News Column

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

August 7, 2014

The following discussion is 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. 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. 38 --------------------------------------------------------------------------------

Highlights



? Diluted earnings per share increased 25.7% to $0.44 per share for the second

quarter of 2014 compared to $0.35 per share for the same quarter a year ago.

? Total loans increased $263.0 million, or 12.7%, in the second quarter of 2014,

to $8.6 billion at June 30, 2014, compared to $8.3 billion at March 31, 2014,

and $8.1 billion at December 31, 2013.



Quarterly Statement of Operations Review

Net Income Net income available to common stockholders for the quarter ended June 30, 2014, was $35.1 million, an increase of $7.3 million, or 26.0%, compared to net income available to common stockholders of $27.8 million for the same quarter a year ago. Diluted earnings per share available to common stockholders for the quarter ended June 30, 2014, was $0.44 compared to $0.35 for the same quarter a year ago due primarily to an increase in net interest income, the negative provision for credit losses in 2014, a decrease in the cost associated with debt redemption and the elimination of preferred stock dividends, which were partially offset by a decrease in securities gains. Return on average stockholders' equity was 9.25% and return on average assets was 1.29% for the quarter ended June 30, 2014, compared to a return on average stockholders' equity of 7.74% and a return on average assets of 1.15% for the same quarter a year ago. Financial Performance Three months ended June 30, 2014 2013 Net income (in millions) $ 35.1 $ 29.9 Net income available to common stockholders (in millions) $ 35.1 $ 27.8 Basic earnings per common share $ 0.44 $ 0.35 Diluted earnings per common share $ 0.44 $ 0.35 Return on average assets 1.29 % 1.15 % Return on average total stockholders' equity 9.25 % 7.74 % Efficiency ratio 44.92 % 53.53 %



Net Interest Income Before Provision for Credit Losses

Net interest income before provision for credit losses increased $5.6 million, or 7.0%, to $85.6 million during the second quarter of 2014 compared to $80.0 million during the same quarter a year ago. The increase was due primarily to the increase in loan interest income and decrease in interest expense from securities sold under agreements to repurchase offset by the decrease in interest income from available-for-sale securities. The net interest margin, on a fully taxable-equivalent basis, was 3.37% for the second quarter of 2014, compared to 3.38% for the first quarter of 2014 and 3.30% for the second quarter of 2013. The increase in the net interest margin was due mainly to the factors discussed above. 39 -------------------------------------------------------------------------------- For the second quarter of 2014, the yield on average interest-earning assets was 4.13%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities was 1.00%, and the cost of interest bearing deposits was 0.66%. In comparison, for the second quarter of 2013, the yield on average interest-earning assets was 4.16%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities was 1.11%, 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 8 basis points to 3.13% for the quarter ended June 30, 2014, from 3.05% for the same quarter a year ago, primarily for the reason discussed above. 40 -------------------------------------------------------------------------------- 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 June 30, 2014, and June 30, 2013. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and Interest-Bearing Liabilities Three months ended June 30, 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 $ 2,252,424$ 21,968 3.91 % $ 2,053,347$ 20,565 4.02% Residential mortgage loans 1,626,458 19,238 4.73 1,388,792 16,214 4.67 Commercial mortgage loans 4,242,975 52,251 4.94 3,829,999 48,980 5.13 Real estate construction loans 270,181 3,975 5.90 156,135 2,085 5.36 Other loans and leases 17,699 22 0.50 13,599 35 1.03 Total loans and leases (1) 8,409,737 97,454 4.65 7,441,872 87,879 4.74 Taxable securities 1,510,183 6,708 1.78 2,050,533 12,332 2.41 Tax-exempt securities (3) - - - 11,051 43 1.56 Federal Home Loan Bank stock 27,979 421 6.04 35,186 342 3.90 Interest bearing deposits 252,552 479 0.76 191,255 281 0.59 Total interest-earning assets 10,200,451 105,062 4.13 9,729,897 100,877 4.16 Non-interest earning assets: Cash and due from banks 141,166 159,317 Other non-earning assets 774,246 744,150 Total non-interest earning assets 915,412 903,467 Less: Allowance for loan losses (171,985 ) (179,409 ) Deferred loan fees (13,488 ) (11,208 ) Total assets $ 10,930,390$ 10,442,747 Interest bearing liabilities: Interest bearing demand accounts $ 702,216$ 307 0.18 $ 622,998$ 248 0.16 Money market accounts 1,303,129 2,016 0.62 1,137,452 1,592 0.56 Savings accounts 523,684 216 0.17 513,781 97 0.08 Time deposits 4,260,700 8,638 0.81 3,974,923 7,879 0.80 Total interest-bearing deposits 6,789,729 11,177 0.66 6,249,154 9,816 0.63 Securities sold under agreements to repurchase 700,000 6,943 3.98 1,042,308 9,982 3.84 Other borrowings 222,618 497 0.90 70,836 145 0.82 Long-term debt 119,760 828 2.77 171,136 924 2.17 Total interest-bearing liabilities 7,832,107 19,445 1.00 7,533,434 20,867 1.11 Non-interest bearing liabilities: Demand deposits 1,498,654 1,278,311 Other liabilities 77,737 71,726 Total equity 1,521,892 1,559,276 Total liabilities and equity $ 10,930,390$ 10,442,747 Net interest spread (4) 3.13 % 3.05% Net interest income (4) $ 85,617$ 80,010 Net interest margin (4) 3.37 % 3.30%



