Edgar Filing: CATHAY GENERAL BANCORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-18630

CATHAY GENERAL BANCORP

(Exact name of registrant as specified in its charter)


Delaware		95-4274680
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

777 North Broadway, Los Angeles, California		90012
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (213) 625-4700

(Former name, former address and former fiscal year, if changed since last report)

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 x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.01 par value, 50,132,426 shares outstanding as of July 29, 2005.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

2ND QUARTER 2005 REPORT ON FORM 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION		4
Item 1.	FINANCIAL STATEMENTS (Unaudited)	4
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	7
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
Item 4.	CONTROLS AND PROCEDURES	38

PART II - OTHER INFORMATION		38
Item 1.	LEGAL PROCEEDINGS	38
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	39
Item 3.	DEFAULTS UPON SENIOR SECURITIES	40
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	40
Item 5.	OTHER INFORMATION	40
Item 6.	EXHIBITS	40

SIGNATURES		41

Forward-Looking Statements

In this quarterly report on Form 10-Q, the term “Bancorp” refers to Cathay General Bancorp and the “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to the Bancorp and the Bank collectively. The statements in this report include forward-looking statements regarding management’s beliefs, projections, and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, include words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” “predicts,” “potential,” “continue” or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, adverse developments, or conditions related to or arising from:

•

the Company’s ability to realize the benefits of the merger with GBC Bancorp

•

expansion into new market areas;

•

fluctuations in interest rates;

•

demographic changes;

•

increases in competition;

•

deterioration in asset or credit quality;

•

earthquake or other natural disasters affecting the condition of real estate collateral;

•

changes in the availability of capital;

•

legislative and regulatory developments such as the potential effects of California tax legislation enacted in late 2003 and the subsequent Franchise Tax Board announcement on December 31, 2003, regarding the taxation of real estate investment trusts and registered investment companies and of the memorandum of understanding between the Bank and the Federal Deposit Insurance Corporation relating to the Bank’s compliance with certain provisions of the Bank Secrecy Act;

•

changes in business strategy, including the formation of a real estate investment trust (REIT); and

•

general economic or business conditions in California and other regions where the Bank has operations such as the impact of the California budget deficit.

These and other factors are further described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, its reports and registration statements filed (including those filed by GBC Bancorp prior to the merger) with the Securities and Exchange Commission (“SEC”) and other filings it makes in the future with the SEC from time to time. The Company has no intention and undertakes no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events.

The Company’s filings with the SEC are available to the public from commercial document retrieval services and at the website maintained by the SEC at http://www.sec.gov, or by requests directed to Cathay General Bancorp, 777 North Broadway, Los Angeles, California 90012, Attn: Investor Relations (213) 625-4749.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


(In thousands, except share and per share data)	June 30, 2005			December 31, 2004			% change
Assets
Cash and due from banks	$	90,715		$	86,133		5
Securities available-for sale, at fair value (amortized cost of $1,439,437 in 2005 and $1,811,891 in 2004)		1,437,382			1,817,942		(21	)
Loans		4,182,321			3,831,988		9
Less: Allowance for loan losses		(61,199	)		(62,880	)	(3	)
Unamortized deferred loan fees, net		(11,327	)		(11,644	)	(3	)

Loans, net		4,109,795			3,757,464		9
Affordable housing investments, net		49,272			45,145		9
Premises and equipment, net		34,166			33,421		2
Customers’ liability on acceptances		20,341			14,368		42
Accrued interest receivable		21,181			21,712		(2	)
Goodwill		240,697			241,013		(0	)
Other intangible assets, net		44,336			47,494		(7	)
Other assets		25,417			33,313		(24	)

Total assets	$	6,073,302		$	6,098,005		(0	)

Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits	$	692,421		$	674,791		3
Interest-bearing deposits:
NOW deposits		245,424			253,767		(3	)
Money market deposits		502,899			588,526		(15	)
Savings deposits		392,042			418,041		(6	)
Time deposits under $100		624,428			539,811		16
Time deposits of $100 or more		2,371,546			2,120,201		12

Total deposits		4,828,760			4,595,137		5

Federal funds purchased and securities sold under agreement to repurchase		85,000			91,000		(7	)
Advances from the Federal Home Loan Bank		275,000			545,000		(50	)
Other borrowings		27,780			17,116		62
Junior subordinated notes		53,946			53,916		0
Acceptances outstanding		20,341			14,368		42
Minority interest in consolidated subsidiary		8,501			8,620		(1	)
Other liabilities		39,155			56,855		(31	)

Total liabilities		5,338,483			5,382,012		(1	)

Commitments and contingencies		—			—		—

Stockholders’ Equity
Preferred stock, $0.01 par value; 10,000,000 shares Authorized, none issued		—			—		—
Common stock, $0.01 par value, 100,000,000 shares authorized, 51,477,873 issued and 50,099,511 outstanding in 2005 and 51,317,716 issued and 50,677,896 outstanding in 2004		515			513		0
Additional paid-in-capital		414,326			396,881		4
Unearned compensation		(22,691	)		(11,826	)	92
Accumulated other comprehensive income (loss), net		(1,191	)		3,627		(133	)
Treasury stock, at cost (1,378,362 shares in 2005 and 639,820 shares in 2004)		(33,311	)		(8,810	)	278
Retained earnings		377,171			335,608		12

Total stockholders’ equity		734,819			715,993		3

Total liabilities and stockholders’ equity	$	6,073,302		$	6,098,005		(0	)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
(In thousands, except share and per share data)	2005			2004			2005			2004
INTEREST INCOME
Interest on loans	$	67,268		$	47,770			128,522			93,229
Interest on securities available-for-sale - taxable		15,948			17,093			34,180			34,659
Interest on securities available-for-sale - nontaxable		940			921			1,923			1,820
Dividend income		203			86			303			200
Interest on federal funds sold and securities purchased under agreements to resell		190			27			211			77
Interest on deposits with banks		102			35			180			65

Total interest income		84,651			65,932			165,319			130,050

INTEREST EXPENSE
Time deposits of $100 or more		12,663			7,391			22,854			14,625
Other deposits		8,589			3,932			15,456			7,665
Other borrowed funds		4,211			2,412			9,057			4,494

Total interest expense		25,463			13,735			47,367			26,784

Net interest income before provision for loan losses		59,188			52,197			117,952			103,266
Provision (reversal) for loan losses		(500	)		—			500			—

Net interest income after provision for loan losses		59,688			52,197			117,452			103,266

NON-INTEREST INCOME
Securities gains, net		745			1,420			1,122			1,218
Letters of credit commissions		1,001			1,223			2,036			2,225
Depository service fees		1,385			1,654			2,896			3,296
Gain on sale of premises and equipment		—			—			958			—
Other operating income		2,308			2,243			4,440			4,182

Total non-interest income		5,439			6,540			11,452			10,921

NON-INTEREST EXPENSE
Salaries and employee benefits		13,021			12,624			25,442			24,567
Occupancy expense		2,168			1,804			4,177			3,933
Computer and equipment expense		1,825			1,817			3,574			3,850
Professional services expense		1,863			1,713			3,386			3,245
FDIC and State assessments		244			263			496			533
Marketing expense		695			516			1,155			1,215
Other real estate owned expense		1			39			(103	)		516
Operations of affordable housing investments		946			646			1,965			1,395
Amortization of core deposit intangibles		1,404			1,333			3,146			2,667
Other operating expense		1,797			1,928			3,569			4,007

Total non-interest expense		23,964			22,683			46,807			45,928

Income before income tax expense		41,163			36,054			82,097			68,259
Income tax expense		15,429			13,910			31,403			26,212

Net income		25,734			22,144			50,694			42,047

Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during the period		8,260			(22,712	)		(4,799	)		(14,547	)
Unrealized losses on cash flow hedge derivatives		—			(367	)		(120	)		(369	)
Less: reclassification adjustments included in net income		(818	)		1,584			(101	)		1,870

Total other comprehensive income (loss), net of tax		9,078			(24,663	)		(4,818	)		(16,786	)

Total comprehensive income (loss)	$	34,812		$	(2,519	)	$	45,876		$	25,261

Net income per common share:
Basic	$	0.51		$	0.44		$	1.00		$	0.85
Diluted	$	0.51		$	0.44		$	0.99		$	0.84
Cash dividends paid per common share	$	0.09		$	0.07		$	0.18		$	0.14
Basic average common shares outstanding		50,497,321			49,762,348			50,601,527			49,716,824
Diluted average common shares outstanding		50,868,919			50,319,188			51,038,046			50,252,246

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CATHAY GENERAL BANCORP AND SUBSIDIARIES CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS

(Unaudited)


	For the six months ended June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	50,694			42,047
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		500			—
Provision for losses on other real estate owned		—			400
Deferred tax provision		1,850			11,559
Depreciation		1,482			1,438
Net gains on sale of other real estate owned		(155	)		—
Net gains on sale of loans		(228	)		(465	)
Proceeds from sale of loans		3,260			6,518
Write-down on venture capital investments		653			302
Gain on sales and calls of securities available-for-sale		(1,775	)		(1,520	)
Other non-cash interest		618			(1,406	)
Amortization/accretion of securities available-for-sale premiums/discounts, net		3,199			4,615
Amortization of intangibles		3,210			2,667
Tax benefits from stock options		714			838
Stock based compensation expense		2,826			1,473
Gain on sale of premises and equipment		(958	)		—
Increase in deferred loan fees, net		(317	)		(721	)
Decrease in accrued interest receivable		531			1,895
Decrease/(increase) in other assets, net		9,918			(18,201	)
Decrease in other liabilities		(18,643	)		(11,692	)

