News Column

CATHAY GENERAL BANCORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

May 8, 2014

The following discussion is given based on the assumption that the reader has access to and has read the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Critical Accounting Policies The discussion and analysis of the Company's unaudited condensed consolidated balance sheets and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed 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 financial statements. Actual results may differ from these estimates under different assumptions or conditions.



Management of the Company considers the following to be critical accounting policies:

Accounting for the allowance for credit losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in "Allowance for Credit Losses" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. 35 -------------------------------------------------------------------------------- Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any "other-than-temporary" impairment to our investment securities. The judgments and assumptions used by management are described in "Investment Securities" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described in "Income Taxes" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described in "Goodwill and Goodwill Impairment" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Highlights



? Diluted earnings per share increased 30.0% to $0.39 per share for the first

quarter of 2014 compared to $0.30 per share for the same quarter a year ago.

? Total loans increased $217.7 million, or 2.7%, in the first quarter of 2014,

to $8.3 billion at March 31, 2014, compared to $8.1 billion at December 31,

2013.



Quarterly Statement of Operations Review

Net Income Net income available to common stockholders for the quarter ended March 31, 2014, was $31.3 million, an increase of $7.6 million, or 32.1%, compared to a net income available to common stockholders of $23.7 million for the same quarter a year ago. Diluted earnings per share available to common stockholders for the quarter ended March 31, 2014, was $0.39 compared to $0.30 for the same quarter a year ago due primarily to the elimination of dividends on preferred stock, a decrease in the cost associated with debt redemption, and an increase in net interest income. Return on average stockholders' equity was 8.53% and return on average assets was 1.19% for the quarter ended March 31, 2014, compared to a return on average stockholders' equity of 7.20% and a return on average assets of 1.12% for the same quarter a year ago. 36

--------------------------------------------------------------------------------

Financial Performance Three months ended March 31, 2014 2013 Net income (in millions) $ 31.3 $ 28.8 Net income available to common stockholders (in millions) $ 31.3 $ 23.7 Basic earnings per common share $ 0.39 $ 0.30 Diluted earnings per common share $ 0.39 $ 0.30 Return on average assets 1.19 % 1.12 % Return on average total stockholders' equity 8.53 % 7.20 % Efficiency ratio 49.44 % 51.71 %