(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%. 41

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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 June 30, 2014-2013 Increase (Decrease) in Net Interest Income Due to: (Dollars in thousands) Changes in Changes in Total Volume Rate Change Interest-earning assets: Loans and leases 11,251 (1,676 ) 9,575 Taxable securities (2,823 ) (2,801 ) (5,624 ) Tax-exempt securities (2) (43 ) - (43 ) Federal Home Loan Bank stock (81 ) 160 79 Deposits with other banks 104 94 198 Total changes in interest income 8,408



(4,223 ) 4,185

Interest-bearing liabilities: Interest bearing demand accounts 33 26 59 Money market accounts 246 178 424 Savings accounts 2 117 119 Time deposits 576 183 759 Securities sold under agreements to repurchase (3,386 ) 347 (3,039 ) Other borrowed funds 338 14 352 Long-term debt (318 ) 222 (96 ) Total changes in interest expense (2,509 ) 1,087 (1,422 ) Changes in net interest income $ 10,917$ (5,310 )$ 5,607



(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 a credit of $3.7 million for the second quarter of 2014 compared to zero for the second quarter of 2013. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at June 30, 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: For the three months ended June 30, For the six months ended June 30, 2014 2013 2014 2013 (In thousands) Charge-offs: Commercial loans $ 114 $ 1,690 $ 7,340 $ 4,380 Construction loans 1,813 - 1,813 - Real estate loans (1) 648 2,237 2,424 3,637 Total charge-offs 2,575 3,927 11,577 8,017 Recoveries: Commercial loans 4,682 624 6,704 1,579 Construction loans - 941 25 1,020 Real estate loans (1) 1,528 2,645 4,099 3,004 Real estate- land loans 4 645 8 654 Installment and other loans - 11 - 11 Total recoveries 6,214 4,866 10,836 6,268 Net (recoveries)/charge-offs $ (3,639 ) $ (939 ) $ 741 $ 1,749