Net cash provided by operating activities		57,379			39,747

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale		(8,544	)		(462,353	)
(Purchase) redemption of Federal Home Loan Bank stock, net		(3,102	)		1,970
Proceeds from maturity and call of investment securities available-for-sale		9,777			103,341
Proceeds from sale of investment securities available-for-sale		40,332			29,117
Proceeds from repayment and sale of mortgage-backed securities available-for-sale		332,469			259,111
Net increase in loans		(357,147	)		(232,973	)
Purchase of premises and equipment		(3,750	)		(474	)
Proceeds from sales of premises and equipment		2,481			—
Proceeds from sale of other real estate owned		1,124			—
Net increase in affordable housing investments		(3,363	)		(4,788	)
Acquisition of GBC		(32	)		(7,241	)

Net cash provided (used) in investing activities		10,245			(314,290	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts, money market and saving deposits		(102,339	)		(18,535	)
Net increase in time deposits		336,006			99,737
Net decrease in federal funds purchased and securities sold under agreement to repurchase		(6,000	)		(17,500	)
Borrowings from Federal Home Loan Bank		350,000			590,000
Repayment of borrowings from Federal Home Loan Bank		(620,000	)		(418,000	)
Increase in other borrowings		10,000			—
Repayment of other borrowings		—			(20,000	)
Cash dividends		(9,131	)		(6,955	)
Issuance/(buy-back) of minority interest in consolidated subsidiary		(119	)		4,208
Proceeds from shares issued to dividend reinvestment plan		1,413			1,338
Proceeds from exercise of stock options		1,629			1,705
Purchases of treasury stock		(24,501	)		—

Net cash (used) provided by financing activities		(63,042	)		215,998

Increase/(decrease) in cash and cash equivalents		4,582			(58,545	)
Cash and cash equivalents, beginning of the year		86,133			193,699

Cash and cash equivalents, end of the year	$	90,715		$	135,154

Supplemental disclosure of cash flows information
Cash paid during the period:
Interest	$	45,215		$	28,762
Income taxes	$	49,582		$	39,618
Non-cash investing and financing activities:
Net change in unrealized holding gains (losses) on securities available-for-sale, net of tax	$	(4,698	)	$	(16,417	)
Unrealized losses on cash flow hedging derivatives, net of tax	$	(120	)	$	(369	)
Transfers of loans to other real estate owned	$	969		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business

Cathay General Bancorp (the “Bancorp”) is the holding company for Cathay Bank (the “Bank”), five limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc., (together the “Company” or “we”, “us,” or “our”). The Bancorp also owns 100% of the common stock of three statutory business trusts created for the purpose of issuing capital securities. The Bank was founded in 1962 and offers a wide range of financial services. As part of its integration and expansion plan to efficiently serve its customers, the Bank consolidated the two Massachusetts branches into one location on April 29, 2005, and opened the fourth branch in New York on May 12, 2005. As of June 30, 2005, the Bank operates twenty branches in Southern California, nine branches in Northern California, one branch in Washington State, four branches in New York State, one branch in Massachusetts, and one branch in Houston, Texas, plus representative offices in Taipei, Hong Kong, and Shanghai.

2. Merger with GBC Bancorp and Related Acquisition Reserves

As of the close of business on October 20, 2003, Cathay Bancorp, Inc. completed its merger with GBC Bancorp and its subsidiary, General Bank (the “GBC merger”), pursuant to the terms of the Agreement and Plan of Merger dated May 6, 2003. As a result of the merger, Cathay Bancorp, Inc. issued 13.5 million shares of its newly issued common stock, and paid $162.4 million in cash, including $7.3 million paid during 2004, for all of the issued and outstanding shares of GBC Bancorp common stock. In addition, Cathay Bancorp, Inc’s name was changed to Cathay General Bancorp. The results of GBC Bancorp’s operations have been included in the Company’s consolidated financial statements since October 20, 2003.

The Company recorded as part of the purchase price estimated lease termination costs of $1.3 million and severance and contract termination costs of $0.8 million. At June 30, 2005, approximately $0.2 million of these costs remain unpaid. During 2005, goodwill was decreased $0.3 million due to the receipt of a Federal income tax refund for the year 2000 and an adjustment of deferred taxes for a GBC Bancorp subsidiary.

3. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

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 most significant estimate subject to change relates to the allowance for loan losses.

4. Recent Accounting Pronouncements

In March 2004, the FASB issued Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. This EITF describes a model involving three steps: (1) determine whether an investment is impaired, (2) determine whether the impairment is other-than-temporary, and (3) recognize the impairment loss in earnings. The EITF also requires several additional disclosures for cost-method investments. In September 2004, the FASB approved the deferral of the effective date for the measurement provisions of EITF No. 03-1 until the finalization of a FASB Staff Position to provide additional implementation guidance. On July 8, 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment.

In December 2004, the FASB revised SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123R). SFAS No. 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. The provisions of this Statement will become effective for the Company commencing on January 1, 2006. SFAS No. 123R requires companies adopting SFAS No. 123R to select either the modified prospective or modified retrospective transition method. On January 1, 2003, the Company adopted prospectively the provisions for SFAS No. 123 and began recognizing compensation expense ratably in the income statement, based on the estimated fair value of all awards granted to employees after January 1, 2003. SFAS No. 123R requires an entity to recognize compensation expense based on an estimate of the number of awards expected to actually vest, exclusive of awards expected to be forfeited. Currently, the Company recognizes forfeitures as they occur. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS No. 154). SFAS 154 requires retroactive application for voluntary changes in accounting principle unless it is impracticable to do so. SFAS No. 154 distinguishes between retrospective application for changes in accounting principle and restatement for correction of an error. SFAS No. 154 is effective for accounting changes and correction of errors made for fiscal years ending after December 15, 2005. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

In June, 2005, the FASB approved EITF 04-5, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights”. EITF 04-5 presumes that a sole general partner in a limited partnership controls the limited partnership and, therefore, should include the limited partnership in its consolidated financial statements. The presumption of control is overcome if the limited partners have (a) the substantive ability to remove the sole general partner or otherwise dissolve the limited partnership or (b) substantive participating rights. The Company has not completed its analysis to determine the impact to the Company’s consolidated financial statements from adoption of this standard.

In July 2005, the FASB issued an exposure draft for a proposed interpretation “Accounting for Uncertain Tax Positions” (Proposed Interpretation). The Proposed Interpretation would clarify the accounting for uncertain tax positions in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. An enterprise would be required to recognize, in its financial statements, the best estimate of the impact of a tax position only if that position is probable of being sustained on audit based solely on the technical merits of the position. The Proposed Interpretation would be effective as of the end of the first fiscal year ending after December 15, 2005. Only tax positions that meet the probable recognition threshold at that date may be recognized. The Company has not completed its analysis to determine the impact to the Company if the Proposed Interpretation were to be approved by the FASB.

5. Derivative Financial Instruments

The Company enters into financial derivatives in order to mitigate exposure to interest rate risks related to its interest-earning assets and interest-bearing liabilities. The Company has received rights to acquire stock in the form of warrants as an adjunct to its high technology lending relationships. The warrants in public companies with cashless exercise provision qualify as derivatives under SFAS No. 133. The Company recognizes all derivatives on the balance sheet at fair value. Those warrants that qualify as derivatives are carried at fair value and are included in other assets on the consolidated balance sheets with the change in fair value included in current earnings. Fair value is based on dealer quotes or quoted prices from instruments with similar characteristics. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income (loss) until the hedged item is recognized 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 derivatives and changes in the fair value of the hedged item. If there is not a highly effective correlation, then only the changes in the fair value of the derivatives are reflected in the Company’s financial statements.

On March 21, 2000, the Company entered into an interest rate swap agreement with a major financial institution in the notional amount of $20.0 million for a period of five years. The interest rate swap was for the purpose of hedging the cash flows from a portion of our floating rate loans against declining interest rates. The purpose of the hedge was to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which matured on March 21, 2005. Amounts paid or received on the interest rate swap were reclassified into earnings upon the receipt of interest payments in the underlying hedged loans, including amounts totaling $0.3 million that were reclassified into earnings during the quarter ended June 30, 2004. There were no such earnings during the quarter ended June 30, 2005. The amount reclassified into earnings were $0.2 million and $0.5 million during the first six months ended June 30, 2005 and June 30, 2004, respectively.

with a principal amount of $13.9 million and an unrealized gain of $0.1 million. The unrealized loss on the swaptions and the unrealized gain on the $13.9 million of Five Year CDs were recorded in income for 2004. The unrealized loss on the ineffective swaptions at December 31, 2004, of $50,000 was recorded in income for 2004.

In 2004, the Bank also entered into $25.7 million of swaptions terminating in 2007 that could be terminated after one year at the election of the counterparty to mitigate risks associated with changes to the fair value of a like amount of fixed rate certificates of deposit (Three Year CDs) that have similar call features. All of these swaptions were initially designated as fair value hedges against a like amount of Three Year CDs and the Bank expected a highly effective correlation between changes in the fair values of the swaptions and changes in the fair value of the Three Year CDs. However, at December 31, 2004, the fair value of these swaptions, which did not have a highly effective correlation with changes in the fair value of the Three Year CDs, was an unrealized loss of $33,000, which was recorded in income for 2004.

On January 18, 2005, the Bank terminated the $111.1 million of swaptions entered in 2004 by making a cash payment of $485,000 and recording a loss of $316,000 which reflected the decrease in the fair value during 2005.

To mitigate risks associated with changes to the fair value of $85.6 million of Five Year CDs, on January 18, 2005, the Bank entered into swaptions that will terminate in 2009 and that can also be terminated after two years from the initial issuance of the Five Year CD’s at the election of the counterparty in exchange for a cash payment of $425,000. For the initial term of the swaptions, the Bank will receive interest at a weighted average fixed rate of 3.03% and will pay interest at a rate of LIBOR less 12.5 basis points. If the swaptions are not terminated in 2006, then the Bank will receive interest at a weighted average rate of 5.86% and pay interest at a rate of LIBOR less 12.5 basis points for the last three years of the swap term. All of these swaptions were initially designated as fair value hedges and the Bank expects a highly effective correlation between changes in the fair values of the swaptions and changes in the fair value of the Five Year CDs. As of June 30, 2005, all of these swaptions were highly effective. The net increase in the unrealized gain on the swaptions of $334,000 and the net change in the unrealized loss on the Five Year CDs of $320,000 have been recorded in income for the second quarter of 2005. The net increase in the unrealized loss on the swaptions of $212,000 and the net change in the unrealized gain on the Five Year CDs of $207,000 have been recorded in income for the six months of 2005.