Net Interest Income Before Provision for Credit Losses

Net interest income before provision for credit losses increased $2.6 million, or 3.2%, to $82.7 million during the first quarter of 2014 compared to $80.1 million during the same quarter a year ago. The increase was due primarily to the decrease in interest expense from securities sold under agreements to repurchase. The net interest margin, on a fully taxable-equivalent basis, was 3.38% for the first quarter of 2014, compared to 3.30% for the fourth quarter of 2013 and 3.35% for the first quarter of 2013. The increase in the net interest margin was due mainly to the prepayment of securities sold under agreements to repurchase during the last twelve months. For the first quarter of 2014, the yield on average interest-earning assets was 4.14%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities was 0.99%, and the cost of interest bearing deposits was 0.65%. In comparison, for the first quarter of 2013, the yield on average interest-earning assets was 4.26%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities was 1.18%, and the cost of interest bearing deposits was 0.63%. The interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, increased seven basis points to 3.15% for the quarter ended March 31, 2014, from 3.08% for the same quarter a year ago, primarily for the reason discussed above. 37 -------------------------------------------------------------------------------- The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months ended March 31, 2014, and March 31, 2013. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and Interest-Bearing Liabilities Three months ended March 31, 2014 2013 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate (1)(2) Balance Expense Rate (1)(2) Interest earning assets: Commercial loans $ 2,260,590$ 21,312 3.82 % $ 2,073,827$ 20,768 4.06 % Residential mortgage loans 1,567,706 18,470 4.71 1,357,346 15,942 4.70 Commercial mortgage loans 4,075,694 49,614 4.94 3,761,187 49,706 5.36 Real estate construction loans 233,245 3,310 5.76 181,254 2,387 5.34 Other loans and leases 19,951 26 0.53 13,252 37 1.13 Total loans and leases (1) 8,157,186 92,732 4.61 7,386,866 88,840 4.88 Taxable securities 1,581,642 7,576 1.94 2,006,091 11,786 2.38 Tax-exempt securities (3) - - - 124,182 1,488 4.86 Federal Home Loan Bank stock 25,054 450 7.28 41,041 250 2.47 Interest bearing deposits 148,241 449 1.23 196,615 208 0.43 Total interest-earning assets 9,912,123 101,207 4.14 9,754,795 102,572 4.26 Non-interest earning assets: Cash and due from banks 136,063 139,378 Other non-earning assets 786,069 763,909 Total non-interest earning assets 922,132 903,287 Less: Allowance for loan losses (174,934 ) (183,547 ) Deferred loan fees (13,341 ) (10,071 ) Total assets $ 10,645,980$ 10,464,464 Interest bearing liabilities: Interest bearing demand accounts $ 682,765$ 273 0.16 $ 600,110$ 235 0.16 Money market accounts 1,275,726 1,927 0.61 1,164,125 1,580 0.55 Savings accounts 498,390 92 0.07 466,952 92 0.08 Time deposits 4,171,061 8,400 0.82 3,878,847 7,615 0.80 Total interest-bearing deposits 6,627,942 10,692 0.65 6,110,034 9,522 0.63 Securities sold under agreements to repurchase 707,222 6,930 3.97 1,197,222 11,393 3.86 Other borrowings 175,252 199 0.46 48,807 80 0.66 Long-term debt 121,136 728 2.44 171,136 924 2.19 Total interest-bearing liabilities 7,631,552 18,549 0.99 7,527,199 21,919 1.18 Non-interest bearing liabilities: Demand deposits 1,445,269 1,221,552 Other liabilities 82,954 82,940 Total equity 1,486,205 1,632,773 Total liabilities and equity $ 10,645,980$ 10,464,464 Net interest spread (4) 3.15 % 3.08 % Net interest income (4) $ 82,658$ 80,653 Net interest margin (4) 3.38 % 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. (3) The average yield has been adjusted to a fully taxable-equivalent basis for certain securities of states and political subdivisions and other securities held using a statutory federal income tax rate of 35%. (4) Net interest income, net interest spread, and net interest margin on interest-earning assets have been adjusted to a



fully taxable-equivalent basis using a statutory federal income tax rate of 35%.

38

--------------------------------------------------------------------------------



The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

Taxable-Equivalent Net Interest Income - Changes Due to Rate and Volume(1) Three months ended March 31, 2014-2013 Increase (Decrease) in Net Interest Income Due to: (Dollars in thousands) Changes in Volume Changes in Rate Total Change Interest-earning assets: Loans and leases 9,020 (5,128 ) 3,892 Taxable securities (2,248 ) (1,962 ) (4,210 ) Tax-exempt securities (2) (1,488 ) - (1,488 ) Federal Home Loan Bank stock (131 ) 331 200 Deposits with other banks (64 ) 305 241 Total changes in interest income 5,089 (6,454 ) (1,365 ) Interest-bearing liabilities: Interest bearing demand accounts 33 5 38 Money market accounts 159 188 347 Savings accounts 6 (6 ) - Time deposits 585 200 785 Securities sold under agreements to repurchase (4,801 ) 338 (4,463 ) Other borrowed funds 151 (32 ) 119 Long-term debt (294 ) 98 (196 ) Total changes in interest expense (4,161 ) 791 (3,370 ) Changes in net interest income $ 9,250 $ (7,245 ) $ 2,005



(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been

allocated proportionately to changes due to volume and changes due to rate. (2) The amount of interest earned on certain securities of states and political subdivisions and other securities



held has been adjusted to a fully taxable-equivalent basis using a statutory federal income tax rate of 35%.

