDRs were $47.7 million
compared to accruing TDRs of $120.0 million and non-accrual TDRs of $50.9 million at December 31, 2011.
The Company has allocated specific reserves of $1.1 million to accruing TDRs and $7.8 million to non-accrual
TDRs at December 31, 2012, and $1.4 million to accruing TDRs and $1.6 million to non-accrual TDRs at
December 31, 2011. The following table presents TDRs that were modified during 2012, their specific reserve at
December 31, 2012, and charge-off during 2012:
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
No. of
Contracts
Specific Reserve Charge-off
Commercial loans . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . .
Residential mortgage and equity
lines . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
20
14
43
$ 3,646
62,118
4,305
$70,069
(Dollars in thousands)
$ 3,646
58,393
$1,213
27
$ —
3,725
4,223
$66,262
162
82
$1,402
$3,807
The following table presents TDRs that were modified during 2011, their specific reserve at December 31, 2011,
and charge-off during 2011:
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
No. of
Contracts
Specific Reserve Charge-off
Commercial loans . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . .
Commercial mortgage loans . . . . . . . . .
Residential mortgage and equity
lines . . . . . . . . . . . . . . . . . . . . . . . . . .
7
3
6
3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
$15,025
33,669
17,343
1,574
$67,611
(Dollars in thousands)
$15,025
21,522
14,294
1,574
$52,415
$104
—
1
114
$219
$ —
12,147
3,049
—
$15,196
F-22
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of TDRs by type of concession and by type of loans is shown below:
Accruing TDRs
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accruing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal
Deferral
531
$
—
27,003
1,461
$28,995
Rate
Reduction
$ 3,020
—
16,656
1,024
$20,700
December 31, 2012
Rate Reduction
and Forgiveness
of Principal
$ —
—
739
—
$ 739
Rate Reduction
and Payment
Deferral
413
$
5,834
85,783
2,231
$94,261
Non-accrual TDRs
Interest
Deferral
Principal
Deferral
Rate
Reduction
Rate Reduction
and Forgiveness
of Principal
Rate Reduction
and Payment
Deferral
December 31, 2012
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . .
Total non-accrual TDRs . . . . . . . . . . . . . . . . . . . . .
$ — $
—
1,685
275
$1,960
912
16,767
2,817
2,010
$22,506
$ —
9,579
5,746
586
$15,911
(In thousands)
$1,518
—
—
—
$1,518
$ —
—
5,076
760
$5,836
Accruing TDRs
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accruing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal
Deferral
$12,933
16,820
471
1,294
$31,518
Rate
Reduction
$ 1,756
9,659
37,796
587
$49,798
As of December 31, 2011
Rate Reduction
and Forgiveness
of Principal
$ —
—
2,071
—
$ 2,071
Rate Reduction
and Payment
Deferral
431
$
5,776
28,935
1,487
$36,629
Non-accrual TDRs
As of December 31, 2011
Interest
Deferral
Principal
Deferral
Rate
Reduction
Rate Reduction
and Forgiveness
of Principal
Rate Reduction
and Payment
Deferral
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . .
Total non-accrual TDRs . . . . . . . . . . . . . . . . . . . . .
$ — $
—
2,633
311
$2,944
616
13,579
9,727
2,427
$26,349
$ 1,859
12,376
—
449
$14,684
(In thousands)
$1,506
—
—
—
$1,506
$ —
—
5,076
311
$5,387
Total
$ 3,964
5,834
130,181
4,716
$144,695
Total
$ 2,430
26,346
15,324
3,631
$47,731
Total
$ 15,120
32,255
69,273
3,368
$120,016
Total
$ 3,981
25,955
17,436
3,498
$50,870
Troubled debt restructurings on accrual status totaled $144.7 million at December 31, 2012, and were comprised of 61
loans, an increase of $24.7 million, compared to 32 loans totaling $120.0 million at December 31, 2011. TDRs at
December 31, 2012, were comprised of sixteen retail shopping and commercial use building loans of $68.1 million, fifteen
office and commercial use building loans of $40.4 million, two hotel loans of $12.4 million, seventeen single family
residential loans of $19.1 million, two land loans of $2.3 million, six commercial loans of $1.3 million, and three multi-
family residential loans of $1.1 million. We expect that the troubled debt restructuring loans on accruing status as of
December 31, 2012, which are all performing in accordance with their restructured terms, will continue to comply with the
restructured terms because of the reduced principal or interest payments on these loans. The comparable TDRs at
December 31, 2011, were comprised of eleven retail shopping and commercial use building loans of $74.4 million, seven
office and commercial use building loans of $23.8 million, one hotel loan of $7.9 million, ten single family residential loans
of $13.3 million, one land loan of $635,000 and two commercial loans of $39,000. The activity within our TDR loans for
2012 and 2011 are shown below:
F-23
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accruing TDRs
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans restored to accrual status . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans placed on nonaccrual
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expiration of loan concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
(In thousands)
$120,016
53,958
8,356
(251)
(5,159)
(32,225)
—
$136,800
60,863
709
(2,341)
(46,313)
(28,969)
(733)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,695
$120,016
Non-accrual TDRs
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans placed on non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans restored to accrual status . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
(In thousands)
$ 50,870
12,304
32,225
(4,182)
(33,931)
(1,199)
(8,356)
$ 28,146
13,269
28,969
(7,303)
(3,355)
(8,147)
(709)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47,731
$ 50,870
A loan is considered to be in payment default once it is 60 to 90 days contractually past due under the
modified terms. Two commercial real estate construction TDRs of $26.3 million, four commercial real estate
TDRs of $12.2 million, and two mortgage TDRs of $1.6 million had payments defaults within the previous
twelve months ended December 31, 2012. One of the TDRs that subsequently defaulted incurred a charge-off of
$46,000 during 2012.
Under the Company’s internal underwriting policy, an evaluation is performed of the probability that the
borrower will be in payment default on any of its debt in the foreseeable future without the modification in order
to determine whether a borrower is experiencing financial difficulty. As of December 31, 2012, there were no
commitments to lend additional funds to those borrowers whose loans have been restructured, were considered
impaired, or were on non-accrual status.
As part of the on-going monitoring of the credit quality of our loan portfolio, the Company utilizes a risk
grading matrix to assign a risk grade to each loan. Loans are risk rated based on analysis of the current state of
the borrower’s credit quality. The analysis of credit quality includes a review of all sources of repayment, the
borrower’s current financial and liquidity status and all other relevant information. The risk rating categories can
be generally described by the following grouping for non-homogeneous loans:
• Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable,
credit risk.
•
Special Mention – Borrower is fundamentally sound and the loan is currently protected but adverse
trends are apparent, that if not corrected, may affect ability to repay. Primary source of loan repayment
remains viable but there is increasing reliance on collateral or guarantor support.
F-24
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
•
Substandard – These loans are inadequately protected by current sound worth, paying capacity or
pledged collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may
not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss.
• Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending
events (which may strengthen the loan) a loss classification is deferred until the situation is better
defined.
• Loss – These loans are considered uncollectible and of such little value that to continue to carry the
loan as an active asset is no longer warranted.
The following table presents loan portfolio by risk rating as of December 31, 2012, and as of December 31,
2011:
Pass/Watch
Special Mention
Substandard Doubtful
Total
As of December 31, 2012
Commercial loans . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . .
Residential mortgage and equity lines . . . . . .
Installment and other loans . . . . . . . . . . . . . . .
$1,944,989
109,269
3,344,783
1,322,768
12,556
$ 76,776
18,000
162,455
816
—
$ 94,077
45,171
261,214
16,084
—
$11,265
8,510
—
414
—
$2,127,107
180,950
3,768,452
1,340,082
12,556
Total gross loans . . . . . . . . . . . . . . . . . . . . . . .
$6,734,365
$258,047
$416,546
$20,189
$7,429,147
Pass/Watch
Special Mention
Substandard Doubtful
Total
As of December 31, 2011
Commercial loans . . . . . . . . . . . . . . . . . . . . . .
Real estate construction loans . . . . . . . . . . . .
Commercial mortgage loans . . . . . . . . . . . . . .
Residential mortgage and equity lines . . . . . .
Installment and other loans . . . . . . . . . . . . . . .
$1,689,842
115,538
3,275,431
1,149,225
17,636
$ 64,290
23,555
69,925
4,439
63
$108,858
90,132
403,541
33,160
—
$ 5,285
8,147
—
145
—
$1,868,275
237,372
3,748,897
1,186,969
17,699
Total gross loans . . . . . . . . . . . . . . . . . . . . . . .
6,247,672
162,272
635,691
13,577
7,059,212
Loans held for sale . . . . . . . . . . . . . . . . .
—
$ —
$
260
$
500
$
760
The allowance for loan losses and the reserve for off-balance sheet credit commitments are significant
estimates that can and do change based on management’s process in analyzing the loan portfolio and on
management’s assumptions about specific borrowers, underlying collateral, and applicable economic and
environmental conditions, among other factors.
F-25
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents the balance in the allowance for loan losses by portfolio segment and based on
impairment method as of December 31, 2012, and as of December 31, 2011.
Commercial
Loans
Real Estate
Construction
Loans
Commercial
Mortgage
Loans
Residential
mortgage
and equity line
Consumer
and Other
Total
(In thousands)
December 31, 2012
Loans individually
evaluated for
impairment
Allowance . . . . . . . . .
Balance . . . . . . . . . . .
$
$
1,467
23,922
$
8,158
$ 42,133
$
1,336
$ 165,885
$
$
1,222
16,657
$ — $
12,183
$ — $ 248,597
Loans collectively
evaluated for
impairment
. . . . . . . . .
Allowance . . . . . . . . .
Balance . . . . . . . . . . .
$
64,634
$2,103,185
Total allowance . . . . .
Total balance . . . . . . .
$
66,101
$2,127,107
December 31, 2011
Loans individually
evaluated for
impairment
$ 14,859
$138,817
$ 23,017
$180,950
$
81,137
$3,602,567
$
10,481
$1,323,425
$
28
$12,556
$ 171,139
$7,180,550
$
82,473
$3,768,452
$
11,703
$1,340,082
$
28
$12,556
$ 183,322
$7,429,147
Allowance . . . . . . . . .
Balance . . . . . . . . . . .
$
$
3,336
45,781
$ — $
$ 78,766
2,969
$ 177,058
$
$
1,247
20,368
$ — $
7,552
$ — $ 321,973
Loans collectively
evaluated for
impairment
Allowance . . . . . . . . .
Balance . . . . . . . . . . .
$
62,322
$1,822,494
Total allowance . . . . .