To mitigate risks associated with changes to the fair value of $25.8 million of Three Year CDs, on January 18, 2005, the Bank entered into swaptions that will terminate in 2007 and that can also be terminated after one year from the initial issuance of the Three Year CDs at the election of the counterparty in exchange for a cash payment of $163,000. For the initial term of the swaptions, the Bank received interest at a weighted average fixed rate of 2.39% and will pay interest at a rate of LIBOR less 12.5 basis points. If the swaptions were not terminated in 2005, then the Bank would receive interest at a weighted average rate of 3.85% and pay interest at a rate of LIBOR less 12.5 basis points for the last two years of the swap term. All of these swaptions were initially designated as fair value hedges and were highly effective correlation between changes in the fair values of the swaptions and changes in the fair value of the Three Year CDs. On May 9, 2005, the Company terminated the $25.8 million swaptions related to the Three Year CDs in exchange for a cash payment of $163,000. The changes in fair values of the Three Year CD’s and the $25.8 million swaptions were recorded in income through the date the swaptions were terminated. This included a net realized gain on the swaptions of $137,000 and the net realized loss on the Three Year CDs of $135,000 have been recorded in income for the second quarter of 2005. The net realized gain or loss was zero on the swaptions and zero for the Three Year CD’s for the first six months of 2005.

The periodic net settlement of swaptions is recorded as an adjustment to net interest income. These swaptions increased net interest income by $8,000 for the quarter and $94,000 for the six months ended June 30, 2005. There was no swaptions adjustment to net interest income for the same quarter and same six-month period a year ago.

In April 2005, the Bank took in a total of $8.9 million in one year certificates of deposit that pay a minimum interest of 0.5% plus additional interest tied to 60% of the appreciation of four foreign currencies against the US dollar. Under SFAS No. 133, a certificate of deposit that pays interest based on changes in exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e. the certificate of deposit). The fair value of the embedded derivative at June 30, 2005 was $170,000 and is included in interest-bearing deposits in the consolidated balance sheet. The Bank purchased two currency options with a fair value at June 30, 2005, of $114,000 to manage its exposure to the appreciation of two of these foreign currencies. For the quarter ended June 30, 2005, the net impact on the consolidated statement of income related to these currency linked certificates of deposit was less than $25,000.

6. Earnings per Share

Basic earnings per share 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 earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings.

For the three months and six months ended June 30, 2005 there were outstanding stock options to purchase an additional 1.8 million shares and 1.5 million shares, respectively, of common stock and, for each of the three months and six months ended June 30, 2004, there were outstanding stock options to purchase 1.3 million shares, that were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

The following table sets forth basic and diluted earnings per share calculations:


	For the three months ended June 30,				For the six months ended June 30,
(Dollars in thousands, except share and per share data)	2005		2004		2005		2004
Net income	$	25,734	$	22,144	$	50,694	$	42,047
Weighted-average shares:
Basic weighted-average number of common shares outstanding		50,497,321		49,762,348		50,601,527		49,716,824
Dilutive effect of weighted-average outstanding common shares equivalents		371,598		556,840		436,519		535,422

Diluted weighted-average number of common shares outstanding		50,868,919		50,319,188		51,038,046		50,252,246

Earnings per share:
Basic	$	0.51	$	0.44	$	1.00	$	0.85
Diluted	$	0.51	$	0.44	$	0.99	$	0.84

7. Stock-Based Compensation

Prior to 2003, the Company used the intrinsic-value method to account for stock-based compensation. Accordingly, no expense was recorded in periods prior to 2003 because the exercise prices did not exceed the market prices on the grant dates. In 2003, the Company adopted prospectively the fair

value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123,” and began recognizing the expense associated with stock options granted beginning in 2003 using the fair value method, which resulted in charges to salaries and employee benefits of $1.8 million for the second quarter of June 2005 and $754,000 for the second quarter of 2004. The compensation expense associated with stock options granted was $2.8 million for the six months ended June 2005 and $1.5 million for the six months ended June 2004. Stock-based compensation expense for stock options is calculated based on the fair value of the award at the grant date, and is recognized as an expense over the vesting period of the grant. 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. Since compensation cost is measured at the grant date, the only variable whose change would impact expected compensation expense recognized in future periods under SFAS No. 123 for existing grants is actual forfeitures.

Under SFAS No. 123, the weighted average per share fair value on the date of grant of the options granted during the first six months of 2005 was $12.83, and $6.80 for the first six months of 2004. For options granted during 2005, the Company has estimated the expected life of the options based on the average of the contractual period and the vesting period. For options granted during 2004, the Company has estimated the expected life of the options to be four years. Fair value under SFAS No. 123 is determined using the Black-Scholes option pricing model with the following assumptions:


	Six months ended June 30,
	2005		2004
Expected life - number of years	6.23		4.00
Risk-free interest rate	4.00	%	2.75	%
Volatility	34.40	%	27.29	%
Dividend yield	1.20	%	0.97	%

If the compensation cost for the Company’s stock option plan had been determined with the fair value at the grant dates for all awards under the Plan consistent with the method of SFAS No. 123, as amended, the Company’s net income and earnings per share for the three months and the six months ended June 30, 2005 and 2004 would have been reduced to the pro forma amounts indicated in the table below:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
Net income, as reported	$	25,734		$	22,144		$	50,694		$	42,047
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		1,058			438			1,638			854
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,120	)		(510	)		(1,762	)		(999	)

Pro forma net income	$	25,672		$	22,072		$	50,570		$	41,902

Earnings per share:
Basic – as reported	$	0.51		$	0.44		$	1.00		$	0.85
Basic – pro forma		0.51			0.44			1.00			0.84
Diluted – as reported		0.51			0.44			0.99			0.84
Diluted – pro forma		0.50			0.44			0.99			0.83

8. Commitments and Contingencies

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 condensed 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.


(In thousands)	At June 30, 2005		At December 31, 2004
Commitments to extend credit	$	1,536,259	$	1,570,425
Investment commitments		37,706		39,801
Standby letters of credit		60,319		47,901
Other letters of credit		74,491		74,628
Bill of lading guarantee		276		217

Total	$	1,709,051	$	1,732,972

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 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. Letters of credit, including standby letters of credit and bill of lading guarantees, are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing these types of instrument is essentially the same as that involved in making loans to customers.

9. Line of Credit

On May 31, 2005, Cathay General Bancorp entered into a $30.0 million 364-day revolving loan agreement with another commercial bank bearing an interest rate of LIBOR plus 90 basis points. At June 30, 2005, $10.0 million was outstanding with a rate of 4.25% under this loan.

10. Regulatory Matters

Following a regular examination by the Federal Deposit Insurance Corporation (the “FDIC”), the Bank’s Board of Directors, on June 17, 2004, approved and signed a memorandum of understanding (“MOU”) with the FDIC in connection with certain deficiencies identified by the FDIC relating to the Bank’s compliance with certain provisions of the Bank Secrecy Act (the “BSA”). Under the terms of the MOU, the Bank must comply in all material respects with the BSA within 90 days from the MOU’s effective date, July 18, 2004. The MOU requires in part that the Bank perform an analysis of its BSA risk profile and implement a written action plan designed to ensure compliance with the BSA. Such plan includes revisions of the Bank’s policies and procedures, enhancements of the Bank’s internal controls for BSA compliance, independent compliance testing, dedicated compliance staff, and regular employee training. Based on its ongoing assessment, management believes that the Bank is currently in compliance in all material respects with the terms of the MOU.

The MOU is expected to result in additional BSA compliance expenses for the Bank, although these expenses are not anticipated to have a material financial impact on the Bancorp or the Bank. It may also have the effect of limiting or delaying the Bank’s and the Bancorp’s ability to obtain regulatory approval for certain expansionary activities.

11. Regulated Investment Company

As previously disclosed, on December 31, 2003, the California Franchise Tax Board (FTB) announced its intent to list certain transactions that in its view constitute potentially abusive tax shelters. Included in the transactions subject to this listing were transactions utilizing regulated investment companies (RICs) and real estate investment trusts (REITs). As part of the notification indicating the listed transactions, the FTB also indicated its position that it intends to disallow tax benefits associated with these transactions. While the Company continues to believe that the tax benefits recorded in three prior years with respect to its RIC were appropriate and fully defensible under California law, the Company has deemed it prudent to participate in Voluntary Compliance Initiative – Option 2, requiring payment of all California taxes and interest on these disputed 2000 through 2002 tax benefits, and permitting the Company to claim a refund for these years while avoiding certain potential penalties. The Company retains potential exposure for assertion of an accuracy-related penalty should the FTB prevail in its position in addition to the risk of not being successful in its refund claims. As of June 30, 2005, the Company reflected a $12.1 million net state tax receivable for the years 2000, 2001, and 2002 after giving effect to reserves for loss contingencies on the refund claims, or an equivalent of $7.9 million after giving effect to Federal tax benefits. The FTB is currently in the process of reviewing and assessing our refund claims for taxes and interest for tax years 2000 through 2002. Although the Company believes its tax deductions related to the regulated investment company were appropriate and fully defensible, there can be no assurance of the outcome of its refund claims, and an adverse outcome on the refund claims could result in a loss of all or a portion of the $7.9 million net state tax receivable after giving effect to Federal tax benefits.

