THE ART OF SUCCESS
WITH YOU ALL THE WAY
2014 Annual Report
Financial Highlights
Net Income (in millions)
Assets (in millions)
Stockholders’ Equity (in millions)
$138
110000
$10,645
$10,694
$10,989
$11,517
$1,621
$1,603
$1,507
$1,459
$123
$117
$100
100000
90000
80000
70000
60000
2011
2012
2013
2014
2011
2012
2013
2014
2011
2012
2013
2014
(Dollars in thousands, except per share data)
2014
2013
Amount
Percentage
Increase/(Decrease)
FOR THE YEAR
Net income
$ 137,830
$ 123,143
$ 14,687
Net income attributable to common stockholders
137,830
113,458
24,372
Net income attributable to common stockholders
per common share
Cash dividends paid per common share
1.72
0.29
1.43
0.08
0.29
0.21
AT YEAR-END
Investment securities
Loans, net
Assets
Deposits
Stockholders’ equity
Book value per common share
PROFITABILITY RATIOS
Return on average assets
Return on average stockholders’ equity
CAPITAL RATIOS
Tier 1 capital ratio
Total capital ratio
Leverage ratio
$ 1,318,935
$ 1,586,668
$ (267,733)
843,081
527,560
802,155
143,917
1.76
8,740,268
11,516,846
8,783,460
1,602,888
20.00
1.26%
8.95%
14.96%
16.22%
12.99%
7,897,187
10,989,286
7,981,305
1,458,971
18.24
1.17%
8.00%
15.04%
16.35%
12.48%
11.9%
21.5%
20.3%
262.5%
(16.9)%
10.7%
4.8%
10.1%
9.9%
9.6%
One
2014 Annual Report
Dear Fellow Stockholders:
I am pleased to report that 2014 was a very prosperous year on many
fronts for Cathay General Bancorp. We made continuous progress in
our growth strategy and achieved positive financial results starting
with our record breaking net income of $137.8 million. Our steady
increase in net income is attributable to strong growth in loans and
deposits and improvement in asset quality. Our net income and
capital allowed us again to increase our quarterly dividend to 10
cents per share in the fourth quarter of 2014, which is the third such
increase in the last two calendar years.
This year, we also planted the seeds for further expansion, remaining
focused on our strategic objectives. We are steadily diversifying and
expanding our footprint both in the United States and in Asia through
both potential accretive acquisitions as well as de novo branching
sites to meet our customer’s needs and to stay ahead of demand. We
also remain committed to sustainable loan growth through a high
quality and diversified credit portfolio.
In January 2015, we signed a definitive agreement to acquire
Asia Bancshares, Inc., for a combination of cash and stock. Asia
Bancshares is the holding company for Asia Bank, N.A., which
operates three branches in New York and one in Maryland. As of
December 31, 2014, Asia Bancshares reported total assets of $533
million, total loans of $429 million, and total deposits of $453 million.
Subject to approval by Asia Bancshares’ stockholders and regulatory
approvals, we expect the acquisition to be completed in the second
quarter of 2015. We are excited by the potential synergies of this
merger and look forward to welcoming Asia Bank into the Cathay
Bank family. We also recently added another full service Cathay Bank
branch in the Richmond district of San Francisco.
While we explore new opportunities for growth and expansion, we are
also cognizant of the regulatory environment and have implemented a
number of regulatory compliance measures both in the United States
and in Hong Kong.
Moreover, our investment in technology, including a full year of
operations with our new core data processing system, is facilitating
our customers’ ability to bank anywhere, anytime, and thereby
increasing our operating efficiency.
Two
After thirty five years of dedicated service to Cathay Bank, Mr. Peter
Wu, our Chief Operating Officer and Vice Chairman, elected to retire
from management but will remain as Vice Chairman on the Board
of Directors. Mr. Wu was a key member of our management team
that has guided our company in its growth and development. Our
deep appreciation and many thanks to Mr. Wu. In March, this year,
the Board also appointed Mr. Pin Tai as the new President of Cathay
Bank and as a Board member of the Bank. At the same time, Mr.
Irwin Wong was appointed as the Chief Operating Officer of Cathay
Bank. These gentlemen have served the company for 15 and 26 years
respectively. We congratulate them on their new positions and look
forward to their continuing leadership.
As much as we invest in technology and infrastructure, we also
invest in talent because our greatest asset is our people. While
our customer and revenue base expand, we still provide consistent
first-rate service. This year, we rearticulated our company’s Vision,
Mission, Core Values, and Culture Statement in order to make what is
implicit more explicit.
As we look ahead, we continue to celebrate and thank you, our
customers and stockholders, for continuing to place your loyalty and
faith in us. Cathay Bank is here today because of your support and
trust. As we strive to increase stockholder value, our philosophy
for growth is to be patiently opportunistic. We are excited about
the future and are well positioned to meet the challenges and take
advantage of the opportunities that lay ahead.
Dunson K. Cheng
Chairman of the Board, President,
and Chief Executive Officer
I would like to share with you some of the notable highlights of
Cathay General Bancorp’s financial performance in 2014:
Growth in income:
• Our net income attributable to common stockholders of $137.8
million in 2014 represents an increase of 21.5% from $113.5
million in 2013.
• Each of our major lending units exhibited strong growth leading to
our profitability and our branch system generated excellent core
deposit growth.
Loan and deposit growth:
• Commercial mortgage loans grew in 2014 by $463.4 million, or
11.5%, to $4.49 billion, residential mortgage loans grew $214.8
million, or 15.9%, to $1.57 billion, commercial loans grew $83.8
million, or 3.6%, to $2.38 billion, and real estate construction loans
grew $77.0 million, or 34.7%, to $298.7 million.
• Our core deposits increased 14.5% from $4.52 billion to $5.18
billion in 2014, and the net interest margin improved by 2 basis
points, from 3.33% to 3.35%.
Improvement in credit quality:
• In 2014, our non-performing assets decreased $35.6 million, or
25.9%, to $101.6 million, from $137.2 million in 2013.
• Net charge-offs decreased by 79.8% to $1.3 million in 2014.
Capital adequacy remains strong:
• As of December 31, 2014, our Tier 1 risk-based capital ratio
of 14.96%, total risk-based capital ratio of 16.22%, and Tier 1
leverage capital ratio of 12.99% continued to place Cathay General
Bancorp in the “well capitalized” category.
• These ratios far exceeded the regulatory minimums for “well-
capitalized” institutions.
Earlier this year, we were saddened by the loss of our last founding
member, Mr. George T.M. Ching. However, we also celebrate his
life accomplishments, including his great legacy and mission over
the years to provide banking services to the Chinese-American
community. We are proud to continue his efforts by increasing our
footprint to 53 branches in eight states, including 33 in California and
nine in New York, one branch in Hong Kong, and two representative
offices, one in Shanghai and the other in Taipei.
Three
2014 Annual Report
親愛的股東們，
我很高興地匯報2014年是國泰萬通金控公司豐收的一年。我們的發展策略不斷取得進
展，並錄得破紀錄的一億三千七百八十萬元淨盈利，成績驕人。淨盈利穩步增長歸功於
貸款和存款的強勁增長及資產質量的提升。我們的淨盈利和資本讓我們再次提高季度股
息，2014年第四季度股息增至每股10美分，這是過去兩年內第三次有如此增長。
今年我們籌備進一步擴大服務網絡的同時，亦繼續專注於部署戰略目標。我們通過具增值
潛力的併購及更新分行，不斷地實現多元化及擴展我們在美國和亞洲的業務，讓我們可以
滿足客戶的需要及在產品和服務上保持領先地位。我們秉持透過高品質及多元化的信貸組
合，達到可持續的貸款增長。
2015年1月我們簽署了一份協議以現金加股票方式併購 Asia Bancshares。Asia
Bancshares 是亞細亞銀行的控股公司，營運三家紐約分行及一家馬里蘭州分行。截至
2014年12月31日， Asia Bancshares 資產總額五億三千三百萬元，貸款總額四億二千
九百萬元，存款總額四億五千三百萬元。併購需獲 Asia Bancshares 股東及監管部門批
准，預計將於2015年第二季度完成。我們對此併購將帶來的潛在優勢感到興奮，並期待
亞細亞銀行加入國泰銀行大家庭。我們最近另在三藩市列治文區增加了一個全面服務的國
泰銀行分行。
在我們尋求增長和擴展業務的新機遇的同時，我們也因應監管環境，在美國和香港實施了
多項規管措施。
此外，我們在技術設備的投資包括已運作一年的核心數據處理系統在內，帶給客戶隨時隨
地管理帳戶的體驗，藉此提高我們的營運效率。
2014年國泰萬通金控公司的財務業績摘要：
收入增長︰
•本年度全年淨盈利(歸於普通股股東)為一億三千七百八十萬元，較2013年的一億一千三
百五十萬元增長21.5%。
•盈利來自各個主要貸款部門的強勁增長，同時分行帶來顯著的核心存款增長。
貸款及存款增長︰
•本年度商業房屋貸款錄得11.5%的增長，增加四億六千三百四十萬元至四十四億九千萬
元；住宅房屋貸款則增加二億一千四百八十萬元至十五億七千萬元，增幅達15.9%。商
業貸款增加八千三百八十萬元至二十三億八千萬元，增幅達3.6%；建築貸款增長34.7%,
增加七千七百萬元至二億九千八百七十萬元。
•核心存款由四十五億二千萬元增加至五十一億八千萬元，增幅為14.5%；淨利差由
3.33%擴大至3.35%，增長了兩個基點。
Four
提高信貸質量︰
•本年度不良貸款資產由2013年的一億三千七百二十萬元減少三千五百六十萬元，至一
億零一百六十萬元，大幅減少25.9%。
•淨呆帳沖銷金額亦大幅減少79.8%至一百三十萬元。
資本充足率保持強勁︰
•截至2014年12月31日，第一類風險資本比率為14.96%，總風險資本比率為16.22%，
第一類槓桿資本比率為12.99%；國泰萬通金控公司繼續處於「資本穩健」類別。
•這些比率遠超過「資本穩健」級別所有法定最低資本比率的規定。
今年初，國泰銀行碩果僅存的創辦人程達民先生逝世，我們對此感到無比悲痛。然而，我
們讚揚他一生的成就，他多年來以為華裔社區提供銀行服務為使命，這正是他其中一項偉
大的遺產。我們榮幸地延續他的努力擴展業務，目前擁有53家分行遍及美國8個州，包括
33家加州分行和9家紐約州分行，另在香港設有一家分行，及於台北及上海設有代表處。
在國泰銀行盡心服務35年後，首席營運長暨副董事長吳平原先生從管理職務退休，但將留
任董事會副董事長。吳先生是管理層中的重要成員，帶領公司成長和發展。我們由衷地感
謝吳先生。今年三月，董事會任命戴斌先生為新任國泰銀行總裁及董事會成員。同時任命
Irwin Wong先生為國泰銀行首席營運長。他們兩位分別在公司服務了15年和26年。我們
衷心祝賀他們並期待他們繼續領導公司發展。
正如我們大力投資於技術和基礎設施，我們亦注重培養人才，因為員工是我們最重要的資
產。儘管我們的客戶和利潤基礎不斷擴展，我們仍持續提供一流的服務。今年我們重申公
司的願景、使命、核心價值及文化宣言，更清晰展示公司的發展方向。
展望未來，我們將繼續表揚並感謝客戶和股東的忠實支持和信任。您的支持和信任成就了
國泰銀行的今天。我們致力增加股東價值，發展理念為耐心地爭取機會。我們對未來充滿
期望，並準備好迎接挑戰及善用前面的機遇。
鄭家發先生
董事長暨總裁兼首席執行長
Five
2014 Annual Report
Multicultural Advantage
Meeting Customer Needs
Navigate the barriers of language,
culture, and currency.
Cathay Bank, a subsidiary of Cathay General Bancorp
(NASDAQ: CATY), offers a unique advantage to customers
in the United States and Asia. Our innate understanding
of both eastern and western cultures allows us to assist
with customers’ financial needs and to help them establish
strong foundations and grow. Customers can feel more
at ease when speaking in their native language while
discussing their financial goals and challenges at our over
50 branches across the U.S., one branch in Hong Kong, and
overseas representative offices in Shanghai and Taipei.
We also offer foreign exchange services to help our
customers better manage their foreign currency risks and
facilitate their trade finance transactions. Our experience in
international trade finance includes an extensive network
of over 600 correspondent relationships with banks around
the globe enabling our customers to take advantage of the
convenience and opportunities on either side of the North
American continent and beyond.
Six
Start or expand a business in the
U.S. or China.
When a business in China desires to expand in the United
States, Cathay Bank is a gateway to creating success. We
have assisted hundreds of new businesses launch quickly. We
offer a suite of services that includes business and personal
accounts, credit lines, credit cards, international trade
financing, a wide variety of loans (including SBA), and much
more. Our banking professionals are experienced in helping
customers learn the “lay of the land” and make their own
footprint on U.S. soil. We can quickly provide customers with
an understanding of both countries and help them navigate the
cultural and business practice differences.
Similarly, businesses looking to launch or expand in China
have access to our multicultural knowledge, experience,
and exceptional service. We have the tools, resources, and
knowledge to help simplify and streamline the process.
Did you Know ?
Many customers stay
with us for generations.
Our attitude is “You need it,
we get it. Done.”
Seven
2014 Annual Report Tap Into New Technologies
SENT
Make deposits, send money.
Anytime, anywhere.
Cathay Bank offers solutions that add
convenience and simplicity to our customers’
banking experience. With our Mobile Banking
App, customers can easily make deposits from
their smartphones, send money person-to-
person, manage their accounts, and pay bills.
We are wherever you are—we are With You All
The Way.
Eight
Tap Into New Technologies
Did you Know ?
Cathay Bank continues to look
ahead by offering new banking
products and services to better
serve our customers.
SENT
GOT IT
Continuously innovate to build long-term relationships.
In addition to serving customer needs, we look ahead for
new and better ways to enhance financial relationships with
our customers. Starting with a warm and attentive initial
contact, we work for you and suggest the products and
services that best suit your needs. Whether it is our mobile
app, online banking or other products and services, we are
leading the way to create lasting relationships.
Nine
2014 Annual Report We Take Extraordinary
Care of Our Customers
At Cathay Bank, we believe banking is based on honesty,
understanding, and personalized care. We truly put each
customer’s needs first. Once we understand what our
customers’ banking needs are, we work effectively to
customize a plan and deliver effective banking solutions.
This relationship-building philosophy has been with us since
our inception. Taking care of customers one at a time has
enabled us to now service thousands of customers across the
United States and in Asia.
Charlie Woo,
CEO of Megatoys Inc.
Ten
Charles Woo, the co-founder and
CEO of Megatoys Inc., is a brilliant and highly-respected
business leader in Southern California. He founded
Megatoys as a toy manufacturer and importer in 1989
together with his brother, Peter Woo. Megatoys has since
grown to become an international operation with offices in
Asia, and one of the strongest and best-performing toy and
gift companies in the country.
“When I began my business in the late 70’s and came
to Cathay Bank for a loan, I was asked for a financial
statement. I didn’t know what a financial statement was.
I studied physics in school. But George Ching, one of the
founding directors of the Bank, showed me an example and
guided me through the process.”
“I’ve made many friends at Cathay Bank over the years.
From getting a car loan to starting a business, I’ve kept
coming back for 36 years.”
“In business, last minute hurdles invariably take place.
Each and every time that happened, Cathay Bank always
came through for me. Now, all banks want my business,
but I can honestly say that I can only depend on Cathay
Bank when the unexpected happens.”
Banks often change their business philosophies; however,
Cathay Bank’s philosophy remains consistent. That is very
important.”
Yan Xing is Managing Director of BCEG
International Co., Ltd. BCEG International is a sub-division of
Beijing Construction Engineering Group which is a 60-year-
old company, mainly focus on the oversea business of BCEG.
For the past decade, international construction projects and
establishing offices of BCEGI covers 27 countries. In 2007,
BCEGI established its first U.S. office in Dallas. In 2009,
BCEGI expanded to Los Angeles. The U.S. makes up about
15 percent of its international market share.
“Our business in the United States is more investment-
based. Loans from Cathay Bank have funded our residential
and commercial mixed-use project in San Gabriel, CA, which
includes a collection of 11 condominiums and retail shops.”
“We are grateful to Cathay Bank’s support in helping
us enter the U.S. market. We maintain a good working
relationship with Cathay Bank’s thorough, sincere and
objective corporate finance team.”
“Cathay Bank’s team also understands our point of view,
takes initiative to introduce us to the investment community,
and provide relevant background information and
recommendations. This has and will undoubtedly help us
deepen our understanding of the U.S. market. Other major
banks have not done this for us.”
“We are very satisfied in working with Cathay Bank. As we
expect to continue to grow in the U.S. market, we want to
continue working with Cathay Bank in forging a long-term
partnership.”
Yan Xing,
Managing Director of
BCEG International Co., Ltd.
Did you Know ?
We are more than a
bank. We are your
resource to business
growth and success.
Eleven
2014 Annual Report Focus on Social
Responsibility and
Sustainability
We grew out of a community. Here’s how we give back.
Cathay Bank created Cathay Bank Foundation in 2002 with a mission to enhance the growth and success of the
communities we serve. The Foundation’s objective is to create opportunities in affordable housing, community
and economic development, and education. Together with the Foundation, Cathay Bank is giving back to our
communities to help people live better lives.
Brooklyn Chinese-American Association
Cathay Bank is active in helping people of all ages stay
informed about financial issues affecting their lives.
In July 2014, Bank volunteers conducted a workshop
to teach “Checking Account Fraud Prevention” to 152
senior citizen members of the Brooklyn Chinese-American
Association located in Brooklyn, New York.
City of Los Angeles Hire LA’s Youth 2014 Program
Cathay Bank is a proud sponsor of one of Los Angeles’ most
exciting programs to put young adults to work, providing first-
time job experience that will set them on the path to success.
Ten thousand summer jobs were extended by the program to
14 to 24-year-olds who live in the city of Los Angeles.
Centro Latino for Literacy
Centro Latino transforms lives through literacy, teaching
non-literate adult Spanish speakers reading, writing, and
numeracy. Cathay Bank supports Centro Latino through grants,
and Cathay Bank volunteers helped teach budgeting and basic
financial management in Spanish to their students.
Field Trip for South El Monte and El Monte High Schools
Students from South El Monte High School and El Monte High School
visited Cathay Bank to see “a bank at work” and learn first-hand from
experts at the Bank. The students were introduced to basic banking,
international trade finance, the global impact of China, treasury
operations, foreign exchange, retail strategic planning, and marketing.
Twelve
Sustainability
is a Core Value of
Cathay Bank
Cathay Bank’s Corporate Center in El Monte (Southern California) was built in
2009 and utilizes many energy-efficient construction technologies. We don’t
just talk green. We are proactive and our efforts have achieved the following:
31%
REDUCTION IN ENERGY USE
47%
SAVINGS IN INTERIOR LIGHTING
15%
DECREASE IN EMPLOYEE COMMUTING MILES
65%
REDUCTION IN WATER USE
40%
REDUCTION IN ENERGY COSTS
Did you Know ?
This Cathay Bank facility has
2,128 solar panels on the
carport and is significantly
reducing its energy consumption
and carbon footprint.
Thirteen
Operation Hope
“HOPE Business In A Box / Gallup
HOPE Index division focuses on
inspiring a generation of young people
to become future American assets of
economic energy, small business, and
entrepreneurship.” With the support
of Cathay Bank and Cathay Bank
volunteers, Operation Hope established
a HOPE Business In A Box Academy at
Rio Hondo School, teaching financial
literacy and entrepreneurship to the
students.
The Bank’s Community Reinvestment
Act Officer serves on Operations Hope’s
Southwest Board.
2014 Annual Report Our experience in
international trade
finance helps
customers connect
the dots.
China
Shanghai
Taiwan
Taipei
China
Hong Kong
Did you Know ?
Cathay Bank has more than 600
correspondent relationships with
global banks—more connections to
help customers succeed.
Fourteen
Washington
Bellevue
Kent
Seattle
Illinois
Chicago
Westmont
New York
Brooklyn
Flushing
New York
Nevada
Las Vegas
Texas
Houston
Plano
New Jersey
Edison
Massachusetts
Boston
Northern California
Southern California
Cupertino
Dublin
Millbrae
Milpitas
Oakland
Richmond
Sacramento
San Francisco
San Jose
Union City
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
West Covina
Westminster
Fifteen
2014 Annual Report Board of Directors
Kelly l. Chan
Certified Public
Accountant
Thomas C.T. Chiu
Medical Doctor
Jane JelenKo
Retired Financial
Services Partner of
KPMG LLP
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 Chairman of the
Board and Chief Executive
Officer of Cathay Bank
nelson Chung
President of Pacific
Communities Builder, Inc.
Felix s. FernanDez
Retired Banker
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
Vice Chairman of the
Board of Cathay General
Bancorp and Cathay Bank
peTer Wu
Vice Chairman of the Board of
Cathay General Bancorp and
Cathay Bank
Sixteen
Corporate Information
DIRECTORS
Dunson K. Cheng
Chairman of the Board, President, and
Chief Executive Officer of Cathay General
Bancorp and Chairman of the Board and
Chief Executive Officer of Cathay Bank
CATHAY GENERAL
BANCORP
Dunson K. Cheng
Chairman of the Board, President,
and Chief Executive Officer
OTHER EXECUTIVE
VICE PRESIDENTS
Eddie Chang
EVP and Manager, Corporate
Commercial Real Estate and
Construction Lending
Shu-Yuan Lai
EVP and Deputy Chief Lending Officer
Allen Peng
EVP and Deputy Chief Retail
Administrator
Peter Wu
Vice Chairman of the Board
Anthony M. Tang
Vice Chairman of the Board
Heng W. Chen
Executive Vice President, Chief
Financial Officer, and Treasurer
Lisa L. Kim
Senior Vice President, General
Counsel, and Secretary
CATHAY BANK
EXECUTIVE OFFICERS
Dunson K. Cheng
Chairman of the Board and
Chief Executive Officer
Pin Tai
President and Director
Irwin Wong
Senior Executive Vice President
and Chief Operating Officer
Heng W. Chen
Executive Vice President
and Chief Financial Officer
Donald S. Chow
Executive Vice President
and Chief Credit Officer
Kim R. Bingham
Executive Vice President
and Chief Risk Officer
Peter Wu
Vice Chairman of the Board of Cathay
General Bancorp and Cathay Bank
Anthony M. Tang
Vice Chairman of the Board 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
IN MEMORIAM
George T.M. Ching
Seventeen
2014 Annual Report Corporate Headquarter
777 N. Broadway
Los Angeles, CA 90012
Tel: (213) 625-4700
Fax: (213) 625-1368
Los Angeles
777 N. Broadway
Los Angeles, CA 90012
Tel: (213) 625-4791
Fax: (213) 625-1368
Westminster
9121 Bolsa Ave.
Westminster, CA 92683
Tel: (714) 890-7118
Fax: (714) 892-8420
San Jose - Brokaw
1708 Oakland Rd., Suite 400,
San Jose, CA 95131
Tel: (408) 437-6188
Fax: (408) 437-6180
Monterey Park
250 S. Atlantic Blvd.
Monterey Park, CA 91754
Tel: (626) 588-1911
Fax: (626) 281-2956
Northridge
9045 Corbin Ave.
Suite 100,
Northridge, CA 91324
Tel: (818) 886-3578
Fax: (818) 886-8057
Ontario
2000A S. Grove Ave.
Unit 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.
Suite 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
West Covina
2672 E. Garvey Ave. South,
West Covina, CA 91791
Tel: (626) 646-1156
Fax: (626) 430-3077
Northern
California Branches
Berkeley-Richmond
3288 Pierce St., Suite D-101,
Richmond, CA 94804
Tel: (510) 526-8898
Fax: (510) 526-0639
Clement
919 Clement St.
San Francisco, CA 94118
Tel: (415) 831-1288
Fax: (415) 422-0917
Cupertino
10480 S. De Anza Blvd.
Cupertino, CA 95014
Tel: (408) 255-8300
Fax: (408) 255-8373
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
4970 Freeport Blvd.
Sacramento, CA 95822
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
Union City
1701 Decoto Rd.
Union City, CA 94587
Tel: (510) 675-9190
Fax: (510) 675-9312
New York Branches
Bensonhurst
6912 18th Ave.
Brooklyn, NY 11204
Tel: (718) 306-5355
Fax: (718) 256-3605
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
New York Chinatown
45 E. Broadway
New York, NY 10002
Tel: (212) 732-0200
Fax: (212) 732-7389
Flushing
40 - 14/16 Main St.
Flushing, NY 11354
Tel: (718) 886-5225
Fax: (718) 961-7680
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
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
City 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.
Suite 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.
Suite 150,
Irvine, CA 92604
Tel: (949) 551-1991
Fax: (949) 551-2438
Eighteen
Illinois Branches
Nevada Branch
Las Vegas
6110 Spring Mountain Rd.
Las Vegas, NV 89146
Tel: (702) 453-8889
Fax: (702) 263-8889
New Jersey Branch
Edison
1775 Route 27
Edison, NJ 08817
Tel: (732) 985-8880
Fax: (732) 985-6689
Edison Walk-Up
1775 Route 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
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
Taipei
6/F, Suite 3,
146 Sung Chiang Rd.
Taipei, Taiwan, R.O.C.
Tel: (886-2) 2537-5057
Fax: (886-2) 2537-5059
Registrar and
Transfer Agent
American Stock
Transfer and Trust
Company
6201 15th Ave.
Brooklyn, NY 11219
Tel: (800) 937-5449
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 & Walk-Up
250 W. Cermak Rd.
Chicago, IL 60616
Washington Branches
Bellevue
13238 NE 20th St.
Suite 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.
Suite 118,
Houston, TX 77036
Tel: (713) 278-9599
Fax: (713) 278-9699
Plano
4100 Legacy Dr.
Suite 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
Cathay Bank is honored
to be of service to you. We
will continue to be WITH
YOU ALL THE WAY.
Visit us online at
www.cathaybank.com
10-K
Nineteen
2014 Annual Report UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:1408)
(cid:1407)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31830
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
Warrants to purchase shares of Common Stock (expiring December 5, 2018)
The NASDAQ Stock Market LLC
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 (cid:1408) No (cid:1407)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:1407) No (cid:1408)
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 (cid:1408) No (cid:1407)
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 (cid:1408) No (cid:1407)
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. (cid:1407)
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 (cid:1408)
Non-accelerated filer (cid:1407)
(Do not check if a smaller reporting company)
Accelerated filer (cid:1407)
Smaller reporting company (cid:1407)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:1407) No (cid:1408)
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, 2014) was $1,862,531,231. 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 17, 2015, there were 79,821,331 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
• Portions of Registrant’s definitive proxy statement relating to Registrant’s 2015 Annual Meeting of Stockholders which will be filed within 120
days of the fiscal year ended December 31, 2014, are incorporated by reference into Part III.
CATHAY GENERAL BANCORP
2014 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I .................................................................................................................................................................................. 2
Item 1.
Business. ........................................................................................................................................................... 2
Item 1A. Risk Factors. ..................................................................................................................................................... 15
Item 1B. Unresolved Staff Comments. ............................................................................................................................ 25
Properties. ......................................................................................................................................................... 25
Item 2.
Legal Proceedings. ............................................................................................................................................ 26
Item 3.
Item 4.
Mine Safety Disclosures. .................................................................................................................................. 26
Executive Officers of the Registrant. .................................................................................................................................... 26
PART II ................................................................................................................................................................................. 27
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. ...................................................................................................................................................... 27
Item 6.
Selected Financial Data. .................................................................................................................................... 28
Management’s Discussion and Analysis of Financial Condition and Results of Operations. ........................... 30
Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. .......................................................................... 59
Financial Statements and Supplementary Data. ................................................................................................ 63
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. .......................... 63
Item 9A. Controls and Procedures. .................................................................................................................................. 63
Item 9B. Other Information. ............................................................................................................................................ 66
PART III ............................................................................................................................................................................... 66
Directors, Executive Officers and Corporate Governance. ............................................................................... 66
Item 10.
Executive Compensation. .................................................................................................................................. 66
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......... 66
Item 12.
Certain Relationships and Related Transactions, and Director Independence. ................................................. 66
Item 13.
Principal Accounting Fees and Services. .......................................................................................................... 67
Item 14.
PART IV ............................................................................................................................................................................... 67
Exhibits, Financial Statement Schedules. ......................................................................................................... 67
Item 15.
SIGNATURES ...................................................................................................................................................................... 71
i
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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:
(cid:404) U.S. and international business and economic conditions;
(cid:404) possible additional provisions for loan losses and charge-offs;
(cid:404)
(cid:404)
(cid:404)
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;
(cid:404) higher capital requirements from the implementation of the Basel III capital standards;
(cid:404)
compliance with the Bank Secrecy Act and other money laundering statutes and regulations;
(cid:404) potential goodwill impairment;
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
liquidity risk;
fluctuations in interest rates;
risks associated with acquisitions and the expansion of our business into new markets;
inflation and deflation;
real estate market conditions and the value of real estate collateral;
environmental liabilities;
(cid:404) our ability to compete with larger competitors;
(cid:404) our ability to retain key personnel;
(cid:404)
successful management of reputational risk;
(cid:404) natural disasters and geopolitical events;
(cid:404) general economic or business conditions in Asia, and other regions where the Bank has operations;
1
(cid:404)
failures, interruptions, or security breaches of our information systems;
(cid:404) our ability to adapt our systems to technological changes;
(cid:404)
risk management processes and strategies;
(cid:404) adverse results in legal proceedings;
(cid:404)
(cid:404)
certain provisions in our charter and bylaws that may affect acquisition of the Company;
changes in accounting standards or tax laws and regulations;
(cid:404) market disruption and volatility;
(cid:404)
(cid:404)
(cid:404)
restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital
structure;
issuance of preferred stock;
successfully raising additional capital, if needed, and the resulting dilution of interests of holders of our common
stock; and
(cid:404)
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.