(1) Real estate loans include commercial mortgage loans, residential mortgage

loans, and equity lines. 42

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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 $9.0 million for the second quarter of 2014, a decrease of $11.4 million, or 55.7%, compared to $20.4 million for the second quarter of 2013. The decrease in non-interest income in the second quarter of 2014 was primarily due to a decrease of $11.7 million in gains on sale of securities offset by an increase of $644,000 in commissions from wealth management. Non-Interest Expense Non-interest expense decreased $11.2 million, or 20.9%, to $42.5 million in the second quarter of 2014 compared to $53.7 million in the same quarter a year ago. The efficiency ratio was 44.92% in the second quarter of 2014 compared to 53.53% for the same quarter a year ago. Costs associated with debt redemption decreased $10.6 million to income of $555,000 in the second quarter of 2014 compared to costs of $10.1 million in the same quarter a year ago. The Company repurchased $2.0 million of Junior Subordinated Notes at a discount in the second quarter of 2014 whereas the Company prepaid $200.0 million of securities sold under agreements to repurchase in the same period a year ago. Other professional services expenses decreased $1.6 million due to the completion of the core system conversion in 2013. Amortization of core deposit premium decreased $1.2 million to $124,000 in the second quarter of 2014 compared to $1.3 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. Operating expenses of affordable housing investments also decreased $1.0 million primarily due to adjustments made in the second quarter of 2014 to reflect actual 2013 operating results for several low income housing investments. Offsetting the above decreases was a $1.8 million increase in salaries and employee benefits, primarily due to higher bonus accruals and amortization of long term incentive compensation awards. Income Taxes



The effective tax rate for the second quarter of 2014 was 37.2% compared to 35.7% for the second quarter of 2013. The effective tax rate includes the impact of the utilization of low income housing tax credits.

Year-to-Date Statement of Operations Review

Net income attributable to common stockholders for the six months ended June 30, 2014, was $66.3 million, an increase of $14.8 million, or 28.8%, compared to net income attributable to common stockholders of $51.5 million for the same period a year ago, due primarily to increases in net interest income, a negative provision for credit losses, and decreases in costs associated with debt redemption partially offset by decreases in gains on sale of securities and increases in salaries and incentive compensation expense. Diluted earnings per share for the six months ended June 30, 2014, was $0.83 compared to $0.65 for the same period a year ago. The net interest margin for the six months ended June 30, 2014, increased four basis points to 3.37% compared to 3.33% for the same period a year ago. Return on average stockholders' equity was 8.89% and return on average assets was 1.24% for the six months ended June 30, 2014, compared to a return on average stockholders' equity of 7.47% and a return on average assets of 1.13% for the same period of 2013. The efficiency ratio for the six months ended June 30, 2014, was 47.21% compared to 52.64% for the same period a year ago. 43 -------------------------------------------------------------------------------- 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 six months ended June 30, 2014, and 2013. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and Interest-Bearing Liabilities Six months ended June 30, 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 $ 2,256,483$ 43,280 3.87% $ 2,063,530$ 41,333 4.04% Residential mortgage loans 1,597,244 37,708 4.72 1,373,156 32,156 4.68 Commercial mortgage loans 4,159,798 101,865 4.94 3,795,783 98,686 5.24 Real estate construction loans 251,815 7,285 5.83 168,626 4,472 5.35 Other loans and leases 18,819 48 0.51 13,426 72 1.08 Total loans and leases (1) 8,284,159 190,186 4.63 7,414,521 176,719 4.81 Taxable securities 1,545,715 14,284 1.86 2,028,435 24,118 2.40 Tax-exempt securities (3) - - - 67,304 1,531 4.59 Federal Home Loan Bank stock 26,525 871 6.62 38,097 592 3.13 Interest bearing deposits 200,684 928 0.93 193,920 489 0.51 Total interest-earning assets 10,057,083 206,269 4.14 9,742,277 203,449 4.21 Non-interest earning assets: Cash and due from banks 138,629 149,403 Other non-earning assets 780,124 753,974 Total non-interest earning assets 918,753 903,377 Less: Allowance for loan losses (173,451 ) (181,467 ) Deferred loan fees (13,415 ) (10,642 ) Total assets $ 10,788,970$ 10,453,545 Interest bearing liabilities: Interest bearing demand accounts $ 692,544$ 580 0.17 $ 611,617$ 483 0.16 Money market accounts 1,289,503 3,943 0.62 1,150,715 3,172 0.56 Savings accounts 511,107 308 0.12 490,496 189 0.08 Time deposits 4,216,128 17,038 0.81 3,927,151 15,494 0.80