Provision for Credit Losses

Provision for credit losses was zero for both the first quarter of 2014 and the first quarter of 2013. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at March 31, 2014. The provision or reversal for credit losses represents the charge against or benefit toward current earnings that is determined by management, through a credit review process, as the amount needed to establish an allowance that management believes to be sufficient to absorb credit losses inherent in the Company's loan portfolio, including unfunded commitments. The following table summarizes the charge-offs and recoveries for the periods indicated: Three months ended March 31, 2014 December 31, 2013 March 31, 2013 (In thousands) Charge-offs: Commercial loans $ 7,226 $ 11,045 $ 2,690 Real estate loans (1) 1,776 626 1,130 Real estate- land loans - - 270 Total charge-offs 9,002 11,671 4,090 Recoveries: Commercial loans 2,017 724 955 Construction loans- residential 16 1 46 Construction loans- other 9 27 33 Real estate loans (1) 2,577 1,749 359 Real estate- land loans 3 896 9 Total recoveries 4,622 3,397 1,402 Net charge-offs $ 4,380 $ 8,274 $ 2,688



(1) Real estate loans include commercial mortgage loans, residential mortgage loans and equity lines.

39

--------------------------------------------------------------------------------

Non-Interest Income Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), gains (losses) on loan sales, wire transfer fees, and other sources of fee income, was $14.6 million for the first quarter of 2014, a decrease of $322,000, or 2.2%, compared to $14.9 million for the first quarter of 2013. The decrease in non-interest income in the first quarter of 2014 was primarily due to decreases of $438,000 in gains on sale of loans and of $332,000 in gains on sale of securities partially offset by an increase of $304,000 in commissions from wealth management. Non-Interest Expense Non-interest expense decreased $1.0 million, or 2.2%, to $48.1 million in the first quarter of 2014 compared to $49.1 million in the same quarter a year ago. The efficiency ratio was 49.44% in the first quarter of 2014 compared to 51.71% for the same quarter a year ago. Prepayment penalties decreased $2.2 million to $3.4 million in the first quarter of 2014 compared to $5.6 million in the same quarter a year ago. The Company prepaid $100.0 million of securities sold under agreements to repurchase in the first quarter of 2014 compared to $100.0 million in the same quarter a year ago. Amortization of core deposit premium decreased $1.2 million to $172,000 in the first quarter of 2014 compared to $1.4 million in the same quarter a year ago as a result of the full amortization of the core deposit premium from the General Bank acquisition. Other professional services expenses decreased $661,000 due to the completion of core system conversion in 2013. Offsetting the above decreases were a $1.0 million increase in litigation expense, a $741,000 increase in operations of affordable housing investments primarily due to new investments, a $598,000 increase in salaries and employee benefits primarily due to higher bonus accruals and amortization of long term incentive compensation awards, and a $416,000 increase in FDIC and state assessments. Income Taxes The effective tax rate for the first quarter of 2014 was 36.4% compared to 36.9% for the first quarter of 2013. The effective tax rate includes the impact of the utilization of low income housing tax credits. Balance Sheet Review Assets Total assets were $11.29 billion at March 31, 2014, an increase of $301.9 million, or 2.7%, from $11.0 billion at December 31, 2013, primarily due to a $217.7 million increase in loans and a $103.4 million increase in short-term investments. Investment Securities Investment securities represented 14.0% of total assets at March 31, 2014, compared with 14.4% of total assets at December 31, 2013. The carrying value of investment securities at March 31, 2014, was $1.58 billion compared with $1.59 billion at December 31, 2013. Securities available-for-sale are carried at fair value and had a net unrealized loss, net of tax, of $22.1 million at March 31, 2014, compared with a net unrealized loss, net of tax, of $29.7 million at December 31, 2013. During the first quarter of 2013, due to the ongoing discussions regarding corporate income tax rates which could have a negative impact on the after-tax yields and fair values of the Company's portfolio of municipal securities, the Company determined it may sell such securities in response to market conditions. As a result, the Company reclassified its municipal securities from securities held-to-maturity to securities available-for-sale. Concurrent with this reclassification, the Company also reclassified all other securities held-to-maturity, which together with the municipal securities had an amortized cost on the date of transfer of $722.5 million, to securities available-for-sale. At the reclassification date, a net unrealized gain was recorded in other comprehensive income for these securities totaling $40.5 million. 40