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”), seven
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 such other activities or acquire such other businesses 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 Business Oversight
(“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”).
Subsidiaries of Bancorp
In addition to its wholly-owned bank subsidiary, the Bancorp has the following subsidiaries:
2
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 a certain series of securities issued by us, with similar terms to the relevant series
of securities issued by each of the Trusts, which we refer to as “Junior Subordinated Notes.” 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.
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 Financial
Officer, Executive Vice Presidents, the Secretary and General Counsel, and the Assistant Secretary. 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
California Department of Business Oversight (“DBO”), previously known as the California Department of Financial
Institutions or 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, 2014, the Bank had branch offices in Southern California (21 branches), Northern
California (12 branches), New York (nine branches), Massachusetts (one branch), Texas (two branches), Washington (three
branches), Illinois (three branch locations and one drive-through location), New Jersey (one branch), Nevada (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 (the “CRA”) 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.
3
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, home equity lines of credit, and installment loans
to individuals for automobile, household, and other consumer expenditures.
Through Cathay Wealth Management business unit, 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.
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 securities, mortgage-
backed securities, collateralized mortgage obligations, corporate debt instruments, and mutual funds.
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,
secondary repayment sources (such as guaranties), quality and availability of collateral, capital, leverage capacity, and
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
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market areas. The Bank participates or syndicates loans, typically more than $25 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 that 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.
The Bank utilizes both the 504 program, which is focused on 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, buildings, equipment and 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, an independent
appraisal of the value of the property, historical loan quality, and other factors deemed relevant by the Bank’s underwriting
personnel. As of December 31, 2014, approximately 58% 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 was not impacted by
the rule pertaining to risk retention implementing the risk retention requirements of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), since the Bank does not 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.
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Asset Quality
The Bank’s lending and credit policies require management to regularly review 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, 2014, 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, and the issuance of 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.
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.”
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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.
In January 2015, the Company signed a definitive agreement to acquire Asia Bancshares, Inc., headquartered in Flushing,
New York. Asia Bancshares has $533.3 million in total assets at December 31, 2014, and operates four branches. The
Company expects the acquisition of Asia Bancshares to close in the second quarter of 2015.
Subsidiaries of Cathay Bank
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.
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. As of December 31, 2014, CHLLC owned two properties with a carrying value of
$1.6 million. CHLLC2 and CHLLC3 did not own property at December 31, 2014.
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. We also compete
for loans and deposits, as well as other banking services, such as payment services, with savings and loan associations, savings
banks, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies and other financial
and non-financial institutions and entities.
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
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.
Employees
As of December 31, 2014, the Bank and its subsidiaries employed approximately 1,074 persons, including 505 banking
officers. None of the employees are represented by a union. We believe that our employer-employee relations are good.
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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”). The content of our website is not incorporated into and is not part
of this Annual Report on Form 10-K. 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-0330.
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, secondarily
for the stability of the U.S. banking system, and not for the protection of stockholders. 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 implementation and impact of legislation and regulations enacted since 2008 in response to the U.S. economic
downturn and financial industry instability continued in 2014 as modest recovery returned to many institutions in the banking
sector. Many institutions have repaid and redeemed U.S. Treasury loans and investments under the Troubled Asset Relief
Program (“TARP”). The Company participated in the TARP Capital Purchase Program and in 2013 fully redeemed the $258
million of preferred stock it had issued to the U.S. Treasury.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act financial reform legislation significantly revised and expanded the rulemaking, supervisory and
enforcement authority of the federal bank regulatory agencies. The numerous rules and regulations promulgated pursuant to
the Dodd-Frank Act have significantly impacted our operations and compliance costs. Various provisions of the Dodd-Frank
Act are now effective and have been fully implemented, including the revisions in the deposit insurance assessment base for
FDIC insurance and the permanent increase in coverage to $250,000; the permissibility of paying interest on business
checking accounts; the removal of barriers to interstate branching; and required disclosure and shareholder advisory votes on
executive compensation. Implementation in 2014 of additional Dodd-Frank Act regulatory provisions included aspects of (i)
the final new capital rules, and (ii) the so called “Volcker Rule” restrictions on certain proprietary trading and investment
activities.
Capital Adequacy Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and
federal banking agencies. New capital rules described below were effective on January 1, 2015, but many elements are being
phased in over multiple future years. Capital adequacy guidelines and, additionally for banks, prompt corrective action
regulations (See “Prompt Corrective Action Provisions” below), 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. The risk-based capital
guidelines for bank holding companies and banks require capital ratios that vary based on the perceived degree of risk
8
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. To the extent that the new rules
are not fully phased in, the prior capital rules continue to apply.
Under the risk-based capital guidelines in place prior to the effectiveness of the new capital rules, there were 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, a Tier 1 risk-based capital ratio and a Tier 1
leverage ratio of at least ten percent, six percent and five percent, respectively. At December 31, 2014, the Bancorp’s and the
Bank’s total risk-based capital ratios were, respectively, 16.22% and 16.35%; their Tier 1 risk-based capital ratios were,
respectively, 14.96% and 15.04%; and the Bancorp’s leverage capital ratio was 12.99%, all of which ratios exceeded the
minimum percentage requirements to be deemed “well-capitalized” for regulatory purposes. The federal banking agencies
may require 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.”
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.
New Capital Rules
The federal bank regulatory agencies adopted final regulations in July 2013, which revised their risk-based and leverage
capital requirements for banking organizations to meet requirements of the Dodd-Frank Act and to implement Basel III
international agreements reached by the Basel Committee. Although many of the rules contained in these final regulations
are applicable only to large, internationally active banks, some of them will apply on a phased in basis to all banking
organizations, including the Bancorp and the Bank.
The following are among the new requirements that are phased in beginning January 1, 2015:
• An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets.
• A new category and a required 4.50% of risk-weighted assets ratio is established for “common equity Tier 1” as a
subset of Tier 1 capital limited to common equity.
• A minimum non-risk-based leverage ratio is set at 4.00% eliminating a 3.00% exception for higher rated banks.
• Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights
and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities.
• A new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios
that will be phased in from 2016 to 2019 must be met to avoid limitations in the ability of the Bank to pay dividends,
repurchase shares or pay discretionary bonuses.
• The risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high
volatility commercial real estate acquisition, development and construction loans, certain past due non-residential
mortgage loans and certain mortgage-backed and other securities exposures.
• An additional “countercyclical capital buffer” is required for larger and more complex institutions.
9
Final Volcker Rule
In December 2013, the federal bank regulatory agencies adopted final rules that implement a part of the Dodd-Frank Act
commonly referred to as the “Volcker Rule.” Under these rules and subject to certain exceptions, banking entities, including
the Company and the Bank, will be restricted from engaging in activities that are considered proprietary trading and from
sponsoring or investing in certain entities, including hedge or private equity funds that are considered “covered funds.” These
rules became effective on April 1, 2014 although certain provisions are subject to delayed effectiveness under rules
promulgated by the Federal Reserve.
The Company held limited partnership interests totaling approximately $5.5 million at December 31, 2014, which are
considered covered funds under the final rule. Therefore, these new rules require us to sell or restructure these limited
partnership interests before July 21, 2017. Except for discontinuing such investments, we believe that the new rules will not
require any material changes in our operations or business.
CFPB Actions
The Dodd-Frank Act provided for the creation of the Consumer Financial Protection Bureau (“CFPB”) as an independent
entity within the Federal Reserve with 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. CFPB regulations and
guidance apply to all financial institutions and banks with $10 billion or more in assets, which are also subject to examination
by the CFPB. As the Bank has more than $10 billion in assets, it is now examined for compliance with CFPB regulation by
the CFPB in addition to examinations of the Bank by the FDIC and the DBO.
In 2014, the CFPB adopted revisions to Regulation Z, which implement the Truth in Lending Act, pursuant to the Dodd-
Frank Act, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or
temporary loans). The revisions mandate specific underwriting criteria for home loans in order for creditors to make a
reasonable, good faith determination of a consumer's ability to repay and establish certain protections from liability under
this requirement for “qualified mortgages” meeting certain standards. In particular, it will prevent banks from making “no
doc” and “low doc” home loans, as the rules require that banks determine a consumer’s ability to pay based in part on verified
and documented information. We do originate certain “low doc” loans that meet specific underwriting criteria. Given the
small volume of such loans, we do not believe that this regulation will have a significant impact on our operations.
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 1280 of the California
Financial Code. Therefore, the Bancorp and any of its subsidiaries are subject to examination by, and may be required to file
reports with, the DBO. 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 DBO 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:
(cid:404) Requirements that bank holding companies and banks file periodic reports.
(cid:404) Requirements that bank holding companies and banks meet or exceed minimum capital requirements.
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(cid:404) 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.
(cid:404) Limitations on dividends payable to stockholders. The Bancorp’s ability to pay dividends is 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.
(cid:404) 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.
(cid:404) 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 the authority to initiate informal or formal enforcement actions.
(cid:404) Requirements for notice, application and approval, or non-objection of acquisitions and certain other activities
conducted directly or in subsidiaries of the Bancorp or the Bank.
(cid:404) 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, restrictions may be imposed, including denials of applications for branches,
for adding subsidiaries or affiliate companies, for engaging in new activities or for the merger with or purchase of
other financial institutions. In its last reported examination by the FDIC in July 2013, the Bank received a CRA
rating of “Satisfactory.”
(cid:404) 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.
(cid:404) Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.
(cid:404) Limitations on transactions with affiliates.
(cid:404) Restrictions on the nature and amount of any investments in, and the ability to underwrite, certain securities.
(cid:404) Requirements for opening of intra- and interstate branches.
(cid:404) Compliance with truth in lending and other consumer protection and disclosure laws to ensure equal access to credit
and to protect consumers in credit transactions.
(cid:404) Compliance with 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
11
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. 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 does not believe it has 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, which would, in the absence of financial
holding company status, require notice or Federal Reserve approval.
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 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.
Regulation of the Bank
As a California commercial bank whose deposits are insured by the FDIC, the Bank is subject to regulation, supervision,
and regular examination by the DBO and the FDIC, as the Bank’s primary Federal regulator, and must also comply with
certain applicable regulations of the Federal Reserve. Specific federal and state laws and regulations which are applicable to
banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing
of the availability of deposited funds, their activities relating to dividends, the nature and amount of and collateral for certain
loans, servicing and foreclosing on loans, borrowings, capital requirements, certain check-clearing activities, branching, and
mergers and acquisitions. California banks are also subject to statutes and regulations including Federal Reserve Regulation
O and Federal Reserve Act Sections 23A and 23B and Regulation W, which restrict or limit loans or extensions of credit to
“insiders,” including officers, directors, and principal shareholders, and affiliates, and purchases of assets from affiliates,
including parent bank holding companies, except pursuant to certain exceptions and only on terms and conditions at least as
favorable to those prevailing for comparable transactions with unaffiliated parties. The Dodd-Frank Act expanded definitions
and restrictions on transactions with affiliates and insiders under Sections 23A and 23B, and also lending limits for derivative
transactions, repurchase agreements and securities lending, and borrowing transactions.
The Bank operates branches and/or loan production offices in California, New York, Illinois, Massachusetts, Texas,
Washington, Nevada, and New Jersey. While the DBO 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 addition to regulation and supervision by
the DBO and the Federal Reserve.
Enforcement Authority
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 DBO 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 DBO and the FDIC have residual authority to:
(cid:404) Require affirmative action to correct any conditions resulting from any violation or practice;
(cid:404) 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, among other
things;
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(cid:404) Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;
(cid:404) 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;
(cid:404) Require prior approval of senior executive officer or director changes, remove officers and directors, and assess civil
monetary penalties; and
(cid:404) Terminate FDIC insurance, revoke the Bank’s charter, take possession of, 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.
In the exercise of their supervisory and examination authority, the regulatory agencies have recently emphasized
corporate governance, stress testing, enterprise risk management and other board responsibilities; anti-money laundering
compliance and enhanced high risk customer due diligence; vendor management; cyber security and fair lending and other
consumer compliance obligations.
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 of $250,000 for each
depositor pursuant to the Dodd-Frank Act. 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 effect on our earnings and could have a material adverse effect on the value of, or market for, our
common stock.
Prompt Corrective Action Provisions
The FDI Act requires the federal bank regulatory agencies 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. Depending on the bank’s capital ratios, the agencies’ regulations define five categories
in which an insured depository institution will be placed: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At each successive lower capital category, an insured bank is
subject to more restrictions, including restrictions on the bank's activities, operational practices or the ability to pay dividends.
Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be
treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and
opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such
treatment.
The prompt corrective action standards were changed when the new capital rule ratios became effective on January 1,
2015. Under the new standards, in order to be considered well-capitalized, the Bank is required to have met the new common
equity Tier 1 ratio of 6.5%, an increased Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and
a leverage ratio of 5% (unchanged).
Dividends
Holders of the Bancorp’s common 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
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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.
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. The Federal
Reserve also discourages dividend policy payment ratios that are at maximum allowable levels unless both asset quality and
capital are very strong.
The terms of our Junior Subordinated Notes also limit our ability to pay dividends on our common stock. If we are not
current on our payment of interest on our Junior Subordinated Notes, we may not pay dividends on our common stock. The
amount of future dividends by the Bancorp 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.
The Bank is a legal entity that is separate and distinct from its holding company. The Bancorp is dependent on the
performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of the Bancorp
and the ability of the Bancorp to pay dividends to stockholders. Future cash dividends by the Bank will also depend upon
management’s assessment of future capital requirements, contractual restrictions, and other factors. When phased in, the new
capital rules will restrict dividends by the Bank if the capital conservation buffer is not achieved.
The power of the board of directors of the Bank to declare cash dividends to the Bancorp is 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 DBO 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.
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,
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
enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain
contractual rights.
Federal Home Loan Bank System
The Bank is a member of the 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.
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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
Global Select 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 and compensation 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. 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, 2014. These assessments are included in Part
II — Item 9A — “Controls and Procedures.”
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 other 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.
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, consumer spending and gross domestic product growth have been less robust than expected and
unemployment remains historically high. Some local governments have been experiencing financial difficulties. There
remains uncertainty over the federal debt ceiling and the direction and long-term effects of the Federal Reserve’s quantitative
easing and tapering of it. In addition, concerns about the performance of international economies, especially in Europe and
emerging markets, and economic conditions in Asia, particularly the economies of China and Taiwan, can impact the
economy and financial markets here in the United States. Concerns about the economy have also resulted in decreased lending
15
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:
(cid:404) 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.
(cid:404) 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.
Our banking operations are concentrated primarily in California, and secondarily in New York, Texas, Massachusetts,
Washington, Illinois, New Jersey, Nevada, 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, 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, 2014, our allowance for loan losses totaled $161.4 million and we had total charge-offs of $1.3 million
for 2014. 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 uneven and in some areas rather
slow, with relatively high and persistent unemployment. Moreover, rising interest rates may adversely affect real estate sales.
As of December 31, 2014, we had approximately $4.8 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 may become subject to 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.
Under federal and state laws and regulations pertaining to the safety and soundness of financial institutions, the Federal
Reserve Bank of San Francisco (the “FRB SF”) has authority over the Bancorp and separately the DBO and FDIC have
authority over the Bank to compel or restrict certain actions if the Bancorp or the Bank should violate any laws or regulations,
16
if its 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 engaged in unsafe or unsound practices, including failure to exercise proper risk
oversight over the many areas of Bancorp’s and the Bank’s operations. These regulators, as well as the CFPB, also have
authority over the Bancorp’s and the Bank’s compliance with various statutes and consumer protection and other regulations.
Among other matters, the corrective actions that may be required of the Bancorp or the Bank following the occurrence of any
of the foregoing 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, closing and
liquidating the Bank. If we are unable to meet the requirements of any corrective actions, we could become subject to
supervisory action. The terms of any such supervisory action could have a material and adverse effect on our business,
financial condition, results of operations and the value of our common stock.
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 and 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 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 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. In
addition, we are required to conduct stress testing based on certain macroeconomic scenarios to reflect the impact on our
income, revenues, balance sheets, and capital levels, the results of which could require us to take certain actions, including
being required to raise additional capital. Current and future legal and regulatory requirements, restrictions, and regulations,
including those imposed under the Dodd-Frank Act, may adversely impact our profitability, make it more difficult to attract
and retain key executives and other personnel, may have a material and adverse effect on our business, financial condition,
results of operations and the value of our common stock, and may require us to invest significant management attention and
resources to evaluate and make any changes required by the legislation and related regulations.
We are subject to stringent capital requirements, including those required by Basel III.
The U.S. federal bank regulators have jointly adopted new capital requirements on banks and bank holding companies
as required by the Dodd-Frank Act, which became effective on January 1, 2015, incorporate the elements of Basel
Committee’s Basel III accords and have the effect of raising our capital requirements and imposing new capital requirements
beyond those previously required. 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 require us to raise additional capital, or impact our ability to pay
dividends or pay compensation to our executives, which could have a material and adverse effect on our business, financial
condition, results of operations and the value of our common stock.
We are subject to extensive laws, regulations and supervision, and may become subject to additional laws, regulations and
supervision that may be enacted and that could limit or restrict our activities, hamper our ability to increase our assets
and earnings, and materially and 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, tax withholding and reporting, 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.
17
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 very difficult 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, among other things, 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. 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 and adverse effect on our business, financial condition, results of operations and the
value of our common stock. See Part I — Item 1 — “Business — Regulation and Supervision.”
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions,
among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and
currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose
significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement
efforts with federal banking regulators, as well as with the U.S. Department of Justice, Drug Enforcement Administration,
and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office
of Foreign Assets Control and compliance with the Foreign Corrupt Practices Act. In addition, our Hong Kong Branch is
subject to the anti-money laundering laws and regulations of Hong Kong. If our policies, procedures and systems are deemed
deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our
ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan,
including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and
terrorist financing could also have serious reputational consequences for us. Any of these results could materially and
adversely affect our business, financial condition, results of operations and the value of our common stock.
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.
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.
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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. Moreover, the long-term effects of the Federal Reserve’s unprecedented quantitative easing and tapering of it
is unknown. 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.
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.
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.
19
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 seven other states (New York, Texas,
Washington, Massachusetts, Illinois, New Jersey, and Nevada) 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.
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, New Jersey, and Nevada. 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 direction of real estate sales and prices in many markets across the United States is not
currently predictable and reductions in the value of our real estate collateral could cause us to have to foreclose on the real
estate. 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.
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
20
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, results of operations and the value of our
common stock 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, including those with foreign
ownership, 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, such as payment services,
with savings and loan associations, savings banks, brokerage houses, insurance companies, mortgage companies, credit
unions, credit card companies and other financial and non-financial institutions and entities. These factors and ongoing
consolidation among insured institutions in the financial services industry may materially and 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.
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, and our Chief Financial Officer, Heng W. Chen.
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, landslides, 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 materially and adversely affect our business, financial condition, results of
operations and the value of our common stock.
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. In addition, pandemics
21
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.
Our information systems may experience failures, interruptions, or breaches in security, which could have a material and
adverse effect on our business, financial condition, results of operations and the value of our common stock.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach
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 and employees of customers. While we have policies and procedures designed to prevent or limit the effect of the
failure, interruption, or breaches of our information systems, there can be no assurance that any such failures, interruptions,
or 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 banking sector. Some financial institutions have reported breaches of their
websites and systems, some of which have involved sophisticated and targeted attacks intended to misappropriate sensitive
or confidential information, destroy or corrupt data, disable or degrade service, disrupt operations or sabotage systems. These
breaches can remain undetected for an extended period of time. The secure maintenance and transmission of confidential
information, as well as the secure 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, and 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 will likely
continue to 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 breaches could damage our reputation, result in a loss of customers,
cause us to incur additional costs (including remediation and cyber security protection costs), disrupt our operations, 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, results of operations and the value of our common stock.
Our need to continue to adapt our information technology systems to allow us to provide new and expanded service could
present operational issues, require significant capital spending, and disrupt our business.
As we continue to offer Internet banking and other online 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 may incur significant losses as a result of ineffective risk management processes and strategies.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of
separate but complementary financial, credit, operational and compliance systems, and internal control and management
review processes. However, these systems and review processes and the judgments that accompany their application may not
be effective and, as a result, we may not anticipate every economic and financial outcome in all market environments or the
specifics and timing of such outcomes, particularly in the event of the kinds of dislocations in market conditions experienced
during the recession, which highlight the limitations inherent in using historical data to manage risk. If those systems and
review processes prove to be ineffective in identifying and managing risks, our business, financial condition, results of
operations and the value of our common stock could be materially and adversely affected.
22
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, and these losses could have a material and adverse effect on our
business, financial condition, results of operations and the value of our common stock.
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:
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
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;
(cid:404) general market conditions and, in particular, developments related to market conditions for the financial services
industry;
(cid:404) proposed or adopted regulatory changes or developments;
(cid:404)
anticipated or pending investigations, proceedings, or litigation that involve or affect us;
23
(cid:404)
successful management of reputational risk; and
(cid:404) 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 their
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.
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 the Bancorp’s cash flow comes 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, if we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on
our common stock. Further, new capital conservation buffer requirements will limit the ability of the Bank to pay dividends
to the Bancorp if we are not compliant with those capital cushions.
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 the 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 initially issued to the U.S.
Treasury in connection with our participation in the TARP Capital Purchase Program and subsequently sold by the U.S.
Treasury in a secondary public offering, 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.
The issuance of preferred stock could adversely affect holders of common stock, which may negatively impact their
investment.
Our Board of Directors is authorized to issue 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 $119.1 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
24
Subordinated Notes.” 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.
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 assurance 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.
The soundness of other financial institutions could adversely affect us.
Financial 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 2014 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.
25
The other branch and representative offices and other properties are leased by the Bank under leases with expiration
dates ranging from May 2015 to November 2024, exclusive of renewal options. As of December 31, 2014, the Bank’s
investment in premises and equipment totaled $99.7 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.
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 17, 2015.
Name
Age
Present Position and Principal Occupation During the Past Five Years
Dunson K. Cheng .........
70
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.
Heng W. Chen ..............
62
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 ..................
66
Pin Tai ..........................
60
Senior Executive Vice President, and Chief Retail Administration and Regulatory
Affairs Officer of the Bank since January 2014; Executive Vice President and Chief
Risk Officer of the Bank from 2011 to December 2013; Executive Vice President-
Branch Administration of the Bank from 1999 to 2011.
Chief Lending Officer of the Bank since October 2013; Executive Vice President of the
Bank since 2006; Deputy Chief Lending Officer and General Manager of Eastern
Regions of the Bank from 2010 to September 2013; General Manager of Eastern
Regions of the Bank from 2006 to 2009.
Kim R. Bingham ..........
58
Chief Risk Officer of the Bank since January 2014; Executive Vice President of the
Bank since 2004; Chief Credit Officer of the Bank from 2004 to December 2013.
Donald S. Chow ...........
64
Executive Vice President and Chief Credit Officer of the Bank since January 2014;
Consultant of the Office of the President from August to December 2013; Executive
Vice President and Senior Credit Supervisor of East West Bank from 2009 to 2013; and
President of Desert Community Bank, a division of East West Bank, from 2007 to 2009.
26
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 17, 2015, was $26.24 per share, as reported by the NASDAQ Global Select Market.
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,
2014
2013
High
Low
High
Low
First quarter .................................................................. $
Second quarter ..............................................................
Third quarter ................................................................
Fourth quarter ...............................................................
26.37 $
26.47
26.81
27.02
22.76 $
23.10
24.81
24.04
20.66 $
20.99
24.68
27.63
19.06
18.37
21.05
22.95
Holders
As of February 17, 2015, there were approximately 1,541 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,
2013
2014
0.05 $
0.07
0.07
0.10
0.29 $
0.01
0.01
0.01
0.05
0.08
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, 2009 (and the reinvestment of dividends thereafter) in each of
our common stock, the SNL Western Bank Index and the S&P 500 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 2015 annual meeting of stockholders, a list of the companies included in the SNL Western Bank Index. Requests
for this information should be addressed to Lisa L. Kim, Secretary, Cathay General Bancorp, 777 North Broadway, Los
Angeles, California 90012.
27
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.
Index
Cathay General Bancorp ...
SNL Western Bank ...........
S&P 500 ............................
12/31/09
100.00
100.00
100.00
12/31/10
222.01
113.31
115.06
12/31/11
199.02
102.37
117.49
12/31/12
12/31/13
260.96
129.18
136.30
358.32
181.76
180.44
12/31/14
347.01
218.14
205.14
Period Ending
Source: SNL Financial LC, Charlottesville, VA © 2014
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, 2014, 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 2014.
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.”
28
Selected Consolidated Financial Data
2014
Year Ended December 31,
2012
(Dollars in thousands, except share and per share data)
2011
2013
2010
Income Statement
Interest income ........................................................ $
Interest expense .......................................................
Net interest income before provision for credit
losses ..................................................................
(Reversal)/Provision for credit losses .....................
Net interest income after provision for credit losses
............................................................................
Securities gains .......................................................
Other non-interest income .......................................
Non-interest expense ...............................................
Income/(loss) before income tax expense ...............
Income tax expense/(benefit) ..................................
Net income/(loss) ....................................................
Less: net income attributable to noncontrolling
interest ............................................................
Net income attributable to Cathay General Bancorp
Dividends on preferred stock ..................................
Net income/(loss) attributable to common
418,647 $
75,866
406,996 $
82,300
429,744 $
108,491
453,571 $
139,881
489,594
191,688
342,781
(10,800)
324,696
(3,000)
321,253
(9,000)
313,690
27,000
297,906
156,900
353,581
327,696
330,253
286,690
141,006
6,748
33,779
174,313
219,795
81,965
137,830
-
137,830
-
27,362
32,945
193,833
194,170
70,435
123,735
592
123,143
(9,685)
18,026
28,481
192,589
21,131
29,761
185,566
184,171
66,128
118,043
152,016
51,261
100,755
605
117,438
(16,488)
605
100,150
(16,437)
18,695
13,556
175,711
(2,454)
(14,629)
12,175
610
11,565
(16,388)
stockholders ........................................................ $
137,830 $
113,458 $
100,950 $
83,713 $
(4,823)
Net income/(loss) attributable to common
stockholders per common share
Basic ................................................................... $
Diluted ................................................................ $
Cash dividends paid per common share .................. $
Weighted-average common shares
1.73 $
1.72 $
0.29 $
1.44 $
1.43 $
0.08 $
1.28 $
1.28 $
0.04 $
1.06 $
1.06 $
0.04 $
(0.06)
(0.06)
0.04
Basic ................................................................... 79,661,571 78,954,898 78,719,133 78,633,317
Diluted ................................................................ 80,106,895 79,137,983 78,723,297 78,640,652
77,073,954
77,073,954
Statement of Condition
2,065,248 $ 2,447,982 $
Investment securities ............................................... $
6,844,483
7,235,587
Net loans (1) ...........................................................
760
-
Loans held for sale ..................................................
Total assets ............................................................. 11,516,846 10,989,286 10,694,089 10,644,864
Deposits .................................................................
7,229,131
Federal funds purchased and securities sold under
1,318,935 $
8,740,268
973
1,586,668 $
7,897,187
-
7,383,225
8,783,460
7,981,305
2,843,669
6,615,769
2,873
10,801,986
6,991,846
agreements to repurchase ..................................
Advances from the Federal Home Loan Bank .......
Long-term debt ......................................................
Total equity ............................................................
450,000
425,000
119,136
1,602,888
800,000
521,200
121,136
1,458,971
1,250,000
146,200
171,136
1,629,504
1,400,000
225,000
171,136
1,515,633
1,561,000
550,000
171,136
1,436,105
Common Stock Data
Shares of common stock outstanding ..................... 79,814,553 79,589,869 78,778,288 78,652,557
15.75 $
Book value per common share ............................... $
17.12 $
20.00 $
18.24 $
78,531,783
14.80
Profitability Ratios
Return on average assets ........................................
Return on average stockholders' equity ..................
Dividend payout ratio ............................................
Average equity to average assets ratio ...................
Efficiency ratio ......................................................
1.26%
8.95
16.76
14.04
45.48
1.17%
8.00
5.15
14.73
50.35
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
(1) Net loans represent gross loans net of loan participations sold, allowance for loan losses, and unamortized deferred loan
fees.
29
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 21 branches in Southern California, 12 branches
in Northern California, nine 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 Nevada, 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.
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.
30
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, “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.
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, “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. 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, “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.
31
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 reporting units. 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) 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.
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, 2014, we reported net income attributable to common stockholders of $137.8 million,
or $1.72 per diluted share, compared to net income attributable to common stockholders of $113.5 million, or $1.43 per share,
in 2013, and net income attributable to common stockholders of $101.0 million, or $1.28 per share, in 2012. The $24.4 million
increase in net income from 2013 to 2014 was primarily the result of increases in net interest income, the elimination of
dividends on preferred stock, a higher negative provision for credit losses, decreases in costs associated with debt redemption,
decreases in amortization of core deposit premiums, decreases in professional services expense, and decreases in OREO
expense. These were partially offset by decreases in gains on sale of securities, increases in salaries and incentive
compensation expense, increases in litigation expenses, and increases in FDIC and state assessments. The return on average
assets in 2014 was 1.26%, improving from 1.17% in 2013, and from 1.11% in 2012. The return on average stockholders’
equity was 8.95% in 2014, improving from 8.0% in 2013, and from 7.48% in 2012.
