CATY

Cathay General Bancorp 2005 10-K Summary

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2005. Cathay General Bancorp is a Delaware corporation and the holding company for Cathay Bank, a California state-chartered commercial bank. The Bank primarily serves individuals, professionals, and small-to-medium-sized businesses, with a significant concentration in Asian-American communities. Operations are centered in Southern and Northern California, with additional branches in New York, Texas, Massachusetts, and Washington, and representative offices in Hong Kong, Shanghai, and Taipei.

Key Financial Metrics

Material Changes vs. Prior Period

• Loan Growth: Gross loans increased 21.3% to $4.65 billion, driven primarily by a 22.2% increase in commercial mortgage loans and a 30.0% increase in residential mortgages and equity lines.
• Asset Quality Improvement: Non-accrual loans decreased 17.8% to $15.8 million. Net charge-offs were $2.1 million (5 basis points of average loans), down from $2.9 million in 2004. Consequently, the Bank recorded a reversal of the provision for loan losses of $0.5 million, compared to zero provision in 2004.
• Interest Rate Environment: Net interest income rose 11.9% due to higher market rates and loan volume growth. The taxable-equivalent yield on interest-earning assets increased 98 basis points to 6.20%.
• Securities Portfolio: The securities portfolio decreased from $1.79 billion to $1.22 billion as the Bank sold securities to fund loan growth. This resulted in a shift from a net unrealized gain position in 2004 to a net unrealized loss of $22.9 million in 2005 due to rising interest rates.
• Stock Repurchases: The Company repurchased 738,542 shares for $24.5 million in 2005 under two active programs.

Guidance, Outlook, and Risks

• Acquisition Activity: On February 21, 2006, the Company announced a definitive agreement to acquire Great Eastern Bank (GEB), a New York-based bank with approximately $330 million in assets. The deal is expected to close in April 2006 and will more than double the Company's presence in New York.
• Regulatory Capital: The Company remains "well capitalized" under regulatory guidelines. Tier 1 risk-based capital ratio was 10.61% and total risk-based capital ratio was 11.72% as of year-end 2005.
• Tax Contingency: The Company is involved in a dispute with the California Franchise Tax Board (FTB) regarding tax benefits from a regulated investment company for tax years 2000-2002. As of December 31, 2005, the Company recorded a $12.1 million net state tax receivable (equivalent to $7.9 million after federal benefits). An adverse outcome could result in the loss of this receivable.
• Key Risks: Management highlights risks related to interest rate fluctuations, concentration in California real estate markets, potential deterioration in asset quality, and the impact of Asian economic conditions on its customer base.

Investor Verification Checklist

• Loan Concentration: Verify the specific exposure to commercial real estate and construction loans, which comprise a significant portion of the portfolio and are sensitive to local economic conditions.
• Tax Receivable Realization: Confirm the status of the $12.1 million California tax refund claim and the likelihood of the FTB disallowing the deduction.
• Acquisition Integration: Monitor the progress and integration costs associated with the pending acquisition of Great Eastern Bank.
• Interest Rate Sensitivity: Review the asset-liability management strategy given the shift to a net unrealized loss position in the securities portfolio due to rising rates.
• Regulatory Compliance: Note that the Memorandum of Understanding (MOU) with the FDIC regarding Bank Secrecy Act compliance was lifted in September 2005, but continued monitoring of compliance costs is warranted.