12. Stock Repurchase Program

On March 18, 2005, the Company announced that its Board of Directors had approved a new stock repurchase program to buyback up to an aggregate of one million shares of the Company’s common stock following the completion of the Company’s current stock buyback authorization. During the second quarter, the Company repurchased 166,845 shares for $5.4 million at an average price of $32.12 to complete the Company’s previous stock buyback program. Also during the second quarter, the Company repurchased 548,297 shares for $18.3 million at an average cost of $33.40 under the March 2005 stock buyback program. At June 30, 2005, 451,703 shares remain under the Company’s March 2005 stock buyback authorization.

For the first six months of 2005, the Company repurchased an aggregate 738,542 shares for $24.5 million, or $33.18 cost per share under both April 2001 repurchase program and March 2005 repurchase program.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is given based on the assumption that the reader has access to and has read the Annual Report on Form 10-K for the year ended December 31, 2004, of Cathay General Bancorp (“Bancorp”) and its wholly-owned subsidiary Cathay Bank (the “Bank” and, together, the “Company” or “we”, “us,” or “our”).

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 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.

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. 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 under the heading “Accounting for the allowance for loan losses” in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Accounting for the merger with GBC Bancorp involves significant judgments and assumptions by management, which have a material impact on the carrying value of fixed rate loans and borrowings and the determination of core deposit intangible assets and goodwill. The judgments and assumptions used by management are described under the heading “Accounting for the merger with GBC Bancorp” in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

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 under the heading “Investment Securities” in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

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 under the heading “Income Taxes” in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

SECOND QUARTER HIGHLIGHTS

•

Second quarter earnings increased $3.6 million, or 16.2%, compared to the same quarter a year ago.

•

Fully diluted earnings per share reached $0.51, increasing 15.9% compared to the same quarter a year ago.

•

Gross loans increased from March 31, 2005, by $169.6 million, or 4.2%.

•

Deposits increased by $150.1 million, or 3.2%, from March 31, 2005.

•

Return on average stockholders’ equity was 14.07% for the quarter ended June 30, 2005, unchanged from the quarter ended March 31, 2005.

•

Return on average assets was 1.68% for the quarter ended June 30, 2005, compared to 1.65% for the quarter ended March 31, 2005.

•

Non-performing loans decreased $2.2 million, or 12.1%, from March 31, 2005.

•

Net interest margin on a fully taxable equivalent basis was 4.22% compared to 4.02% for the same quarter a year ago and 4.22% for the first quarter of 2005.

•

Efficiency ratio was 37.1% for the second quarter of 2005 compared to 35.3% in the first quarter of 2005 and 38.6% in the second quarter of 2004.

•

Repurchased 715,142 shares during the second quarter at an average cost of $33.10 per share.

Income Statement Review

Net Income

Net income for the second quarter of 2005 was $25.7 million, or $0.51 per diluted share, a $3.6 million, or 16.2%, increase compared with net income of $22.1 million or $0.44 per diluted share for the same quarter a year ago. Return on average stockholders’ equity was 14.07% and return on average assets was 1.68% for the second quarter of 2005 compared with a return on average stockholders’ equity of 13.88% and a return on average assets of 1.55% for the three months ended June 30, 2004.

Financial Performance


(In thousands, except per share data)	Second Quarter 2005			Second Quarter 2004
Net income	$	25,734		$	22,144
Basic earnings per share	$	0.51		$	0.44
Diluted earnings per share	$	0.51		$	0.44
Return on average assets		1.68	%		1.55	%
Return on average stockholders’ equity		14.07	%		13.88	%
Efficiency ratio		37.08	%		38.62	%
Total average assets	$	6,142,639		$	5,731,908
Total average stockholders’ equity	$	733,666		$	641,866

Net Interest Income Before Provision for Loan Losses

Net interest income before provision for loan losses increased to $59.2 million during the second quarter of 2005, or 13.4% higher than the $52.2 million during the same quarter a year ago. The increase was due primarily to the strong growth in loans.

The net interest margin, on a fully taxable-equivalent basis, was 4.22% for both the first quarter and second quarter 2005. The net interest margin increased from 4.02% in the second quarter of 2004, primarily as a result of increases in short term interest rates.

For the second quarter of 2005, the interest rate earned on our average interest-earning assets was 6.01% on a fully taxable-equivalent basis, and our cost of funds on average interest-bearing liabilities equaled 2.20%. In comparison, for the second quarter of 2004, the interest rate earned on our average interest-earning assets was 5.06% and our cost of funds on average interest-bearing liabilities equaled 1.27%.

Average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income and interest expense, and the weighted-average interest rate and net interest margin were as follows:

Interest-Earning Assets and Interest-Bearing Liabilities


Three months ended June 30,	2005							2004
Taxable-equivalent basis (Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Yield/ Rate (1)(2)		Average Balance			Interest Income/ Expense		Average Yield/ Rate(1)(2)
Interest Earning Assets
Loans (1)	$	4,063,720		$	67,268	6.64	%	$	3,478,180		$	47,770	5.52	%
Taxable securities available-for-sale		1,481,568			15,948	4.32			1,675,233			17,062	4.10
Tax-exempt securities available-for-sale (3)		104,517			1,726	6.62			105,219			1,583	6.05
Interest bearing deposits		9,178			102	4.47			5,900			35	2.39
Federal funds sold & securities purchased under agreements to resell		25,730			190	2.95			16,462			27	0.66

Total interest-earning assets		5,684,713			85,234	6.01			5,280,994			66,477	5.06

Non-interest earning assets
Cash and due from banks		85,925							102,065
Other non-earning assets		444,987							424,833

Total non-interest earning assets		530,912							526,898
Less: Allowance for loan losses		(61,956	)						(65,907	)
Unamortized deferred loan fees		(11,030	)						(10,077	)

Total assets	$	6,142,639						$	5,731,908

Interest-bearing liabilities:
Interest-bearing demand deposits	$	246,533		$	318	0.52		$	274,768		$	167	0.24
Money market deposits		534,812			1,583	1.19			598,451			1,077	0.72
Savings deposits		398,181			398	0.40			423,052			317	0.30
Time deposits		2,924,412			18,953	2.60			2,465,099			9,762	1.59

Total interest-bearing deposits		4,103,938			21,252	2.08			3,761,370			11,323	1.21

Federal funds purchased and securities sold under agreement to repurchase		32,280			243	3.01			56,560			321	2.28
Other borrowings		448,813			3,115	2.78			461,726			1,527	1.33
Junior subordinated notes		53,937			853	6.34			53,877			564	4.21

Total interest-bearing liabilities		4,638,968			25,463	2.20			4,333,533			13,735	1.27

Non-interest bearing liabilities:
Demand deposits		688,583							659,806
Other liabilities		81,422							96,703
Stockholders’ equity		733,666							641,866

Total liabilities and stockholders’ equity	$	6,142,639						$	5,731,908

Net interest spread (4)						3.81	%						3.79	%

Net interest income (4)				$	59,771						$	52,742

Net interest margin (4)						4.22	%						4.02	%

(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%

Taxable-Equivalent Net Interest Income - Changes Due to Rate and Volume(1)


	Three months ended June 30, 2005-2004 Increase (Decrease) in Net Interest Income Due to:
(Dollars in thousands)	Changes in Volume			Changes in Rate		Total Change
Interest-Earning Assets:
Loans	$	8,864		$	10,634	$	19,498
Taxable securities available-for-sale		(2,022	)		908		(1,114	)
Tax-exempt securities available-for-sale (2)		(10	)		153		143
Interest bearing deposits		26			41		67
Federal funds sold and securities purchased under agreement to resell		23			140		163

Total increase in interest income		6,881			11,876		18,757

Interest-Bearing Liabilities:
Interest bearing demand deposits		(19	)		170		151
Money Market deposits		(125	)		631		506
Savings deposits		(20	)		101		81
Time deposits		2,092			7,099		9,191
Federal funds purchased and securities sold under agreements to repurchase		(163	)		85		(78	)
Other borrowings		(44	)		1,632		1,588
Junior subordinated notes		1			288		289

Total increase in interest expense		1,722			10,006		11,728

Changes in net interest income	$	5,159		$	1,870	$	7,029

(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 Loan Losses

The provision for loan losses was a negative $500,000 for the second quarter of 2005 compared to a $1.0 million provision for loan losses for the first quarter of 2005 and to no provision for the second quarter of 2004. The negative provision for loan losses was based on the review of the adequacy of the allowance for loan losses at June 30, 2005, which was favorably impacted by the net recoveries as well as the payoff of a number of loans with credit weaknesses during the second quarter of 2005. The provision for loan losses represents the charge or credit against 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 loan losses inherent in the Company’s loan portfolio. The following table summarizes the charge-offs and recoveries for the quarters shown:


	For the three months ended,
(In thousands)	June 30, 2005			March 31, 2005		June 30, 2004
Charge-offs	$	270		$	3,661	$	106
Recoveries		430			1,320		311

Net Charge-offs (Recoveries)	$	(160	)	$	2,341	$	(205	)

Non-Interest Income

Non-interest income, which includes revenues from service charges on deposit accounts, letters of credit commissions, securities gains (losses), gains (losses) on loan sales, wire transfer fees, and other sources of fee income, was $5.4 million for the second quarter of 2005, a decrease of $1.1 million, or 16.8%, compared to the non-interest income of $6.5 million for the second quarter of 2004.

For the second quarter of 2005, the Company recorded net securities gains of $745,000 compared to $1.4 million of net gains for the same quarter in 2004.

Letters of credit commissions decreased $222,000, or 18.2%, from $1.2 million in the second quarter of 2004 to $1.0 million in the second quarter of 2005 due in part to lower letter of credit volumes. Depository service fees decreased $269,000, or 16.3%, from $1.7 million in the second quarter of 2004 to $1.4 million in the second quarter of 2005 due to the increases in short term interest rates which resulted in lower account analysis fees collected from depositors. Other operating income increased $65,000, or 2.9%, from $2.2 million in the second quarter of 2004 to $2.3 million in the second quarter of 2005.

