777 North Broadway
Los Angeles, CA 90012
t 213 625 4700
f 213 625 1368
www.cathaygeneralbancorp.com
www.cathaybank.com
One Vision.
Many Facets.
2016 Annual Report
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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 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,” “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, 2016, 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, 2016, 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.
Corporate Profile
In 1962, Cathay Bank opened for business with the mission of providing financial services
to the growing but underserved Chinese-American community in the greater Los Angeles area,
thus becoming the first Chinese-American bank in Southern California. Recognizing that the
community it served was part of a more diverse one, Cathay Bank adopted the motto “An Open
Door for All.” Its rapid expansion was fueled by successive waves of immigration, burgeoning
trade between America and Asia, and the economic development of the surrounding community.
Today, Cathay Bank is a subsidiary of Cathay General Bancorp (NASDAQ: CATY), a publicly
held bank holding company with over $14.5 billion in assets as of December 31, 2016. Its
service network extends from California and Washington on the West Coast and Nevada,
Texas, and Illinois, and New York, New Jersey, Maryland, and Massachusetts on the Eastern
Seaboard. Overseas, it has a presence in the three important commercial centers in Greater
China—Hong Kong, Shanghai, and Taipei.
Cathay Bank, with years of history and experience, is committed to providing a broad spectrum
of personal and commercial financial services.
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One Vision. Many Facets.
Stability. Customer satisfaction. Leaving a legacy
in our community. At Cathay Bank, we stand
behind these words. Because we built our business
on these principles—and it shows in our customer
interactions, from retail banking to commercial
lending. For more than 50 years, Cathay has
established itself as the financial institution of
choice for commercial customers and individuals
and families seeking to build businesses, secure
their personal wealth, and entrust their day-to-
day banking needs. Our story has many facets,
but one uniting theme is that we care. About our
customers, our employees, our communities, and
our investors. We invite you to read further—and
discover what makes Cathay so unique.
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2016 Annual Report
1
One Vision.
Many Kinds of Customers.
As a growing regional bank, Cathay offers a wide range of
financial services, from retail banking to commercial lending
and real estate financing, foreign exchange, international
trade, and wealth management. Each customer we serve has
unique needs, whether buying a home, starting or growing
a business, or managing their day-to-day finances and cash
management. What sets us apart, however, is that with all
of our capabilities, we are able to offer not just products and
services, but solutions. Only in this way can we help our
customers realize their business and personal goals—and
truly prosper.
In retail banking Cathay has 58 branches in 45 cities across the
United States. Our focus on customer solutions means we don’t
have thousands of branches or think that bigger is better. Cathay
invests in the technologies that give our customers access to
banking convenience anytime, anywhere. And when our customers
are greeted by name at their local branch, it’s a singularly human
experience—and it builds confidence in trusting us with their
banking needs.
Cathay also has a rich portfolio of real estate and commercial
lending solutions, and nothing makes us prouder than helping
families finance their new home or working with new faces and
old friends to help them bring to life their vision of building
and growing a business. This is particularly true when it comes
to serving immigrant communities in the U.S., particularly
immigrants from China and Asia—the original mission of Cathay
Bank when we began more than 50 years ago.
Cathay bankers provide unique insight into the U.S. financial
system and banking practices for first-generation immigrants.
And as our customers’ families grow and businesses pass from
one generation to the next, Cathay is proud to remain a trusted
financial resource. Our unparalleled experience in supporting
U.S. businesses with financing, international trade, and foreign
exchange makes us uniquely qualified to be the first choice of our
large commercial customers as well.
We take pride in helping all of our customers—with their
individual needs—succeed. And it’s not just because that makes
us successful as a bank. We genuinely care about each customer.
It shows in each interaction, every innovative solution we build
together, and every smile and handshake we share. It’s the way we
would like to be treated as a customer at any place of business.
And it’s the way customers feel about Cathay Bank.
2 Cathay General Bancorp
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95%
Customer satisfaction
2016 Voice of the Customer
Our Services
Personal
Business
Checking & Savings
Credit & Debit Cards
Foreign Exchange
Home Equity Financing
Mortgage Loans
Online & Mobile Banking
Wealth Management
Business Online
& Mobile Banking
Business Credit Cards
Cash Management
Checking & Savings
Commercial Lending
Community Loan Program
Foreign Exchange
International Banking
& Financing
SBA Guaranteed
Loan Programs
Real Estate &
Construction Financing
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2016 Annual Report
3
One Vision.
Many Committed Employees.
The primary reason why Cathay Bank is able to deliver
innovative solutions to our customers is our employees.
What sets us apart is that our employees genuinely care
that our customers are completely satisfied each time
they interact with Cathay. This is not by accident. We have
fostered a culture where diversity, training, resources,
and a commitment to our customers have made Cathay a
fulfilling destination for banking professionals at all levels.
Since its inception Cathay Bank has fostered a culture of respect,
mindfulness, and transparency. And these qualities—the ones
we look for in each of our employees—are even more important
given today’s rich diversity and teeming global culture. Another
key component of our culture is training.
We help our employees understand more than just their areas
of expertise, because when you are committed to providing
customers with complete solutions, we know it’s our employees
who bring those solutions to life.
Motivated employees aren’t just good for business; they’re good
for our customers and they’re good for the communities in which
they live. Cathay Bank is committed to developing our employees
to their potential. We continuously strive to provide career
enhancement, a competitive benefits package, and to endure as
a satisfying, rewarding place to work. That’s why the hallmark
of a Cathay Bank employee is a ready smile and exceptional
customer service.
4 Cathay General Bancorp
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1,129
33%
Total employees in
nine states and overseas
Employees with
10+ years of service
Employee
Development
• Emerging Leadership Program
• Officer Trainee Program
• Banker Excellence Workshops
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2016 Annual Report
5
One Vision.
Many Communities.
When we think of community at Cathay Bank, it’s a
combination of many — where we do business, where we
live, the businesses and institutions that we depend on,
and the businesses that depend on us. And while we may
serve each of these communities in different ways to suit
their needs, the key is that we do serve. And we do so with
commitment, humility, and excitement.
As a respected regional bank, Cathay has an unparalleled
opportunity to deeply identify with the communities in which
we do business. We know who we serve and where they come
from. We have the technical expertise to provide small businesses
and microenterprises with financial education in collaboration
with community-based organizations. We know what it takes to
build a successful business. It’s not about the numbers; it’s about
people, knowledge, and understanding.
It’s also about giving back to our communities, to blend in
and become part of the local fabric. In 2002 we established
the Cathay Bank Foundation to raise and administer funds
for the benefit of community-based nonprofit organizations.
As much as we are generous with our philanthropy, our employees
are generous with their time and expertise. They are just as
likely to engage with a civic organization such as Chinatown
Service Center serving Southern California as they are to educate
diverse groups in financial literacy through Operation Hope. It’s
easy to get caught up in today’s 24/7 connected world and forget
that the human touch is the most important of all. We have held
that belief every year we’ve been in business, and it’s central to
the Cathay Bank culture.
6 Cathay General Bancorp
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2,200
Hours of
community service
40th
6,450+
Annual Charity Golf
Tournament raised $115,000
for nine local nonprofits
Community members served:
• Financial Literacy for Seniors,
Adults, and Students
• Financial Technical Assistance
for Small Businesses
• Job/Career Fair
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2016 Annual Report
7
One Vision.
Many Guiding Principles.
When we characterize Cathay as conservative, we believe
that’s a very good thing. So do our depositors. Our borrowers.
And our investors, who continue to place their confidence
in us. We strive to make sound, prudent decisions on where
to invest, how to grow the business, and when to undertake
new ventures. Our profitability—including record profits for
three consecutive years—proves that this strategy works in
an ever-changing environment.
Commitment is a guiding principle we embrace: to our customers,
employees, stockholders, and communities. Through our long-
term commitment to employ strategic business initiatives,
Cathay has been able to deliver results to our stockholders,
and meet the financial needs of our diversified customer base
with exceptional service.
Strategic, effective leadership and prudent risk management are
core to our success. Our Board of Directors provides many years of
business experience in management oversight and implementation
of key strategic initiatives. Combined with Cathay’s wide product
portfolio and the delivery of effective customer solutions, we work
tirelessly to achieve a win-win situation for both the customer and
the bank—and, by extension, our investors. Taken together these
principles have helped us build a financial institution that is stable,
respected, and trustworthy.
8 Cathay General Bancorp
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31.7%
63.3%
69.2%
$175
million
30.8%
5.0%
26.7%
73.3%
Lorem Ipsum
Record net income
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Most Admired Corporate Dealmakers Awards
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Winner for Asia Bancshares Inc. acquisition
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2016 Annual Report
9
Dear Fellow
Stockholders
We are pleased to report that Cathay General Bancorp generated
strong financial performance in 2016. For the third consecutive
year, our company achieved a record net income of $175 million,
an increase of nine percent from $161 million in 2015. Diluted
earnings per share grew 10.6% to $2.19 per share. Total loan growth
increased by 10.2% to $11.2 billion across lending platforms—
commercial mortgage and real estate construction loans and
residential mortgages. In step with loan growth, our total deposits
grew by eleven percent to $11.7 billion. Total assets for the year
increased $1.3 billion to $14.5 billion at December 31, 2016.
Our capital ratios remain strong and positioned for growth. At
December 31, 2016, our common equity Tier 1 capital ratio of
12.84%, Tier 1 risk-based capital ratio of 13.85%, total risk-
based capital ratio of 14.97%, and Tier 1 leverage capital ratio of
11.57%, calculated under the Basel III capital rules, continue to
place the Company in the “well capitalized” category for regulatory
purposes. We also increased our dividend to $0.21 per share in the
fourth quarter, the fifth increase in three years.
The past year was also a year of transition in leadership. After
being at the helm as Chairman of the Board, Chief Executive
Officer, and President for over 30 years, it was time for the
changing of the guards. As of October 1, 2016, the Board of
Directors elected me as Executive Chairman of the Company and
the Bank and appointed Pin Tai as the new CEO of the same.
While this is a meaningful change and part of our succession plan,
we remain consistent and united in our vision and mission for the
Company. Together we continue our strategic path for consistent
growth with the announcement of our transaction to acquire
SinoPac Bancorp, the parent company of Far East National Bank.
The joinder of Far East National Bank will strengthen our presence
in California and create a footprint in Beijing with a representative
office. In line with our expansion efforts, in July, we established
a full-service branch in Rancho Cucamonga, California, further
developing our market visibility in the San Bernardino area. Our
smooth transition is further evidenced by our strong progress and
performance on all fronts.
10 Cathay General Bancorp
Within our strategic framework, we focus on three areas for
sustainable growth. First, our commitment to our stockholders
by seeking to create value in everything we do, both in the short-
term as well as long-term for which you as our investors place your
confidence. Second, our focus on delivering extraordinary customer
service in product offerings and customer relationships. Third, the
development of leadership at every level of our Company.
“An Open Door for All” is our hallmark as we celebrate 55 years
in 2017. For over five decades we are proud to come alongside
and grow with our communities, serving their banking needs
as they begin their journey and plant roots for a better future in
the United States. This is our building block and fundamental to
our success. We will never lose sight of this creed as we become
a regional bank, capturing cross-border opportunities and other
expansion efforts into the greater population both here in the
U.S. and in Greater China.
Our branch network will continue to expand as we look for
strategically positioned locations, focusing on fewer but higher-
visibility and profitable locations while our delivery of customer
service is and will remain exceptional. Our branch employees
will be able to assist a customer across a multitude of products
and services—the universal teller. Our commitment to servicing
our customers’ lending needs will exceed expectations as we
are relationship driven. We will continually strive to achieve
operational excellence and higher efficiencies at all levels. These
factors combined garnered our Bank to be in the top 20 of Forbes’
Best Banks in America for the second consecutive year.
Our success is attributable to our employees’ hard work and
dedication. We are grateful for their service, the pride they take in
their work, and for being part of the Cathay family. Their devotion
will continue to make this a great Company to work for.
As announced earlier this year, it is with mixed emotions but with
tremendous gratitude that we embrace the upcoming retirement of
our dear friend and esteemed colleague, Patrick S.D. Lee in May
2017. Mr. Lee has been an outstanding member of the Board of
Directors and his level of commitment and unparalleled service
to our Company for over 34 years is an inspiration to all.
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He has served as a Director of Cathay Bank since 1983, a Director
of Cathay General Bancorp since inception in 1990, and has
been the lead independent director since 2011. His leadership at
the Board will certainly be missed but we wish him all the best.
After retirement, Mr. Lee plans to spend time with his family and
friends and travel the world.
Looking ahead, as the world’s political and economic landscape
become increasingly volatile, our commitment to you, our
stockholders, is consistent and stable growth. We have the
ambition and the drive to lead the Company into the next chapter.
Our business sectors are performing well, giving us strength and
depth to capitalize on the momentum and opportunities that
are before us to increase stockholder value as we capture greater
market share while remaining competitive.
Thank you for placing your trust and confidence in us. We
appreciate your support and look forward to commemorating
our emerald anniversary by celebrating this important milestone
with you.
Dunson K. Cheng
Executive Chairman of the Board
Pin Tai
CEO and President
Dunson K. Cheng Assumes Role of Executive Chairman
On September 30, 2016, Dunson K. Cheng retired as Chief
Executive Officer and President of Cathay General Bancorp and as
Chief Executive Officer of Cathay Bank, positions which he had held
for nearly 30 years. As of October 1, 2016, the Board of Directors
appointed Mr. Cheng as Executive Chairman of the Bancorp and
the Bank.
In 1984, when Mr. Cheng first joined the executive management
team,Cathay Bank was a very different company. Under his leader-
ship, the Company has undergone significant growth and expansion,
surpassing numerous milestones. Cathay Bank was reorganized in
1990 to what is now our Company—Cathay General Bancorp, a
publicly traded company on NASDAQ Global Select Market with a
market capitalization of $3.1 billion. Total asset size has more than
quadrupled, from approximately $331 million to over $14 billion.
During his tenure, he led nine successful mergers and acquisitions
substantiating our geographic presence. From three modest branches
in Southern California, we have expanded to 58 branches in nine
states with locations in ten of the top twelve cities with the largest Asian
American population. In addition, we have one branch in Hong Kong,
and an overseas representative office in Shanghai and in Taipei.
We are 55 years strong and our strength is attributable to his leader-
ship. As one of the largest regional banks headquartered in California
focusing on cross-border opportunities between the U.S. and Greater
China, Mr. Cheng has established a legacy from which we continue
to expand.
I am honored to serve as the new CEO and look forward to leading
the Company. It is a privilege to work alongside Dunson Cheng,
our Executive Chairman, whose vision and dedication to the orga-
nization and commitment to sustainable growth are instrumental
to solidifying Cathay in the marketplace. Our ability to extend and
increase our market share is a direct product of his excellence in leader-
ship and management. The success and stability of Cathay Bank
is Dunson’s legacy.
Pin Tai, CEO and President
2016 Annual Report
11
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致
股東
我們欣然向閣下報告，2016 年為國泰萬通金控財政豐收的
一年。公司錄得一億七千五百萬元淨盈利，較 2015 年的
一億六千一百萬元增長 9%，連續三年創出新高。稀釋後每
股盈餘增長 10.6% 至每股 $2.19。貸款業務的總貸款額，包
括商業貸款、房地產及建築貸款，和房屋貸款，上升 10.2%
至一百一十二億元。隨着貸款增長的步伐，總存款額增長
11% 至一百一十七億元。總資產額於年內增加十三億元，
在 2016 年 12 月 31 日達至一百四十五億元。
我們的資本比率繼續表現強勁，為未來增長奠定基礎。截
至 2016 年 12 月 31 日，在巴塞爾資本協定 III 的計算方法
下，我們的普通股第一類資本比率為 12.84%，第一類風險
基礎資本比率為 13.85%，總風險基礎資本比率為 14.97%
，第一類槓桿資本比率為 11.57%，依照監管要求，公司繼
續被評為「資本穩健」。同時，我們於第四季提高股息至每
股 $0.21，是三年內的第五次提升。
過去一年也是公司領導層過渡的一年。在擔任董事長暨總裁
兼首席執行長超過三十年後，是薪火相傳的時候了。2016
年 10 月 1 日，本人獲董事會推選為公司及銀行執行主席，
戴斌被委任為新首席執行長。在平穩推進這項義意重大的交
接計劃時，公司保持一貫的願景和使命。我們繼續執行一
致性的成長策略，宣佈收購遠東國民銀行的母公司 SinoPac
Bancorp 的交易。收購遠東國民銀行不但加強我們在加州的
版圖，並為我們增加北京代表處。因應擴張行動，我們在七
月於加州蘭丘庫卡蒙加開設全方位服務的分行，提高我們於
聖伯納迪諾地區的市場能見度。我們在各方面的強勁發展及
業績證明過渡工作是順利進行的。
為確保可持續成長，我們的策略架構聚焦於三個領域：第
一、為增強股東對我們的信心，我們對每項大小決策作決定
時，均會確保能為公司在長遠及短期內創造價值；第二、我
們以推出產品及建立客戶關係，專注實現優質顧客服務；第
三、我們會在公司各階層培養領導人才。
2017 年是我們的五十五周年誌慶，「為所有顧客敞開大
門」一直是我們的宗旨。過去五十多年，我們十分榮幸能
與社區共同成長，當客人在美國展開新一頁及開創更好生
活之時提供他們所需的金融服務。這是我們成功的基石；
在我們擴展成區域銀行，於美國及大中華地區尋找跨境及
其他擴展機會之際，決不會忘記此信念。
我們會策略性地尋找能見度高及具獲利能力的地區開設少
量分行，繼續拓展分行網絡，同時不忘維持卓越的客戶服
務。我們分行員工都能協助客人全面了解各類產品及服
務，成為全能的銀行櫃員。更由於我們重視與客人的關
係，我們致力提供超乎預期的貸款服務。我們更會致力在
各層面達成卓越的營運成績與高超效率。正因如此，我
們連續第二年名列富比士雜誌美國最佳銀行排行榜前 20
名。
我們的成功歸功於員工的辛勤和貢獻。我們感謝各位的努
力、對這份工作的自豪感，以及作為國泰大家庭的一份
子。各位的投入使這間出色的企業得以運作。
一如今年稍早的公佈，我們以百感交集，但心懷感恩的心
情，在 2017 年 5 月迎來我們的摯友及同事李樹滋的榮
退。李先生一直以來是位傑出的董事會成員，他的高度投
入及長達三十四年的效勞，是我們所有人的模範。他於
1983 年成為國泰銀行董事，並在國泰萬通金控 1990 年
成立時成為其董事，自 2011 年起為首席獨立董事。我們
將懷念他在董事會的領導風采，同時也衷心祝福他一切順
利。退休後，李先生計劃與他的家人和朋友共享相聚時光
及環遊世界。
12 Cathay General Bancorp
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展望未來，即使國際政治和經濟形勢變幻莫測，我們對您
和股東們貫徹穩健成長的承諾。我們殷切期望帶領公司邁
向新的一章。我們出色的業務部門，使我們有實力把握眼
前的形勢和機會，擴大市場佔有率及保持競爭力，為股東
增加價值。
感謝您的支持和信任，在到達翡翠週年此重大里程碑之
時，我們期待與您同慶。
鄭家發
董事會執行主席
戴斌
首席執行長兼總裁
鄭家發就任執行主席
2016 年 9 月 30 日，鄭家發先生從其擔任了近三十年的
國泰萬通金控公司總裁兼執行長兼國泰銀行執行長之職位
上榮休。同年 10 月 1 日，董事會委任鄭先生為金控公司
及銀行的執行主席。
鄭先生於 1984 年加入國泰銀行管理層；當時的國泰銀行
與現時大為不同。在鄭先生的領導下，國泰銀行業績持續
顯著增長、屢攀高峰。1990 年，國泰銀行重組成如今於
那斯達克全球精選市場上市，且市值達三十一億元的國泰
萬通金控公司。時至今日，我們的總資產已從三億三千一
百萬增至超過一百四十億元。在其任期中，鄭先生更帶領
公司完成九次成功併購，擴展了我們的版圖。我們從最初
在南加州擁有三家分行，發展到目前在九個州設有五十八
家分行，且分行網絡涵蓋了全美亞裔人口最多之十二個城
市中的十個。同時，我們在香港也設有一家分行，還分別
在上海和台北設有海外代表處。
我們五十五年來的強盛與成功要歸功於鄭先生的領導。作
為總部設在加州、專注發展美國及大中華地區跨境商機的
最大地區性銀行之一，鄭先生為我們奠定了重要的擴展基
礎，讓我們在將來繼續向前邁進。
我很榮幸擔任新的首席執行長一職，並期待帶領公司向前
邁進。能與執行主席鄭家發先生共事難能可貴。他的遠
見、投入，以及對持續增長的努力不懈，強化了公司的市
場地位。正因為有他的卓越領導及管理，我們具備了擴展
及增加市場佔有率之實力。國泰銀行今天的成功與穩健，
當歸功於鄭先生。
戴斌，首席執行長兼總裁
19700_CAT-001_2016 Annual Report_Marketing_CS6_r4.indd 13
3/31/17 6:01 PM
2016 Annual Report
13
Financial
Highlights
(Dollars in thousands, except per share data)
2016
2015
Increase/(Decrease)
Amount
Percentage
For the Year
Net income
Net income per common share
Cash dividends paid per common share
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
Common equity Tier 1 capital
Tier 1 capital ratio
Total capital ratio
Leverage ratio
$
175,099
2.19
0.75
$ 1,314,345
11,077,315
14,520,769
11,674,726
1,828,539
22.80
1.31%
9.88%
12.84%
13.85%
14.97%
11.57%
$
161,109
1.98
0.56
$ 1,586,352
10,016,227
13,254,126
10,509,087
1,747,778
21.46
1.34%
9.52%
12.95%
14.03%
15.30%
11.95%
$
13,990
0.21
0.19
$ (272,007)
1,061,088
1,266,643
1,165,639
80,761
1.34
8.7%
10.6%
33.9%
(17.1)%
10.6%
9.6%
11.1%
4.6%
6.2%
$175
$161
$14,521
$13,254
$1,829
$1,748
$138
$123
$11,517
$10,989
$1,603
$1,459
2013
2014
2015
2016
2013
2014
2015
2016
2013
2014
2015
2016
Net Income (in millions)
Assets (in millions)
Stockholders’ Equity (in millions)
14 Cathay General Bancorp
19700_CAT-001_2016 Annual Report_Marketing_CS6_r3.indd 14
3/31/17 4:24 PM
Serving More Customers
in More Places
Overseas
Hong Kong
Shanghai
Taipei
United States
California
Alhambra
Arcadia
Artesia
City of Industry
Cupertino
Diamond Bar
Dublin
El Monte
Fountain Valley
Irvine
Los Angeles
Millbrae
Milpitas
Monterey Park
Northridge
Oakland
Ontario
Orange
Rancho Cucamonga
Richmond
Rowland Heights
Sacramento
San Diego
San Francisco
San Gabriel
San Jose
Torrance
Union City
West Covina
Westminster
New York
Brooklyn
Elmhurst
Flushing
New York City
Illinois
Chicago
Westmont
Washington
Bellevue
Kent
Seattle
Texas
Houston
Plano
Maryland
Rockville
Massachusetts
Boston
Nevada
Las Vegas
New Jersey
Edison
19700_CAT-001_2016 Annual Report_Marketing_CS6_r3.indd 15
3/31/17 4:24 PM
2016 Annual Report
15
Corporate
Information
Board of Directors
Dunson K. Cheng
Executive 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
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
16 Cathay General Bancorp
Standing, left to right: Felix S. Fernandez, Nelson Chung, Thomas C.T. Chiu, Michael M.Y. Chang,
Jane Jelenko, Kelly L. Chan, Ting Y. Liu. Seated, left to right: Peter Wu, Patrick S.D. Lee,
Anthony M. Tang, Dunson K. Cheng, Joseph C.H. Poon
Patrick S.D. Lee
Retired Real Estate Developer
Cathay Bank
Executive Officers
Other Executive
Vice Presidents
Dunson K. Cheng
Executive Chairman
of the Board
Pin Tai
Chief Executive Officer,
President, and Director
of Cathay Bank
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
Eddie Chang
Executive Vice President
and Manager, Corporate
Commercial Real Estate
and Construction Lending
Shu-Yuan Lai
Executive Vice President
and Chief Lending Officer
Chang Liu
Executive Vice President
and Chief Lending Officer
Allen Peng
Executive Vice President and
Chief Retail Administrator
Veronica Tsang
Executive Vice President and
Chief Retail Administrator
Kelly Wu
Executive Vice President,
Corporate Banking Division
Ting Y. Liu
Retired Investor
Joseph C.H. Poon
President of Edward
Properties, LLC
Cathay General Bancorp
Dunson K. Cheng
Executive Chairman
of the Board
Peter Wu
Vice Chairman
of the Board
Anthony M. Tang
Vice Chairman
of the Board
Pin Tai
Chief Executive Officer
and President
Heng W. Chen
Executive Vice President,
Chief Financial Officer,
and Treasurer
Lisa L. Kim
Senior Vice President, General
Counsel, and Secretary
19700_CAT-001_2016 Annual Report_Marketing_CS6_r3.indd 16
3/31/17 4:24 PM
Form
10-K
2016 Annual Report
19700_CAT-001_2016 Annual Report_MECH_Form 10-K Cover_032317_CS6.indd 1
3/24/17 8:31 AM
19700_CAT-001_2016 Annual Report_MECH_Form 10-K Cover_032317_CS6.indd 2
3/24/17 8:31 AM
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
☑
☐
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)
95-4274680
(I.R.S. Employer Identification No.)
777 North Broadway,
Los Angeles, California
(Address of principal executive offices)
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
Common Stock, $.01 par value
Warrants to purchase shares of Common Stock (expiring December 5, 2018)
Name of each exchange on which registered
NASDAQ Global Select Market
NASDAQ Global Select Market
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 ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
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,
2016) was $2,070,323,558. This value is estimated solely for the purposes of this cover page. The market value of shares held by registrant’s
directors, executive officers, and Employee Stock Ownership Plan have been excluded because they may be considered to be affiliates of
the registrant.
As of February 15, 2017, there were 79,620,817 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
• Portions of Registrant’s definitive proxy statement relating to Registrant’s 2017 Annual Meeting of Stockholders which will be
filed within 120 days of the fiscal year ended December 31, 2016, are incorporated by reference into Part III.
CATHAY GENERAL BANCORP
2016 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
.....................................................................................................................................................................
Business. .......................................................................................................................................................
Item 1.
Item 1A. Risk Factors. .................................................................................................................................................
Item 1B. Unresolved Staff Comments. ........................................................................................................................
Properties. .....................................................................................................................................................
Item 2.
Legal Proceedings. ........................................................................................................................................
Item 3.
Item 4.
Mine Safety Disclosures. ..............................................................................................................................
Executive Officers of the Registrant. ................................................................................................................................
PART II
Item 5.
.....................................................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. ..................................................................................................................................................
Selected Financial Data. ................................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. .......................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. ......................................................................
Financial Statements and Supplementary Data. ............................................................................................
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. ......................
Item 9A. Controls and Procedures. ..............................................................................................................................
Item 9B. Other Information. ........................................................................................................................................
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
.....................................................................................................................................................................
Directors, Executive Officers and Corporate Governance. ...........................................................................
Executive Compensation. ..............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. .....
Certain Relationships and Related Transactions, and Director Independence. .............................................
Principal Accounting Fees and Services. ......................................................................................................
PART IV
Item 15.
.....................................................................................................................................................................
Exhibits, Financial Statement Schedules. .....................................................................................................
3
3
22
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36
37
37
37
38
38
41
43
77
81
81
81
84
84
84
84
84
85
85
85
85
SIGNATURES ..................................................................................................................................................................
90
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Forward-Looking Statements
In this Annual Report on Form 10-K, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers
to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements
in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities
Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and
events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements
in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of
federal and state securities laws, including statements about anticipated future operating and financial performance,
financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture
opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and
competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and
statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,”
“anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,”
“seeks,” “shall,” “should,” “will,” “predicts,” “potential,” “continue,” “possible,” “optimistic,” and variations of these
words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us
are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance.
These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ
materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other
factors include, but are not limited to, adverse developments or conditions related to or arising from:
● U.S. and international business and economic conditions;
● possible additional provisions for loan losses and charge-offs;
●
●
●
credit risks of lending activities and deterioration in asset or credit quality;
extensive laws and regulations and supervision that we are subject to, including potential supervisory action by
bank supervisory authorities;
increased costs of compliance and other risks associated with changes in regulation, including the
implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
● higher capital requirements from the implementation of the Basel III capital standards;
●
compliance with the Bank Secrecy Act and other money laundering statutes and regulations;
● potential goodwill impairment;
●
●
●
●
●
●
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;
● our ability to compete with larger competitors;
● our ability to retain key personnel;
●
successful management of reputational risk;
● natural disasters and geopolitical events;
● general economic or business conditions in Asia, and other regions where the Bank has operations;
●
failures, interruptions, or security breaches of our information systems;
● our ability to adapt our systems to technological changes;
1
●
risk management processes and strategies;
● adverse results in legal proceedings;
●
●
●
the impact of regulatory enforcement actions, if any;
certain provisions in our charter and bylaws that may affect acquisition of the Company;
changes in accounting standards or tax laws and regulations;
● market disruption and volatility;
●
●
●
●
fluctuations in the Bancorp’s stock price;
restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital
structure;
issuances of preferred stock;
capital level requirements and successfully raising additional capital, if needed, and the resulting dilution of
interests of holders of our common stock; and
●
the soundness of other financial institutions.
These and other factors are further described in this Annual Report on Form 10-K (at Item 1A in particular), the
Company’s other reports filed with the Securities and Exchange Commission (the “SEC”) and other filings the Company
makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in
this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking
statements, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-
looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or
events, except as required by law.
2
PART I
Item 1. Business.
Business of Bancorp
Overview
Cathay General Bancorp (the “Bancorp” on a parent-only basis, and the “Company,” “we” or “our” on a consolidated
basis) 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, GBC Venture Capital, Inc., and
Asia Realty Corp. 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:
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.
Asia Realty Corp. Asia Realty Corp. was incorporated in January 2013 for the purpose of holding other real estate owned
and became a subsidiary of the Bancorp as a result of the acquisition of Asia Bancshares. Asia Realty Corp. owned one
foreclosed property with a carrying value of $3.0 million at December 31, 2016.
3
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 the Bancorp’s management, which includes the Chief Executive Officer and President, Executive
Chairman, 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, is licensed by the California
Department of Business Oversight (“DBO”), 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, 2016, the Bank has branch offices in Southern California (22 branches), Northern
California (12 branches), New York (12 branches), Illinois (three branches), Washington (three branches), Texas (two
branches), Maryland (one branch), Massachusetts (one branch), Nevada (one branch), New Jersey (one branch), and Hong
Kong (one branch) and a representative office in Shanghai and in Taipei. Deposit accounts at the Hong Kong branch are not
insured by the FDIC. Each branch has loan approval rights subject to the branch manager’s authorized lending limits. Current
activities of the Shanghai and Taipei representative offices are limited to coordinating the transportation of documents to the
Bank’s head office and performing liaison services.
Our primary market area is defined by the Community Reinvestment Act (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.
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.
4
Through its 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. As of December
31, 2016, all securities and insurance products provided by Cathay Wealth Management were offered by, and all Financial
Advisors were 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. Effective March
1, 2017, LPL Financial, a registered securities broker/dealer and licensed insurance agency and member of the Financial
Industry Regulatory Authority and Security Investor Protection Corporation, will replace Cetera Financial Services and
continue the services to customers of the Bank. Cetera Financial Services, LPL Financial, and the Bank are independent
entities. These securities and insurance 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
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.
5
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. The Bank retains all 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.