Total balance . . . . . . .
$
65,658
$1,868,275
$ 21,749
$158,606
$ 21,749
$237,372
$ 105,052
$3,571,839
$
9,548
$1,166,601
$
57
$17,699
$ 198,728
$6,737,239
$ 108,021
$3,748,897
$
10,795
$1,186,969
$
57
$17,699
$ 206,280
$7,059,212
F-26
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table details activity in the allowance for loan losses by portfolio segment for the years ended
December 31, 2012 and 2011. Allocation of a portion of the allowance to one category of loans does not preclude its
availability to absorb losses in other categories.
Commercial
Loans
Real Estate
Construction
Loans
Commercial
Mortgage
Loans
Residential
mortgage
and equity line
Installment
and Other
Loans
Total
(In thousands)
2011 Beginning Balance . . . . . . . . . .
$ 63,918
$ 43,262
$128,348
$ 9,668
$ 35
$245,231
Provision for possible loan losses . . .
Charge-offs . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . .
Net Charge-offs . . . . . . . . . . . . . . . . .
2011 Ending Balance . . . . . . . . . . . . .
Reserve to impaired loans . . . . . . . . .
Reserve to non-impaired loans . . . . .
Reserve for off-balance sheet credit
commitments . . . . . . . . . . . . . . . . .
2012 Beginning Balance . . . . . . . . . .
Provision/(reversal) for possible loan
losses . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . .
Net Charge-offs . . . . . . . . . . . . . . . . .
11,711
(11,745)
1,774
(9,971)
$ 65,658
$ 3,336
$ 62,322
11,514
(37,500)
4,473
(33,027)
$ 21,749
$ —
$ 21,749
1,454
(26,750)
4,969
(21,781)
$108,021
$
2,969
$105,052
816
$
$ 65,658
$ 1,103
$ 21,749
113
$
$108,021
16,201
(17,707)
1,949
(15,758)
(3,720)
(1,165)
6,153
4,988
(23,128)
(11,762)
9,342
(2,420)
2012 Ending Balance . . . . . . . . . . . . .
$ 66,101
$ 23,017
$ 82,473
Reserve to impaired loans . . . . . . . . .
Reserve to non-impaired loans . . . . .
Reserve for off-balance sheet credit
$ 1,467
$ 64,634
$ 8,158
$ 14,859
1,336
$
$ 81,137
2,392
(1,456)
191
(1,265)
$10,795
$ 1,247
$ 9,548
34
$
$10,795
2,360
(2,132)
680
(1,452)
$11,703
$ 1,222
$10,481
197
(175)
—
(175)
$ 57
$ —
$ 57
3
$
$ 57
(7)
(25)
3
(22)
$ 28
$ —
$ 28
27,268
(77,626)
11,407
(66,219)
$206,280
$
7,552
$198,728
2,069
$
$206,280
(8,294)
(32,791)
18,127
(14,664)
$183,322
$ 12,183
$171,139
commitments . . . . . . . . . . . . . . . . .
$
837
$
390
$
98
$
34
$
3
$ 1,362
An analysis of the activity in the allowance for credit losses for the year ended 2012, 2011, and 2010 is as
follows:
December 31,
2012
2011
2010
(In thousands)
Allowance for Loan Losses
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Reversal)/provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from reserve for off-balance sheet credit commitments . . . . . . . . . . . .
Loans charged off
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of charged off loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$206,280
(9,000)
706
(32,791)
18,127
$245,231
27,000
268
(77,626)
11,407
$ 211,889
156,900
2,870
(138,755)
12,327
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$183,322
$206,280
$ 245,231
Reserve for Off-balance Sheet Credit Commitments
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses/transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,069
(706)
1,363
$
$
2,337
(268)
2,069
$
$
5,207
(2,870)
2,337
F-27
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Other Real Estate Owned
At December 31, 2012, the net carrying value of other real estate owned decreased $46.3 million, or 50.0%,
to $46.4 million from $92.7 million at December 31, 2011. OREO located in California was $12.2 million and
was comprised primarily of six parcels of land zoned for residential purpose of $9.1 million, three office and
commercial use buildings of $1.7 million, one commercial building construction projects of $740,000, one
residential construction project of $530,000, and one single family residential properties of $179,000. OREO
located in Texas was $29.6 million and was comprised of four office and commercial use buildings of $14.4
million, four parcels of land zoned for residential purposes of $12.6 million, two commercial building
construction projects of $1.3 million, one parcel of land zoned for non-residential purposes of $1.1 million, and
one single family residential properties of $169,000. OREO located in the state of Washington was $1.6 million
and was comprised one parcels of land zoned for residential purpose of $733,000 and one commercial
construction project of $870,000. OREO located in the state of New York was a retail store of $1.2 million.
OREO located in the state of Nevada was $1.1 million and was comprised of a commercial use building. OREO
in all other states was $752,000 and was comprised of a commercial use property and a retail store.
For 2011, OREO located in California was $32.3 million and was comprised primarily of five parcels of
land zoned for residential purpose of $9.9 million, four parcels of land zoned for commercial purpose properties
of $4.8 million, two commercial building construction projects of $3.5 million, one residential construction
project of $588,000, twelve office and commercial use buildings of $13.2 million, two single family residential
properties of $395,000. OREO located in Texas was $48.6 million and was comprised of eight commercial use
buildings of $33.5 million, three parcels of land zoned for residential purpose of $11.7 million, three commercial
building construction projects of $2.4 million, and three single family residential properties of $959,000. OREO
located in the state of Washington was $3.9 million and was comprised of two retail stores $1.6 million, three
parcels of land zoned for residential purpose of $1.2 million, one commercial construction project of $658,000,
and three single family residential properties of $531,000. OREO located in the state of Nevada was $4.8 million
and was comprised of a parcel of land zoned for residential purpose of $3.5 million and one commercial use
building of $1.3 million. OREO in all other states was $3.0 million and was comprised of three commercial use
properties of $2.1 million and four single family residential properties of $878,000.
An analysis of the activity in the valuation allowance for other real estate losses for the years ended on
December 31, 2012, 2011, and 2010 is as follows:
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OREO disposal
$ 26,422
10,668
(17,534)
(In thousands)
$25,310
10,385
(9,273)
$ 22,743
20,139
(17,572)
Balance, end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,556
$26,422
$ 25,310
2012
2011
2010
The following table presents the components of other real estate owned expense for the year ended:
Operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on transfer and disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,817
10,668
(369)
(In thousands)
$ 5,441
10,385
(5,243)
$ 5,849
20,139
(9,977)
Total other real estate owned expense . . . . . . . . . . . . . . . . . . . . . . . .
$15,116
$10,583
$16,011
2012
2011
2010
F-28
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Investments in Affordable Housing
The Company has invested in certain limited partnerships that were formed to develop and operate housing
for lower-income tenants throughout the United States. The Company’s investments in these partnerships were
$85.0 million at December 31, 2012, and $78.4 million at December 31, 2011. At December 31, 2012, and
December 31, 2011, six of the limited partnerships in which the Company has an equity interest were determined
to be variable interest entities for which the Company is the primary beneficiary. The consolidation of these
limited partnerships in the Company’s Consolidated Financial Statements increased total assets and liabilities by
$22.9 million at December 31, 2012, and by $22.8 million at December 31, 2011. Other borrowings for
affordable housing limited partnerships were $18.7 million at December 31, 2012, and $18.9 million at
December 31, 2011; recourse is limited to the assets of the limited partnerships. Unfunded commitments for
affordable housing limited partnerships of $10.6 million as of December 31, 2012, and $1.5 million as of
December 31, 2011, were recorded under other liabilities.
Each of the partnerships must meet regulatory requirements for affordable housing for a minimum 15-year
compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance
period, the credits may be denied for any period in which the projects are not in compliance and a portion of the
credits previously taken is subject to recapture with interest. The remaining tax credits to be utilized over a
multiple-year period are $45.3 million for Federal and $1.7 million for state at December 31, 2012. The
Company’s usage of tax credits approximated $9.2 million in 2012, $9.5 million in 2011, and $10.5 million in
2010. For the year ended December 31, operations of investments in affordable housing resulted in pretax losses
of $6.3 million for 2012, $8.2 million for 2011, and $7.6 million for 2010. Losses in excess of the Bank’s
investment in two limited partnerships have not been recorded in the Company’s Consolidated Financial
Statements because the Company had fully satisfied all capital commitments required under the respective
limited partnership agreements.
8. Premises and Equipment
Premises and equipment consisted of the following at December 31, 2012, and December 31, 2011:
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation/amortization . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
(In thousands)
$ 33,429
73,723
39,701
12,391
38
159,282
56,669
$ 33,429
72,608
37,445
12,494
1,314
157,290
51,329
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$102,613
$105,961
The amount of depreciation/amortization included in operating expense was $5.9 million in 2012, $6.1
million in 2011, and $4.6 million in 2010.
F-29
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Deposits
The following table displays deposit balances as of December 31, 2012, and December 31, 2011:
2012
2011
(In thousands)
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Saving accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits under $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,269,455
593,133
1,186,771
473,805
644,191
3,215,870
$1,074,718
451,541
951,516
420,030
832,997
3,498,329
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,383,225
$7,229,131
Time deposits outstanding as of December 31, 2012, mature as follows.
Expected Maturity Date at December 31,
2013
2014
2015
2016
2017
Thereafter
Total
(In thousands)
Time deposits, $100,000 and over . . . . . $2,895,712 $238,836 $60,309 $1,344 $19,669
1,232
Other time deposits
. . . . . . . . . . . . . . . .
610,364
25,011
7,426
155
$ — $3,215,870
644,191
3
$3,506,076 $263,847 $67,735 $1,499 $20,901
$
3
$3,860,061
Accrued interest payable on customer deposits was $2.1 million at December 31, 2012, $4.2 million at
December 31, 2011, and $5.2 million at December 31, 2010. The following table summarizes the interest
expense on deposits by account type for the years ended December 31, 2012, 2011, and 2010:
Year Ended December 31,
2012
2011
2010
(In thousands)
Interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Saving accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
792
5,938
365
40,278
$
756
7,351
482
53,625
$
927
8,733
694
73,808
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,373
$62,214
$84,162
10. Borrowed Funds
Federal Funds Purchased. There were no Federal funds purchased at any time during 2010 or 2012. The
average amount of Federal funds purchased during 2011 was $27,000 with a weighted average interest rate of
1.29%.