Highlights
(cid:404) Diluted earnings per share increased 20.3% to $1.72 per share for the year ended December 31, 2014 compared
to $1.43 per share for the year ended December 31, 2013.
(cid:404) Strong growth in loans – Total loans increased $829.5 million, or 10.3%, excluding loans held for sale, during
2014, to $8.9 billion at December 31, 2014, compared to $8.1 billion at December 31, 2013.
32
Net income available to common stockholders and key financial performance ratios are presented below for the three
years indicated:
Year Ended December 31,
2013
(Dollars in thousands, except per share data)
2012
2014
Net income .................................................................................. $
Dividends on preferred stock ......................................................
Net income available to common stockholders ........................... $
Basic earnings per common share .............................................. $
Diluted earnings per common share ........................................... $
Return on average assets ............................................................
Return on average stockholders' equity ......................................
Total average assets .................................................................... $
Total average equity ................................................................... $
Efficiency ratio ...........................................................................
Effective income tax rate ............................................................
137,830 $
-
137,830 $
1.73 $
1.72 $
1.26%
8.95%
10,974,890 $
1,540,564 $
45.48%
37.29%
123,143 $
(9,685)
113,458 $
1.44 $
1.43 $
1.17%
8.00%
10,506,842 $
1,548,179 $
50.35%
36.39%
117,438
(16,488)
100,950
1.28
1.28
1.11%
7.48%
10,617,004
1,579,195
52.37%
36.02%
Net Interest Income
Net interest income increased $18.1 million, or 5.6%, from 324.7 million in 2013 to $342.8 million in 2014. Interest
income on tax-exempt securities was zero in 2014 compared to $1.0 million, or $1.5 million on a tax-equivalent basis, in
2013. The increase in net interest income was due primarily to the the increase in loan interest income and the decrease in
interest expense from securities sold under agreements to repurchase, offset by the decrease in interest income from available-
for-sale securities.
Average loans for 2014 were $8.53 billion, a $901.7 million, or an 11.8%, increase from $7.63 billion in 2013. Compared
with 2013, average commercial mortgage loans increased $411.4 million, or 10.6%, average residential mortgage loans
increased $222.8 million, or 15.7%, average commercial loans increased $173.8 million, or 8.1%, and average real estate
construction loans increased $95.4 million, or 53.9%. Average investment securities were $1.42 billion in 2014, a decrease
of $515.6 million, or 26.7%, from 2013, due primarily to decreases in agency mortgage-backed securities of $483.4 million,
or 38.6%.
Average interest bearing deposits were $6.92 billion in 2014, an increase of $586.1 million, or 9.3%, from $6.33 billion
in 2013, primarily due to increases of $264.2 million, or 6.6%, in time deposits, $191.7 million, or 15.8%, in money market
deposits, $86.9 million, or 13.7% in interest bearing demand deposits, and $43.3 million, or 8.9%, in saving deposits. Average
securities sold under agreements to repurchase decreased $343.0 million, or 35.3%, to $629.3 million in 2014 from $972.3
million in 2013, primarily due to mature and prepayments of securities sold under agreements to repurchase in 2014. Average
other borrowings increased $73.4 million, or 101%, to $146.1 million in 2014 from $72.7 million in 2013, primarily due to
increases in FHLB advances. Average long term debt decreased $49.7 million, or 29.3%, to $119.8 million in 2014 from
$169.5 million in 2013.
Taxable-equivalent interest income increased $11.1 million, or 2.7%, to $418.6 million in 2014 from $407.5 million in
2013, primarily due to increases in volume of loans offset by a decline in volume of investment securities and by a change in
the mix of interest-earning assets as discussed below:
(cid:404) Changes in volume: Average interest-earning assets increased $439.5 million, or 4.5%, to $10.22 billion in 2014,
compared with the average interest-earning assets of $9.78 billion in 2013. The increase in average loans of
$901.7 million in 2014 offset by a decrease in average investment securities of $515.6 million primarily
contributed to the increase in interest income. The increase of $30.5 million in interest income due to volume
were primarily contributed from a $41.5 million increases in interest income from loan volume increase offset
by a $9.7 million decrease in interest income caused by the decrease in investment securities volume.
(cid:404) Decrease in rate: The average yield of interest bearing assets decreased 7 basis points to 4.10% in 2014 from
4.17% in 2013. The rate on taxable investment securities decreased 57 basis points to 1.71% in 2014 from 2.28%
in 2013. The decrease in taxable investment securities yields caused a $9.5 million decline in interest income.
The rate on loans decreased 14 basis points to 4.58% in 2014 from 4.72% in 2013. The decrease in loan yield
caused a $11.0 million decline in interest income.
33
(cid:404) Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than
other types of investments, comprised 83.5% of total average interest-earning assets in 2014, an increase from
78.1% in 2013. Average investment securities comprised 13.9% of total average interest-bearing assets in 2014,
a decrease from 19.8% in 2013.
Interest expense decreased by $6.4 million, or 7.8%, to $75.9 million in 2014, compared with $82.3 million in 2013,
primarily due to decreased cost from securities sold under agreements to repurchase offset by increased cost from time
deposits and money market deposits. The overall decrease in interest expense was primarily due to decreases in volume on
securities sold under agreements to repurchase offset by increases on rate and volume on interest bearing deposits as discussed
below:
(cid:404) Changes in volume: Average securities sold under agreements to repurchase decreased $343.0 million, or 35.3%
in 2014 and contributed to $13.5 million decrease in interest expense. Average time deposits increased $264.2
million, or 6.6%, and average money market deposits increased $191.7 million, or 15.8%, causing interest
expense to increase by $3.3 million. The changes in volume contributed to decreases in interest expense of $10.8
million
Increase in rate: The average cost of interest bearing deposits increased to 0.66% in 2014 from 0.64% in 2013.
The average cost securities sold under agreements to repurchase increased to 3.92% in 2014 from 3.88% in
2013. The average cost of long-term debt increased to 3.73% in 2014 from 2.18% in 2013. The increase in rate
caused interest expense to increase by $4.3 million.
(cid:404)
(cid:404) Change in the mix of interest-bearing liabilities: Average interest bearing deposits of $6.92 billion increased to
88.5% of total interest-bearing liabilities in 2014 compared to 83.9% in 2013. Offsetting the increase, average
securities sold under agreements to repurchase decreased to 8.1% of total interest-bearing liabilities in 2014
compared to 12.9% in 2013.
Our taxable-equivalent net interest margin, defined as taxable-equivalent net interest income to average interest-earning
assets, increased to 3.35% in 2014 from 3.33% in 2013. The increase in the net interest margin was due to the impact from
increases in loans and decreases in securities sold under agreements to repurchase offset by decreases in investment securities.
Net interest income increased $3.4 million, or 1.1%, from $321.3 million in 2012 to $324.7 million in 2013. Taxable-
equivalent net interest income, using a statutory federal income tax rate of 35%, totaled $325.2 million in 2013, compared
with $323.5 million in 2012, an increase of $1.7 million, or 0.5%. Interest income on tax-exempt securities was $1.0 million,
or $1.5 million on a tax-equivalent basis, in 2013 compared to $4.2 million, or $6.4 million on a tax-equivalent basis, in 2012.
The increase in net interest income was due primarily to the decrease in interest expense from securities sold under agreements
to repurchase and interest expense from time deposits offset by the decrease in interest income from investment securities.
Average loans for 2013 were $7.63 billion, a $535.5 million, or a 7.6%, increase from $7.10 billion in 2012. Compared
with 2012, average commercial loans increased $201.8 million, or 10.4%, average residential mortgage loans increased
$187.8 million, or 15.2%, and average commercial mortgage loans increased $167.2 million, or 4.52%. Offsetting the above
increases was a decrease of $21.3 million, or 10.7%, in average real estate construction loans. Average investment securities
were $1.93 billion in 2013, a decrease of $415.8 million, or 17.7%, from 2012, due primarily to decreases of U.S. agency
securities of $252.7 million, corporate bonds of $166.3 million, municipal bonds of $100.7 million, trading securities of $47.4
million, and mortgage-backed securities of $32.5 million, offset by increases of U.S. Treasury notes of $214.4 million.
Average interest bearing deposits were $6.33 billion in 2013, an increase of $107.3 million, or 1.7%, from $6.23 billion
in 2012, primarily due to increases of $311.7 million in interest-bearing demand deposits, money market deposits, and saving
deposits offset primarily by decreases of $204.4 million in time deposits. Average securities sold under agreements to
repurchase decreased $389.1 million, or 28.6%, to $972.3 million in 2013 from $1.36 billion in 2012, primarily due to
prepayments of securities sold under agreements to repurchase in 2013. Average other borrowings increased $35.0 million,
or 92.7%, to $72.7 million in 2013 from $37.7 million in 2012, primarily due to increases in FHLB advances.
34
Taxable-equivalent interest income decreased $24.5 million, or 5.7%, to $407.5 million in 2013, primarily due to
a 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:
(cid:404) Changes in volume: Average interest-earning assets decreased $92.3 million, or 0.9%, to $9.78 billion in 2013,
compared with the average interest-earning assets of $9.87 billion in 2012. The decreases in average investment
securities of $415.8 million and decreases in average interest bearing deposits of $182.5 million, offset by an
increase in average loans balance of $535.5 million in 2013, caused the decreases in interest income. The
increase in loan volume contributed to a $26.2 million increase in interest income, offset by the decrease in
investment securities volume which caused a $13.5 million decrease in interest income.
(cid:404) Decrease in rate: The average yield of interest bearing assets decreased 21 basis points to 4.17% in 2013 from
4.38% in 2012. The rate on taxable investment securities decreased 53 basis points to 2.28% in 2013 from 2.81%
in 2012. The decrease in taxable investment securities yields caused a $10.9 million decline in interest income.
The rate on loans decreased 36 basis points to 4.72% in 2013 from 5.08% in 2012. The decrease in loan yield
caused a $26.9 million decline in interest income.
(cid:404) Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than
other types of investments, comprised 78.1% of total average interest-earning assets in 2013, an increase from
71.9% in 2012. Average investment securities comprised 19.8% of total average interest-bearing assets in 2013,
a decrease from 23.8% in 2012.
Interest expense decreased by $26.2 million to $82.3 million in 2013, compared with $108.5 million in 2012, primarily
due to decreased cost from time deposits 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:
(cid:404) Decrease in volume: Average interest-bearing liabilities decreased $248.5 million in 2013, due primarily to the
decrease in time deposits and securities sold under agreements to repurchase. The decrease in volume caused
interest expense to decline by $15.8 million.
(cid:404) Decrease in rate: The average cost of interest bearing liabilities decreased 30 basis points from 1.39% in 2012
to 1.09% in 2013 due primarily to a decrease of 16 basis points in the average cost of time deposits to 0.80% in
2013 from 0.96% in 2012 and a decrease of 21 basis points in average cost of securities sold under agreements
to repurchase to 3.88% in 2013 from 4.09% in 2012. The decline in rate caused interest expense to decline by
$10.4 million.
(cid:404) Change in the mix of interest-bearing liabilities: Average interest bearing deposits of $6.33 billion increased to
83.9% of total interest-bearing liabilities in 2013 compared to 79.9% in 2012. Offsetting the increases, average
securities sold under agreements to repurchase decreased to 12.9% of total interest-bearing liabilities in 2013
compared to 17.5% in 2012.
Our taxable-equivalent net interest margin, defined as taxable-equivalent net interest income to average interest-earning
assets, increased 5 basis points to 3.33% in 2013 from 3.28% in 2012. 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 securities sold under
agreements to repurchase.
35
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
2014
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
(4)
(1)(2)
2013
Average
Balance
Interest
Income/
Expense
(4)
Average
Yield/
Rate
(1)(2)
(Dollars in thousands)
2012
Average
Balance
Interest
Income/
Expense
(4)
Average
Yield/
Rate
(1)(2)
2,322,563 $
1,643,239
4,280,255
89,994
77,231
207,235
3.87% $
4.70
4.84
2,148,763 $
1,420,434
3,868,837
84,680
66,229
198,904
3.94% $
4.66
5.14
1,946,986 $
1,232,573
3,701,613
81,684
60,644
207,541
Interest-Earning Assets:
Commercial loans ......... $
Residential mortgages ...
Commercial mortgages .
Real estate construction
loans .........................
Other loans ....................
Loans (1) ..........................
Taxable securities ............
Tax-exempt securities (3)
FHLB stock ......................
Federal funds sold &
securities purchased
under agreements to
resell .............................
Interest-bearing deposits .
Total interest-earning
272,479
13,712
8,532,248
1,417,007
-
29,487
15,889
91
390,440
24,237
-
1,974
-
242,037
1,996
5.83
0.66
4.58
1.71
-
6.69
-
0.82
177,093
15,403
7,630,530
1,903,541
29,076
33,446
10,010
136
359,959
43,412
1,531
1,480
5.65
0.88
4.72
2.28
5.27
4.43
198,363
15,541
7,095,076
2,216,857
131,530
47,938
10,440
334
360,643
62,395
6,401
485
-
184,654
-
1,150
-
0.62
14,986
367,138
18
2,042
0.12
0.56
4.20%
4.92
5.61
5.26
2.15
5.08
2.81
4.87
1.01
assets ........................... $
10,220,779 $
418,647
4.10
$
9,781,247 $
407,532
4.17
$
9,873,525 $
431,984
4.38
Non-interest Earning
Assets: ..........................
Cash and due from
banks .......................
177,129
Other non-earning
assets .......................
762,535
Total non-interest earning
assets ...........................
Less: Allowance for loan
losses ...........................
Deferred loan fees ...........
Total Assets .................... $
939,664
(172,377)
(13,176)
10,974,890
Interest-Bearing
Liabilities:
Interest-bearing demand
deposits ................... $
Money market deposits .
Savings deposits ............
Time deposits ...............
Total interest-bearing
deposits ........................
Federal funds purchased .
Securities sold under
agreements to
repurchase ...................
FHLB advances and other
borrowings ..................
Long-term debt ...............
Total interest-bearing
721,435 $
1,407,053
532,184
4,257,736
1,229
8,627
802
35,111
6,918,408
-
45,769
-
0.17
0.61
0.15
0.82
0.66
-
149,196
769,388
918,584
(181,272)
(11,717)
10,506,842
634,506 $
1,215,347
488,932
3,993,508
1,017
7,034
374
31,964
6,332,293
-
40,389
-
0.16
0.58
0.08
0.80
0.64
-
126,476
819,986
946,462
(194,385)
(8,598)
10,617,004
516,246 $
1,059,841
451,022
4,197,906
792
5,938
365
40,278
6,225,015
-
47,373
-
0.15
0.56
0.08
0.96
0.76
-
$
$
$
$
629,315
24,685
3.92
972,329
37,692
3.88
1,361,475
55,699
4.09
146,120
119,785
945
4,467
0.65
3.73
72,687
169,492
528
3,691
0.73
2.18
37,717
171,136
270
5,149
0.72
3.01
liabilities ......................
7,813,628
75,866
0.97
7,546,801
82,300
1.09
7,795,343
108,491
1.39
Non-interest Bearing
Liabilities:
Demand deposits ............
Other liabilities ...............
Stockholders' equity .......
Total liabilities and
1,535,461
85,237
1,540,564
1,325,781
86,081
1,548,179
1,157,343
85,123
1,579,195
stockholders' equity ..... $
10,974,890
$
10,506,842
$
10,617,004
$
Net interest spread (4) .....
Net interest income (4) ....
Net interest margin (4) ....
____________
(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
325,232
323,493
342,781
3.13%
3.35%
3.08%
3.33%
2.99%
3.28%
$
$
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%.
36
Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)
2014 - 2013
Increase/(Decrease) in
Net Interest Income Due to:
2013 - 2012
Increase/(Decrease) in
Net Interest Income Due to:
Change in Change in
Volume
Rate
Total
Change
Change in Change in Total
Volume
Change
Rate
Interest-Earning Assets
Deposits with other banks ..... $
Federal funds sold and
securities purchased under
agreements to resell ...........
Taxable securities ...................
Tax-exempt securities (2) ......
FHLB stock ............................
Loans ......................................
Total increase (decrease) in
(In thousands)
414 $
432 $
846 $
(1,113) $
221 $
(892)
-
(9,694)
(1,531)
(192)
41,521
-
(9,481)
-
686
(11,040)
-
(19,175)
(1,531)
494
30,481
(9)
(8,104)
(5,356)
(187)
26,215
(9)
(10,879)
486
1,182
(26,899)
(18)
(18,983)
(4,870)
995
(684)
interest income ..................
30,518
(19,403)
11,115
11,446
(35,898)
(24,452)
Interest-Bearing Liabilities
Interest-bearing demand
deposits .............................
Money market deposits .........
Savings deposits ....................
Time deposits ........................
Securities sold under
145
1,157
36
2,159
67
436
392
988
212
1,593
428
3,147
188
895
30
(1,887)
37
201
(21)
(6,427)
225
1,096
9
(8,314)
agreements to repurchase ..
(13,450)
443
(13,007)
(15,215)
(2,792)
(18,007)
FHLB advances and other
borrowings ........................
Long-term debt ......................
Total decrease in interest
481
(1,307)
(64)
2,083
417
776
253
(49)
5
(1,409)
258
(1,458)
expense ..............................
(10,779)
4,345
(6,434)
(15,785)
(10,406)
(26,191)
Change in net interest income $
_________
(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated
(25,492) $
(23,748) $
27,231 $
17,549 $
41,297 $
1,739
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 $10.8 million provision for credit losses in 2014 compared
with a negative $3.0 million in 2013, and a negative $9.0 million in 2012. Net charge-offs for 2014 were $1.3 million, or
0.02% of average loans, compared to net charge-offs for 2013 of $6.4 million, or 0.08% of average loans, and compared to
net charge-offs for 2012 of $14.7 million, or 0.2% of average loans. The decreases in provision for credit losses and net
charge-offs in 2014 were primarily due to decreases in the level of classified and impaired loans.
Non-interest Income
Non-interest income decreased $19.8 million, or 32.8%, to $40.5 million for 2014, from $60.3 million for 2013, and
compared to $46.5 million for 2012. 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.
37
The decrease in non-interest income from 2013 to 2014 was primarily due to a $20.6 million decrease in securities gains
offset by a $1.4 million increase in wealth management commissions. We sold securities of $859.0 million in 2014 compared
to $1.0 billion in 2013. In 2014, gains of $18.0 million and losses of $10.5 million were realized on sales of investment
securities compared with gains of $29.0 million and losses of $1.6 million realized in 2013.
The increase in non-interest income from 2012 to 2013 was primarily due to a combination of the following:
(cid:404) A $9.4 million increase in securities gains. We sold securities of $1.0 billion and recorded net gains on sale of
securities of $27.4 million in 2013 compared to security sales of $544.2 million and recorded net gains on sale
of securities of $18.0 million in 2012.
(cid:404) A $2.3 million increase in wealth management commissions.
(cid:404) A $1.1 million increase in miscellaneous loan fees and loan service fees.
(cid:404) A $398,000 increase in commission on foreign exchange transactions, a $333,000 increase in trading security
revenue, and a $288,000 decrease in net losses on interest rate swaps.
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 $174.3 million in 2014 compared to $193.8 million in 2013. The decrease of $19.5 million, or 10.1%,
in non-interest expense in 2014 compared to 2013 was primarily due to a combination of the following:
(cid:404) Costs associated with debt redemptions due to prepayment penalties on securities sold under agreements to
repurchase and advances from Federal Home Loan Bank decreased $19.2 million, or 85%, to $3.3 million in
2014 from $22.6 million in 2013.
(cid:404) Amortization of core deposit intangibles decreased $3.8 million, or 84%, to $719,000 in 2014 from $4.5 million
in 2013 as a result of the full amortization of the core deposit premium from the General Bank acquisition.
(cid:404) Professional service expense decreased $1.9 million, or 7.9%, due primarily to the decreases in legal collection
expense and consulting expense.
(cid:404) OREO expense decreased $1.1 million primarily due to gains on sale of OREO in 2014.
(cid:404) Offsetting the above decreases were a $1.6 million increase in salaries and employee benefits, a $1.5 million
increase in litigation expense, and a $1.4 million increase in FDIC and state assessments.
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 45.48% in 2014 compared to 50.35% in 2013 due primarily to lower non-
interest expense as explained above.
Non-interest expense totaled $193.8 million in 2013 compared with $192.6 million in 2012. The increase of $1.2 million,
or 0.6%, in non-interest expense in 2013 compared to 2012 was primarily due to a combination of the following:
(cid:404) Costs associated with debt redemptions due to prepayment penalties on securities sold under agreements to
repurchase increased $10.5 million, or 86%, to $22.6 million in 2013 from $12.1 million in 2012.
(cid:404) Salaries and employee benefits increased $9.9 million, or 12.6%, primarily due to the hiring of new employees
as well as the addition of temporary employees related to our core system conversion completed in July 2013.
(cid:404) Professional service expense increased $2.8 million, or 12.9%, due primarily to the increases in legal collection
expense, consulting expense and data processing service expense.
(cid:404) Offsetting the above increases were a decrease of $15.4 million in OREO expenses primarily due to decreases
in OREO operating expense, and write-down provision and a decrease of $5.8 million in litigation expense.
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 50.35% in 2013 compared to 52.37% in 2012 due primarily to higher non-
interest income as explained above.
Income Tax Expense
Income tax expense was $82.0 million in 2014, compared to $70.4 million in 2013, and $66.1 million in 2012. The
effective tax rate was 37.3% for 2014, 36.4% for 2013, and 36.0% for 2012. 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 $10.2 million
recognized in 2014, $10.1 million recognized in 2013, and $9.4 million recognized in 2012.
38
Our tax returns are open for audits by the Internal Revenue Service back to 2011 and by the California Franchise Tax
Board back to 2003. The Company is under audit by the California Franchise Tax Board for the years 2003 to 2007. From
time to time, there may be differences of 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 $11.5 billion at December 31, 2014, an increase of $527.6 million, or 4.8%, from $11.0 billion at
December 31, 2013, primarily due to increases of $829.5 million in gross loans, excluding loans held for sale, offset by
decreases of $267.7 million in investment securities.
Investment Securities
Investment securities were $1.3 billion and represented 11.5% of total assets at December 31, 2014, compared with $1.6
billion and 14.4% of total assets at December 31, 2013. During the first quarter of 2013, due to the ongoing discussions
regarding corporate income tax rates which could have a negative impact on the after-tax yields and fair values of the
Company’s portfolio of municipal securities, the Company determined it may sell such securities in response to market
conditions. As a result, the Company reclassified its municipal securities from securities held-to-maturity to securities
available-for-sale. Concurrent with this reclassification, the Company also reclassified all other securities held-to-maturity,
which together with the municipal securities had an amortized cost on the date of transfer of $722.5 million, to securities
available-for-sale. At the reclassification date, a net unrealized gain was recorded in other comprehensive income for these
securities totaling $40.5 million.
The following table summarizes the carrying value of our portfolio of securities for each of the past two years:
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 .......................................................
Other equity securities ..................................................................................................
Total securities available-for-sale ............................................................................. $
As of December 31,
2014
2013
(In thousands)
664,004 $
544,303
45
-
94,472
5,866
3,224
7,021
1,318,935 $
460,193
952,814
6,106
123
150,304
5,725
11,403
-
1,586,668
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.
At December 31, 2014, all of the Company’s mortgage-backed securities were rated as investment grade except for one
non-agency issue. Total unrealized losses of $6.4 million from all mortgage-backed securities resulted from increases in
interest rates subsequent to the date that these securities were purchased. Total unrealized losses of $1.2 million on corporate
39
bonds relates to four issues of investments in bonds of financial institutions, all of which were investment grade at the date
of acquisition and as of December 31, 2014. 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 mortgage-backed securities and corporate 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 mortgaged-backed securities and corporate
bonds to be other-than-temporarily impaired at December 31, 2014. During the third quarter of 2014, the Company wrote
down the carrying value of its portfolio of agency preferred stock by $820,000. As of December 31, 2014, agency preferred
stock with a cost of $6.2 million had an unrealized loss of $3.7 million, which the Company believes to be temporary.
The temporarily impaired securities represent 66.1% of the fair value of investment securities as of December 31, 2014.
Unrealized losses for securities with unrealized losses for less than twelve months represent 1.1%, and securities with
unrealized losses for twelve months or more represent 1.6%, of the historical cost of these securities. Unrealized losses on
these securities generally resulted from increases in interest rates or spreads subsequent to the date that these securities were
purchased. At December 31, 2014, 22 issues of securities had unrealized losses for 12 months or longer and 8 issues of
securities had unrealized losses of less than 12 months.
At December 31, 2014, management believed the impairment was temporary and, accordingly, no impairment loss on
debt securities has been recognized in our condensed consolidated statements of operations. The Company expects to recover
the amortized cost basis of its debt securities, and has 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 tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment
securities portfolio as of December 31, 2014, and December 31, 2013:
As of December 31, 2014
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value Losses
Unrealized No. of
Fair
Issuances Value Losses
Unrealized No. of
Fair
Issuances Value
Unrealized No. of
Losses
Issuances
(Dollars in thousands)
Securities Available-for-
Sale
U.S. treasury securities ..... $ 374,153 $
Mortgage-backed
265
6 $
- $
-
- $ 374,153 $
265
securities ......................
Collateralized mortgage
obligations ...................
Corporate debt securities ..
Mutual funds ....................
Preferred stock of
government sponsored
entities ..........................
Total securities
-
-
-
-
-
-
-
-
- 425,090
6,386
16 425,090
6,386
-
-
-
45
63,753
5,866
34
1,247
134
1
45
4 63,753
5,866
1
34
1,247
134
2,448
3,733
2
-
-
-
2,448
3,733
6
16
1
4
1
2
available-for-sale ..... $ 376,601 $
3,998
8 $ 494,754 $
7,801
22 $ 871,355 $
11,799
30
40
As of December 31, 2013
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value Losses
Unrealized No. of
Fair
Issuances Value Losses
Unrealized No. of
Fair
Issuances Value
Unrealized No. of
Losses
Issuances
(Dollars in thousands)
Securities Available-for-
Sale
U.S. treasury securities ..... $ 75,064 $
Mortgage-backed
1
1 $
- $
securities ...................... 792,012
64,526
25
272
Mortgage-backed
securities-Non-agency .
94
Collateralized mortgage
obligations ...................
Corporate debt securities ..
Mutual funds ....................
68
9,970
-
1
4
30
-
Total securities
-
2
-
- $ 75,064 $
1
7 792,284
64,528
-
94
1
1
-
301
2
1 100,081
5,724
-
50
4,919
275
369
3
8 110,051
5,724
1
54
4,949
275
1
32
1
5
9
1
available-for-sale ..... $ 877,208 $
64,562
30 $ 106,378 $
5,246
19 $ 983,586 $
69,808
49
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, 2014
One Year
or Less
After One
Year to
Five Years
After Five
Years to Over Ten
Ten Years Years
Total
(Dollars in thousands)
Maturity Distribution:
Securities Available-for-Sale:
U.S. treasury securities ................................................. $
Mortgage-backed securities (1) ....................................
Collateralized mortgage obligations (1) .......................
Corporate debt securities ..............................................
Mutual funds (2) ...........................................................
Preferred stock of government sponsored entities (2) ...
Other equity securities (2) .............................................
115,068 $
-
-
-
-
-
-
548,936 $
11,262
-
10,173
-
-
-
- $
798
-
84,299
-
-
-
- $
532,243
45
-
5,866
3,224
7,021
664,004
544,303
45
94,472
5,866
3,224
7,021
Total securities available-for-sale ............................. $
115,068 $
570,371 $
85,097 $
548,399 $ 1,318,935
Weighted-Average Yield:
Securities Available-for-Sale:
U.S. treasury securities..................................................
Mortgage-backed securities (1) ....................................
Collateralized mortgage obligations (1) .......................
Corporate debt securities ...............................................
Mutual funds (2) ...........................................................
Total securities available-for-sale .............................
0.20%
-
-
-
-
0.20%
0.50%
4.69
-
1.24
-
0.60%
-
5.88
-
1.46
-
1.50%
-
2.54
3.50
-
4.72
2.51%
0.45%
2.59
3.50
1.43
4.72
1.43%
(1) Securities reflect stated maturities and do not reflect the impact of anticipated prepayments.
(2) There is no stated maturity for mutual funds and equity securities.
41
Loans
Loans represented 83.5% of average interest-earning assets during 2014, compared with 78.0% during 2013. Gross loans,
excluding loans held for sale, increased by $829.5 million, or 10.3%, to $8.91 billion at December 31, 2014, compared with
$8.08 billion at December 31, 2013. The increase in gross loans was primarily attributable to the following:
• Commercial loans increased $83.8 million, or 3.6%, to $2.38 billion at December 31, 2014, compared to $2.30
billion at December 31, 2013. 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 $214.8 million, or 15.9%, to $1.57 billion at December 31, 2014,
compared to $1.36 billion at December 31, 2013, primarily due to the low level of interest rates and the rebound in
housing sales.