Non-Interest Expense

Non-interest expense increased $1.3 million, or 5.6%, to $24.0 million in the second quarter of 2005 compared to the same quarter a year ago primarily due to increases in salaries and employee benefits expenses, occupancy expenses and operations of affordable housing investments. The efficiency ratio was 37.08% for the second quarter of 2005 compared to 38.62% in the year ago quarter. Salaries and employee benefits increased $397,000, or 3.1%, from $12.6 million in the second quarter of 2004 to $13.0 million in the second quarter of 2005 due primarily to higher expense for stock options as well as annual merit increases for officers effective April 1, 2005. Occupancy expense increased by $364,000, or 20.2%, from $1.8 million in the second quarter of 2004 to $2.2 million in the second quarter of 2005, due primarily to the addition of two new branches and the write-off of leasehold improvements for two closed branches. Professional services expenses increased $150,000, or 8.8%, from $1.7 million in the second quarter of 2004 to $1.9 million in the second quarter of 2005 due primarily to increases in external auditing expenses and legal expenses. Expenses from operations of affordable housing investments increased $300,000, or 46.4%, to $946,000 compared to $646,000 in the same quarter a year ago due to additional investments in affordable housing investments.

Income Taxes

The effective tax rate was 37.5% for the second quarter of 2005 and 38.6% for the second quarter of 2004. The effective tax rate was 38.3% for the six months ended June 30, 2005, compared to 38.4% for the six months ended June 30, 2004.

on the refund claims, or an equivalent of $7.9 million after giving effect to Federal tax benefits. The FTB is currently in the process of reviewing and assessing our refund claims for taxes and interest for tax years 2000 through 2002. Although the Company believes its tax deductions related to the regulated investment company were appropriate and fully defensible, there can be no assurance of the outcome of its refund claims, and an adverse outcome on the refund claims could result in a loss of all or a portion of the $7.9 million net state tax receivable after giving effect to Federal tax benefits.

Year-to-Date Income Statement Review

Net income was $50.7 million, or $0.99 per diluted share for the six months ended June 30, 2005, an increase of 20.6% in net income over the $42.0 million, or $0.84 per diluted share for the same period a year ago due primarily to increases in net interest income. The net interest margin for the six months ended June 30, 2005, increased 18 basis points to 4.22% compared to 4.04% in the same period a year ago.

The average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income and interest expense, and the weighted-average interest rates, the net interest spread and the net interest margins were as follows:

Interest-Earning Assets and Interest-Bearing Liabilities


Six months ended June 30,	2005							2004
Taxable-equivalent basis (Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Yield/ Rate (1)(2)		Average Balance			Interest Income/ Expense		Average Yield/ Rate (1)(2)
Interest Earning Assets
Loans (1)	$	3,989,136		$	128,522	6.50	%	$	3,404,344		$	93,229	5.51	%
Taxable securities available-for-sale		1,573,352			34,180	4.38			1,659,606			34,628	4.20
Tax-exempt securities available-for-sale (3)		106,418			3,377	6.40			102,750			3,122	6.11
Interest bearing deposits		8,593			180	4.22			5,489			65	2.38
Federal funds sold & securities purchased under agreements to resell		14,721			211	2.89			20,275			77	0.77

Total interest-earning assets		5,692,220			166,470	5.90			5,192,464			131,121	5.08

Non-interest earning assets
Cash and due from banks		88,246							100,613
Other non-earning assets		439,377							417,358

Total non-interest earning assets		527,623							517,971
Less: Allowance for loan losses		(62,724	)						(66,822	)
Unamortized deferred loan fees		(11,315	)						(10,391	)

Total assets	$	6,145,804						$	5,633,222

Interest-bearing liabilities:
Interest-bearing demand deposits	$	246,803		$	569	0.46		$	276,434		$	379	0.28
Money market deposits		559,270			3,177	1.15			625,251			2,215	0.71
Savings deposits		403,352			774	0.39			420,270			628	0.30
Time deposits		2,817,187			33,790	2.42			2,448,735			19,068	1.57

Total interest-bearing deposits		4,026,612			38,310	1.92			3,770,690			22,290	1.19

Federal funds purchased and securities sold under agreement to repurchase		36,536			493	2.72			63,904			727	2.29
Other borrowings		524,581			6,938	2.67			376,504			2,631	1.41
Junior subordinated notes		53,929			1,626	6.08			53,869			1,136	4.24

Total interest-bearing liabilities		4,641,658			47,367	2.06			4,264,967			26,784	1.26

Non-interest bearing liabilities:
Demand deposits		690,522							647,387
Other liabilities		84,450							84,878
Stockholders’ equity		729,174							635,990

Total liabilities and stockholders’ equity	$	6,145,804						$	5,633,222

Net interest spread (4)						3.84	%						3.82	%

Net interest income (4)				$	119,103						$	104,337

Net interest margin (4)						4.22	%						4.04	%

(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%

Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)


	Six months ended June 30, 2005-2004 Increase (Decrease) in Net Interest Income Due to:
(Dollars in thousands)	Changes in Volume			Changes in Rate		Total Change
Interest-Earning Assets:
Loans	$	17,247		$	18,046	$	35,293
Taxable securities available-for-sale		(1,903	)		1,455		(448	)
Tax-exempt securities available-for-sale (2)		110			145		255
Interest bearing deposits		49			66		115
Federal funds sold and securities purchased under agreement to resell		(26	)		160		134

Total increase in interest income		15,477			19,872		35,349

Interest-Bearing Liabilities:
Interest bearing demand deposits		(45	)		235		190
Money Market deposits		(258	)		1,220		962
Savings deposits		(27	)		173		146
Time deposits		3,187			11,535		14,722
Federal funds purchased and securities sold under agreements to repurchase		(354	)		120		(234	)
Other borrowings		1,312			2,995		4,307
Junior subordinated notes		1			489		490

Total increase in interest expense		3,816			16,767		20,583

Changes in net interest income	$	11,661		$	3,105	$	14,766

(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%.

Return on average stockholders’ equity was 14.02% and return on average assets was 1.66% for the six months of 2005, compared to a return on average stockholders’ equity of 13.30% and a return on average assets of 1.50% for the six months ended June 30, 2004. The efficiency ratio for the six months ended June 30, 2005 was 36.17% compared to 40.22% during the same period a year ago.

Balance Sheet Review

Assets

Total assets decreased by $24.7 million, or 0.4%, to $6.07 billion at June 30, 2005 from year-end 2004 of $6.10 billion. The decrease in total assets was due primarily to sales of investment securities to fund loan growth and to pay down advances from the Federal Home Loan Bank.

Securities

Total securities were $1.4 billion, or 23.7%, of total assets at June 30, 2005, compared with $1.82 billion, or 29.8%, of total assets at December 31, 2004. The decrease was primarily due to sales of $207.8 million of securities, $165.6 million of pay-downs from mortgage-backed securities and calls of municipal bonds during the first six months of 2005.

The net unrealized loss on securities available-for-sale, which represented the difference between fair value and amortized cost, totaled $2.1 million at June 30, 2005 compared to a net unrealized gain of $6.1 million at year-end 2004. The changes were caused by increases in market interest rates. Net unrealized gains and losses in the securities available-for-sale are included in accumulated other comprehensive income or loss, net of tax.

The average taxable-equivalent yield on securities available-for-sale increased 20 basis points to 4.51% for the first six months ended June 30, 2005, compared with 4.31% for same period a year ago, as securities matured, prepaid, or were called and proceeds were reinvested at the higher prevailing interest rates or to pay down other borrowings.

The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale, as of June 30, 2005, and December 31, 2004:


	June 30, 2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
U.S. government sponsored entities	$	187,974	$	—	$	2,044	$	185,930
State and municipal securities		80,840		2,932		40		83,732
Mortgage-backed securities		732,787		3,030		4,755		731,062
Commercial mortgage-backed securities		38,579		—		660		37,919
Collateralized mortgage obligations		330,441		775		1,964		329,252
Asset-backed securities		1,632		2		8		1,626
Corporate bonds		9,078		54		108		9,024
Preferred stock of government sponsored entities		19,500		1,094		363		20,231
Equity securities		8,911		—		—		8,911
Other securities		29,695		—		—		29,695

Total	$	1,439,437	$	7,887	$	9,942	$	1,437,382


	December 31, 2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
U.S. government sponsored entities	$	224,896	$	1,197	$	1,594	$	224,499
State and municipal securities		85,629		3,108		111		88,626
Mortgage-backed securities		1,012,220		7,475		3,641		1,016,054
Commercial mortgage-backed securities		47,018		85		543		46,560
Collateralized mortgage obligations		373,547		1,515		1,493		373,569
Asset-backed securities		4,821		3		19		4,805
Corporate bonds		9,149		103		34		9,218
Preferred stock of government sponsored entities		19,500		—		—		19,500
Equity securities		9,073		—		—		9,073
Other securities		26,038		—		—		26,038

Total	$	1,811,891	$	13,486	$	7,435	$	1,817,942

The Company has the ability and intent to hold the securities for a period of time sufficient for a recovery of cost. The securities included in the table below represent 63.4% of the fair value of the Company’s securities. Unrealized losses on securities with unrealized losses for 12 months or longer and less than twelve months represent 1.8% and 0.7%, respectively, of the amortized cost of these securities and generally resulted from increases in market interest rates from the date that these securities were purchased. All of these securities are investment grade. At June 30, 2005, management believes the impairment detailed in the table below is temporary and accordingly no impairment loss has been recognized in the Company’s consolidated statement of income.