F-30
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Securities Sold under Agreements to Repurchase. Securities sold under agreements to repurchase were $1.3
billion with a weighted average rate of 3.84% at December 31, 2012, compared to $1.4 billion with a weighted
average rate of 4.14% at December 31, 2011. In May 2011, the Company prepaid a security sold under an
agreement to repurchase of $50 million with a rate of 4.83% and incurred a prepayment penalty of $1.7 million.
In 2012, the Company modified $200.0 million of securities sold under agreements to repurchase by extending
the term by an additional four years on average, reducing the rate of these agreements by an average of 168 basis
points and removing the callable feature of these borrowings. In 2012, the Company prepaid three securities sold
under an agreement to repurchase for the total of $150 million with a weighted average rate of 4.43% and
incurred prepayment penalties of $9.4 million. Seven floating-to-fixed rate agreements totaling $400.0 million
have initial floating rates for a period of time ranging from six months to one year, with floating rates ranging
from the three-month LIBOR minus 200 basis points to three-month LIBOR minus 340 basis points. Thereafter,
the rates are fixed for the remainder of the term, with interest rates ranging from 4.52% to 5.07%. After the initial
floating rate term, the counter parties have the right to terminate the transaction at par at the fixed rate reset date
and quarterly thereafter. Thirteen fixed-to-floating rate agreements totaling $650.0 million have initial fixed rates
ranging from 1.00% to 3.50% with initial fixed rate terms ranging from six months to 18 months. For the
remainder of the seven year term, the rates float at 8% minus the three-month LIBOR rate with a maximum rate
ranging from 3.25% to 3.79% and minimum rate of 0.0%. After the initial fixed rate term, the counter parties
have the right to terminate the transaction at par at the floating rate reset date and quarterly thereafter. The table
below provides summary data for the $1.05 billion of callable securities sold under agreements to repurchase as
of December 31, 2012:
(Dollars in millions)
Rate type . . . . . . . . . . . . . . . .
Rate index . . . . . . . . . . . . . . .
Maximum rate . . . . . . . . . . .
Minimum rate . . . . . . . . . . . .
No. of agreements . . . . . . . .
Amount . . . . . . . . . . . . . . . . .
Weighted average rate . . . . .
Final maturity . . . . . . . . . . . .
Fixed-to-floating
Float Rate
Floating-to-fixed
Total
Fixed Rate
8% minus 3 month LIBOR
3.79% 3.53% 3.50% 3.50% 3.53% 3.25%
0.0% 0.0% 0.0%
0.0% 0.0%
1
$ 50.0
0.0%
4
$200.0
3
$150.0
1
$ 50.0
1
$ 50.0
3
$150.0
3
$200.0
4
$200.0
20
$1,050.0
3.78% 3.53% 3.50% 3.50% 3.53% 3.25% 4.69% 5.00%
2014
2014
2015
2015
2017
2014
2015
2014
4.04%
The table below provides summary data for non-callable fixed rate securities sold under agreements to
repurchase as of December 31, 2012:
Maturity
No. of
Agreements
Amount
(In thousands)
3 years to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
2
4
$100,000
100,000
$200,000
Weighted
Average
Interest Rate
2.71%
2.86%
2.78%
These transactions are accounted for as collateralized financing transactions and recorded at the amount at
which the securities were sold. We may have to provide additional collateral for the repurchase agreements, as
necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities,
U.S. government agency security debt, and mortgage-backed securities with a fair value of $1.4 billion as of
December 31, 2012, and $1.6 billion as of December 31, 2011.
F-31
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below provides comparative data for securities sold under agreements to repurchase for the years
indicated:
2012
2011
2010
Average amount outstanding during the year (1) . . . . . . . .
Maximum amount outstanding at month-end (2) . . . . . . . .
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rate for the year . . . . . . . . . . . . .
$1,361,475
1,400,000
1,250,000
(Dollars in thousands)
$1,448,363
1,559,000
1,400,000
$1,560,215
1,566,000
1,561,000
3.84%
4.09%
4.14%
4.19%
4.18%
4.24%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January 2012, January 2011, and September 2010.
Advances from the Federal Home Loan Bank. Total advances from the FHLB were $146.2 million with
weighted average rate of 0.44% at December 31, 2012, compared to $225.0 million with weighted average rate of
2.08% at December 31, 2011. The Company prepaid advances from the FHLB totaling $100.0 million at a rate of
4.60% and incurred prepayment penalties of $2.8 million in 2012 and prepaid advances totaling $450.0 million
with a weighted rate of 4.39% and incurred prepayment penalties of $18.5 million in 2011.
The following relates to the outstanding advances at December 31, 2012, and 2011:
Maturity
Within 90 days . . . . . . . . . . . . .
91 days through 365 days . . . . .
4 – 5 years . . . . . . . . . . . . . . . . .
2012
2011
Amount
(In thousands)
Weighted Average
Interest Rate
Amount
(In thousands)
Weighted Average
Interest Rate
$125,000
—
21,200
$146,200
0.28%
0.00%
1.38%
0.44%
$ —
225,000
—
$ 225,000
0.00%
2.08%
—
2.08%
Other borrowings from financial institutions. At December 31, 2012, there were no other borrowings from
financial institutions. At December 31, 2011, other borrowings from a financial institution were $880,000 with a
weighted average rate of 0.55%.
Other Liabilities. On November 23, 2004, the Company entered into an agreement with its Chief Executive
Officer (“CEO”) pursuant to which the CEO agreed to defer any bonus amounts in excess of $225,000 for the
year ended December 31, 2005, until January 1 of the first year following such time as the CEO separates from
the Company. Accordingly, an amount equal to $610,000 was deferred in 2004 and was accrued in other
liabilities in the consolidated balance sheet. The Company agreed to accrue interest on the deferred portion of the
bonus at 7.0% per annum compounded quarterly. The deferred amount will be increased each quarter by the
amount of interest computed for that quarter. Beginning on the tenth anniversary of the agreement, the interest
rate will equal 275 basis points above the prevailing interest rate on the ten-year Treasury Note. Interest of
$71,000 during 2012, $67,000 during 2011, and $62,000 during 2010 was accrued on this deferred bonus. The
balance was $1.1 million at December 31, 2012, and $995,000 at December 31, 2011.
11. Capital Resources
In 2010, the Company sold $132.3 million of new common stock consisting of 15,028,409 shares at an
average price of $8.80 per share. Net of issuance costs and fees, this issuance added $124.9 million to common
stockholders’ equity. The Company did not sell any common stock in 2012 and in 2011.
F-32
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company has participated in the U.S. Treasury’s Troubled Asset Relief Program Capital Purchase
Program under the Emergency Economic Stabilization Act of 2008. Upon the approval of participation, the U.S.
Treasury purchased the Company’s senior preferred stock on December 5, 2008, in the amount of $258.0 million.
The senior preferred stock pays cumulative compounding dividends at a rate of 5% per year for the first five
years, and thereafter at a rate of 9% per year. The shares are non-voting, other than class voting rights on matters
that could adversely affect the shares. They are callable at par after three years. Prior to the end of three years, the
shares may only be redeemed with the proceeds from one or more qualified equity offerings. In conjunction with
the purchase of senior preferred shares, the U.S. Treasury received warrants to purchase 1,846,374 shares of
common stock at the exercise price of $20.96 with an aggregate market price equal to $38.7 million, 15% of the
senior preferred stock amount that U.S. Treasury invested.
On September 29, 2006, the Bank issued $50.0 million in subordinated debt in a private placement
transaction. The debt had an original maturity term of 10 years, was unsecured and bore interest at a rate of three-
month LIBOR plus 110 basis points, payable on a quarterly basis. In March 2011, the Company extended the
debt for an additional year. As part of the extension agreement, the rate was increased from LIBOR plus 110
basis points to LIBOR plus 330 basis points for 2012 and 2011, after which time it reverts back to LIBOR plus
110 basis points. At December 31, 2012, the per annum interest rate on the subordinated debt was 3.61%
compared to 3.88% at December 31, 2011. The subordinated debt was issued through the Bank and qualifies as
Tier 2 capital for regulatory reporting purposes and is included in long-term debt in the accompanying condensed
Consolidated Balance Sheets.
The Bancorp established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing trust
preferred securities to outside investors (“Capital Securities”). The trusts exist for the purpose of issuing the
Capital Securities and investing the proceeds thereof, together with proceeds from the purchase of the common
securities of the trusts by the Bancorp, in Junior Subordinated Notes issued by the Bancorp. Subject to some
limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of the trusts
or the redemption of the Capital Securities are guaranteed by the Bancorp to the extent the trusts have funds on
hand at such time. The obligations of the Bancorp under the guarantees and the Junior Subordinated Notes are
subordinate and junior in right of payment to all indebtedness of the Bancorp and will be structurally
subordinated to all liabilities and obligations of the Bancorp’s subsidiaries. The Bancorp has the right to defer
payments of interest on the Junior Subordinated Notes at any time or from time to time for a period of up to
twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior
Subordinated Notes, the Bancorp may not, with certain exceptions, declare or pay any dividends or distributions
on its capital stock or purchase or acquire any of its capital stock if the Bancorp has deferred payment of interest
on the Junior Subordinated Notes.
The five special purpose trusts are considered variable interest entities under FIN 46R. Because the Bancorp
is not the primary beneficiary of the trusts, the financial statements of the trusts are not included in the
Consolidated Financial Statements of the Company.
The Junior Subordinated Notes are currently included in the Tier 1 capital of the Bancorp for regulatory
capital purposes. On March 1, 2005, the Federal Reserve adopted a final rule that retains trust preferred securities
in the Tier I capital of bank holding companies, which after a five-year transition period, limited the aggregate
amount of trust preferred securities and certain other capital elements to 25% of Tier 1 capital elements, net of
goodwill, less any associated deferred tax liability. The amount of trust preferred securities and certain other
elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. This rule did not have a
materially adverse effect on the Company’s capital positions.
Interest expense on the Junior Subordinated Notes was $3.2 million for 2012, $3.0 million for 2011, and
$3.1 million for 2010.
F-33
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below summarizes the outstanding Junior Subordinated Notes issued by the Company to each trust as of
December 31, 2012:
Trust Name
Cathay Capital
Trust I . . . . . . . . . .