• Commercial mortgage loans increased $463.4 million, or 11.5%, to $4.49 billion at December 31, 2014, compared
to $4.02 billion at December 31, 2013. Total commercial mortgage loans accounted for 50.3% of gross loans at
December 31, 2014, compared to 49.8% at December 31, 2013. Commercial mortgage loans consist primarily of
commercial retail properties, shopping centers, and owner-occupied industrial facilities, and, secondarily, of 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 increased $77.0 million, or 34.7%, to $298.7 million at December 31, 2014, compared
to $221.7 million at December 31, 2013.
Our lending relates predominantly to activities in the states of California, Nevada, 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 $227.6 million as of December 31, 2014, compared to $255.6
million as of December 31, 2013.
The classification of loans by type and amount outstanding as of December 31 for each of the past five years is presented
below:
Loan Type and Mix
2014
2013
As of December 31,
2012
(In thousands)
2011
2010
Commercial loans ................................................ $ 2,382,493 $ 2,298,724 $ 2,127,107 $ 1,868,275 $ 1,441,167
Residential mortgage loans and equity lines ........ 1,742,938 1,526,532 1,340,082 1,186,969 1,061,330
Commercial mortgage loans ................................ 4,486,443 4,023,051 3,768,452 3,748,897 3,940,061
409,986
298,654
Real estate construction loans .............................
16,077
3,552
Installment and other loans .................................
180,950
12,556
237,372
17,699
221,701
14,555
Gross loans .......................................................... 8,914,080 8,084,563 7,429,147 7,059,212 6,868,621
Less:
(245,231)
(161,420)
Allowance for loan losses ...................................
Unamortized deferred loan fees ..........................
(7,621)
(12,392)
Total loans and leases, net ................................... $ 8,740,268 $ 7,897,187 $ 7,235,587 $ 6,844,483 $ 6,615,769
2,873
Loans held for sale .............................................. $
(183,322)
(10,238)
(206,280)
(8,449)
(173,889)
(13,487)
760 $
973 $
- $
- $
42
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.
Contractual Maturity of Loan Portfolio
Within One
Year
One to Five
Years
Over Five
Years
Total
(In thousands)
Commercial loans
Floating rate ........................................................................ $ 1,042,719 $
Fixed rate .............................................................................
296,565
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 .............................................................................
215,011
11,983
422,284
133,121
-
3,160
27
3,035
732,323 $
102,573
193,146 $
15,167
1,968,188
414,305
297,614
1,030
15,135 1,426,097
298,671
1,444,267
1,121,888 1,509,279
321,129
978,742
3,053,451
1,432,992
65,818
5,842
-
392
-
-
-
Total Loans .................................................................... $ 2,127,905 $ 3,023,743 $ 3,762,432 $
Floating rate ........................................................................ $ 1,680,041 $ 1,921,059 $ 2,000,039 $
1,102,684 1,762,393
Fixed rate .............................................................................
3,023,743 3,762,432
Total Loans ....................................................................
Allowance for loan losses ...................................................
Unamortized deferred loan fees ..........................................
Net loans .............................................................................
Loans held for sale ...............................................................
447,864
2,127,905
$
$
280,829
17,825
-
3,552
8,914,080
5,601,139
3,312,941
8,914,080
(161,420)
(12,392)
8,740,268
973
Deposits
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 deposits generated by brokers or Internet listing services. 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 $497.4 million,
or 5.7%, of total deposits, at December 31, 2014, compared to $318.2 million, or 4.0%, at December 31, 2013.
The Company’s total deposits increased $802.2 million, or 10.1%, to $8.78 billion at December 31, 2014, from $7.98
billion at December 31, 2013, primarily due to a $251.8 million, or 19.6%, increase in money market deposits, a $231.3
million, or 24.8%, increase in time deposits under $100,000, a $223.1 million, or 15.4%, increase in non-interest bearing
demand deposits, a $94.8 million, or 13.9%, increase in NOW deposits, and a $34.4 million, or 6.9%, increase in savings
deposits.
43
The following table displays the deposit mix for the past three years:
Deposit Mix
2014
Year Ended December 31,
2013
2012
Amount
Percentage
Amount
Percentage
Amount
Percentage
(Dollars in thousands)
Demand deposits .................... $ 1,664,914
778,691
NOW deposits ........................
Money market deposits .......... 1,538,187
Saving deposits ......................
533,940
Time deposits under $100,000 1,162,547
Time deposits of $100,000 or
more ................................... 3,105,181
Total .................................... $ 8,783,460
19.0% $ 1,441,858
683,873
1,286,338
499,520
931,204
8.9
17.5
6.1
13.2
8.6
18.1% $ 1,269,455
593,133
16.1 1,186,771
473,805
644,191
6.2
11.7
17.2%
8.0
16.1
6.4
8.7
35.3
3,138,512
100.0 % $ 7,981,305
39.3 3,215,870
100.0% $ 7,383,225
43.6
100.0%
Average total deposits increased $795.8 million, or 10.4%, to $8.45 billion in 2014 compared with average total deposits
of $7.66 billion in 2013.
The following table displays average deposits and rates for the past five years:
Average Deposits and Average Rates
2014
2013
Amount % Amount
Year Ended December 31,
2012
Amount %
(Dollars in thousands)
%
2011
2010
Amount % Amount %
Demand deposits ........ $1,535,461
-%
NOW deposits ........... 721,435 0.17 634,506 0.16 516,246 0.15 426,252 0.18 397,434 0.23
Money market
-% $ 911,351
-% $ 996,215
-% $1,325,781
-% $1,157,343
deposits ................. 1,407,053 0.61 1,215,347 0.58 1,059,841 0.56 979,253 0.75 966,888 0.90
Saving deposits .......... 532,184 0.15 488,932 0.08 451,022 0.08 411,953 0.12 369,190 0.19
Time deposits ............ 4,257,736 0.82 3,993,508 0.80 4,197,906 0.96 4,323,833 1.24 4,765,632 1.55
Total ........................ $8,453,869 0.54% $7,658,074 0.53% $7,382,358 0.64% $7,137,506 0.87% $7,410,495 1.14%
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 69% 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 13,980 individual accounts averaging approximately $255,000 per
account owned by 8,956 individual depositors as of December 31, 2014; 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.
Of our Jumbo CDs, approximately 83.8% mature within one year as of December 31, 2014. The following tables display
time deposits of $100,000 or more by maturity:
44
Time Deposits of $100,000 or More by Maturity
Less than three months ......................................................................................................................... $
Three to six months ..............................................................................................................................
Six to twelve months ............................................................................................................................
Over one year .......................................................................................................................................
Total ................................................................................................................................................. $
920,803
604,743
1,075,596
504,039
3,105,181
The following table displays time deposits with a remaining term of more than one year at December 31, 2014:
At December 31,
2014
(In thousands)
Maturities of Time Deposits with a Remaining Term
of More Than One Year for Each
of the Five Years Following December 31, 2014
2016 .......................................................................................................................................................... $
2017 ..........................................................................................................................................................
2018 ..........................................................................................................................................................
2019 ..........................................................................................................................................................
2020 ..........................................................................................................................................................
(In thousands)
325,513
347,635
178,412
42,486
11
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.
Securities sold under agreements to repurchase were $450.0 million with a weighted average rate of 3.85% at
December 31, 2014, compared to $800.0 million with a weighted average rate of 3.87% at December 31, 2013. In 2014, the
Company prepaid securities sold under agreements to repurchase totaling $100 million with a weighted average rate of 3.5%
and incurred prepayment penalties of $3.4 million. In 2013, the Company prepaid securities sold under agreements to
repurchase totaling $450 million with a weighted average rate of 3.79% and incurred prepayment penalties of $22.6 million.
Four floating-to-fixed rate agreements totaling $200.0 million have initial floating rates for one year, with floating rates of
three-month LIBOR minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates
ranging from 4.89% to 5.07%. After the initial floating rate term, the counterparties have the right to terminate the transaction
at par at the fixed rate reset date and quarterly thereafter. One fixed-to-floating rate agreement of $50.0 million has an initial
fixed rate of 1.00% with initial fixed rate term of nine months. For the remaining term, the rate floats at 8% minus the three-
month LIBOR with a maximum rate of 3.50% and a minimum rate of 0.0%. After the initial fixed rate term, the counterparties
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 $250.0 million of callable securities sold under agreements to repurchase as of December 31,
2014:
(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
8% minus 3 month
LIBOR
Floating-to-fixed
Fixed Rate
Total
3.50%
0.0%
1
50.0
$
3.50%
2015
4
200.0
$
5.00%
2017
5
250.0
4.70%
45
The table below provides summary data for non-callable fixed rate securities sold under agreements to repurchase as of
December 31, 2014:
Maturity
1 year to 3 years ...............................................................
3 years to 5 years ..............................................................
Total .................................................................................
No. of
Agreements
2
2
4
$
$
$
Amount
(In thousands)
Weighted
Average
Interest Rate
100,000
100,000
200,000
2.71%
2.86%
2.78%
These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the
securities were sold. The Company 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
securities, and mortgage-backed securities with a fair value of $516.3 million as of December 31, 2014, and $906.1 million
as of December 31, 2013.
The table below provides comparative data for securities sold under agreements to repurchase for the years indicated:
2014
2013
(Dollars in thousands)
2012
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 ................................
629,315 $
700,000
450,000
3.85%
3.92%
972,329 $
1,200,000
800,000
3.87%
3.88%
1,361,475
1,400,000
1,250,000
3.84%
4.09%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January 2014, January 2013, and January 2012.
Advances from the FHLB were $425.0 million with a weighted average rate of 0.32% at December 31, 2014, compared
to $521.2 million with weighted average rate of 0.17% at December 31, 2013. The Company prepaid $171.2 million at a rate
of 1.08% with prepayment penalties of $527,000 in 2014 and did not prepay any advances from the FHLB in 2013.
The following relates to the outstanding advances at December 31, 2014, and 2013:
2014
2013
Amount
Weighted
Average
Amount
Weighted
Average
Maturity
Within 90 days .................................................... $
4 - 5 years .............................................................
Total ..................................................................... $
(In thousands) Interest Rate
(In thousands) Interest Rate
400,000
25,000
425,000
0.27% $
1.13%
0.32% $
475,000
46,200
521,200
0.06%
1.24%
0.17%
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 it reverts to LIBOR plus 110 basis points. In December 2013, the subordinated
debt was prepaid in full with a prepayment penalty of $2,000.
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
46
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, 2014, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 2.42%
compared to $121.1 million with a weighted average rate of 2.40% at December 31, 2013. The Company prepaid Junior
Subordinated Notes of $2 million and incurred income of $555,000 in April 2014. The Junior Subordinated Notes have a
stated maturity term of 30 years. The Junior Subordinated Notes 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, 2014. 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.
Payment Due by Period
More than 3 years or
1 year but more but
1 year
or less
less than
3 years
less than
5 years
(In thousands)
5 years
or more
Total
Contractual obligations:
50,000 $
Securities sold under agreements to repurchase (1) ..... $
-
Securities sold under agreements to repurchase (2) .....
400,000
Advances from the Federal Home Loan Bank ..............
-
Other borrowings .........................................................
-
Long-term debt .............................................................
Operating leases ...........................................................
6,767
Deposits with stated maturity dates .............................. 3,373,672
Total contractual obligations and other commitments . $ 3,830,439 $
Other commitments:
Commitments to extend credit ..................................... 1,244,443
50,390
Standby letters of credit ................................................
48,142
Commercial letters of credit .........................................
108
Bill of lading guarantees ..............................................
Total contractual obligations and other commitments . $ 1,343,083 $
200,000 $
100,000
-
-
-
10,189
673,148
983,337 $
631,484
3,062
-
-
634,546 $
- $
100,000
25,000
-
-
6,319
220,897
352,216 $
103,668
-
-
-
103,668 $
- $ 250,000
200,000
-
425,000
-
19,934
19,934
119,136
119,136
28,827
5,552
11 4,267,728
144,633 $5,310,625
92,171 2,071,766
53,910
48,142
108
92,629 $2,173,926
458
-
-
(1) These repurchase agreements have a final maturity of 7-years and 10-years from origination date but are callable on a
quarterly basis after six months, 12 months, or one year for the 7-year term and one year for the 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.
47
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.
Capital Resources
Stockholders’ Equity
Total equity of $1.60 billion at December 31, 2014, increased $143.9 million, or 9.9%, compared to $1.46 billion at
December 31, 2013, primarily due to increases in net income of $137.8 million and decreases in unrealized losses on securities
available-for-sale of $24.2 million offset by common stock cash dividends of $23.1 million. The Company paid cash
dividends of $0.29 per common share in 2014 and $0.08 per common share in 2013.
We 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. In conjunction with the purchase of our preferred shares, the U.S. Treasury received
warrants to purchase 1,846,374 shares of our common stock at the exercise price of $20.96 with an aggregate exercise price
equal to $38.7 million, 15% of the amount the U.S. Treasury invested. In 2013, the Company redeemed all $258 million
Series B preferred stock issued under the U.S. Treasury’s TARP Capital Purchase Program. On December 9, 2013, the U.S.
Treasury sold all of the warrants it held for a total $13.1 million, or $7.20 per warrant, through a secondary public offering.
As of December 31, 2014, the maximum number of shares that may yet be purchased under our November 2007 stock
repurchase program was 622,500 shares. No shares were repurchased during the years from 2008 to 2014.
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, 2014, our Tier 1 risk-based capital ratio of 14.96%, total risk-based
capital ratio of 16.22%, and Tier 1 leverage capital ratio of 12.99%, 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, 2013, were Tier 1 risk-based capital ratio of 15.04%, total risk-based capital ratio of
16.35%, and Tier 1 leverage capital ratio of 12.48%.
A table displaying the Bancorp’s and the Bank’s capital and leverage ratios at December 31, 2014, and 2013, 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. We increased the common stock dividend to $.05 per share in the fourth
quarter of 2013, to $.07 per share in the second quarter of 2014, and to $.10 per share in the fourth quarter of 2014. 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. The terms of our Junior Subordinated Notes also limit our ability to pay dividends.
If we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on our
common stock.
48
Substantially all of the revenues of the Company available for payment of dividends derive from amounts paid to it by
the Bank. The Bank paid dividends to Bancorp totaling $30.0 million during 2014, $138.0 million during 2013, and $154.7
million during 2012.
The Federal Reserve Board 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.
On December 17, 2009, the Bancorp entered into a memorandum of understanding with the Federal Reserve Bank of
San Francisco (“FRB SF”). Although the memorandum of understanding was terminated effective April 5, 2013, we remain
subject to Federal Reserve supervisory policies, including informing and consulting with the FRB SF sufficiently in advance
of any planned capital actions (i.e. increased dividend payments or stock redemptions).
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, 2014, was restricted to approximately $57.2 million.
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 decreased $35.5 million, or 25.9%, to $101.6 million at December 31, 2014,
compared to $137.2 million at December 31, 2013, primarily due to a $13.0 million decrease in non-accrual loans and a $21.5
million decrease in OREO.
As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets decreased to 1.14%
at December 31, 2014, from 1.69% at December 31, 2013. The non-performing portfolio loan, excluding loans held for sale,
coverage ratio, defined as the allowance for credit losses to non-performing loans, excluding loans held for sale, increased to
232.8% at December 31, 2014, from 208.2% at December 31, 2013.
49
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
Accruing loans past due 90 days or more .. $
Non-accrual loans ......................................
Total non-performing loans .......................
Real estate acquired in foreclosure and
other assets ............................................
Total non-performing assets ...................... $
Accruing troubled debt restructurings
2014
2013
As of December 31,
2012
(Dollars in thousands)
2011
2010
- $
70,163
70,163
982 $
83,183
84,165
630 $
103,902
104,532
6,726 $
201,197
207,923
5,006
242,319
247,325
31,477
101,640 $
52,985
137,150 $
46,384
150,916 $
92,713
300,636 $
77,740
325,065
(TDRs) .................................................. $
104,356 $
117,597 $
144,695 $
120,016 $
136,800
Non-accrual TDRs (included in non-
accrual loans) ......................................... $
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
41,618 $
973 $
38,769 $
- $
47,731 $
- $
50,870 $
760 $
28,146
2,873
1.14%
1.69%
2.02%
4.20%
4.68%
percentage of gross loans .......................
1.83%
2.17%
2.49%
2.95%
3.60%
Allowance for credit losses as a
percentage of non-performing loans .....
232.84%
208.22%
176.68%
100.20%
100.10%
The effect of non-accrual loans on interest income for the past five years is presented below:
2014
2013
Year Ended December 31,
2012
(In thousands)
2011
2010
Non-accrual Loans
Contractual interest due ............................. $
Interest recognized ....................................
Net interest foregone ................................. $
6,663 $
217
6,446 $
5,851 $
22
5,829 $
6,621 $
1,006
5,615 $
13,049 $
71
12,978 $
17,304
4,853
12,451
As of December 31, 2014, 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
Total non-accrual portfolio loans, excluding loans held for sale, of $70.2 million at December 31, 2014, decreased
$13.0 million, or 15.7%, from $83.2 million at December 31, 2013. 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 contracts, 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, excluding loans held for sale, at December 31, 2014, consisted of 32 commercial real estate
loans totaling $29.8 million, two non-farm non-residential construction loans totaling $19.5 million, 39 residential mortgage
loans totaling $7.6 million, 18 commercial loans totaling $7.0 million, two land loans totaling $5.9 million, and one mixed
use construction loan of $0.5 million. Non-accrual loans also include those troubled debt restructurings that do not qualify
for accrual status. The comparable numbers for 2013 were one mixed use construction loan totaling $3.3 million, two non-
farm non-residential construction loans totaling $25.3 million, 23 commercial real estate loans totaling $13.1 million, three
land loans totaling $6.5 million, 27 commercial loans totaling $21.2 million, and 48 residential mortgage loans totaling $13.7
million.
50
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, 2014
December 31, 2013
Real
Estate (1)
Commercial
Real
Estate (1)
Commercial
(In thousands)
Type of Collateral
Single/Multi-family residence ...................... $
Commercial real estate .................................
Land .............................................................
Personal Property (UCC) .............................
Total ......................................................... $
9,068 $
48,256
5,856
-
63,180 $
1,184 $
903
-
4,896
6,983 $
22,370 $
33,079
6,502
-
61,951 $
2,030
1,366
-
17,836
21,232
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and
equity lines.
December 31, 2014
December 31, 2013
Real
Estate (1)
Commercial
Real
Estate (1)
Commercial
Type of Business
Real estate development ............................... $
Wholesale/Retail ..........................................
Food/Restaurant ...........................................
Import/Export ...............................................
Other ............................................................
Total ......................................................... $
35,299 $
20,658
650
-
6,573
63,180 $
(In thousands)
860 $
4,078
144
1,901
-
6,983 $
31,895 $
16,796
569
-
12,691
61,951 $
5,866
3,526
173
11,667
-
21,232
(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, 2014, the net carrying value of other real estate owned (“OREO”) decreased $21.5 million, or 40.6%,
to $31.5 million from $53.0 million at December 31, 2013. OREO located in California was $4.1 million and was comprised
primarily of one residential property of $2.0 million, four commercial use buildings of $1.2 million, one residential
construction project of $526,000, one parcel of land zoned for residential purpose of $243,000, and one parcel of land zoned
for commercial purpose of $235,000. OREO located in Texas was $15.7 million and was comprised of three parcels of land
zoned for commercial purpose of $12.3 million, one medical office building of $1.6 million, a retail store of $761,000, a
commercial building construction project of $752,000, and a shopping center of $304,000. OREO located in Illinois was $4.0
million and was comprised of two multi-family residential properties of $3.1 million and an office of $921,000. OREO
located in the state of Washington was an office and commercial use building of $3.8 million. OREO located in the state of
New York was $3.8 million and was comprised of one residential property of $2.7 million and a retail store of $1.1 million.
At December 31, 2013, OREO located in California was $10.9 million and was comprised primarily of eight parcels of
land zoned for residential purpose of $9.0 million, three commercial use buildings of $564,000, three commercial building
construction projects of $635,000, one residential construction project of $530,000, and one parcel of land zoned for
commercial purpose of $235,000. OREO located in Texas was $27.3 million and was comprised of three office and
commercial use buildings of $12.5 million, six parcels of land zoned for residential purposes of $12.7 million, four
commercial building construction projects of $1.3 million and a retail store of $766,000. OREO located in the state of
Washington was $6.5 million and was comprised three parcels of land zoned for residential purpose of $667,000 and one
office and commercial use building of $5.8 million. OREO located in the state of New York was one office and commercial
use building $893,000. OREO located in the state of North Carolina was one commercial use building of $4.1 million. OREO
located in Illinois was $3.3 million and was comprised of one condominium property of $2.4 million, two commercial use
properties of $639,000 and one residential property of $202,000.
51
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 of the stated interest rate, reduction of the amount of principal amortization,
forgiveness of a portion of a loan balance or accrued interest, or an extension of the maturity date. Although these loan
modifications are considered under ASC Subtopic 310-40, to be TDRs, 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 $104.3 million at December 31, 2014, and were comprised of 60
loans, a decrease of $13.3 million, compared to 64 loans totaling $117.6 million at December 31, 2013. TDRs at
December 31, 2014, were comprised of nine commercial loans of $16.5 million, three hotel loans of $15.7 million, 31 single
family residential loans of $13.6 million, two industrial and manufactural use building loans of $12.2 million, two land loans
for residential purpose of $10.2 million, four commercial condos loans of $10.1 million, three retail shopping and commercial
use building loans of $9.0 million, one multi-family residential loan of $6.1 million, one shopping center construction loan
of $5.8 million, three office buildings loans of $3.5 million, and one warehouse loan of $1.6 million. We expect that the
troubled debt restructuring loans on accruing status as of December 31, 2014, 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, 2013, were comprised of 13 retail shopping and commercial
use building loans of $44.2 million, ten office and commercial use building loans of $28.6 million, four hotel loans of $17.2
million, 25 single family residential loans of $20.0 million, two warehouses of $1.6 million, five commercial loans of $5.3
million, and five multi-family residential loans of $748,000. A summary of TDRs by type of loans and by accrual/non-accrual
status is shown below:
Accruing TDRs
Interest
Deferral
Principal
Deferral
Commercial loans ................... $
Real estate construction loans
Commercial mortgage loans ...
Residential mortgage loans ....
Total accruing TDRs ............... $
- $
-
436
-
436 $
11,572 $
5,765
20,107
3,316
40,760 $
December 31, 2014
Rate
Reduction
and
Forgiveness
of Principal
Rate
Reduction
Rate
Reduction
and
Payment
Deferral
Total
(In thousands)
- $
-
26,694
-
26,694 $
- $
-
-
410
410 $
4,934 $
-
26,351
4,771
16,506
5,765
73,588
8,497
36,056 $ 104,356
December 31, 2014
Non-accrual TDRs
Interest
Deferral
Principal
Deferral
Rate
Reduction
(In thousands)
Rate
Reduction
and
Payment
Deferral
Total
Commercial loans ....................................... $
Real estate construction loans ....................
Commercial mortgage loans .......................
Residential mortgage loans ........................
Total non-accrual TDRs .............................. $
1,184 $
-
-
-
1,184 $
239 $
-
15,917
1,026
17,182 $
860 $
-
-
-
860 $
1,269 $
19,462
973
688
22,392 $
3,552
19,462
16,890
1,714
41,618
52
Accruing TDRs
Principal
Deferral
As of December 31, 2013
Rate
Reduction
and
Forgiveness
of Principal
(In thousands)
Rate
Reduction
and
Payment
Deferral
Rate
Reduction
Total
Commercial loans ....................................... $
Real estate construction loans ....................
Commercial mortgage loans .......................
Residential mortgage loans ........................
Total accruing TDRs ................................... $
9,112 $
-
11,333
1,564
22,009 $
2,916 $
-
9,389
1,024
13,329 $
- $
-
-
-
- $
2,708 $
5,834
70,200
3,517
82,259 $
14,736
5,834
90,922
6,105
117,597
Non-accrual TDRs
Interest
Deferral
Principal
Deferral
December 31, 2013
Rate
Reduction
and
Forgiveness
of Principal
(In thousands)
Rate
Reduction
and
Payment
Deferral
Total
Commercial loans ....................................... $
Real estate construction loans ....................
Commercial mortgage loans .......................
Residential mortgage loans ........................
Total non-accrual TDRs .............................. $
- $
-
1,443
241
1,684 $
2,866 $
16,009
2,168
2,206
23,249 $
1,352 $
-
-
-
1,352 $
- $
9,263
1,843
1,378
12,484 $
4,218
25,272
5,454
3,825
38,769
The activity within our TDR loans for 2014, 2013, and 2012 is shown below:
Accruing TDRs
Beginning balance ........................................................................ $
New restructurings .......................................................................
Restructured loans restored to accrual status ................................
Charge-offs ...................................................................................
Payments ......................................................................................
Restructured loans placed on non-accrual ....................................
Ending balance ............................................................................. $
2014
2013
(In thousands)
2012
117,597 $
23,740
962
-
(13,256)
(24,687)
104,356 $
144,695 $
21,382
6,851
(78)
(52,362)
(2,891)
117,597 $
120,016
53,958
8,356
(251)
(5,159)
(32,225)
144,695
Non-accrual TDRs
2014
2013
(In thousands)
2012
Beginning balance .................................................................. $
New restructurings .................................................................
Restructured loans placed on non-accrual ..............................
Charge-offs ............................................................................
Payments ................................................................................
Foreclosures ...........................................................................
Restructured loans restored to accrual status .........................
38,769 $
1,331
24,688
(8,938)
(11,710)
(1,560)
(962)
47,731 $
6,226
2,891
(2,124 )
(4,295 )
(4,809 )
(6,851 )
50,870
12,304
32,225
(4,182)
(33,931)
(1,199)
(8,356)
Ending balance ....................................................................... $
41,618 $
38,769 $
47,731
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 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 when a loan amount is $500,000 or less, are treated as
53
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 twelve months from qualified independent appraisers. 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.
We identified impaired loans with a recorded investment of $174.5 million at December 31, 2014, compared to
$200.8 million at December 31, 2013. The average balance of impaired loans was $190.2 million in 2014 and $221.2 million
in 2013. We considered all non-accrual loans to be impaired. Interest recognized on impaired loans totaled $5.3 million in
2014 and $5.6 million in 2013. As of December 31, 2014, $63.2 million, or 90.1%, of the $70.2 million of non-accrual
portfolio loans, excluding loans held for sale, was secured by real estate. As of December 31, 2013, $62.0 million, or 74.5%,
of the $83.2 million of non-accrual loans was secured by real estate. The Bank obtains current appraisals or other available
market price information which provides updated factors in evaluating potential loss.
At December 31, 2014, $11.8 million of the $161.4 million allowance for loan losses was allocated for impaired loans
and $149.6 million was allocated to the general allowance. At December 31, 2013, $13.3 million of the $173.9 million
allowance for loan losses was allocated for impaired loans and $160.6 million was allocated to the general allowance. In
2014, net loan charge-offs were $1.3 million, or 0.02%, of average loans, compared to $6.4 million, or 0.08%, of average
loans in 2013.
The allowance for loan losses to non-performing loans, excluding loans held for sale, was 230.1% at December 31, 2014,
compared to 206.6% at December 31, 2013. Non-accrual loans also include those TDRs that do not qualify for accrual
status.
The following table presents impaired loans and the related allowance as of the dates indicated:
Impaired Loans
As of December 31, 2014
As of December 31, 2013
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Unpaid
Principal
Balance
Recorded
Investment
Allowance
(Dollars in thousands)
With no allocated allowance
Commercial loans .................... $
Real estate construction loans ..
Commercial mortgage loans ....
Residential mortgage and
equity lines ..........................
Subtotal ............................... $
With allocated allowance
Commercial loans .................... $
Real estate construction loans ..
Commercial mortgage loans ....
Residential mortgage and
equity lines ..........................
Subtotal ............................... $
Total impaired loans .................. $
19,479 $
32,924
77,474
18,452 $
17,025
75,172
2,518
132,395 $
2,518
113,167 $
7,003 $
19,006
38,197
14,019
78,225 $
210,620 $
5,037 $
8,703
34,022
13,590
61,352 $
174,519 $
- $
-
-
-
- $
20,992 $
25,401
105,593
18,905 $
15,097
78,930
4,892
156,878 $
4,892
117,824 $
-
-
-
-
-
1,263 $
1,077
8,993
465
11,798 $
11,798 $
22,737 $
28,475
39,223
13,063 $
19,323
35,613
16,535
106,970 $
263,848 $
14,957
82,956 $
200,780 $
2,519
3,460
6,584
721
13,284
13,284
54
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 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, 2014, construction loans of $211.5 million were disbursed with pre-established interest reserves of
$35.6 million compared to $160.8 million of such loans disbursed with pre-established interest reserves of $20.0 million at
December 31, 2013. The balance for construction loans with interest reserves which have been extended was $55.2 million
with pre-established interest reserves of $3.1 million at December 31, 2014, compared to $20.5 million with pre-established
interest reserves of $1.8 million at December 31, 2013. Land loans of $76.4 million were disbursed with pre-established
interest reserves of $3.8 million at December 31, 2014, compared to $32.8 million land loans disbursed with pre-established
interest reserves of $3.0 million at December 31, 2013. The balance for land loans with interest reserves which have been
extended was $4.0 million with pre-established interest reserves of $56,000 at December 31, 2014, compared to $1.7 million
land loans with pre-established interest reserves of $53,000 at December 31, 2013.