6
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 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, 2016, the Bank
offered passbook accounts, checking accounts, money market deposit accounts, certificates of deposit, individual retirement
accounts, 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 is included in Part II —
Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 8 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 in Part II — Item 7 —
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 9 and Note 10 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.”
7
Interest Rates and Differentials
Information concerning the interest-earning asset mix, average interest-earning assets, average interest-bearing liabilities,
and the yields on interest-earning assets and interest-bearing liabilities is included in Part II — Item 7 — “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Analysis of Changes in Net Interest Income
An analysis of changes in net interest income due to changes in rate and volume is included in Part II — Item 7 —
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Commitments and Letters of Credit
Information concerning the Bank’s outstanding loan commitments and letters of credit is included in Note 13 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.
On July 8, 2016, we announced the signing of a Stock Purchase Agreement for the Bancorp to acquire SinoPac Bancorp,
the U.S. subsidiary of Bank SinoPac Co. Ltd., for $340 million subject to certain adjustments. SinoPac Bancorp, through its
subsidiary Far East National Bank, operates nine branches in California. We expect the acquisition of SinoPac Bancorp to
close in the first half of 2017, and that, subject to receipt of regulatory approvals, Far East National Bank will subsequently
merge with Cathay Bank.
Subsidiaries of Cathay Bank
In October 2006, Cathay New Asia Community Development Corporation (“CNACDC”) was formed, 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. 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, 2016, CHLLC owned a property with a carrying value of $526,000. CHLLC2 and CHLLC3 did not own
property at December 31, 2016.
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.”
8
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 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, 2016, the Bank and its subsidiaries employed approximately 1,129 persons, including 551 banking
officers. None of the employees are represented by a union. We believe that our employer-employee relations are good.
Available Information
We invite you to visit our website at www.cathaygeneralbancorp.com, to access free of charge the Bancorp's Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports,
all of which are made available as soon as reasonably practicable after we electronically file such material with or furnish it
to the Securities and Exchange Commission (the “SEC”). 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.
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. DBO approvals are also required for bank holding companies to acquire control of banks. 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.
9
Bank holding companies and their bank and non-bank subsidiaries are subject to significant regulation and restrictions by
federal and state laws and regulatory agencies. These laws, regulations and restrictions, which may affect the cost of doing
business, limit permissible activities and expansion or impact the competitive balance between banks and other financial
services providers, are intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund, and
secondarily for the stability of the U.S. banking system. They are not intended for the benefit of stockholders of financial
institutions. The following discussion of key statutes and regulations to which the Bancorp and the Bank are subject is a
summary and does not purport to be complete nor does it address all applicable statutes and regulations. This discussion is
qualified in its entirety by reference to the full statutes and regulations.
The wide range of requirements and restrictions contained in both federal and state banking laws include:
● Requirements that bank holding companies and banks file periodic reports.
● Requirements that bank holding companies and banks meet or exceed minimum capital requirements (see “Capital
Adequacy Requirements” below).
● 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. (See “Source of Strength” and “Prompt
Corrective Action Provisions” below.)
● 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. (See “Dividends” below)
● 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. (See “Dividends” below)
● 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.
● 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.
● 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 March 2016, the Bank received a CRA
rating of “Satisfactory.”
10
● Compliance with the Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws, and the
regulations of the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). (See “Anti-Money
Laundering and OFAC Regulations” below.)
● Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.
● Limitations on transactions with affiliates.
● Restrictions on the nature and amount of any investments in, and the ability to underwrite, certain securities.
● Requirements for opening of intra- and interstate branches.
● 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. (See “Operations and Consumer Compliance Laws” below.)
● 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. The federal bank regulators have adopted
rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers
to unaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal information to an unaffiliated third party.
These regulations affect how consumer information is transmitted through diversified financial companies and
conveyed to outside vendors.
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, Maryland, 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.
11
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act financial reform legislation, adopted in July 2010, significantly revised and expanded the
rulemaking, supervisory and enforcement authority of the federal bank regulatory agencies. Various provisions of the Dodd-
Frank Act are now effective and have been fully implemented, including, among others:
● new capital standards that, among other things, increase capital requirements and eliminate the treatment of trust
preferred securities as Tier 1 regulatory capital (except for any trust preferred securities issued before May 19,
2010 by Bancorp and other bank holding companies with assets of less than $15 billion as of December 31,
2009);
●
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;
●
required disclosure and shareholder advisory votes on executive compensation;
●
annual stress tests for financial entities, including the Company;
●
●
additional risk management and other enhanced prudential standards for larger bank holding companies,
including the Company;
restrictions on banking entities, after a transition period, from engaging in proprietary trading, as well as having
investments in, sponsoring, and maintaining relationships with hedge funds and private equity funds (commonly
referred to as the “Volcker Rule”);
●
limitations on interchange fees charged for debit card transactions;
●
the establishment of new minimum mortgage underwriting standards for residential mortgages; and
●
the establishment of the Consumer Financial Protection Bureau (“CFPB”) to be responsible for consumer
protection in the financial services industry and to examine financial institutions with $10 billion or more in
assets, such as the Company, for compliance with regulations promulgated by the CFPB.
The numerous rules and regulations promulgated pursuant to the Dodd-Frank Act, including those described further
below, have significantly impacted our operations and compliance costs. The Dodd
Frank Act also requires the issuance of
numerous implementing regulations, some of which have not yet been issued. Some of the final regulations will continue to
take effect over several more years, continuing to make it difficult to anticipate the overall impact to us, our customers, or
the financial industry in general.
‐
Capital Adequacy Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal
banking agencies. 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 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.
12
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 on Banking Supervision. Although many of the rules contained in
these final regulations are applicable only to large, internationally active banks, most will apply on a phased in basis to all
banking organizations, including the Bancorp and the Bank. The new capital rules took effect on January 1, 2015, but many
elements are being phased-in. To the extent that the new capital rules are not fully phased-in, the prior capital rules continue
to apply.
The following are among the new requirements that are effective or being 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 (other than certain
grandfathered 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
will be phased in from 2016 to 2019 and 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.
Without taking into account the capital conservation buffer, the new capital rules require the following minimum ratios:
(i) a Tier 1 leverage ratio of 4.0%; (ii) a common equity Tier 1 risk-based capital ratio of 4.5%, (iii) a Tier 1 risk-based capital
ratio of 6%, and (iv) a total risk-based capital ratio of 8.0%. To be considered “well capitalized,” a bank holding company or
bank would be required to have the following minimum ratios: (i) a Tier 1 leverage ratio of 5.0%; (ii) a common equity Tier
1 risk-based capital ratio of 6.5%, (iii) a Tier 1 risk-based capital ratio of 8.0%, and (iv) a total risk-based capital ratio of
10.0%. The implementation of the new capital conservation buffer requirements began on January 1, 2016 at 0.625% of risk-
weighted assets, increasing each year by 0.625% until fully implemented in January 2019 at 2.50% of risk-weighted assets.
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.
At December 31, 2016, (i) the Bancorp’s and the Bank’s common equity Tier 1 capital ratios were 12.84% and 13.35%,
respectively; (ii) their total risk-based capital ratios were, respectively, 14.97% and 14.43%; (iii) their Tier 1 risk-based capital
ratios were, respectively, 13.85% and 13.35%; and (iv) their leverage capital ratios were, respectively, 11.57% and 11.16%,
all of which ratios exceeded the minimum percentage requirements to be deemed “well-capitalized” for regulatory purposes.
13
While the new capital rules set higher regulatory capital standards for the Bancorp and the Bank, bank regulators may
also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements.
The federal banking agencies may also 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. The implementation of the
new capital rules or more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid
assets could adversely impact the Bancorp’s net income and return on equity, restrict the ability of the Bank and/or the
Bancorp to pay dividends or executive bonuses and require the raising of additional capital.
As of December 31, 2016, the Bancorp and the Bank met all applicable capital requirements under the new capital rules
on a fully phased-in basis if such requirements were currently in effect.
Liquidity Requirements
In response to the endemic liquidity problems that accompanied the 2008 financial crisis and as part of the Basel III
initiative, the federal regulatory agencies promulgated regulations in 2014 requiring the largest financial institutions to
maintain an amount of high-quality liquid assets at least equal to those institutions’ estimated net cash outflows over a 30-
day stressed liquidity period. This ratio is referred to as the “liquidity coverage ratio” or “LCR.” The LCR requirement
generally applies only to banking organizations with $250 billion or more in assets (or total consolidated on-balance sheet
foreign exposure of $10 billion or more), and any subsidiary depository institution of such an organization with $10 billion
or more in consolidated assets. In addition, pursuant to the authority granted to federal regulators under the Dodd- Frank Act
to require enhanced prudential standards from banking organizations, bank holding companies with $50 billion or more in
consolidated assets are subject to specific liquidity risk management requirements and liquidity stress testing and buffer
requirements. Although smaller banking organizations, such as the Bancorp, are not subject to such specific liquidity
requirements, appropriate liquidity management (including liquidity stress testing) has become an increasingly important
focus of prudential regulation of smaller institutions by federal and state bank regulators. This emphasis had led many
financial institutions to hold a higher percentage of lower-yielding, short term assets than they may have held in past years.
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 and its subsidiaries, 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.” Bank holding companies and banks were generally required to conform their activities to the Volcker rule
on or before July 21, 2015 although certain provisions are subject to delayed effectiveness under rules promulgated by the
Federal Reserve. The Federal Reserve granted an extension until July 21, 2017 of the conformance period for banking entities
to divest ownership in certain legacy investment funds and terminate relationships with funds that are prohibited under the
rule.
Except for divesting some investments aggregating less than $4 million as of December 31, 2016, we believe that the
Volcker Rule will not require any material changes in our operations or business or security holdings.
CFPB Actions
The Dodd-Frank Act provided for the creation of the 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.
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The CFPB has enforcement authority over unfair, deceptive or abusive act and practices (“UDAAP”). UDAAP is
considered one of the most far reaching new enforcement tools at the disposal of the CFPB and covers all consumer and
small business financial products or services such as deposit and lending products or services such as overdraft programs and
third-party payroll card vendors. It is a wide-ranging regulatory net that potentially picks up the gaps not included in other
consumer laws, rules and regulations. Violations of UDAAP can be found in many areas and can include advertising and
marketing materials, the order of processing and paying items in a checking account or the design of client overdraft
programs. The scope of coverage includes not only direct interactions with clients and prospects but also actions by third-
party service providers. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards.
State regulation of financial products and potential enforcement actions could also adversely affect our business, financial
condition or results of operations.
Additionally, 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.
Enhanced Prudential Standards
Pursuant to Federal Reserve Board regulations promulgated under authority of the Dodd-Frank Act, as a publicly traded
bank holding company with $10 billion or more (but less than $50 billion) in assets, we are required and have established
and maintained a risk committee responsible for enterprise-wide risk management practices, comprised of an independent
chairman and at least one risk management expert. Additional stress testing is required for banking organizations having $50
billion or more of assets. The risk committee approves and periodically reviews the risk-management policies of the bank
holding company’s global operations and oversees the operations of its risk-management framework. The bank holding
company’s risk-management framework must be commensurate with its structure, risk profile, complexity, activities and
size. At a minimum, the framework must include policies and procedures establishing risk-management governance and
providing for adequate risk-control infrastructure for the bank holding company’s operations. In addition, the framework
must include processes and systems to monitor compliance with the foregoing policies and procedures, including processes
and systems designed to identify and report risk-management risks and deficiencies; ensure effective implementation of
actions to address emerging risks and risk-management deficiencies; designate managerial and staff responsibility for risk
management; ensure the independence of the risk-management function; and integrate risk-management and associated
controls with management goals and the management compensation structure.
Stress Testing
As a bank holding company with more than $10 billion in assets, we are also required under the Dodd-Frank Act to
conduct annual stress tests using various scenarios established by the Federal Reserve, including a baseline, adverse and
severely adverse economic conditions (known as “Dodd Frank Act Stress Tests” or “DFAST”). The stress tests are designed
to determine whether our capital planning, assessment of capital adequacy and risk management practices adequately protect
the Bancorp and its affiliates in the event of an economic downturn. The Bancorp must establish adequate internal controls,
documentation, policies and procedures to ensure the annual stress adequately meets these objectives. The Board of Directors
must review our policies and procedures at least annually. We are required to report the results of our annual stress tests to
the Federal Reserve by July 31 of each year, using data as of December 31 of the preceding year, publish a summary of the
results between October 15 and October 31, and consider the results of our stress tests as part of our capital planning and risk
management practices. We reported the results of our 2016 annual stress test to the Federal Reserve on July 28, 2016, and
published a summary of the results in a Form 8-K furnished with the SEC on October 26, 2016.
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Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for
assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are
“reasonable and proportional” to the costs incurred by issuers for processing such transactions.
Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing
electronic payment transactions. Under the final rules, the maximum permissible interchange fee is equal to no more than 21
cents plus 5 basis points of the transaction value for many types of debit interchange transactions. The Federal Reserve also
adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud prevention purposes if the issuer complies
with certain fraud-related requirements required by the Federal Reserve. The Federal Reserve also has rules governing routing
and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
On July 31, 2013, the U.S. District Court for the District of Columbia found the interchange fee cap and the exclusivity
provision adopted by the Federal Reserve to be invalid. The U.S. Court of Appeals for the District of Columbia, or D.C.
Circuit, reversed this decision on March 21, 2014, generally upholding the Federal Reserve’s interpretation of the Durbin
Amendment and the Federal Reserve’s rules implementing it. On August 18, 2014, the plaintiffs in this litigation filed a
petition for a writ of certiorari asking the U.S. Supreme Court to review the D.C. Circuit’s decision with respect to the
interchange fee cap. The petition was denied on January 23, 2015. With the U.S. Supreme Court's denial of certiorari, the
U.S. Court of Appeals decision will stand. We continue to monitor developments in the litigation surrounding these rules.
Anti-Money Laundering (“AML”) and Office of Foreign Assets Control (“OFAC”) Regulation
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money
laundering and terrorist financing through AML and OFAC regulations. AML laws and regulations, including the Bank
Secrecy Act and the U.S.A. Patriot Act, require us 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. The AML program must include, at a minimum, a designated
compliance officer, written policies, procedures and internal controls, training of appropriate personnel and independent
testing of the program, and a customer identification program.
OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under
authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially
designated targets and countries. We and our bank are responsible for, among other things, blocking accounts of, and
transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting
blocked transactions after their occurrence.
Regulatory authorities routinely examine financial institutions for compliance with these obligations, and any failure by
us to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all
of the relevant laws or regulations, could have serious legal and reputational consequences, including causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit
such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil
money penalties against institutions found to be violating these obligations.
Additional Restrictions on Bancorp and Bank Activities
Subject to prior notice or Federal Reserve approval, bank holding companies may generally engage in, or acquire shares
of companies engaged in, activities determined by the Federal Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Bank holding companies which elect and retain “financial holding
company” status pursuant to the GLB Act may engage in these nonbanking activities and broader securities, insurance,
merchant banking and other activities that are determined to be “financial in nature” or are incidental or complementary to
activities that are financial in nature without prior Federal Reserve approval. Pursuant to the GLB Act and the Dodd-Frank
Act, in order to elect and retain financial holding company status, a bank holding company and all depository institution
subsidiaries of a bank holding company must be well capitalized and well managed, and, except in limited circumstances,
depository subsidiaries must be in satisfactory compliance with the CRA. 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
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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.
Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial
strength to their subsidiary banks. Under this requirement, Bancorp is expected to commit resources to support the Bank,
including at times when Bancorp may not be in a financial position to provide such resources, and it may not be in Bancorp’s,
or Bancorp’s stockholders’ or creditors’, best interests to do so. In addition, any capital loans Bancorp makes to the Bank are
subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of Bancorp’s
bankruptcy, any commitment by Bancorp to a federal bank regulatory agency to maintain the capital of the Bank will be
assumed by the bankruptcy trustee and entitled to priority of payment.
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; (vi) loan concentration; and (vii) 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:
● Require affirmative action to correct any conditions resulting from any violation or practice;
● Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the
Bank from being deemed “well-capitalized” and restrict its ability to accept certain brokered deposits, among other
things;
● Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;
●
Issue, or require the Bank to enter into, informal or formal enforcement actions, including required Board resolutions,
memoranda of understanding, written agreements and consent or cease and desist orders or prompt corrective action
orders to take corrective action and cease unsafe and unsound practices;
● Require prior approval of senior executive officer or director changes, remove officers and directors, and assess civil
monetary penalties; and
● Terminate FDIC insurance, revoke the Bank’s charter, take possession of, close and liquidate the Bank, or appoint
the FDIC as receiver.
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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. As an institution with
$10 billion or more in assets, the FDIC uses a performance score and a loss-severity score to calculate an initial assessment
rate for the Bank. In calculating these scores, the FDIC uses the Bank’s capital level and regulatory supervisory ratings and
certain financial measures to assess the Bank’s ability to withstand asset-related stress and funding-related stress. The FDIC
also has the ability to make discretionary adjustments to the total score based upon significant risk factors that are not
adequately captured in the calculations. In addition to ordinary assessments described above, the FDIC has the ability to
impose special assessments in certain instances.
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 through 2019.
Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), that is, the ratio
of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35%
(formerly 1.15%) by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the
FDIC to offset the effect of the increase in the statutory minimum DRR to 1.35% on institutions with assets less than $10
billion. Beginning with the third quarter of the 2016 assessment period, large banks will pay quarterly surcharges in addition
to their lower regular risk-based assessments. The final rule imposes a surcharge of 4.5 basis points on the assessment base
of large banks. The surcharges are to begin the quarter after the reserve ratio first reaches or surpasses 1.15%. The FDIC
expects that surcharges will last eight quarters or through the quarter in which the reserve ratio first meets or exceeds 1.35%.
The surcharge is applied to the Bank’s total liabilities in excess of $10 billion. To determine an institution’s quarterly
assessment surcharge, the FDIC will take a bank’s standard assessment base, calculated as average consolidated total assets
less average tangible equity, minus $10 billion multiplied by 1.125 basis points.
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.
Under the FDI Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
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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
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.
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Operations and Consumer Compliance Laws
The Bank must comply with numerous federal and state 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, the California Homeowner Bill of Rights 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 $15
million (100% of “membership asset value” as defined), or (ii) an activity based stock requirement (based on a percentage of
outstanding advances). There can be no assurance that the FHLB will pay dividends at the same rate it has paid in the past,
or that it will pay any dividends in the future.
Impact of Monetary Policies
The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or spread
between the yield on its interest-earning assets and the rates paid on its deposits and other interest-bearing liabilities. As a
result, the Bank’s performance is influenced by general economic conditions, both domestic and foreign, the monetary and
fiscal policies of the federal government, and the policies of the regulatory agencies. The Federal Reserve implements national
monetary policies (such as seeking to curb inflation and combat recession) by its open-market operations in U.S. government
securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by
varying the discount rate applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal
Reserve in these areas influence the growth of bank loans, investments, and deposits, and also affect interest rates charged
on loans and deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
Securities and Corporate Governance
The Bancorp is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, both as administered by the SEC. As a company listed on the NASDAQ
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, 2016. These assessments are included in Part
II — Item 9A — “Controls and Procedures.”
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Federal Banking Agency Compensation Guidelines
Guidelines adopted by the federal banking agencies pursuant to the FDI Act prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate
to the services performed by an executive officer, employee, director or principal stockholder. In June 2010, the federal
banking agencies issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive
compensation policies of banking organizations do not undermine the safety and soundness of such organizations by
encouraging excessive risk-taking.
In addition, the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations
or guidelines prohibiting certain incentive-based payment arrangements. These regulators must establish regulations or
guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed
such regulations in April 2011, but the regulations have not been finalized. In April 2016, the agencies published a notice of
proposed rulemaking further revising the incentive-based compensation standards originally proposed in 2011. Similar to the
2011 proposed rule, the 2016 proposed rule would prohibit financial institutions with at least $1 billion in consolidated assets
from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk by providing
any executive officer, employee, director or principal shareholder who is a covered person with excessive compensation, fees
or benefits or that could lead to material financial loss to the covered institution.
The scope, content and application of the U.S. banking regulators’ policies on incentive compensation continue to evolve.
It cannot be determined at this time whether compliance with such policies will adversely affect the ability of the Bancorp
and the Bank to hire, retain and motivate key employees.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will
be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of
incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination.
Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to
make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive
compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s
safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
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.
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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, as well as demand for loans and other products and services we
offer, is highly dependent upon the business and economic conditions in the markets in which we operate and in the United
States as a whole. Unfavorable or uncertain economic and market conditions could lead to credit quality concerns related to
repayment ability and collateral protection as well as reduced demand for the products and services we offer. In recent years
there has been gradual improvement in the U.S. economy as evidenced by a rebound in the housing market, lower
unemployment and higher equities markets; however, economic growth has been uneven, and opinions vary on the strengthen
and direction of the economy. Uncertainties also have arisen regarding the potential for a reversal or renegotiation of
international trade agreements and for comprehensive tax reform under the administration of U.S. President Donald J. Trump,
and the impact such actions and other policies of the new administration may have on economic and market conditions. 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. 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:
● Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for
our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional
provisions for loan losses, adverse asset values and an overall material adverse effect on the quality of our loan
portfolio.
● Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in
changes in consumer and business spending, borrowing and saving habits. Such conditions could have a material
adverse effect on the credit quality of our loans or our business, financial condition or results of operations.
● The banking industry remains heavily regulated, and notwithstanding the stated intent of the Trump administration
to seek to reduce governmental regulations, changes by Congress or federal regulatory agencies to the banking and
financial institutions regulatory regime and heightened legal standards and regulatory requirements may continue to
be adopted in the future. Compliance with such regulation may increase our costs and limit our ability to pursue
business opportunities.
● The process we use to estimate losses inherent in our credit exposure requires difficult, subjective, and complex
judgments, including qualitative factors that pertain to 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.
● The value of the portfolio of investment securities that we hold may be adversely affected by increasing interest rates
and defaults by debtors.
Our banking operations are concentrated primarily in California, and secondarily in New York, Texas, Massachusetts,
Washington, Illinois, New Jersey, Maryland, Nevada, and Hong Kong. The economic conditions in these local markets may
be different from, and in some instances worse than, the economic conditions in the United States as a whole. 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, decrease demand for our loans and other services 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; declines in economic growth, business activity or investor or business confidence; limitations on the availability or
increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; state
or local government insolvency; or a combination of these or other factors. 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.
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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, 2016, our allowance for loan losses totaled $119 million and we had net charge-offs of $4.3 million
for 2016. 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, 2016, we had approximately $6.3 billion in commercial real estate and construction loans. Any
deterioration in the real estate market generally and in the commercial real estate and residential building segments in
particular could result in additional loan charge-offs and provisions for loan losses in the future, which could have a material
adverse effect on our financial condition, net income, and capital.
The allowance for credit losses is an estimate of probable credit losses. Actual credit losses in excess of the estimate could
adversely affect our results of operations and capital.
A significant source of risk arises from the possibility that we could sustain losses because borrowers, guarantors, and
related parties may fail to perform in accordance with the terms of their loans and leases. The underwriting and credit
monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could
have a material adverse effect on our business, financial condition, results of operations, and cash flows. The allowance for
credit losses is based on management’s estimate of the probable losses from our credit portfolio. If actual losses exceed the
estimate, the excess losses could adversely affect our results of operations and capital. Such excess losses could also lead to
larger allowances for credit losses in future periods, which could in turn adversely affect results of operations and capital in
those periods. If economic conditions differ substantially from the assumptions used in the estimate or adverse developments
arise with respect to our credits, future losses may occur, and increases in the allowance may be necessary. In addition,
various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of our
allowance. These agencies may require us to establish additional allowances based on their judgment of the information
available at the time of their examinations. No assurance can be given that we will not sustain credit losses in excess of
present or future levels of the allowance for credit losses.
We are 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.
23
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.”
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; the implementation of the qualified mortgage and ability-to-repay
rules for mortgage loans; 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. If we do not meet minimum capital requirements, we
will be subject to prompt corrective action by federal bank regulatory agencies. Prompt corrective action can include
progressively more restrictive constraints on operations, management and capital distributions. For additional discussion
regarding our capital requirements, please see “Item 1. Business – Regulation and Supervision – Capital Adequacy
Requirements” above.
24
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,
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 the 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.
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 are subject to the CRA, fair lending and other laws and regulations, and our failure to comply with these laws and
regulations could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose
nondiscriminatory lending and other requirements on financial institutions. The U.S. Department of Justice and other federal
agencies, including the FDIC and CFPB, are responsible for enforcing these laws and regulations. A successful challenge to
an institution’s performance under the CRA, fair lending and other compliance laws and regulations could result in a wide
variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of
restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to
challenge an institution’s performance under fair lending laws in private class action litigation. The costs of defending, and
any adverse outcome from, any such challenge could damage our reputation or could have a material adverse effect on our
business, financial condition or results of operations.
25
Our stress testing processes rely on analytical and forecasting models that may prove to be inadequate or inaccurate,
which could adversely affect the effectiveness of our strategic planning and our ability to pursue corporate goals.
‐
In accordance with the Dodd
Frank Act and the Federal Reserve’s regulations thereunder, banking organizations with
$10 billion to $50 billion in assets are required to perform annual capital stress tests. The results of our capital stress tests
may require us to increase our regulatory capital, raise additional capital or take or decline to take certain other capital
related
actions under certain circumstances. Our stress testing processes also rely on our use of analytical and forecasting models.
These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen
circumstances. Furthermore, even if our assumptions are accurate predictors of future performance, the models they are based
on may prove to be inadequate or inaccurate because of other flaws in their design or implementation. Also, the assumptions
we utilize for our stress tests may not be met with regulatory approval, which could result in our stress tests receiving a failing
grade. In addition to adversely affecting our reputation, failing our stress tests would likely preclude or delay our growth
through acquisition, and would limit our ability to pay any cash dividends
‐
Our deposit insurance premiums could increase in the future, which could have a material adverse impact on future
earnings and financial condition.
The FDIC insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges insured
financial institutions premiums to maintain the Deposit Insurance Fund ("DIF") at a specific level. Unfavorable economic
conditions, increased bank failures and additional failures decreased the DIF. In order to restore the DIF to its statutorily
mandated minimum of 1.35% of total deposits by September 30, 2020, the FDIC may need to increase deposit insurance
premium rates. Insured institutions with assets of $10 billion or more will be responsible for funding this increase. The FDIC
has issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher reserve
ratio of 2% as a long term goal which goes beyond what is required by statute. There is no implementation deadline for the
2% ratio. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF
at the statutory target level. Any increase in the Bank's FDIC premiums could have an adverse effect on its financial condition
and results of operations.
Our use of third party vendors and our other ongoing third party business relationships are subject to increasing
regulatory requirements and attention.
We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships
with other third parties. These types of third party relationships are subject to increasingly demanding regulatory requirements
and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring
and control over our third party vendors and other ongoing third party business relationships. In certain cases we may be
required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our
costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party
relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators
conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party
business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions,
including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer
remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
26
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, FHLB advances and other 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. Deposit balances can decrease when
customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank
deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and
reducing our net interest income and net income. 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.
Based on past experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase
interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our
business, financial condition and results of operations. Any decline in available funding could adversely impact our ability
to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders or to fulfill obligations such as
repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our
liquidity, business, financial condition and results of operations.
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. Therefore, as interest rates begin to increase, if
our floating rate interest-earning assets do not reprice faster than our interest-bearing liabilities in a rising rate environment,
our net interest income and, in turn, our profitability, could be adversely affected.
27
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 off
are unknown, and while interest rates have begun to increase, they remain at historically low levels. 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 other 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.
As with any acquisition of financial institutions, there also may be business disruptions that cause us to lose customers or
cause customers to remove their accounts from us and move their business to competing financial institutions.
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.
Concentration of risk increases the potential for significant losses.
We have naturally developed concentrated exposures to those markets and asset classes in which we have specific
knowledge or competency. In particular, we primarily operate in California markets with a concentration of Chinese-
American individuals and businesses, and commercial and commercial real estate loans constitute a significant portion of our
loan portfolio. In management's judgment, our extensive experience within these concentration areas helps us to better
evaluate underwriting and other associated risks with extending credit. However, the presence of similar exposures
concentrated in certain asset classes leaves us exposed to the risk of a focused downturn within a concentration area. Thus,
our concentration in the California markets increases our exposure to materially higher credit losses if there is a deterioration
in the economic conditions, housing conditions or real estate values in the California markets. Our concentration in
commercial and commercial real estate lending also increases our exposure to risks generally associated with such lending.
Our commercial and commercial real estate loans may have a greater risk of loss than residential mortgage loans, in part
because these loans are generally larger or more complex to underwrite and are characterized by having a limited supply of
real estate at commercially attractive locations, long delivery time frames for development and high interest rate sensitivity.
Unexpected deterioration in the credit quality of our commercial or commercial real estate loan portfolios would require us
to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our
business, financial condition and results of operations. Moreover, with respect to commercial real estate loans, federal and
state banking regulators are examining commercial real estate lending activity with heightened scrutiny and may require
banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk
28
management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels
as a result of commercial real estate lending growth and exposures.
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 eight other states (New York, Texas,
Washington, Massachusetts, Illinois, New Jersey, Maryland, 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, Maryland, 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.
29
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. A general decline in real estate sales and prices across the United States or locally in the relevant
real estate market, a decline in demand for residential real estate, economic weakness, high rates of unemployment, and
reduced availability of mortgage credit, are some of the 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
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.
30
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, Pin Tai, and our Chief Financial Officer, Heng W. Chen.
Our compensation practices are subject to review and oversight by the FDIC, the DBO, the Federal Reserve and other
regulators. We may be subject to limitations on compensation practices, which may or may not affect our competitors, by the
FDIC, the DBO, the Federal Reserve or other regulators. These limitations could further affect our ability to attract and retain
our executive officers and other key personnel. In April 2011 and April 2016, the Federal Reserve, other federal banking
agencies and the SEC jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting
incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which
includes a bank or bank holding company with $1 billion or more of assets, such as the Bancorp and the Bank. It cannot be
determined at this time whether or when a final rule will be adopted and whether compliance with such a final rule will
substantially affect the manner in which we structure compensation for our executives and other employees. Depending on
the nature and application of the final rules, we may not be able to successfully compete with certain financial institutions
and other companies that are not subject to some or all of the rules to retain and attract executives and other high performing
employees. If this were to occur, our business, financial condition and results of operations could be adversely affected,
perhaps materially.
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, failure to protect confidential client information 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 and
volatility in the real estate and stock markets 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 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
31
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.
We depend on the accuracy and completeness of information about customers.
In deciding whether to extend credit, open a bank account or enter into other transactions with customers, we may rely
on information furnished to us by or on behalf of customers, including financial statements and other financial information.
We also may rely on representations of customers as to the accuracy and completeness of that information and, with respect
to financial statements, on reports of independent auditors. We may further rely on invoices, contracts, and other supporting
documentation provided by our customers, as well as our customers' representations that their financial statements conform
to U.S. GAAP (or other applicable accounting standards in foreign markets) and present fairly, in all material respects, the
financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and
certifications, or other audit or accountants' reports, with respect to the business and financial condition of our clients. Our
financial condition, results of operations, financial reporting or reputation could be negatively affected if we rely on materially
misleading, false, inaccurate or fraudulent information.
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
or threatened 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. Cyber security risks may
also occur with our third-party service providers, and may interfere with their ability to fulfill their contractual obligations to
us, with attendant potential for financial loss or liability that could adversely affect our financial condition or results of
operations. 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.