-------------------------------------------------------------------------------- The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of March 31, 2014, and December 31, 2013: March 31, 2014 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (In thousands) Securities Available-for-Sale U.S. treasury securities $ 475,139$ 120 $ - $ 475,259 Mortgage-backed securities 969,042 1,860 49,749 921,153 Collateralized mortgage obligations 82 - 39 43 Corporate debt securities 165,716 423 3,458 162,681 Mutual funds 6,000 243 5,757 Preferred stock of government sponsored entities 535 12,909 13,444 Other equity securities 500 60 560



Total securities available-for-sale $ 1,617,014$ 15,372 $

53,489 $ 1,578,897 Total investment securities $ 1,617,014$ 15,372$ 53,489$ 1,578,897 December 31, 2013 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (In thousands) Securities Available-for-Sale U.S. treasury securities $ 460,095 $ 99 $ 1 $ 460,193 Mortgage-backed securities 1,010,294 7,049 64,529 952,814 Collateralized mortgage obligations 5,929 231 54 6,106 Asset-backed securities 123 - - 123 Corporate debt securities 154,955 298 4,949 150,304 Mutual funds 6,000 - 275 5,725 Preferred stock of government sponsored entities 569 10,834 - 11,403 Total securities available-for-sale $ 1,637,965$ 18,511$ 69,808$ 1,586,668 Total investment securities $ 1,637,965$ 18,511$ 69,808$ 1,586,668



For additional information, see Note 6 to the Company's condensed consolidated financial statements presented elsewhere in this report.

Investment securities having a carrying value of $853.6 million at March 31, 2014, and $926.5 million at December 31, 2013, were pledged to secure public deposits, other borrowings, treasury tax and loan, Federal Home Loan Bank advances, securities sold under agreements to repurchase, interest rate swaps, and foreign exchange transactions. 41 --------------------------------------------------------------------------------

Loans Gross loans were $8.30 billion at March 31, 2014, an increase of $217.7 million, or 2.7%, from $8.08 billion at December 31, 2013, primarily due to increases of $169.9 million, or 4.2%, in commercial mortgage loans, $86.0 million, or 6.3%, in residential mortgage loans, and $32.1 million, or 14.5%, in real estate construction loans, offset by a decrease of $68.8 million, or 3.0%, in commercial loans. The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated: December 31, % of Gross March 31, 2014 % of Gross Loans 2013 Loans % Change Type of Loans (Dollars in thousands) Commercial loans $ 2,229,880 26.9 % $ 2,298,724 28.50 % -3.0 % Residential mortgage loans 1,441,230 17.4 1,355,255 16.8 6.3 Commercial mortgage loans 4,192,987 50.5 4,023,051 49.8 4.2 Equity lines 172,395 2.1 171,277 2.2 0.7 Real estate construction loans 253,832 3.0 221,701 2.5 14.5 Installment and other loans 11,958 0.1 14,555 0.2 (17.8 ) Gross loans $ 8,302,282 100 % $ 8,084,563 100 % 2.7 % Allowance for loan losses (169,138 ) (173,889 ) (2.7 ) Unamortized deferred loan fees (12,936 ) (13,487 ) (4.1 ) Total loans, net $ 8,120,208$ 7,897,187 2.8 % Non-performing Assets Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and other real estate owned ("OREO"). The Company's policy is to place loans on non-accrual status if interest and/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 loans on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. The ratio of non-performing assets to total assets was 1.0% at March 31, 2014, compared to 1.3% at December 31, 2013. Total non-performing assets decreased $20.9 million, or 15.3%, to $116.2 million at March 31, 2014, compared to $137.2 million at December 31, 2013, primarily due to a $12.8 million, or 15.4%, decrease in non-accrual loans and a $8.1 million, or 15.3%, decrease in OREO. As a percentage of gross loans plus OREO, our non-performing assets decreased to 1.39% at March 31, 2014, from 1.69% at December 31, 2013. The non-performing portfolio loan coverage ratio, defined as the allowance for credit losses to non-performing loans, increased to 239.4% at March 31, 2014, from 208.2% at December 31, 2013. 42