At December 31, 2014, the Bank had no loans on non-accrual status with available interest reserves. At December 31,
2014, $0.5 million of non-accrual mixed use construction loans, $19.5 million of non-accrual non-residential construction
loans, and no non-accrual land loans had been originated with pre-established interest reserves. At December 31, 2013, the
Bank had no loans on non-accrual status with available interest reserves. At December 31, 2013, $3.3 million of non-accrual
mixed use construction loans, $25.3 million of non-accrual non-residential construction loans, and $32,000 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 the sale 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; Nevada; 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, 2014.
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. The Bank’s loans for construction, land development, and other land represented 30% of total risk-based capital
as of December 31, 2014, and 23% as of December 31, 2013. Total CRE loans represented 256% of total risk-based capital
as of December 31, 2014, and 249% as of December 31, 2013, both of which were within the Bank’s internal limit of 300%
of total capital. See Part I — Item 1A — “Risk Factors” for a discussion of some of the factors that may affect us.
55
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 that 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 $161.4 million and the allowance for off-balance sheet unfunded credit commitments
was $1.9 million at December 31, 2014, which represented the amount believed by management to be sufficient to absorb
credit losses inherent in the loan portfolio, including unfunded commitments. The allowance for credit losses, which is the
sum of the allowances for loan losses and for off-balance sheet unfunded credit commitments, was $163.4 million at
December 31, 2014, compared to $175.3 million at December 31, 2013, a decrease of $11.9 million, or 6.8%. The allowance
for credit losses represented 1.83% of period-end gross loans and 232.8% of non-performing loans at December 31, 2014.
The comparable ratios were 2.17% of period-end gross loans and 208.2% of non-performing loans at December 31, 2013.
56
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
Allowance for loan losses
Balance at beginning of year ............................... $
(Reversal)/provision for credit losses ..................
(Provision)/reversal of reserve for off-balance
2014
Amount Outstanding as of December 31,
2012
(Dollars in thousands)
2011
2013
2010
173,889 $
(10,800)
183,322 $
(3,000)
206,280 $ 245,231 $ 211,889
27,000 156,900
(9,000)
sheet credit commitments .................................
(372)
-
706
268
2,870
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 ......................................... $
Reserve for off-balance sheet credit
commitments
(7,875)
(2,382)
(4,365)
(7,613)
-
-
(22,235)
12,517
48
2,499
5,752
109
13
20,938
161,420 $
(15,625)
-
-
(3,499)
(1,318)
-
(20,442)
2,739
1,201
1,083
5,978
2,997
11
14,009
173,889 $
(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)
1,949
3,788
2,365
8,820
1,202
3
18,127
4,712
5,448
553
933
668
13
12,327
183,322 $ 206,280 $ 245,231
1,774
3,808
665
4,539
621
-
11,407
Balance at beginning of year ............................... $
Provision/(reversal) for credit losses ...................
Balance at end of year ......................................... $
1,363 $
586
1,949 $
1,363 $
-
1,363 $
2,069 $
(706)
1,363 $
2,337 $
(268)
2,069 $
5,207
(2,870)
2,337
Average loans outstanding during the year (1) ..... $ 8,532,245 $ 7,630,530 $ 7,094,197 $ 6,959,331 $6,879,457
Ratio of net charge-offs to average loans
outstanding during the year (1) ........................
0.02%
0.08%
0.21%
0.95%
1.84%
(Reversal)/provision for credit losses to average
loans outstanding during the year (1) ..............
-0.13%
-0.04%
-0.13%
0.39%
2.28%
Allowance for credit losses to non-performing
portfolio loans at year-end (2) ..........................
232.84%
208.22%
176.68%
100.20%
100.10%
Allowance for credit losses to gross loans at
year-end (1) ......................................................
1.83%
2.17%
2.49%
2.95%
3.60%
(1) Excluding loans held for sale
(2) Excluding non-accrual loans held for sale
Our allowance for loan losses consists of the following:
• 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 determined
by 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.
57
• 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 19 segments: two commercial
segments, ten commercial real estate segments, one residential construction segment, one non-residential
construction segment, 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, environmental factors including 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 classification. In the second quarter of 2009, the look-back period was reduced from five years
to four years, and in the second quarter of 2010, management increased the weighting given to the most recent four
quarters to 50%, and reduced the weighting of the earliest and second earliest four quarters to 10% and 15%,
respectively, for pass rated loans, to place greater emphasis on losses taken by the Bank during the economic
downturn. In the third quarter of 2014, management reevaluated the look-back period and restored the five year look-
back period in order to capture a sufficient history of loss data. Additionally, risk factor calculations for pass rated
loans included a specified loss emergence period and were determined based on the higher of the not-weighted five
year average or weighted at 50.0 percent for the most recent four quarters, 25.0 percent for the next four quarters,12.5
percent for the next four quarters, 7.5% for the next four quarters and 5.0% for the next four quarters. In light of the
changes above, the relevant environmental factors were reduced. These refinements maintained the Bank’s
allowance at a level consistent with the prior quarter.
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:
2014
Percentage
of
Loans in
Each
Category
to Average
Gross
Loans
2013
Percentage
of
Loans in
Each
Category
to Average
Gross
Loans
As of December 31,
2012
Percentage
of
Loans in
Each
Category
to Average
Gross
Loans
Amount
(Dollars in thousands)
2011
Percentage
of
Loans in
2010
Percentage
of
Loans in
Each
Category
to Average
Gross
Loans
Each
Category
to Average
Gross
Loans
Amount
Amount
Amount
Amount
Type of Loans:
Commercial loans ...... $ 47,501
Residential mortgage
loans and equity
lines ......................... 11,578
Commercial mortgage
27.2% $ 65,103
28.2% $ 66,101
27.4% $ 65,658
23.9 % $ 63,919
19.7%
19.2 12,005
18.6 11,703
17.4 10,795
16.4
9,668
13.9
loans ........................ 74,673
50.2 84,753
50.7 82,473
52.2 108,021
54.9 128,347
58.3
Real estate
construction loans ... 27,652
3.2 11,999
2.3 23,017
2.8 21,749
4.5 43,261
Installment and other
loans ........................
16
0.2
29
0.2
28
0.2
57
0.3
36
7.8
0.3
Total ...................... $ 161,420
100.0% $ 173,889
100.0% $ 183,322
100.0% $ 206,280
100.0 % $ 245,231
100.0%
The allowance allocated to commercial loans was $47.5 million at December 31, 2014, compared to $65.1 million at
December 31, 2013. The decrease is due primarily to a reduction in loss factors as a result of the net recoveries in 2014 and
the decrease in substandard commercial loans from $102.1 million at December 31, 2013, to $72.6 million at December 31,
2014.
The allowance allocated to residential mortgage loans and equity lines decreased $427,000, to $11.6 million at
December 31, 2014, from $12.0 million at December 31, 2013, primarily due to the decrease in substandard residential
mortgage loans from $15.9 million at December 31, 2013 to $9.7 million at December 31, 2014.
The allowance allocated to commercial mortgage loans decreased from $84.8 million at December 31, 2013, to $74.7
million at December 31, 2014, which was due primarily to decreases in loss experience from commercial mortgage loans and
decreases in special mention and substandard commercial mortgage loans. The overall allowance for total commercial
mortgage loans was 1.7% of such loans at December 31, 2014, and 2.1% at December 31, 2013.
58
The allowance allocated for construction loans increased to $27.7 million, or 9.3%, of construction loans at
December 31, 2014, compared to $12.0 million, or 5.4%, of construction loans at December 31, 2013, primarily due to the
increase in outstanding construction loans, a lengthening of the loss emergence period, and higher loss factors resulting from
2014 chargeoffs for construction loans.
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.
Our liquidity ratio (defined as net cash and short-term and marketable securities to net deposits and short-term liabilities) was
14.9% at December 31, 2014 and 15.3% at December 31, 2013.
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, 2014, the Bank had an approved credit line with the FHLB of San Francisco totaling $3.76
billion. Total advances from the FHLB of San Francisco were $425.0 million at December 31, 2014. These borrowings bear
fixed rates and are secured by loans. See Note 10 to the Consolidated Financial Statements. At December 31, 2014, the Bank
pledged $127.2 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 $114.3 million from the Federal Reserve Bank Discount Window at
December 31, 2014.
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, 2014, investment securities totaled $1.32
billion, with $591.3 million pledged as collateral for borrowings and other commitments. The remaining $727.7 million was
available as additional liquidity or to be pledged as collateral for additional borrowings.
Approximately 79.1% of our time deposits mature within one year or less as of December 31, 2014. 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 during the next twelve months for 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. The Bancorp obtains funding for its activities primarily through dividend income contributed by the Bank,
proceeds from the issuance of the Bancorp common stock through our Dividend Reinvestment Plan and exercise of stock
options. Dividends paid to the Bancorp by the Bank are subject to regulatory limitations. Management believes the Bancorp’s
liquidity generated from its prevailing sources is sufficient to meet its operational needs.
Also, see Note 14 to the Consolidated Financial Statements regarding commitments and contingencies.
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.
59
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 limitations 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, 2014, 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 3.8%, 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 9.7%. Conversely, if interest rates were to decrease
instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would
decrease by 1.2%, 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 1.9%.
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, 2014, 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 0.8%, 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 decrease by 9.5%.
60
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, 2014, and 2013. 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.
Average
Interest
Rate
Expected Maturity Date at December 31,
2015
2016
2017 2018
2019
Thereafter Total
(Dollars in thousands)
December 31,
2014
Fair
Value
2013
Fair
Value
Total
Interest-Sensitive
Assets:
Mortgage-backed
securities and
collateralized
mortgage
obligations ..............
Other investment
securities .................
Loans held for sale ....
Gross loans
receivable:
Commercial .............
Residential mortgage
Commercial
2.59% $
53,617 $ 54,546 $ 51,388 $ 45,399 $
40,554 $
298,844 $ 544,348 $ 544,348 $ 958,920 $ 958,921
0.60 115,068 449,659 99,278 10,173
-
6.00
973
-
-
-
-
100,409
-
774,587 774,587 627,748 927,747
-
1,225
973
-
3.87 1,339,284 342,988 193,810 149,074 149,023
4.60
3,061 1,755
208,314 2,382,493 2,379,790 2,298,724 2,287,490
7,405 1,723,712 1,742,938 1,765,472 1,526,532 1,537,149
2,966
4,039
mortgage ...............
4.62 555,406 401,040 553,010 597,384 549,196 1,830,407 4,486,443 4,400,716 4,023,051 3,905,328
5.13 226,994 61,688
349
2.24
-
-
3,160
-
9,972
43
-
-
-
-
-
-
-
-
-
-
298,654 298,511 221,701 221,549
14,555
4,936
14,555
4,936
3,534
-
3,552
-
0.39 399,921 239,169 142,461 24,604 1,049,993
42,485
0.82 3,373,672 325,513 347,635 178,412
994,670 2,850,818 2,850,818 2,469,730 2,469,730
11 4,267,728 4,269,610 4,069,716 4,066,050
3.85
50,000 50,000 250,000 100,000
-
-
450,000 473,816 800,000 852,835
0.32 400,000
-
-
-
2.42
-
-
-
- 25,000
-
-
-
-
-
-
-
-
19,934
119,136
425,000 424,974 521,200 521,560
16,107
19,934
58,970
119,136
17,978
19,062
59,425 121,136
Real estate
construction ..........
Installment & other .
Trading securities ......
Interest Sensitive
Liabilities:
Other interest-bearing
deposits ...................
Time deposits ............
Securities sold under
agreements to
repurchase ...............
Advances from the
Federal Home Loan
Bank ........................
Other borrowings .......
Long-term debt ..........
Off-Balance Sheet
Financial
Instruments:
Commitments to
extend credit ...........
1,244,443 550,877 80,607 57,153
46,515
92,171 2,071,766
(3,442) 1,858,669
(2,187)
Standby letters of
credit ........................
Other letters of credit .
Bill of lading
guarantees ...............
Country Risk Exposures
50,390 2,430
-
48,142
632
-
108
-
-
-
-
-
-
-
-
458
-
53,910
48,142
(243)
(29)
45,058
54,098
(205)
(34)
-
108
-
80
-
The Company’s total assets were $11.5 billion and total foreign country risk net exposures were $787.7 million at
December 31, 2014, compared to total assets of $11.0 billion and total foreign country risk net exposures of $927.2 million
at December 31, 2013. Total foreign country risk net exposures at December 31, 2014, were comprised primarily of $329.4
million from Hong Kong, $139.4 million from China, $111.9 million from England, $48.2 million from Switzerland, $44.1
million from France, $30.4 million from Australia, $23.9 million from Taiwan, $17.1 million from the Philippines, $16.5
61
million from Japan, $15.6 million from Canada, $8.4 million from Singapore, and $1.8 million from Macau. Total foreign
country risk net exposures at December 31, 2013, were comprised primarily of $321.7 million from Hong Kong, $202.9
million from England, $200.3 million from China, $51.5 million from Switzerland, $53.4 million from France, $30.2 million
from Australia, $26.8 million from Canada, $17.1 million from the Philippines, $9.3 million from Singapore, $5.8 million
from Germany, $5.8 million from Taiwan, and $1.8 million from Macau.
All foreign country risk net exposures were to non-sovereign counterparties except $20.8 million due from the Hong
Kong Monetary Authority at December 31, 2014 and $19.1 million at December 31, 2013.
Unfunded exposures were $68.9 million at December 31, 2014, and were comprised of $68.2 million of unfunded loans
to four financial institutions in China and a $720,000 of unfunded loan to a borrower in Taiwan. Unfunded exposures were
$29.9 million at December 31, 2013, and were comprised of $29.0 million of unfunded loans to two financial institutions in
China and $860,000 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 hedging 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 Bancorp or the Bank’s Investment Committee.
The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives,
including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all
financial derivatives as assets or liabilities in the Company’s consolidated balance sheet 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. Fair value is determined using third-party models with
observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other
comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives
designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with
changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value
of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If
there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair
value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest
rate swaps are reflected in the Company’s consolidated financial statements.
In May 2014, the Bancorp entered into five interest rate swap contracts in the notional amount of $119.1 million for a
period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash
flow hedges, was to hedge the quarterly interest payments on the Bancorp’s $119.1 million of Junior Subordinated Debentures
that had been issued to five trusts throughout the ten-year period beginning in June 2014 and ending in June 2024, from the
risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. The Bancorp pays a
weighted average fixed interest rate of 2.61% and receives a variable interest rate of three-month LIBOR at a weighted
average rate of 0.24%. As of December 31, 2014, the notional amount of cash flow interest rate swaps was $119.1 million
and their unrealized loss of $2.4 million, net of taxes, was included in other comprehensive income. The amount of periodic
net settlement of interest rate swaps included in interest expense was $1.5 million in 2014. As of December 31, 2014, the
ineffective portion of these interest rate swaps was not significant.
In June 2014, the Bank entered into ten interest rate swap contracts in the notional amount of $148.1 million for various
terms from four to eight years. In October 2014, the Bank entered into four additional interest rate swap contracts in the
notional amount of $34.9 million. The Bank entered into these interest rate swap contracts that are matched to individual
fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging
instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loan due to changes in
interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual
amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan.
The Bank pays a weighted average fixed rate of 4.60% and receives a variable rate at one month LIBOR rate plus a weighted
62
average spread of 292 basis points, or at a weighted average rate of 3.08%. As of December 31, 2014, the notional amount
of fair value interest rate swaps was $181.3 million and their unrealized loss of $489,000 was included in other non-interest
income. The amount of periodic net settlement of interest rate swaps reducing interest income was $1.3 million in 2014. As
of December 31, 2014, the ineffective portion of these interest rate swaps was not significant.
Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to
meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by the Company’s
Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest
payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the
counterparty. The Bancorp’s interest rate swaps have been assigned by the counterparties to a derivatives clearing
organization and daily margin is indirectly maintained with the derivatives clearing organization. Cash posted as collateral
by the Bancorp related to derivative contracts totaled $7.5 million as of December 31, 2014.
The Company enters into foreign exchange forward contracts and foreign currency option contracts with various
counterparties 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, 2014, no option contracts were outstanding. Spot and forward contracts in the total notional amount of $167.0
million had a positive fair value of $1.9 million at December 31, 2014. Spot and forward contracts in the total notional amount
of $178.9 million had a negative fair value of $5.0 million at December 31, 2014. At December 31, 2013, the notional amount
of option contracts totaled $200,000 with a net positive fair value of $83. Spot and forward contracts in the total notional
amount of $267.6 million had a positive fair value of $6.2 million at December 31, 2013. Spot and forward contracts in the
total notional amount of $236.3 million had a negative fair value of $6.1 million at December 31, 2013.
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) under 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 2014 that have materially affected or are reasonably likely to materially affect these controls and procedures.
63
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, 2014, 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 (1992),” 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, 2014, based on those criteria.
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, 2014. The report, which expresses an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, 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 2014 that have materially affected,
or are reasonably likely to materially effect, the Company’s internal control over financial reporting.
64
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, 2014,
based on criteria established in Internal Control - Integrated Framework (1992) 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, 2014, based on criteria established in Internal Control - Integrated Framework (1992) 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, 2014 and 2013, 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, 2014, and our report dated February 27, 2015 expressed
an unqualified opinion on those Consolidated Financial Statements.
/s/ KPMG LLP
Los Angeles, California
February 27, 2015
65
Item 9B.
Other Information.
None.
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
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 2015 Annual Meeting of Stockholders (our “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, 2014, 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
(a)
Weighted-average
Exercise Price of
Outstanding
Options, Warrants,
and Rights
(b)
Number of
Securities
Remaining
Available For
Future Issuance
Under Equity
Compensation Plans
[Excluding
Securities Reflected
in Column (a)]
(c)
2,332,904 $
32.34
2,984,895
-
2,332,904 $
-
32.34
-
2,984,895
Plan Category
Equity Compensation Plans Approved by
Security Holders ............................................
Equity Compensation Plans Not Approved by
Security Holders ............................................
Total ..................................................................
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.
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.
66
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 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.
3.1.1 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.
3.2 Amended and Restated Bylaws, effective February 20, 2014. Previously filed with the Securities and Exchange
Commission on March 3, 2014 as an exhibit to the Bancorp’s Annual Report on Form 10-K for the year ended
December 31, 2013 and incorporated herein by reference.
3.3 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.
3.4 Certificate of Designation of Fixed Rate Cumulative Perpetual Preferred Stock, Series B. Previously filed with
the Securities and Exchange Commission on March 3, 2014 as an exhibit to the Bancorp’s Annual Report on
Form 10-K for the year ended December 31, 2013 and incorporated herein by reference.
4.1
Indenture, dated as of March 30, 2007, between Cathay General Bancorp and LaSalle Bank National Association
(including form of debenture). Previously filed with the Securities and Exchange Commission on March 1, 2013,
as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and incorporated
herein by reference.
4.1.1 Amended and Restated Declaration of Trust of Cathay Capital Trust III, dated as of March 30, 2007. Previously
filed with the Securities and Exchange Commission on March 1, 2013, as an exhibit to Bancorp’s Annual Report
on Form 10-K for the year ended December 31, 2012, and incorporated herein by reference.
4.1.2 Guarantee Agreement, dated as of March 30, 2007, between Cathay General Bancorp and LaSalle Bank National
Association. Previously filed with the Securities and Exchange Commission on March 1, 2013, as an exhibit to
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and incorporated herein by
reference.
4.1.3
Form of Capital Securities of Cathay Capital Trust III (included within Exhibit 4.1.1).
67
4.2 Warrant to purchase up to 1,846,374 shares of Common Stock, issued on December 5, 2008. Previously filed
with the Securities and Exchange Commission on March 3, 2014 as an exhibit to the Bancorp’s Annual Report
on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference.
4.2.1 Warrant Agreement, dated as of December 4, 2013. Previously filed with the Securities and Exchange
Commission on December 4, 2013, as an exhibit to Bancorp’s Registration Statement on Form 8-A, and
incorporated herein by reference.
4.2.2
Form of Warrant (included within Exhibit 4.2.1).
10.1 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.
10.2 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.**
10.3 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.
10.4
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.**
10.4.1 First Amendment to Cathay Bancorp, Inc. Equity Incentive Plan. Previously filed with the Securities and
Exchange Commission on March 3, 2014, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year
ended December 31, 2013, and incorporated herein by reference.**
10.5
10.6
Cathay Bank Bonus Deferral Agreement (Amended and Restated). Previously filed with the Securities and
Exchange Commission on March 1, 2013, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year
ended December 31, 2012, and incorporated herein by reference.**
Cathay General Bancorp 2005 Incentive Plan (Amended and Restated). Previously filed with the Securities and
Exchange Commission on March 1, 2013, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year
ended December 31, 2012, and incorporated herein by reference.**
10.6.1 Form of Cathay General Bancorp 2005 Incentive Plan Restricted Stock Award Agreement. Previously filed with
the Securities and Exchange Commission on March 1, 2013, as an exhibit to Bancorp’s Annual Report on
Form 10-K for the year ended December 31, 2012, and incorporated herein by reference.**
10.6.2 Form of Cathay General Bancorp 2005 Incentive Plan Stock Option Agreement (Nonstatutory). Previously filed
with the Securities and Exchange Commission on March 1, 2013, as an exhibit to Bancorp’s Annual Report on
Form 10-K for the year ended December 31, 2012, and incorporated herein by reference.**
10.6.3 Form of Cathay General Bancorp 2005 Incentive Plan Stock Option Agreement (Nonstatutory) (Nonemployee
Director). Previously filed with the Securities and Exchange Commission on March 1, 2013, as an exhibit to
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and incorporated herein by
reference.**
10.6.4 Form of Cathay General Bancorp 2005 Incentive Plan Restricted Stock Unit Agreement. Previously filed with
the Securities and Exchange Commission on March 1, 2013, as an exhibit to Bancorp’s Annual Report on
Form 10-K for the year ended December 31, 2012, and incorporated herein by reference.**
10.6.5 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.**
68
10.6.6 Form of Restricted Stock Unit Agreement (Performance Shares – EPS), used to award performance-based
restricted stock units under the Company’s 2005 Incentive Plan. Previously filed with the Securities and
Exchange Commission on December 24, 2013, as an exhibit to Bancorp’s Current Report on Form 8-K, and
incorporated herein by reference.**
10.6.7 Form of Restricted Stock Unit Agreement (Performance Shares – TSR), used to award performance-based
restricted stock units under the Company’s 2005 Incentive Plan. Previously filed with the Securities and
Exchange Commission on December 24, 2013, as an exhibit to Bancorp’s Current Report on Form 8-K, and
incorporated herein by reference.**
10.6.8 Form of Restricted Stock Unit Agreement (Clawback Rider), used in connection with award performance-based
restricted stock units under the Company’s 2005 Incentive Plan. Previously filed with the Securities and
Exchange Commission on December 24, 2013, as an exhibit to Bancorp’s Current Report on Form 8-K, and
incorporated herein by reference.**
10.6.9 Executive Officer Annual Cash Bonus Program under the Company's 2005 Incentive Plan. Previously filed with
the Securities and Exchange Commission on March 28, 2014 as an exhibit to the Bancorp's Current Report on
Form 8-K/A, and incorporated herein by reference. **
10.7
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 3, 2014 as an exhibit to the
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by
reference.**
10.7.1 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 3, 2014 as an exhibit to the Bancorp’s
Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference.**
10.7.2 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 3, 2014 as an exhibit to the
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by
reference.**
10.7.3 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 3, 2014 as an exhibit to the
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by
reference.**
10.7.4 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 3, 2014 as an exhibit to the
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by
reference.**
10.7.5 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 3, 2014 as an exhibit to the
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by
reference.**
10.7.6 Amended and Restated Change of Control Employment Agreement for Pin Tai dated as of December 18, 2008.
Previously filed with the Securities and ExchangenCommission on November 7, 2014 as an exhibit to the
Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by
reference.**
10.7.7 Change of Control Employment Agreement for Donald S. Chow dated as of August 14, 2014. Previously filed
with the Securities and Exchange Commission on November 7, 2014 as an exhibit to the Bancorp’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference. **
21.1
Subsidiaries of Bancorp.+
69
23.1 Consent of Independent Registered Public Accounting Firm.+
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.++
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.++
101.INS XBRL Instance Document ***
101.SCH XBRL Taxonomy Extension Schema Document ***
101.CALXBRL Taxonomy Extension Calculation Linkbase Document***
101.DEF XBRL Taxonomy Extension Definition Linkbase Document***
101.LABXBRL Taxonomy Extension Label Linkbase Document***
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document***
** Management contract or compensatory plan or arrangement.
*** 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.
70
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Cathay General Bancorp
By:
/s/ Dunson K. Cheng
Dunson K. Cheng
Chairman, President, and Chief Executive Officer
Date: February 27, 2015
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
President, Chairman of the Board, Director, and Chief
Executive Officer (principal executive officer)
February 27, 2015
/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
/s/ Nelson Chung
Nelson Chung
/s/ Felix S. Fernandez
Felix S. Fernandez
/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
Executive Vice President, Chief Financial
Officer/Treasurer (principal financial officer)
(principal accounting officer)
February 27, 2015
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
71
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm ............................................................................................ F - 2
Consolidated Balance Sheets at December 31, 2014 and 2013 ....................................................................................... F - 3
Consolidated Statements of Operations and Comprehensive Income for each of the years ended December 31, 2014,
2013, and 2012 ............................................................................................................................................................ F - 4
Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 31, 2014, 2013,
and 2012 ...................................................................................................................................................................... F - 5
Consolidated Statements of Cash Flows for each of the years ended December 31, 2014, 2013, and 2012 ................... F - 6
Notes to Consolidated Financial Statements ................................................................................................................... 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 - 51
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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2014 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, 2014, based on criteria established in
Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 27, 2015 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
February 27, 2015
F-2
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
2014
2013
(In thousands, except share and per
share data)
Assets
Cash and due from banks ............................................................................................................... $
Short-term investments and interest bearing deposits ....................................................................
Securities available-for-sale (amortized cost of $1,324,408 in 2014 and $1,637,965 in 2013) ......
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 ....................................................................................................................................
176,830 $
489,614
1,318,935
-
973
8,914,080
(161,420)
(12,392)
8,740,268
30,785
31,477
104,579
99,682
35,656
25,364
316,340
3,237
143,106
153,747
516,938
1,586,668
4,936
-
8,084,563
(173,889)
(13,487)
7,897,187
25,000
52,985
84,108
102,045
32,194
24,274
316,340
2,230
190,634
Total assets ................................................................................................................................. $
11,516,846 $
10,989,286
Liabilities and Stockholders’ Equity
Deposits
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 for affordable housing investments ...................................................................
Long-term debt ..............................................................................................................................
Acceptances outstanding ................................................................................................................
Other liabilities ..............................................................................................................................
Total liabilities ...........................................................................................................................
Commitments and contingencies ...................................................................................................
Stockholders’ Equity
Common stock, $0.01 par value, 100,000,000 shares authorized, 84,022,118 issued and
79,814,553 outstanding at December 31, 2014, and 83,797,434 issued and 79,589,869
outstanding at December 31, 2013 .........................................................................................
Additional paid-in-capital ..........................................................................................................
Accumulated other comprehensive loss, net ..............................................................................
Retained earnings .......................................................................................................................
Treasury stock, at cost (4,207,565 shares at December 31, 2014, and at December 31, 2013) ..
1,664,914 $
1,441,858
778,691
1,538,187
533,940
1,162,547
3,105,181
8,783,460
450,000
425,000
19,934
119,136
35,656
80,772
9,913,958
-
683,873
1,286,338
499,520
931,204
3,138,512
7,981,305
800,000
521,200
19,062
121,136
32,194
55,418
9,530,315
-
840
789,519
(5,569)
943,834
(125,736)
838
784,489
(29,729)
829,109
(125,736)
Total equity ................................................................................................................................
Total liabilities and equity .......................................................................................................... $
1,602,888
11,516,846 $
1,458,971
10,989,286
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,
2014
2012
2013
(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 .........................................................................................................
Total interest expense ...............................................................................................
Net interest income before provision for credit losses .............................................
(Reversal)/provision for credit losses .......................................................................
Net interest income 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 (income)/expense ................................................................
Operations of investments in affordable housing ......................................................
Amortization of core deposit premium ......................................................................
Cost associated with debt redemption ........................................................................
Other operating expense ............................................................................................
Total non-interest expense .........................................................................................
Income before income tax expense .................................................................................
Income tax expense ........................................................................................................
Net income .......................................................................................................................
Less: net income attributable to noncontrolling interest ............................................
Net income attributable to Cathay General Bancorp ......................................................
Dividends on preferred stock ..........................................................................................
Net income attributable to common stockholders .......................................................... $
Other comprehensive income/(loss), net of tax:
Unrealized holding gains/(losses) on securities available for sale ............................
Unrealized holding losses on cash flow hedge derivatives .......................................
Less: reclassification adjustment for gains included in net income ..........................
Total other comprehensive income/(loss), net of tax ................................................
Total comprehensive income ...................................................................................... $
Net income attributable to common stockholders per common share
Basic ........................................................................................................................... $
Diluted ........................................................................................................................ $
Basic average common shares outstanding ....................................................................
Diluted average common shares outstanding ................................................................