32
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.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of
new technology-driven products and services. In addition to better serving customers, the effective use of technology
increases efficiency and may enable us to reduce costs. Our future success may depend, in part, on our ability to use
technology to provide products and services that provide convenience to customers and to create additional efficiencies in
our operations. 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. Some of our competitors have substantially greater resources
to invest in technological improvements than we currently have. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these products and services to our customers. As a
result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial
condition or results of operations, may be adversely affected.
We may incur significant losses as a result of ineffective risk management processes and strategies.
We are exposed to many types of operational risks, including liquidity risk, credit risk, market risk, interest rate risk,
legal and compliance risk, strategic risk, information security risk, and reputational risk. We are also reliant upon our
employees, and our operations are subject to the risk of fraud, theft or malfeasance by our employees. 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. We may also suffer severe reputational damage.
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.
33
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:
●
actual or anticipated quarterly fluctuations in our operating results and financial condition and prospects;
●
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;
●
actions by institutional stockholders;
●
fluctuations in the stock price and operating results of our competitors;
● general market conditions and, in particular, developments related to market conditions for the financial services
industry;
● proposed or adopted regulatory changes or developments;
●
anticipated or pending investigations, proceedings, or litigation that involve or affect us;
●
successful management of reputational risk; and
● domestic and international economic factors, such as interest or foreign exchange rates, stock, commodity, credit,
or asset valuations or volatility, 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.
34
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, which could adversely affect the market price of our common
stock.
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
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.
35
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 2016 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.
36
The Bank owns its branch offices in Monterey Park, Alhambra, Westminster, San Gabriel, City of Industry, Cupertino,
Artesia, New York City (2 locations), Flushing (3 locations), Chicago, and Rockville in the state of Maryland. In addition,
the Bank has certain operating and administrative departments located at 4128 Temple City Boulevard, Rosemead, California,
where it owns the building and land with approximately 27,600 square feet of space.
The other branch and representative offices and other properties are leased by the Bank under leases with expiration dates
ranging from March 2017 to June 2027, exclusive of renewal options. As of December 31, 2016, the Bank’s investment in
premises and equipment totaled $105.6 million, net of accumulated depreciation. See Note 7 and Note 13 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 15, 2017.
Name
Age
Present Position and Principal Occupation During the Past Five Years
Dunson K. Cheng ................ 72
Pin Tai .................................. 62
Irwin Wong ........................ 68
Executive Chairman of the Boards of Directors of the Bancorp and the Bank since
October 2016; Director of the Bancorp since 1990; Director of the Bank since
1982; Chairman of the Boards of Directors of the Bancorp and the Bank from 1994
to September 2016; President of the Bank from 1985 to March 2015; President and
Chief Executive Officer of the Bancorp from 1990 to September 2016.
Chief Executive Officer and President of the Bancorp since October 2016; Chief
Executive Officer of the Bank since October 2016; Director and President of the
Bank since April 2015; Chief Lending Officer of the Bank from 2013 to March
2015; Executive Vice President of the Bank from 2006 to 2015; Deputy Chief
Lending Officer and General Manager of Eastern Regions of the Bank from 2010
to 2013; General Manager of Eastern Regions of the Bank from 2006 to 2009.
Chief Operating Officer of the Bank since April 2015; Senior Executive Vice
President since 2014, Chief Retail Administration and Regulatory Affairs Officer
of the Bank from January 2014 to March 2015; Executive Vice President and Chief
Risk Officer of the Bank from 2011 to 2013; Executive Vice President-Branch
Administration of the Bank from 1999 to 2011.
Heng W. Chen ...................... 64
Executive Vice President, Chief Financial Officer, and Treasurer of the Bancorp
since 2003; Executive Vice President of the Bank since 2003; Chief Financial
Officer of the Bank since 2004.
Donald S. Chow ................... 66
Executive Vice President and Chief Credit Officer of the Bank since 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.
Kim R. Bingham ................ 60
Chief Risk Officer of the Bank since 2014; Executive Vice President of the Bank
since 2004; Chief Credit Officer of the Bank from 2004 to 2013.
37
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities.
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “CATY.” The closing price of our
common stock on February 15, 2017, was $39.05 per share, as reported by the NASDAQ Global elect Market.
The following table sets forth the high and low closing prices as reported on the NASDAQ Global Select Market for the
periods presented:
First quarter ......................................................................... $
Second quarter .....................................................................
Third quarter .......................................................................
Fourth quarter ......................................................................
30.12 $
31.25
31.53
38.56
25.65 $
26.27
26.79
28.89
28.45 $
33.37
34.14
34.52
23.07
28.32
27.73
29.36
2016
2015
High
Low
High
Low
Holders
As of February 15, 2017, there were approximately 1,461 holders of record of our common stock.
38
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,
2015
2016
0.18 $
0.18
0.18
0.21
0.75 $
0.10
0.14
0.14
0.18
0.56
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 12 to
the Consolidated Financial Statements.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item regarding equity compensation plans is incorporated by reference to the
information set forth in Part III, Item 12 in this report.
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, 2011 (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 2017 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.
39
NOTE: The comparisons in the graph below are based upon historical data and are not indicative of, or 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.
Cathay General Bancorp
SNL Western Bank
S&P 500
Index
Cathay General Bancorp .
SNL Western Bank .........
S&P 500 ..........................
12/31/11
100.00
100.00
100.00
12/31/12
131.12
126.20
116.00
12/31/13
180.05
177.56
153.57
12/31/14
174.36
213.09
174.60
12/31/15
217.45
220.79
177.01
12/31/16
270.38
244.77
198.18
Period Ending
Source: SNL Financial LC, Charlottesville, VA © 2016
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
In August 2015, the Company resumed stock repurchases under the November 2007 repurchase program and repurchased
the remaining 622,500 shares for $18.1 million, or an average price of $29.08 per share. Also, in August 2015, the Board of
Directors approved a stock repurchase program for the Company to buy back up to two million shares of our common stock,
and 1,366,750 shares were repurchased during 2015. In January and February of 2016, the Company repurchased the
remaining 633,250 shares under the August 2015 repurchase program for $17.0 million, or an average price of $26.82 per
share.
40
On February 1, 2016, the Board of Directors approved a new stock repurchase program to buy back up to $45.0 million
of our common stock. In 2016, the Company repurchased 1,380,578 shares for $37.5 million, or $27.13 per share under the
February 2016 repurchase program. As of December 31, 2016, the Company may repurchase up to $7.5 million of its common
stock under the February 2016 repurchase program.
Issuer Purchases of Equity Securities
(c) Total
Number
of Shares (or
Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or
Units) that May
Yet Be
Purchased
Under the Plans
or Programs
(a) Total
Number
of Shares (or
Units)
Purchased
(b) Average
Price Paid
per Share
(or Unit)
-
-
-
-
-
-
-
-
- $
- $
- $
- $
7,543,008
7,543,008
7,543,008
7,543,008
Period
(October 1, 2016 - October 31, 2016)
(November 1, 2016 - November 30, 2016)
(December 1, 2016 - December 31, 2016)
Total
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.”
41
2012
429,744
108,491
321,253
(9,000)
330,253
18,026
28,481
192,589
184,171
66,128
118,043
605
117,438
(16,488)
100,950
Selected Consolidated Financial Data
2016
Year Ended December 31,
2014
(Dollars in thousands, except share and per share data)
2013
2015
Income Statement
Interest income ............................................................. $
Interest expense ............................................................
Net interest income before reversal for credit losses ....
Reversal for credit losses .............................................
Net interest income after reversal for credit losses .......
499,070 $
81,200
417,870
(15,650)
433,520
453,706 $
73,964
379,742
(11,400)
391,142
418,647 $
75,866
342,781
(10,800)
353,581
406,996 $
82,300
324,696
(3,000)
327,696
Securities gains/(losses) ................................................
Other non-interest income ............................................
Non-interest expense ....................................................
4,898
28,472
224,690
(3,349)
36,023
202,720
6,748
33,779
174,313
27,362
32,945
193,833
Income before income tax expense ..............................
Income tax expense .......................................................
Net income ....................................................................
242,200
67,101
175,099
221,096
59,987
161,109
219,795
81,965
137,830
194,170
70,435
123,735
Less: net income attributable to noncontrolling
interest ..................................................................
Net income attributable to Cathay General Bancorp .....
Dividends on preferred stock ........................................
Net income attributable to common stockholders ......... $
Net income attributable to common stockholders per
common share
Basic ........................................................................ $
Diluted ..................................................................... $
Cash dividends paid per common share ....................... $
Weighted-average common shares
-
175,099
-
175,099 $
-
161,109
-
161,109 $
-
137,830
-
137,830 $
592
123,143
(9,685)
113,458 $
2.21 $
2.19 $
0.75 $
2.00 $
1.98 $
0.56 $
1.73 $
1.72 $
0.29 $
1.44 $
1.43 $
0.08 $
1.28
1.28
0.04
Basic ........................................................................ 79,153,762 80,563,577 79,661,571 78,954,898 78,719,133
Diluted ..................................................................... 79,929,262 81,294,796 80,106,895 79,137,983 78,723,297
Statement of Condition
Investment securities .................................................... $ 1,314,345 $ 1,586,352 $ 1,318,935 $ 1,586,668 $ 2,065,248
Net loans (1) .................................................................. 11,077,315 10,016,227 8,740,268 7,897,187 7,235,587
Total assets ................................................................... 14,520,769 13,254,126 11,516,846 10,989,286 10,694,089
Deposits ....................................................................... 11,674,726 10,509,087 8,783,460 7,981,305 7,383,225
Federal funds purchased and securities sold under
800,000 1,250,000
350,000
agreements to repurchase .........................................
146,200
521,200
350,000
Advances from the Federal Home Loan Bank .............
Long-term debt ............................................................
171,136
121,136
119,136
Total equity .................................................................. 1,828,539 1,747,778 1,602,888 1,458,971 1,629,504
450,000
425,000
119,136
400,000
275,000
119,136
Common Stock Data
Shares of common stock outstanding ........................... 79,610,277 80,806,116 79,814,553 79,589,869 78,778,288
17.12
22.80 $
Book value per common share ..................................... $
21.46 $
20.00 $
18.24 $
Profitability Ratios
Return on average assets ..............................................
Return on average stockholders' equity ........................
Dividend payout ratio ..................................................
Average equity to average assets ratio .........................
Efficiency ratio ............................................................
1.31%
9.88
33.85
13.29
49.79
1.34%
9.52
28.11
14.04
49.15
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
(1) Net loans represent gross loans net of loan participations sold, allowance for loan losses, and unamortized deferred loan fees.
42
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 22 branches in Southern California, 12 branches
in Northern California, 12 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 Maryland, 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.
On July 8, 2016, the Company announced the signing of a Stock Purchase Agreement for the Bancorp to acquire SinoPac
Bancorp, the U.S. subsidiary of Bank SinoPac Co. Ltd., for $340 million subject to certain adjustments. SinoPac Bancorp,
through its subsidiary Far East National Bank, operates nine branches in California. The Company expects the acquisition of
SinoPac Bancorp to close in the first half of 2017, and that, subject to receipt of regulatory approvals, Far East National Bank
will subsequently merge with Cathay Bank.
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.
43
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,
the 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, Watch, 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 11 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.
44
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.
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.
Results of Operations
Overview
For the year ended December 31, 2016, we reported net income of $175.1 million, or $2.19 per diluted share, compared
to net income of $161.1 million, or $1.98 per share, in 2015, and net income of $137.8 million, or $1.72 per share, in 2014.
The $14.0 million increase in net income from 2015 to 2016 was primarily the result of increases in net interest income,
increases in reversal for credit losses, and increases in securities gains, partially offset by decreases in other operating income,
increases in operating expenses from amortization of investments in affordable housing and alternative energy partnerships
and in salaries and employee benefits. The return on average assets in 2016 was 1.31%, compared to 1.34% in 2015, and to
1.26% in 2014. The return on average stockholders’ equity was 9.88% in 2016, compared to 9.52% in 2015, and to 8.95% in
2014.
45
Highlights
● Diluted earnings per share increased 10.6% to $2.19 per share for the year ended December 31, 2016 compared to $1.98
per share for the year ended December 31, 2015.
● Total loans increased $1.0 billion, or 10.2%, excluding loans held for sale, during 2016, to $11.2 billion at December
31, 2016, compared to $10.2 billion at December 31, 2015.
● Total assets for the year increased $1.3 billion, or 9.6%, to $14.5 billion at December 31, 2016 from $13.3 billion at
December 31, 2015.
Net income available to common stockholders and key financial performance ratios are presented below for the three
years indicated:
Year Ended December 31,
2015
(Dollars in thousands, except per share data)
2016
2014
Net income ................................................................................. $
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 ............................................................
175,099 $
2.21 $
2.19 $
1.31%
9.88%
13,331,148 $
1,772,017 $
49.79%
27.70%
161,109 $
2.00 $
1.98 $
1.34%
9.52%
12,056,531 $
1,692,826 $
49.15%
27.13%
137,830
1.73
1.72
1.26%
8.95%
10,974,890
1,540,564
45.48%
37.29%
Net Interest Income
Comparison of 2016 with 2015
Net interest income increased $38.2 million, or 10.0%, from $379.7 million in 2015 to $417.9 million in 2016. The
increase in net interest income was due primarily to the increase in loan interest income, offset by the decrease in dividend
income from FHLB stock and increases in interest expense from money market accounts and time deposits.
Average loans for 2016 were $10.6 billion, a $1.0 billion, or a 10.7%, increase from $9.6 billion in 2015. Compared with
2015, average commercial mortgage loans increased $612.5 million, or 12.4%, average residential mortgage loans increased
$441.6 million, or 23.4%, and average real estate construction loans increased $125.7 million, or 34.0%. Compared with
2015, average commercial loans decreased $149.3 million, or 6.3%. Average investment securities were $1.37 billion in
2016, a decrease of $5.7 million, or 0.4%, from 2015. Average interest bearing cash on deposits with financial institutions
increased $152.3 million, or 79.1%, to $345.1 million in 2016 from $192.8 million in 2015.
Average interest bearing deposits were $8.6 billion in 2016, an increase of $750.6 million, or 9.6%, from $7.8 billion in
2015, primarily due to increases of $382.8 million, or 22.8%, in money market deposits, $185.5 million, or 21.6%, in interest
bearing demand deposits, $136.9 million, or 2.9%, in time deposits, and $45.4 million, or 7.7%, in saving deposits. Average
securities sold under agreements to repurchase decreased $18.9 million, or 4.7%, to $381.9 million in 2016 from $400.8
million in 2015, primarily due to maturities of securities sold under agreements to repurchase. Average other borrowings
increased $21.3 million, or 20.3%, to $126.7 million in 2016 from $105.4 million in 2015, primarily due to increases in FHLB
advances.
46
Interest income increased $45.4 million, or 10.0%, from $453.7 million in 2015 to $499.1 million in 2016 primarily due
to increases in the volume of loans:
● Changes in volume: Average interest-earning assets increased $1.2 billion, or 10.5%, to $12.4 billion in 2016,
compared with the average interest-earning assets of $11.2 billion in 2015. Average loans increased $1.0 billion
and average interest bearing cash on deposits with financial institutions increased $152.3 million in 2016 which
contributed to the increase in interest income. The increase of $46.1 million in interest income resulted primarily
from a $45.9 million increase in interest income from the loan volume increase.
● Change in rate: The average yield of interest bearing assets decreased to 4.04% in 2016 from 4.06% in 2015.
Decreases in rate on interest bearing cash on deposits with financial institutions caused a $502,000 decline in
interest income. Decreases in rate on FHLB stock caused a $535,000 decline in interest income. Increase in rate
on loans contributed $277,000 to interest income.
● Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than
other types of investments, comprised 86.0% of total average interest-earning assets in 2016, an increase from
85.8% in 2015. Average investment securities comprised 11.1% of total average interest-bearing assets in 2016,
a decrease from 12.3% in 2015.
Interest expense increased by $7.2 million, or 9.8%, to $81.2 million in 2016, compared with $74.0 million in 2015,
primarily due to increased cost from money market accounts and time deposits. The overall increase in interest expense was
primarily due to increases in both volume and rates in all deposit categories offset by decreases in volume on securities sold
under agreements to repurchase as discussed below:
● Changes in volume: Average interest bearing deposits increased $750.6 million, or 9.6% and average other
borrowings increased $21.4 million, or 20.3%, partially offset by an $18.9 million, or 4.7%, decrease in average
securities sold under agreements to repurchase. The changes in volume caused an increase in interest expense
of $3.3 million.
Increase in rate: The average cost of interest bearing deposits increased to 0.69% in 2016 from 0.67% in 2015.
The average cost of securities sold under agreements to repurchase increased to 4.01% in 2016 from 3.95% in
2015. The increases in rate caused interest expense to increase by $3.9 million.
●
● Change in the mix of interest-bearing liabilities: Average interest bearing deposits of $8.6 billion increased to
93.2% of total interest-bearing liabilities in 2016 compared to 92.6% in 2015. Offsetting the increase, average
securities sold under agreements to repurchase decreased to 4.2% of total interest-bearing liabilities in 2016
compared to 4.8% in 2015.
Net interest margin, defined as net interest income to average interest-earning assets, was 3.38% in 2016 compared to
3.39% in 2015.
Comparison of 2015 with 2014
Net interest income increased $36.9 million, or 10.8%, from $342.8 million in 2014 to $379.7 million in 2015. The
increase in net interest income was due primarily to 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 and increases in interest expense from time deposits.
Average loans for 2015 were $9.6 billion, a $1.1 billion, or a 12.4%, increase from $8.5 billion in 2014. Compared with
2014, average commercial mortgage loans increased $658.1 million, or 15.4%, average residential mortgage loans increased
$247.3 million, or 15.1%, average real estate construction loans increased $97.4 million, or 35.8% and average commercial
loans increased $67.2 million, or 2.9%. Average investment securities were $1.4 billion in 2015, a decrease of $38.4 million,
or 2.7%, from 2014, due primarily to decreases in U.S. Treasury securities of $153.4 million and in corporate debt securities
of $42.6 million, offset by increases in agency mortgage-backed securities of $125.1 million and increases in U.S. government
sponsored agency securities of $31.3 million.
47
Average interest bearing deposits were $7.8 billion in 2015, an increase of $884.0 million, or 12.8%, from $6.9 billion in
2014, primarily due to increases of $416.1 million, or 9.8%, in time deposits, $270.0 million, or 19.2%, in money market
deposits, $139.1 million, or 19.3%, in interest bearing demand deposits, and $58.8 million, or 11.1%, in saving deposits.
Average securities sold under agreements to repurchase decreased $228.5 million, or 36.3%, to $400.8 million in 2015 from
$629.3 million in 2014, primarily due to maturities and prepayments of securities sold under agreements to repurchase.
Average other borrowings decreased $40.8 million, or 27.9%, to $105.4 million in 2015 from $146.1 million in 2014,
primarily due to decreases in FHLB advances.
Interest income increased $35.1 million, or 8.4%, from $418.6 million in 2014 to $453.7 million in 2015 primarily due to
increases in the volume of loans offset by a decline in rate of loans and investment securities and by a change in the mix of
interest-earning assets as discussed below:
● Changes in volume: Average interest-earning assets increased $965.6 million, or 9.4%, to $11.19 billion in 2015,
compared with the average interest-earning assets of $10.22 billion in 2014. The increase in average loans of
$1.06 billion in 2015 offset by a decrease in average investment securities of $38.4 million and in average
interest bearing cash on deposits with financial institutions of $49.3 million contributed to the increase in interest
income. The increase of $45.8 million in interest income due to volume were resulted primarily from a $47.5
million increase in interest income from the loan volume increase offset by a $1.7 million decrease in interest
income caused by the decrease in the volume of investment securities, FHLB stock, and deposits with other
banks.
● Decrease in rate: The average yield of interest bearing assets decreased to 4.06% in 2015 from 4.10% in 2014.
The rate on taxable investment securities decreased 15 basis points to 1.56% in 2015 from 1.71% in 2014. The
decrease in taxable investment securities yields caused a $2.1 million decline in interest income. The rate on
loans decreased 12 basis points to 4.46% in 2015 from 4.58% in 2014. The decrease in loan yield caused a $10.3
million decline in interest income.
● Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than
other types of investments, comprised 85.8% of total average interest-earning assets in 2015, an increase from
83.5% in 2014. Average investment securities comprised 12.3% of total average interest-bearing assets in 2015,
a decrease from 13.9% in 2014.
Interest expense decreased by $1.9 million, or 2.5%, to $74.0 million in 2015, compared with $75.9 million in 2014,
primarily due to decreased cost from securities sold under agreements to repurchase offset by increased cost from time
deposits, long-term debt 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 in volume on interest bearing deposits and
by increases in rate on long-term debt and time deposits as discussed below:
● Changes in volume: Average securities sold under agreements to repurchase decreased $228.5 million, or 36.3%,
in 2015 and contributed to a $9.0 million decrease in interest expense. Average time deposits increased $416.1
million, or 9.8%, and average money market deposits increased $270.0 million, or 19.2%, causing interest
expense to increase by $5.1 million. The changes in volume contributed to a decrease in interest expense of $3.8
million.
Increase in rate: The average cost of interest bearing deposits increased to 0.67% in 2015 from 0.66% in 2014.
The average cost of securities sold under agreements to repurchase increased to 3.95% in 2015 from 3.92% in
2014. The average cost of long-term debt increased to 4.85% in 2015 from 3.73% in 2014 primarily due to the
full year impact of cash flow interest rate swaps entered into during June 2014. The increases in rate caused
interest expense to increase by $1.9 million.
●
● Change in the mix of interest-bearing liabilities: Average interest bearing deposits of $7.80 billion increased to
92.6% of total interest-bearing liabilities in 2015 compared to 88.5% in 2014. Offsetting the increase, average
securities sold under agreements to repurchase decreased to 4.8% of total interest-bearing liabilities in 2015
compared to 8.1% in 2014.
48
Net interest margin, defined as net interest income to average interest-earning assets, increased to 3.39% in 2015 from
3.35% in 2014. The increase in the net interest margin was primarily due to the impact from the increase in loans and the
decrease in securities sold under agreements to repurchase offset by the increase in time deposits and money market deposits.
49
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
2016
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
(1)(2)
2015
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
(1)(2)
(Dollars in thousands)
2014
Average
Balance
Interest
Income/
Expense
Average
Yield/
Rate
(1)(2)
Interest-Earning Assets:
Commercial loans .......................... $ 2,240,475 $ 86,871
Residential mortgages .................... 2,332,166 102,770
Commercial mortgages .................. 5,550,930 254,016
495,630 30,053
Real estate construction loans ........
72
Other loans .....................................
Loans (1) ............................................. 10,622,160 473,782
Taxable securities .............................. 1,372,916 21,426
2,099
FHLB stock ........................................
Interest-bearing deposits ...................
1,763
Total interest-earning assets .............. $ 12,357,728 $ 499,070
Non-interest Earning Assets:
17,516
345,136
2,959
3.88 % $ 2,389,776 $ 90,980
4.41 1,890,558 85,537
4.58 4,938,397 229,292
369,928 21,717
6.06
2.43
95
4.46 9,593,448 427,621
1.56 1,378,641 21,523
3,164
21,480
11.98
0.51
1,398
192,763
4.04 $ 11,186,332 $ 453,706
4,789
3.81% $ 2,322,563 $ 89,994
4.52 1,643,239 77,231
4.64 4,280,255 207,235
272,479 15,889
5.87
1.98
91
13,712
4.46 8,532,248 390,440
1.56 1,417,007 24,237
1,974
29,487
14.73
0.73
1,996
242,037
4.06 $ 10,220,779 $ 418,647
3.87%
4.70
4.84
5.83
0.66
4.58
1.71
6.69
0.82
4.10
Cash and due from banks ..............
Other non-earning assets ...............
216,443
893,478
Total non-interest earning assets ....... 1,109,921
(129,701 )
Less: Allowance for loan losses ........
(6,800 )
Deferred loan fees ....................
Total Assets ....................................... $ 13,331,148
213,882
822,326
1,036,208
(155,683)
(10,326)
$ 12,056,531
177,129
762,535
939,664
(172,377)
(13,176)
$ 10,974,890
Interest-Bearing Liabilities:
Interest-bearing demand deposits . $ 1,046,046 $
1,740
Money market deposits .................. 2,059,823 13,308
1,046
Savings deposits .............................
Time deposits ................................ 4,810,746 43,327
Total interest-bearing deposits .......... 8,553,037 59,421
Securities sold under agreements to
636,422
0.17 $
1,406
860,513 $
0.65 1,677,065 10,138
901
590,987
0.16
0.90 4,673,862 39,443
0.69 7,802,427 51,888
1,229
0.16 $
721,435 $
8,627
0.60 1,407,053
802
532,184
0.15
0.84 4,257,736 35,111
0.67 6,918,408 45,769
0.17
0.61
0.15
0.82
0.66
repurchase .....................................
381,967 15,329
4.01
400,822 15,813
3.95
629,315 24,685
3.92
FHLB advances and other
126,720
119,136
659
borrowings ....................................
Long-term debt ..................................
5,791
Total interest-bearing liabilities ........ 9,180,860 81,200
Non-interest Bearing Liabilities:
Demand deposits ............................... 2,199,274
178,997
Other liabilities ..................................
Stockholders' equity .......................... 1,772,017
Total liabilities and stockholders'
487
105,367
0.52
4.86
5,776
119,136
0.88 8,427,752 73,964
945
146,120
0.46
4.85
4,467
119,785
0.88 7,813,628 75,866
0.65
3.73
0.97
1,781,981
153,972
1,692,826
1,535,461
85,237
1,540,564
equity ............................................. $ 13,331,148
$ 12,056,531
$ 10,974,890
Net interest spread .............................
Net interest income ............................
Net interest margin ............................
$ 417,870
3.16 %
3.38 %
$ 379,742
3.18%
3.39%
$ 342,781
3.13%
3.35%
(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.
50
Net Interest Income — Changes Due to Rate and Volume (1)
2016 - 2015
Increase/(Decrease) in
Net Interest Income Due to:
2015 - 2014
Increase/(Decrease) in
Net Interest Income Due to:
Change in Change in
Volume
Rate
Total
Change
Change in Change in
Volume
Rate
Total
Change
Interest-Earning Assets
Deposits with other banks . $
Taxable securities ..............
FHLB stock .......................
Loans ................................
Total increase/(decrease)
(In thousands)
867 $
(89)
(530)
45,884
(502) $
(8)
(535)
277
365 $
(97)
(1,065)
46,161
(376) $
(643)
(655)
47,519
(222) $
(2,071)
1,845
(10,338)
(598)
(2,714)
1,190
37,181
in interest income ..........
46,132
(768)
45,364
45,845
(10,786)
35,059
Interest-Bearing
Liabilities
Interest-bearing demand
deposits ..........................
Money market deposits ....
Savings deposits ...............
Time deposits ...................
Securities sold under
agreements to
repurchase ......................
FHLB advances and other
borrowings .....................
Long-term debt .................
Total increase/(decrease)
in interest expense ..........
Change in net interest
308
2,436
72
1,179
26
734
73
2,705
334
3,170
145
3,884
229
1,634
90
3,496
(52)
(123)
9
836
177
1,511
99
4,332
(753)
269
(484)
(9,014)
142
(8,872)
106
-
66
15
172
15
(226)
(24)
(232)
1,333
(458)
1,309
3,348
3,888
7,236
(3,815)
1,913
(1,902)
income ........................... $
42,784 $
(4,656) $
38,128 $
49,660 $
(12,699) $
36,961
(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated
proportionately to changes due to volume and changes due to rate.
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 $15.7 million provision for credit losses in 2016 compared
with a negative $11.4 million in 2015, and a negative $10.8 million in 2014. Net charge-offs for 2016 were $4.3 million, or
0.04% of average loans, compared to net charge-offs for 2015 of $11.1 million, or 0.12% of average loans, and net charge-
offs for 2014 of $1.3 million, or 0.02% of average loans.
Non-interest Income
Non-interest income increased $696,000, or 2.1%, to $33.4 million for 2016, from $32.7 million for 2015, compared to
$40.5 million for 2014. 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.
51
Comparison of 2016 with 2015
The increase in non-interest income from 2015 to 2016 was primarily due to a $8.2 million increase in securities gains
offset by a $4.1 million decrease in wealth management commissions, by a $2.4 million decrease in venture capital gains,
and by a $1.0 million decrease in commissions from foreign exchange transactions. We sold securities of $605.5 million in
2016 compared to $1.0 billion in 2015. In 2016, gains of $5.1 million and no losses were realized on sales of investment
securities compared with gains of $2.4 million and losses of $1.9 million realized in 2015. An other-than-temporary write-
down of $206,000 on one equity security was recorded in 2016 compared to a $3.9 million write-down on agency preferred
stock in 2015.
Comparison of 2015 with 2014
The decrease in non-interest income from 2014 to 2015 was primarily due to a $10.1 million decrease in securities gains
and a $1.1 million decrease in wealth management commissions offset by increases in venture capital gains of $1.9 million
and in other fees and commissions of $1.6 million. We sold securities of $1.0 billion in 2015 compared to $859.0 million in
2014. In 2015, gains of $2.4 million and losses of $1.9 million were realized on sales of investment securities compared with
gains of $18.0 million and losses of $10.5 million realized in 2014. Other-than-temporary write-downs on agency preferred
stock were $3.9 million in 2015 compared to $0.8 million in 2014.
Non-interest Expense
Comparison of 2016 with 2015
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 $224.7 million in 2016 compared to $202.7 million in 2015. The increase of $22.0 million, or 10.8%,
in non-interest expense in 2016 compared to 2015 was primarily due to a combination of the following:
● Salaries and employee benefits increased $7.4 million, or 8.2%, due primarily to higher salaries and benefits,
the acquisition of Asia Bank and the hiring of new employees.
● Amortization of investments in affordable housing and alternative energy partnerships increased $6.9 million,
or 20.8%, primarily due to the investment in one additional alternative energy partnership in 2016.
● OREO expenses increased $1.7 million primarily due to decreases in gains on sale of OREO.
● Professional service expenses increased $1.4 million, or 7.9%, primarily due to increases in legal collection
expenses.
● Occupancy expenses increased $1.3 million, or 7.6%, due primarily to the acquisition of Asia Bank.
● Data processing service expenses increased $1.3 million, or 16.4%, primarily due to increases in business
transaction volume.
The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before provision for loan
losses plus non-interest income, increased to 49.79% in 2016 compared to 49.15% in 2015 due primarily to higher non-
interest expense as explained above.
52
Comparison of 2015 with 2014
Non-interest expense totaled $202.7 million in 2015 compared to $174.3 million in 2014. The increase of $28.4 million,
or 16.3%, in non-interest expense in 2015 compared to 2014 was primarily due to a combination of the following:
● Amortization of investments in affordable housing and alternative energy partnerships increased $26.3 million
to $33.3 million in 2015 from $7.0 million in 2014 primarily due to the investment in an alternative energy
partnership in 2015.
● Occupancy expenses increased $1.3 million, or 8.2%, due primarily to increases in higher rental expenses
resulting from the acquisition of Asia Bank and from new branches.
● Professional service expenses increased $2.4 million primarily due to increases in data processing expenses and
expenses related to the conversion of Asia Bank customers to our data processing systems.
● Marketing expenses increased $0.8 million primarily due to increases in media and promotion expenses.
● OREO expenses increased $0.5 million primarily due to decreases in gains on sale and transfer of OREO offset
by decreases in the provision for OREO losses and expenses.
● Offsetting the above increases were a decrease of $3.3 million in costs associated with debt redemptions during
2014 for prepayment penalties on securities sold under agreements to repurchase.
The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before provision for loan
losses plus non-interest income, increased to 49.15% in 2015 compared to 45.48% in 2014 due primarily to higher non-
interest expense as explained above.