Total

interest-bearing

deposits 6,709,282 21,869 0.66 6,179,979 19,338 0.63 Securities sold under agreements to repurchase 703,591 13,873 3.98 1,119,337 21,375 3.85 Other borrowings 199,066 696 0.71 59,883 225 0.76 Long-term debt 120,444 1,556 2.61 171,136 1,848 2.18 Total interest-bearing liabilities 7,732,383 37,994 0.99 7,530,335 42,786 1.15 Non-interest bearing liabilities: Demand deposits 1,472,109 1,250,088 Other liabilities 80,331 77,301 Total equity 1,504,147 1,595,821 Total liabilities and equity $ 10,788,970$ 10,453,545 Net interest spread (4) 3.15% 3.06% Net interest income (4) $ 168,275$ 160,663 Net interest margin (4) 3.37% 3.33%



(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%. 44

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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) Six months ended June 30, 2014-2013 Increase (Decrease) in Net Interest Income Due to: (Dollars in Changes in Changes in Total thousands) Volume Rate Change Interest-earning assets: Loans and leases 20,229 (6,762 ) 13,467 Taxable securities (5,079 ) (4,755 ) (9,834 ) Tax-exempt securities (2) (1,531 ) - (1,531 ) Federal Home Loan Bank stock (225 ) 504 279 Interest bearing deposits 18 421 439 Total decrease in interest income 13,412 (10,592 ) 2,820 Interest-bearing liabilities: Interest bearing demand accounts 67 30 97 Money market accounts 405 366 771 Savings accounts 8 111 119 Time deposits 1,161 383 1,544 Securities sold under agreements to repurchase (8,187 ) 685 (7,502 ) Other borrowings 488 (17 ) 471 Long-term debts (616 ) 324 (292 ) Total decrease in interest expense (6,674 ) 1,882 (4,792 ) Changes in net interest income $ 20,086$ (12,474 )$ 7,612 (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%. Balance Sheet Review Assets



Total assets were $11.6 billion at June 30, 2014, an increase of $567.5 million, or 5.2%, from $11.0 billion at December 31, 2013, primarily due to a $480.7 million increase in loans and a $286.6 million increase in short-term investments offset by a $246.7 million decrease in securities available-for-sale.

Investment Securities Investment securities represented 11.6% of total assets at June 30, 2014, compared with 14.4% of total assets at December 31, 2013. The carrying value of investment securities at June 30, 2014, was $1.34 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 $8.6 million at June 30, 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. 45

-------------------------------------------------------------------------------- The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of June 30, 2014, and December 31, 2013: June 30, 2014 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (In thousands) Securities Available-for-Sale U.S. treasury securities $ 565,091 $ 73 $ 1 $ 565,163 Mortgage-backed securities 680,556 1,210 24,897 656,869 Collateralized mortgage obligations 81 - 35 46 Corporate debt securities 94,938 848 1,449 94,337 Mutual funds 6,000 - 167 5,833 Preferred stock of government sponsored entities 4,611 6,885 1 11,495 Other equity securities 3,608 2,638 - 6,246



Total securities available-for-sale $ 1,354,885$ 11,654 $

26,550 $ 1,339,989 Total investment securities $ 1,354,885$ 11,654$ 26,550$ 1,339,989 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 $849.1 million at June 30, 2014, and $926.5 million at December 31, 2013, were pledged to secure public deposits, other borrowings, treasury tax and loan, , securities sold under agreements to repurchase.