Issuance
Date
Principal
Balance
of Notes
Not
Redeemable
Until
Stated
Maturity
Annualized
Coupon
Rate
Current
Interest
Rate
Date of Rate
Change
Payable/
Distribution
Date
(Dollars in thousands)
June 26,
2003
$20,619
June 30,
2008
June 30,
2033
3-month
LIBOR
+3.15%
3-month
LIBOR
+3.00%
3-month
LIBOR
+2.90%
3-month
LIBOR
+1.48%
3-month
LIBOR
1.40%
3.46% December 30, March 30
June 30
September 30
December 30
2012
3.31% December 17, March 17
June 17
September 17
December 17
2012
3.21% December 30, March 30
June 30
September 30
December 30
2012
1.79% December 17, March 15
June 15
September 15
December 15
2012
1.71% December 6,
2012
March 6
June 6
September 6
December 6
Cathay Statutory
Trust I . . . . . . . . . . September 17,
20,619
September 17, September 17,
2003
2008
2033
Cathay Capital
Trust II
. . . . . . . . . December 30,
2003
12,887
March 30,
2009
March 30,
2034
Cathay Capital
Trust III . . . . . . . . . March 28,
46,392
2007
June 15,
2012
June 15,
2037
Cathay Capital
Trust IV . . . . . . . . .
Total Junior
Subordinated
Notes . . . . . . . . . . .
12. Income Taxes
May 31,
2007
20,619
September 6,
2012
September 6,
2037
$121,136
For the years ended December 31, 2012, 2011, and 2010, the current and deferred amounts of the income tax
expense are summarized as follows:
F-34
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2012
2011
2010
(In thousands)
Current:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,263
17,081
$26,548
10,905
$ 16,496
7,379
$61,344
$37,453
$ 23,875
Deferred:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,755
1,029
10,133
3,675
(28,600)
(9,904)
Total income tax expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$66,128
$51,261
$(14,629)
$ 4,784
$13,808
$(38,504)
Temporary differences between the amounts reported in the financial statements and the tax basis of assets and
liabilities give rise to deferred taxes. Net deferred tax assets at December 31, 2012, and at December 31, 2011, are included
in other assets in the accompanying Consolidated Balance Sheets and are as follows:
Deferred Tax Assets
Loan loss allowance, due to differences in computation of bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accrual interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down on other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual for litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available-for-sale, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
$100,774
3,374
16,120
4,479
3,208
10,302
2,415
—
—
3,544
$109,686
3,609
16,048
3,744
2,048
14,148
—
1,097
6,311
3,536
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,216
160,227
Deferred Tax Liabilities
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in aircraft financing trust and venture capital partnerships . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities available-for-sale, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on Federal Home Loan Bank common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,632)
(19,684)
(338)
(3,071)
(5,084)
(29,809)
(2,125)
(3,919)
(21,628)
—
(2,788)
(5,646)
(33,981)
(2,533)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$112,282
$123,713
Amounts for the current year are based upon estimates and assumptions and could vary from amounts shown on 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 Company will realize all benefits related to these
deductible temporary differences except for $2.1 million of state deferred taxes for a portion of the capital losses related to
the Company’s former investments in the preferred stock of Fannie Mae and Freddie Mac.
F-35
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2012, the Company had income tax refunds receivable of $12.4 million. As of
December 31, 2011, the Company had income tax receivables of approximately $39.3 million, of which $11.2
million relates to the carryback of the Company’s net operating loss for 2009 to the 2007 tax year and $9.1
million relates to the carryback of the Company’s low income housing tax credits for 2009 to the 2008 tax year.
These income tax receivables are included in other assets in the accompanying Consolidated Balance Sheets.
At December 31, 2012, the Company had Federal net operating loss carry forwards of approximately $1.6
million which expire through 2022. The Federal net operating loss carry-forwards were acquired in connection
with the Company’s acquisition of United Heritage Bank.
At December 31, 2012 and 2011, the amount of unrecognized tax benefits was none and $508,000,
respectively. During 2012, the Company reversed its unrecognized tax benefits during the filing of the
Company’s 2011 tax returns, During 2011, the Company paid $0.1 million of state taxes previously recorded in
unrecognized tax benefits. The Company had accrued interest and penalties of less than $0.1 million at
December 31, 2012 and 2011.
The Company’s tax returns are open for audits by the Internal Revenue Service back to 2010 and by the
FTB of the State of California back to 2003. The Company is under audit by the California Franchise Tax Board
for the years 2003 to 2007. As the Company is presently under audit by a number of tax authorities, it is
reasonably possible that unrecognized tax benefits could change significantly over the next twelve months. The
Company does not expect that any such changes would have a material impact on its annual effective tax rate.
Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the
years indicated as follows:
Tax provision at Federal statutory rate . . . . . . . . . . . . . . . .
State income taxes, net of Federal income tax benefit . . . .
Interest on obligations of state and political subdivisions,
which are exempt from Federal taxation . . . . . . . . . . . .
Low income housing and other tax credits . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
2012
2011
2010
(In thousands)
$64,248
11,772
35.0% $ 52,994
9,477
6.4
35.0% $ (1,072)
(1,641)
6.3
35.0%
53.5
(1,456)
(9,353)
917
(0.8)
(5.1)
0.5
(1,476)
(10,087)
353
(1.0)
(6.6)
0.2
(299)
9.8
(11,220) 366.2
13.0
(397)
Total income tax expense/(benefit)
. . . . . . . . . . . . . . . . . .
$66,128
36.0% $ 51,261
33.9% $(14,629) 477.5%
13. Stockholders’ Equity and Earnings per Share
As a bank holding company, the 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 it may engage,
either directly or through other subsidiaries.
F-36
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Under California banking law, the Bank may not, without regulatory approval, pay a cash dividend that
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. Under this regulation, the amount of retained earnings available for cash
dividends to the Company immediately after December 31, 2012, is restricted to approximately $80.8 million.
During 2003, the Bank formed Cathay Real Estate Investment Trust (“Trust”) to provide the Bank flexibility
in raising capital. In 2003 and 2004, the Trust sold to accredited investors $8.6 million of its 7.0% Series A Non-
Cumulative preferred stock which pays dividends, if declared, at the end of each quarter. This preferred stock
qualifies as Tier 1 capital under current regulatory guidelines. The Company paid dividends of $605,000 in 2012,
$605,000 in 2011, and $611,000 in 2010. For the years ended and as of December 31, 2012, December 31, 2011,
and December 31, 2010, the net income and assets of the Trust were eliminated in consolidation.
The Board of Directors of the 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 the Bancorp may rank prior to
the 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 the Bancorp common stock.
On November 16, 2000, the Bancorp’s Board of Directors adopted a Rights Agreement between the
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 the 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 the Bancorp one one-
thousandth of a share of the 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 the 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 Agreement expired at the close of business
on November 16, 2010, and was not renewed.
Pursuant to the U.S. Treasury’s Troubled Asset Relief Program Capital Purchase Program under the
Emergency Economic Stabilization Act of 2008, on December 5, 2008, the U.S. Treasury purchased 258,000
shares of the Company’s Series B Preferred Stock in the amount of $258.0 million. The Series B Preferred Stock
pays cumulative compounding dividends at a rate of 5% per year for the first five years, and thereafter at a rate of
9% per year. In conjunction with the purchase of senior preferred shares, the U.S. Treasury received warrants to
purchase 1,846,374 shares of common stock at the exercise price of $20.96 per share with an aggregate market
price equal to $38.7 million, or 15%, of the senior preferred stock amount that the U.S. Treasury invested. The
exercise price of $20.96 on warrants was calculated based on the average of closing prices of the Company’s
common stock on the 20 trading days ending on the last trading day prior to November 17, 2008, the date that the
Company received the preliminary approval of the purchase from the U.S. Treasury.
F-37
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share
computations for the years as indicated:
Year Ended December 31,
2012
2011
2010
Income
(Numerator)
Shares
(Denominator)
Per
Share
Amount
Income
(Numerator)
Shares
(Denominator)
Per
Share
Amount
Income
(Numerator)
Shares
(Denominator)
Per
Share
Amount
Net income . . . . . . . . . . . .
Dividends on preferred
stock . . . . . . . . . . . . . . .
$117,438
(16,488)
Basic EPS,
(In thousands, except shares and per share data)
$100,150
(16,437)
$ 11,565
(16,388)
income/(loss) . . . . . . . .
$100,950
78,719,133
$1.28
$ 83,713
78,633,317
$1.06
$ (4,823)
77,073,954
$(0.06)
Effect of dilutive stock
options . . . . . . . . . . . . .
Diluted EPS, income/
4,164
7,335
—
(loss) . . . . . . . . . . . . . . .
$100,950
78,723,297
$1.28
$ 83,713
78,640,652
$1.06
$ (4,823)
77,073,954
$(0.06)
Options to purchase an additional 4.0 million shares, and warrants to purchase an additional 1.8 million shares at
December 31, 2012, were not included in the computation of diluted earnings per share because their inclusion would
have had an anti-dilutive effect. Options to purchase an additional 4.4 million shares, restricted stock units for an
additional 103,000 shares, and warrants to purchase an additional 1.8 million shares at December 31, 2011, were not
included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive
effect.
14. Commitments and Contingencies
Litigation. The Company is involved in various litigation concerning transactions entered into during the normal
course of business. Management, after consultation with legal counsel, does not believe that the resolution of such
litigation will have a material effect upon its consolidated financial condition, results of operations, or liquidity taken
as a whole.
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 include 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 Balance Sheets. 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
Standby letters of credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bill of lading guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,740,463
44,672
71,073
77
$1,626,523
62,076
64,233
187
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,856,285
$1,753,019
2012
2011
(In thousands)
F-38
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2012, 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.
As of December 31, 2012, commitments to extend credit of $1.7 billion include commitments to fund fixed
rate loans of $115.4 million and adjustable rate loans of $1.6 billion.
Commercial letters of credit and bill of lading guarantees are issued to facilitate domestic and foreign trade
transactions while standby letters of credit are issued to make payments on behalf of customers if certain
specified future events occur. The credit risk involved in issuing letters of credit and bill of lading guarantees is
essentially the same as that involved in making loans to customers.
Leases. The Company is obligated under a number of operating leases for premises and equipment with
terms ranging from one to 50 years, many of which provide for periodic adjustment of rentals based on changes
in various economic indicators. Rental expense was $7.4 million for 2012, $6.7 million for 2011, and $6.6
million for 2010. The following table shows future minimum payments under operating leases with terms in
excess of one year as of December 31, 2012.
Year Ending December 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
Commitments
(In thousands)
$ 6,084
4,939
3,009
2,028
617
661
Total minimum lease payments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,338
Rental income was $0.3 million for 2012, $0.2 million for 2011, and $0.3 million for 2010. The following
table shows future rental payments to be received under operating leases with terms in excess of one year as of
December 31, 2012:
Year Ending December 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
Total minimum lease payments to be received . . . . . . . . . . . . . . . . . . . .