-------------------------------------------------------------------------------- The following table presents the changes in non-performing assets and troubled debt restructurings (TDRs) at March 31, 2014, compared to December 31, 2013, and to March 31, 2013: December 31, (Dollars in thousands) March 31, 2014 2013 % Change March 31, 2013 % Change Non-performing assets Accruing loans past due 90 days or more $ 974 $ 982 (1 ) $ 800 22 Non-accrual loans: Construction loans- residential 3,313 3,313 - 3,271 1 Construction loans- non-residential 24,729 25,273 (2 ) 32,966 (25 ) Land loans 6,502 6,502 - 8,325 (22 ) Commercial real estate loans, excluding land loans 10,540 13,119 (20 ) 30,896 (66 ) Commercial loans 13,806 21,232 (35 ) 13,192 5 Residential mortgage loans 11,498 13,744 (16 ) 11,679 (2 ) Total non-accrual loans: $ 70,388 $ 83,183 (15 ) $ 100,329 (30 ) Total non-performing loans 71,362 84,165 (15 ) 101,129 (29 ) Other real estate owned 44,853 52,985 (15 ) 45,316 (1 ) Total non-performing assets $ 116,215$ 137,150 (15 ) $ 146,445 (21 ) Accruing troubled debt restructurings (TDRs) $ 118,922$ 117,597 1 $ 130,215 (9 ) Non-accrual TDRs (included in non-accrual loans above) $ 37,797 $ 38,769 (3 ) $ 49,878 (24 ) Allowance for loan losses $ 169,138$ 173,889 (3 ) $ 178,692 (5 ) Allowance for off-balance sheet credit commitments 1,734 1,362 27 3,304 (48 ) Allowance for credit losses $ 170,872$ 175,251 (2 ) $ 181,996 (6 ) Total gross loans outstanding, at period-end $ 8,302,282$ 8,084,563 3 $ 7,364,340 13 Allowance for loan losses to non-performing loans, at period-end 237.01 % 206.60 % 176.70 % Allowance for loan losses to gross loans, at period-end 2.04 % 2.15 % 2.43 % Allowance for credit losses to gross loans, at period-end 2.06 % 2.17 % 2.47 % Non-accrual Loans At March 31, 2014, total non-accrual loans were $70.4 million, an decrease of $29.9 million, or 29.8%, from $100.3 million at March 31, 2013, and a decrease of $12.8 million, or 15.4%, from $83.2 million at December 31, 2013. The allowance for the collateral-dependent loans is calculated based on 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 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, of these loans on a quarterly basis and adjust the allowance accordingly. Non-accrual loans also include those troubled debt restructurings that do not qualify for accrual status. 43 -------------------------------------------------------------------------------- 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: March 31, 2014 December 31, 2013 Real Real Estate (1) Commercial Estate (1) Commercial (In thousands) Type of Collateral Single/multi-family residence $ 15,624$ 3,039$ 22,370$ 2,030 Commercial real estate 34,457 1,167 33,079 1,366 Land 6,502 - 6,502 - Unsecured - 9,599 - 17,836 Total $ 56,583$ 13,805$ 61,951$ 21,232



(1) Real estate includes commercial mortgage loans, real estate construction loans,

residential mortgage loans and equity lines. March 31, 2014 December 31, 2013 Real Real Estate (1) Commercial Estate (1) Commercial (In thousands) Type of Business Real estate development $ 29,007$ 900$ 31,895$ 5,866 Wholesale/Retail 16,736 8,083 16,796 3,526 Food/Restaurant 617 214 569 173 Import/Export - 4,608 - 11,667 Other 10,223 - 12,691 - Total $ 56,583$ 13,805$ 61,951$ 21,232



(1) Real estate includes commercial mortgage loans, real estate construction loans,

residential mortgage loans and equity lines. Other Real Estate Owned



At March 31, 2014, OREO totaled $44.9 million, which decreased $8.1 million, or 15.3%, compared to $53.0 million at December 31, 2013.

