CATY

Cathay General Bancorp 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2005. Cathay General Bancorp (the "Bancorp") is the holding company for Cathay Bank, which operates branches primarily in California, New York, Texas, Washington, and Massachusetts, with representative offices in Asia. The Bancorp completed a merger with GBC Bancorp in 2003 and is currently pursuing the acquisition of Great Eastern Bank.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 15.0% year-over-year in Q3 2005, driven primarily by a 9.5% increase in net interest income due to loan growth and higher yields.
• Asset Growth: Gross loans increased 14.0% year-over-year to $4.37 billion, with commercial mortgage loans rising 13.9% and commercial loans rising 11.0%.
• Asset Quality: Non-performing assets (NPAs) decreased significantly to $17.5 million (0.40% of gross loans) from $29.2 million in the prior year. The allowance for loan losses was reduced to $61.1 million, representing 1.40% of gross loans.
• Securities Portfolio: Total securities decreased 27% to $1.32 billion due to sales and pay-downs to fund loan growth. The portfolio shifted from a net unrealized gain of $6.1 million at year-end 2004 to a net unrealized loss of $17.3 million due to rising interest rates.
• Expense Management: Non-interest expense increased 13.9% year-over-year, largely due to higher salaries (including stock-based compensation) and professional services.

Outlook, Risks, and Contingencies

• Acquisition Activity: The Company is actively pursuing the acquisition of Great Eastern Bank. It exercised options to purchase 41% of the bank's stock in October 2005 and raised its bid to compete with another suitor (UCBH Holdings). Closing is subject to regulatory approval.
• Regulatory Compliance: The FDIC terminated a Memorandum of Understanding (MOU) regarding Bank Secrecy Act compliance in September 2005, citing substantial compliance by the Bank.
• Tax Contingency: The Company faces a dispute with the California Franchise Tax Board regarding tax benefits from Regulated Investment Company (RIC) transactions for years 2000-2002. The Company has paid taxes and interest to claim a refund of approximately $12.1 million (net state tax receivable), but an adverse outcome could result in a loss of this amount.
• Market Risk: Interest rate sensitivity analysis indicates that a 200 basis point increase in rates would increase net interest income by 9.1% over the next 12 months, while a 200 basis point decrease would reduce it by 8.0%.
• Stock Repurchase: The Company has a program to repurchase up to 1 million shares. As of September 30, 2005, 451,703 shares remained available for purchase under the March 2005 authorization.

Investor Verification Checklist

• Great Eastern Bank Acquisition: Verify the status of regulatory approvals and the final terms of the proposed transaction.
• California Tax Dispute: Monitor the status of the refund claim with the California Franchise Tax Board and any potential penalties.
• Asset Quality Trends: Confirm the sustainability of the decline in non-performing assets and the adequacy of the allowance for loan losses given the concentration in commercial real estate.
• Securities Valuation: Review the impact of rising interest rates on the unrealized losses in the available-for-sale securities portfolio and the potential for other-than-temporary impairment.
• Stock Buyback Execution: Track the execution of the remaining 451,703 shares authorized for repurchase under the current program.