Commitments
(In thousands)
$108
60
11
—
$179
F-39
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Financial Derivatives
It is the policy of the Company 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 its interest-
earning assets and interest-bearing liabilities. Management believes that these transactions, when properly structured
and managed, may provide a hedge against inherent interest rate risk in the Company’s assets or liabilities and against
risk in specific transactions. In such instances, the Company 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.
The Company follows ASC Topic 815 which established 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 Consolidated Balance Sheets 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.
As of December 31, 2011, we had five interest rate swap agreements with two major financial institutions in the
notional amount of $300.0 million for a period of three years. These interest rate swaps were not structured to hedge
against inherent interest rate risks related to our interest-earning assets and interest-bearing liabilities. These five
interest rate swap agreements all matured in the third quarter of 2012. The net amount accrued on these interest rate
swaps and the changes in the market value of these interest rate swaps were recorded as a reduction to other non-
interest income in the amount of $288,000 in 2012 compared to $4.9 million in the same period a year ago.
The Company enters into foreign exchange forward contracts and foreign currency option contracts with various
counter parties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates
of deposit, foreign exchange contracts, or foreign currency option contracts entered into with our clients. These
contracts are not designated as hedging instruments and are recorded at fair value in our condensed consolidated
balance sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of
deposit, foreign exchange contracts or foreign currency option contracts are recognized immediately in net income as a
component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative
fair values are recorded in other liabilities. At December 31, 2012, the notional amount of option contracts totaled
$209,000 with a net negative fair value of $2,000. Spot and forward contracts in the total notional amount of $188.1
million had a positive fair value of $2.9 million at December 31, 2012. Spot and forward contracts in the total notional
amount of $133.7 million had a negative fair value of $1.6 million at December 31, 2012. At December 31, 2011, the
notional amount of option contracts totaled $4.3 million with a net positive fair value of $29,000. Spot and forward
contracts in the total notional amount of $238.6 million had a positive fair value, in the amount of $2.2 million, at
December 31, 2011. Spot and forward contracts in the total notional amount of $128.2 million had a negative fair
value, in the amount of $486,000, at December 31, 2011.
16. Fair Value Measurements
The Company adopted ASC Topic 820 on January 1, 2008, and determined the fair values of our financial
instruments based on the following:
• Level 1 – Quoted prices in active markets for identical assets or liabilities.
• Level 2 – Observable prices in active markets for similar assets or liabilities; prices for identical or similar
assets or liabilities in markets that are not active; directly observable market inputs for substantially the full
term of the asset and liability; market inputs that are not directly observable but are derived from or
corroborated by observable market data.
F-40
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Level 3 – Unobservable inputs based on the Company’s own judgments about the assumptions that a market
participant would use.
The Company uses the following methodologies to measure the fair value of its financial assets and liabilities on a
recurring basis:
Securities Available for Sale. For certain actively traded agency preferred stocks, mutual funds, and U.S. Treasury
securities, the Company measures the fair value based on quoted market prices in active exchange markets at the
reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for
similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government
agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS,
collateralized mortgage obligations, asset-backed securities, corporate bonds and trust preferred securities.
Trading Securities. The Company measures the fair value of trading securities based on quoted market prices in
active exchange markets at the reporting date, a Level 1 measurement. The Company also measures the fair value
for other trading securities based on quoted market prices for similar securities or dealer quotes, a Level 2
measurement.
Warrants. The Company measures the fair value of warrants based on unobservable inputs based on assumption
and management judgment, a Level 3 measurement.
Currency Option Contracts and Foreign Exchange Contracts. The Company measures the fair value of currency
option and foreign exchange contracts based on dealer quotes on a recurring basis, a Level 2 measurement.
Interest Rate Swaps. Fair value of interest rate swaps was derived from observable market prices for similar assets
on a recurring basis, a Level 2 measurement.
The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:
Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to
time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the
current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of
value reported on old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.
Loans Held for sale. The Company records loans held for sale at fair value based on quoted prices from third party
sale analysis, existing sale agreements, or appraisal reports adjusted by sales commission assumption, a Level 3
measurement.
Goodwill. The Company completes “step one” of the impairment test by comparing the fair value of each
reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”)
of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting
unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the
impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the
impairment test is performed to determine the amount of impairment. Step two of the impairment test compares
the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair
value of goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the
current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair
value used in step two. An impairment charge is then recognized for the amount by which the carrying amount of
goodwill exceeds its implied fair value. In connection with the determination of fair value, certain data and
information was utilized, including earnings forecast at the reporting unit level for the next four years. Other key
assumptions include terminal values based on future growth rates and discount rates for valuing the cash flows,
which have inputs for the risk-free rate, market risk premium and adjustments to reflect inherent risk and required
market returns. Because of the significance of unobservable inputs in the valuation of goodwill impairment,
goodwill subject to nonrecurring fair value adjustments is classified as Level 3 measurement.
F-41
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Core Deposit Intangibles. Core deposit intangibles is initially recorded at fair value based on a valuation of
the core deposits acquired and is amortized over its estimated useful life to its residual value in proportion to
the economic benefits consumed. The Company assesses the recoverability of this intangible asset on a
nonrecurring basis using the core deposits remaining at the assessment date and the fair value of cash flows
expected to be generated from the core deposits, a Level 3 measurement.
Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded at fair value
based on the appraised value of the property on the date of transfer, less estimated costs to sell, a Level 2
measurement. From time to time, nonrecurring fair value adjustments are made to other real estate owned
based on the current updated appraised value of the property, also a Level 2 measurement, or management’s
judgment and estimation of value reported on old appraisals which are then adjusted based on recent market
trends, a Level 3 measurement.
Investments in Venture Capital. The Company periodically reviews for OTTI on a nonrecurring basis.
Investments in venture capital were written down to their fair value based on available financial reports
from venture capital partnerships and management’s judgment and estimation, a Level 3 measurement.
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on
a recurring basis at December 31, 2012, and at December 31, 2011:
F-42
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 31, 2012
Assets
Securities available-for-sale
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total at
Fair Value
(In thousands)
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock of government sponsored entities . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$509,971
—
—
—
—
6,079
—
10,115
526,165
—
—
—
—
$ 16,194
$
416,694
10,168
141
335,977
—
2,335
—
765,315
4,703
—
— $ — $ 509,971
416,694
10,168
141
335,977
6,079
2,335
10,115
1,291,480
4,703
104
0
2,924
$1,299,211
—
—
—
—
—
—
—
—
—
104
—
—
$ 104
0
2,924
$1,282,913
Liabilities
Option contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
—
$ — $
2
1,586
1,588
$ — $
—
$ — $
2
1,586
1,588
As of December 31, 2011
Assets
Securities available-for-sale
U.S. government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock of government sponsored entities . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total at
Fair Value
(In thousands)
$ — $ 501,226
1,928
337,631
16,486
166
380,429
—
—
—
—
—
6,035
—
45,963
2,960
54,958
2
—
—
—
$ 54,960
—
1,654
—
—
1,239,520
4,540
—
34
2,151
$1,246,245
$ — $ 501,226
1,928
337,631
16,486
166
380,429
6,035
1,654
45,963
2,960
1,294,478
4,542
218
34
2,151
$1,301,423
—
—
—
—
—
—
—
—
—
—
—
218
—
—
$ 218
Liabilities
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
—
—
— $
2,634
5
486
3,125
$ — $
—
—
$ — $
2,634
5
486
3,125
F-43
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company measured the fair value of its warrants on a recurring basis using significant unobservable
inputs. The fair value of warrants was $104,000 at December 31, 2012, compared to $218,000 at December 31,
2011. The fair value adjustment of warrants was included in other operating income of 2012.
For financial assets measured at fair value on a nonrecurring basis that were still reflected in the balance
sheet at December 31, 2012, the following table provides the level of valuation assumptions used to determine
each adjustment and the carrying value of the related individual assets at December 31, 2012, and at
December 31, 2011, and the total losses for the periods indicated:
As of December 31, 2012
Total Losses
Fair Value Measurements Using
For the Twelve Months Ended
Level 1
Level 2
Level 3
Total at
Fair Value
December 31,
2012
December 31,
2011
(In thousands)
Assets
Impaired loans by type:
Commercial loans . . . . . . . . . . . . . . . . . . . $ — $ — $ 3,492 $
Commercial mortgage loans . . . . . . . . . . . —
Construction-residential . . . . . . . . . . . . . . . —
Construction-other . . . . . . . . . . . . . . . . . . . —
Residential mortgage and equity lines . . . . —
Land loans . . . . . . . . . . . . . . . . . . . . . . . . . —
— 11,295
500
—
— 46,153
— 11,206
297
—
3,492
11,295
500
46,153
11,206
297
Total impaired loans . . . . . . . . . . . . . —
Other real estate owned (1) . . . . . . . . . . . . . . . . — 27,149
—
Investments in venture capital . . . . . . . . . . . . . . —
—
142
Equity investments . . . . . . . . . . . . . . . . . . . . . .
72,943
31,990
9,001
142
Total assets . . . . . . . . . . . . . . . . $ 142 $27,149 $86,785 $114,076
— 72,943
4,841
9,001
—
$ —
440
—
65
605
162
1,272
10,904
309
181
$ 877
—
—
—
820
46
1,743
7,003
379
200
$12,666
$9,325
(1) Other real estate owned balance of $46.4 million in the consolidated balance sheet is net of estimated
disposal costs.
As of December 31, 2011
Total Losses
Fair Value Measurements Using
For the Twelve Months Ended
Level 1
Level 2
Level 3
Total at
Fair Value
December 31,
2011
December 31,
2010
(In thousands)
Assets
Impaired loans by type:
Commercial loans . . . . . . . . . . . . . . . . . . . $ — $ — $ 4,251 $
Construction-residential . . . . . . . . . . . . . . . —
Real estate loans . . . . . . . . . . . . . . . . . . . . —
Land loans . . . . . . . . . . . . . . . . . . . . . . . . . —
—
—
— 35,576
611
—
4,251
—
35,576
611
— 40,438
Total impaired loans . . . . . . . . . . . . . —
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . —
760
—
1,093
Other real estate owned (1) . . . . . . . . . . . . . . . . — 79,029
8,693
—
Investments in venture capital . . . . . . . . . . . . . . —
—
—
323
Equity investments . . . . . . . . . . . . . . . . . . . . . .