Impaired Loans A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. The assessment for impairment occurs when and while such loans are on non-accrual as a result of delinquency status of over 90 days or receipt of information indicating that full collection of principal is doubtful, or when the loan has been restructured in a troubled debt restructuring. Those loans with a balance less than our defined selection criteria, generally a loan amount less than $500,000 (less than $100,000 for quarters before June 30, 2012), are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan's effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan's observable market price or the fair value of the collateral. We obtain an appraisal to determine the amount of impairment at the date that the loan becomes impaired. The appraisals are based on "as is" or bulk sale valuations. To ensure that appraised values remain current, we generally obtain an updated appraisal every six months from qualified independent appraisers. Furthermore, if the most current appraisal is dated more than three months prior to the effective date of the impairment test, we validate the most current value with third party market data appropriate to the location and property type of the collateral. If the third party market data indicates that the value of our collateral has declined since the most recent valuation date, we adjust downward the value of the property to reflect current market conditions. If the fair value of the collateral, less cost to sell, 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 the impaired loan, is charged off against the allowance for loan losses. Non-accrual impaired loans, including TDRs, are not returned to accrual 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 TDRs are reviewed for continued impairment until they are no longer reported as TDRs. 44 -------------------------------------------------------------------------------- At March 31, 2014, recorded investment in impaired loans totaled $189.3 million and was comprised of non-accrual loans of $70.4 million and accruing TDRs of $118.9 million. At December 31, 2013, recorded investment in impaired loans totaled $200.8 million and was comprised of non-accrual loans of $83.2 million and accruing TDRs of $117.6 million. For impaired loans, the amounts previously charged off represent 15.0% at March 31, 2014, and 23.9% at December 31, 2013, of the contractual balances for impaired loans. As of March 31, 2014, $56.6 million, or 80.4%, of the $70.4 million of non-accrual loans that were secured by real estate compared to $62.0 million, or 74.5%, of the $83.2 million of non-accrual loans that were secured by real estate at December 31, 2013. In light of changing property values in the current economic fluctuation affecting the real estate markets, the Bank has obtained current appraisals, sales contracts, or other available market price information which provide updated factors in evaluating potential loss. At March 31, 2014, $14.5 million of the $169.1 million allowance for loan losses was allocated for impaired loans and $154.6 million was allocated to the general allowance. At December 31, 2013, $13.3 million of the $173.9 million allowance for loan losses was allocated for impaired loans and $160.6 million was allocated to the general allowance. The allowance for credit losses to non-accrual loans increased to 242.8% at March 31, 2014, from 210.7% at December 31, 2013, primarily due to decreases in non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status. 45