Income Tax Expense
Income tax expense was $67.1 million in 2016, compared to $60.0 million in 2015, and $82.0 million in 2014. The
effective tax rate was 27.7% for 2016, 27.1% for 2015, and 37.3% for 2014. The effective tax rate differed from the composite
statutory composite rate of 42% primarily as a result of alternative energy tax credits, low income housing and other tax
credits totaling $37.9 million recognized in 2016, $31.0 million recognized in 2015, and $10.2 million recognized in 2014.
Our tax returns are open for audits by the Internal Revenue Service back to 2013 and by the California Franchise Tax
Board back to 2012. 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 $14.5 billion at December 31, 2016, an increase of $1.3 billion, or 9.6%, from $13.3 billion at December
31, 2015, primarily due to an increase of $1.0 billion in gross loans, excluding loans held for sale, and an increase of $430.2
million in short-term investments.
53
Investment Securities
Investment securities were $1.3 billion and represented 9.1% of total assets at December 31, 2016, compared with $1.6
billion and 12.0% of total assets at December 31, 2015. 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 .................................................................................................... $
U.S. government sponsored entities ................................................................................
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 ................................................................................. $
As of December 31,
2016
2015
(In thousands)
489,017 $
390,331
336,260
28
74,350
6,230
7,308
10,821
1,314,345 $
284,288
148,160
1,062,269
36
73,855
5,833
3,216
8,695
1,586,352
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.
The temporarily impaired securities represent 80.1% of the fair value of investment securities as of December 31, 2016.
Unrealized losses for securities with unrealized losses for less than twelve months represent 1.3%, and securities with
unrealized losses for twelve months or more represent 3.2%, 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, 2016, 7 issues of securities had unrealized losses for 12 months or longer and 30 issues of
securities had unrealized losses of less than 12 months.
Total unrealized losses of $15.0 million at December 31, 2016, were primarily caused by increases in interest rates
subsequent to the date that these securities were purchased or 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.
At December 31, 2016, management believed the impairment was temporary and, accordingly, no impairment loss on
debt securities has been recognized in our Consolidated Statements of Operations. The Company expects to recover the
amortized cost basis of its debt securities, and has no intent to sell and believes it is more likely than not that it will not be
required to sell available-for-sale debt securities that have declined below their cost before their anticipated recovery.
54
The tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment
securities portfolio as of December 31, 2016, and December 31, 2015:
As of December 31, 2016
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized No. of
Losses
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 ............... $
U.S. government sponsored
entities .....................................
Mortgage-backed securities .......
Collateralized mortgage
obligations ..............................
Corporate debt securities ............
Mutual funds ...............................
Total securities available-for-
299,088 $
857
6 $
- $
390,331
328,236
9,669
3,288
8
16
-
62
-
-
-
-
-
-
28
-
- 29,138
- 6,230
-
-
2
20
862
270
- $
299,088 $
857
-
3
1
2
1
390,331
328,298
9,669
3,290
28
29,138
6,230
20
862
270
6
8
19
1
2
1
sale ..................................... $ 1,017,655 $
13,814
30 $ 35,458 $
1,154
7 $ 1,053,113 $
14,968
37
As of December 31, 2015
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized No. of
Losses
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 ............... $
U.S. government sponsored
224,289 $
395
5 $
- $
entities .....................................
148,160
Mortgage-backed securities ....... 1,025,342
Collateralized mortgage
1,840
11,398
3
35
-
6
obligations ..............................
Corporate debt securities ............
Mutual funds ...............................
Preferred stock of government
sponsored entities ....................
Other equity securities ................
Total securities available-for-
-
9,950
-
2,488
158
-
50
-
228
342
-
36
1 43,525
- 5,833
2
1
-
-
-
-
1
27
1,475
167
-
-
- $
224,289 $
395
-
148,160
2 1,025,348
1,840
11,399
1
3
1
-
-
36
53,475
5,833
2,488
158
27
1,525
167
228
342
5
3
37
1
4
1
2
1
sale ..................................... $ 1,410,387 $
14,253
47 $ 49,400 $
1,670
7 $ 1,459,787 $
15,923
54
55
The scheduled maturities and taxable-equivalent yields by security type are presented in the following table:
Securites Portfolio Maturity Distribution and Yield Analysis:
As of December 31, 2016
After One After Five
One Year Year to
or Less
Years to
Five Years Ten Years Years
Over Ten
Total
Maturity Distribution:
Securities Available-for-Sale:
U.S. treasury securities .............................. $
U.S. government sponsored entities ..........
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) ............................
Total securities available-for-sale .............. $
Weighted-Average Yield:
Securities Available-for-Sale:
U.S. treasury securities ...............................
U.S. government sponsored entities ..........
Mortgage-backed securities (1) ...................
Collateralized mortgage obligations (1) ......
Corporate debt securities ............................
Mutual funds (2) ..........................................
Total securities available-for-sale ..............
(Dollars in thousands)
339,823 $
-
-
-
-
-
149,194 $
317,718
3,323
-
74,350
-
- $
72,613
120
-
-
-
- $
-
332,817
28
-
6,230
489,017
390,331
336,260
28
74,350
6,230
-
-
339,823 $
-
-
544,585 $
-
-
72,733 $
7,308
7,308
10,821
10,821
357,204 $ 1,314,345
0.63%
-
-
-
-
-
0.63%
0.80%
1.67
4.86
-
2.13
-
1.52%
-
1.63
4.73
-
-
-
1.64%
-
-
1.86
3.50
-
2.26
1.77%
0.68 %
1.66
1.89
3.50
2.13
2.26
1.38 %
(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.
Loans
Loans represented 86.0% of average interest-earning assets during 2016, compared with 85.8% during 2015. Gross loans,
excluding loans held for sale, increased by $1.0 billion, or 10.2%, to $11.2 billion at December 31, 2016, compared with
$10.2 billion at December 31, 2015. The increase in gross loans was primarily attributable to the following:
● Commercial mortgage loans increased $484.0 million, or 9.1%, to $5.79 billion at December 31, 2016, compared to
$5.30 billion at December 31, 2015. Total commercial mortgage loans accounted for 51.7% of gross loans at
December 31, 2016, compared to 52.2% at December 31, 2015. Commercial mortgage loans consist primarily of
commercial retail properties, shopping centers, owner-occupied industrial facilities, office buildings, multiple-unit
apartments, hotels, and multi-tenanted industrial properties, and are typically secured by first deeds of trust on such
commercial properties.
56
● Total residential mortgage loans increased by $511.7 million, or 26.5%, to $2.44 billion at December 31, 2016,
compared to $1.93 billion at December 31, 2015, primarily due to the low level of interest rates and the originations
of mortgages to non-US residents secured by residential real estate in the United States.
● Real estate construction loans increased $106.6 million, or 24.1%, to $548.1 million at December 31, 2016,
compared to $441.5 million at December 31, 2015.
● Commercial loans decreased $68.7 million, or 3.0%, to $2.25 billion at December 31, 2016, compared to $2.32
billion at December 31, 2015. 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.
Our lending relates predominantly to activities in the states of California, New York, Texas, Washington, Massachusetts,
Illinois, New Jersey, Maryland, and Nevada although we have some loans to domestic clients who are engaged in international
trade. Loans outstanding in our branch in Hong Kong were $214.6 million as of December 31, 2016, compared to $216.2
million as of December 31, 2015.
The classification of loans by type and amount outstanding as of December 31 for each of the past five years is presented
below:
2016
2015
Loan Type and Mix
As of December 31,
2014
(In thousands)
2013
2012
Commercial loans ....................................... $ 2,248,187 $ 2,316,863 $ 2,382,493 $ 2,298,724 $ 2,127,107
Residential mortgage loans and equity
lines ........................................................... 2,615,759 2,101,335 1,742,938 1,526,532 1,340,082
Commercial mortgage loans ....................... 5,785,248 5,301,218 4,486,443 4,023,051 3,768,452
180,950
Real estate construction loans ....................
Installment and other loans ........................
12,556
Gross loans ................................................. 11,201,275 10,163,452 8,914,080 8,084,563 7,429,147
Less:
(183,322)
Allowance for loan losses ..........................
Unamortized deferred loan fees .................
(10,238)
Total loans and leases, net .......................... $ 11,077,315 $ 10,016,227 $ 8,740,268 $ 7,897,187 $ 7,235,587
-
Loans held for sale ..................................... $
(173,889 )
(13,487 )
(118,966)
(4,994)
(161,420)
(12,392)
(138,963)
(8,262)
221,701
14,555
548,088
3,993
298,654
3,552
441,543
2,493
6,676 $
7,500 $
973 $
- $
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.
57
Contractual Maturity of Loan Portfolio
Within One
Year
One to Five
Years
Over Five
Years
Total
(In thousands)
Commercial loans
Floating rate ................................................................ $
Fixed rate .....................................................................
Residential mortgage loans and equity lines
Floating rate ................................................................
Fixed rate .....................................................................
Commercial mortgage loans
Floating rate ................................................................
Fixed rate .....................................................................
Real estate construction loans
Floating rate ................................................................
Fixed rate .....................................................................
Installment and other loans
Floating rate ................................................................
Fixed rate .....................................................................
Total Loans ............................................................. $
Floating rate ................................................................ $
Fixed rate .....................................................................
Total Loans .............................................................
Allowance for loan losses ...........................................
Unamortized deferred loan fees ...................................
Net loans .....................................................................
Loans held for sale .......................................................
Deposits
1,580,615 $
116,552
414,893 $
34,310
96,185 $
5,632
2,091,693
156,494
44
7,051
550
11,275
992,165
1,604,674
992,759
1,623,000
431,884
226,487
1,183,519
867,289
2,807,654
268,415
4,423,057
1,362,191
422,783
11,790
113,515
-
-
-
536,298
11,790
89
1,579
2,798,874 $
2,435,415 $
363,459
2,798,874
-
2,325
2,627,676 $
1,712,477 $
915,199
2,627,676
-
-
89
3,904
5,774,725 $ 11,201,275
8,043,896
3,896,004 $
1,878,721
3,157,379
5,774,725 11,201,275
(118,966)
(4,994)
$ 11,077,315
7,500
$
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 $632.9 million,
or 5.4%, of total deposits, at December 31, 2016, compared to $684.2 million, or 6.5%, at December 31, 2015.
58
The Company’s total deposits increased $1.2 billion, or 11.1%, to $11.7 billion at December 31, 2016, from $10.5 billion
at December 31, 2015, primarily due to a $445.1 million, or 21.9%, increase in non-interest bearing demand deposits, a
$293.2 million, or 15.4%, increase in money market deposits, a $264.0 million, or 27.3%, increase in NOW deposits, a $101.8
million, or 16.5% increase in savings deposits, and a $61.5 million, or 1.2%, increase in time deposits. The following table
displays the deposit mix for the past three years:
Deposit Mix
2016
Year Ended December 31,
2015
2014
Amount
Percentage Amount
Percentage Amount
Percentage
(Dollars in thousands)
Demand deposits .............. $ 2,478,107
NOW deposits .................. 1,230,445
Money market deposits .... 2,198,938
Savings deposits ...............
719,949
Time deposits ................... 5,047,287
Total .............................. $ 11,674,726
21.2 % $ 2,033,048
966,404
10.6
18.8 1,905,719
618,164
43.2 4,985,752
100 % $ 10,509,087
6.2
19.4% $ 1,664,914
778,691
9.2
18.1 1,538,187
533,940
47.4 4,267,728
100% $ 8,783,460
5.9
19.0%
8.9
17.5
6.1
48.5
100%
Average total deposits increased $1.2 billion, or 12.2%, to $10.8 billion in 2016, compared with average total deposits of
$9.6 billion in 2015.
The following table displays average deposits and rates for the past five years:
Average Deposits and Average Rates
2016
Year Ended December 31,
2014
2015
2013
2012
Amount
% Amount % Amount % Amount % Amount %
(Dollars in thousands)
Demand deposits $ 2,199,274
NOW deposits ... 1,046,046 0.17 860,513 0.16 721,435 0.17 634,506 0.16 516,246 0.15
Money market
- % $ 1,157,343
-% $ 1,535,461
-% $ 1,325,781
- % $1,781,981
-%
deposits .......... 2,059,823 0.65 1,677,065 0.60 1,407,053 0.61 1,215,347 0.58 1,059,841 0.56
Savings deposits .
636,422 0.16 590,987 0.15 532,184 0.15 488,932 0.08 451,022 0.08
Time deposits .... 4,810,746 0.90 4,673,862 0.84 4,257,736 0.82 3,993,508 0.80 4,197,906 0.96
Total .................. $10,752,311 0.55 % $9,584,408 0.54% $ 8,453,869 0.54% $ 7,658,074 0.53 % $ 7,382,358 0.64%
Management considers the Bank time deposits of $250,000 or more, which totaled $2.0 billion at December 31, 2016, to
be generally less volatile than other wholesale funding sources primarily because approximately 86% of the Bank’s CDs of
$250,000 or more have been on deposit with the Bank for two years or more. Management monitors the CDs of $250,000
or more portfolio to identify any changes in the deposit behavior in the market and of the customers the Bank is serving.
59
Of our CDs, approximately 91% mature within one year as of December 31, 2016. The following tables display time
deposits by maturity:
Time Deposits by Maturity
Less than three months ..................................................................... $
Three to six months ..........................................................................
Six to twelve months ........................................................................
Over one year ...................................................................................
Total .............................................................................................. $
Time Deposits
-under
$100,000
At December 31, 2016
Time Deposits
-$100,000 and
over
(Dollars in thousands)
1,174,529 $
666,969
1,542,317
299,887
3,683,702 $
413,994 $
330,554
468,996
150,041
1,363,585 $
Total Time
Deposits
1,588,523
997,523
2,011,313
449,928
5,047,287
Percent of total deposits ...................................................................
11.7%
31.5%
43.2%
The following table displays time deposits with a remaining term of more than one year at December 31, 2016:
Maturities of Time Deposits with a Remaining Term
of More Than One Year for Each
of the Five Years Following December 31, 2016
2018 ...................................................................................................................................................... $
2019 ......................................................................................................................................................
2020 ......................................................................................................................................................
2021 ......................................................................................................................................................
2022 ......................................................................................................................................................
371,713
75,266
2,899
39
11
(In thousands)
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 $350.0 million with a weighted average rate of 4.06% at December
31, 2016, compared to $400.0 million with a weighted average rate of 3.89% at December 31, 2015. As of December 31,
2016, four floating-to-fixed rate agreements totaling $200.0 million with weighted average rate of 5.0% and final maturity in
January 2017 have initial floating rates for one year, with floating rates of the 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%. As of
December 31, 2016, three fixed rate non-callable securities sold under agreements to repurchase totaled $150 million with a
weighted average rate of 2.81%, compared to four fixed rate non-callable securities sold under agreements to repurchase
totaling $200 million with a weighted average rate of 2.78% as of December 31, 2015. Final maturity for the three fixed rate
non-callable securities sold under agreements to repurchase is $50.0 million in July 2017, $50.0 million in June 2018, and
$50.0 million in July 2018.
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 and mortgage-backed
securities with a fair value of $372.0 million as of December 31, 2016, and $430.2 million as of December 31, 2015.
60
The table below provides comparative data for securities sold under agreements to repurchase for the years indicated:
2016
2015
(Dollars in thousands)
2014
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 ..........................
381,967 $
400,000
350,000
4.06 %
4.01 %
400,822 $
400,000
400,000
3.89 %
3.95 %
629,315
700,000
450,000
3.85%
3.92%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January 2016, January 2015, and January 2014.
As of December 31, 2016, over-night borrowings from the FHLB were $275.0 million at a rate of 0.55% compared to
$250.0 million at a rate of 0.27% at December 31, 2015. As of December 31, 2016, the advances from the FHLB were $75
million at a rate of 1.48% compared to $25 million at a rate of 1.13% as of December 31, 2015. As of December 31, 2016,
final maturity for the FHLB advances is $25 million in March 2018 and $50 million in December 2019.
Long-term Debt
We established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing Guaranteed Preferred
Beneficial Interests in their Subordinated Debentures to outside investors (“Capital Securities”). The proceeds from the
issuance of the Capital Securities as well as our purchase of the common stock of the special purpose trusts were invested in
Junior Subordinated Notes of the Company (“Junior Subordinated Notes”). The trusts exist for the purpose of issuing the
Capital Securities and investing in Junior Subordinated Notes. Subject to some limitations, payment of distributions out of
the monies held by the trusts and payments on liquidation of the trusts, or the redemption of the Capital Securities, are
guaranteed by the Company to the extent the trusts have funds on hand at such time. The obligations of the Company under
the guarantees and the Junior Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the
Company and will be structurally subordinated to all liabilities and obligations of the Company’s subsidiaries. The Company
has the right to defer payments of interest on the Junior Subordinated Notes at any time or from time to time for a period of
up to twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior Subordinated
Notes, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or
purchase or acquire any of its capital stock if it has deferred payment of interest on any Junior Subordinated Notes.
At December 31, 2016, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 3.15%,
compared to $119.1 million with a weighted average rate of 2.70% at December 31, 2015. 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 at both December 31, 2016 and 2015. The trusts are not consolidated with the Company in accordance with an
accounting pronouncement that took effect in December 2003.
61
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, 2016. 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
1 year
or less
More than 3 years or
more but
1 year but
less than
less than
5 years
3 years
(In thousands)
5 years
or more
Total
Contractual obligations:
Securities sold under agreements to
repurchase (1) ................................. $
200,000 $
- $
Securities sold under agreements to
repurchase (2) .................................
Advances from the Federal Home
Loan Bank .....................................
Other borrowings .............................
Long-term debt .................................
Operating leases ...............................
Deposits with stated maturity dates
50,000
100,000
- $
-
- $
200,000
-
150,000
275,000
-
-
8,562
25,000
-
-
12,239
50,000
-
-
6,590
-
17,662
119,136
7,778
350,000
17,662
119,136
35,169
leases ............................................
4,597,359
446,979
2,938
11
5,047,287
Total contractual obligations and
other commitments ....................... $
5,130,921 $
584,218 $
59,528 $
144,587 $
5,919,254
Other commitments:
Commitments to extend credit ......
Standby letters of credit ................
Commercial letters of credit .........
Bill of lading guarantees ...............
1,109,889
44,940
37,033
75
708,603
2,255
92
-
91,234
27,743
158
-
152,515
458
-
-
2,062,241
75,396
37,283
75
Total contractual obligations and
other commitments ....................... $
1,191,937 $
710,950 $
119,135 $
152,973 $
2,174,995
(1) These repurchase agreements have a final maturity of 10-years from origination date but are callable on a quarterly basis.
(2) These repurchase agreements are non-callable.
In the normal course of business, we enter into various transactions, which, in accordance with U.S. generally accepted
accounting principles, are not included in our Consolidated Balance Sheets. We enter into these transactions to meet the
financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit,
which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the
Consolidated Balance Sheets.
Loan Commitments. We enter into contractual commitments to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are
contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to
loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the
credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.
Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by us to secure the
obligations of a customer to a third party. In the event the customer does not perform in accordance with the terms of an
agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future
payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is
62
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 was $1.83 billion at December 31, 2016, an increase of $80.8 million, or 4.6%, from $1.75 billion at
December 31, 2015, primarily due to increases in net income of $175.1 million, proceeds from exercise of stock options of
$7.7 million, in other comprehensive income of $4.7 million, and proceeds from dividend reinvestment of $2.3 million offset
by purchases of treasury stock of $54.4 million and common stock cash dividends of $59.3 million. The Company paid cash
dividends of $0.75 per common share in 2016 and $0.56 per common share in 2015.
In August 2015, the Company resumed stock repurchases under the November 2007 repurchase program and repurchased
the remaining 622,500 shares for $18.1 million, or an average price of $29.08 per share. Also, in August 2015, the Board of
Directors approved a stock repurchase program for the Company to buy back up to two million shares of our common stock,
and 1,366,750 shares were repurchased during 2015. In January and February of 2016, the Company repurchased the
remaining 633,250 shares under the August 2015 repurchase program for $17.0 million, or an average price of $26.82 per
share.
On February 1, 2016, the Board of Directors approved a new stock repurchase program to buy back up to $45.0 million
of our common stock. In 2016, the Company repurchased 1,380,578 shares for $37.5 million, or $27.13 per share under the
February 2016 repurchase program. As of December 31, 2016, the Company may repurchase up to $7.5 million of its common
stock under the February 2016 repurchase program.
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, 2016, the Company’s common equity Tier 1 capital ratio of 12.84%,
Tier 1 risk-based capital ratio of 13.85%, total risk-based capital ratio of 14.97%, and Tier 1 leverage capital ratio of 11.57%,
calculated under the new Basel III capital rules that became effective January 1, 2015, continue to place the Company in the
“well capitalized” category for regulatory purposes, which is defined as institutions with a common equity Tier 1 capital ratio
equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal
to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%. At December 31, 2015, the Company’s
common equity Tier 1 capital ratio was 12.95%, Tier 1 risk-based capital ratio was 14.03%, total risk-based capital ratio was
15.30%, and Tier 1 leverage capital ratio was 11.95%.
A table displaying the Bancorp’s and the Bank’s capital and leverage ratios at December 31, 2016, and 2015, is included
in Note 21 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. We increased the common stock dividend from $.01 per share to $.05 per share in the fourth quarter of
2013, to $.07 per share in the second quarter of 2014, to $.10 per share in the fourth quarter of 2014, to $.14 per share in the
second quarter of 2015, to $.18 per share in the fourth quarter of 2015, and to $.21 per share in the fourth quarter of 2016.
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.
63
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 the Bancorp totaling $113.4 million during 2016, $163.3 million during 2015, and
$30.0 million during 2014.
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.
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, 2016, was restricted to approximately $178.2 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 $7.0 million, or 9.2%, to $69.8 million at December 31, 2016, compared
to $76.8 million at December 31, 2015, primarily due to a $2.4 million decrease in non-accrual loans and a $4.6 million
decrease in OREO.
As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets decreased to 0.62%
at December 31, 2016, from 0.75% at December 31, 2015. 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, decreased
to 245.9% at December 31, 2016, from 269.4% at December 31, 2015.
64
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
2016
2015
As of December 31,
2014
(Dollars in thousands)
2013
2012
Accruing loans past due 90 days or more .. $
Non-accrual loans ......................................
Total non-performing loans ...................
- $
49,682
49,682
- $
52,130
52,130
- $
70,163
70,163
982 $
83,183
84,165
630
103,902
104,532
Real estate acquired in foreclosure and
other assets ............................................
Total non-performing assets .................. $
20,070
69,752 $
24,701
76,831 $
31,477
101,640 $
52,985
137,150 $
46,384
150,916
Accruing troubled debt restructurings
(TDRs) .................................................. $
65,393 $
81,680 $
104,356 $
117,597
$
144,695
Non-accrual TDRs (included in non-
accrual loans) ......................................... $
Non-accrual loans held for sale ................. $
Non-performing assets as a percentage of
29,722 $
7,500 $
39,923 $
5,944 $
41,618 $
973 $
38,769 $
- $
47,731
-
gross loans and OREO at year-end ........
0.62%
0.75%
1.14%
1.69%
2.02%
Allowance for credit losses as a
percentage of gross loans ........................
1.09%
1.38%
1.83%
2.17%
2.49%
Allowance for credit losses as a
percentage of non-performing loans ......
245.94%
269.44%
232.84%
208.22%
176.68%
The effect of non-accrual loans on interest income for the past five years is presented below:
2016
2015
Year Ended December 31,
2014
(In thousands)
2013
2012
Non-accrual Loans
Contractual interest due .............................. $
Interest recognized .....................................
Net interest foregone .............................. $
1,573 $
95
1,478 $
5,732 $
119
5,613 $
6,663 $
217
6,446 $
5,851 $
22
5,829 $
6,621
1,006
5,615
As of December 31, 2016, 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 $49.7 million at December 31, 2016, decreased
$2.4 million, or 4.7%, from $52.1 million at December 31, 2015. 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.
65
Non-accrual portfolio loans, excluding loans held for sale, at December 31, 2016, consisted of 28 commercial real estate
loans totaling $19.8 million, one residential construction loan of $5.5 million, 33 residential mortgage loans totaling $8.4
million, 19 commercial loans totaling $15.7 million, and one land loan of $283,000. Non-accrual loans also include those
troubled debt restructurings that do not qualify for accrual status. The comparable numbers for 2015 were 29 commercial
real estate loans totaling $16.0 million, two residential construction loans of $15.8 million, 33 residential mortgage loans
totaling $7.0 million, 12 commercial loans totaling $3.5 million, two land loans totaling $9.3 million, and one non-farm non-
residential construction loan of $500,000.
The following tables present the type of properties securing the non-accrual portfolio loans and the type of businesses the
borrowers engaged in as of the dates indicated:
December 31, 2016
December 31, 2015
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 ......................................................... $
9,368 $
24,321
283
-
33,972 $
218 $
-
-
15,492
15,710 $
8,727 $
30,588
9,270
-
48,585 $
-
834
-
2,711
3,545
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and equity
lines.
December 31, 2016
December 31, 2015
Real
Estate (1)
Commercial
Real
Estate (1)
Commercial
Type of Business
Real estate development .............................. $
Wholesale/Retail .........................................
Food/Restaurant ..........................................
Import/Export ..............................................
Other ............................................................
Total ......................................................... $
13,804 $
12,312
153
-
7,703
33,972 $
(In thousands)
- $
9,213
-
6,174
323
15,710 $
29,174 $
13,414
293
-
5,704
48,585 $
834
780
-
1,931
-
3,545
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and equity
lines.
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.
66
A summary of TDRs by type of loan and by accrual/non-accrual status is shown below:
Accruing TDRs
Payment
Deferral
December 31, 2016
Rate
Reduction
and
Payment
Deferral
Rate
Reduction
(In thousands)
Total
Commercial loans ................................................................ $
Commercial mortgage loans ................................................
Residential mortgage loans .................................................
Total accruing TDRs ............................................................ $
7,971 $
25,979
5,104
39,054 $
- $
5,961
789
6,750 $
4,081 $
12,452
3,056
19,589 $
12,052
44,392
8,949
65,393
Non-accrual TDRs
Payment
Deferral
December 31, 2016
Rate
Reduction
and
Payment
Deferral
Rate
Reduction
(In thousands)
Total
Commercial loans ................................................................ $
Commercial mortgage loans ................................................
Residential mortgage loans .................................................
Total non-accrual TDRs ....................................................... $
14,565 $
2,510
356
17,431 $
- $
1,795
-
1,795 $
- $
10,328
168
10,496 $
14,565
14,633
524
29,722
Accruing TDRs
Payment
Deferral
December 31, 2015
Rate
Reduction
and
Payment
Deferral
Rate
Reduction
Commercial loans ................................................................ $
Real estate construction loans .............................................
Commercial mortgage loans ................................................
Residential mortgage loans .................................................
Total accruing TDRs ............................................................ $
8,298 $
-
16,701
5,201
30,200 $
(In thousands)
- $
-
6,045
999
7,044 $
1,726 $
5,696
33,800
3,214
44,436 $
Total
10,024
5,696
56,546
9,414
81,680
Non-accrual TDRs
December 31, 2015
Rate
Reduction
and
Payment
Deferral
(In thousands)
Total
Payment
Deferral
Commercial loans ............................................................................................ $
Real estate construction loans .........................................................................
Commercial mortgage loans ............................................................................
Residential mortgage loans .............................................................................
Total non-accrual TDRs ................................................................................... $
1,033 $
9,981
1,544
388
12,946 $
90 $
5,825
20,362
700
26,977 $
1,123
15,806
21,906
1,088
39,923
67
The activity within our TDR loans for 2016, 2015, and 2014 is shown below:
Accruing TDRs
Beginning balance ............................................................ $
New restructurings ...........................................................
Restructured loans restored to accrual status ....................
Charge-offs .......................................................................
Payments ..........................................................................
Restructured loans placed on non-accrual ........................
Expiration of loan concession ..........................................
Ending balance ................................................................. $
2016
2015
(In thousands)
2014
81,680 $
26,965
10,303
(88)
(24,192)
(13,984)
(15,291)
65,393 $
104,356 $
17,752
723
(104)
(30,858)
(10,189)
-
81,680 $
117,597
23,740
962
-
(13,256 )
(24,687 )
-
104,356
Non-accrual TDRs
2016
2015
(In thousands)
2014
Beginning balance ............................................................ $
New restructurings ...........................................................
Restructured loans placed on non-accrual ........................
Charge-offs .......................................................................
Payments ..........................................................................
Foreclosures .....................................................................
Restructured loans restored to accrual status ....................
Ending balance ................................................................. $
39,923 $
6,940
13,984
(5,271)
(15,551)
-
(10,303)
29,722 $
41,618 $
2,006
10,189
(3,246)
(9,921)
-
(723)
39,923 $
38,769
1,331
24,688
(8,938 )
(11,710 )
(1,560 )
(962 )
41,618
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
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 TDRs.
We identified impaired loans with a recorded investment of $115.1 million at December 31, 2016, compared to
$133.8 million at December 31, 2015. The average balance of impaired loans was $131.0 million in 2016 and $162.9 million
in 2015. We considered all non-accrual loans to be impaired. Interest recognized on impaired loans totaled $3.5 million in
2016 and $4.0 million in 2015. As of December 31, 2016, $34.0 million, or 68.4%, of the $49.7 million of non-accrual
portfolio loans, excluding loans held for sale, was secured by real estate. As of December 31, 2015, $48.6 million, or 93.2%,
of the $52.1 million of non-accrual portfolio loans, excluding loans held for sale, was secured by real estate. The Bank obtains
current appraisals or other available market price information which provides updated factors in evaluating potential loss.
68
At December 31, 2016, $2.8 million of the $119.0 million allowance for loan losses was allocated for impaired loans and
$116.2 million was allocated to the general allowance. At December 31, 2015, $7.8 million of the $139.0 million allowance
for loan losses was allocated for impaired loans and $131.2 million was allocated to the general allowance. In 2016, net loan
charge-offs were $4.3 million, or 0.04%, of average loans, compared to $11.1 million, or 0.12%, of average loans in 2015.
The allowance for loan losses to non-performing loans, excluding loans held for sale, was 239.5% at December 31, 2016,
compared to 266.6% at December 31, 2015. 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, 2016
As of December 31, 2015
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Unpaid
Principal
Balance
Recorded
Investment
Allowance
(In thousands)
With no allocated allowance
Commercial loans ........................ $
Real estate construction loans ......
Commercial mortgage loans ........
Residential mortgage and equity
24,037 $
5,776
60,522
23,121 $
5,458
54,453
- $
-
-
15,493 $
51,290
59,954
6,721 $
22,002
54,625
lines ...........................................
Subtotal ................................... $
5,472
95,807 $
5,310
88,342 $
-
3,233
- $ 129,970 $
3,026
86,374 $
With allocated allowance
Commercial loans ........................ $
Commercial mortgage loans ........
Residential mortgage and equity
5,216 $
10,158
4,640 $
10,017
1,827 $
573
7,757 $
28,258
6,847 $
27,152
lines ...........................................
Subtotal ................................... $
Total impaired loans ..................... $
13,263
28,637 $
124,444 $
12,075
26,732 $
115,074 $
14,383
396
2,796 $
50,398 $
2,796 $ 180,368 $
13,437
47,436 $
133,810 $
-
-
-
-
-
530
6,792
427
7,749
7,749
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, 2016, construction loans of $500.2 million were disbursed with pre-established interest reserves of
$58.9 million compared to $371.4 million of such loans disbursed with pre-established interest reserves of $49.5 million at
December 31, 2015. The balance for construction loans with interest reserves which have been renewed was $113.1 million
with pre-established interest reserves of $2.1 million at December 31, 2016, compared to $67.8 million with pre-established
interest reserves of $2.6 million at December 31, 2015. Land loans of $51.3 million were disbursed with pre-established
interest reserves of $1.0 million at December 31, 2016, compared to $87.3 million land loans disbursed with pre-established
interest reserves of $1.8 at December 31, 2015. The balance for land loans with interest reserves which have been renewed
was $2.0 million at December 31, 2016 with pre-established interest reserves of $40,000, compared to $73.2 million land
loans with pre-established interest reserves of $1.3 million at December 31, 2015.