390,440 $
24,237
-
1,974
-
1,996
418,647
27,465
18,304
24,685
945
4,467
75,866
342,781
(10,800)
353,581
6,748
6,043
5,288
22,448
40,527
89,893
15,735
9,793
22,634
8,796
4,126
(1,304)
6,990
719
3,348
13,583
174,313
219,795
81,965
137,830
-
137,830
-
137,830 $
30,468
(2,397)
3,911
24,160
161,990 $
359,959 $
43,412
995
1,480
-
1,150
406,996
27,211
13,178
37,692
528
3,691
82,300
324,696
(3,000)
327,696
27,362
6,281
5,701
20,963
60,307
88,276
14,846
9,768
24,574
7,351
3,403
(235)
7,253
4,533
22,557
11,507
193,833
194,170
70,435
123,735
592
123,143
(9,685)
113,458 $
(14,335)
-
15,859
(30,194)
92,949 $
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)
100,950
19,645
-
10,448
9,197
126,635
1.73 $
1.72 $
79,661,571
80,106,895
1.44 $
1.43 $
78,954,898
79,137,983
1.28
1.28
78,719,133
78,723,297
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, 2014, 2013, and 2012
(In thousands, except number of shares)
Preferred Stock
Common Stock
Number
of
Shares
Amount
Number
of
Shares
Additional
Paid-in
Capital
Accumulated Other
Comprehensive
Income
Amount
Retained Treasury
Earnings
Stock
Noncontrolling
Interest
Total
Stockholders'
Equity
Balance at December 31, 2011
258,000 $
250,992
78,652,557 $
829 $
765,641 $
(8,732) $
624,192 $
(125,736) $
8,447 $
1,515,633
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,588
-
17,956
11,814
45,937
50,024
-
-
-
-
-
-
-
-
1
-
-
-
-
-
291
-
788
763
(620)
2,062
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,149)
-
-
(3,588)
(12,900)
-
-
-
-
-
-
-
-
-
-
-
258,000
-
-
254,580
-
-
78,778,288
-
-
830
-
-
768,925
9,197
-
465
117,438
721,993
-
-
(125,736)
Preferred Stock ....................
(258,000)
(258,000)
-
-
-
25,984
Dividend Reinvestment Plan ..
Restricted stock units vested ...
Stock salary .............................
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, 2012
Dividend Reinvestment Plan ..
Redemption of Series B
Redemption of noncontrolling
interest .................................
Restricted stock units vested ...
Stock salary .............................
Stock options exercised ...........
Tax short-fall from stock
options ................................
Stock -based compensation ....
Cash dividends of $0.08 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, 2013
Dividend Reinvestment Plan .
Restricted stock units vested ..
Shares withheld related to net
share settlement of RSUs ...
Stock issued to directors .........
Stock options exercised ..........
Tax short-fall from stock
options ...............................
Stock -based compensation ...
Cash dividends of $0.29 per
share ..................................
Change in other
comprehensive loss ...........
Net income ............................
Balance at December 31, 2014
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
3,420
-
-
138,220
52,431
594,946
-
-
-
-
-
-
-
-
1
1
6
-
-
-
-
-
605
(302)
(191)
-
1,106
14,749
(2,509)
2,106
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(6,342)
(3,420)
(6,265)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
79,589,869
-
-
838
-
-
784,489
(30,194)
-
(29,729)
-
123,143
829,109
-
-
(125,736)
116,957
88,537
-
13,690
5,500
-
-
-
1
1
-
-
-
-
-
-
2,847
-
(850)
350
128
(1,285)
3,840
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(23,105)
-
-
-
-
-
-
-
-
-
-
79,814,553 $
-
-
840 $
-
-
789,519 $
24,160
-
(5,569) $
-
137,830
943,834 $
-
-
(125,736) $
See accompanying notes to Consolidated Financial Statements.
F-5
-
-
-
-
-
-
-
291
-
788
764
(620)
2,062
(3,149)
-
(605)
-
605
8,447
-
(13,505)
9,197
118,043
1,629,504
-
-
605
(258,302)
(8,447)
-
-
-
-
-
-
-
(592)
-
592
-
-
-
-
-
-
-
-
-
-
- $
(8,638)
1
1,107
14,755
(2,509)
2,106
(6,342)
-
(6,857)
(30,194)
123,735
1,458,971
2,848
1
(850)
350
128
(1,285)
3,840
(23,105)
24,160
137,830
1,602,888
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/(Reversal) 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 ..........................................................................................
Proceeds from sale of loans .......................................................................................
Originations of loans held for sale ..............................................................................
Decrease in unrealized loss from interest rate swaps .................................................
Purchase of trading securities .....................................................................................
Income associated with debt redemption ...................................................................
Write-down on venture capital and other investments ..............................................
Write-down on impaired securities ............................................................................
Gain on sales and calls of securities ..........................................................................
Other non-cash interest expense/(income) ................................................................
Amortization of security premiums, net ....................................................................
Amortization of other intangible assets .....................................................................
Excess tax short-fall from stock options ....................................................................
Stock based and stock issued to officers and directors compensation expense ........
Noncontrolling interest ...............................................................................................
Net change in accrued interest receivable and other assets ........................................
Net change in other liabilities ....................................................................................
Net cash provided by operating activities ............................................................
Cash Flows from Investing Activities
Increase in short-term investments.................................................................................
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 .
Proceeds from maturity and call of investment securities held-to-maturity .................
Purchase of Federal Home Loan Bank stock .................................................................
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 .........................................................
Net cash used in investing activities ....................................................................
Cash Flows from Financing Activities
Net change in deposits ....................................................................................................
Net decrease in federal funds purchased and securities sold under agreements to
repurchase ....................................................................................................................
Advances from Federal Home Loan Bank .....................................................................
Repayment of Federal Home Loan Bank borrowings ...................................................
Cash dividends ...............................................................................................................
Redemption of Series B preferred stock ........................................................................
Redemption of noncontrolling interest ...........................................................................
Repayment of subordinated debt ....................................................................................
Repayment of long-term debt and other borrowings .....................................................
Proceeds from shares issued to Dividend Reinvestment Plan .......................................
Proceeds from exercise of stock options ........................................................................
Taxes paid related to net share settlement of RSUs ........................................................
Excess tax short-fall from share-based payment arrangements ......................................
Net cash provided by/(used in) financing activities ..............................................
Increase in cash and cash equivalents ...........................................................................
Cash and cash equivalents, beginning of the year ........................................................
Cash and cash equivalents, end of the year ................................................................... $
2014
Year Ended December 31,
2013
(In thousands)
2012
137,830 $
123,735 $
118,043
(10,800)
1,619
31,304
7,065
(4,065)
(395)
19,287
(19,865)
-
-
(555)
436
820
(7,568)
(137)
2,849
803
1,285
4,190
-
(2,776)
(11,256)
150,071
32,260
(885,782)
585,776
160,451
(307,617)
768,236
-
(18,164)
12,379
(824,558)
(4,777)
29,880
(7,445)
(459,361)
(3,000 )
(2,122 )
(15,114 )
6,690
(1,793 )
(879 )
42,573
(41,694 )
-
(234 )
-
409
-
(27,362 )
1,100
4,425
4,657
2,509
3,213
(592 )
23,525
(4,973 )
115,073
(104,955 )
(350,130 )
180,088
575,358
(676,529 )
669,658
50,973
-
16,272
(676,245 )
(6,182 )
19,411
(9,525 )
(311,806 )
(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
2,850
(605)
43,304
(2,256)
164,576
(117,027)
(517,513)
552,099
60,951
(680,388)
619,169
376,981
-
11,717
(395,743)
(3,108)
47,866
(1,540)
(46,536)
802,281
596,964
154,275
(350,000)
9,822,400
(9,918,600)
(23,104)
-
-
-
(1,445)
2,848
128
(850)
(1,285)
332,373
23,083
153,747
176,830 $
(450,000 )
2,402,000
(2,027,000 )
(12,606 )
(258,000 )
(8,638 )
(50,000 )
-
605
14,755
-
(2,509 )
205,571
8,838
144,909
153,747 $
(150,000)
531,200
(610,000)
(16,049)
-
-
-
(880)
291
764
-
(620)
(91,019)
27,021
117,888
144,909
See accompanying notes to Consolidated Financial Statements.
F-6
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
2014
Year Ended December 31,
2013
(In thousands)
2012
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest ............................................................................................................... $
Income taxes ..................................................................................................... $
78,366 $ 84,848 $ 112,411
36,083
60,225 $ 55,521 $
Non-cash investing and financing activities:
Transfers from trading securities to short-term investments .............................. $
Net change in unrealized holding gain/(loss) on securities available-for-sale,
4,936 $
- $
-
net of tax ....................................................................................................... $
26,557 $ (30,194) $
9,197
Net change in unrealized losses on interest rate swaps designated as cash flow
hedges ................................................................................................................ $
Transfers to investment securities available-for-sale at fair value ..................... $
Transfers to other real estate owned from loans held for investment ................. $
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 ........................................ $
(2,397) $
- $
- $ 722,466 $
4,970 $ 22,171 $
- $
- $
75 $
973 $
- $
413 $
-
-
14,389
15,986
500
1,785
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, seven
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: 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, 2014, gross loans were primarily
comprised of 50.3% of commercial mortgage loans and 26.7% of commercial loans. As of December 31, 2014, approximately
58% of the Bank’s residential mortgages were for properties located in California. Total deposits were comprised of 35.4%
of time deposit of $100,000 or more (Jumbo CDs) at December 31, 2014, and approximately 68.5% 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 and 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.
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
F-8
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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.
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 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 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
F-9
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
amount of the FHLB stock was $30.8 million at December 31, 2014, and $25.0 million at December 31, 2013. As of
December 31, 2014, the Company owned 307,850 shares of FHLB stock, which exceeded the minimum stock requirement
based on outstanding FHLB borrowings of $425.0 million.
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 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.
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.
F-10
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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
Buildings .............................................. 15 to 45 years
Building improvements ........................ 5 to 20 years
Furniture, fixtures, and equipment ....... 3 to 25 years
Leasehold improvements ...................... Shorter of useful lives or the terms of the leases
Estimated Useful Life
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.
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, 2014, seven 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 seven limited
partnerships into its Consolidated Financial Statements.
Investments in Venture Capital. The Company invests in limited partnerships that invest in nonpublic companies. These
are commonly referred to as venture capital investments. These limited partnership interests 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.
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 reporting units. 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
F-11
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 Company has identified two reporting units for its business: the Commercial Lending unit and the Retail Banking
unit. The reporting unit fair values were determined based on an equal weighting of (1) a market approach using a combination
of price to earnings multiples determined based on a representative peer group applied to 2014 and forecasted 2015 and 2016
earnings, and a price to book multiple and (2) 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, 2014.
As a result of this analysis, the Company determined that there was no goodwill impairment at December 31, 2014 as the fair
value of all reporting units exceeded the current carrying amount of the units. No assurance can be given that goodwill will
not be written down in future periods.
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.
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 option compensation expense 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. Restricted stock units are valued at the closing price of the Company’s stock on the date of the grant.
Stock-based compensation is recognized ratably over the requisite service period for all awards.
Derivatives. The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial
derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the
recognition of all financial derivatives as assets or liabilities in the Company’s consolidated balance sheet 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. Fair value is determined using third-party
models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in
other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For
derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings,
together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in
the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be
hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes
in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the
interest rate swaps are reflected in the Company’s consolidated financial statements.
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
F-12
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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.
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 January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323):
Accounting for Investments in Qualified Affordable Housing Projects.” ASU No. 2014-01 permits a reporting entity to make
an accounting policy election to account for its investments in affordable housing projects using the proportional amortization
method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the
investment in proportion to the amount of tax credits and other tax benefits received and recognizes the net investment
performance in the income statement as a component of income tax expense or benefit. ASU 2014-01 becomes effective for
interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-01 is not expected to have a
significant impact on the Company’s consolidated financial statements.
F-13
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
In January 2014, the FASB issued ASU 2014-04, “Receivables—Trouble Debt Restructurings by Creditors.” ASU
No. 2014-04 clarifies that upon either the creditor obtaining legal title to the residential real estate property upon completion
of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan
through completion of a deed in lieu of foreclosure or through a similar legal agreement, a creditor is considered to have
physical possession of residential real estate property collateralizing a consumer mortgage loan. A reporting entity is required
to have interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor
and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in process
of foreclosure. ASU 2014-04 becomes effective for interim and annual periods beginning on or after December 15, 2014.
Adoption of ASU 2014-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements and Property, Plant, and
Equipment.” ASU No. 2014-08 defines a discontinued operation as disposal of components of an entity that represent a
strategic shift that has or will have a major effect on an entity’s operations. ASU No. 2014-08 also requires a reporting entity
to present the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and
liability sections, respectively, of the statement of financial position for each comparative period. ASU 2014-08 becomes
effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-08 is not expected
to have a significant impact on the Company’s consolidated financial statements.
In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and
Disclosures.” ASU No. 2014-11 expands secured borrowing accounting for certain repurchase agreements. It requires the
repurchase agreement be separate from the initial transfer of the financial asset in a repurchase financing arrangement. An
entity is required to disclose additional information about certain transactions accounted for as a sale in which the transferor
retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with
the same counterparty. An entity is also required to disclose information about repurchase agreements, securities lending
transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings. ASU 2014-11 becomes
effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-11 is not expected
to 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 zero for 2014 and $6.5 million for 2013. The
average excess balance with Federal Reserve Bank was $170.1 million in 2014 and $136.3 million in 2013. At
December 31, 2014, the Bancorp had $7.5 million on deposit in a cash margin account that serves as collateral for the
Bancorp’s interest rate swaps.
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.
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 zero for 2014, zero for 2013 and $18,000 for 2012.
F-14
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
4. Investment Securities
Investment Securities. The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses,
and fair values of investment securities as of December 31, 2014, and December 31, 2013:
As of December 31, 2014
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
(In thousands)
Securities Available-for-Sale
U.S. treasury securities ................................................................ $
Mortgage-backed securities .........................................................
Collateralized mortgage obligations ............................................
Corporate debt securities ..............................................................
Mutual funds ................................................................................
Preferred stock of government sponsored entities .......................
Other equity securities ..................................................................
6,000
6,276
3,608
Total securities available-for-sale ............................................ $ 1,324,408 $
664,206 $
549,296
79
94,943
63 $
1,393
-
776
681
3,413
6,326 $
265
6,386
34
1,247
134
3,733
664,004
544,303
45
94,472
5,866
3,224
7,021
11,799 $ 1,318,935
As of December 31, 2013
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
(In thousands)
Securities Available-for-Sale
U.S. treasury securities ................................................................ $
460,095 $
Mortgage-backed securities ......................................................... 1,010,294
5,929
Collateralized mortgage obligations ............................................
123
Asset-backed securities ...............................................................
154,955
Corporate debt securities ..............................................................
6,000
Mutual funds ................................................................................
569
Preferred stock of government sponsored entities .......................
Total securities available-for-sale ............................................ $ 1,637,965 $
99 $
7,049
231
-
298
-
10,834
18,511 $
1 $
64,529
54
-
4,949
275
-
460,193
952,814
6,106
123
150,304
5,725
11,403
69,808 $ 1,586,668
The amortized cost and fair value of investment securities at December 31, 2014, 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.
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) .........................................................................................
Total ................................................................................................................. $
(In thousands)
115,033 $
569,853
85,654
553,868
1,324,408 $
115,068
570,371
85,097
548,399
1,318,935
Securities Available-for-Sale
Amortized Cost
Fair Value
(1) Equity securities are reported in this category
During the first quarter of 2013, due to the ongoing discussions regarding corporate income tax rates which could have a
negative impact on the after-tax yields and fair values of the Company’s portfolio of municipal securities, the Company
determined it may sell such securities in response to market conditions. As a result, the Company reclassified its municipal
F-15
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
securities from securities held-to-maturity to securities available-for-sale. Concurrent with this reclassification, the Company
also reclassified all other securities held-to-maturity, which together with the municipal securities had an amortized cost on
the date of transfer of $722.5 million, to securities available-for-sale. At the reclassification date, a net unrealized gain was
recorded in other comprehensive income for these securities totaling $40.5 million.
Proceeds from sales of mortgage-backed securities were $698.5 million and from repayments, maturities and calls of
mortgage-backed securities were $69.7 million during 2014 compared to proceeds from sales of $456.4 million and proceeds
of $213.2 million from repayments, maturities, and calls during 2013. Proceeds from sales of other investment securities
were $160.5 million during 2014 compared to $575.4 million during 2013. Proceeds from maturities and calls of other
investment securities were $585.8 during 2014 compared to $231.1 million during 2013. In 2014, gains of $18.0 million and
losses of $11.3 million were realized on sales and calls of investment securities compared with gains of $29.0 million and
losses of $1.6 million realized in 2013.
At December 31, 2014, all of the Company’s mortgage-backed securities were rated as investment grade except for one
non-agency issue. Total unrealized losses of $6.4 million from all mortgage-backed securities resulted from increases in
interest rates subsequent to the date that these securities were purchased. Total unrealized losses of $1.2 million on corporate
bonds relates to four issues of investments in bonds of financial institutions, all of which were investment grade at the date
of acquisition and as of December 31, 2014. 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 mortgage-backed securities and corporate 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 mortgaged-backed securities and corporate
bonds to be other-than-temporarily impaired at December 31, 2014. During the third quarter of 2014, the Company wrote
down the carrying value of its portfolio of agency preferred stock by $820,000. As of December 31, 2014, agency preferred
stock of with a cost of $6.2 million had an unrealized loss of $3.7 million, which the Company believes to be temporary.
The temporarily impaired securities represent 66.1% of the fair value of investment securities as of December 31, 2014.
Unrealized losses for securities with unrealized losses for less than twelve months represent 1.1%, and securities with
unrealized losses for twelve months or more represent 1.6%, of the historical cost of these securities. Unrealized losses on
these securities generally resulted from increases in interest rates or spreads subsequent to the date that these securities were
purchased. At December 31, 2014, 22 issues of securities had unrealized losses for 12 months or longer and 8 issues of
securities had unrealized losses of less than 12 months.
At December 31, 2014, management believed the impairment was temporary and, accordingly, no impairment loss on
debt securities has been recognized in our condensed 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.
F-16
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment
securities portfolio as of December 31, 2014, and December 31, 2013:
As of December 31, 2014
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value Losses
Unrealized No. of
Fair
Issuances Value Losses
Unrealized No. of
Fair
Issuances Value
Unrealized No. of
Losses
Issuances
(Dollars in thousands)
Securities Available-for-
Sale
U.S. treasury securities ..... $ 374,153 $
Mortgage-backed
265
6 $
- $
-
- $ 374,153 $
265
securities ........................
Collateralized mortgage
obligations .....................
Corporate debt securities ..
Mutual funds ....................
Preferred stock of
government sponsored
entities ............................
Total securities
-
-
-
-
-
-
-
-
- 425,090
6,386
16 425,090
6,386
-
-
-
45
63,753
5,866
34
1,247
134
1
45
4 63,753
5,866
1
34
1,247
134
2,448
3,733
2
-
-
-
2,448
3,733
6
16
1
4
1
2
available-for-sale ....... $ 376,601 $
3,998
8 $ 494,754 $
7,801
22 $ 871,355 $
11,799
30
As of December 31, 2013
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value Losses
Unrealized No. of
Fair
Issuances Value Losses
Unrealized No. of
Fair
Issuances Value
Unrealized No. of
Losses
Issuances
(Dollars in thousands)
Securities Available-for-
Sale
U.S. treasury securities ..... $ 75,064 $
Mortgage-backed
1
1 $
- $
securities ........................ 792,012
64,526
25
272
Mortgage-backed
securities-Non-agency ...
94
Collateralized mortgage
obligations .....................
Corporate debt securities ..
Mutual funds ....................
Total securities
68
9,970
-
1
4
30
-
-
2
-
- $ 75,064 $
1
7 792,284
64,528
-
94
1
1
-
2
301
1 100,081
5,724
-
50
4,919
275
3
369
8 110,051
5,724
1
54
4,949
275
1
32
1
5
9
1
available-for-sale ....... $ 877,208 $
64,562
30 $ 106,378 $
5,246
19 $ 983,586 $
69,808
49
Investment securities having a carrying value of $591.3 million at December 31, 2014, and $926.5 million at
December 31, 2013, 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-17
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; Nevada; 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, 2014, and December 31, 2013, 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 ......................................................................................
Total loans and leases, net ................................................................................................ $
Loans held for sale ........................................................................................................... $
As of December 31,
2014
2013
(In thousands)
2,382,493 $
298,654
4,486,443
1,570,059
172,879
3,552
8,914,080
(161,420 )
(12,392 )
8,740,268 $
973 $
2,298,724
221,701
4,023,051
1,355,255
171,277
14,555
8,084,563
(173,889)
(13,487)
7,897,187
-
The Company pledged real estate loans of $3.8 billion at December 31, 2014, and $1.6 billion at December 31, 2013, to
the Federal Home Loan Bank of San Francisco under its specific pledge program. In addition, the Bank pledged $127.2
million at December 31, 2014, and $119.1 million at December 31, 2013, 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, 2014, totaled $240.1 million and were comprised of $125.8 million of
residential mortgages, $52.5 million of commercial loans, $31.2 million of commercial real estate loans, and $30.6 million
of construction loans.
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, 2014. An analysis of the activity with respect to loans to Related Parties for the years indicated is as follows:
Balance at beginning of year ................................................................................... $
Additional loans made .............................................................................................
Payment received .....................................................................................................
Balance at end of year ............................................................................................. $
126,985 $
50,657
(119,783 )
57,859 $
172,584
64,063
(109,662)
126,985
December 31,
2014
2013
(In thousands)
F-18
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
At December 31, 2014, recorded investment in impaired loans totaled $174.5 million and was comprised of nonaccrual
loans, excluding loans held for sale, of $70.2 million and accruing TDR’s of $104.3 million. At December 31, 2013, recorded
investment in impaired loans totaled $200.8 million and was comprised of nonaccrual loans of $83.2 million and accruing
TDR’s of $117.6 million. The average balance of impaired loans was $190.2 million in 2014 and $221.2 million in 2013. We
considered all non-accrual loans and troubled debt restructurings ("TDR") to be impaired. Interest recognized on impaired
loans totaled $5.3 million in 2014 and $5.6 million in 2013. 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 17.1% at December 31, 2014, and 23.9% at December 31, 2013, of the contractual
balances for impaired loans. The following table presents impaired loans and the related allowance as of the dates indicated:
As of December 31, 2014
As of December 31, 2013
Impaired Loans
Unpaid
Principal
Balance
Recorded
Investment
Unpaid
Principal
Balance
Allowance
(Dollars in thousands)
Recorded
Investment
Allowance
With no allocated allowance
Commercial loans ...................... $
Real estate construction loans ....
Commercial mortgage loans ......
Residential mortgage and equity
19,479 $
32,924
77,474
18,452 $
17,025
75,172
lines .........................................
2,518
Subtotal ................................. $ 132,395 $
2,518
113,167 $
- $
-
-
-
- $
20,992 $
25,401
105,593
18,905 $
15,097
78,930
4,892
4,892
156,878 $ 117,824 $
With allocated allowance
Commercial loans ...................... $
Real estate construction loans ....
Commercial mortgage loans ......
Residential mortgage and equity
7,003 $
19,006
38,197
5,037 $
8,703
34,022
1,263 $
1,077
8,993
22,737 $
28,475
39,223
13,063 $
19,323
35,613
lines .........................................
Subtotal ................................. $
14,019
78,225 $
Total impaired loans ................... $ 210,620 $
13,590
61,352 $
174,519 $
465
11,798 $
11,798 $
14,957
16,535
106,970 $
82,956 $
263,848 $ 200,780 $
-
-
-
-
-
2,519
3,460
6,584
721
13,284
13,284
The following table presents the average balance and interest income recognized related to impaired loans for the periods
indicated:
For the year ended December 31,
2014
2013
Average Recorded Investment
2012
2014
2013
Interest Income Recognized
2012
Commercial loans .......................... $
Real estate construction loans .......
Commercial mortgage loans ..........
Residential mortgage and equity
26,128 $
32,439
114,248
27,123 $
37,875
138,121
(In thousands)
31,798 $
49,094
178,822
878 $
264
3,735
lines ...........................................
Subtotal ..................................... $
17,411
190,226 $
18,033
221,152 $
18,062
277,776 $
462
5,339 $
770 $
284
4,256
289
5,599 $
580
265
8,221
239
9,305
F-19
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The following is a summary of non-accrual loans as of December 31, 2014, 2013, and 2012 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 ......................................................................... $
2014
2013
(In thousands)
2012
70,163 $
973
71,136 $
6,663 $
217
6,446 $
83,183 $
-
83,183 $
5,851 $
22
5,829 $
103,902
-
103,902
6,621
1,006
5,615
The following tables present the aging of the loan portfolio by type as of December 31, 2014, and December 31, 2013:
As of December 31, 2014
30-59
Days
Past Due
60-89
Days
Past Due
Greater
than 90
Days
Past Due
Type of Loans:
Commercial loans ..................... $ 11,595 $
Real estate construction loans ..
1,416
Commercial mortgage loans ..... 17,654
5,634
Residential mortgage loans ......
Installment and other loans ......
60
Total loans ................................ $ 36,359 $
1,238 $
-
3,909
732
-
5,879 $
30-59
Days
Past Due
60-89
Days
Past Due
Greater
than 90
Days
Past Due
Type of Loans:
7,170 $ 16,562 $
Commercial loans ..................... $
-
-
Real estate construction loans ..
7,862
Commercial mortgage loans ..... 20,043
832
3,508
Residential mortgage loans ......
Installment and other loans ......
-
100
Total loans ................................ $ 30,821 $ 25,256 $
Non-
accrual
Loans
(In thousands)
Total
Past Due
Loans Not
Past Due
Total
6,983 $ 19,816 $ 2,362,677 $2,382,493
- $
21,379 277,275
19,963
298,654
-
57,169 4,429,274 4,486,443
35,606
-
13,977 1,728,961 1,742,938
7,611
-
-
3,552
-
60
- $ 70,163 $ 112,401 $ 8,801,679 $8,914,080
3,492
As of December 31, 2013
Non-
accrual
Loans
(In thousands)
Total
Past Due
Loans Not
Past Due
Total
- $ 21,232 $ 44,964 $ 2,253,760 $2,298,724
221,701
-
28,586 193,115
48,508 3,974,543 4,023,051
982
18,084 1,508,448 1,526,532
-
14,555
14,455
-
100
982 $ 83,183 $ 140,242 $ 7,944,321 $8,084,563
28,586
19,621
13,744
-
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.
F-20
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
At December 31, 2014, accruing TDRs were $104.3 million and non-accrual TDRs were $41.6 million compared to
accruing TDRs of $117.6 million and non-accrual TDRs of $38.8 million at December 31, 2013. The Company has allocated
specific reserves of $6.5 million to accruing TDRs and $4.9 million to non-accrual TDRs at December 31, 2014, and $6.9
million to accruing TDRs and $2.2 million to non-accrual TDRs at December 31, 2013. The following table presents TDRs
that were modified during 2014, their specific reserve at December 31, 2014, and charge-offs during 2014:
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
Specific
Reserve
No. of
Contracts
Charge-
offs
Commercial loans .............................................
Commercial mortgage loans .............................
Residential mortgage and equity lines ..............
Total ....................................................................
4 $
3
7
14 $
10,539 $
11,817
2,715
25,071 $
10,539 $
11,817
2,715
25,071 $
21 $
5,550
29
5,600 $
-
-
-
-
The following table presents TDRs that were modified during 2013, their specific reserve at December 31, 2013, and
charge-offs during 2013:
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
Specific
Reserve
No. of
Contracts
Charge-
offs
Commercial loans .............................................
Commercial mortgage loans .............................
Residential mortgage and equity lines ..............
Total ....................................................................
9 $
5
11
25 $
12,026 $
13,090
3,736
28,852 $
10,860 $
13,090
3,658
27,608 $
550 $
329
103
982 $
1,166
-
78
1,244
The following table presents TDRs that were modified during 2012, their specific reserve at December 31, 2012, and
charge-offs during 2012:
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
Specific
Reserve
No. of
Contracts
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 $
3,646 $
58,393
4,223
66,262 $
1,213 $
27
162
1,402 $
-
3,725
82
3,807
F-21
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
A summary of TDRs by type of concession and by type of loans as of December 31, 2014, and December 31, 2013, are
shown below:
Accruing TDRs
Interest
Deferral
Principal
Deferral
December 31, 2014
Rate
Reduction
and
Forgiveness
of Principal
Rate
Reduction
Rate
Reduction
and
Payment
Deferral
Total
Commercial loans ................... $
Real estate construction loans
Commercial mortgage loans ...
Residential mortgage loans ....
Total accruing TDRs ............... $
- $
-
436
-
436 $
11,572 $
5,765
20,107
3,316
40,760 $
(In thousands)
- $
-
26,694
-
26,694 $
- $
-
-
410
410 $
4,934 $
-
26,351
4,771
16,506
5,765
73,588
8,497
36,056 $ 104,356
December 31, 2014
Non-accrual TDRs
Interest
Deferral
Principal
Deferral
Rate
Reduction
(In thousands)
Rate
Reduction
and
Payment
Deferral
Total
Commercial loans ....................................... $
Real estate construction loans ....................
Commercial mortgage loans .......................
Residential mortgage loans ........................
Total non-accrual TDRs .............................. $
1,184 $
-
-
-
1,184 $
239 $
-
15,917
1,026
17,182 $
860 $
-
-
-
860 $
1,269 $
19,462
973
688
22,392 $
3,552
19,462
16,890
1,714
41,618
Accruing TDRs
Principal
Deferral
As of December 31, 2013
Rate
Reduction
and
Forgiveness
of Principal
(In thousands)
Rate
Reduction
and
Payment
Deferral
Rate
Reduction
Total
Commercial loans ....................................... $
Real estate construction loans ....................