Temporarily Impaired Securities at June 30, 2005


	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Description of securities
U.S. government sponsored entities	$	121,297	$	632	$	64,627	$	1,412	$	185,924	$	2,044
State and municipal securities		392		3		3,366		37		3,758		40
Mortgage-backed securities		255,634		1,571		198,549		3,184		454,183		4,755
Commercial mortgage-backed securities		21,087		118		16,832		542		37,919		660
Collateralized mortgage obligations		166,583		1,144		49,685		820		216,268		1,964
Asset-backed securities		—		—		1,507		8		1,507		8
Corporate bonds		2,029		15		4,940		93		6,969		108
Preferred stock of government sponsored entities		4,062		363		—		—		4,062		363

Total	$	571,084	$	3,846	$	339,506	$	6,096	$	910,590	$	9,942

The following table summarizes the scheduled maturities by security type of securities available-for-sale as of June 30, 2005:


	One Year or Less		After One Year to Five Years		After Five Years to Ten Years		Over Ten Years		Total
	(Dollars in thousands)
Maturity Distribution:
U.S. government sponsored entities		10,138		112,087		63,339		366	$	185,930
State and municipal securities		2,151		10,663		38,952		31,966		83,732
Mortgage-backed securities(1)		—		11,394		35,375		684,293		731,062
Commercial mortgage-backed securities(1)		—		4,954		—		32,965		37,919
Collateralized mortgage obligations(1)		—		146		3,481		325,625		329,252
Asset-backed securities(1)		—		—		—		1,626		1,626
Corporate bonds		3,037		5,987		—		—		9,024
Preferred stock of government sponsored entities (2)		—		—		—		20,231		20,231
Equity securities (2)		—		—		—		8,911		8,911
Other securities (2)		—		—		—		29,695		29,695

Total	$	15,326	$	145,231	$	141,147	$	1,135,678	$	1,437,382

(1)	Securities reflect stated maturities and do not reflect the impact of anticipated prepayments.

(2)	These securities have no final maturity date.

Loans

Gross loans at June 30, 2005, were $4.18 billion compared with $3.83 billion at year-end 2004. Gross loan growth during the second quarter equaled $169.6 million, an increase of 4.2% from March 31, 2005, reflecting primarily increases in commercial mortgage loans and commercial loans.

Commercial mortgage loans increased $177.2 million, or 8.4%, to $2.30 billion at June 30, 2005, compared to $2.12 billion at year-end 2004. At June 30, 2005, this portfolio represented approximately 54.9% of the Bank’s gross loans compared to 55.3% at year-end 2004. In addition, commercial loans increased $90.1 million, or 9.4%, to $1.05 billion at June 30, 2005 compared to $955.4 million at year-end 2004.

The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated:


(Dollars in thousands)	June 30, 2005			% of Gross Loans		December 31, 2004			% of Gross Loans		% Change
Type of Loans
Commercial	$	1,045,436		25.0	%	$	955,377		24.9	%	9.4
Residential mortgage and equity lines		375,715		9.0			331,727		8.6		13.3
Commercial mortgage		2,296,530		54.9			2,119,349		55.3		8.4
Real estate construction		450,572		10.8			412,611		10.8		9.2
Installment		11,080		0.2			10,481		0.3		5.7
Other		2,988		0.1			2,443		0.1		22.3

Gross loans and leases	$	4,182,321		100	%	$	3,831,988		100	%	9.1
Allowance for loan losses		(61,199	)				(62,880	)			(2.7	)
Unamortized deferred loan fees		(11,327	)				(11,644	)			(2.7	)

Total loans and leases, net	$	4,109,795				$	3,757,464				9.4

Asset Quality Review

Non-performing Assets

Non-performing assets (“NPAs”) to gross loans plus other real estate owned decreased to 0.38% at June 30, 2005, from 0.59% at December 31, 2004, and from 0.86% at June 30, 2004. Total non-performing assets decreased to $16.0 million at June 30, 2005, compared with $22.5 million at December 31, 2004, and $30.3 million at June 30, 2004. Non-performing assets include accruing loans past due 90 days or more, non-accrual loans, and other real estate owned. The allowance for loan losses was $61.2 million at June 30, 2005, and represented the amount that the Company believes to be sufficient to absorb loan losses inherent in the Company’s loan portfolio. The allowance for loan losses represented 1.46% of period-end gross loans and 383% of non-performing loans at June 30, 2005. The comparable ratios were 1.64% of gross loans and 280% of non-performing loans at December 31, 2004.

The following table sets forth the breakdown of non-performing assets by categories as of the dates indicated:


(Dollars in thousands)	June 30, 2005			December 31, 2004
Non-performing assets
Accruing loans past due 90 days or more	$	1,854		$	3,260
Non-accrual loans		14,121			19,211

Total non-performing loans		15,975			22,471
Other real estate owned		—			—

Total non-performing assets	$	15,975		$	22,471

Troubled debt restructurings	$	991		$	1,006

Non-performing assets as a percentage of gross loans and OREO		0.38	%		0.59	%
Allowance for loan losses as a percentage of non-performing loans		383	%		280	%

Accruing loans past due 90 days or more decreased to $1.9 million at June 30, 2005, from $3.3 million at December 31, 2004. Non-accrual loans decreased $5.1 million to $14.1 million at June 30, 2005, from $19.2 million at December 31, 2004, primarily due to loan pay-offs.

Non-accrual Loans

The following table presents non-accrual loans by type of collateral securing the loans, as of the dates indicated:


	June 30, 2005						December 31, 2004
	Real Estate (1)		Commercial		Other		Real Estate (1)		Commercial		Other
	(In thousands)
Type of Collateral
Single/ multi-family residence	$	81	$	28	$	—	$	232	$	—	$	—
Commercial real estate		3,827		3,233		—		—		7,171		—
Land		—		—		—		1,018		—		—
UCC		—		6,547		—		—		10,217		—
Other		—		—		—		—		—		31
Unsecured		—		405		—		—		542		—

Total	$	3,908	$	10,213	$	—	$	1,250	$	17,930	$	31

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

The following table presents non-accrual loans by type of businesses the borrowers are engaged in, as of the dates indicated:


	June 30, 2005						December 31, 2004
	Real Estate (1)		Commercial		Other		Real Estate (1)		Commercial		Other
	(In thousands)
Type of Business
Real estate development	$	3,827	$	—	$	—	$	1,181	$	621	$	—
Wholesale/Retail		—		2,215		—		—		5,687		—
Food/Restaurant		—		866		—		—		873		—
Import/Export		—		7,132		—		—		10,749		—
Other		81		—		—		69		—		31

Total	$	3,908	$	10,213	$	—	$	1,250	$	17,930	$	31

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

Troubled Debt Restructurings

A troubled debt restructuring (“TDR”) is a formal restructure 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.

Troubled debt restructurings were $1.0 million at both June 30, 2005, and December 31, 2004.

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, or the loan has been restructured. Those loans less than our defined selection criteria 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. If the measurement of the impaired loan 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.

The Company identified impaired loans with a recorded investment of $14.1 million at June 30, 2005, compared with $19.2 million at year-end 2004. The Company considers all nonaccrual loans to be impaired. The decrease in impaired loans during the second quarter resulted from payoffs and charge-offs of impaired loans. The following tables present a breakdown of impaired loans and the related allowances as of the dates indicated:


	June 30, 2005						December 31, 2004
	Recorded Investment		Allowance		Net Balance		Recorded Investment		Allowance		Net Balance
	(In thousands)
Commercial	$	10,213	$	16	$	10,197	$	14,114	$	142	$	13,972
Real Estate (1)		3,908		28		3,880		5,066		12		5,054
Other		—		—		—		31		7		24

Total	$	14,121	$	44	$	14,077	$	19,211	$	161	$	19,050

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

Loan Concentration

Most of the Company’s business activity is with customers located in the predominantly Asian areas of Southern and Northern California; New York City; Houston, Texas; Seattle, Washington; and Boston, Massachusetts. 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.

There were no loan concentrations to multiple borrowers in similar activities which exceeded 10% of total loans as of June 30, 2005, or December 31, 2004.

Allowance for Loan Losses

The Bank’s management is committed to managing the risk in its loan portfolio by maintaining the allowance for loan losses at a level that is considered to be equal to the estimated and known risks in the loan portfolio. With a 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 loan losses in a timely manner.

In addition, our Board of Directors has established a written loan policy that includes an effective loan review and control system to ensure that the Bank maintains an adequate allowance for loan losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and judges that it is adequate to absorb inherent losses in the loan portfolio. The determination of the amount of the allowance for loan losses and the provision for loan losses is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectibility when determining the appropriate level for the allowance for loan losses. The nature of the process by which the Bank determines the appropriate allowance for loan losses requires the exercise of considerable judgment.

Additions to the allowance for loan losses are made by charges to the provision for loan losses. While management utilizes its best judgment and 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 loan losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for loan 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 loan losses in future periods.

The allowance for loan losses totaled $61.2 million at June 30, 2005, and represented the amount needed to maintain an allowance that we believe to be sufficient to absorb loan losses inherent in the Company’s loan portfolio. The allowance for loan losses represented 1.46% of period-end gross loans and 383% of non-performing loans at June 30, 2005. The comparable ratios were 1.64% of year-end 2004 gross loans and 280% of non-performing loans at December 31, 2004. The majority of the total charge-offs of $3.6 million in the first quarter of 2005 and $4.9 million in the fourth quarter of 2004 were related to charge-offs taken on a $9.5 million commercial loan originated by the former New York loan production office of General Bank. Please refer to “Provision for Loan Losses” section above for the summary of charge-offs and recoveries.

The following table sets forth information relating to the allowance for loan losses for the periods indicated:


(Dollars in thousands)	For the six months ended June 30, 2005			For the year ended December 31, 2004
Balance at beginning of period	$	62,880		$	65,808
Provision for loan losses		500			—
Loans charged off		(3,931	)		(9,728	)
Recoveries of loans charged off		1,750			6,800

Balance at end of period	$	61,199		$	62,880

Average loans outstanding during the period	$	4,063,720		$	3,522,575
Ratio of net charge-offs to average loans outstanding during the period (annualized)		0.22	%		0.08	%
Provision for loan losses to average loans outstanding during the period (annualized)		0.05	%		0.00	%
Allowance to non-performing loans, at period-end		383	%		280	%
Allowance to gross loans, at period-end		1.46	%		1.64	%

Our allowance for loan losses consists of the following:

Specific allowance: For impaired loans, we provide specific allowances based on an evaluation of impairment, and for each criticized loan, we allocate a portion of the general allowance to each loan based on a loss percentage assigned. The percentage assigned depends on a number of factors including loan classification, the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral, charge-off history, management’s knowledge of the portfolio, and general economic conditions.