69
At December 31, 2016, the Bank had no loans on non-accrual status with available interest reserves. At December 31,
2016, $5.5 million non-accrual non-residential construction loans, zero of non-accrual residential construction loans, and
$7.8 million of non-accrual land loans had been originated with pre-established interest reserves. At December 31, 2015, the
Bank had no loans on non-accrual status with available interest reserves. At December 31, 2015, $15.8 million of non-accrual
non-residential construction loans, $0.5 million of non-accrual residential construction loans, and $13.9 million of non-
accrual land loans had been originated with pre-established interest reserves. While loans with interest reserves are typically
expected to be repaid in full according to the original contractual terms, some loans require one or more extensions beyond
the original maturity. Typically, these extensions are required due to construction delays, delays in 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; New Jersey; and
Maryland. 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, 2016.
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 40% of total risk-based capital
as of December 31, 2016, and 36% as of December 31, 2015. Total CRE loans represented 300% of total risk-based capital
as of December 31, 2016, and 286% as of December 31, 2015, which were within the Bank’s internal limit of 400%, of total
capital. See Part I — Item 1A — “Risk Factors” for a discussion of some of the factors that may affect us.
Allowance for Credit Losses
The Bank maintains the allowance for credit losses at a level that is considered appropriate 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.
70
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 appropriate allowance for credit
losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and
determines whether the allowance is appropriate 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 collectability
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 or reductions
to the allowance for credit losses are made by charges or credits 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 $119.0 million and the allowance for off-balance sheet unfunded credit commitments
was $3.2 million at December 31, 2016, which represented the amount believed by management to be appropriate to absorb
credit losses inherent in the loan portfolio. The allowance for credit losses, which is the sum of the allowances for loan losses
and for off-balance sheet unfunded credit commitments, was $122.2 million at December 31, 2016, compared to $140.5
million at December 31, 2015, a decrease of $18.3 million, or 13.0%. The allowance for credit losses represented 1.09% of
period-end gross loans and 245.9% of non-performing loans at December 31, 2016. The comparable ratios were 1.38% of
period-end gross loans and 269.4% of non-performing loans at December 31, 2015.
71
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
2016
Amount Outstanding as of December 31,
2014
(Dollars in thousands)
2015
2013
2012
Allowance for loan losses
Balance at beginning of year ............................... $
Reversal for credit losses .....................................
(Reversal)/provision for reserve for off-balance
sheet credit commitments .................................
Charge-offs :
Commercial loans ................................................
Construction loans-residential ..............................
Construction loans-other .....................................
Real estate loans ..................................................
Real estate land loans ..........................................
Installment loans and other loans ........................
Total charge-offs ..............................................
Recoveries:
Commercial loans ................................................
Construction loans-residential ..............................
Construction loans-other ......................................
Real estate loans ..................................................
Real estate land loans ..........................................
Installment loans and other loans ........................
Total recoveries ...............................................
Balance at end of year ......................................... $
Reserve for off-balance sheet credit
commitments
138,963 $ 161,420 $ 173,889 $ 183,322 $ 206,280
(9,000)
(15,650)
(10,800)
(11,400)
(3,000 )
-
-
(372)
-
706
(12,955)
-
-
(1,486)
(4,462)
-
(18,903)
(16,426)
-
-
(3,355)
(646)
-
(20,427)
(7,875)
(2,382)
(4,365)
(7,613)
-
-
(22,235)
(15,625 )
-
-
(3,499 )
(1,318 )
-
(20,442 )
(17,707)
(391)
(774)
(13,616)
(278)
(25)
(32,791)
4,144
500
7,417
1,542
953
-
14,556
1,949
3,788
2,365
8,820
1,202
3
18,127
118,966 $ 138,963 $ 161,420 $ 173,889 $ 183,322
12,517
48
2,499
5,752
109
13
20,938
2,739
1,201
1,083
5,978
2,997
11
14,009
4,619
-
202
4,283
266
-
9,370
Balance at beginning of year ............................... $
Provision/(Reversal) for credit losses ..................
Balance at end of year ......................................... $
1,494 $
1,730
3,224 $
1,949 $
(455)
1,494 $
1,363 $
586
1,949 $
1,363 $
-
1,363 $
2,069
(706)
1,363
Average loans outstanding during the year (1) ...... $10,620,819 $ 9,593,448 $ 8,532,245 $ 7,630,530 $ 7,094,197
Ratio of net charge-offs to average loans
outstanding during the year (1) ..........................
(Reversal)/provision for credit losses to average
loans outstanding during the year (1) ................
Allowance for credit losses to non-performing
portfolio loans at year-end (2) ............................
Allowance for credit losses to gross loans at
year-end (1) ........................................................
(1) Excluding loans held for sale
(2) Excluding non-accrual loans held for sale
0.04%
0.12%
0.02%
0.08 %
0.21%
-0.15%
-0.12%
-0.13%
-0.04 %
-0.13%
245.94%
269.44%
232.84%
208.22 %
176.68%
1.09%
1.38%
1.83%
2.17 %
2.49%
72
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.
● 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 take 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 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 five-year
average of observed net losses, unless trends would indicate that a different weighting would be appropriate. In the
fourth quarter of 2016, management reevaluated the look back period and increase the period from five to eight years
to capture additional history that would incorporate the losses from the last recession. 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.
73
The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the ratio
of each loan category to the total loans as of the dates indicated:
Allocation of Allowance for Loan Losses
2016
2015
Percentage
of Loans in
Each
Category
to Average
Gross
Loans
Percentage
of Loans in
Each
Category
to Average
Gross
Loans
Amount
Amount
As of December 31,
2014
Percentage
of Loans in
Each
Category
to Average
Gross
Loans
Amount
(Dollars in thousands)
2013
2012
Percentage
of Loans in
Each
Category
to Average
Gross
Loans
Amount
Percentage
of Loans in
Each
Category
to Average
Gross
Loans
Amount
Type of Loans:
Commercial
loans ........... $ 49,203
21.1% $ 56,199
24.9% $ 47,501
27.2% $ 65,103
28.2% $ 66,101
27.4%
Residential
mortgage
loans and
equity lines . 11,620
Commercial
mortgage
loans ........... 34,864
Real estate
construction
loans ........... 23,268
Installment and
22.0 11,145
19.7 11,578
19.2 12,005
18.6 11,703
17.4
52.2 49,440
51.5 74,673
50.2 84,753
50.7 82,473
52.2
other loans ..
11
0.0
9
0.0
16
0.2
29
0.2
28
4.7 22,170
3.9 27,652
3.2 11,999
2.3 23,017
2.8
0.2
Total ................ $ 118,966
100.0% $ 138,963
100.0% $ 161,420
100.0% $ 173,889
100.0% $ 183,322
100.0%
The allowance allocated to commercial loans was $49.2 million at December 31, 2016, compared to $56.2 million at
December 31, 2015. The decrease was due to lower loan balances, a reduction in the general allowance for commercial loans
and a reduction in the allowance for loan participations as a result of lower losses.
The allowance allocated to residential mortgage loans and equity lines was $11.6 million at December 31, 2016, compared
to $11.1 million at December 31, 2015. The increase was primarily due to the growth of residential mortgages.
The allowance allocated to commercial mortgage loans decreased from $49.4 million at December 31, 2015, to $34.9
million at December 31, 2016, as a result of reduced historical loan loss experience for commercial mortgage loans.
The allowance allocated for construction loans increased to $23.3 million at December 31, 2016, compared to $22.2
million at December 31, 2015, as a result of the increase in the look back period from five to eight years.
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.
For December 2016, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net
deposits and short-term liabilities) was 12.6% compared to 15.8% for December 2015.
74
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, 2016, the Bank had an approved credit line with the FHLB of San Francisco totaling $5.5 billion.
Total advances from the FHLB of San Francisco were $350.0 million at December 31, 2016. These borrowings bear fixed
rates and are secured by loans. See Note 9 to the Consolidated Financial Statements. At December 31, 2016, the Bank pledged
$30.0 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 $27.7 million from the Federal Reserve Bank Discount Window at December
31, 2016.
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, 2016, investment securities totaled $1.3 billion,
with $649.1 million pledged as collateral for borrowings and other commitments. The remaining $665.2 million was available
as additional liquidity or to be pledged as collateral for additional borrowings.
Approximately 91% of our time deposits mature within one year or less as of December 31, 2016. 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 the 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 13 to the Consolidated Financial Statements regarding commitments and contingencies.
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.” This update requires an entity to measure equity investments
with readily determinable fair values at fair value with changes in fair value recognized in net income. Equity investment
without readily determinable fair values will be measured at fair value either upon the occurrence of an observable price
change or upon identification of an impairment and any amount by which the carrying value exceeding the fair value will be
recognized as an impairment in net income. This update also requires an entity to disclose fair value of financial instruments
measured at amortized cost on the balance sheet to measure that fair value using the exit price option. In addition, this update
requires separate presentation in comprehensive income for changes in the fair value of a liability and in the balance sheet by
measurement category and form of financial asset. ASU 2016-01 becomes effective for interim and annual periods beginning
after December 15, 2017. The Company is currently evaluating the impact on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options
in Debt Instruments.” This update requires an entity to perform a four-step decision sequence when assessing whether
contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related
to their debt hosts. The four-step decision sequence is: the payoff is adjusted based on changes in an index; the payoff is
indexed to an underlying other than interest rates or credit risk; the debt involves a substantial premium or discount; and the
call or put option is contingently exercisable. ASU 2016-06 becomes effective for interim and annual periods beginning after
December 15, 2016. The Company is currently evaluating the impact on its Consolidated Financial Statements.
75
In March 2016, the FASB issued ASU 2016-07, “Investments Equity Method and Joint Ventures (Topic 323): Simplifying
the Transition to the Equity Method of Accounting.” This update eliminates the requirement to retroactively adopt the equity
method of accounting. It requires that an equity method investor add the cost of acquiring the additional interest to the current
basis of the previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified
for equity method accounting. The retroactive adjustment of the investment is no longer required. ASU 2016-07 becomes
effective for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact
on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting.” ASU 2016-09 changes aspects of the accounting for share-based payment
award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of
cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes
paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is
effective for fiscal years beginning after December 15, 2016, and interim periods within those years. ASU 2016-09 becomes
effective for interim and annual periods beginning after December 15, 2016. The Company does not expect the effect of
ASU 2016-09 to have a material impact on its financial statements and related disclosures on the date of adoption, January
1, 2017. The Company is currently evaluating the impact on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts
and Cash Payments.” This update provides guidance on eight cash flow issues with the objective of reducing the existing
diversity in practice related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or
other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing,
contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims,
proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies,
distributions received from equity method investees, beneficial interest in securitization transactions, separately identifiable
cash flows and application of the predominance principle. The amendments reduce current and potential future diversity in
practice. The amendments in this update apply to all entities that are required to present a statement of cash flows under Topic
230. ASU 2016-15 becomes effective for interim and annual periods beginning after December 15, 2017. The Company is
currently evaluating the impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes – Intra-Entity Transfers of Assets Other Than
Inventory.” This update will allow the income tax consequences of intra-entity transfers of assets other than inventory when
the transfer occurs. The amendments in this update are effective for annual reporting periods beginning after December 15,
2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the
impact on its Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-17, “Consolidation – Interests Held through Related Parties that are
under Common Control.” This update is to amend the consolidation guidance on how a reporting entity that is the single
decision maker of a variable interest entity (VIE) should treat indirect interest in the entity held through related parties that
are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The
primary beneficiary of a BIE is the reporting entity that has a controlling financial interest in a BIE and, therefore, consolidates
the VIE. A reporting entity has an indirect interest in a BIE if it has a direct interest in a related party that, in turn, has a direct
interest in the VIE. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. The Company is currently evaluating the impact on its Consolidated Financial
Statements.
76
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows – Restricted Cash.” This update requires
that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The amendments in this update do not provide a
definition of restricted cash or restricted cash equivalents. The amendments in this update are effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the
impact on its Consolidated Financial Statements.
See Note 1 to the Consolidated Financial Statements for details of recent accounting pronouncements and their expected
impact, if any, on the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The principal market risk to the Company
is the interest rate risk inherent in our lending, investing, deposit taking and borrowing activities, due to the fact that interest-
earning assets and interest-bearing liabilities do not re-price at the same rate, to the same extent, or on the same basis.
We monitor and manage our interest rate risk through analyzing the re-pricing characteristics of our loans, securities,
deposits, and borrowings on an on-going basis. The primary objective is to minimize the adverse effects of changes in interest
rates on our earnings, and ultimately the underlying market value of equity, while structuring our asset-liability composition
to obtain the maximum spread. Management uses certain basic measurement tools in conjunction with established risk limits
to regulate its interest rate exposure. Due to the 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.
77
We establish a tolerance level in our policy for net interest income volatility of plus or minus 5% 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, 2016, 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 4.8%, 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 10.0%. 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 5.3%, 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 6.2%.
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 not less than
0% when the hypothetical rate change is plus or minus 200 basis points. At December 31, 2016, 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 1.9%, 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 2.2%.
78
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, 2016, and 2015. 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 16 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,
2017
2018
2019
2020
2021
Thereafter Total
(Dollars in thousands)
December 31,
2016
Fair
Value
2015
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 mortgage ......
Real estate construction ....
Installment & other ...........
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 .................................
Standby letters of credit ..........
Other letters of credit .............
Bill of lading guarantees ........
1.89% $
1.20
5.25
52,226 $ 45,938 $ 40,053 $ 34,772 $
- 20,177
339,823 159,048
-
-
-
7,500
30,266 $
362,038
-
133,033 $
96,971
-
336,288 $
978,057
7,500
336,288 $ 1,062,305 $ 1,062,305
524,047
524,047
978,057
6,676
6,676
7,500
7,095
3.95 1,697,166 286,552 121,126 18,875
4.38
3,728
2,014
658,371 605,098 506,511 480,544
4.48
434,572 94,560 18,956
5.06
-
2,000
-
2.61
3,059
1,668
325
22,650
101,818 2,248,187 2,246,909 2,316,863 2,315,572
3,024 2,596,839 2,615,759 2,618,191 2,101,335 2,112,481
458,655 3,076,069 5,785,248 5,707,193 5,301,218 5,220,251
441,453
2,490
548,058
3,935
548,088
3,993
441,543
2,493
-
-
-
-
0.51
0.88 4,597,359 371,713 75,266
574,935 340,906 204,470 55,755 1,642,322 1,330,944 4,149,332 4,149,332 3,490,285 3,490,285
11 5,047,287 5,052,913 4,985,752 4,987,294
2,899
39
4.06
250,000 100,000
-
0.75
-
3.15
275,000 25,000 50,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
350,000
351,989
400,000
413,417
-
17,662
119,136
350,000
17,662
119,136
350,062
15,944
63,169
275,000
18,593
119,136
274,488
16,684
58,420
1,109,889 587,703 120,900 52,318
356
700
158
-
-
-
44,940
37,033
75
1,555
92
-
38,916
27,387
-
-
152,515 2,062,241
75,396
37,283
75
458
-
-
(6,025) 1,971,848
49,081
38,131
454
(668)
(16)
(0)
(5,570 )
(194 )
(22 )
(1 )
Country Risk Exposures
The Company’s total assets were $14.5 billion and total foreign country risk net exposures were $503.9 million at
December 31, 2016, compared to total assets of $13.3 billion and total foreign country risk net exposures of $651.9 million
at December 31, 2015. Total foreign country risk net exposures at December 31, 2016, were comprised primarily of $298.5
million from Hong Kong, $79.6 million from China, $29.9 million from Australia, $26.2 million from Germany, $24.3
million from France, $13.3 million from Singapore, $12.0 million from England, $10.0 million from the Philippines, $3.7
million from Macau, $1.8 million from Taiwan, $1.4 million from Canada, $1.1 million from Switzerland, $1.0 million from
Japan, $0.7 million from Indonesia, and $0.3 million from Venezuela. Total foreign country risk net exposures at December
31, 2015, were comprised primarily of $296.9 million from Hong Kong, $107.0 million from China, $76.7 million from
England, $37.0 million from Germany, $30.1 million from Australia, $25.8 million from Switzerland, $23.7 million from
France, $21.1 million from Canada, $20.0 million from the Philippines, $5.9 million from Singapore, $3.4 million from
Macau, $2.0 million from Taiwan, and $1.3 million from Indonesia.
All foreign country risk net exposures were to non-sovereign counterparties except $14.0 million due from the Hong
Kong Monetary Authority at December 31, 2016 and $19.8 million at December 31, 2015.
79
Unfunded exposures were $21.5 million at December 31, 2016, and were comprised of $20.0 million of unfunded loans
to two financial institutions in China, a $720,000 of unfunded loan to a borrower in Taiwan, and a $711,000 of unfunded
loans to borrowers in Canada. Unfunded exposures were $40.7 million at December 31, 2015, and were comprised of $40.0
million of unfunded loans to three financial institutions in China and a $720,000 of unfunded loan to a borrower 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 the three-month LIBOR at a weighted
average rate of 0.98%. As of December 31, 2016, the notional amount of cash flow interest rate swaps was $119.1 million
and their unrealized loss of $2.2 million, net of taxes, was included in other comprehensive income compared to unrealized
loss of $3.0 million at December 31, 2015. For the year ended December 31, 2016, the periodic net settlement of interest rate
swaps included in interest expense was $2.3 million compared to $2.8 million in 2015. As of December 31, 2016, and 2015,
the ineffective portion of these interest rates swaps was not significant.
As of December 31, 2016, the Bank’s outstanding interest rate swap contracts had a notional amount of $361.5 million
for various terms from two to eight years. 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 loans 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 4.61% and receives a variable rate at the one month LIBOR rate
plus a weighted average spread of 316 basis points, or at a weighted average rate of 3.82%. As of December 31, 2016, and
2015, the notional amount of fair value interest rate swaps was $361.5 million and $340.3 million, respectively, and their
unrealized gain of $938,000 and unrealized loss of $1.3 million, respectively, were included in other non-interest income.
The amount of periodic net settlement of interest rate swaps reducing interest income was $3.6 million in 2016 compared to
$3.3 million in 2015. As of December 31, 2016, and 2015, the ineffective portion of these interest rate swaps was not
significant.
80
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 $6.9 million as of December 31, 2016 and $7.9 million as of December
31, 2015.
The Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of
fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts
entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our
Consolidated Balance Sheet. Changes in the fair value of these contracts as well as the related foreign exchange certificates
of deposit and foreign exchange 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, 2016, the notional amount of option contracts totaled $12.1 million with a net negative fair value of
$121,000. At December 31, 2016, spot, forward, and swap contracts in the total notional amount of $82.4 million had a
positive fair value of $1.3 million. Spot, forward, and swap contracts in the total notional amount of $89.5 million had a
negative fair value of $3.1 million at December 31, 2016. At December 31, 2015, the notional amount of option contracts
totaled $9.4 million with a net negative fair value of $28,000. At December 31, 2015, spot, forward, and swap contracts in
the total notional amount of $100.6 million had a positive fair value of $3.3 million. Spot, forward, and swap contracts in the
total notional amount of $115.4 million had a negative fair value of $4.1 million at December 31, 2015.
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.
81
There have not been any changes in the Company’s disclosure controls and procedures that occurred during its fourth
fiscal quarter of 2016 that have materially affected, or are reasonably likely to materially affect, these controls and procedures.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2016, 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 (2013),” 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, 2016, 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, 2016. The report, which expresses an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, 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 2016 that have materially affected,
or are reasonably likely to materially effect, the Company’s internal control over financial reporting.
82
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, 2016,
based on criteria established in Internal Control - Integrated Framework (2013) 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, 2016, based on criteria established in Internal Control - Integrated Framework (2013) 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, 2016 and 2015, 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, 2016, and our report dated March 1, 2017 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Los Angeles, California
March 1, 2017
83
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 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 2017 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, 2016, with respect to compensation plans under
which equity securities of the Company were authorized for issuance.
Number of
Securities
Remaining
Available For
Future
Issuance
Under
Equity
Compensation
Plans
[Excluding
Securities
Reflected in
Column (a)]
(c)
3,524,517
-
3,524,517
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)
Plan Category
Equity Compensation Plans Approved by Security Holders ..............
Equity Compensation Plans Not Approved by Security Holders .......
Total ...................................................................................................
82,670 $
-
82,670 $
Security Ownership of Certain Beneficial Owners and Management
23.37
-
23.37
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.
84
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference to the information set forth under the captions
“Transactions with Related Persons, Promoters and Certain Control Persons” and “Board of Directors and Corporate
Governance— Director Independence” in our Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated herein by reference from the information set forth under the caption
“Principal Accounting Fees and Services” in our Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Documents Filed as Part of this Report
(a)(1) Financial Statements
See “Index to Consolidated Financial Statements” on page F-1.
(a)(2) Financial Statement Schedules
Schedules have been omitted since they are not applicable, they are not required, or the information required to be set
forth in the schedules is included in the Consolidated Financial Statements or Notes thereto.
(b) Exhibits
3.1
3.1.1
3.2
3.3
3.4
4.1
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 (File No. 000-18630), and incorporated herein by reference.
Amendment to Restated Certificate of Incorporation. Previously filed with the Securities and Exchange
Commission on March 16, 2010, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year
ended December 31, 2009 (File No. 000-18630), and incorporated herein by reference.
Amended and Restated Bylaws, effective February 16, 2017. Previously filed with the Securities and
Exchange Commission on February 17, 2017 as an exhibit to the Bancorp’s Periodic Report on Form
8-K and incorporated herein by reference.
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 the Bancorp’s Annual
Report on Form 10-K for the year ended December 31, 2011 (File No. 000-18630), and incorporated
herein by reference.
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.
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 the Bancorp’s Annual Report on Form 10-K for the year
ended December 31, 2012, and incorporated herein by reference.
85
4.1.1
4.1.2
4.1.3
4.2
4.2.1
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 the
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and incorporated herein
by reference.
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 the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and
incorporated herein by reference.
Form of Capital Securities of Cathay Capital Trust III (included within Exhibit 4.1.1).
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.
Warrant Agreement, dated as of December 4, 2013. Previously filed with the Securities and Exchange
Commission on December 4, 2013, as an exhibit to the 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
10.2
10.3
10.4
10.5
10.5.1
Form of Indemnity Agreements between the Bancorp and its directors and certain officers. Previously
filed with the Securities and Exchange Commission on February 28, 2012, as an exhibit to the Bancorp’s
Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-18630), and
incorporated herein by reference.
Cathay Bank Employee Stock Ownership Plan, as amended and restated effective January 1, 2010.
Previously filed with the Securities and Exchange Commission on February 28, 2011, as an exhibit to
the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 000-
18630), and incorporated herein by reference.**
Dividend Reinvestment Plan and Stock Purchase Plan (Amended and Restated) of the Bancorp.
Previously filed with the Securities and Exchange Commission on July 27, 2015, to Registration
Statement No. 333-205888, and incorporated herein by reference.
Cathay Bank Bonus Deferral Agreement (Amended and Restated). Previously filed with the Securities
and Exchange Commission on March 1, 2013, as an exhibit to the 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. Previously filed with the Securities and Exchange
Commission on March 1, 2013, as an exhibit to the Bancorp’s Annual Report on Form 10-K for the year
ended December 31, 2012, and incorporated herein by reference.**
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 the Bancorp’s
Annual Report on Form 10-K for the year ended December 31, 2012, and incorporated herein by
reference.**
86
10.5.2
10.5.3
10.5.4
10.5.5
10.5.6
10.5.7
10.5.8
10.5.9
10.5.10
10.5.11
10.5.12
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 the
Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2012, and incorporated herein
by reference.**
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.**
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 the Bancorp’s
Annual Report on Form 10-K for the year ended December 31, 2012, and incorporated herein by
reference.**
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 the Bancorp’s Current
Report on Form 8-K, and incorporated herein by reference.**
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 the Bancorp’s Current
Report on Form 8-K, and incorporated herein by reference.**
Form of Restricted Stock Unit Agreement (Performance Shares – ROA), used to award performance-
based restricted stock units under the Company’s 2005 Incentive Plan (As Amended and Restated).
Previously filed with the Securities and Exchange Commission on December 21, 2016, as an exhibit to
the Bancorp’s Current Report on Form 8-K, and incorporated herein by reference.**
Form of Restricted Stock Unit Agreement (Clawback Rider), used in connection with award of
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 the Bancorp’s
Current Report on Form 8-K, and incorporated herein by reference.**
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.**
Cathay General Bancorp 2005 Incentive Plan (As 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.**
Form of Restricted Stock Unit Agreement (Performance Shares – EPS), used to award performance-
based restricted stock units under the Company’s 2005 Incentive Plan (As Amended and Restated).
Previously filed with the Securities and Exchange Commission on February 29, 2016, as an exhibit to
the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated
herein by reference.**
Form of Restricted Stock Unit Agreement (Performance Shares – TSR), used to award performance-
based restricted stock units under the Company’s 2005 Incentive Plan (As Amended and Restated).
Previously filed with the Securities and Exchange Commission on February 29, 2016, as an exhibit to
the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated
herein by reference.**
87
10.5.13
Form of Restricted Stock Unit Agreement (Clawback Rider), used in connection with award of
performance-based restricted stock units under the Company’s 2005 Incentive Plan (As Amended and
Restated). Previously filed with the Securities and Exchange Commission on February 29, 2016, as an
exhibit to the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, and
incorporated herein by reference.**
10.6
10.6.1
10.6.2
10.6.3
10.6.4
10.6.5
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.**
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.**
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.**
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.**
Amended and Restated Change of Control Employment Agreement for Pin Tai dated as of December
18, 2008. 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**
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. **
Employment Agreement for Pin Tai dated as of August 18, 2016. Previously filed with the Securities
and Exchange Commission on August 19, 2016 as an exhibit to the Bancorp’s Current Report on Form
8-K, and incorporated herein by reference. **
21.1
Subsidiaries of the Bancorp.+
23.1
Consent of Independent Registered Public Accounting Firm.+
31.1
31.2
32.1
32.2
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.+
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.++
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.++
88
101.INS
XBRL Instance Document ***
101.SCH
XBRL Taxonomy Extension Schema Document ***
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document***
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document***
101.LAB
XBRL Taxonomy Extension Label Linkbase Document***
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document***
** Management contract or compensatory plan or arrangement.
*** XBRL (Extensible Business Reporting Language) information shall not be deemed to be filed or part of a registration
statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, shall not be deemed to be filed
for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise shall not be subject to liability under
these sections, and shall not be incorporated by reference into any registration statement or other document filed under
the Securities Act of 1933, except as expressly set forth by specific reference in such filing.
+
Filed herewith.
++ Furnished herewith.
89
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/ Pin Tai
Pin Tai
Chief Executive Officer and President
Date: March 1, 2017
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
/s/ Pin Tai
Pin Tai
/s/ Heng W. Chen
Heng W. Chen
/s/ Dunson K. Cheng
Dunson K. Cheng
/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
Title
Chief Executive Officer and President
(principal executive officer)
Executive Vice President,
Chief Financial Officer/Treasurer
(principal financial officer)
(principal accounting officer)
Date
March 1, 2017
March 1, 2017
Executive Chairman of
the Board
March 1, 2017
Vice Chairman of the Board
March 1, 2017
Vice Chairman of the Board
March 1, 2017
Director
Director
Director
Director
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
90
/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
Director
March 1, 2017
Director
Director
Director
Director
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
91
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm ...................................................................................
F-2
Consolidated Balance Sheets at December 31, 2016 and 2015 .............................................................................
F-3
Consolidated Statements of Operations and Comprehensive Income for each of the years ended December 31,
2016, 2015, and 2014 ...........................................................................................................................................
Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 31, 2016,
2015, and 2014 ......................................................................................................................................................
F-4
F-5
Consolidated Statements of Cash Flows for each of the years ended December 31, 2016, 2015, and 2014 .........
F-6
Notes to Consolidated Financial Statements .........................................................................................................
F-8
Parent-only condensed financial information of Cathay General Bancorp is included in Note 19 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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2016 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, 2016, based on criteria established in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 1, 2017 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
March 1, 2017
F-2
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
2016
2015
(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 $1,317,012 in 2016 and $1,595,723 in 2015) ......
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 and alternative energy partnerships, net .....................................
Premises and equipment, net ..........................................................................................................
Customers’ liability on acceptances ...............................................................................................
Accrued interest receivable ............................................................................................................
Goodwill ........................................................................................................................................
Other intangible assets, net ............................................................................................................
Other assets ....................................................................................................................................
Total assets ................................................................................................................................. $
Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits ....................................................................................... $
Interest-bearing deposits:
NOW deposits ........................................................................................................................
Money market deposits ..........................................................................................................
Savings deposits .....................................................................................................................
Time deposits ........................................................................................................................
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, 87,820,920 issued and
79,610,277 outstanding at December 31, 2016, and 87,002,931 issued and 80,806,116
outstanding at December 31, 2015 .........................................................................................
Additional paid-in-capital ..........................................................................................................
Accumulated other comprehensive loss, net ..............................................................................
Retained earnings .......................................................................................................................
Treasury stock, at cost (8,210,643 shares at December 31, 2016, and 6,196,815 shares at
218,017 $
967,067
1,314,345
7,500
11,201,275
(118,966)
(4,994)
11,077,315
17,250
20,070
251,077
105,607
12,182
37,299
372,189
2,949
117,902
14,520,769 $
180,130
536,880
1,586,352
6,676
10,163,452
(138,963)
(8,262)
10,016,227
17,250
24,701
182,943
108,924
40,335
30,558
372,189
3,677
147,284
13,254,126
2,478,107 $
2,033,048
1,230,445
2,198,938
719,949
5,047,287
11,674,726
350,000
350,000
17,662
119,136
12,182
168,524
12,692,230
-
966,404
1,905,719
618,164
4,985,752
10,509,087
400,000
275,000
18,593
119,136
40,335
144,197
11,506,348
-
878
895,480
(3,715)
1,175,485
870
880,822
(8,426)
1,059,660
December 31, 2015) ...............................................................................................................
Total equity ................................................................................................................................
Total liabilities and equity .......................................................................................................... $
(239,589)
1,828,539
14,520,769 $
(185,148)
1,747,778
13,254,126
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,
2015
(In thousands, except share and per share data)
2016
2014
INTEREST AND DIVIDEND INCOME
Loan receivable ......................................................................................... $
Investment securities .................................................................................
Federal Home Loan Bank stock .................................................................
Deposits with banks ..................................................................................
Total interest and dividend income ...........................................................
INTEREST EXPENSE
Time deposits ............................................................................................
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 reversal for credit losses .................................
Reversal for credit losses ..........................................................................
Net interest income after reversal for credit losses ....................................
NON-INTEREST INCOME
Securities gains/(losses), 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 ...................................................................
Data processing service expense ...............................................................
FDIC and State assessments ......................................................................
Marketing expense ....................................................................................
Other real estate owned income/(loss) ......................................................
Operations of investments in affordable housing and alternative energy
partnerships, net ......................................................................................
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 attributable to common stockholders .......................................... $
Other comprehensive income/(loss), net of tax:
Unrealized holding gains/(losses) on securities available for sale .............
Unrealized holding gains/(losses) on cash flow hedge derivatives ...........
Less: reclassification adjustment for gains/(losses) included in net
income ....................................................................................................
Total other comprehensive income/(loss), net of tax .................................