40,438
760
80,122
8,693
323
Total assets . . . . . . . . . . . . . . . . $ 323 $79,029 $50,984 $130,336
$ 877
—
820
46
1,743
—
7,003
379
200
$ 3,411
1,295
1,407
1,003
7,116
3,160
20,139
760
304
$9,325
$31,479
(1) Other real estate owned balance of $71.0 million in the consolidated balance sheet is net of estimated
disposal costs.
F-44
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-
dependent impaired loans was primarily based on the appraised value of collateral adjusted by estimated sales
cost and commissions. The Company generally obtains new appraisal reports every six months. As the
Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding
balance of the loan, less marketable collateral would receive a larger discount. During the reported periods,
collateral discounts ranged from 45% in the case of accounts receivable collateral to 65% in the case of inventory
collateral.
The significant unobservable inputs used in the fair value measurement of loans held for sale was primarily
based on the quoted price or sale price adjusted by estimated sales cost and commissions. The significant
unobservable inputs used in the fair value measurement of other real estate owned (“OREO”) was primarily
based on the appraised value of OREO adjusted by estimated sales cost and commissions.
The Company applies estimated sales cost and commission ranging from 3% to 6% to collateral value of
impaired loans, quoted price or loan sale price of loans held for sale, and appraised value of OREOs.
The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants
are the expected life of warrant ranging from 1 to 4 years, risk-free interest rate from 0.25% to 0.54%, and stock
volatility of the Company from 13.7% to 18.6%.
17. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments.
Cash and Cash Equivalents. For cash and cash equivalents, the carrying amount was assumed to be a
reasonable estimate of fair value, a Level 1 measurement.
Short-term Investments. For short-term investments, the carrying amount was assumed to be a reasonable
estimate of fair value, a Level 1 measurement.
Securities Purchased under Agreements to Resell. The fair value of securities purchased under agreements
to resell is based on dealer quotes, a Level 2 measurement.
Securities. For securities, including securities held-to-maturity, available-for-sale and for trading, 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 or dealer quotes. For certain actively traded
agency preferred stocks and U.S. Treasury securities, the Company measures the fair value based on quoted
market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also
measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement.
This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-
backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, and
corporate bonds.
Loans Held for Sale. The Company records loans held for sale at fair value based on quoted prices from
third party sources, or appraisal reports adjusted by sales commission assumptions, a Level 3 measurement.
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.
F-45
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, a Level 3 measurement.
The fair value of impaired loans was calculated based on the net realizable fair value of the collateral or the
observable market price of the most recent sale or quoted price from loans held for sale. The Company does not
record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent
impaired loans are recorded based on the current appraised value of the collateral, a Level 2 measurement.
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, a Level 3 measurement.
Securities Sold under Agreements to Repurchase. The fair value of securities sold under agreements to
repurchase is based on dealer quotes, a Level 2 measurement.
Advances from Federal Home Loan Bank. The fair value of the advances is based on quotes from the FHLB
to settle the advances, a Level 2 measurement.
Other Borrowings. This category includes borrowings from other financial institutions. The fair value of
other borrowings is calculated by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.
Long-term Debt. The fair value of long-term debt is estimated based on the quoted market prices or dealer
quotes, a Level 2 measurement.
Currency Option and Foreign Exchange Contracts. The Company measures the fair value of currency
option and foreign exchange contracts based on dealer quotes, a Level 2 measurement.
Interest Rate Swaps. Fair value of interest rate swaps was derived from observable market prices for similar
assets, a Level 2 measurement.
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. Off-balance-sheet financial instruments were fair valued based on the assumptions that a
market participant would use, a Level 3 measurement.
Fair value was estimated in accordance with ASC Topic 825, formerly SFAS 107. 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.
F-46
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value of Financial Instruments
As of December 31, 2012
As of December 31, 2011
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(In thousands)
Financial Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net
Investment in Federal Home Loan Bank stock . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 144,909
411,983
773,768
1,291,480
4,703
—
7,235,587
41,272
104
$ 144,909
411,983
823,906
1,291,480
4,703
—
7,169,732
41,272
104
$ 117,888
294,956
1,153,504
1,294,478
4,542
760
6,844,483
52,989
218
$ 117,888
294,956
1,203,977
1,294,478
4,542
760
6,825,571
52,989
218
Option contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . .
$
105
188,145
$
— $
2,924
3,026
238,581
$
34
2,151
Notional
Amount
Fair Value
Notional
Amount
Fair Value
Financial Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreement to repurchase . . . . . .
Advances from Federal Home Loan Bank . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
Carrying
Amount
$7,383,225
1,250,000
146,200
18,713
171,136
Notional
Amount
Option contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . .
$
104
—
133,669
Fair Value
$7,389,015
1,361,585
146,789
14,573
98,392
Carrying
Amount
$7,229,131
1,400,000
225,000
19,800
171,136
Fair Value
$7,240,857
1,547,900
227,825
19,801
98,676
Fair Value
$
2
$
—
1,586
Notional
Amount
Fair Value
$
1,282
300,000
128,215
5
2,634
486
Notional
Amount
Fair Value
Notional
Amount
Fair Value
Off-Balance Sheet Financial Instruments
. . . . . . . . . . . . . . . . . .
Commitments to extend credit
. . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit
Other letters of credit
. . . . . . . . . . . . . . . . . . . . . . . . .
Bill of lading guarantees . . . . . . . . . . . . . . . . . . . . . . .
$1,740,463
44,672
71,073
77
$
$
(1,875) $1,626,523
62,076
64,233
187
(204)
(34)
—
(1,253)
(367)
(38)
—
The following table presents the level in the fair value hierarchy for the estimated fair values of only
financial instruments that are not already on the Consolidated balance sheets at fair value at December 31, 2012,
and December 31, 2011.
F-47
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Financial Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Federal Home Loan Bank stock . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreement to repurchase . . . . . . . . . . .
Advances from Federal Home Loan Bank . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
Financial Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Federal Home Loan Bank stock . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreement to repurchase . . . . . . . . . . .
Advances from Federal Home Loan Bank . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
18. Employee Benefit Plans
Estimated
Fair Value
Measurements
$ 144,909
411,983
823,906
1,291,480
4,703
7,169,732
41,272
104
7,389,015
1,361,585
146,789
14,573
98,392
Estimated
Fair Value
Measurements
$ 117,888
294,956
1,203,977
1,294,478
4,542
760
6,825,571
52,989
218
7,240,857
1,547,900
227,825
19,801
98,676
As of December 31, 2012
Level 1
Level 2
Level 3
(In thousands)
$144,909 $
411,983
—
526,165
—
—
—
—
— $
—
823,906
765,315
4,703
—
41,272
—
—
—
—
—
—
7,169,732
—
104
—
—
— 1,361,585
146,789
—
—
—
98,392
—
7,389,015
—
—
14,573
—
As of December 31, 2011
Level 1
Level 2
Level 3
(In thousands)
$117,888 $
294,956
54,958
2
— $
—
— 1,203,977
1,239,520
4,540
760
—
52,989
—
—
—
—
—
—
—
— 1,547,900
227,825
—
—
—
98,676
—
—
—
—
—
—
.
6,825,571
—
218
7,240,857
—
—
19,801
—
Employee Stock Ownership Plan. Under the Company’s Amended and Restated Cathay Bank Employee Stock
Ownership Plan (“ESOP”), the Company can make annual contributions to a trust in the form of either cash or
common stock of the Bancorp 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 Company has not made contributions to the trust since 2004 and does not expect to make any
contributions in the future. Effective June 17, 2004, the ESOP was amended to provide the participants the election
either to reinvest the dividends on the Company stock allocated to their accounts or to have these dividends distributed
to the participant. The ESOP trust purchased 2,814 shares in 2012, 3,437 shares in 2011, and 4,881 shares in 2010, of
the Bancorp’s common stock at an aggregate cost of $47,000 in 2012, $47,000 in 2011, and $51,000 in 2010. All
purchases after 2006 were through the Dividend Reinvestment Plan. The distribution of benefits to participants totaled
116,124 shares in 2012, 83,020 shares in 2011, and 171,689 shares in 2010. As of December 31, 2012, the ESOP
owned 1,188,741 shares, or 1.5%, of the Company’s outstanding common stock.
F-48
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
401(k) Plan. In 1997, the Board approved the Company’s 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 75% of their eligible 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. Prior to April 1, 2010, the Company matched 100% on the first 5% of eligible compensation contributed
per pay period by the participant, 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% is vested after five years of service. In February 2010, the Board revised and reduced the
contribution match for the Company’s 401(k) Profit Sharing Plan. Effective on April 1, 2010, the Company
matches 100% on the first 2.5% of eligible compensation contributed per pay period by the participant, after one
year of service. The Company’s contribution amounted to $1.0 million in 2012, $0.9 million in 2011, and $0.9
million in 2010. 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, with a maximum of $50,000. The minimum loan amount is $1,000.
19. Equity Incentive Plans
In 1998, the Board adopted the Cathay Bancorp, Inc. Equity Incentive Plan. Under the Equity Incentive
Plan, as amended in September, 2003, directors and eligible employees may be granted incentive or non-statutory
stock options and/or restricted stock units, or awarded non-vested stock, for up to 7,000,000 shares of the
Company’s common stock on a split adjusted basis. In May 2005, the stockholders of the Company approved the
2005 Incentive Plan which provides that 3,131,854 shares of the Company’s common stock may be granted as
incentive or non-statutory stock options, or as restricted stock, or as restricted stock units. In conjunction with the
approval of the 2005 Incentive Plan, the Bancorp agreed to cease granting awards under the Equity Incentive
Plan. As of December 31, 2012, the only options granted by the Company under the 2005 Incentive Plan were
non-statutory stock options to selected bank officers and non-employee directors at exercise prices 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) except certain
options granted to the Chief Executive Officer of the Company in 2005 and 2008. If such options expire or
terminate without having been exercised, any shares not purchased will again be available for future grants or
awards. Stock options are typically granted in the first quarter of the year. There were no options granted in 2012,
in 2011, or in 2010. The Company expects to issue new shares to satisfy stock option exercises and the vesting of
restricted stock units.
Cash received from exercises of stock options totaled $764,000 for 50,024 shares in 2012 compared to $1.3
million for 86,860 shares in 2011. The fair value of stock options vested in 2012 was $745,000 compared to $2.6
million in 2011. Aggregate intrinsic value for options exercised was $103,000 in 2012 compared to $172,000 in
2011.
A summary of stock option activity for 2012, 2011, and 2010 follows:
F-49
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Shares
Weighted-Average
Exercise Price
Weighted-Average
Remaining Contractual
Life (in years)
Aggregate Intrinsic
Value (in thousands)
Balance, December 31, 2009 . . . . . . . .