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Loans Gross loans were $8.57 billion at June 30, 2014, an increase of $480.7 million, or 5.9%, from $8.08 billion at December 31, 2013, primarily due to increases of $24.2 million, or 1.1%, in commercial loans, $63.6 million, or 28.7%, in real estate construction loans, $113.5 million, or 8.4%, in residential mortgage loans, and $285.1 million, or 7.1%, in commercial mortgage loans. The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated: December 31, June 30, 2014 % of Gross Loans 2013 % of Gross Loans % Change (Dollars in thousands) Type of Loans Commercial loans $ 2,322,880 27.1 % $ 2,298,724 28.4 % 1.1 % Residential mortgage loans 1,468,715 17.2 1,355,255 16.8 8.4 Commercial mortgage loans 4,308,170 50.3 4,023,051 49.8 7.1 Equity lines 170,711 2.0 171,277 2.1 (0.3 ) Real estate construction loans 285,339 3.3 221,701 2.7 28.7 Installment and other loans 9,463 0.1 14,555 0.2 (35.0 ) Gross loans $ 8,565,278 100 % $ 8,084,563 100 % 5.9 % Allowance for loan losses (169,077 ) (173,889 ) (2.8 ) Unamortized deferred loan fees (13,501 ) (13,487 ) 0.1 Total loans, net $ 8,382,700$ 7,897,187 6.1 % 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 June 30, 2014, compared to 1.3% at December 31, 2013. Total non-performing assets decreased $23.4 million, or 17.0%, to $113.8 million at June 30, 2014, compared to $137.2 million at December 31, 2013, primarily due to a $5.6 million, or 6.7%, decrease in non-accrual loans and a $18.2 million, or 34.3%, decrease in OREO. As a percentage of gross loans plus OREO, our non-performing assets decreased to 1.32% at June 30, 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 216.4% at June 30, 2014, from 208.2% at December 31, 2013. 47

-------------------------------------------------------------------------------- The following table presents the changes in non-performing assets and troubled debt restructurings (TDRs) at June 30, 2014, compared to December 31, 2013, and to June 30, 2013: December 31, (Dollars in thousands) June 30, 2014 2013 % Change June 30, 2013 % Change Non-performing assets Accruing loans past due 90 days or more $ 1,426 $ 982 45 $ - 100 Non-accrual loans: Construction- residential loans 1,500 3,313 (55 ) 3,691 (59 ) Construction- non-residential loans 24,428 25,273 (3 ) 25,763 (5 ) Land loans 6,502 6,502 - 11,534 (44 ) Commercial real estate loans, excluding land loans 24,047 13,119 83 30,326 (21 ) Commercial loans 11,570 21,232 (46 ) 14,029 (18 ) Residential mortgage loans 9,526 13,744 (31 ) 10,270 (7 ) Total non-accrual loans: $ 77,573$ 83,183 (7 ) $ 95,613 (19 ) Total non-performing loans 78,999 84,165 (6 ) 95,613 (17 ) Other real estate owned 34,835 52,985 (34 ) 49,141 (29 ) Total non-performing assets $ 113,834$ 137,150 (17 ) $ 144,754 (21 ) Accruing troubled debt restructurings (TDRs) $ 111,136$ 117,597 (5 ) $ 115,464 (4 ) Allowance for loan losses $ 169,077$ 173,889 (3 ) $ 179,733 (6 ) Allowance for off-balance sheet credit commitments 1,844 1,362 35 3,203 (42 ) Allowance for credit losses $ 170,921$ 175,251 (2 ) $ 182,936 (7 ) Total gross loans outstanding, at period-end $ 8,565,278$ 8,084,563 6 $ 7,694,373 11 Allowance for loan losses to non-performing loans, at period-end 214.02 % 206.60 % 187.98 % Allowance for loan losses to gross loans, at period-end 1.97 % 2.15 % 2.34 % Allowance for credit losses to gross loans, at period-end 2.00 % 2.17 % 2.38 % Non-accrual Loans At June 30, 2014, total non-accrual loans were $77.6 million, a decrease of $18.0 million, or 18.9%, from $95.6 million at June 30, 2013, and a decrease of $5.6 million, or 6.7%, 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. 48 -------------------------------------------------------------------------------- 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: June 30, 2014 December 31, 2013 Real Real Estate (1) Commercial Estate (1) Commercial (In thousands) Type of Collateral Single/multi-family residence $ 12,006 $ 2,998 $ 22,370 $ 2,030 Commercial real estate 47,495 1,733 33,079 1,366 Land 6,502 - 6,502 - Unsecured - 6,839 - 17,836 Total $ 66,003 $ 11,570 $ 61,951 $ 21,232 (1) Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines. June 30, 2014 December 31, 2013 Real Real Estate (1) Commercial Estate (1) Commercial (In thousands) Type of Business Real estate development $ 41,636 $ 1,465 $ 31,895 $ 5,866 Wholesale/Retail 15,380 6,234 16,796 3,526 Food/Restaurant 1,165 195 569 173 Import/Export - 3,676 - 11,667 Other 7,822 - 12,691 - Total $ 66,003$ 11,570 $ 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 June 30, 2014, OREO totaled $34.8 million, which decreased $18.2 million, or 34.3%, compared to $53.0 million at December 31, 2013, and decreased $14.3 million, or 29.1%, compared to $49.1 million at June 30, 2013.