Commercial mortgage loans .......................
Residential mortgage loans ........................
Total accruing TDRs ................................... $
9,112 $
-
11,333
1,564
22,009 $
2,916 $
-
9,389
1,024
13,329 $
- $
-
-
-
- $
2,708 $
5,834
70,200
3,517
82,259 $
14,736
5,834
90,922
6,105
117,597
Non-accrual TDRs
Interest
Deferral
As of December 31,2013
Rate
Reduction
and
Forgiveness
of Principal
(In thousands)
Rate
Reduction
and
Payment
Deferral
Principal
Deferral
Total
Commercial loans ....................................... $
Real estate construction loans ....................
Commercial mortgage loans .......................
Residential mortgage loans ........................
Total non-accrual TDRs .............................. $
- $
-
1,443
241
1,684 $
2,866 $
16,009
2,168
2,206
23,249 $
1,352 $
-
-
-
1,352 $
- $
9,263
1,843
1,378
12,484 $
4,218
25,272
5,454
3,825
38,769
F-22
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Troubled debt restructurings on accrual status totaled $104.3 million at December 31, 2014, and were comprised of 60
loans, a decrease of $13.3 million, compared to 64 loans totaling $117.6 million at December 31, 2013. TDRs at
December 31, 2014, were comprised of nine commercial loans of $16.5 million, three hotel loans of $15.7 million, 31 single
family residential loans of $13.6 million, two industrial and manufactural use building loans of $12.2 million, two land loans
for residential purpose of $10.2 million, four commercial condos loans of $10.1 million, three retail shopping and commercial
use building loans of $9.0 million, one multi-family residential loan of $6.1 million, one shopping center construction loan
of $5.8 million, three office buildings loans of $3.5 million, and one warehouse loan of $1.6 million. We expect that the
troubled debt restructuring loans on accruing status as of December 31, 2014, 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, 2013, were comprised of 13 retail shopping and commercial
use building loans of $44.2 million, ten office and commercial use building loans of $28.6 million, four hotel loans of $17.2
million, 25 single family residential loans of $20.0 million, two warehouses of $1.6 million, five commercial loans of $5.3
million, and five multi-family residential loans of $748,000. The activity within our TDR loans for 2014, 2013, and 2012 are
shown below:
Accruing TDRs
Beginning balance .................................................................. $
New restructurings .................................................................
Restructured loans restored to accrual status .........................
Charge-offs ............................................................................
Payments ................................................................................
Restructured loans placed on non-accrual ..............................
Ending balance ....................................................................... $
Non-accrual TDRs
2014
2013
(In thousands)
2012
117,597 $
23,740
962
-
(13,256)
(24,687)
104,356 $
144,695 $
21,382
6,851
(78 )
(52,362 )
(2,891 )
117,597 $
120,016
53,958
8,356
(251)
(5,159)
(32,225)
144,695
2014
2013
(In thousands)
2012
Beginning balance .................................................................. $
New restructurings .................................................................
Restructured loans placed on non-accrual ..............................
Charge-offs ............................................................................
Payments ................................................................................
Foreclosures ...........................................................................
Restructured loans restored to accrual status .........................
38,769 $
1,331
24,687
(8,937)
(11,710)
(1,560)
(962)
47,731 $
6,226
2,891
(2,124 )
(4,295 )
(4,809 )
(6,851 )
50,870
12,304
32,225
(4,182)
(33,931)
(1,199)
(8,356)
Ending balance ....................................................................... $
41,618 $
38,769 $
47,731
A loan is considered to be in payment default once it is 60 to 90 days contractually past due under the modified
terms. There were no loans modified as TDRs during the previous twelve months that subsequently defaulted as of
December 31, 2014.
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, 2014, 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:
(cid:404) Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.
F-23
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
(cid:404) 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.
(cid:404) 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.
(cid:404) 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.
(cid:404) Loss – These loans are considered uncollectible and of such little value that to continue to carry the loans as an active
asset is no longer warranted.
The following tables present loan portfolio by risk rating as of December 31, 2014, and as of December 31, 2013:
As of December 31, 2014
Pass/Watch
Special
Mention
Substandard
Doubtful
Total
Commercial loans ................................................. $ 2,260,474 $
Real estate construction loans ..............................
272,927
Commercial mortgage loans ................................. 4,213,453
Residential mortgage and equity lines .................. 1,733,248
3,552
Installment and other loans ..................................
47,619 $
-
105,970
-
-
72,561 $
25,227
167,020
9,690
-
500
1,839 $ 2,382,493
298,654
- 4,486,443
- 1,742,938
3,552
-
Total gross loans .................................................. $ 8,483,654 $
153,589 $
274,498 $
2,339 $ 8,914,080
Loans held for sale ............................................... $
- $
- $
973 $
- $
973
As of December 31, 2013
Pass/Watch
Special
Mention Substandard Doubtful
Total
Commercial loans ................................................. $ 2,108,191 $
Real estate construction loans ..............................
184,449
Commercial mortgage loans ................................. 3,686,788
Residential mortgage and equity lines .................. 1,510,647
14,555
Installment and other loans ..................................
84,786 $
-
127,436
-
-
102,088 $
33,939
208,827
15,885
-
3,659 $ 2,298,724
221,701
3,313
- 4,023,051
- 1,526,532
14,555
-
Total gross loans .................................................. $ 7,504,630 $
212,222 $
360,739 $
6,972 $ 8,084,563
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-24
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, 2014, and as of December 31, 2013.
Residential
Real Estate Commercial Mortgage
Commercial Construction Mortgage and Equity Consumer
and Other
Loans
Loans
Loans
Lines
Total
December 31, 2014
Loans individually evaluated
for impairment
Allowance ............................. $
Balance .................................. $
1,263 $
23,489 $
1,077 $
25,728 $
8,993 $
109,194 $
465 $
16,108 $
- $
- $
11,798
174,519
(In thousands)
Loans collectively evaluated
for impairment
Allowance ............................. $
46,238 $
Balance .................................. $ 2,359,004 $
26,575 $
11,113 $
65,680 $
272,926 $ 4,377,249 $ 1,726,830 $
16 $
149,622
3,552 $ 8,739,561
47,501 $
Total allowance ..................... $
Total balance ......................... $ 2,382,493 $
11,578 $
74,673 $
27,652 $
298,654 $ 4,486,443 $ 1,742,938 $
16 $
161,420
3,552 $ 8,914,080
December 31, 2013
Loans individually evaluated
for impairment
Allowance ............................. $
Balance .................................. $
2,519 $
31,968 $
3,460 $
34,420 $
6,584 $
114,544 $
721 $
19,848 $
- $
- $
13,284
200,780
Loans collectively evaluated
for impairment
Allowance ............................. $
62,584 $
Balance .................................. $ 2,266,756 $
8,539 $
11,284 $
78,169 $
187,281 $ 3,908,507 $ 1,506,684 $
29 $
160,605
14,555 $ 7,883,783
Total allowance ..................... $
65,103 $
Total balance ......................... $ 2,298,724 $
11,999 $
12,005 $
84,753 $
221,701 $ 4,023,051 $ 1,526,532 $
29 $
173,889
14,555 $ 8,084,563
F-25
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, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its
availability to absorb losses in other categories.
Residential
Real Estate Commercial Mortgage Installment
Commercial Construction Mortgage and Equity and Other
Loans
Loans
Loans
Loans
Lines
Total
2013 Beginning Balance ... $
66,101 $
23,017 $
(In thousands)
82,473 $
11,703 $
28 $
183,322
Provision/(reversal) for
possible loan losses .........
11,888
(13,302)
(2,500)
924
(10)
(3,000)
Charge-offs ........................
Recoveries .........................
Net Charge-offs .................
(15,625 )
2,739
(12,886 )
-
2,284
2,284
(3,945)
8,725
4,780
(872)
250
(622)
2013 Ending Balance ........ $
Reserve to impaired loans . $
Reserve to non-impaired
65,103 $
2,519 $
11,999 $
3,460 $
84,753 $
6,584 $
12,005 $
721 $
-
11
11
29 $
- $
(20,442)
14,009
(6,433)
173,889
13,284
loans ................................ $
62,584 $
8,539 $
78,169 $
11,284 $
29 $
160,605
Reserve for off-balance
sheet credit commitments $
909 $
304 $
111 $
38 $
1 $
1,363
2014 Beginning Balance ... $
65,103 $
11,999 $
84,753 $
12,005 $
29 $
173,889
Provision/(reversal) for
possible loan losses .........
(22,244 )
19,853
(8,197)
(558)
(26)
(11,172)
Charge-offs ........................
Recoveries .........................
Net Charge-offs .................
(7,875 )
12,517
4,642
(6,747)
2,547
(4,200)
(7,458)
5,575
(1,883)
(155)
286
131
2014 Ending Balance ........ $
Reserve to impaired loans . $
Reserve to non-impaired
47,501 $
1,263 $
27,652 $
1,077 $
74,673 $
8,993 $
11,578 $
465 $
-
13
13
16 $
- $
(22,235)
20,938
(1,297)
161,420
11,798
loans ................................ $
46,238 $
26,575 $
65,680 $
11,113 $
16 $
149,622
Reserve for off-balance
sheet credit commitments $
923 $
728 $
259 $
39 $
- $
1,949
F-26
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
An analysis of the activity in the allowance for credit losses for the years ended December 31, 2014, 2013, and 2012 is
as follows:
Allowance for Loan Losses
Balance at beginning of year ............................................................. $
(Reversal)/provision for credit losses ................................................
Transfers (to)/from reserve for off-balance sheet credit
commitments ..................................................................................
Loans charged off ..............................................................................
Recoveries of charged off loans ........................................................
Balance at end of year ....................................................................... $
Reserve for Off-balance Sheet Credit Commitments
Balance at beginning of year ............................................................. $
Provision for credit losses/transfers ..................................................
Balance at end of year ....................................................................... $
2014
December 31,
2013
(In thousands)
2012
173,889 $
(10,800)
183,322 $
(3,000 )
(372)
(22,235)
20,938
161,420 $
1,363 $
586
1,949 $
-
(20,442 )
14,009
173,889 $
1,363 $
-
1,363 $
206,280
(9,000)
706
(32,791)
18,127
183,322
2,069
(706)
1,363
Residential mortgage loans in process of formal foreclosure proceedings were $2.3 million at December 31, 2014,
compared to $4.0 million at December 31, 2013.
6. Other Real Estate Owned
At December 31, 2014, the net carrying value of other real estate owned (“OREO”) decreased $21.5 million, or 40.6%,
to $31.5 million from $53.0 million at December 31, 2013. The carrying amount of foreclosed residential real estate properties
held were $4.7 million at December 31, 2014, compared to $202,000 at December 31, 2013. OREO located in California was
$4.1 million and was comprised primarily of one residential property of $2.0 million, four commercial use buildings of $1.2
million, one residential construction project of $526,000, one parcel of land zoned for residential purpose of $243,000, and
one parcel of land zoned for commercial purpose of $235,000. OREO located in Texas was $15.7 million and was comprised
of three parcels of land zoned for commercial purpose of $12.3 million, one medical office building of $1.6 million, a retail
store of $761,000, a commercial building construction project of $752,000, and a shopping center of $304,000. OREO located
in Illinois was $4.0 million and was comprised of two multi-family residential properties of $3.1 million and an office of
$921,000. OREO located in the state of Washington was an office and commercial use building of $3.8 million. OREO
located in the state of New York was $3.8 million and was comprised of one residential property of $2.7 million and a retail
store of $1.1 million.
For 2013, OREO located in California was $10.9 million and was comprised primarily of eight parcels of land zoned for
residential purpose of $9.0 million, three commercial use buildings of $564,000, three commercial building construction
projects of $635,000, one residential construction project of $530,000, and one parcel of land zoned for commercial purpose
of $235,000. OREO located in Texas was $27.3 million and was comprised of three office and commercial use buildings of
$12.5 million, six parcels of land zoned for residential purposes of $12.7 million, four commercial building construction
projects of $1.3 million and a retail store of $766,000. OREO located in the state of Washington was $6.5 million and was
comprised three parcels of land zoned for residential purpose of $667,000 and one office and commercial use building of
$5.8 million. OREO located in the state of New York was one office and commercial use building $893,000. OREO located
in the state of North Carolina was one commercial use building of $4.1 million. OREO located in Illinois was $3.3 million
and was comprised of one condominium property of $2.4 million, two commercial use properties of $639,000 and one
residential property of $202,000.
F-27
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
An analysis of the activity in the valuation allowance for other real estate losses for the years ended December 31, 2014,
2013, and 2012 is as follows:
2014
Year Ended December 31,
2013
(In thousands)
2012
Balance, beginning of year ................................................................ $
Provision/(Reversal) for losses ..........................................................
OREO disposal ...................................................................................
Balance, end of year .......................................................................... $
13,384 $
1,619
(12,893)
2,110 $
19,556 $
(2,122 )
(4,050 )
13,384 $
26,422
10,668
(17,534)
19,556
The following table presents the components of other real estate owned expense for the years ended December 31, 2014,
2013, and 2012:
2014
Year Ended December 31,
2013
(In thousands)
2012
Operating expense .............................................................................. $
Provision/(reversal) for losses ...........................................................
Net gain on transfers and disposals ....................................................
Total other real estate owned expense ............................................... $
1,142 $
1,619
(4,065)
(1,304) $
3,680 $
(2,122 )
(1,793 )
(235 ) $
4,817
10,668
(369)
15,116
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 $104.6 million at
December 31, 2014, and $84.1 million at December 31, 2013. At December 31, 2014, and December 31, 2013, seven 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 $24.8 million at December 31, 2014, and by $23.8 million at
December 31, 2013. Other borrowings for affordable housing limited partnerships were $19.9 million at December 31, 2014,
and $19.1 million at December 31, 2013; recourse is limited to the assets of the limited partnerships. Unfunded commitments
for affordable housing limited partnerships of $22.0 million as of December 31, 2014, and $7.0 million as of December 31,
2013, 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 $57.7 million for Federal and
$1.4 million for state at December 31, 2014. The Company’s usage of tax credits approximated $10.2 million in 2014, $9.8
million in 2013, and $9.2 million in 2012. 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.
F-28
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
8. Premises and Equipment
Premises and equipment consisted of the following as of December 31, 2014, and December 31, 2013:
Land and land improvements ...................................................................................... $
Building and building improvements ..........................................................................
Furniture, fixtures and equipment ...............................................................................
Leasehold improvement ...............................................................................................
Construction in process ...............................................................................................
Less: Accumulated depreciation/amortization ............................................................
Premises and equipment, net ....................................................................................... $
As of December 31,
2014
2013
(In thousands)
33,543 $
74,550
47,936
14,006
54
170,089
70,407
99,682 $
33,441
73,756
44,278
12,753
1,160
165,388
63,343
102,045
The amount of depreciation/amortization included in operating expense was $7.1 million in 2014, $6.7 million in 2013,
and $5.9 million in 2012.
9. Deposits
The following table displays deposit balances as of December 31, 2014, and December 31, 2013:
Demand ........................................................................................................... $
NOW accounts ................................................................................................
Money market accounts ..................................................................................
Saving accounts ..............................................................................................
Time deposits under $100,000 ........................................................................
Time deposits of $100,000 or more .................................................................
Total ............................................................................................................ $
Time deposits outstanding as of December 31, 2014, mature as follows.
As of December 31,
2014
2013
(In thousands)
1,664,914 $
778,691
1,538,187
533,940
1,162,547
3,105,181
8,783,460 $
1,441,858
683,873
1,286,338
499,520
931,204
3,138,512
7,981,305
2015
Time deposits, $100,000
Expected Maturity Date at December 31,
2019
2016
2017
2018
(In thousands)
Thereafter
Total
and over .......................... $ 2,601,143 $ 163,048 $ 238,333 $
61,992 $
Other time deposits ............ 772,529 162,465 109,302 116,420
$ 3,373,672 $ 325,513 $ 347,635 $ 178,412 $
40,665 $
1,820
42,485 $
- $ 3,105,181
11 1,162,547
11 $ 4,267,728
F-29
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Accrued interest payable on customer deposits was $2.3 million at December 31, 2014, $2.0 million at December 31,
2013, and $2.1 million at December 31, 2012. The following table summarizes the interest expense on deposits by account
type for the years ended December 31, 2014, 2013, and 2012:
Interest bearing demand ............................................ $
Money market accounts ............................................
Saving accounts ........................................................
Time deposits ............................................................
Total ...................................................................... $
10. Borrowed Funds
2014
Year Ended December 31,
2013
(In thousands)
2012
1,229 $
8,627
802
35,111
45,769 $
1,017 $
7,034
374
31,964
40,389 $
792
5,938
365
40,278
47,373
Securities Sold under Agreements to Repurchase. Securities sold under agreements to repurchase were $450.0 million
with a weighted average rate of 3.85% at December 31, 2014, compared to $800.0 million with a weighted average rate of
3.87% at December 31, 2013. In 2014, the Company prepaid securities sold under agreements to repurchase totaling $100
million with a weighted average rate of 3.5% and incurred prepayment penalties of $3.4 million. In 2013, the Company
prepaid securities sold under agreements to repurchase totaling $450 million with a weighted average rate of 3.79% and
incurred prepayment penalties of $22.6 million. Four floating-to-fixed rate agreements totaling $200.0 million have initial
floating rates for one year, with floating rates of three-month LIBOR rate minus 340 basis points. Thereafter, the rates are
fixed for the remainder of the term, with interest rates ranging from 4.89% to 5.07%. After the initial floating rate term, the
counterparties have the right to terminate the transaction at par at the fixed rate reset date and quarterly thereafter. One fixed-
to-floating rate agreement of $50.0 million had an initial fixed rate of 1.00% with initial fixed rate term of nine months. For
the remaining term, the rates float at 8% minus the three-month LIBOR rate with a maximum rate of 3.50% and a minimum
rate of 0.0%. After the initial fixed rate term, the counterparties 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 $250.0 million of callable securities
sold under agreements to repurchase as of December 31, 2014:
(Dollars in millions)
Rate type
Rate index
Maximum rate ..................................................
Minimum rate ...................................................
No. of agreements ............................................
Amount ............................................................. $
Weighted average rate ......................................
Final maturity ...................................................
Fixed-to-floating
Floating-to-fixed
Total
Float Rate
8% minus 3 month
LIBOR
Fixed Rate
3.50%
0.0%
1
50.0
$
3.50%
2015
4
200.0
$
5.00%
2017
5
250.0
4.70%
The table below provides summary data for non-callable fixed rate securities sold under agreements to repurchase as of
December 31, 2014:
Maturity
1 year to 3 years .........................................................
3 years to 5 years ........................................................
Total ...........................................................................
No. of
Agreements
2
2
4
$
$
Amount
(In thousands)
Weighted Average
Interest Rate
100,000
100,000
200,000
2.71%
2.86%
2.78%
These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the
securities were sold. The Company 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
securities, and mortgage-backed securities with a fair value of $516.3 million as of December 31, 2014, and $906.1 million
as of December 31, 2013.
F-30
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:
2014
2013
(Dollars in thousands)
2012
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 .......................................
629,315 $
700,000
450,000
3.85%
3.92%
972,329 $
1,200,000
800,000
3.87%
3.88%
1,361,475
1,400,000
1,250,000
3.84%
4.09%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January 2014, January 2013, and January 2012.
Advances from the FHLB were $425.0 million with a weighted average rate of 0.32% at December 31, 2014, compared
to $521.2 million with weighted average rate of 0.17% at December 31, 2013. The Company prepaid $171.2 million advances
from the FHLB at a rate of 1.08% with prepayment penalties of $527,000 in 2014 and did not prepay any advances from the
FHLB in 2013.
The following relates to the outstanding advances at December 31, 2014, and 2013:
2014
2013
Amount
Weighted
Average
Amount
Weighted
Average
Maturity
Within 90 days ................................................. $
4 - 5 years ..........................................................
Total .................................................................. $
(In thousands) Interest Rate
(In thousands) Interest Rate
400,000
25,000
425,000
0.27% $
1.13%
0.32% $
475,000
46,200
521,200
0.06%
1.24%
0.17%
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 the later of January 1 of the first year following the CEO’s separation from service or the first day
of the seventh month following the CEO’s separation from service. 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. On November 23, 2014, the interest rate was reset to 5.06% based on
275 basis points above the interest rate on the ten-year Treasury Note on that date. On March 13, 2014, the Compensation
Committee of the Company awarded the Company’s CEO a cash bonus in the amount of $300,000 for the quarter ended
December 31, 2013, and provided as part of the award that payment of the bonus would be deferred until the later of January
1 of the first year following the CEO’s separation from service or the first day of the seventh month following the CEO’s
separation from service. The Company accrues interest on the deferred bonus at 5.02% per annum compounded quarterly.
Beginning on the fifth anniversary of the agreement, the interest rate will be reset at 350 basis points above the then prevailing
interest rate on the five-year Treasury Note.
Interest of $93,000 during 2014, $77,000 during 2013, and $71,000 during 2012 was accrued on deferred bonus. The
balance was $1.5 million at December 31, 2014, and $1.1 million at December 31, 2013.
11. Capital Resources
The Company 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 paid
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. In conjunction with
F-31
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 exercise price equal to $38.7 million, 15% of the senior preferred stock
amount that U.S. Treasury invested. In 2013, the Company redeemed all $258 million Series B Preferred Stock issued under
the U.S. Treasury's TARP Capital Purchase Program. On December 9, 2013, the U.S. Treasury sold all of the warrants that
it held for $13.1 million, or $7.20 per warrant, through a secondary public offering.
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. The per annum interest rate on the subordinated debt
was 3.61% at December 31, 2012. In December 2013, the subordinated debt was repaid in full with a prepayment penalty of
$2,000.
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. 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. Interest expense on the Junior Subordinated Notes was $4.5 million for 2014, $3.0 million for 2013, and $3.2
million for 2012.
F-32
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, 2014:
Trust Name
Cathay Capital Trust I ..........
Issuance
Date
June 26,
2003
Principal
Not
Balance of
Redeemable
Notes
Until
Stated
Maturity
Annualized
Coupon Rate
Current
Interest
Rate
Date of
Rate
Change
Payable/
Distribution
Date
$
20,619
(Dollars in thousands)
June 30,
2008
June 30,
2033
Cathay Statutory Trust I .......
September 17,
2003
20,619
September 17,
2008
September 17,
2033
Cathay Capital Trust II .........
December 30,
2003
12,887
March 30,
2009
March 30,
2034
Cathay Capital Trust III ........
March 28,
2007
46,392
June 15,
2012
June 15,
2037
Cathay Capital Trust IV .......
May 31,
2007
18,619
September 6,
2012
September 6,
2037
Total Junior Subordinated Notes ......................... $
119,136
12. Income Taxes
3-month
LIBOR+
3.15%
3-month
LIBOR
+ 3.00%
3-month
LIBOR
+ 2.90%
3-month
LIBOR
+ 1.48%
3-month
LIBOR
+ 1.4%
3.41% December 30,
2014
3.24% December 17,
2014
3.16% December 30,
2014
1.72% December 15,
2014
1.64% December 8,
2014
March 30
June 30
September 30
December 30
March 17
June 17
September 17
December 17
March 30
June 30
September 30
December 30
March 15
June 15
September 15
December 15
March 6
June 6
September 6
December 6
For the years ended December 31, 2014, 2013, and 2012, the current and deferred amounts of the income tax expense
are summarized as follows:
Current:
Federal ................................................................................................ $
State ....................................................................................................
Total Current ....................................................................................... $
Deferred:
Federal ................................................................................................
State ....................................................................................................
Total Deferred ..................................................................................... $
Total income tax expense/(benefit) ......................................................... $
2014
Year Ended December 31,
2013
(In thousands)
2012
36,180 $
14,481
50,661 $
23,783
7,521
31,304 $
81,965 $
62,254 $
23,295
85,549 $
(11,162)
(3,952)
(15,114) $
70,435 $
44,263
17,081
61,344
3,755
1,029
4,784
66,128
F-33
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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, 2014, and at December 31, 2013, 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 ............................. $
Share-based compensation ...............................................................................................
Accrual for bonuses ..........................................................................................................
Non-accrual interest ........................................................................................................
Accrual for litigation ........................................................................................................
Write-down on equity securities and venture capital investments ..................................
Write-down on other real estate owned ............................................................................
State tax ...........................................................................................................................
Unrealized loss on interest rate swaps ..............................................................................
Unrealized loss on securities available-for-sale, net .......................................................
Other, net .........................................................................................................................
Gross deferred tax assets .................................................................................................
Deferred Tax Liabilities
Basis difference in acquired assets ...................................................................................
Dividends on Federal Home Loan Bank common stock ..................................................
Other, net .........................................................................................................................
Gross deferred tax liabilities ...........................................................................................
Valuation allowance .........................................................................................................
Net deferred tax assets ..................................................................................................... $
As of December 31,
2014
2013
(In thousands)
66,999 $
12,808
4,585
3,735
2,918
2,697
1,357
3,253
1,739
2,301
2,179
104,571
(3,321 )
(1,927 )
(3,075 )
(8,323 )
-
96,248 $
89,560
13,573
3,380
3,968
2,415
2,857
8,595
6,493
-
21,569
4,214
156,624
(3,138)
(2,986)
(2,773)
(8,897)
(1,263)
146,464
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.
The Company had income tax refunds receivables of $18.1 million at December 31, 2014, and $8.6 million at December
31, 2013. These income tax receivables are included in other assets in the accompanying Consolidated Balance Sheets. At
December 31, 2014, the Company had Federal net operating loss carry forwards of approximately $0.8 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 both December 31, 2014 and 2013, there were no unrecognized tax benefits. The Company’s tax returns are open for
audits by the Internal Revenue Service back to 2011 and by the California Franchise Tax Board 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.
F-34
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years
indicated as follows:
2014
Year Ended December 31,
2013
(In thousands)
2012
Tax provision at Federal statutory
rate ........................................... $
76,928
35.0% $
67,752
35.0% $
64,248
35.0%
State income taxes, net of Federal
income tax benefit ....................
14,324
6.6
12,573
6.5
11,772
6.4
Interest on obligations of state and
political subdivisions, which are
exempt from Federal taxation ...
Low income housing and other
-
-
(348)
(0.2)
(1,456)
(0.8)
tax credits ..................................
Other, net ......................................
Total income tax expense ............. $
(10,014)
727
81,965
(4.6)
0.3
37.3% $
(10,056)
514
70,435
(5.2)
0.3
36.4% $
(9,353)
917
66,128
(5.1)
0.5
36.0%
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.
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, 2014, is restricted to approximately $57.2 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 qualified as Tier 1 capital under
current regulatory guidelines. The Company paid dividends of $605,000 in 2013 and $605,000 in 2012. The Bank dissolved
the Trust on December 23, 2013.
F-35
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Activity in accumulated other comprehensive income, net of tax, and reclassification out of accumulated other
comprehensive income for the years ended December 31, 2014, and 2013 was as follows:
2014
Tax
expense/
(Benefit) Net-of-tax
Pre-tax
2013
Tax
expense/
(Benefit) Net-of-tax
Pre-tax
(In thousands)
Beginning balance,
(loss)/income, net of tax
Securities available-for sale ......
Cash flow hedge derivatives .....
Total ......................................
Net unrealized gains/(losses)
arising during the period
Securities available-for sale ....... $
Cash flow hedge derivatives ......
Total .......................................
Reclassification adjustment for
net gains included in net
income
Securities available-for sale .......
Cash flow hedge derivatives ......
Total .......................................
Net unrealized gains arising
from transferring securities
held-to-maturity to available-
for-sale ......................................
Total other comprehensive
income/(loss)
Securities available-for sale .......
Cash flow hedge derivatives ......
Total ....................................... $
Ending balance, loss, net of tax
Securities available-for sale .......
Cash flow hedge derivatives ......
Total .......................................
$
$
(29,729)
-
(29,729)
$
$
465
-
465
39,077 $
(4,136)
34,941
16,431 $
(1,739)
14,692
22,646 $ (117,515) $
(2,397)
-
(117,515)
20,249
(49,407) $
-
(49,407) $
(68,108)
-
(68,108)
6,748
-
6,748
2,837
-
2,837
3,911
-
3,911
27,362
-
27,362
11,503
-
11,503
15,859
-
15,859
-
-
-
38,052
15,997
22,055
45,825
(4,136)
41,689 $
19,268
(1,739)
17,529 $
26,557
(2,397)
24,160 $
(52,101)
-
(52,101) $
(21,907)
-
(21,907) $
(30,194)
-
(30,194)
$
$
(3,172)
(2,397)
(5,569)
$
$
(29,729)
-
(29,729)
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.
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 paid 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. In
F-36
Net income ...... $
Dividends on
preferred
stock .............
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
2013, the Company redeemed all $258 million Series B Preferred Stock issued under the U.S. Treasury's TARP Capital
Purchase Program. On December 9, 2013, the U.S. Treasury sold all of the warrants that it held for $13.1 million, or $7.20
per warrant, through a secondary public offering.
The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share
computations for the years as indicated:
2014
Year Ended December 31,
2013
2012
Income
Per
Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
(In thousands, except shares and per share data)
$
$
Per
Share
Per
Share
123,143
117,438
137,830
Income
Income
Shares
Shares
Shares
-
(9,685)
(16,488)
Basic EPS,
income/(loss) $
137,830
79,661,571 $
1.73 $
113,458
78,954,898 $
1.44 $
100,950
78,719,133 $
1.28
Effect of
dilutive stock
options .........