5,169,653
$27.71
Forfeited . . . . . . . . . . . . . . . . . . . .
(222,305)
Balance, December 31, 2010 . . . . . . . .
4,947,348
Exercised . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . .
(86,860)
(503,503)
Balance, December 31, 2011 . . . . . . . .
4,356,985
Exercised . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . .
(50,024)
(310,331)
Balance, December 31, 2012 . . . . . . . .
3,996,630
Exercisable, December 31, 2012 . . . . . .
3,889,514
23.23
27.93
$15.05
22.72
28.86
$15.27
23.75
29.45
$29.61
4.6
3.7
3.0
2.2
2.2
$ —
$ 334
$
37
$ —
$ —
At December 31, 2012, 2,364,947 shares were available under the 2005 Incentive Plan for future grants. The
following table shows stock options outstanding and exercisable as of December 31, 2012, the corresponding
exercise prices, and the weighted-average contractual life remaining:
Exercise Price
Shares
Outstanding
Weighted-Average
Remaining Contractual Life
(in Years)
Exercisable Shares
$19.93 . . . . . . . . . . . . .
23.37 . . . . . . . . . . . . . .
24.80 . . . . . . . . . . . . . .
28.70 . . . . . . . . . . . . . .
32.26 . . . . . . . . . . . . . .
32.47 . . . . . . . . . . . . . .
33.54 . . . . . . . . . . . . . .
37.00 . . . . . . . . . . . . . .
38.38 . . . . . . . . . . . . . .
36.90 . . . . . . . . . . . . . .
36.24 . . . . . . . . . . . . . .
38.26 . . . . . . . . . . . . . .
319,240
637,680
811,956
453,000
10,000
245,060
264,694
582,650
15,000
231,120
414,230
12,000
3,996,630
0.1
5.1
0.9
1.1
1.5
2.2
2.4
2.1
1.9
3.1
3.0
3.3
2.2
319,240
530,564
811,956
453,000
10,000
245,060
264,694
582,650
15,000
231,120
414,230
12,000
3,889,514
In addition to stock options, the Company also grants restricted stock units to eligible employees. On
February 21, 2008, restricted stock units for 82,291 shares were granted. Upon vesting of restricted stock units,
the Company issued 15,006 shares of common stock at the closing price of $9.64 per share on February 21, 2010,
and 12,633 shares of common stock at the closing price of $18.79 per share on February 21, 2011. Restricted
stock units granted in 2008 have a maximum term of five years and vest in approximately 20% annual
increments subject to continued employment with the Company.
The Company granted restricted stock units for 125,133 shares at an average closing price of $18.24 per
share in 2012 and for 147,661 shares at an average closing price of $14.78 in 2011. The restricted stock units
granted in 2012 and 2011 are scheduled to vest two years from grant date.
The following table presents restricted stock unit activity for 2012, 2011, and 2010:
F-50
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Units
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,021
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,006)
(6,055)
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,960
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,661
(12,633)
(2,578)
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171,410
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125,133
(11,814)
(28,113)
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
256,616
The compensation expense recorded related to the restricted stock units above was $1.3 million in 2012,
$758,000 in 2011, and $327,000 in 2010. Unrecognized stock-based compensation expense related to restricted
stock units was $2.7 million at December 31, 2012, and is expected to be recognized over the next 1.5 years.
The following table summarizes the tax benefit from options exercised:
(Short-fall)/benefit of tax deductions in excess of grant-date fair value . . . . . . . . . . . . . . .
Benefit of tax deductions on grant-date fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
(In thousands)
$(620) $(290) $(539)
539
362
747
Total benefit of tax deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 127
$ 72
$ —
In 2012, 45,937 shares of the Company’s common stock at the average price of $17.16 per share were
issued to six executive officers and recorded as compensation expense.
F-51
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
20. Condensed Financial Information of Cathay General Bancorp
The condensed financial information of the Bancorp as of December 31, 2012, and December 31, 2011, and
for the years ended December 31, 2012, 2011, and 2010 is as follows:
Balance Sheets
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term certificates of deposit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in non-bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity
Preferred stock, 10,000,000 shares authorized, 258,000 issued and outstanding at
December 31, 2012, and December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.01 par value, 100,000,000 shares authorized, 82,985,853
issued and 78,778,288 outstanding at December 31, 2012, and 82,860,122
issued and 78,652,557 outstanding at December 31, 2011 . . . . . . . . . . . . . . . . .
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (4,207,565 shares at December 31, 2012, and at December 31,
2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Operations
Year Ended December 31,
2012
2011
(In thousands, except
share and per share data)
$
639
161,300
1,569,902
2,598
9,936
$1,744,375
$
809
19,000
1,593,831
2,615
14,189
$1,630,444
$ 121,136
2,182
123,318
—
$ 121,136
2,122
123,258
—
254,580
250,992
830
768,925
465
721,993
829
765,641
(8,732)
624,192
(125,736)
1,621,057
$1,744,375
(125,736)
1,507,186
$1,630,444
Cash dividends from Cathay Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income/(loss) before income tax benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . .
Undistributed (loss)/earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-52
Year Ended December 31,
2012
2011
2010
(In thousands)
$154,700
196
3,228
3,718
2,064
153,322
(579)
153,901
(36,463)
$117,438
$ — $ —
227
3,075
(782)
1,308
(4,938)
(2,076)
(2,862)
14,427
$11,565
259
3,038
286
1,548
(4,041)
(1,699)
(2,342)
102,492
$100,150
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Statements of Cash Flows
Cash flows from Operating Activities
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Year Ended December 31,
2012
2011
2010
(In thousands)
$ 117,438
$ 100,150
$ 11,565
Dividends in excess of earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Gains on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs on venture capital and other investments . . . . . . . . . . . . . . . . .
Write-downs on impaired securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss/(gains) in fair value of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax short-fall from stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease)/increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase/(decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,463
—
(3,380)
12
262
181
114
620
1,820
59
—
(102,492)
—
24
321
200
(215)
290
(121)
(221)
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,589
(2,064)
—
(14,427)
—
3
521
492
29
539
1,040
(607)
(845)
Cash flows from Investment Activities
Additional investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease/(increase) in short-term investment
. . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale/(purchase) of available-for-sale securities . . . . . . . . . . .
Venture capital investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(142,300)
4,849
(694)
—
17,500
—
(671)
(94,000)
(12,000)
(418)
(1,056)
Net cash provided by/(used in) investment activities . . . . . . . . . . . . . .
(138,145)
16,829
(107,474)
Cash flows from Financing Activities
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from shares issued under the Dividend Reinvestment Plan . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax short-fall from share-based payment arrangements . . . . . . . . . . .
(16,049)
—
291
764
(620)
(16,046)
—
287
1,306
(290)
(16,041)
124,928
310
—
(539)
Net cash (used in)/provided by financing activities . . . . . . . . . . . . . . . .
(15,614)
(14,743)
108,658
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . .
(170)
809
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
639
$
22
787
809
$
339
448
787
21. Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan which allows for participants’ reinvestment of cash
dividends and certain optional additional investments in the Company’s common stock. Shares issued under the
plan and the consideration received were 17,956 shares for $291,000 in 2012, 21,281 shares for $287,000 in
2011, and 28,778 shares for $310,000 in 2010.
F-53
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
22. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can result in 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. See Note 11 for discussion of possible future disallowance of
Capital Securities as Tier 1 capital.
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, 2011 and 2009, the Bank qualified as well capitalized under the regulatory framework for
prompt corrective action.
The Bancorp’s and the Bank’s capital and leverage ratios as of December 31, 2012, and December 31, 2011, are
presented in the tables below:
As of December 31, 2012
As of December 31, 2011
Company
Bank
Company
Bank
Balance Percentage Balance Percentage Balance Percentage Balance Percentage
(Dollars in thousands)
Tier I Capital (to risk- weighted
assets)
. . . . . . . . . . . . . . . . . . . . . . $ 1,426,566
17.36% $ 1,259,005
15.33% $ 1,318,948
15.97% $ 1,289,747
15.64%
Tier I Capital minimum
requirement . . . . . . . . . . . . . . . . . .
328,713
4.00
328,440
4.00
330,355
4.00
329,928
4.00
Excess . . . . . . . . . . . . . . . . . . . . $ 1,097,853
13.36% $
930,565
11.33% $
988,593
11.97% $
959,819
11.64%
Total Capital (to risk- weighted
assets)
. . . . . . . . . . . . . . . . . . . . . . $ 1,571,060
19.12% $ 1,402,691
17.08% $ 1,474,496
17.85% $ 1,444,165
17.51%
Total Capital minimum
requirement . . . . . . . . . . . . . . . . . .
657,426
8.00
656,880
8.00
660,710
8.00
659,855
8.00
Excess . . . . . . . . . . . . . . . . . . . . $
913,634
11.12% $
745,811
9.08% $
813,786
9.85% $
784,310
9.51%
Tier I Capital (to average assets)
Leverage ratio . . . . . . . . . . . . . . . . $ 1,426,566
412,844
Minimum leverage requirement
. . . .
13.82% $ 1,259,005
412,272
4.00
12.22% $ 1,318,948
408,146
4.00
12.93% $ 1,289,747
407,643
4.00
Excess . . . . . . . . . . . . . . . . . . . . $ 1,013,722
9.82% $
846,733
8.22% $
910,802
8.93% $
882,104
Total average assets (1) . . . . . . . . . . . $10,321,104
Risk-weighted assets . . . . . . . . . . . . . $ 8,217,821
$10,306,790
$ 8,211,004
$10,203,647
$ 8,258,878
$10,191,078
$ 8,248,190
(1) Average assets represent average balances for the fourth quarter of each year presented.
12.66%
4.00
8.66%
On December 17, 2009, the Bancorp entered into a memorandum of understanding with Federal Reserve Bank of San
Francisco (the “FRB SF”) under which it agreed that it will not, without the FRB SF’s prior written approval, (i) receive any
dividends or any other form of payment or distribution representing a reduction of capital from the Bank, or (ii) declare or pay
any dividends, make any payments on trust preferred securities, or make any other capital distributions. Under the
memorandum, the Bancorp agreed to submit to the FRB SF for review and approval a plan to maintain sufficient capital at the
Bancorp on a consolidated basis and at the Bank, a dividend policy for the Bancorp, a plan to improve management of its
liquidity position and funds management practices, and a liquidity policy and contingency funding plan for the Bancorp. As
part of its compliance with the memorandum, on January 22, 2010, the Bancorp submitted to the FRB SF a Three-Year
Capital and Strategic Plan that updates a previously submitted plan and establishes, among other things, targets for its Tier 1
risk-based capital ratio, total risk-based capital ratio, Tier 1 leverage capital ratio and tangible common risk-based ratio, each
of which, where applicable, are above the minimum requirements for a well-capitalized institution. In addition, the Bancorp
agreed to notify the FRB SF prior to effecting certain changes to its senior executive officers and board of directors and it is
limited and/or prohibited, in certain circumstances, in its ability to enter into contracts to pay and to make golden parachute
severance and indemnification payments. The Bancorp also agreed in the memorandum that we will not, without the prior
written approval of the FRB SF, directly or indirectly, (i) incur, renew, increase or guaranty any debt, (ii) issue any additional
trust preferred securities, or (iii) purchase, redeem, or otherwise acquire any stock.