Total comprehensive income ..................................................................... $
Net income attributable to common stockholders per common share
473,782 $
21,426
2,099
1,763
499,070
43,327
16,094
15,329
659
5,791
81,200
417,870
(15,650)
433,520
4,898
4,939
5,478
18,055
33,370
97,348
18,315
9,777
18,686
8,957
9,712
5,092
856
40,264
689
-
14,994
224,690
242,200
67,101
175,099 $
6,725
825
2,839
4,711
179,810 $
427,621 $
21,523
3,164
1,398
453,706
39,443
12,445
15,813
487
5,776
73,964
379,742
(11,400 )
391,142
(3,349 )
5,545
5,348
25,130
32,674
89,960
17,018
9,828
17,316
7,698
9,087
4,926
(800 )
33,335
667
-
13,685
202,720
221,096
59,987
161,109 $
(4,200 )
(598 )
(1,941 )
(2,857 )
158,252 $
390,440
24,237
1,974
1,996
418,647
35,111
10,658
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
15,927
6,707
8,796
4,126
(1,304 )
6,990
719
3,348
13,583
174,313
219,795
81,965
137,830
30,468
(2,397 )
3,911
24,160
161,990
Basic ......................................................................................................... $
Diluted ...................................................................................................... $
Basic average common shares outstanding ...................................................
Diluted average common shares outstanding ................................................
2.21 $
2.19 $
79,153,762
79,929,262
2.00 $
1.98 $
80,563,577
81,294,796
1.73
1.72
79,661,571
80,106,895
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, 2016, 2015, and 2014
(In thousands, except number of shares)
Accumulated
Balance at December 31, 2013 .............. 79,589,869 $
Common Stock
Number of
Shares
Additional
Paid-in
Amount Capital
838 $
784,489 $
Other
Total
Comprehensive Retained
Earnings
Income/(Loss)
Treasury Stockholders'
Stock
829,109 $ (125,736) $
1,458,971
Equity
(29,729) $
Dividend Reinvestment Plan ................
Restricted stock units vested .................
Shares withheld related to net share
116,957
88,537
1
1
2,847
-
-
-
-
-
-
-
2,848
1
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 ............................................
-
13,690
5,500
-
-
-
-
-
Balance at December 31, 2014 ......... 79,814,553 $
Dividend Reinvestment Plan ................
Restricted stock units vested .................
Warrant exercised ..................................
Shares withheld related to net share
148,582
18,955
369
settlement of RSUs ...........................
Stock issued to directors ........................
Stock options exercised .........................
Equity consideration for acquisition .....
Purchases of treasury stock ...................
Tax short-fall from stock options .........
Stock -based compensation ..................
Cash dividends of $0.56 per share .......
Change in other comprehensive loss ....
Net income ............................................
-
17,974
214,580
2,580,353
(1,989,250)
-
-
-
-
-
Balance at December 31, 2015 ......... 80,806,116 $
Dividend Reinvestment Plan ................
Restricted stock units vested .................
Warrants exercised ................................
Shares withheld related to net share
72,231
10,325
388,001
settlement of RSUs ...........................
Stock issued to directors ........................
Stock options exercised .........................
Purchases of treasury stock ...................
Tax short-fall from stock options .........
Stock -based compensation ..................
Cash dividends of $0.75 per share .......
Change in other comprehensive loss ....
Net income ............................................
-
19,602
327,830
(2,013,828)
-
-
-
-
-
Balance at December 31, 2016 ......... 79,610,277 $
-
-
-
-
-
-
-
-
840 $
2
-
-
-
-
2
26
-
-
-
-
-
-
870 $
1
-
4
-
-
3
-
-
-
-
-
-
878 $
(850)
350
128
(1,285)
3,840
-
-
-
789,519 $
4,173
-
-
(227)
495
5,012
82,743
-
(5,348)
4,455
-
-
-
880,822 $
2,276
-
(4)
(103)
550
7,658
-
(132)
4,413
-
-
-
895,480 $
-
-
-
-
-
-
24,160
-
(5,569) $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(23,105)
-
-
-
137,830
943,834 $ (125,736) $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,857)
-
-
-
-
-
-
-
-
-
(59,412)
-
-
-
-
-
-
(45,283)
-
-
-
161,109
(8,426) $ 1,059,660 $ (185,148) $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,711
-
-
-
-
-
-
-
(54,441)
-
-
-
-
-
-
(59,274)
-
-
-
175,099
(3,715) $ 1,175,485 $ (239,589) $
(850)
350
128
(1,285)
3,840
(23,105)
24,160
137,830
1,602,888
4,175
-
-
(227)
495
5,014
82,769
(59,412)
(5,348)
4,455
(45,283)
(2,857)
161,109
1,747,778
2,277
-
-
(103)
550
7,661
(54,441)
(132)
4,413
(59,274)
4,711
175,099
1,828,539
See accompanying notes to Consolidated Financial Statements.
F-5
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net income ...................................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
Credit for loan losses .................................................................................................
Provision for losses on other real estate owned ........................................................
Deferred tax liability ...................................................................................................
Depreciation and amortization ....................................................................................
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 ..............................................................................
Income associated with debt redemption ...................................................................
Amortization on alternative energy partnerships, venture capital and other
investments ...........................................................................................................
Write-down on impaired securities ............................................................................
Gain on sales and calls of securities ..........................................................................
Other non-cash interest income .................................................................................
Amortization of security premiums, net ....................................................................
Excess tax short-fall from stock options ....................................................................
Stock based and stock issued to officers and directors compensation expense ........
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)/decrease 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 ..
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 premises and equipment ............................................................
Proceeds from sales of other real estate owned .............................................................
Increase in investment in affordable housing and alternative energy partnerships ........
Acquisition, net of cash acquired ....................................................................................
Net cash used in investing activities .....................................................................
Cash Flows from Financing Activities
Net increase 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 ...............................................................................................................
Purchase of treasury stock ..............................................................................................
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 financing activities .............................................................
2016
Year Ended December 31,
2015
(In thousands)
2014
175,099 $
161,109 $
137,830
(15,650)
176
15,949
7,490
(546)
(285)
20,079
(12,665)
-
28,897
206
(5,104)
(1,272)
6,371
-
4,963
13,478
(2,784)
234,402
(430,187)
(941,327)
460,000
294
-
758,271
(1,650)
1,650
(1,051,952)
(3,523)
12
7,699
(82,966)
-
(1,283,679)
(11,400 )
547
2,004
7,574
(2,012 )
(786 )
32,530
(37,447 )
-
25,058
3,875
(526 )
(332 )
5,140
5,348
4,950
(3,429 )
(15,506 )
176,697
(47,266 )
(295,497 )
165,000
385,234
(1,280,870 )
749,219
-
13,535
(829,501 )
(3,518 )
602
12,154
(53,235 )
6,572
(1,177,571 )
(10,800 )
1,619
31,304
7,868
(4,065 )
(395 )
19,287
(19,865 )
(555 )
436
820
(7,568 )
(137 )
2,849
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 )
1,166,044
1,305,255
802,281
(50,000)
3,555,000
(3,480,000)
(59,274)
(54,441)
-
2,277
7,661
(103)
-
1,087,164
(50,000 )
5,092,000
(5,242,000 )
(45,283 )
(59,412 )
-
4,175
5,014
(227 )
(5,348 )
1,004,174
(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
Increase in cash and cash equivalents ............................................................................
Cash and cash equivalents, beginning of the year .........................................................
Cash and cash equivalents, end of the year .................................................................... $
37,887
180,130
218,017 $
3,300
176,830
180,130 $
See accompanying notes to Consolidated Financial Statements.
F-6
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
2016
Year Ended December 31,
2015
(In thousands)
2014
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest ........................................................................................ $
Income taxes .............................................................................. $
81,793 $
38,671 $
72,870 $
69,074 $
78,366
60,225
Non-cash investing and financing activities:
Net change in unrealized holding gain/(loss) on securities
available-for-sale, net of tax .................................................. $
3,886 $
(2,259 ) $
26,557
Net change in unrealized gain/(loss) on interest rate swaps
designated as cash flow hedges ............................................... $
Transfers to short-term investments from trading securities ....... $
Transfers to other real estate owned from loans held for
investment ............................................................................... $
Loans transferred to loans held for sale ...................................... $
Loans to facilitate the sale of other real estate owned ................. $
Issuance of stock related to acquisition ....................................... $
825 $
- $
2,698 $
7,953 $
2,616 $
- $
Supplemental disclosure for acquisitions
Cash and cash equivalents .............................................................. $
Securities available-for-sale ............................................................
Loans ..............................................................................................
Premises and equipment .................................................................
Other real estate owned ..................................................................
Goodwill ........................................................................................
Core deposit intangible ...................................................................
Accrued interest receivable and other assets ..................................
Total assets acquired ...................................................................
Deposits ..........................................................................................
Accrued interest payable and other liabilities .................................
Total liabilities assumed ..............................................................
Net assets acquired .................................................................... $
Cash paid ........................................................................................ $
Fair value of common stock issued .................................................
Total consideration paid .......................................................... $
- $
-
-
-
-
-
-
-
-
-
-
-
- $
- $
-
- $
(598 ) $
- $
866 $
6,684 $
- $
82,857 $
63,579 $
2,370
419,219
13,291
3,048
55,849
1,302
2,884
561,542
420,623
1,056
421,679
139,863 $
57,006 $
82,857
139,863 $
(2,397 )
4,936
4,970
973
413
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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, Asia Realty Corp., 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, and Cathay Holdings 3, LLC and 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, and fair value disclosures. 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, 2016, gross loans were primarily
comprised of 51.7% of commercial mortgage loans, 21.8% of residential mortgage loans, and 20.1% of commercial loans.
As of December 31, 2016, approximately 63% of the Bank’s residential mortgages were for properties located in California.
Approximately 86% of the Company’s CDs of $250,000 or more 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 or decreased by the provision or credit to the allowance for loan losses
and decreased by charge-offs when management believes the uncollectability of a loan is confirmed.
F-8
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Subsequent recoveries, if any, are credited to the allowance. A weakening of the economy or other factors that adversely
affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of
non-performing assets, net charge-offs, and provision for loan losses in future periods.
The total allowance for loan losses consists of two components: specific allowances and general allowances. To
determine the appropriateness 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 appropriateness of our allowance to
provide for probable losses inherent in the loan portfolio. These methodologies are further supported by additional analysis
of relevant factors such as the historical losses in the portfolio, and environmental factors which include trends in delinquency
and non-accrual, and other significant factors, such as the national and local economy, the volume and composition of the
portfolio, strength of management and loan staff, underwriting standards, and the concentration of credit.
The Bank’s management allocates a specific allowance for “Impaired Credits,” in accordance with Accounting
Standard Codification (“ASC”) Section 310-10-35. For non-Impaired Credits, a general allowance is established for those
loans internally classified and risk graded Pass, Watch, 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. 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.
F-9
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Trading securities are reported at fair value, with unrealized gains or losses included in income.
Investment in Federal Home Loan Bank (“FHLB”) Stock. As a member of the FHLB system the Bank is required to
maintain an investment in the capital stock of the FHLB. The amount of investment is also affected by the outstanding
advances under the line of credit the Bank maintains with the FHLB. FHLB stock is carried at cost and is pledged as collateral
to the FHLB. FHLB stock is periodically evaluated for impairment based on ultimate recovery of par value. The carrying
amount of the FHLB stock was $17.3 million at December 31, 2016, and $17.3 million at December 31, 2015. As of
December 31, 2016, the Company owned 172,500 shares of FHLB stock, which exceeded the minimum stock requirement
of 150,000 shares.
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 allowances on these impaired loans reflect only
losses incurred after the acquisition.
F-10
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Impaired Loans. A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts
due (i.e. both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment
may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original
effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-
dependent loan. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is
recognized by recording a valuation allowance with a corresponding charge to the provision for loan losses. The Company
stratifies its loan portfolio by size and treats smaller non-performing loans with an outstanding balance based on the
Company’s defined criteria, generally where the loan amount is $500,000 or less, as a homogenous portfolio. Once a loan
has been identified as a possible problem loan, the Company conducts a periodic review of such loan in order to test for
impairment. When loans are placed on an impaired status, previously accrued but unpaid interest is reversed against current
income and subsequent payments received are generally first applied toward the outstanding principal balance of the loan.
Troubled Debt Restructured Loan (“TDR”). A TDR is a formal modification of the terms of a loan when the lender, for
economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions
may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued
interest, or extension of the maturity date. Although these loan modifications are considered TDRs, accruing TDR loans have,
pursuant to the Bank’s policy, performed under the restructured terms and have demonstrated sustained performance under
the modified terms for six months before being returned to accrual status. The sustained performance considered by
management pursuant to its policy includes the periods prior to the modification if the prior performance met or exceeded
the modified terms. This would include cash paid by the borrower prior to the restructure to set up interest reserves. Loans
classified as TDRs are reported as impaired loans.
Unfunded Loan Commitments. Unfunded loan commitments are generally related to providing credit facilities to clients
of the Bank, and are not actively traded financial instruments. These unfunded commitments are disclosed as off-balance
sheet financial instruments in Note 13 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
Building improvements .................................................................... 5
Furniture, fixtures, and equipment ................................................... 3
Leasehold improvements .................................................................. Shorter of useful lives or the terms of the leases
Estimated Useful Life (in years)
to 45
to 20
to 25
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.
F-11
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Investments in Affordable Housing Partnerships and Other Tax Credit Investments. 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 and
limited partnerships that invests in alternative energy systems. As further discussed in Note 6, the partnership interests are
accounted for utilizing the equity method of accounting. As of December 31, 2016, 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. The tax credits from these partnerships are recognized in the consolidated financial
statements to the extent they are utilized on the Company’s income tax returns. The investments are reviewed for impairment
on an annual basis or on an interim basis if an event occurs that would trigger potential impairment.
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
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 2016 and forecasted 2017 and 2018
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, 2016.
As a result of this analysis, the Company determined that there was no goodwill impairment at December 31, 2016 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.
F-12
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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
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.
F-13
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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), 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance
replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing
guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate. ASU 2014-
09 clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S.
GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers are also required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08,
ASU 2016-10 and ASU 2016-12, is effective for interim and annual periods beginning after December 15, 2017 and is applied
on either a modified retrospective or full retrospective basis. Our revenue is primarily comprised of net interest income on
financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest
income. We expect that ASU 2014-09 will require us to change how we recognize certain recurring revenue streams for
certain fee income products, however, we are still in the process of identifying those revenue streams, the related accounting
policies, the impact on current accounting policies and the related effects on the consolidated financial statements. We do not
expect these changes to have a significant impact on our financial statements. We expect to adopt the standard in the first
quarter of 2018 with a cumulative affect adjustment to opening retained earnings, if such adjustment is deemed to be
significant.
F-14
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and
comparability in the accounting for lease transactions. ASU 2016-02 requires lessees to recognize all leases longer than
twelve months on the Consolidated Balance Sheet as lease assets and lease liabilities and quantitative and qualitative
disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. ASU 2016-02 is
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with an
option to early adopt. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is
evaluating the impact of ASU 2016-02 and has determined that the majority of our leases are operating leases. We expect,
upon adoption, the Company will record a liability for the remaining obligation under the lease agreements and a
corresponding right-of-use asset in the consolidated financial statements. ASU 2016-02 will be effective for us on January 1,
2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” This update requires an entity to use a broader range of reasonable and supportable
forecasts, in addition to historical experience and current conditions, to develop an expected credit loss estimate for financial
assets and net investments that are not accounted for at fair value through net income. Credit losses relating to available-for-
sale debt securities should be recorded through an allowance for credit losses to the amount by which fair value is below
amortized cost. ASU 2016-13 becomes effective for interim and annual periods beginning after December 15, 2019. The
Company has designated a management team to evaluate ASU 2016-13 and develop an implementation strategy. The
Company has not yet determined the effect of ASU 2016-13 on its accounting policies or the impact on the Company’s
consolidated financial statements.
2. Acquisition
On July 31, 2015, the Company completed the acquisition of New York-based Asia Bancshares, Inc., parent of Asia
Bank. Asia Bank operated three branch locations in New York City and one branch location in the state of Maryland. The
acquisition allowed the Company to expand its number of branches in New York City and to enter the state of Maryland. The
purchase consideration consisted of fifty-five percent in Bancorp stock and forty-five percent in cash. The fair value of the
consideration was $139.9 million, which consisted of 2,580,359 shares of Bancorp common stock valued at $82.9 million at
the date of acquisition and $57.0 million in cash.
Goodwill from the acquisition represents the excess of the purchase price over the fair value of the net tangible and
intangible assets acquired and is not deductible for tax purposes. As a result of the business combination, the Company
recorded goodwill of $55.8 million.
The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the July 31, 2015
acquisition date. The assets acquired and liabilities assumed have been accounted for under the acquisition method of
accounting. We have included the financial results of the business combinations in the condensed consolidated statement of
income beginning on the acquisition date.
The fair value of the assets and the liabilities acquired as of July 31, 2015 are shown below:
F-15
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Asia Bancshares, Inc
Assets acquired:
Cash and cash equivalents ................................................................................................................ $
Securities available-for-sale ..............................................................................................................
Loans ................................................................................................................................................
Premises and equipment ...................................................................................................................
Other real estate owned ....................................................................................................................
Goodwill ...........................................................................................................................................
Core deposit intangible .....................................................................................................................
Accrued interest receivable and other assets ....................................................................................
Total assets acquired .........................................................................................................................
Liabilities assumed:
Deposits ............................................................................................................................................
Accrued interest payable and other liabilities ...................................................................................
Total liabilities assumed ...................................................................................................................
Net assets acquired ......................................................................................................................... $
Cash paid .......................................................................................................................................... $
Fair value of common stock issued ...................................................................................................
Total consideration paid ................................................................................................................. $
63,579
2,370
419,219
13,291
3,048
55,849
1,302
2,884
561,542
420,623
1,056
421,679
139,863
57,006
82,857
139,863
3. 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 $1.9 million for 2016 and $138,000 for 2015.
The average excess balance with Federal Reserve Bank was $338.5 million in 2016 and $163.3 million in 2015. At December
31, 2016, the Bancorp had $6.9 million on deposit in a cash margin account that serves as collateral for the Bancorp’s interest
rate swaps.
F-16
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, 2016, and December 31, 2015:
Amortized
Cost
As of December 31, 2016
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(In thousands)
Fair Value
Securities Available-for-Sale
U.S. treasury securities ....................................................................... $
U.S. government sponsored entities ...................................................
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 .................................................. $
489,839 $
400,000
339,241
48
74,965
6,500
2,811
3,608
1,317,012 $
35 $
-
309
-
247
-
4,497
7,213
12,301 $
857 $
9,669
3,290
20
862
270
-
-
14,968 $
489,017
390,331
336,260
28
74,350
6,230
7,308
10,821
1,314,345
Amortized
Cost
As of December 31, 2015
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(In thousands)
Fair Value
Securities Available-for-Sale
U.S. treasury securities ....................................................................... $
U.S. government sponsored entities ...................................................
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 .................................................. $
284,678 $
150,000
1,073,108
63
74,955
6,000
2,811
4,108
1,595,723 $
5 $
-
560
-
425
-
633
4,929
6,552 $
395 $
1,840
11,399
27
1,525
167
228
342
15,923 $
284,288
148,160
1,062,269
36
73,855
5,833
3,216
8,695
1,586,352
The amortized cost and fair value of investment securities at December 31, 2016, 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 ............................................................................................................................................ $
(1) Equity securities are reported in this category
Securities Available-for-Sale
Amortized Cost
Fair Value
(In thousands)
339,879 $
553,130
75,111
348,892
1,317,012 $
339,823
544,585
72,733
357,204
1,314,345
Proceeds from sales of mortgage-backed securities were $605.2 million and proceeds from repayments, maturities and
calls of mortgage-backed securities were $153.0 million during 2016 compared to proceeds from sales of $648.0 million and
proceeds of $101.2 million from repayments, maturities, and calls during 2015. Proceeds from sales of other investment
securities were $294,000 during 2016 compared to $385.2 million during 2015. Proceeds from maturities and calls of other
investment securities were $460.0 million during 2016 compared to $165.0 million during 2015. In 2016, gains of $5.1
million and no losses were realized on sales and calls of investment securities compared with gains of $2.4 million and losses
of $1.9 million realized in 2015. In 2016, the Company recorded investment securities write-downs of $206,000 compared
to $3.9 million in 2015.
F-17
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The temporarily impaired securities represent 80.1% of the fair value of investment securities as of December 31, 2016.
Unrealized losses for securities with unrealized losses for less than twelve months represent 1.3%, and securities with
unrealized losses for twelve months or more represent 3.2%, 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, 2016, 7 issues of securities had unrealized losses for 12 months or longer and 30 issues of
securities had unrealized losses of less than 12 months.
Total unrealized losses of $15.0 million at December 31, 2016, were primarily caused by increases in interest rates
subsequent to the date that these securities were purchased or 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.
At December 31, 2016, management believed the impairment was temporary and, accordingly, no impairment loss on
debt securities has been recognized in our Consolidated Statements of Operations. The Company expects to recover the
amortized cost basis of its debt securities, and has no intent to sell and believes it is more likely than not that it 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, 2016, and December 31, 2015:
As of December 31, 2016
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized No. of Fair Unrealized No. of
Issuances Value Losses
Losses
Fair
Issuances Value
Unrealized No. of
Issuances
Losses
(Dollars in thousands)
Securities Available-for-Sale
U.S. treasury securities .......... $ 299,088 $
U.S. government sponsored
entities ................................ 390,331
Mortgage-backed securities .. 328,236
Collateralized mortgage
857
6 $
- $
9,669
3,288
8
16
-
62
obligations .........................
Corporate debt securities .......
Mutual funds .........................
Total securities available-
-
-
-
-
-
-
-
28
- 29,138
- 6,230
-
-
2
20
862
270
- $ 299,088 $
857
- 390,331
3 328,298
9,669
3,290
1
2
1
28
29,138
6,230
20
862
270
6
8
19
1
2
1
for-sale .......................... $1,017,655 $
13,814
30 $35,458 $
1,154
7 $1,053,113 $
14,968
37
F-18
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
As of December 31, 2015
Temporarily Impaired Securities
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized No. of Fair Unrealized No. of
Issuances Value Losses
Losses
Fair
Issuances Value
Unrealized No. of
Issuances
Losses
(Dollars in thousands)
Securities Available-for-Sale
U.S. treasury securities .......... $ 224,289 $
U.S. government sponsored
entities ................................ 148,160
Mortgage-backed securities .. 1,025,342
Collateralized mortgage
obligations .........................
Corporate debt securities .......
Mutual funds .........................
Preferred stock of government
sponsored entities ...............
Other equity securities ..........
Total securities available-
-
9,950
-
2,488
158
395
5 $
- $
1,840
11,398
3
35
-
6
-
-
1
-
50
-
228
342
-
36
1 43,525
- 5,833
27
1,475
167
2
1
-
-
-
-
- $ 224,289 $
395
- 148,160
2 1,025,348
1,840
11,399
1
3
1
-
-
36
53,475
5,833
27
1,525
167
2,488
158
228
342
5
3
37
1
4
1
2
1
for-sale .......................... $1,410,387 $
14,253
47 $49,400 $
1,670
7 $1,459,787 $
15,923
54
Investment securities having a carrying value of $649.1 million at December 31, 2016, and $449.6 million at December
31, 2015, were pledged to secure public deposits, other borrowings, treasury tax and loan, securities sold under agreements
to repurchase, and foreign exchange transactions.
F-19
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; Rockville, Maryland; 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, 2016, and December 31, 2015, 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,
2016
2015
(In thousands)
2,248,187 $
548,088
5,785,248
2,444,048
171,711
3,993
11,201,275
2,316,863
441,543
5,301,218
1,932,355
168,980
2,493
10,163,452
(118,966 )
(4,994 )
11,077,315 $
7,500 $
(138,963)
(8,262)
10,016,227
6,676
The Company pledged real estate loans of $7.8 billion at December 31, 2016, and $6.8 billion at December 31, 2015, to
the Federal Home Loan Bank of San Francisco under its blanket lien pledging program. In addition, the Bank pledged $30.0
million at December 31, 2016, and $71.3 million at December 31, 2015, 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, 2016, totaled $367.6 million and were comprised of $133.3 million of
residential mortgages, $112.8 million of commercial real estate loans, $83.1 million of construction loans, and $38.4 million
of commercial 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”). All loans to Related Parties were current as of December 31, 2016. 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 ............................................................................................... $
December 31,
2016
2015
(In thousands)
91,620 $
62,206
(102,499)
51,327 $
83,812
54,975
(47,167)
91,620
F-20
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
At December 31, 2016, recorded investment in impaired loans totaled $115.1 million and was comprised of nonaccrual
loans, excluding loans held for sale, of $49.7 million and accruing TDR’s of $65.4 million. At December 31, 2015, recorded
investment in impaired loans totaled $133.8 million and was comprised of nonaccrual loans, excluding loans held for sale,
of $52.1 million and accruing TDR’s of $81.7 million. The average balance of impaired loans was $131.0 million in 2016
and $162.9 million in 2015. We considered all non-accrual loans and troubled debt restructurings ("TDR") to be impaired.
Interest recognized on impaired loans totaled $3.5 million in 2016 and $4.0 million in 2015. 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 8.4% at December 31, 2016, and 22.4% at December
31, 2015, of the contractual balances for impaired loans.
F-21
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The following table presents impaired loans and the related allowance as of the dates indicated:
Impaired Loans
As of December 31, 2016
As of December 31, 2015
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Unpaid
Principal
Balance
Recorded
Investment
Allowance
(In thousands)
With no allocated allowance
Commercial loans ...................... $
Real estate construction loans ....
Commercial mortgage loans ......
Residential mortgage and equity
24,037 $
5,776
60,522
23,121 $
5,458
54,453
- $
-
-
15,493 $
51,290
59,954
6,721 $
22,002
54,625
lines .......................................
Subtotal ................................. $
5,472
95,807 $
5,310
88,342 $
3,233
-
- $ 129,970 $
3,026
86,374 $
With allocated allowance
Commercial loans ...................... $
Commercial mortgage loans ......
Residential mortgage and equity
5,216 $
10,158
4,640 $
10,017
1,827 $
573
7,757 $
28,258
6,847 $
27,152
lines .......................................
Subtotal ................................. $
12,075
26,732 $
Total impaired loans ................... $ 124,444 $ 115,074 $
13,263
28,637 $
13,437
14,383
396
2,796 $
47,436 $
50,398 $
2,796 $ 180,368 $ 133,810 $
-
-
-
-
-
530
6,792
427
7,749
7,749
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,
2016
2014
2015
Average Recorded Investment
2016
2015
Interest Income Recognized
2014
Commercial loans .......................... $
Real estate construction loans .......
Commercial mortgage loans ..........
Residential mortgage and equity
21,199 $
10,362
81,905
23,960 $
22,066
100,118
(In thousands)
26,128 $
32,439
114,248
767 $
-
2,214
lines ...........................................
Subtotal ..................................... $
17,553
131,019 $
17,411
16,801
162,945 $ 190,226 $
481
3,462 $
546 $
261
2,708
482
3,997 $
878
264
3,735
462
5,339
The following is a summary of non-accrual loans as of December 31, 2016, 2015, and 2014 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 ......................................................................... $
2016
2015
(In thousands)
2014
49,682 $
7,500
57,182 $
1,573 $
95
1,478 $
52,130 $
5,944
58,074 $
5,732 $
119
5,613 $
70,163
973
71,136
6,663
217
6,446
F-22
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The following tables present the aging of the loan portfolio by type as of December 31, 2016, and December 31, 2015:
As of December 31, 2016
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or
More
Past
Due
Type of Loans:
Commercial loans .............................. $ 22,753 $ 27,190 $
5,835
Real estate construction loans ............ 10,390
700
5,886
Commercial mortgage loans ...............
-
4,390
Residential mortgage loans ................
Installment and other loans ................
-
-
Total loans .......................................... $ 43,419 $ 33,725 $
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or
More
Past
Due
Type of Loans:
8,367 $
Commercial loans .............................. $
7,285
Real estate construction loans ............
2,243
Commercial mortgage loans ...............
4,959
Residential mortgage loans ................
Installment and other loans ................
-
Total loans .......................................... $ 22,854 $
221 $
-
2,223
1,038
-
3,482 $
Non-
accrual
Loans
Total
Past Due
Loans Not
Past Due
Total
(In thousands)
5,458 21,683
- $ 15,710 $ 65,653 $ 2,182,534 $ 2,248,187
-
548,088
- 20,078 26,664 5,758,584 5,785,248
8,436 12,826 2,602,933 2,615,759
-
-
3,993
- $ 49,682 $ 126,826 $ 11,074,449 $ 11,201,275
526,405
3,993
-
As of December 31, 2015
Non-
accrual
Loans
Total
Past Due
Loans Not
Past Due
Total
(In thousands)
3,545 $ 12,133 $ 2,304,730 $ 2,316,863
- $
441,543
- 16,306 23,591
- 25,231 29,697 5,271,521 5,301,218
7,048 13,045 2,088,290 2,101,335
-
-
2,493
- $ 52,130 $ 78,466 $ 10,084,986 $ 10,163,452
417,952
2,493
-
-
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 collectability 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.
At December 31, 2016, accruing TDRs were $65.4 million and non-accrual TDRs were $29.7 million compared to
accruing TDRs of $81.7 million and non-accrual TDRs of $39.9 million at December 31, 2015. The Company has allocated
specific reserves of $1.3 million to accruing TDRs and $1.1 million to non-accrual TDRs at December 31, 2016, and $2.0
million to accruing TDRs and $5.4 million to non-accrual TDRs at December 31, 2015. The following table presents TDRs
that were modified during 2016, their specific reserve at December 31, 2016, and charge-offs during 2016:
No. of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
Specific
Reserve
Charge-offs
Commercial loans ................
Commercial mortgage loans
Residential mortgage and
equity lines ........................
Total .......................................
24 $
4
2
30 $
29,385 $
4,153
367
33,905 $
1,746 $
34
-
1,780 $
830
-
-
830
30,215 $
4,153
367
34,735 $
F-23
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The following table presents TDRs that were modified during 2015, their specific reserve at December 31, 2015, and charge-
offs during 2015:
No. of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
Specific
Reserve
Charge-offs
Commercial loans ...................
Commercial mortgage loans ...
Residential mortgage and
equity lines ............................
Total .......................................
3 $
20
5
28 $
1,181 $
17,204
1,521
19,906 $
1,181 $
17,204
1,374
19,759 $
2 $
708
42
752 $
-
-
148
148
The following table presents TDRs that were modified during 2014, their specific reserve at December 31, 2014, and charge-
offs during 2014:
No. of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
Specific
Reserve
Charge-off
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 $
-
-
-
-
A summary of TDRs by type of concession and by type of loans as of December 31, 2016, and December 31, 2015, are
shown below:
Accruing TDRs
Payment
Deferral
December 31, 2016
Rate
Reduction
and
Payment
Deferral
Rate
Reduction
Total
Commercial loans ................................................................ $
Commercial mortgage loans ................................................
Residential mortgage loans .................................................
Total accruing TDRs ............................................................ $
7,971 $
25,979
5,104
39,054 $
- $
5,961
789
6,750 $
4,081 $
12,452
3,056
19,589 $
12,052
44,392
8,949
65,393
F-24
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
December 31, 2016
Non-accrual TDRs
Payment
Deferral
Rate
Reduction
Rate Reduction
and
Payment
Deferral
Commercial loans ........................................................ $
Commercial mortgage loans ........................................
Residential mortgage loans ..........................................
Total non-accrual TDRs ................................................ $
14,565 $
2,510
356
17,431 $
(In thousands)
- $
1,795
-
1,795 $
- $
10,328
168
10,496 $
December 31, 2015
Accruing TDRs
Payment
Deferral
Rate
Reduction
Rate Reduction
and
Payment
Deferral
Commercial loans ........................................................ $
Real estate construction loans ......................................
Commercial mortgage loans ........................................
Residential mortgage loans ..........................................
Total accruing TDRs ..................................................... $
8,298 $
-
16,701
5,201
30,200 $
(In thousands)
- $
-
6,045
999
7,044 $
1,726 $
5,696
33,800
3,214
44,436 $
Non-accrual TDRs
Payment
Deferral
December 31, 2015
Rate Reduction
and
Payment Deferral
(In thousands)
Commercial loans .................................................................................. $
Real estate construction loans ................................................................
Commercial mortgage loans ..................................................................
Residential mortgage loans ....................................................................
Total non-accrual TDRs .......................................................................... $
1,033 $
9,981
1,544
388
12,946 $
90 $
5,825
20,362
700
26,977 $
The activity within our TDR loans for 2016, 2015, and 2014 are shown below:
Total
14,565
14,633
524
29,722
Total
10,024
5,696
56,546
9,414
81,680
Total
1,123
15,806
21,906
1,088
39,923
Accruing TDRs
Beginning balance ................................................................................... $
New restructurings ..................................................................................
Restructured loans restored to accrual status...........................................
Charge-offs .............................................................................................
Payments .................................................................................................
Restructured loans placed on non-accrual ...............................................
Expiration of loan concession .................................................................
Ending balance ........................................................................................ $
2016
2015
(In thousands)
2014
81,680 $
26,965
10,303
(88)
(24,192)
(13,984)
(15,291)
65,393 $
104,356 $
17,752
723
(104)
(30,858)
(10,189)
-
81,680 $
117,597
23,740
962
-
(13,256 )
(24,687 )
-
104,356
Non-accrual TDRs
2016
2015
(In thousands)
2014
Beginning balance ................................................................................... $
New restructurings ..................................................................................
Restructured loans placed on non-accrual ...............................................
Charge-offs .............................................................................................
Payments .................................................................................................
Foreclosures ............................................................................................
Restructured loans restored to accrual status...........................................
Ending balance ........................................................................................ $
39,923 $
6,940
13,984
(5,271)
(15,551)
-
(10,303)
29,722 $
41,618 $
2,006
10,189
(3,246)
(9,921)
-
(723)
39,923 $
38,769
1,331
24,688
(8,938 )
(11,710 )
(1,560 )
(962 )
41,618
F-25
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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, 2016.
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, 2016, there were no commitments to lend additional funds
to those borrowers whose loans have been restructured, were considered impaired, or were on non-accrual status.
As part of the on-going monitoring of the credit quality of our loan portfolio, the Company utilizes a risk grading matrix
to assign a risk grade to each loan. Loans are risk rated based on analysis of the current state of the borrower’s credit quality.
The analysis of credit quality includes a review of all sources of repayment, the borrower’s current financial and liquidity
status and all other relevant information. The risk rating categories can be generally described by the following grouping for
non-homogeneous loans:
● Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.
● Special Mention – Borrower is fundamentally sound and the loan is currently protected but adverse trends are
apparent that, if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but
there is increasing reliance on collateral or guarantor support.
● Substandard – These loans are inadequately protected by current sound worth, paying capacity or pledged
collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent,
but if weaknesses are not corrected, there is a good possibility of some loss.
● Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending events (which
may strengthen the loan) a loss classification is deferred until the situation is better defined.
● Loss – These loans are considered uncollectible and of such little value that to continue to carry the loans as an
active asset is no longer warranted.
The following tables present loan portfolio by risk rating as of December 31, 2016, and as of December 31, 2015:
As of December 31, 2016
Pass/Watch
Special
Mention
Substandard
(In thousands)
Doubtful
Total
Commercial loans ................................................. $ 2,023,114 $ 140,682 $
44,129
Real estate construction loans ..............................
469,909
250,221
Commercial mortgage loans ................................. 5,410,623
Residential mortgage and equity lines .................. 2,605,834
-
-
3,993
Installment and other loans ..................................
Total gross loans .................................................. $10,513,473 $ 435,032 $
84,293 $
34,050
124,404
9,925
-
252,672 $
98 $ 2,248,187
-
548,088
- 5,785,248
- 2,615,759
3,993
-
98 $11,201,275
Loans held for sale ............................................... $
- $
- $
7,500 $
- $
7,500
F-26
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
As of December 31, 2015
Pass/Watch
Special
Mention
Substandard
(In thousands)
Doubtful
Total
Commercial loans ................................................. $ 2,143,270 $ 110,338 $
5,776
Real estate construction loans ..............................
413,765
155,553
Commercial mortgage loans ................................. 5,018,199
399
Residential mortgage and equity lines .................. 2,091,434
Installment and other loans ..................................
-
2,493
Total gross loans .................................................. $ 9,669,161 $ 272,066 $
61,297 $
21,502
118,196
9,502
-
210,497 $
500
1,958 $ 2,316,863
441,543
9,270 5,301,218
- 2,101,335
2,493
-
11,728 $10,163,452
Loans held for sale ............................................... $
732 $
- $
5,944 $
- $
6,676
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.
The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment
method as of December 31, 2016, and as of December 31, 2015.
Commercial
Loans
Real Estate
Construction
Loans
Residential
Mortgage
and Equity
Lines
Commercial
Mortgage
Loans
(In thousands)
Consumer
and Other
Total
December 31, 2016
Loans individually evaluated for
impairment
Allowance .................................... $
Balance ......................................... $
1,827 $
27,761 $
- $
5,458 $
573 $
64,470 $
396 $
17,385 $
- $
- $
2,796
115,074
Loans collectively evaluated for
impairment
Allowance .................................... $
47,376 $
Balance ......................................... $ 2,220,426 $
23,268 $
11,224 $
542,630 $ 5,720,778 $ 2,598,374 $
34,291 $
11 $
116,170
3,993 $ 11,086,201
49,203 $
Total allowance ............................ $
Total balance ................................ $ 2,248,187 $
11,620 $
23,268 $
548,088 $ 5,785,248 $ 2,615,759 $
34,864 $
11 $
118,966
3,993 $ 11,201,275
December 31, 2015
Loans individually evaluated for
impairment
Allowance .................................... $
Balance ......................................... $
530 $
13,568 $
- $
22,002 $
6,792 $
81,776 $
427 $
16,464 $
- $
- $
7,749
133,810
Loans collectively evaluated for
impairment
Allowance .................................... $
55,669 $
Balance ......................................... $ 2,303,295 $
22,170 $
10,718 $
419,541 $ 5,219,442 $ 2,084,871 $
42,648 $
9 $
131,214
2,493 $ 10,029,642
Total allowance ............................ $
56,199 $
Total balance ................................ $ 2,316,863 $
22,170 $
11,145 $
441,543 $ 5,301,218 $ 2,101,335 $
49,440 $
9 $
138,963
2,493 $ 10,163,452
F-27
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, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to
absorb losses in other categories.
Commercial
Loans
Real Estate
Construction
Commercial
Mortgage
Loans
Loans
Residential
Mortgage and
Equity Lines
Installment
and Other
Loans
Total
2015 Beginning Balance .............. $
47,501 $
27,652 $
(In thousands)
74,673 $
11,578 $
16 $
161,420
Provision/(reversal) for loan
losses ..........................................
20,505
(5,684)
(26,035)
(179)
(7)
(11,400)
Charge-offs ...................................
Recoveries ....................................
Net (Charge-offs)/Recoveries ......
2015 Ending Balance ................... $
Reserve for impaired loans ........... $
Reserve for non-impaired loans ... $
Reserve for off-balance sheet
credit commitments ................... $
(16,426)
4,619
(11,807)
56,199 $
530 $
55,669 $
-
202
202
22,170 $
- $
22,170 $
(3,716)
4,518
802
49,440 $
6,792 $
42,648 $
(285)
31
(254)
11,145 $
427 $
10,718 $
810 $
526 $
158 $
- $
-
-
-
9 $
- $
9 $
- $
(20,427)
9,370
(11,057)
138,963
7,749
131,214
1,494
2016 Beginning Balance .............. $
56,199 $
22,170 $
49,440 $
11,145 $
9 $
138,963
Provision/(reversal) for loan
losses ..........................................
1,815
(6,819)
(11,123)
475
2
(15,650)
Charge-offs ...................................
Recoveries ....................................
Net (Charge-offs)/Recoveries ......
2016 Ending Balance ................... $
Reserve for impaired loans ........... $
Reserve for non-impaired loans ... $
Reserve for off-balance sheet
credit commitments ................... $
(12,955)
4,144
(8,811)
49,203 $
1,827 $
47,376 $
-
7,917
7,917
23,268 $
- $
23,268 $
(5,948)
2,495
(3,453)
34,864 $
573 $
34,291 $
-
-
-
11,620 $
396 $
11,224 $
-
-
-
11 $
- $
11 $
(18,903)
14,556
(4,347)
118,966
2,796
116,170
2,091 $
940 $
41 $
146 $
6 $
3,224
An analysis of the activity in the allowance for credit losses for the years ended December 31, 2016, 2015, and 2014 is
as follows:
Allowance for Loan Losses
Balance at beginning of year ............................................................. $
Reversal for credit losses ...................................................................
Transfers to reserve for off-balance sheet credit commitments ..........
Loans charged off ..............................................................................
Recoveries of charged off loans ........................................................
Balance at end of year ....................................................................... $
2016
December 31,
2015
(In thousands)
138,963 $
(15,650)
-
(18,903)
14,556
118,966 $
161,420 $
(11,400 )
-
(20,427 )
9,370
138,963 $
2014
173,889
(10,800 )
(372 )
(22,235 )
20,938
161,420
Reserve for Off-balance Sheet Credit Commitments
Balance at beginning of year ............................................................. $
Provision/(reversal) for credit losses and transfers ............................
Balance at end of year ....................................................................... $
1,494 $
1,730
3,224 $
1,949 $
(455 )
1,494 $
1,363
586
1,949
Residential mortgage loans in process of formal foreclosure proceedings were $3.6 million at December 31, 2016,
compared to $2.0 million at December 31, 2015.
F-28
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
6. Investments in Affordable Housing and Alternative Energy Partnerships
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 $236.8 million at
December 31, 2016, and $172.7 million at December 31, 2015. In addition, in March 2016 and April 2015, the Company
invested in alternative energy partnerships that qualify for energy tax credits.
At December 31, 2016, 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 $23.7 million at December 31,
2016, and by $24.3 million at December 31, 2015. Other borrowings for affordable housing limited partnerships were $17.7
million at December 31, 2016, and $18.6 million at December 31, 2015; recourse is limited to the assets of the limited
partnerships. Unfunded commitments for affordable housing limited partnerships of $115.0 million as of December 31, 2016,
and $85.8 million as of December 31, 2015, were recorded under other liabilities. The scheduled funding date for unfunded
commitment as of December 31, 2016 are $ 52.7 million in 2017, $ 33.4 million in 2018, $22.7 million in 2019, $2.6 million
in 2020, $0.6 million in 2021 and $3.0 million thereafter.
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 $160.2 million for Federal
and $3.3 million for state at December 31, 2016. The Company’s usage of affordable housing and other tax credits
approximated $13.4 million in 2016, $10.1 million in 2015, and $10.2 million in 2014. Losses in excess of the Bank’s
investment in three 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.
Investment in alternative energy tax credit partnerships, net, was $14.3 million at December 31, 2016, compared to $10.5
million at December 31, 2015. The Company’s usage of energy tax credits approximated $24.5 million in 2016 compared to
$20.9 million in 2015.
7. Premises and Equipment
Premises and equipment consisted of the following as of December 31, 2016, and December 31, 2015:
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,
2016
2015
(In thousands)
42,455 $
78,463
51,654
15,546
703
188,821
83,214
105,607 $
42,407
78,299
50,378
14,546
538
186,168
77,244
108,924
The amount of depreciation/amortization included in operating expense was $6.8 million in 2016, $7.0 million in 2015,
and $7.1 million in 2014.
F-29
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
8. Deposits
The following table displays deposit balances as of December 31, 2016, and December 31, 2015:
As of December 31,
2016
2015
(In thousands)
Demand ........................................................................................................... $
NOW accounts ................................................................................................
Money market accounts ..................................................................................
Saving accounts ..............................................................................................
Time deposits ..................................................................................................
Total ............................................................................................................ $
2,478,107 $
1,230,445
2,198,938
719,949
5,047,287
11,674,726 $
2,033,048
966,404
1,905,719
618,164
4,985,752
10,509,087
Time deposits outstanding as of December 31, 2016, mature as follows.
Time deposits ..................... $ 4,597,359 $ 371,713 $ 75,266 $
39 $
11 $ 5,047,287
2017
Expected Maturity Date at December 31,
2021
2018
2019
Thereafter Total
2020
(In thousands)
2,899 $
Accrued interest payable on customer deposits was $2.9 million at December 31, 2016, $3.4 million at December 31,
2015, and $2.3 million at December 31, 2014. The following table summarizes the interest expense on deposits by account
type for the years ended December 31, 2016, 2015, and 2014:
2016
Year Ended December 31,
2015
(In thousands)
2014
Interest bearing demand ............................................ $
Money market accounts ............................................
Saving accounts ........................................................
Time deposits ............................................................
Total ...................................................................... $
1,740 $
13,308
1,046
43,327
59,421 $
1,406 $
10,138
901
39,443
51,888 $
1,229
8,627
802
35,111
45,769
The aggregate amount of domestic time deposits in denominations that meet or exceed the current FDIC insurance limit
of $250,000 was $1.8 billion and $1.6 billion as of December 31, 2016 and 2015, respectively. Foreign offices time deposits
of $137.7 million and $181.8 million as of December 31, 2016 and 2015, respectively, were in denominations of $250,000
or more.
9. Borrowed Funds
Securities Sold under Agreements to Repurchase. Securities sold under agreements to repurchase were $350.0 million
with a weighted average rate of 4.06% at December 31, 2016, compared to $400.0 million with a weighted average rate of
3.89% at December 31, 2015. As of December 31, 2016, four floating-to-fixed rate agreements totaling $200.0 million with
weighted average rate of 5.0% and final maturity in January 2017 have initial floating rates for one year, with floating rates
of the 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%. As of December 31, 2016, three fixed rate non-callable securities sold under
agreements to repurchase totaled $150 million with a weighted average rate of 2.81%, compared to four fixed rate non-
callable securities sold under agreements to repurchase totaling $200 million with a weighted average rate of 2.78% as of
December 31, 2015. The final maturity for the three fixed rate non-callable securities sold under agreements to repurchase is
$50.0 million in July 2017, $50.0 million in June 2018, and $50.0 million in July 2018.
F-30
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 security, and mortgage-backed securities with a fair value of $372.0 million as of December 31, 2016, and $430.2
million as of December 31, 2015.
The table below provides comparative data for securities sold under agreements to repurchase for the years indicated:
2016
2015
(Dollars in thousands)
2014
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 ................................
381,967 $
400,000
350,000
4.06%
4.01%
400,822 $
400,000
400,000
3.89%
3.95%
629,315
700,000
450,000
3.85%
3.92%
(1) Average balances were computed using daily averages.
(2) Highest month-end balances were January 2016, January 2015, and January 2014.
As of December 31, 2016, over-night borrowings from the FHLB were $275.0 million at a rate of 0.55% compared to
$250.0 million at a rate of 0.27% at December 31, 2015. At December 31, 2016, $75.0 million in advances from the FHLB
were outstanding at a weighted average rate of 1.48% compared to $25.0 million in advances outstanding at a weighted
average rate of 1.13% at December 31, 2015. As of December 31, 2016, $25.0 million will mature in March 2018 and $50.0
million will mature in December 2019.
Other Liabilities. On November 23, 2004, the Company entered into an agreement with Mr. Dunson K. Cheng, pursuant
to which he 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 his separation from service from the Company or the first day of the seventh month
following his separation from service from the Company. Accordingly, an amount equal to $610,000 was deferred in 2004
and was accrued in other liabilities in the consolidated balance sheet. The Company agreed to accrue interest on the deferred
portion of the bonus at 7.0% per annum compounded quarterly. The deferred amount will be increased each quarter by the
amount of interest computed for that quarter. 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 Mr. Cheng 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 his separation from service from the Company or the first day of the seventh month following his separation from
service from the Company. 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.
F-31
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
Interest of $83,000 during 2016, $79,000 during 2015, and $93,000 during 2014 was accrued on the deferred bonuses.
The balance was $1.7 million at December 31, 2016, and $1.6 million at December 31, 2015.
10. Capital Resources
Total equity was $1.83 billion at December 31, 2016, an increase of $80.8 million, or 4.6%, from $1.75 billion at
December 31, 2015, primarily due to increases in net income of $175.1 million, and in other comprehensive income of $4.7
million, proceeds from exercise of stock options of $7.7 million, from dividend reinvestment of $2.3 million which were
offset by purchases of treasury stock of $54.4 million and common stock cash dividends of $59.3 million. The Company paid
cash dividends of $0.75 per common share in 2016 and $0.56 per common share in 2015.
In August 2015, the Company resumed stock repurchases under the November 2007 repurchase program and repurchased
the remaining 622,500 shares for $18.1 million, or an average price of $29.08 per share. Also, in August 2015, the Board of
Directors approved a stock repurchase program for the Company to buy back up to two million shares of our common stock,
and 1,366,750 shares were repurchased during 2015. In January and February of 2016, the Company repurchased the
remaining 633,250 shares under the August 2015 repurchase program for $17.0 million, or an average price of $26.82 per
share.
On February 1, 2016, the Board of Directors approved a new stock repurchase program to buy back up to $45.0 million
of our common stock. In 2016, the Company repurchased 1,380,578 shares for $37.5 million, or $27.13 per share under the
February 2016 repurchase program. As of December 31, 2016, the Company may repurchase up to $7.5 million of its common
stock under the February 2016 repurchase program.
The U.S. Treasury received warrants to purchase common stock of 1,846,374 shares at an exercise price of $20.96 as
part of the Company’s participation in the U.S. Treasury Troubled Asset Relief Program Capital Purchase Program. As a
result of the anti-dilution adjustments under the warrant, the exercise price at December 31, 2016 has been adjusted to $20.65
and the number of warrants increased by 1.5%. During 2016, 930,113 warrants were exercised on a cashless basis and 388,001
common shares were issued. At December 31, 2016, 943,345 warrants remain exercisable.
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, all of which were issued before May 19, 2010, are currently included in the
Tier 1 capital of the Bancorp for regulatory capital purposes. Under the Dodd-Frank Act, trust preferred securities issued
before May 19, 2010 by the Bancorp and other bank holding companies with assets of less than $15 billion as of December
31, 2019 continue to qualify for Tier 1 capital treatment. Interest expense, excluding impact of cash flow interest rate swaps
entered into during June 2014, on the Junior Subordinated Notes was $3.5 million for 2016, $3.0 million for 2015, and $2.9
million for 2014.
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, 2016:
Issuance
Date
Principal
Balance of Redeemable
Not
Notes
Until
Stated
Maturity
Annualized
Coupon Rate
Current
Interest
Rate
Date of
Rate
Change
Payable/
Distribution
Date
(Dollars in thousands)
June 26,
2003
$
20,619
June 30,
2008
June 30,
2033
Trust Name
Cathay Capital
Trust I ............
Cathay Statutory
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%
4.15% December 30,
2016
3.99% December 19,
2016
3.90% December 30,
2016
2.44% December 15,
2016
2.35% December 6,
2016
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
Trust I ............ September 17,
20,619 September 17, September 17,
2003
2008
2033
Cathay Capital
Trust II ........... December 30,
12,887 March 30,
March 30,
2003
2009
2034
Cathay Capital
Trust III ......... March 28,
46,392
2007
June 15,
2012
June 15,
2037
Cathay Capital
Trust IV .........
May 31,
2007
18,619 September 6, September 6,
2012
2037
Total Junior Subordinated Notes ....... $
119,136
F-33
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
11. Income Taxes
For the years ended December 31, 2016, 2015, and 2014, the current and deferred amounts of the income tax expense
are summarized as follows:
2016
Year Ended December 31,
2015
(In thousands)
2014
Current:
Federal .......................................................................................................... $
State ..............................................................................................................
Total Current ................................................................................................. $
28,788 $
22,364
51,152 $
31,587 $
26,396
57,983 $
Deferred:
Federal .......................................................................................................... $
State ..............................................................................................................
Total Deferred ............................................................................................... $
11,775 $
4,174
15,949 $
3,738 $
(1,734 )
2,004 $
36,180
14,481
50,661
23,783
7,521
31,304
Total income tax expense .............................................................................. $
67,101 $
59,987 $
81,965
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, 2016, and at December 31, 2015, 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 .................................................
Depreciation and amortization .......................................................................................................
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
Deferred loan costs ........................................................................................................................
Investment in affordable housing partnerships ...............................................................................
Basis difference in acquired assets .................................................................................................
Dividends on Federal Home Loan Bank common stock ................................................................
Other, net ......................................................................................................................................
Gross deferred tax liabilities .........................................................................................................
Net deferred tax assets .................................................................................................................. $
As of December 31,
2016
2015
(In thousands)
51,192 $
4,729
6,095
4,246
-
4,437
8,334
6,426
1,763
1,121
3,598
91,941
(8,695)
(2,659)
(4,841)
(1,322)
(3,228)
(20,745)
71,196 $
59,639
7,513
4,984
4,929
3,209
3,981
2,917
4,802
2,173
3,940
2,127
100,214
-
(1,444)
(4,947)
(1,322)
(1,937)
(9,650)
90,564
Amounts for the current year are based upon estimates and assumptions and could vary from amounts shown on the tax
returns as filed.
F-34
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 $14.6 million at December 31, 2016, and $28.9 million at December
31, 2015. These income tax receivables are included in other assets in the accompanying Consolidated Balance Sheets.
At both December 31, 2016 and 2015, there were no unrecognized tax benefits. The Company’s tax returns are open for
audits by the Internal Revenue Service back to 2013 and by the California Franchise Tax Board back to 2012. It is reasonably
possible that unrecognized tax benefits could change significantly over the next twelve months. The Company does not expect
that any such changes would have a material impact on its annual effective tax rate.
Income tax expense results in effective tax rates that differ from the statutory Federal income tax rate for the years
indicated as follows:
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
Tax provision at Federal statutory
rate ........................................... $
84,770
35.0 % $
77,384
35.0% $
76,928
35.0 %
State income taxes, net of Federal
income tax benefit ....................
17,250
7.1
14,656
6.6
14,324
6.6
Low income housing and other
tax credits ..................................
(37,901)
(15.6 )
(30,986)
(14.0)
(10,014)
(4.6 )
Non-deductible stock options
expense .....................................
Other, net ......................................
Total income tax expense ............. $
3,469
(487)
67,101
1.4
(0.2 )
27.7 % $
-
(1,067)
59,987
-
(0.5)
27.1% $
-
727
81,965
-
0.3
37.3 %
12. 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, 2016, is restricted to approximately $178.2 million.
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, 2016, and 2015 was as follows:
Beginning balance, loss, net of tax
Securities available-for-sale...................................
Cash flow hedge derivatives ..................................
Total ...................................................................
Net unrealized (losses)/gains arising during the
period
2016
Tax expense/
(Benefit)
Pre-tax
Net-of-tax
Pre-tax
(In thousands)
2015
Tax expense/
(Benefit)
Net-of-tax
$
$
(5,431)
(2,995)
(8,426)
$
$
(3,172)
(2,397)
(5,569)
Securities available-for-sale................................... $
Cash flow hedge derivatives ..................................
Total ...................................................................
11,603 $
1,423
13,026
4,878 $
598
5,476
6,725 $
825
7,550
(7,247) $
(1,032)
(8,279)
(3,047) $
(434)
(3,481)
(4,200)
(598)
(4,798)
Reclassification adjustment for net losses/(gains)
included in net income
Securities available-for-sale...................................
Cash flow hedge derivatives ..................................
Total ...................................................................
Total other comprehensive (loss)/income
Securities available-for-sale...................................
Cash flow hedge derivatives ..................................
Total ................................................................... $
Ending balance, loss, net of tax
Securities available-for sale ...................................
Cash flow hedge derivatives ..................................
Total ...................................................................
(4,898)
-
(4,898)
6,705
1,423
8,128 $
(2,059)
-
(2,059)
2,819
598
3,417 $
(2,839)
-
(2,839)
3,349
-
3,349
1,408
-
1,408
3,886
825
4,711 $
(3,898)
(1,032)
(4,930) $
(1,639)
(434)
(2,073) $
$
$
(1,545)
(2,170)
(3,715)
$
$
1,941
-
1,941
(2,259)
(598)
(2,857)
(5,431)
(2,995)
(8,426)
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.
The following is the reconciliation of the numerators and denominators of the basic and diluted earnings per share
computations for the years as indicated:
2016
2015
2014
Income
Shares
Per
Share
Income
Shares
Per
Share
Income
Shares
Per
Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
(In thousands, except shares and per share data)
Net
income .. $
Basic EPS,
income .. $
Effect of
dilutive
stock
options ..
Diluted
EPS,
income .. $
175,099
$
161,109
$
137,830
175,099
79,153,762 $
2.21 $
161,109
80,563,577 $
2.00 $
137,830
79,661,571 $
1.73
775,500
731,219
445,324
175,099
79,929,262 $
2.19 $
161,109
81,294,796 $
1.98 $
137,830
80,106,895 $
1.72
Options to purchase an additional 242,419 shares at December 31, 2016, and 988,569 shares at December 31, 2015, were
not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.
F-36
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
13. Commitments and Contingencies
Litigation. The Company is involved in various litigation concerning transactions entered into during the normal course
of business. Management, after consultation with legal counsel, does not believe that the resolution of such litigation will
have a material effect upon its consolidated financial condition, results of operations, or liquidity taken as a whole.
Lending. In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet
risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the
form of loans or through commercial or standby letters of credit and financial guarantees. Those instruments represent varying
degrees of exposure to risk in excess of the amounts included in the accompanying Consolidated Balance Sheets. The
contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial
instrument and is not a reflection of the level of expected losses, if any.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted
otherwise, the Company does not require collateral or other security to support financial instruments with credit risk.
Financial instruments for which contract amounts represent the amount of credit risk include the following:
As of December 31,
2016
2015
(In thousands)
Commitments to extend credit ........................................................................ $
Standby letters of credit ..................................................................................
Commercial letters of credit ............................................................................
Bill of lading guarantees .................................................................................
Total ............................................................................................................ $
2,062,241 $
75,396
37,283
75
2,174,995 $
1,971,848
49,081
38,131
454
2,059,514
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, 2016, 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, 2016, commitments to extend credit of $2.1 billion include commitments to fund fixed rate loans of
$75.7 million and adjustable rate loans of $1.99 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.
F-37
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 $10.2 million for 2016, $9.3 million for 2015, and $8.2 million for 2014. The following table
shows future minimum payments under operating leases with terms in excess of one year as of December 31, 2016.
Year Ending December 31,
2017 ............................................................................................................................................................ $
2018 ............................................................................................................................................................
2019 ............................................................................................................................................................
2020 ............................................................................................................................................................
2021 ............................................................................................................................................................
Thereafter ...................................................................................................................................................
Total minimum lease payments .............................................................................................................. $
Commitments
(In thousands)
8,562
7,047
5,192
3,488
3,102
7,778
35,169
Rental income was $0.4 million for 2016, $0.3 million for 2015, and $0.2 million for 2014. The following table shows
future rental payments to be received under operating leases with terms in excess of one year as of December 31, 2016:
2017 ............................................................................................................................................................. $
2018 .............................................................................................................................................................
2019 .............................................................................................................................................................
2020 .............................................................................................................................................................
Thereafter ...................................................................................................................................................
Total minimum lease payments to be received ....................................................................................... $
(In thousands)
260
153
73
15
-
501
14. Financial Derivatives
The Company does not speculate on the future direction of interest rates. However, the Company enters into financial
derivatives in order to seek mitigation of exposure to interest rate risks related to its interest-earning assets and interest-
bearing liabilities. These transactions, when properly structured and managed, may provide a hedge against inherent interest
rate risk in assets or liabilities and against risk in specific transactions of the Company. In such instances, The Company may
protect its position through the purchase or sale of interest rate futures contracts for a specific cash or interest rate risk position.
Other 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, the Company seeks 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.
F-38
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 the three-month LIBOR at a weighted
average rate of 0.98%. As of December 31, 2016, the notional amount of cash flow interest rate swaps was $119.1 million
and their unrealized loss of $2.2 million, net of taxes, was included in other comprehensive income compared to unrealized
loss of $3.0 million at December 31, 2015. For the year ended December 31, 2016, the periodic net settlement of interest rate
swaps included in interest expense was $2.3 million compared to $2.8 million in 2015. As of December 31, 2016, and 2015,
the ineffective portion of these interest rates swaps was not significant.
As of December 31, 2016, the Bank’s outstanding interest rate swap contracts had a notional amount of $361.5 million
for various terms from two to eight years. 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 loans 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 4.61% and receives a variable rate at the one month LIBOR rate
plus a weighted average spread of 316 basis points, or at a weighted average rate of 3.82%. As of December 31, 2016, and
2015, the notional amount of fair value interest rate swaps was $361.5 million and $340.3 million, respectively, and their
unrealized gain of $938,000 and unrealized loss of $1.3 million, respectively, were included in other non-interest income.
The amount of periodic net settlement of interest rate swaps reducing interest income was $3.6 million in 2016 compared to
$3.3 million in 2015. As of December 31, 2016, and 2015, 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 $6.9 million as of December 31, 2016.
The Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of
fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange 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 and foreign exchange 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, 2016, the notional amount of option contracts totaled 12.1 million with a net negative
fair value of $121,000. At December 31, 2016, spot, forward, and swap contracts in the total notional amount of $82.4 million
had a positive fair value of $1.3 million. Spot, forward, and swap contracts in the total notional amount of $89.5 million had
a negative fair value of $3.1 million at December 31, 2016. At December 31, 2015, the notional amount of option contracts
totaled $9.4 million with a net negative fair value of $28,000. At December 31, 2015, spot, forward, and swap contracts in
the total notional amount of $100.6 million had a positive fair value of $3.3 million. Spot, forward, and swap contracts in the
total notional amount of $115.4 million had a negative fair value of $4.1 million at December 31, 2015.
F-39
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
15. Fair Value Measurements
The Company adopted ASC Topic 820 on January 1, 2008, and determined the fair values of our financial instruments
based on the following:
● Level 1 – Quoted prices in active markets for identical assets or liabilities.
● Level 2 – Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or
liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset
and liability; market inputs that are not directly observable but are derived from or corroborated by observable market
data.
● 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, U.S. Treasury securities,
and other equity 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.
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 observable market rates on a recurring basis, a Level 2 measurement.
Interest Rate Swaps. The Company measures the fair value of interest rate swaps using third party models with
observable market data, a Level 2 measurement.
The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:
Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time,
nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current
appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported
on old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.
Loans Held for Sale. The Company records loans held for sale at fair value based on quoted prices from third party sale
analysis, existing sale agreements, or appraisal reports adjusted by sales commission assumption, a Level 3 measurement.
F-40
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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, which range from 4 to 10 years, 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. The weighted average amortization period and the
remaining amortization is considered minor.
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, 2016, and at December 31, 2015:
As of December 31, 2016
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 ...................................................................... $
U.S. government sponsored entities ....................................................
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 ..................................................................................................
Interest rate swaps ...................................................................................
Foreign exchange contracts .....................................................................
Total assets ................................................................................. $
489,017 $
-
-
-
-
6,230
7,308
10,821
513,376
-
-
-
513,376 $
- $
390,331
336,260
28
74,350
-
-
-
800,969
-
938
1,302
803,209 $
- $
-
-
-
-
-
-
-
-
79
-
-
489,017
390,331
336,260
28
74,350
6,230
7,308
10,821
1,314,345
79
938
1,302
79 $ 1,316,664
Liabilities
Option contracts ...................................................................................... $
Interest rate swaps ...................................................................................