General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan type and by identifying risk characteristics that are common to the groups of loans. The allowance is provided to each segmented group based on the group’s historical loan loss experience, trends in delinquencies and non-accrual loans, and other significant factors, such as national and local economy, trends and conditions, strength of management and loan staff, underwriting standards and the concentration of credit.

To determine the adequacy of the allowance in each of these two components, the Bank employs two primary methodologies, the classification process and the individual loan review analysis methodology. These methodologies support the basis for determining allocations between the various loan categories and the overall adequacy of the Bank’s allowance to provide for probable loss in the loan portfolio. These methodologies are further supported by additional analysis of relevant factors such as the historical losses in the portfolio, trends in the non-performing loans, loan delinquencies, the volume of the portfolio, peer group comparisons, and federal regulatory policy for loan and lease losses. Other significant factors of portfolio analysis include changes in lending policies/underwriting standards, portfolio composition, concentrations of credit, and trends in the national and local economy.

With these above methodologies, the specific allowance is for those loans internally classified and risk graded as Special Mention, Substandard, Doubtful, or Loss. Additionally, the Bank’s management allocates a specific allowance for “Impaired Credits,” in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan.” 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 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


(Dollars in thousands)	June 30, 2005				December 31, 2004
(Dollars in thousands)	Amount		Percentage of Loans in Each Category to Average Gross Loans		Amount		Percentage of Loans in Each Category to Average Gross Loans
Type of Loans:
Commercial loans	$	33,265	25.2	%	$	33,712	26.8	%
Residential mortgage loans		865	8.8			1,346	8.4
Commercial mortgage loans		19,319	54.7			20,949	55.1
Real estate construction loans		7,729	10.9			6,838	9.4
Installment loans		15	0.2			17	0.2
Other loans		6	0.2			18	0.1

Total	$	61,199	100	%	$	62,880	100	%

The allowance allocated to commercial loans decreased from $33.7 million at December 31, 2004, to $33.3 million at June 30, 2005. The decrease in the allowance allocated to commercial loans resulted from a decrease in the amount of classified loans during the second quarter of 2005. Non-accrual commercial loans comprised 72.3% of nonaccrual loans at June 30, 2005.

Management has decreased the allowance allocated to residential mortgage loans from $1.3 million at December 31, 2004, to $865,000 at June 30, 2005 due to the continued low level of losses for these loans.

The allowance allocated to commercial mortgage loans decreased from $20.9 million at December 31, 2004, to $19.3 million at June 30, 2005, due to the lower loss experience and a reduction in the general environmental factor resulting from the improving California economy and lower loan delinquencies at June 30, 2005. As of June 30, 2005, there were $3.8 million commercial mortgage loans on non-accrual status.

The allowance allocated to construction loans has increased from $6.8 million at December 31, 2004, construction loans to $7.7 million at June 30, 2005, due to the growth in the construction loan portfolio. The allowance allocated to construction loans remained constant at 1.7% of construction loans at December 31, 2004 and June 30, 2005. At June 30, 2005, there were no construction loans on non-accrual status.

Allowances for other risks of potential loan losses equaling $4.3 million as of June 30, 2005, compared to $3.8 million at December 31, 2004, have been included in the allocations above. The components of the other risks that have a potential of affecting the Bank’s portfolio are comprised of two basic elements. First, the Bank has set aside funds to cover the risk factors of higher energy prices on the ability of its borrowers to service their loans. The second component of other portfolio risk is the lifting of textile quotas on Chinese manufacturers and the impact of the increased competition on the Bank’s borrowers in the textile industry. With the continued reduction in classified loans from the former General Bank, the Company has determined that potential errors in loan classification and review methodologies, particularly for General Bank’s loans is no longer a risk that requires an additional allocation of the allowance as was the case in prior quarters. Based on the assessment of the above described components of other risks, management has determined that the $4.3 million allowance for other risks of probable loan losses at June 30, 2005 was appropriate.

Deposits

Total deposits increased $233.6 million, or 5.1%, from December 31, 2004. Non-interest-bearing demand deposits, interest-bearing demand deposits, and savings deposits comprised 38.0% of total deposits at June 30, 2005, time deposit accounts of less than $100,000 comprised 12.9% of total deposits, while the remaining 49.1% was comprised of time deposit accounts of $100,000 or more. Due to the continued increases in interest rates during the first half of 2005, the Company’s lower yielding interest bearing deposits have decreased. The Company’s non-interest bearing demand deposits and certificates of deposits have increased since December 31, 2004, due to business development efforts and, in the case of certificates of deposits, also because of the success of the one year Anniversary Celebration CD promotion.

The following tables display the deposit mix as of the dates indicated:


(Dollars in thousands)	June 30, 2005		% of Total		December 31, 2004		% of Total		% Change
Deposits
Non-interest-bearing demand deposits	$	692,421	14.4	%	$	674,791	14.7	%	2.6	%
Interest-bearing demand deposits		748,323	15.5			842,293	18.3		(11.2	)
Savings deposits		392,042	8.1			418,041	9.1		(6.2	)
Time deposits under $100		624,428	12.9			539,811	11.7		15.7
Time deposits of $100 or more		2,371,546	49.1			2,120,201	46.2		11.9

Total deposits	$	4,828,760	100.0	%	$	4,595,137	100.0	%	5.1	%

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, borrowing from other financial institutions and junior subordinated notes issued.

Federal funds purchased were $85.0 million with a weighted average rate of 3.40% as of June 30, 2005, and were $76.0 million with a weighted average rate of 2.25% as of December 31, 2004. Securities sold under agreements to repurchase were $15.0 million with a weighted average rate of 2.15% as of December 31, 2004. There were no securities sold under agreements to repurchase as of June 30, 2005.

Total advances from the FHLB of San Francisco were $275.0 million at June 30, 2005 and $545.0 million at December 31, 2004. All advances will mature in 2005. These advances are non-callable with fixed interest rates, with a weighted average rate of 3.18% as of June 30, 2005, and 2.57% as of December 31, 2004.

As of June 30, 2005 and December 31, 2004, the Junior Subordinated Notes issued by the Company totaled $53.9 million.

Other Liabilities

Other liabilities decreased to $39.2 million at June 30, 2005 from $56.9 million at December 31, 2004 due primarily to income tax payments.

Capital Resources

Stockholders’ equity of $734.8 million at June 30, 2005, increased by $18.8 million, or 2.6%, compared to $716.0 million at December 31, 2004. The following table summarizes the increase in stockholders’ equity:


(Dollars in thousands)	Six months ended June 30, 2005
Net income	$	50,694
Proceeds from shares issued to the Dividend Reinvestment Plan		1,413
Proceeds from exercise of stock options		1,629
Tax benefits from stock-based compensation expense		714
Stock based compensation		2,826
Purchase of treasury stock		(24,501	)
Changes in other comprehensive income		(4,818	)
Cash dividends paid		(9,131	)

Net increase in stockholders’ equity	$	18,826

In April 2001, the Board of Directors approved a stock repurchase program of up to $15 million of our common stock. Through December 31, 2004, the Company had repurchased 639,820 shares for a total of $8.8 million at an average price of $13.77 per share. During 2005, the Company completed the April 2001 repurchase plan by buying back 190,245 shares of common stock for $6.2 million, or $32.54 per share.

On March 18, 2005, the Company announced that its Board of Directors had approved a new stock repurchase program to buyback up to an aggregate of one million shares of the Company’s common stock following the completion of the April 2001 stock buyback authorization. During the second quarter of 2005, the Company repurchased 548,297 shares for a total of $18.3 million at an average price of $33.4 per share under its March 18, 2005 repurchase program. As of June 30, 2005, 451,703 shares remain under the Company’s March 18, 2005 stock buyback authorization.

For the first six months of 2005, the Company repurchased 738,542 shares for $24.5 million, or $33.18 cost per share under both April 2001 repurchase program and March 2005 repurchase program.

The Company declared cash dividend of 9 cents per share in January 2005 on 50,677,896 shares outstanding, in April 2005 on 50,778,016 shares. On July 1, 2005, the Company declared a cash dividend of 9 cents per share on 50,104,615 shares outstanding. Total cash dividends paid in 2005, including the $4.5 million paid in July, amounted to $13.6 million.

Capital Adequacy Review

Management seeks to maintain the Company’s capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.

Both the Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements as of June 30, 2005. In addition, the capital ratios of the Bank place it in the “well capitalized” category which is defined as institutions with total risk-based ratio equal to or greater than 10.0%, Tier 1 risk-based capital ratio equal to or greater than 6.0%, and Tier 1 leverage capital ratio equal to or greater than 5.0%.

The following table presents the Company’s capital and leverage ratios as of June 30, 2005, and December 31, 2004:


	Cathay General Bancorp
	June 30, 2005			December 31, 2004
(Dollars in thousands)	Balance		%	Balance		%
Tier 1 capital (to risk-weighted assets)	$	530,619	10.60	$	504,924	10.78
Tier 1 capital minimum requirement		200,304	4.00		187,330	4.00

Excess	$	330,315	6.60	$	317,594	6.78

Total capital (to risk-weighted assets)	$	592,147	11.83	$	563,518	12.03
Total capital minimum requirement		400,608	8.00		374,659	8.00

Excess	$	191,539	3.83	$	188,859	4.03

Tier 1 capital (to average assets) – Leverage ratio	$	530,619	9.03	$	504,924	8.86
Minimum leverage requirement		235,057	4.00		227,896	4.00

Excess	$	295,562	5.03	$	277,028	4.86

Risk-weighted assets	$	5,007,600		$	4,683,239
Total average assets (1)	$	5,876,428		$	5,697,403

(1)	Average assets represent average balances for the second quarter of 2005 and the fourth quarter of 2004.