Diluted EPS,
445,324
183,085
4,164
income/(loss) $
137,830
80,106,895 $
1.72 $
113,458
79,137,983 $
1.43 $
100,950
78,723,297 $
1.28
Options to purchase an additional 2.0 million shares at December 31, 2014, 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
2.2 million shares at December 31, 2013, 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.
F-37
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Financial instruments for which 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 .....................................................................................
Total ................................................................................................................ $
As of December 31,
2014
2013
(In thousands)
2,071,766 $
53,910
48,143
108
2,173,927 $
1,858,669
45,058
54,098
80
1,957,905
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, 2014, 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, 2014, commitments to extend credit of $2.1 billion include commitments to fund fixed rate loans of
$125.8 million and adjustable rate loans of $1.9 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 25 years, many of which provide for periodic adjustment of rentals based on changes in various economic
indicators. Rental expense was $8.2 million for 2014, $7.7 million for 2013, and $7.4 million for 2012. The following table
shows future minimum payments under operating leases with terms in excess of one year as of December 31, 2014.
Year Ending December 31,
2015 ............................................................................................................................................................ $
2016 ............................................................................................................................................................
2017 ............................................................................................................................................................
2018 ............................................................................................................................................................
2019 ............................................................................................................................................................
Thereafter ...................................................................................................................................................
Total minimum lease payments .............................................................................................................. $
Commitments
(In thousands)
6,767
5,840
4,349
3,888
2,431
5,552
28,827
F-38
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Rental income was $0.2 million for 2014, $0.3 million for 2013, and $0.3 million for 2012. The following table shows
future rental payments to be received under operating leases with terms in excess of one year as of December 31, 2014:
Year Ending December 31,
2015 ............................................................................................................................................................. $
2016 .............................................................................................................................................................
2017 .............................................................................................................................................................
2018 .............................................................................................................................................................
2019 .............................................................................................................................................................
Thereafter ...................................................................................................................................................
Total minimum lease payments to be received ....................................................................................... $
Commitments
(In thousands)
65
46
47
49
33
-
240
15. 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 hedging 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 Bancorp or the Bank’s Investment Committee.
In May 2014, the Bancorp entered into five interest rate swap contracts in the notional amount of $119.1 million for a
period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash
flow hedges, was to hedge the quarterly interest payments on the Bancorp’s $119.1 million of Junior Subordinated Debentures
that had been issued to five trusts throughout the ten-year period beginning in June 2014 and ending in June 2024, from the
risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. The Bancorp pays a
weighted average fixed interest rate of 2.61% and receives a variable interest rate of three-month LIBOR at a weighted
average rate of 0.24%. As of December 31, 2014, the notional amount of cash flow interest rate swaps was $119.1 million
and their unrealized loss of $2.4 million, net of taxes, was included in other comprehensive income. The amount of periodic
net settlement of interest rate swaps included in interest expense was $1.5 million in 2014. As of December 31, 2014, the
ineffective portion of these interest rate swaps was not significant.
In June 2014, the Bank entered into ten interest rate swap contracts in the notional amount of $148.1 million for various
terms from four to eight years. In October 2014, the Bank entered into four additional interest rate swap contracts in the
notional amount of $34.9 million. The Bank entered into these interest rate swap contracts that are matched to individual
fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging
instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loan due to changes in
interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual
amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan.
The Bank pays a weighted average fixed rate of 4.60% and receives a variable rate at one month LIBOR rate plus a weighted
average spread of 292 basis points, or at a weighted average rate of 3.08%. As of December 31, 2014, the notional amount
of fair value interest rate swaps was $181.3 million and their unrealized loss of $489,000 was included in other non-interest
income. The amount of periodic net settlement of interest rate swaps reducing interest income was $1.3 million in 2014. As
of December 31, 2014, the ineffective portion of these interest rate swaps was not significant.
Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to
meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by the Company’s
Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest
payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the
F-39
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
counterparty. The Company’s interest rate swaps have been assigned by the counterparties to a derivatives clearing
organization and daily margin is indirectly maintained with the derivatives clearing organization. Cash posted as collateral
by the Bancorp related to derivative contracts totaled $7.5 million as of December 31, 2014.
The Company enters into foreign exchange forward contracts and foreign currency option contracts with various
counterparties 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, 2014, no option contracts were outstanding. Spot and forward contracts in the total notional amount of $167.0
million had a positive fair value of $1.9 million at December 31, 2014. Spot and forward contracts in the total notional amount
of $178.9 million had a negative fair value of $5.0 million at December 31, 2014. At December 31, 2013, the notional amount
of option contracts totaled $200,000 with a net positive fair value of $83. Spot and forward contracts in the total notional
amount of $267.6 million had a positive fair value of $6.2 million at December 31, 2013. Spot and forward contracts in the
total notional amount of $236.3 million had a negative fair value of $6.1 million at December 31, 2013.
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:
(cid:404) Level 1 – Quoted prices in active markets for identical assets or liabilities.
(cid:404) 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.
(cid:404) 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.
The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:
F-40
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 forecasts 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.
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.
F-41
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring
basis at December 31, 2014, and at December 31, 2013:
As of December 31, 2014
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 .........................................
Corporate debt securities ..........................................................
Mutual funds .............................................................................
Preferred stock of government sponsored entities ....................
Other equity securities ..............................................................
Total securities available-for-sale ................................................
Warrants .......................................................................................
Foreign exchange contracts ..........................................................
Total assets ........................................................................... $
664,004
-
-
-
5,866
-
-
669,870
-
-
669,870 $
$
544,303
45
94,472
-
3,224
7,021
649,065
-
1,876
650,941 $
- $
664,004
-
544,303
-
45
-
94,472
-
5,866
-
3,224
7,021
-
- 1,318,935
27
1,876
27 $ 1,320,838
27
-
Liabilities
Interest rate swaps ........................................................................ $
Foreign exchange contracts ..........................................................
Total liabilities ..................................................................... $
- $
-
- $
4,626 $
5,007
9,633 $
- $
-
- $
4,626
5,007
9,633
As of December 31, 2013
Assets
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total at
Fair Value
(In thousands)
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 ....................
Total securities available-for-sale ................................................
Trading securities .........................................................................
Warrants .......................................................................................
Option contracts ...........................................................................
Foreign exchange contracts ..........................................................
Total assets ........................................................................... $
Liabilities
460,193 $
-
-
-
-
5,725
-
- $
952,814
6,106
123
150,304
-
11,403
465,918 1,120,750
4,936
-
-
6,182
465,918 $ 1,131,868 $
-
-
-
-
460,193
- $
952,814
-
6,106
-
123
-
150,304
-
5,725
-
11,403
-
- 1,586,668
4,936
-
30
30
-
-
6,182
-
30 $ 1,597,816
Foreign exchange contracts ..........................................................
Total liabilities ..................................................................... $
-
- $
6,140
6,140 $
-
- $
6,140
6,140
F-42
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
For financial assets measured at fair value on a nonrecurring basis that were still reflected in the balance sheet at
December 31, 2014 and 2013, the following tables provide the level of valuation assumptions used to determine each
adjustment and the carrying value of the related individual assets at December 31, 2014, and at December 31, 2013, and the
total losses for the periods indicated:
As of December 31, 2014
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total Losses/(Gains)
Total at
Fair Value
For the Twelve Months Ended
December 31,
2013
December 31,
2014
(In thousands)
Assets
Impaired loans by type:
Commercial loans ............. $
Commercial mortgage
loans .............................
Construction- residential ...
Construction- other ...........
Residential mortgage and
equity lines ...................
Land loans .........................
Total impaired loans .......
Other real estate owned (1) ...
Investments in venture
capital and private
company stock ..................
Equity investments ................
Total assets .................. $
- $
- $
3,774 $
3,774 $
17 $
5,731
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
16,458
25,029
-
7,625
13,126
-
49,554
4,110
25,029
-
7,625
13,126
-
49,554
20,568
3,914
-
-
27
-
3,958
202
-
-
16,458 $
5,495
617
59,776 $
5,495
617
76,234 $
436
-
4,596 $
125
-
-
213
-
6,069
(3,134)
409
-
3,344
(1) Other real estate owned balance of $31.5 million in the Consolidated Balance Sheets is net of estimated disposal
costs.
As of December 31, 2013
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total Losses
Total at
Fair Value
For the Twelve Months Ended
December 31,
2012
December 31,
2013
(In thousands)
Assets
Impaired loans by type:
Commercial loans ............. $
Commercial mortgage
loans .............................
Construction- residential ...
Construction- other ...........
Residential mortgage and
equity lines ...................
Land loans .........................
Total impaired loans .......
Other real estate owned (1) ...
Investments in venture
capital and private
company stock ..................
Equity investments ................
Total assets ................... $
- $
- $
7,584 $
7,584 $
5,731 $
-
-
-
-
-
-
-
-
-
-
-
-
-
13,248
29,001
500
15,363
14,236
29
66,713
26,498
29,001
500
15,363
14,236
29
66,713
39,746
125
-
-
213
-
6,069
(3,134)
-
642
642 $
-
-
13,248 $
8,900
-
102,111 $
8,900
642
116,001 $
409
-
3,344 $
-
440
-
65
605
162
1,272
10,904
309
181
12,666
(1) Other real estate owned balance of $53.0 million in the Consolidated Balance Sheets is net of estimated disposal
costs.
F-43
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 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% of 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 6 years, risk-free interest rate from 0.68% to 1.83%, and stock volatility of the
Company from 9.42% to 16.0%.
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 price from third party sources,
or appraisal reports adjusted by sales commission assumption.
Loans. Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was
further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.
The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, 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.
F-44
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 is derived from third party models with observable market data, 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 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. 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-45
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Fair Value of Financial Instruments
December 31, 2014
December 31, 2013
Carrying
Fair Value Amount Fair Value
Carrying
Amount
Financial Assets
(In thousands)
153,747
Cash and due from banks ......................................................... $
Short-term investments .............................................................
516,938
Securities available-for-sale ..................................................... 1,318,935 1,318,935 1,586,668 1,586,668
4,936
Trading securities ....................................................................
Loans held for sale ....................................................................
-
Loans, net ................................................................................ 8,740,268 8,688,072 7,897,187 7,760,490
25,000
Investment in Federal Home Loan Bank stock .........................
30
Warrants ...................................................................................
176,830 $ 153,747 $
516,938
489,614
176,830 $
489,614
30,785
27
25,000
30
30,785
27
-
1,225
4,936
-
-
973
Option contracts ........................................................................ $
Foreign exchange contracts ......................................................
Notional
Amount
Notional
Fair Value Amount Fair Value
0
- $
6,182
167,005
200 $
267,644
- $
1,876
Financial Liabilities
Carrying
Amount
Carrying
Fair Value Amount Fair Value
Deposits ................................................................................... $ 8,783,460 $ 8,785,342 $ 7,981,305 $ 7,977,639
852,835
Securities sold under agreements to repurchase ......................
521,560
Advances from Federal Home Loan Bank ...............................
16,107
Other borrowings .....................................................................
58,970
Long-term debt ........................................................................
473,816
424,974
17,978
59,425
800,000
521,200
19,062
121,136
450,000
425,000
19,934
119,136
Foreign exchange contracts ...................................................... $
Interest rate swaps ....................................................................
178,868 $
300,480
Notional
Amount
Notional
Fair Value Amount Fair Value
6,140
-
5,007 $ 236,350 $
-
4,626
Off-Balance Sheet Financial Instruments
Commitments to extend credit ................................................. $ 2,071,766 $
53,910
Standby letters of credit ...........................................................
48,142
Other letters of credit ...............................................................
108
Bill of lading guarantees ..........................................................
(3,442) $ 1,858,669 $
45,058
54,098
80
(243)
(29)
-
(2,187)
(205)
(34)
-
Notional
Amount
Notional
Fair Value Amount Fair Value
F-46
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The following tables present 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, 2014, and December 31, 2013.
As of December 31, 2014
Estimated
Fair Value
Measurements Level 1
Level 2
Level 3
(In thousands)
Financial Assets
Cash and due from banks ......................................................... $
Short-term investments .............................................................
Securities available-for-sale .....................................................
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 ........................................................................
176,830 $
489,614
1,318,935
1,225
8,688,072
30,785
27
8,785,342
473,816
424,974
17,978
59,425
176,830 $
489,614
669,870
-
-
-
-
-
- $
-
-
-
649,065
-
1,225
- 8,688,072
-
27
30,785
-
-
-
-
-
-
- 8,785,342
-
-
17,978
-
473,816
424,974
-
59,425
As of December 31, 2013
Estimated
Fair Value
Measurements Level 1
Level 2
Level 3
(In thousands)
Financial Assets
Cash and due from banks ......................................................... $
Short-term investments .............................................................
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 ........................................................................
153,747 $
516,938
1,586,668
4,936
7,760,490
25,000
30
7,977,639
852,835
521,560
16,107
58,970
18. Employee Benefit Plans
- $
153,747 $
516,938
-
465,917 1,120,751
4,936
-
-
-
-
- 7,760,490
-
30
25,000
-
-
-
-
-
-
-
-
-
-
- 7,977,639
-
-
16,107
-
852,835
521,560
-
58,970
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
F-47
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
allocated to their accounts or to have these dividends distributed to the participant. The ESOP trust purchased 11,887 shares
in 2014, 3,825 shares in 2013, and 2,814 shares in 2012, of the Bancorp’s common stock at an aggregate cost of $301,902 in
2014, $92,000 in 2013, and $47,000 in 2012. The distribution of benefits to participants totaled 73,439 shares in 2014, 51,779
shares in 2013, and 116,124 shares in 2012. As of December 31, 2014, the ESOP owned 1,079,236 shares, or 1.4%, of the
Company’s outstanding common stock.
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. 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. Effective on October 1, 2014, the Company matches 100% on the first 4.0% of eligible
compensation contributed per pay period by the participant, after one year of service. The Company’s contribution amounted
to $1.4 million in 2014, $1.0 million in 2013, and $1.0 million in 2012. 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, 2014, 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. There were no options granted during
the three years ended 2014. 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 $128,000 for 5,500 shares in 2014, $14.8 million for 594,946
shares in 2013, and $764,000 for 50,024 shares in 2012. Aggregate intrinsic value for options exercised was $16,000 in 2014
compared to $307,000 in 2013.
F-48
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
A summary of stock option activity for 2014, 2013, and 2012 follows:
Weighted-
Average
Weighted-
Average
Remaining
Contractual
Aggregate
Intrinsic Value
Shares
Exercise Price Life (in years) (in thousands)
Balance, December 31, 2011 .....................
Exercised ...............................................
Forfeited ................................................
Balance, December 31, 2012 .....................
Exercised ...............................................
Forfeited ................................................
Balance, December 31, 2013 .....................
Exercised ...............................................
Forfeited ................................................
Balance, December 31, 2014 .....................
Exercisable, December 31, 2014 ................
4,356,985
(50,024) $
(310,331)
3,996,630
(594,946) $
(588,810)
2,812,874
(5,500) $
(474,470)
2,332,904
2,332,904 $
28.86
15.27
23.75
29.45
24.80
22.86
31.81
23.37
29.28
32.34
32.34
3.0 $
2.2 $
37
-
1.9 $
2,119
1.2 $
1.2 $
1,388
1,388
At December 31, 2014, 2,984,895 shares were available under the 2005 Incentive Plan for future grants. The following
table shows stock options outstanding and exercisable as of December 31, 2014, the corresponding exercise prices, and the
weighted-average contractual life remaining:
Exercise Price
Shares
Outstanding
Weighted-Average
Remaining Contractual
Life (in Years)
Exercisable
Shares
$
37.00
32.47
33.54
36.90
38.26
36.24
23.37
563,610
245,060
264,694
211,730
12,000
410,730
625,080
2,332,904
0.1
0.2
0.4
1.1
1.3
1.1
3.2
1.2
563,610
245,060
264,694
211,730
12,000
410,730
625,080
2,332,904
In addition to stock options, the Company also grants restricted stock units to eligible employees which vest subject to
continued employment at the vesting dates.
The Company granted restricted stock units for 17,601 shares at an average closing price of $24.66 per share in 2014,
25,037 shares at an average closing price of $20.68 per share in 2013, and for 125,133 shares at an average closing price of
$18.24 per share in 2012. The restricted stock units granted in 2014, 2013, and 2012 are scheduled to vest two years from
grant date.
In December 2013, the Company granted performance share unit awards in which the number of units earned is
calculated based on the relative total shareholder return (“TSR”) of the Company’s common stock as compared to the TSR
of the KBW Regional Banking Index. In addition, the Company granted performance share unit awards in which the number
of units earned is determined by comparison to the targeted EPS as defined in the award for the 2014 to 2016 period.
Performance TSR restricted stock units for 119,840 shares and performance EPS restricted stock units for 116,186 shares
were granted to eight executive officers in 2013. Both the performance TSR and performance EPS share awarded in 2013
are scheduled to vest at December 31, 2016. In December 2014, the Company granted additional performance TSR restricted
F-49
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
stock units for 60,456 shares and performance EPS restricted stock units for 57,642 shares were granted to six executive
officers. Both the performance TSR and performance EPS share awarded in 2014 are scheduled to vest at December 31,
2017.
The following table presents restricted stock unit activity for 2014, 2013, and 2012:
Balance at December 31, 2011 .............................................................................................................
Granted ..............................................................................................................................................
Vested ...............................................................................................................................................
Cancelled or forfeited ........................................................................................................................
Balance at December 31, 2012 .............................................................................................................
Granted ..............................................................................................................................................
Vested ...............................................................................................................................................
Balance at December 31, 2013 .............................................................................................................
Granted ..............................................................................................................................................
Vested ...............................................................................................................................................
Cancelled or forfeited ........................................................................................................................
Balance at December 31, 2014 .............................................................................................................
Units
171,410
125,133
(11,814)
(28,113)
256,616
261,062
(138,220)
379,458
135,699
(122,832)
(5,860)
386,465
The compensation expense recorded for restricted stock units was $3.8 million in 2014, $2.0 million in 2013, and $1.3
million in 2012. Unrecognized stock-based compensation expense related to restricted stock units was $6.5 million at
December 31, 2014, and is expected to be recognized over the next 2.4 years.
In 2013, 52,431 shares of the Company’s common stock at the average price of $21.13 per share were issued to seven
executive officers and recorded as compensation expense compared to 45,937 shares at the average price of $17.16 in 2012.
Salary stock compensation expenses were $1.1 million in 2013 compared to $788,000 in 2012. There was no salary stock
compensation in 2014.
The following table summarizes the tax benefit from options exercised:
Short-fall of tax deductions in excess of grant-date fair value ..... $
Benefit of tax deductions on grant-date fair value .......................
Total benefit of tax deductions ..................................................... $
(1,285) $
1,292
7 $
(2,509) $
4,172
1,663 $
(620)
747
127
2014
2013
(In thousands)
2012
F-50
20. Condensed Financial Information of Cathay General Bancorp
The condensed financial information of the Bancorp as of December 31, 2014, and December 31, 2013, and for the years
ended December 31, 2014, 2013, and 2012 is as follows:
Balance Sheets
Assets
Cash ................................................................................................................................. $
Cash pledged as margin for interest rate swaps ...............................................................
Short-term certificates of deposit .....................................................................................
Securities available for sale ..............................................................................................
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
Common stock, $0.01 par value, 100,000,000 shares authorized, 84,022,118 issued
and 79,814,553 outstanding at December 31, 2014, and 83,797,434 issued and
79,589,869 outstanding at December 31, 2013 ............................................................
Additional paid-in-capital ...............................................................................................
Accumulated other comprehensive loss, net ...................................................................
Retained earnings ............................................................................................................
Treasury stock, at cost (4,207,565 shares at December 31, 2014, and at December 31,
As of December 31,
2014
2013
(In thousands, except
share and per share data)
7,420 $
7,465
23,203
10,244
1,666,238
2,631
9,541
1,726,742 $
119,136 $
4,718
123,854
-
1,835
-
38,000
11,404
1,525,459
2,536
1,462
1,580,696
121,136
589
121,725
-
840
789,519
(5,569)
943,834
838
784,489
(29,729)
829,109
2013) ...........................................................................................................................
Total stockholders' equity ...............................................................................................
Total liabilities and stockholders' equity ......................................................................... $
(125,736)
1,602,888
1,726,742 $
(125,736)
1,458,971
1,580,696
Statements of Operations
Cash dividends from Cathay Bank .................................................... $
Interest income ...................................................................................
Interest expense .................................................................................
Non-interest income ...........................................................................
Non-interest expense ..........................................................................
Income before income tax benefit .....................................................
Income tax benefit .............................................................................
Income before undistributed earnings of subsidiaries ........................
Distributions more than earnings of subsidiaries ..............................
Undistributed earnings of subsidiary .................................................
Net income ........................................................................................ $
2014
Year Ended December 31,
2013
(In thousands)
2012
30,000 $
88
4,469
10,144
2,248
33,515
1,478
32,037
-
105,793
137,830 $
138,030 $
157
2,994
434
2,443
133,184
(2,037 )
135,221
(12,078 )
-
123,143 $
154,700
196
3,228
3,718
2,064
153,322
(579)
153,901
(36,463)
-
117,438
F-51
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Statements of Cash Flows
Cash flows from Operating Activities
Net income ........................................................................................ $
Adjustments to reconcile net income to net cash provided by
operating activities:
Dividends in excess of earnings of subsidiaries ................................
Equity in undistributed earnings of subsidiaries ................................
Gains on sale of securities ..................................................................
Income associated with debt redemption ...........................................
Write-downs on venture capital and other investments .....................
Write-downs on impaired securities ..................................................
Loss in fair value of warrants .............................................................
Stock issued to officers as compensation ..........................................
Excess tax short-fall from stock options ...........................................
Net change in other assets .................................................................
Net change in other liabilities .............................................................
Net cash provided by operating activities ......................................
Cash flows from Investment Activities
Decrease/(increase) in short-term investment ...................................
Proceeds from sale of available-for-sale securities ............................
Purchase of available-for-sale securities ............................................
Venture capital and other investments ...............................................
Net cash provided by/(used in) investment activities ....................
Cash flows from Financing Activities
Redemption of Series B preferred stock ............................................
Repayment of long-term debt .............................................................
Cash dividends ..................................................................................
Proceeds from shares issued under the Dividend Reinvestment Plan
Proceeds from exercise of stock options ...........................................
Taxes paid related to net share settlement of RSUs ...........................
Excess tax short-fall from share-based payment arrangements ..........
Net cash used in financing activities ..............................................
Increase/(decrease) in cash and cash equivalents ..............................
Cash and cash equivalents, beginning of year ...................................
Cash and cash equivalents, end of year ............................................. $
21. Dividend Reinvestment Plan
2014
Year Ended December 31,
2013
(In thousands)
2012
137,830 $
123,143 $
117,438
-
(105,793)
(10,689)
(555)
432
264
3
350
1,285
(3,445)
(1,294)
18,388
14,797
12,083
(7,920)
(590)
18,370
-
(1,445)
(23,104)
2,848
128
(850)
(1,285)
(23,708)
13,050
1,835
14,885 $
12,078
-
-
-
357
-
56
-
2,509
(1,684 )
27
136,486
123,300
-
-
(835 )
122,465
(258,000 )
-
(12,606 )
605
14,755
-
(2,509 )
(257,755 )
1,196
639
1,835 $
36,463
-
(3,380)
-
262
181
114
-
620
1,820
71
153,589
(142,300)
4,849
-
(694)
(138,145)
-
-
(16,049)
291
764
-
(620)
(15,614)
(170)
809
639
The Company has a Dividend Reinvestment Plan which allows for participants’ reinvestment of cash dividends and
certain optional additional investments in the Bancorp’s common stock. Shares issued under the plan and the consideration
received were 116,957 shares for $2.8 million in 2014, 25,984 shares for $605,000 in 2013, and 17,956 shares for $291,000
in 2012.
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
F-52
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Federal Deposit Insurance Corporation has established five capital ratio categories: “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A well capitalized
institution must have a Tier 1 capital ratio of at least 6%, a total risk-based capital ratio of at least 10%, and a leverage ratio
of at least 5%. At December 31, 2014 and 2013, 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, 2014, and December 31, 2013, are
presented in the tables below:
As of December 31, 2014
Company
Bank
As of December 31, 2013
Company
Bank
Balance
Percentage
Balance
Percentage
Balance
Percentage Balance
Percentage
(Dollars in thousands)
Tier I Capital (to risk-
weighted assets) ............... $
1,406,511
14.96% $
1,353,481
14.42% $
1,288,892
15.04% $
1,244,480
14.53%
Tier I Capital minimum
requirement ......................
Excess .................................... $
Total Capital (to risk-
376,072
1,030,439
4.00
10.96% $
375,318
978,163
4.00
10.42% $
342,899
945,993
4.00
11.04% $
342,701
901,779
4.00
10.53%
weighted assets) ............... $
1,524,702
16.22% $
1,471,337
15.68% $
1,401,319
16.35% $
1,352,415
15.79%
Total Capital minimum
requirement ......................
Excess .................................... $
Tier I Capital (to average
752,144
772,558
8.00
8.22% $
750,637
720,700
8.00
7.68% $
685,799
715,520
8.00
8.35% $
685,402
667,013
8.00
7.79%
assets) Leverage ratio ....... $
1,406,511
12.99% $
1,353,481
12.52% $
1,288,892
12.48% $
1,244,480
12.06%
Minimum leverage
requirement ......................
433,121
973,390
Excess .................................... $
Total average assets (1) ......... $ 10,828,015
9,401,803
Risk-weighted assets ............. $
4.00
8.99% $
432,350
921,131
$ 10,808,747
9,382,961
$
4.00
8.52% $
413,158
875,734
$ 10,328,952
8,572,487
$
4.00
8.48% $
412,815
831,665
$ 10,320,368
8,567,523
$
4.00
8.06%
(1) Average assets represent average balances for the fourth quarter of each year presented.
On December 17, 2009, the Bancorp entered into a memorandum of understanding with Federal Reserve Bank of San
Francisco (the “FRB SF”). Although the memorandum of understanding was terminated effective April 5, 2013, we remain
subject to Federal Reserve supervisory policies, including informing and consulting with the FRB SF sufficiently in advance
of any planned capital actions (i.e. increased dividend payments or stock redemptions).
23. Balance Sheet Offsetting
Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and
derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or
similar agreements. The Company’s securities sold with agreements to repurchase and derivative transactions with upstream
financial institution counter parties are generally executed under International Swaps and Derivative Association master
agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset
recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not
generally offset such financial instruments for financial reporting purposes.
F-53
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Financial instruments that are eligible for offset in the condensed consolidated balance sheets, as of December 31, 2014,
and December 31, 2013, are presented in the following tables:
Gross Amounts Not Offset in the
Balance Sheet
Gross
Amounts
Offset in the
Balance
Sheet
Net Amounts
Presented in
the Balance
Sheet
Gross
Amounts of
Recognized
Financial
Instruments
Collateral
Posted
Net
Amount
(In thousands)
December 31, 2014
Liabilities:
Securities sold under agreements to
repurchase ...................................... $
Derivatives ..........................................
450,000 $
4,626
- $
-
450,000 $
4,626
- $
-
(450,000) $
(4,626)
December 31, 2013
Liabilities:
Securities sold under agreements to
repurchase ...................................... $
800,000 $
- $
800,000 $
- $
(800,000) $
24. Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly financial data:
Summary of Operations
2014
2013
-
-
-
Fourth Third Second
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Fourth Third
Second First
First
Interest income ............................ $ 106,043 $ 106,335 $ 105,062 $ 101,207 $ 101,621 $ 102,462 $ 100,862 $102,051
20,868 21,919
Interest expense ...........................
79,994 80,132
Net interest income .....................
Reversal for credit losses ............
-
Net-interest income after
18,292
87,751
(2,000)
19,854
82,608
(3,000)
19,580
86,755
(5,100)
18,549
82,658
-
19,659
81,962
-
19,445
85,617
(3,700)
-
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
89,751
7,973
41,125
91,855
8,974
42,607
89,317
9,021
42,513
82,658
14,559
48,068
81,962
8,345
40,319
85,608
16,720
50,670
79,994 80,132
20,361 14,881
53,716 49,128
56,599
21,021
35,578
58,222
22,313
35,909
55,825
20,741
35,084
49,149
17,890
31,259
49,988
17,946
32,042
51,658
19,029
32,629
46,639 45,885
16,573 16,887
30,066 28,998
noncontrolling interest .........
-
-
-
-
140
151
150
151
Net income attributable to Cathay
General Bancorp ......................
Dividends on preferred stock .......
Net income available to common
35,578
-
35,909
-
35,084
-
31,259
-
31,902
-
32,478
(2,434)
29,916 28,847
(5,184)
(2,067)
stockholders ............................. $
35,578 $
35,909 $
35,084 $
31,259 $
31,902 $
30,044 $
27,849 $ 23,663
Basic net income attributable to
common stockholders per
common share ......................... $
Diluted net income attributable to
common stockholders per
common share ......................... $
0.45 $
0.45 $
0.44 $
0.39 $
0.40 $
0.38 $
0.35 $
0.30
0.44 $
0.45 $
0.44 $
0.39 $
0.40 $
0.38 $
0.35 $
0.30
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Forward-Looking Statements
Our 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 in these
provisions. 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,” “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, 2014, 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, 2014, 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.
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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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