F-54
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Until it was terminated as of November 7, 2012, the Bank was subject to a memorandum of understanding
with the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation
(“FDIC’) that was entered into on March 1, 2010, by which the Bank agreed to undertake certain steps to
strengthen its operations. The Bank was required to develop and implement, within specified time periods, plans
satisfactory to the DFI and the FDIC to reduce commercial real estate concentrations, to enhance and to improve
the quality of our stress testing of the Bank’s loan portfolio, and to revise our loan policy in connection
therewith; to develop and adopt a strategic plan addressing improved profitability and capital ratios and to reduce
the Bank’s overall risk profile; to develop and adopt a capital plan; to develop and implement a plan to improve
asset quality, including the methodology for calculating the loss reserve allocation and evaluating its adequacy;
and to develop and implement a plan to reduce dependence on wholesale funding. In addition, we were required
to report our progress to the DFI and FDIC on a quarterly basis. As part of our compliance with the Bank
memorandum, on April 30, 2010, we submitted to the DFI and the FDIC a Three-Year Capital Plan that updated
the Three-Year Capital and Strategic Plan previously submitted to the FRB SF on January 22, 2010, and
established, among other things, targets for our Tier 1 risk-based capital ratio and total risk-based capital ratio,
each of which are above the minimum requirements for a well-capitalized institution and effective June 30, 2010,
a target Tier 1 to total tangible assets ratio. We were in compliance with the applicable target ratios through the
date of termination of the memorandum.
23. Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly financial data:
F-55
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Summary of Operations
2012
2011
Third
Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Second
Second
Fourth
Third
First
First
Interest income . . . . . . . . . . . . . . . . . . . . $105,281 $106,747 $107,581 $110,135 $111,076 $114,379 $114,339 $113,777
38,672
Interest expense . . . . . . . . . . . . . . . . . . .
24,216
29,484
31,759
33,426
28,461
36,024
26,330
Net interest income . . . . . . . . . . . . . . . .
(Reversal)/provision for credit losses . .
81,065
—
80,417
—
79,120
(5,000)
80,651
(4,000)
79,317
2,000
80,953
9,000
78,315
10,000
75,105
6,000
Net-interest income after provision for
loan losses . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . .
Income before income tax expense . . . .
Income tax expense . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Less: net income attributable to
81,065
12,202
49,532
43,735
15,276
28,459
80,417
15,622
47,844
48,195
17,686
30,509
84,120
9,852
47,342
46,630
16,619
30,011
84,651
8,831
47,871
45,611
16,547
29,064
77,317
8,986
43,990
42,313
14,459
27,854
71,953
16,827
48,383
40,397
14,162
26,235
68,315
12,453
45,410
35,358
10,906
24,452
69,105
12,626
47,783
33,948
11,734
22,214
noncontrolling interest . . . . . . . .
153
151
150
151
153
151
150
151
Net income attributable to Cathay
General Bancorp . . . . . . . . . . . . . . . .
28,306
30,358
29,861
28,913
27,701
26,084
24,302
22,063
Dividends on preferred stock . . . . . . . . .
(4,127)
(4,123)
(4,121)
(4,117)
(4,114)
(4,111)
(4,107)
(4,105)
Net income available to common
stockholders . . . . . . . . . . . . . . . . . . . . $ 24,179 $ 26,235 $ 25,740 $ 24,796 $ 23,587 $ 21,973 $ 20,195 $ 17,958
Basic net income attributable to
common stockholders per common
share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted net income attributable to
common stockholders per common
share . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.31 $
0.33 $
0.33 $
0.32 $
0.30 $
0.28 $
0.26 $
0.23
0.31 $
0.33 $
0.33 $
0.32 $
0.30 $
0.28 $
0.26 $
0.23
F-56
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corporate information
CatHaY general
BanCorp
dunson k. cheng
Chairman of the Board,
President, and
Chief Executive Officer
Peter wu
Executive Vice Chairman
of the Board and
Chief
Operating Officer
Anthony m. tang
Executive Vice President
heng w. chen
Executive Vice President,
Chief Financial Officer,
and Treasurer
Perry oei
Senior Vice President, General
Counsel, and Secretary
CatHaY Bank
exeCutive
offiCers
dunson k. cheng
Chairman of the Board,
President, and
Chief
Executive Officer
Peter wu
Executive Vice Chairman
of the Board and
Chief Operating Officer
Anthony m. tang
Senior Executive
Vice President and
Chief Lending Officer
heng w. chen
Executive Vice President
and Chief Financial Officer
irwin wong
Executive Vice President
and Chief Risk Officer
kim r. bingham
Executive Vice President
and Chief Credit Officer
Perry oei
Senior Vice President, General
Counsel, and Secretary
direCtors
dunson k. cheng
Chairman of the Board,
President, and Chief Executive
Officer of Cathay General
Bancorp and Cathay Bank
Peter wu
Executive Vice Chairman of
the Board and Chief Operating
Officer of Cathay General
Bancorp and Cathay Bank
michael m.y. chang
Retired Attorney and former
Secretary of Cathay General
Bancorp and Cathay Bank
kelly l. chan
Certified Public Accountant
thomas c.t. chiu
Medical Doctor
nelson chung
President of Pacific
Communities Builder, Inc.
felix s. fernandez
Retired Banker
Jane Jelenko
Retired Financial Services
Partner of KPMG LLP
Patrick s.d. lee
Retired Real Estate Developer
ting y. liu
Retired Investor
Joseph c.h. Poon
President of Edward
Properties, LLC
Anthony m. tang
Executive Vice President
of Cathay General Bancorp,
Senior Executive Vice
President and Chief Lending
Officer of Cathay Bank
eMeritus
direCtor
george t.m. ching
Vice Chairman Emeritus of
Cathay General Bancorp and
Cathay Bank
in MeMoriaM
wilbur k. woo
otHer exeCutive
viCe presidents
Pin tai
EVP, Deputy Chief Lending
Officer, and General Manager
of Eastern Regions
eddie chang
EVP and Manager, Corporate
Commercial Real Estate
and Construction Lending
shu-yuan lai
EVP and Director of
Business Development
otHer senior
Managers
gregory badura
SVP and Manager,
Special Assets
Peggy chan
SVP and Manager,
Commercial Lending, New
York and New Jersey Regions
gary cook
SVP, Loan Officer and
Manager, Other Real Estate
Owned Department
marisa de rojas
SVP and Chief BSA/AML/
OFAC Officer
brenda hanson
SVP and Chief Internal
Auditor
Jane ho
SVP and Manager,
High Tech Lending
olha holland
SVP and Operations
Administrator
Angela hui
SVP and Assistant Manager,
Corporate Commercial Real
Estate and Construction
Lending
Ayub kathrada
SVP and Commercial Lending
Manager, Commercial
Banking Group Los Angeles
dennis kwok
SVP and Treasurer
Alex lee
SVP and Deputy Branch
Administrator
Joseph lee
SVP and Director of
Sales, Wealth Management
maggie lee
SVP and Team Manager,
Multi-Cultural Corporate
Lending Group
shu lee
SVP and District
Administrator, Southern
California Region III
david lin
SVP and District
Administrator, Northern
California Region
michael lum
SVP and Regional Manager,
Washington Region
nancy moore
SVP and Senior Loan
Investment Officer
ernest oon
SVP and Deputy Chief
Credit Officer
Allen Peng
Special Assistant, Office
of the President
Jennifer l. Powells
SVP and Director of
Human Resources
robert romero
SVP and Chief
Information Officer
Jack sun
SVP and District Administrator,
Southern California Region II
wilson tang
SVP and District Administrator,
Southern California Region I
Peter ting
SVP and General Manager,
Hong Kong and
Greater China Regions
Veronica tsang
SVP and Branch Administrator,
Eastern Regions
esther wee
SVP and Community
Reinvestment Officer
tony wong
SVP, Corporate Banking
Hong Kong Branch
david wu
Regional EVP, Commercial
Lending Manager
New York Region
susan yang
SVP and Team Manager,
Corporate Commercial
Lending
Vivian yip
SVP and Global Director of
Credit Analysis & Underwriting
Forward-Looking StatementsOur annual report includes forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Words such as “aims,” “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “optimistic,” “plans,” “predicts,” “possible,” “potential,” “projects,” “pursue,” “seeks,” “shall,” “should,” and “will,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These and other factors are described in our Annual Report on Form 10-K (at Item 1A in particular) for the year ended December 31, 2012, which with a more detailed disclaimer under the caption “Forward-Looking Statements” is included with this annual report; in other reports filed with the Securities and Exchange Commission (the “SEC”); and in other filings we make with the SEC from time to time. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this annual report. We have no intention and undertake no obligation to update any forward-looking statements or to publicly announce any revision of any forward-looking statements to reflect future developments or events, except as required by law.Cathay General Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and other filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations, (626) 279-3286. These reports and filings are also available at http://www.cathaygeneralbancorp.com. The information contained on the websites at Cathay General Bancorp and Cathay Bank is not part of this annual report.Cathay Bank, Member FDIC, is an Equal Housing Lender.FDIC insurance coverage is limited to deposit accounts at Cathay Bank’s U.S. domestic branch locations.Non-Deposit Investment Products are NOT A DEPOSIT | NOT FDIC INSURED | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NO BANK GUARANTEE | MAY LOSE VALUE.in 2013Cathay Bank has been serving customers since 1962. With over 50 years of experience, we have learned that our customers value exceptional service, proactive relationship-building, and innovative banking solutions. Our vision is to do our best to build roads that lead our customers to success and continuous growth. 60492_A.indd 23/29/13 2:20 PM 777 North Broadway, Los Angeles, CA 90012
T: (213) 625-4700 F: (213) 625-1368
www.cathaygeneralbancorp.com
www.cathaybank.com
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Continuing Growth
2012 Annual Report
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