The following table presents the Bank’s capital and leverage ratios as of June 30, 2005, and December 31, 2004:


	Cathay Bank
	June 30, 2005			December 31, 2004
(Dollars in thousands)	Balance		%	Balance		%
Tier 1 capital (to risk-weighted assets)	$	525,779	10.52	$	469,086	10.04
Tier 1 capital minimum requirement		199,928	4.00		186,918	4.00

Excess	$	325,851	6.52	$	282,168	6.04

Total capital (to risk-weighted assets)	$	587,307	11.75	$	527,553	11.29
Total capital minimum requirement		399,855	8.00		373,836	8.00

Excess	$	187,452	3.75	$	153,717	3.29

Tier 1 capital (to average assets) – Leverage ratio	$	525,779	8.97	$	469,086	8.25
Minimum leverage requirement		234,550	4.00		227,418	4.00

Excess	$	291,229	4.97	$	241,668	4.25

Risk-weighted assets	$	4,998,192		$	4,672,951
Total average assets (1)	$	5,863,745		$	5,685,449

(1)	Average assets represent average balances for the second quarter of 2005 and the fourth quarter of 2004.

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 Federal Home Loan Bank (“FHLB”). At June 30, 2005, our liquidity ratio (defined as net cash, short-term and marketable securities to net deposits and short-term liabilities) was at 21.5%, which is a slight decrease from the 25.5% at year-end 2004.

To supplement its liquidity needs, the Bank maintains a total credit line of $183.5 million for federal funds with three correspondent banks, and master agreements with four brokerage firms whereby up to $550.0 million would be available through the sale of securities subject to repurchase. The Bank is also a shareholder of the FHLB of San Francisco, enabling it to have access to lower cost FHLB financing when necessary. As of June 30, 2005, based on collateral pledged, the Bank had a total credit line with the FHLB of San Francisco totaling $487.7 million. The total credit outstanding with the FHLB of San Francisco at June 30, 2005, was $275.0 million. These borrowings are secured by securities.

Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities sold under agreements to repurchase, and investment securities available-for-sale. At June 30, 2005, such assets at fair value totaled $1.44 billion, with $845.8 million pledged as collateral for borrowings and other commitments. The remaining $591.6 million was available as additional liquidity or to be pledged as collateral for additional borrowings.

The Company had a significant portion of its time deposits maturing within one year or less as of June 30, 2005. 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 that the outflow will be minimal and can be replenished through our normal growth in deposits. Management believes all the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs.

The Bancorp obtains funding for its activities primarily through borrowings under its $30.0 million revolving line of credit with another commercial bank, dividend income contributed by the Bank and proceeds from the issuance of securities, including proceeds from the issuance of its common stock pursuant to its Dividend Reinvestment Plan and the exercise of stock options. Dividends paid to the Bancorp by the Bank are subject to regulatory limitations. The business activities of the Bancorp consist primarily of the operation of the Bank with limited activities in other investments. Management believes the Bancorp’s liquidity generated from its prevailing sources is sufficient to meet its operational needs.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending 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 Company’s traditional business activities of extending loans and accepting deposits. 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 100 basis point increments.

Although the modeling is very 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 rates changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.

We establish a tolerance level in our policy to define and limit interest income volatility to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. At June 30, 2005, 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 5.5%, 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 10.9%. 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 5.6%, 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 6.6%.

The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level to value the net economic value of our portfolio of

assets and liabilities in our policy to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. At June 30, 2005, if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that the net economic value of our portfolio of assets and liabilities would increase 0.5%, and conversely, if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that the net economic value of our assets and liabilities would increase by 11.1%.

Financial Derivatives

In 2004, the Bank entered into $85.4 million of interest rate swaps terminating in 2009 that could be terminated after two years at the election of the counterparty (swaptions) to mitigate risks associated with changes to the fair value of a like amount of fixed rate certificates of deposit (Five Year CDs) that have similar call features. All of these swaptions were initially designated as fair value hedges against the Five Year CDs and the Bank expected a highly effective correlation between changes in the fair values of the swaptions and changes in the fair value of the Five Year CDs. However, at December 31, 2004, there was a highly effective correlation for only one group of Five Year CDs with a principal amount of $13.9 million and an unrealized gain of $0.1 million. The unrealized loss on the swaptions and the unrealized gain on the $13.9 million of Five Year CDs were recorded in income for 2004. The unrealized loss on the ineffective swaptions at December 31, 2004, of $50,000 was recorded in income for 2004.

To mitigate risks associated with changes to the fair value of $25.8 million of Three Year CDs, on January 18, 2005, the Bank entered into swaptions that will terminate in 2007 and that can also be terminated after one year from the initial issuance of the Three Year CDs at the election of the counterparty in exchange for a cash payment of $163,000. For the initial term of the swaptions, the Bank received interest at a weighted average fixed rate of 2.39% and will pay interest at a rate of LIBOR less 12.5 basis points. If the swaptions were not terminated in 2005, then the Bank would receive interest at a weighted average rate of 3.85% and pay interest at a rate of LIBOR less 12.5 basis points for the last two years of the swap term. All of these swaptions were initially designated as fair value hedges and were highly effective correlation between changes in the fair values of the swaptions and changes in the fair value of the Three Year CDs. On May 9, 2005, the Company terminated the $25.8 million swaptions related to the Three Year CDs in exchange for a cash payment of $163,000. The changes in fair values of the Three Year CD’s and the $25.8 million swaptions were recorded in income through the date the swaptions were terminated. This included a net realized gain on the swaptions of $137,000 and the net realized loss on the. Three Year CDs of $135,000 have been recorded in income for the second quarter of 2005. The net realized gain or loss was zero on the swaptions and zero for the Three Year CD’s for the first six months of 2005.

In April 2005, the Bank took in a total of $8.9 million in one year certificates of deposit that pays a minimum interest of 0.5% plus additional interest tied to 60% of the appreciation of four foreign currencies against the US dollar. Under SFAS No. 133, a certificate of deposit that pays interest based on changes in exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e. the certificate of deposit). The fair value of the embedded derivative at June 30, 2005, was $170,000 and is included in interest-bearing deposits in the consolidated balance sheet. The Bank purchased two currency options with a fair value at June 30, 2005, of $114,000 to manage its exposure to the appreciation of two of these foreign currencies. For the quarter ended June 30, 2005, the net impact on the consolidated statement of income related to these currency linked certificates of deposit was less than $25,000.

ITEM 4.

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 13(a)-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There has not been any change in our internal control over financial reporting, that occurred during the fiscal quarter covered by this report, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Bancorp’s wholly-owned subsidiary, Cathay Bank, has been a party to ordinary routine litigation from time to time incidental to various aspects of its operations. Management is not currently aware of any litigation that is expected to have material adverse impact on the Company’s consolidated financial condition, or the results of operations.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ISSUER PURCHASES OF EQUITY SECURITIES


Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(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
Month #1 (April 1, 2005 - April 30, 2005)	166,000	$	32.12	166,000	1,000,845
Month #2 (May 1, 2005 - May 31, 2005)	264,500	$	33.78	264,500	736,345
Month #3 (June 1, 2005 - June 30, 2005)	284,642	$	33.04	284,642	451,703
Total	715,142	$	33.10	715,142	451,703

In April 2001, the Board of Directors approved a stock repurchase program of up to $15 million of our common stock. On May 2, 2005, the Company completed the April 2001 repurchase plan and repurchased from April 2001 to May 2005, a total of 830,065 shares of our common stock for $15 million, or $18.07 per share.

On March 18, 2005, the Board of Directors approved a new stock repurchase program to buy back up to an aggregate of one million shares of the Company’s common stock following the completion of April 2001 stock buyback authorization. During the second quarter of 2005, the Company repurchased 548,297 shares under the March 2005 buyback authorization for a total of $18.3 million, or $33.40 a share. As of June 30, 2005, 451,703 shares remain under the Company’s latest stock buyback authorization which was announced on March 18, 2005.

For the first six months of 2005, the Company repurchased 738,542 shares for $24.5 million, or $33.18 cost per share under both the April 2001 repurchase program and the March 2005 repurchase program.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders of Cathay General Bancorp was held on May 9, 2005, for the purpose of considering and acting upon the following:

1. Election of Directors: Three directors were elected as Class III directors to serve until the 2008 Annual Meeting and the votes cast for or withheld were as follows:


	FOR	%	WITHHELD
Patrick S.D. Lee	43,335,928	98.1	838,251
Ting Y. Liu	43,197,728	97.8	976,451
Nelson Chung	43,711,475	99.0	462,704

Other Directors whose terms of office continued after the meeting:


Term ending in 2006 (Class I)		Term ending in 2007 (Class II)
Michael M.Y. Chang		Kelly L. Chan
Anthony M. Tang		Dunson K. Cheng
Thomas G. Tartaglia		Thomas C.T. Chiu
Peter Wu		Joseph C.H. Poon

2. To approve the Cathay General Bancorp 2005 Incentive Plan:


FOR	%	AGAINST	ABSTAIN	BROKER NON-VOTE
27,735,963	80.6	6,301,386	369,484	9,767,346

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

(i)

Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(ii)

Exhibit 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(iii)

Exhibit 32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(iv)

Exhibit 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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.


	Cathay General Bancorp
	(Registrant)

Date: August 9, 2005	By	/s/ Dunson K. Cheng
		Dunson K. Cheng
		Chairman, President, and Chief Executive Officer

Date: August 9, 2005	By	/s/ Heng W. Chen
		Heng W. Chen
		Executive Vice President and Chief Financial Officer