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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. At June 30, 2014, recorded investment in impaired loans totaled $188.7 million and was comprised of non-accrual loans of $77.6 million and accruing TDRs of $111.1 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 12.9% at June 30, 2014, and 23.9% at December 31, 2013, of the contractual balances for impaired loans. As of June 30, 2014, $66.0 million, or 85.1%, of the $77.6 million of non-accrual loans 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. The Bank obtains current appraisals, sales contracts, or other available market price information which provide updated factors in evaluating potential loss. At June 30, 2014, $9.6 million of the $169.1 million allowance for loan losses was allocated for impaired loans and $159.5 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 220.3% at June 30, 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. 50

-------------------------------------------------------------------------------- The following table presents impaired loans and related allowance as of the dates indicated: Impaired Loans June 30, 2014 December 31, 2013 Unpaid Unpaid Principal Recorded Principal Recorded Balance Investment Allowance Balance Investment Allowance (In thousands) With no allocated allowance Commercial loans $ 20,298$ 19,271 $ - $ 20,992$ 18,905 $ - Real estate construction loans 37,494 16,225 - 25,401 15,097 - Commercial mortgage loans 82,090 80,102 - 105,593 78,930 - Residential mortgage loans and equity lines 3,084 3,084 - 4,892 4,892 - Subtotal $ 142,966$ 118,682 $ - $ 156,878$ 117,824 $ - With allocated allowance Commercial loans $ 10,725$ 7,700$ 2,717$ 22,737$ 13,063$ 2,519 Real estate construction loans 15,503 15,503 143 28,475 19,323 3,460 Commercial mortgage loans 33,411 33,149 6,230 39,223 35,613 6,584 Residential mortgage loans and equity lines 14,077 13,675 519 16,535 14,957 721 Subtotal $ 73,716$ 70,027$ 9,609$ 106,970$ 82,956$ 13,284 Total impaired loans $ 216,682$ 188,709$ 9,609$ 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 June 30, 2014, construction loans of $226.0 million were disbursed with pre-established interest reserves of $25.8 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 $40.1 million with pre-established interest reserves of $1.5 million at June 30, 2014, compared to $20.5 million with pre-established interest reserves of $1.8 million at December 31, 2013. Land loans of $33.7 million were disbursed with pre-established interest reserves of $2.0 million at June 30, 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 June 30, 2014, compared to $1.7 million land loans with pre-established interest reserves of $53,000 at December 31, 2013. 51 -------------------------------------------------------------------------------- At June 30, 2014, the Bank had no loans on non-accrual status with available interest reserves. At June 30, 2014, $1.5 million of non-accrual residential construction loans, $24.4 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 the sale 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 June 30, 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 26% of the Bank's total risk-based capital as of June 30, 2014, and 23% as of December 31, 2013. Total CRE loans represented 255% of total risk-based capital as of June 30, 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. 52

-------------------------------------------------------------------------------- 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 $169.1 million and the allowance for off-balance sheet unfunded credit commitments was $1.8 million at June 30, 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 June 31, 2014, compared to $175.3 million at December 31, 2013, a decrease of $4.3 million, or 2.5%. The allowance for credit losses represented 2.00% of period-end gross loans and 216.4% of non-performing loans at June 30, 2014. The comparable ratios were 2.17% of period-end gross loans and 208.2% of non-performing loans at December 31, 2013. 53



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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:


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