Foreign exchange contracts .....................................................................
Total liabilities ........................................................................... $
- $
-
-
- $
121 $
3,744
3,132
6,997 $
- $
-
-
- $
121
3,744
3,132
6,997
As of December 31, 2015
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 ...................................................................... $
U.S. government sponsored entities ....................................................
Mortgage-backed securities ................................................................
Collateralized mortgage obligations ....................................................
Corporate debt securities .....................................................................
Mutual funds .......................................................................................
Preferred stock of government sponsored entities (1) ...........................
Other equity securities (1) ....................................................................
Total securities available-for-sale ...........................................................
Warrants ..................................................................................................
Foreign exchange contracts .....................................................................
Total assets ................................................................................. $
284,288 $
-
-
-
-
5,833
3,216
8,695
302,032
-
-
- $
148,160
1,062,269
36
73,855
-
-
-
1,284,320
-
3,339
302,032 $ 1,287,659 $
- $
-
-
-
-
-
-
-
-
62
-
284,288
148,160
1,062,269
36
73,855
5,833
3,216
8,695
1,586,352
62
3,339
62 $ 1,589,753
Liabilities
Option contracts ...................................................................................... $
Interest rate swaps ...................................................................................
Foreign exchange contracts .....................................................................
Total liabilities ........................................................................... $
- $
-
-
- $
28 $
6,496
4,124
10,648 $
- $
-
-
- $
28
6,496
4,124
10,648
(1) Preferred stock of government sponsored entities and other equity securities as of December 31, 2015 were reclassified as level 1 rather
than level 2 as originally classified due to the availability of quoted prices in active markets.
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, 2016 and 2015, 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, 2016, and at December 31, 2015, and the
total losses for the periods indicated:
Assets
Impaired loans by type:
Commercial loans ................................... $
Commercial mortgage loans ...................
Residential mortgage and equity lines
Total impaired loans ...........................
Other real estate owned (1) ...........................
Investments in venture capital and
private company stock ........................
Total assets .................................... $
As of December 31, 2016
Fair Value Measurements Using
Total at
Level 1
Level 2
Level 3
Fair Value
(In thousands)
Total Losses/(Gains)
For the Twelve Months Ended
December 31,
2015
December 31,
2016
- $
-
-
-
-
-
- $
- $
-
-
-
6,006
-
6,006 $
2,813 $
9,444
11,679
23,936
4,372
2,813 $
9,444
11,679
23,936
10,378
322 $
-
-
322
9
3,667
31,975 $
3,667
37,981 $
976
1,307 $
806
598
146
1,550
404
553
2,507
(1) Other real estate owned balance of $20.1 million in the Consolidated Balance Sheets is net of estimated disposal costs.
Assets
Impaired loans by type:
Commercial loans ................................... $
Commercial mortgage loans ...................
Residential mortgage and equity lines
Total impaired loans ...........................
Other real estate owned (1) ...........................
Investments in venture capital and
private company stock ........................
Total assets .................................... $
As of December 31, 2015
Fair Value Measurements Using
Total at
Level 1
Level 2
Level 3
Fair Value
(In thousands)
Total Losses/(Gains)
For the Twelve Months Ended
December 31,
2014
December 31,
2015
- $
-
-
-
-
-
- $
- $
-
-
-
10,047
-
10,047 $
6,317 $
20,359
13,009
39,685
4,235
4,922
48,842 $
6,317 $
20,359
13,009
39,685
14,282
4,922
58,889 $
806 $
598
146
1,550
404
553
2,507 $
17
3,914
27
3,958
202
436
4,596
(1) Other real estate owned balance of $24.7 million in the Consolidated Balance Sheets is net of estimated disposal costs.
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 55% 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 7 years, risk-free interest rate from 1.05% to 2.59%, and stock volatility of the
Company from 11.1% to 14.8%.
F-43
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
16. 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. 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, U.S. Treasury
securities, and other equity 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, a Level 3 measurement.
Loans. Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was
further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.
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, 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.
Deposit Liabilities. The fair value of demand deposits, savings accounts, and certain money market deposits was assumed
to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was
estimated using the rates currently offered for deposits with similar remaining maturities, a Level 3 measurement.
Securities Sold under Agreements to Repurchase. The fair value of securities sold under agreements to repurchase is
based on dealer quotes, a Level 2 measurement.
Advances from Federal Home Loan Bank. The fair value of the advances is based on quotes from the FHLB to settle the
advances, a Level 2 measurement.
F-44
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
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 observable market rates, 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
Financial Assets
December 31, 2016
Carrying
Amount Fair Value Amount Fair Value
(In thousands)
December 31, 2015
Carrying
180,130
Cash and due from banks ......................................................... $
Short-term investments .............................................................
536,880
Securities available-for-sale ..................................................... 1,314,345 1,314,345 1,586,352 1,586,352
6,676
Loans held for sale ....................................................................
Loans, net ................................................................................ 11,077,315 11,006,344 10,016,227 9,938,810
17,250
Investment in Federal Home Loan Bank stock .........................
62
Warrants ...................................................................................
218,017 $
967,067
180,130 $
536,880
218,017 $
967,067
17,250
62
17,250
79
17,250
79
7,500
6,676
7,500
Foreign exchange contracts ...................................................... $
Interest rate swaps ....................................................................
Notional
Amount
Notional
Fair Value Amount
1,302 $
938
100,602 $
-
Fair Value
3,339
-
82,439 $
361,526
Financial Liabilities
Carrying
Amount
Carrying
Fair Value Amount Fair Value
Deposits ................................................................................... $ 11,674,726 $ 11,680,017 $10,509,087 $ 10,509,879
413,417
Securities sold under agreements to repurchase ......................
274,488
Advances from Federal Home Loan Bank ...............................
16,684
Other borrowings .....................................................................
58,420
Long-term debt ........................................................................
350,000
350,000
17,662
119,136
351,989
350,062
15,944
63,169
400,000
275,000
18,593
119,136
Option contracts ........................................................................ $
Foreign exchange contracts ......................................................
Interest rate swaps ....................................................................
Notional
Notional
Amount Fair Value Amount Fair Value
28
121 $
4,124
3,132
6,496
3,744
9,396 $
115,418
459,416
12,117 $
89,545
119,136
Off-Balance Sheet Financial Instruments
Commitments to extend credit ................................................. $ 2,062,241 $
75,396
Standby letters of credit ...........................................................
37,283
Other letters of credit ...............................................................
75
Bill of lading guarantees ..........................................................
(6,025) $ 1,971,848 $
49,081
38,131
454
(668)
(16)
(0)
(5,570)
(194)
(22)
(1)
Notional
Amount Fair Value Amount Fair Value
Notional
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, 2016, and December 31, 2015.
As of December 31, 2016
Estimated
Fair Value
Measurements
Level 1
Level 2
Level 3
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 ........................................................................................
218,017 $
967,067
1,314,345
7,500
11,006,344
17,250
79
11,680,017
351,989
350,062
15,944
63,169
(In thousands)
218,017 $
967,067
513,376
-
-
-
-
-
-
-
-
-
- $
-
800,969
-
-
17,250
-
-
351,989
350,062
-
63,169
-
-
-
7,500
11,006,344
-
79
11,680,017
-
-
15,944
-
As of December 31, 2015
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 (1) ..................................................................
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 ........................................................................................
180,130 $
536,880
1,586,352
6,676
9,938,810
17,250
62
10,509,879
413,417
274,488
16,684
58,420
180,130 $
536,880
302,032
-
-
-
-
- $
-
1,284,320
-
-
17,250
-
-
-
-
6,676
9,938,810
-
62
-
-
-
-
-
-
413,417
-
-
58,420
10,509,879
-
274,488
16,684
-
(1) Preferred stock of government sponsored entities and other equity securities as of December 31, 2015 were reclassified as level 1 rather than level 2 as
originally classified due to the availability of quoted prices in active markets.
17. Employee Benefit Plans
Employee Stock Ownership Plan. Under the Company’s Amended and Restated Cathay Bank Employee Stock Ownership
Plan (“ESOP”), the Company can make annual contributions to a trust in the form of either cash or common stock of the
Bancorp for the benefit of eligible employees. Employees are eligible to participate in the ESOP after completing two years
of service for salaried full-time employees or 1,000 hours for each of two consecutive years for salaried part-time employees.
The amount of the annual contribution is discretionary except that it must be sufficient to enable the trust to meet its current
obligations. The Company also pays for the administration of this plan and of the trust. The Company has not made
contributions to the trust since 2004 and does not expect to make any contributions in the future. Effective June 17, 2004, the
ESOP was amended to provide the participants the election either to reinvest the dividends on the Company stock allocated
to their accounts or to have these dividends distributed to the participant. The ESOP trust purchased 19,377 shares in 2016,
18,012 shares in 2015, and 11,887 shares in 2014, of the Bancorp’s common stock at an aggregate cost of $600,000 in 2016,
$541,000 in 2015, and $301,902 in 2014. The distribution of benefits to participants totaled 103,367 shares in 2016, 107,202
shares in 2015, and 73,439 shares in 2014. As of December 31, 2016, the ESOP owned 918,360 shares, or 1.2%, of the
Company’s outstanding common stock.
F-47
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
401(k) Plan. In 1997, the Board approved the Company’s 401(k) Profit Sharing Plan, which began on March 1, 1997.
Salaried employees who have completed three months of service and have attained the age of 21 are eligible to participate.
Enrollment dates are on the first of each month. 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 $2.1 million in 2016, $2.0
million in 2015, and $1.4 million in 2014. 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.
18. 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. In May 2015, the stockholders of
the Company approved, amendment, and restatement of the 2005 Incentive Plan which provides that 3,562,168 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. As of December 31, 2016, the only options granted by the Company under the 2005 Incentive Plan, as amended
and restated, 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 Mr. Dunson K. Cheng 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
2016. 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 $7.7 million for 327,830 shares in 2016, $5.0 million for 214,580
shares in 2015, and $128,000 for 5,500 shares in 2014. Aggregate intrinsic value for options exercised was $4.0 million in
2016 compared to $2.0 million in 2015.
F-48
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
A summary of stock option activity for 2016, 2015, and 2014 follows:
Weighted-
Average
Remaining
Contractual
Exercise Price Life (in years) (in thousands)
2,119
Aggregate
Intrinsic
Value
Weighted-
Average
1.9 $
Balance, December 31, 2013 ...............................
Exercised .........................................................
Forfeited ..........................................................
Balance, December 31, 2014 ...............................
Exercised .........................................................
Forfeited ..........................................................
Balance, December 31, 2015 ...............................
Exercised .........................................................
Forfeited ..........................................................
Balance, December 31, 2016 ...............................
Exercisable, December 31, 2016 ..........................
Shares
2,812,874
(5,500 ) $
(474,470 )
2,332,904
(214,580 ) $
(1,087,154 )
1,031,170
(327,830 ) $
(620,670 )
82,670
82,670 $
31.81
23.37
29.28
32.34
23.37
35.13
31.27
23.37
36.50
23.37
23.37
1.2 $
1,388
0.9 $
3,268
1.1 $
1.1 $
1,211
1,211
At December 31, 2016, 3,524,517 shares were available under the 2005 Incentive Plan for future grants.
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 88,693 shares at an average closing price of $30.37 per share in 2016,
72,900 shares at an average closing price of $28.11 per share in 2015, and for 17,601 shares at an average closing price of
$24.66 per share in 2014. The restricted stock units granted in 2014, 2013, and 2012 are scheduled to vest two years from
grant date. The restricted stock units granted in 2015 and 2016 are scheduled to vest three 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. In
December 2016, in addition to TSR and EPS awards, the Company granted performance share unit awards in which the
number of units earned is determined by comparison to the targeted return of assets ROA as defined in the award for
December 2016. 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. In December 2014, the Company granted additional
performance TSR restricted stock units for 60,456 shares and performance EPS restricted stock units for 57,642 shares were
granted to seven executive officers. In December 2015, the Company granted additional performance TSR restricted stock
units for 61,209 shares and performance EPS restricted stock units for 57,409 shares were granted to seven executive officers.
In December 2016, the Company granted additional performance TSR restricted stock units for 30,319 shares, performance
EPS restricted stock units for 58,241 shares, and performance ROA restricted stock units for 29,119 shares were granted to
seven executive officers. Performance TSR, performance EPS, and performance ROA shares awarded are scheduled to vest
three years from grant date.
F-49
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
The following table presents restricted stock unit activity for 2016, 2015, and 2014:
Balance at December 31, 2013 .............................................................................................................
Granted ..............................................................................................................................................
Vested ...............................................................................................................................................
Cancelled or forfeited ........................................................................................................................
Balance at December 31, 2014 .............................................................................................................
Granted ..............................................................................................................................................
Vested ...............................................................................................................................................
Cancelled or forfeited ........................................................................................................................
Balance at December 31, 2015 .............................................................................................................
Granted ..............................................................................................................................................
Vested ...............................................................................................................................................
Cancelled or forfeited ........................................................................................................................
Balance at December 31, 2016 .............................................................................................................
Units
379,458
135,699
(122,832)
(5,860)
386,465
191,518
(26,924)
(8,684)
542,375
206,372
(13,780)
(7,548)
727,419
All awards are deemed probable of issuance and the compensation expense recorded for restricted stock units was $4.4
million in 2016, $4.5 million in 2015, and $3.8 million in 2014. Unrecognized stock-based compensation expense related to
restricted stock units was $10.0 million at December 31, 2016, and is expected to be recognized over the next 2.4 years.
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 ......................................... $
- $
-
- $
(5,348) $
6,485
1,137 $
(1,285 )
1,292
7
2016
2015
(In thousands)
2014
F-50
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
19. Condensed Financial Information of Cathay General Bancorp
The condensed financial information of the Bancorp as of December 31, 2016, and December 31, 2015, and for the years
ended December 31, 2016, 2015, and 2014 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, 87,820,920 issued
and 79,610,277 outstanding at December 31, 2016, and 87,002,931 issued and
80,806,116 outstanding at December 31, 2015 .........................................................
Additional paid-in-capital ...............................................................................................
Accumulated other comprehensive loss, net ...................................................................
Retained earnings ............................................................................................................
Treasury stock, at cost (8,210,643 shares at December 31, 2016, and 6,196,815 shares
at December 31, 2015) .................................................................................................
Total stockholders' equity ...............................................................................................
Total liabilities and stockholders' equity ......................................................................... $
As of December 31,
2016
2015
(In thousands, except
share and per share data)
34,596 $
6,895
325
18,129
1,879,868
5,448
6,674
1,951,935 $
119,136 $
4,260
123,396
-
878
895,480
(3,715 )
1,175,485
(239,589 )
1,828,539
1,951,935 $
5,048
7,936
24,324
11,911
1,807,825
5,979
9,551
1,872,574
119,136
5,660
124,796
-
870
880,822
(8,426)
1,059,660
(185,148)
1,747,778
1,872,574
Statements of Operations
2016
Year Ended December 31,
2015
(In thousands)
2014
Cash dividends from Cathay Bank .................................................... $
Cash dividends from GBC Venture Capital ......................................
Interest income ...................................................................................
Interest expense .................................................................................
Non-interest (loss)/income .................................................................
Non-interest expense ..........................................................................
Income before income tax benefit .....................................................
Income tax (benefit)/expense ............................................................
Income before undistributed earnings of subsidiaries ........................
Undistributed earnings of subsidiary .................................................
Net income ........................................................................................ $
113,448 $
950
48
5,791
(488)
3,756
104,411
(4,199)
108,610
66,489
175,099 $
163,301 $
-
68
5,776
(1,858 )
4,644
151,091
(5,134 )
156,225
4,884
161,109 $
30,000
-
88
4,469
10,144
2,248
33,515
1,478
32,037
105,793
137,830
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:
Equity in undistributed earnings of subsidiaries ................................
Dividends in excess of earnings of non-bank 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 directors 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
(Increase)/decrease in short-term investment ....................................
Proceeds from sale of available-for-sale securities ............................
Purchase of available-for-sale securities ............................................
Venture capital and other investments ...............................................
Acquisition, net of cash acquired .......................................................
Net cash (used in)/provided by investment activities ....................
Cash flows from Financing Activities
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 ..........
Purchase of treasury stock .................................................................
Net cash used in financing activities ..............................................
Increase/(Decrease) in cash and cash equivalents .............................
Cash and cash equivalents, beginning of the year .............................
Cash and cash equivalents, end of the year ....................................... $
20. Dividend Reinvestment Plan
2016
Year Ended December 31,
2015
(In thousands)
2014
175,099 $
161,109 $
137,830
(67,770)
1,281
-
-
503
206
(17)
550
-
(1,136)
(756)
107,960
23,999
294
-
134
-
24,427
-
(59,274)
2,277
7,661
(103)
-
(54,441)
(103,880)
28,507
12,984
41,491 $
(4,884 )
-
-
-
468
-
-
495
5,348
619
(5,438 )
157,717
(1,121 )
-
(410 )
-
(57,006 )
(58,537 )
-
(45,283 )
4,175
5,014
(227 )
(5,348 )
(59,412 )
(101,081 )
(1,901 )
14,885
12,984 $
(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
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 72,231 shares for $2.3 million in 2016, 148,582 shares for $4.2 million in 2015, and 116,957 shares for $2.8
million in 2014.
F-52
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
21. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
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 common equity tier 1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal
to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to
or greater than 5%. At December 31, 2016 and 2015, 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, 2016, and December 31, 2015, are
presented in the tables below:
(Dollars in thousands)
December 31, 2016
Balance
%
December 31, 2015
%
Balance
December 31, 2016
%
Balance
December 31, 2015
%
Balance
Cathay General Bancorp
Cathay Bank
Common equity Tier 1
capital ( to risk-
weighted assets) ............ $ 1,459,351
12.84 $ 1,383,377
12.95 $ 1,515,096
13.35 $ 1,443,159
13.54
Common equity Tier 1
capital minimum
requirement ...................
Excess ........................... $
Tier 1 capital (to risk-
511,590
947,761
4.50
8.34 $
480,830
902,547
510,582
4.50
8.45 $ 1,004,514
4.50
8.85 $
479,801
963,358
4.50
9.04
weighted assets) ............ $ 1,574,806
13.85 $ 1,498,810
14.03 $ 1,515,096
13.35 $ 1,443,159
13.54
Tier 1 capital minimum
requirement ...................
Excess ........................... $
682,120
892,686
6.00
7.85 $
641,107
857,703
6.00
8.03 $
680,776
834,320
6.00
7.35 $
639,735
803,424
6.00
7.54
Total capital (to risk-
weighted assets) ............ $ 1,702,144
14.97 $ 1,634,631
15.30 $ 1,637,286
14.43 $ 1,576,525
14.79
Total capital minimum
requirement ...................
Excess ........................... $
909,493
792,651
8.00
6.97 $
854,809
779,822
8.00
7.30 $
907,701
729,585
8.00
6.43 $
852,980
723,545
8.00
6.79
Tier 1 capital (to average
assets) – Leverage ratio . $ 1,574,806
11.57 $ 1,498,810
11.95 $ 1,515,096
11.16 $ 1,443,159
11.53
Minimum leverage
544,614
requirement ..................
Excess ........................... $ 1,030,192
4.00
7.57 $
501,875
996,935
4.00
7.95 $
543,059
972,037
4.00
7.16 $
500,455
942,704
4.00
7.53
Risk-weighted assets ......... $ 11,368,663
Total average assets (1) ...... $ 13,615,348
$ 10,685,115
$ 12,546,879
$ 11,346,260
$ 13,576,477
$ 10,662,248
$ 12,511,382
(1) The quarterly total average assets reflect all debt securities at amortized cost, equity security with readily determinable fair values at the
lower of cost or fair value, and equity securities without readily determinable fair values at historical cost.
F-53
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
22.
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.
Financial instruments that are eligible for offset in the condensed consolidated balance sheets, as of December 31, 2016,
and December 31, 2015, 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
Recognized
Financial
Instruments
Collateral
Posted
Net Amount
December 31, 2016
(In thousands)
Assets:
Derivatives ........................ $
Liabilities:
Securities sold under
agreements to
repurchase ...................... $
Derivatives ........................ $
December 31, 2015
Liabilities:
Securities sold under
agreements to
repurchase ...................... $
Derivatives ........................ $
938 $
- $
938 $
- $
- $
938
350,000 $
3,744 $
- $
- $
350,000 $
3,744 $
- $
- $
(350,000) $
(3,744) $
400,000 $
6,496 $
- $
- $
400,000 $
6,496 $
- $
- $
(400,000) $
(6,496) $
-
-
-
-
F-54
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)
23.
Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly financial data:
Summary of Operations
2016
2015
Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Fourth Third Second First
Interest income ............. $ 130,668 $ 124,155 $ 121,902 $ 122,345 $ 119,519 $ 116,867 $ 112,386 $ 104,934
Interest expense ............ 20,766 20,331 20,126 19,977 20,103 19,221 17,632 17,008
Net interest income ...... 109,902 103,824 101,776 102,368 99,416 97,646 94,754 87,926
Reversal for credit
losses ........................
-
-
(5,150) (10,500)
(3,000)
(1,250)
(2,150 )
(5,000)
Net-interest income
after reversal for loan
losses ......................... 109,902 103,824 106,926 112,868 102,416 98,896 96,904 92,926
8,549
Non-interest income .....
Non-interest expense .... 53,503 50,737 68,879 51,571 53,533 57,471 47,585 44,131
Income before income
9,057
9,350
8,811
5,619
9,156
7,541
7,961
tax expense ................ 64,360 61,898 47,104 68,838 58,233 50,581 54,938 57,344
9,738 21,364
Income tax expense ...... 16,345 15,808 12,273 22,675 16,787 12,098
Net income ................... $ 48,015 $ 46,090 $ 34,831 $ 46,163 $ 41,446 $ 38,483 $ 45,200 $ 35,980
Net income per common
0.61 $
0.60 $
0.58 $
0.58 $
0.44 $
0.44 $
0.58 $
0.57 $
0.51 $
0.51 $
0.47 $
0.47 $
0.57 $
0.56 $
0.45
0.45
share
Basic .......................... $
Diluted ...................... $
24. Subsequent Events
Dividend Declared
On February 16, 2017, the Company's Board declared first quarter 2017 dividends for the Company's common stock.
The common stock cash dividend of $0.21 per share will be paid on March 10, 2017 to stockholders of record on March 1,
2017.
The Company has evaluated the effect of events that have occurred subsequent to December 31, 2016 through the date
of issuance of the Consolidated Financial Statements, and there have been no material events that would require recognition
in the Consolidated Financial Statements or disclosure in the notes to the Consolidated Financial Statements.
F-55
This page intentionally left blank
Corporate Headquarters
777 N. Broadway
Los Angeles, CA 90012
t 213 625 4700
f 213 625 1368
Corporate Center
9650 Flair Dr.
El Monte, CA 91731
t 626 279 3298
f 626 279 3295
Southern California
Alhambra
601 N. Atlantic Blvd.
Alhambra, CA 91801
t 626 284 6556
f 626 282 3496
Arcadia
1139 W. Huntington Dr.
Arcadia, CA 91007
t 626 574 7767
f 626 574 3075
Cerritos Valley
18643 S. Pioneer Blvd.
Artesia, CA 90701
t 562 809 1300
f 562 809 1415
City of Industry
1250 S. Fullerton Rd.
City of Industry, CA 91748
t 626 810 1088
f 626 964 4784
Diamond Bar
1195 S. Diamond Bar Blvd.
Diamond Bar, CA 91765
t 909 860 8299
f 909 861 0920
El Monte
9650 Flair Dr.
El Monte, CA 91731
t 626 279 3298
f 626 279 3295
Fountain Valley
17860 Newhope St.
Ste. 104
Fountain Valley, CA 92708
t 714 619 0268
f 714 619 0278
Irvine
15323 Culver Dr.
Irvine, CA 92604
t 949 559 7500
f 949 559 7508
Irvine (Barranca)
4010 Barranca Pkwy.
Ste. 150
Irvine, CA 92604
t 949 551 1991
f 949 551 2438
Los Angeles
777 N. Broadway
Los Angeles, CA 90012
t 213 625 4791
f 213 625 1368
Monterey Park
250 S. Atlantic Blvd.
Monterey Park, CA 91754
t 626 588 1911
f 626 281 2956
Northridge
9045 Corbin Ave. #100
Northridge, CA 91324
t 818 886 3578
f 818 886 8057
Ontario
2000A S. Grove Ave.
Ste. 103
Ontario, CA 91761
t 909 923 8081
f 909 923 5378
Orange
2263 N. Tustin St.
Orange, CA 92865
t 714 283 8688
f 714 283 1988
Rancho Cucamonga
9759 Baseline Rd.
Rancho Cucamonga, CA
91730
t 909 942 3870
f 909 989 7456
Rowland Heights
17432 Colima Rd.
Rowland Heights, CA 91748
t 626 333 8533
f 626 336 4227
San Diego
4688 Convoy St.
San Diego, CA 92111
t 858 277 2030
f 858 277 3339
San Gabriel
825 E. Valley Blvd.
San Gabriel, CA 91776
t 626 573 1000
f 626 573 0983
Torrance
23211 Hawthorne Blvd.
Ste. 108
Torrance, CA 90505
t 310 373 9070
f 424 212 5091
Valley (Stoneman)
43 E. Valley Blvd.
Alhambra, CA 91801
t 626 576 7600
f 626 576 5831
West Covina
2672 E. Garvey Ave. S.
West Covina, CA 91791
t 626 646 1156
f 626 430 3077
Westminster
9121 Bolsa Ave.
Westminster, CA 92683
t 714 890 7118
f 714 892 8420
Northern California
Cupertino
10480 S. De Anza Blvd.
Cupertino, CA 95014
t 408 255 8300
f 408 255 8373
Dublin
7190 Regional St.
Dublin, CA 94568
t 925 551 8300
f 925 551 8310
Millbrae
1095 El Camino Real
Millbrae, CA 94030
t 650 652 0188
f 650 652 0180
Milpitas
1759 N. Milpitas Blvd.
Milpitas, CA 95035
t 408 262 0280
f 408 262 0780
Oakland
710 Webster St.
Oakland, CA 94607
t 510 208 3700
f 510 208 3727
Richmond
3288 Pierce St.
Ste. D-101
Richmond, CA 94804
t 510 526 8898
f 510 526 0639
Sacramento
4970 Freeport Blvd.
Sacramento, CA 95822
t 916 428 4890
f 916 428 4966
San Francisco
540 Montgomery St.
San Francisco, CA 94111
t 415 398 3122
f 415 398 3117
San Francisco (Clement)
919 Clement St.
San Francisco, CA 94118
t 415 831 1288
f 415 422 0917
San Jose
2010 Tully Rd.
San Jose, CA 95122
t 408 238 8880
f 408 238 2302
San Jose (Brokaw)
1708 Oakland Rd.
Ste. 400
San Jose, CA 95131
t 408 437 6188
f 408 437 6180
Union City
1701 Decoto Rd.
Union City, CA 94587
t 510 675 9190
f 510 675 9312
New York
Bensonhurst
6912 18th Ave.
Brooklyn, NY 11204
t 718 306 5355
f 718 256 3605
Brooklyn
5402 8th Ave.
Brooklyn, NY 11220
t 718 435 0800
f 718 633 0128
Chatham Square
16-18 E. Broadway
New York, NY 10002
t 212 941 8500
f 212 941 8493
Elmhurst
82-62 Broadway
Elmhurst, NY 11373
t 718 446 9700
f 718 446 8707
Flushing
40-14 Main St.
Flushing, NY 11354
t 718 886 5225
f 718 961 7680
Flushing (North)
36-54 Main St.
Flushing, NY 11354
t 718 683 3800
f 718 460 4509
Flushing (South)
41-48 Main St.
Flushing, NY 11355
t 718 886 7500
f 718 886 6938
Flushing Roosevelt
135-34 Roosevelt Ave.
Flushing, NY 11354
t 718 961 9700
f 718 961 6721
Midtown
235 5th Ave.
New York, NY 10016
t 212 725 3800
f 212 683 7822
New York Chinatown
45 E. Broadway
New York, NY 10002
t 212 732 0200
f 212 732 7389
New York Chinatown
Park Row
23 Chatham Square
New York, NY 10038
t 212 693 9700
f 212 693 9707
Soho
129 Lafayette St.
New York, NY 10013
t 646 307 8300
f 646 613 8025
Illinois
Broadway
5000 N. Broadway
Chicago, IL 60640
t 773 561 2300
f 773 561 3003
Chicago Chinatown
222 W. Cermak Rd.
Chicago, IL 60616
t 312 225 5991
f 312 225 2627
Westmont
665 Pasquinelli Dr.
#B104
Westmont, IL 60559
t 630 325 7988
f 630 325 7442
Washington
Bellevue
13238 NE 20th St.
Ste. 200
Bellevue, WA 98005
t 425 644 8822
f 425 644 6818
Kent
18030 E. Valley Hwy.
Kent, WA 98032
t 425 656 0278
f 425 656 0687
Seattle
621 S. Lane St.
Seattle, WA 98104
t 206 223 2890
f 206 223 3735
Texas
Houston
9440 Bellaire Blvd.
Ste. 118
Houston, TX 77036
t 713 278 9599
f 713 278 9699
Plano
4100 Legacy Dr.
Ste. 403
Plano, TX 75024
t 972 618 2000
f 972 618 7345
Massachusetts
Boston Main
621 Washington St.
Boston, MA 02111
t 617 338 4700
f 617 338 1674
Nevada
Las Vegas
6110 Spring Mountain Rd.
Las Vegas, NV 89146
t 702 453 8889
f 702 263 8889
New Jersey
Edison
1775 Route 27
Edison, NJ 08817
t 732 985 8880
f 732 985 6689
Maryland
Rockville
650 Hungerford Dr.
(Route 355)
Rockville, MD 20850
t 301 738 9700
f 301 738 9923
Overseas Branch
Hong Kong
503 Central Tower
No. 28 Queen’s Rd.
Central, Hong Kong
t 852 3710 1333
f 852 2810 1652
Overseas
Representative Offices
Shanghai
RM 1806, JingAn
Kerry Center, Tower 1
1515 Nanjing West Rd.
Shanghai, 200040
People’s Republic of China
t 86 21 5298 5656
f 86 21 5298 6161
Taipei
146 Sung Chiang Rd.
6/F, Ste. 3
Taipei, Taiwan
t 886 2 2537 5057
f 886 2 2537 5059
Registrar and
Transfer Agent
American Stock Transfer
and Trust Company, LLC
6201 15th Ave.
Brooklyn, NY 11219
t 800 937 5449
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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 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,” “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, 2016, 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, 2016, 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.
Corporate Profile
In 1962, Cathay Bank opened for business with the mission of providing financial services
to the growing but underserved Chinese-American community in the greater Los Angeles area,
thus becoming the first Chinese-American bank in Southern California. Recognizing that the
community it served was part of a more diverse one, Cathay Bank adopted the motto “An Open
Door for All.” Its rapid expansion was fueled by successive waves of immigration, burgeoning
trade between America and Asia, and the economic development of the surrounding community.
Today, Cathay Bank is a subsidiary of Cathay General Bancorp (NASDAQ: CATY), a publicly
held bank holding company with over $14.5 billion in assets as of December 31, 2016. Its
service network extends from California and Washington on the West Coast and Nevada,
Texas, and Illinois, and New York, New Jersey, Maryland, and Massachusetts on the Eastern
Seaboard. Overseas, it has a presence in the three important commercial centers in Greater
China—Hong Kong, Shanghai, and Taipei.
Cathay Bank, with years of history and experience, is committed to providing a broad spectrum
of personal and commercial financial services.
19700_CAT-001_2016_AnnualReport_Cover_CS6_r1.indd 2
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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
One Vision.
Many Facets.
2016 Annual Report
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