-------------------------------------------------------------------------------- The following table presents impaired loans and the related allowance as of the dates indicated: Impaired Loans March 31, 2014 December 31, 2013 Unpaid Unpaid Principal Recorded Principal Recorded Balance Investment Allowance Balance Investment Allowance (In thousands) With no allocated allowance Commercial loans $ 14,001$ 11,914 $ - $ 20,992$ 18,905 $ - Real estate construction loans 25,157 14,854 - 25,401 15,097 - Commercial mortgage loans 73,274 71,934 - 105,593 78,930 - Residential mortgage loans and equity lines 4,876 4,876 - 4,892 4,892 - Subtotal $ 117,308$ 103,578 $ - $ 156,878$ 117,824 $ - With allocated allowance Commercial loans $ 27,772$ 18,099$ 4,663$ 22,737$ 13,063$ 2,519 Real estate construction loans 28,158 19,005 3,129 28,475 19,323 3,460 Commercial mortgage loans 35,363 34,979 6,165 39,223 35,613 6,584 Residential mortgage loans and equity lines 14,083 13,650 538 16,535 14,957 721 Subtotal $ 105,376$ 85,733$ 14,495$ 106,970$ 82,956$ 13,284 Total impaired loans $ 222,684$ 189,311$ 14,495$ 263,848$ 200,780$ 13,284 Loan Interest Reserves In accordance with customary banking practice, construction loans and land development loans are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 65% in the case of land to 85% in the case of one to four family residential construction projects. As of March 31, 2014, construction loans of $187.9 million were disbursed with pre-established interest reserves of $21.2 million compared to $160.8 million of such loans disbursed with pre-established interest reserves of $20.0 million at December 31, 2013. The balance for construction loans with interest reserves which have been extended was $26.6 million with pre-established interest reserves of $2.1 million at March 31, 2014, compared to $20.5 million with pre-established interest reserves of $1.8 million at December 31, 2013. Land loans of $26.8 million were disbursed with pre-established interest reserves of $2.3 million at March 31, 2014, compared to $32.8 million land loans disbursed with pre-established interest reserves of $3.0 million at December 31, 2013. The balance for land loans with interest reserves which have been extended was zero at March 31, 2014, compared to $1.7 million land loans with pre-established interest reserves of $53,000 at December 31, 2013. 46 -------------------------------------------------------------------------------- At March 31, 2014, the Bank had no loans on non-accrual status with available interest reserves. At March 31, 2014, $3.3 million of non-accrual residential construction loans, $24.7 million of non-accrual non-residential construction loans, and $32,000 of non-accrual land loans had been originated with pre-established interest reserves. At December 31, 2013, the Bank had no loans on non-accrual status with available interest reserves. At December 31, 2013, $3.3 million of non-accrual residential construction loans, $25.3 million of non-accrual non-residential construction loans, and $32,000 of non-accrual land loans had been originated with pre-established interest reserves. While loans with interest reserves are typically expected to be repaid in full according to the original contractual terms, some loans require one or more extensions beyond the original maturity. Typically, these extensions are required due to construction delays, delays in sales or lease of property, or some combination of these two factors. Loan Concentration Most of the Company's business activities are with customers located in the predominantly Asian areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Las Vegas, 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 collateral. There were no loan concentrations to multiple borrowers in similar activities which exceeded 10% of total loans as of March 31, 2014, or as of December 31, 2013. 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-nine months. Total loans for construction, land development, and other land represented 24% of the Bank's total risk-based capital as of March 31, 2014, and 23% as of December 31, 2013. Total CRE loans represented 253% of total risk-based capital as of March 31, 2014, and 249% as of December 31, 2013 and were below the Bank's internal limit for CRE loans of 300% of total capital at both dates. Allowance for Credit Losses The Bank maintains the allowance for credit losses at a level that is considered adequate to absorb the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and the reserve 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. 47

-------------------------------------------------------------------------------- In addition, the Bank's Board of Directors has established a written credit policy that includes a credit review and control system which it believes should be effective in ensuring that the Bank maintains an adequate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is adequate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses is based on management's current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect 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 to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its best judgment based on the information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Bank's control, including the performance of the Bank's loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. 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 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 credit losses in future periods. The allowance for loan losses was $169.2 million and the allowance for off-balance sheet unfunded credit commitments was $1.7 million at March 31, 2014, which represented the amount believed by management to be sufficient to absorb credit losses inherent in the loan portfolio, including unfunded commitments. The allowance for credit losses, which is the sum of the allowances for loan losses and for off-balance sheet unfunded credit commitments, was $170.9 million at March 31, 2014, compared to $175.3 million at December 31, 2013, a decrease of $4.4 million, or 2.5%. The allowance for credit losses represented 2.06% of period-end gross loans and 239.4% of non-performing loans at March 31, 2014. The comparable ratios were 2.17% of period-end gross loans and 208.2% of non-performing loans at December 31, 2013. 48



--------------------------------------------------------------------------------

The following table sets forth information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the periods indicated:


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters