UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

FORM 10-K

Mark One

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

For the fiscal year ended December 31, 2005

or

[ ] 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 000-24939

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	95-4703316 (I.R.S. Employer Identification No.)
135 North Los Robles Ave., 7th Floor, Pasadena, California  (Address of principal executive offices)	91101  (Zip Code)

Registrant's telephone number, including area code:

(626) 768-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
NONE	NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [x] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]

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 regis-trant 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 if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [x]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filed [x]  Accelerated filer [ ]  Non-accelerated filer [ ]

The aggregate market value of the registrant’s common stock held by non-affiliates is approximately $1,745,341,271 (based on the June 30, 2005 closing price of Common Stock of $33.59 per share).

As of February 28, 2006, 56,674,229 shares of East West Bancorp, Inc. Common Stock were outstanding.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

DOCUMENT INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Annual Meeting of Stockholders - Part III

EAST WEST BANCORP, INC.

2005 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I 3

Item 1.	Business	3
Item 1A.	Risk Factors	23
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Submission of Matters to a Vote of Security Holders	24

PART II 25

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	25
Item 6.	Selected Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 8.	Financial Statements and Supplementary Data	61
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	61
Item 9A.	Controls and Procedures	61
Item 9B.	Other Information	64

PART III 64

Item 10.	Directors and Executive Officers of the Registrant	64
Item 11.	Executive Compensation	64
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	65
Item 13.	Certain Relationships and Related Transactions	65
Item 14.	Principal Accountant Fees and Services	65

PART IV 66

Item 15. Exhibits, Financial Statement Schedules 66

SIGNATURES	111
EXHIBIT INDEX	112

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PART I

 Certain matters discussed in this Annual Report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “1933 Act” and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act” and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates and projections of future performance. The Company’s actual results, performance, or achievements may differ significantly from the results, performance, or achievements expected or implied in such forward-looking statements. For discussion of some of the factors that might cause such differences, see “Item 1A. RISK FACTORS.” The Company does not undertake, and specifically disclaims any obligation to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements.

ITEM 1. BUSINESS

Organization

East West Bancorp, Inc. East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company” or “we”) is a bank holding company incorporated in Delaware on August 26, 1998 and registered under the Bank Holding Company Act of 1956, as amended. The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of East West Bank, or the “Bank”. The Bank is the Company’s principal asset. In addition to the Bank, the Company has seven other subsidiaries, namely East West Insurance Services, Inc., East West Capital Trust I, East West Capital Trust II, East West Capital Statutory Trust III, East West Capital Trust IV, East West Capital Trust V, and East West Capital Trust VI.

East West Insurance Services, Inc. On August 22, 2000, East West completed the acquisition of East West Insurance Services, Inc. or, the “Agency”, in a stock exchange transaction. The Agency provides business and consumer insurance services to the Southern California market. The Agency runs its operations autonomously from the operations of the Company.

Other Subsidiaries of East West Bancorp, Inc. The Company has established six other subsidiaries as statutory business trusts, East West Capital Trust I and East West Capital Trust II in 2000, East West Capital Statutory Trust III in 2003, East West Capital Trust IV and East West Capital Trust V in 2004, and East West Capital Trust VI in 2005, collectively referred to as the “Trusts”. In six separate private placement transactions, the Trusts have issued either fixed or variable rate capital securities representing undivided preferred beneficial interests in the assets of the Trusts. East West is the owner of all the beneficial interests represented by the common securities of the Trusts. The purpose of issuing the capital securities was to provide the Company with a cost-effective means of obtaining Tier I capital for regulatory purposes. In accordance with Financial Accounting Standards Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN No. 46R”), the Trusts are not consolidated into the accounts of the Company.

East West’s principal business is to serve as a holding company for the Bank and other banking or banking-related subsidiaries which East West may establish or acquire. East West has not engaged in any other activities to date. As a legal entity separate and distinct from its subsidiaries, East West’s principal source of funds is, and will continue to be, dividends that may be paid by its subsidiaries. East West’s other sources of funds include proceeds from the issuance of its common stock in connection with stock option and warrant exercises and employee stock purchase plans. At December 31, 2005, the Company had $8.28 billion in total consolidated assets, $6.72 billion in net consolidated loans, and $6.26 billion in total consolidated deposits.

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The principal office of the Company is located at 135 N. Los Robles Ave., 7^th Floor, Pasadena, California 91101, and the telephone number is (626) 768-6000.

East West Bank. East West Bank was chartered by the Federal Home Loan Bank Board in June 1972, as the first federally chartered savings institution focused primarily on the Chinese-American community, and opened for business at its first office in the Chinatown district of Los Angeles in January 1973. From 1973 until the early 1990's, the Bank conducted a traditional savings and loan business by making predominantly long-term, single family residential and commercial and multifamily real estate loans. These loans were made principally within the ethnic Chinese market in Southern California and were funded primarily with retail savings deposits and advances from the Federal Home Loan Bank of San Francisco. The Bank has emphasized commercial lending since its conversion to a state-chartered commercial bank on July 31, 1995. The Bank now also provides loans for commercial, construction, and residential real estate projects and for the financing of international trade for companies in California.

Acquisitions of existing banks have contributed to the Bank’s growth. On May 28, 1999, the Bank completed its acquisition of First Central Bank, N.A. for an aggregate cash price of $13.5 million. First Central Bank had three branches in Southern California--one branch located in the Chinatown sector of Los Angeles, one branch in Monterey Park and one branch in Cerritos. The Bank acquired approximately $55.0 million in loans and assumed approximately $92.6 million in deposits.

On January 18, 2000, the Bank completed its acquisition of American International Bank for an aggregate cash price of $33.1 million. American International Bank had eight branches in Southern California. The Bank acquired approximately $107.9 million in loans and assumed approximately $170.8 million in deposits.

On January 16, 2001, the Bank completed the acquisition of Prime Bank for a combination of shares and cash valued at $16.6 million. Prime Bank was a one-branch commercial bank located in the Century City area of Los Angeles. The Bank acquired approximately $45.0 million in loans and assumed approximately $98.1 million in deposits.

On March 14, 2003, the Bank completed its acquisition of Pacific Business Bank for an aggregate cash price of $25.0 million. Pacific Business Bank operated four branches in Southern California located in Santa Fe Springs, Carson, El Monte, and South El Monte. The Bank acquired approximately $110.1 million in loans and $134.9 million in deposits.

On August 6, 2004, the Bank completed its acquisition of Trust Bancorp, parent company of Trust Bank, in an all-stock transaction valued at $32.9 million. Trust Bank operated four branches in Southern California, located in Monterey Park, Rowland Heights, West Covina and Arcadia. The Bank acquired approximately $164.0 million in loans and assumed $193.4 million in deposits through this acquisition.

On September 6, 2005, the Bank completed its acquisition of United National Bank (“UNB”), a commercial bank headquartered in San Marino, California. The purchase price was $177.9 million with sixty percent paid in stock and the remainder in cash. UNB provided community banking services through eleven branches, with eight located in Southern California, two in Northern California and one in Houston, Texas. The Bank acquired approximately $665.0 million in net loans receivable and assumed $865.1 million in deposits through this acquisition.

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On December 23, 2005, we signed a definitive agreement to acquire Standard Bank, a federal savings bank headquartered in Monterey Park, California. Standard Bank provides banking services to the community through six branches in the Los Angeles metropolitan area. At December 31, 2005, Standard Bank had total assets of $922.6 million, net loans of $500.3 million and total deposits of $747.0 million. Under the terms of the agreement, the shareholders of Standard Bank will receive consideration of two times book value, or approximately $204 million. The shareholders of Standard Bank will receive a minimum of 65% and up to 100% of the merger consideration in shares of East West Bancorp common stock. The acquisition is expected to close in the first quarter of 2006, subject to requisite regulatory approvals.

The Bank has also grown through strategic partnerships and additional branch locations. On August 30, 2001, the Bank entered into an exclusive ten-year agreement with 99 Ranch Market to provide retail banking services in their stores throughout California. 99 Ranch Market is the largest Asian-focused chain of supermarkets on the West Coast, with twenty-one full service stores in California, two in Washington, and affiliated licensee stores in Arizona, Georgia, Hawaii, Nevada, and Indonesia. Tawa Supermarket Companies or “Tawa” is the parent company of 99 Ranch Market. Tawa’s property development division owns and operates many of the shopping centers where 99 Ranch Market stores are located. We are currently providing in-store banking services to eight 99 Ranch Market locations in Southern California and one in Northern California.

On January 20, 2003, the Bank opened its first overseas office in Beijing, China. The Beijing representative office serves to further develop the Bank’s existing international banking capabilities. In addition to facilitating traditional letters of credit and trade finance business, the Beijing office allows the Bank to assist existing clients, as well as develop new business relationships. Through this office, the Bank intends to focus on growing its export-import lending volume by aiding domestic exporters in identifying and developing new sales opportunities to China-based customers as well as capturing additional letters of credit business generated from China-based exports through broader correspondent banking relationships with a variety of Chinese financial institutions.

Banking Services

The Bank was the second largest independent commercial bank in Southern California as of December 31, 2005, and one of the largest banks in the United States that focuses on the Chinese-American community. Through its network of 56 banking locations, the Bank provides a wide range of personal and commercial banking services to small and medium-sized businesses, business executives, professionals, and other individuals. The Bank offers multilingual services to its customers in English, Cantonese, Mandarin, Vietnamese, and Spanish. The Bank also offers a variety of deposit products which includes the traditional range of personal and business checking and savings accounts, time deposits and individual retirement accounts, travelers' checks, safe deposit boxes, and MasterCard and Visa merchant deposit services.

The Bank’s lending activities include residential and commercial real estate, construction, commercial, trade finance, accounts receivable, small business administration, or the “SBA”, inventory and working capital loans. It provides commercial loans to small and medium-sized businesses with annual revenues that generally range from several million to $200 million. In addition, the Bank provides short-term trade finance facilities for terms of less than one year primarily to U.S. importers and manufacturers doing business in the Asia Pacific region. The Bank’s commercial borrowers are engaged in a wide variety of manufacturing, wholesale trade, and service businesses.

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The Company’s management has identified four principal operating segments within the organization: retail banking, commercial lending, treasury, and residential lending. Although all four operating segments offer financial products and services, they are managed separately based on each segment’s strategic focus. While the retail banking segment focuses primarily on retail operations through the Bank’s branch network, certain designated branches have responsibility for generating commercial deposits and loans. The commercial lending segment, which includes commercial real estate, primarily generates commercial loans and deposits through the efforts of commercial lending officers located in the Northern and Southern California production offices. The treasury department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk; while the residential lending segment is mainly responsible for the Bank’s portfolio of single family and multifamily loans. Information about the financial results of our operating segments can be found in Note 24 of our consolidated financial statements presented elsewhere herein.

Market Area and Competition

The Bank concentrates on marketing its services in the Los Angeles metropolitan area, Orange County, the San Francisco Bay area, San Mateo County, the Silicon Valley area in Santa Clara County and Alameda County, with a particular focus on regions with a high concentration of ethnic Chinese. The ethnic Chinese markets within the Bank’s primary market area have experienced rapid growth in recent years.According to information provided by the California State Department of Finance, there were an estimated 4.7 million Asians and Pacific Islanders residing in California, or 13.2% of the total population, as of March 2004. As California continues to gain momentum as the hub of the Pacific Rim, the Bank provides important competitive advantages to its customers participating in the Asia Pacific marketplace. We believe that our customers benefit from our understanding of Asian markets and cultures, our corporate and organizational ties throughout Asia, as well as our international banking products and services. We believe that this approach, combined with the extensive ties of our management and Board of Directors to the growing Asian and ethnic Chinese communities, provides us with an advantage in competing for customers in our market area.

The banking and financial services industry in California generally, and in our market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers.

The Bank competes for loans, deposits, and customers with other commercial banks, savings and loan associations and savings banks, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Some of these competitors are larger in total assets and capitalization, have greater access to capital markets, including foreign-ownership, and offer a broader range of financial services than the Bank. The Bank has 55 branches in California located in the following counties: Los Angeles, Orange, San Francisco, San Mateo, Santa Clara and Alameda. Neither the deposits nor loans of the offices of the Bank exceed 1% of the deposits or loans of all financial services companies located in the counties in which it operates.

Additionally, the Bank has one branch in Houston, Texas as a result of the UNB acquisition in September 2005.

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Recently Issued Accounting Standards

In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 is effective for loans and debt securities acquired by the Company after December 15, 2004. The adoption of this Statement on January 1, 2005 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This Statement supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance and is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.

This Statement requires a public entity to measure the cost of employee services received in exchange for award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

The revised accounting for stock-based compensation requirements must be adopted by the Company on January 1, 2006. SFAS No. 123R allows for two alternative transition methods. The Company intends to follow the modified prospective method, which requires application of the new statement to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite services are rendered on or after the effective date. The compensation cost of that portion of awards shall be based on the grant-date fair value of those awards as calculated for pro-forma disclosures under the original SFAS No. 123. Had the Company adopted SFAS No. 123R in prior periods, the impact on net income and earnings per share would have been approximately similar to the pro forma net income and earnings per share as disclosed in Note 1 of our consolidated financial statements presented elsewhere herein. Stock option expense for fiscal 2006 is estimated to be $1.0 million, net of tax, which may change as a result of future stock option grants, forfeitures and/or other items.

7

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which addresses accounting for changes in accounting principle, changes in accounting estimates, changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions and error correction.  SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle and error correction unless impracticable to do so.  SFAS No. 154 states an exception to retrospective application when a change in accounting principle, or the method of applying it, may be inseparable from the effect of a change in accounting estimate.  When a change in principle is inseparable from a change in estimate, such as depreciation, amortization or depletion, the change to the financial statements is to be presented in a prospective manner.  SFAS No. 154 and the required disclosures are effective for accounting changes and error corrections in fiscal years beginning after December 15, 2005.

In November 2005, the FASB issued Staff Position (“FSP”) Nos. FAS 115-1 and 124-1 to address the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impaired loss.  This FSP nullified certain requirements of Emerging Issues Task Force 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1), and references existing guidance on other than temporary impairment.  Furthermore, this FSP creates a three step process in determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss.  The FSP is effective for reporting periods beginning after December 15, 2005.  It is not anticipated that adoption will have a material impact on our financial condition or results of operations.

During December 2005, the FASB issued FSP Statement of Position (“SOP”) 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk, which addresses the circumstances under which the terms of loan products give rise to such risk and the disclosures or other accounting considerations that apply for entities that originate, hold, guarantee, service, or invest in loan products with terms that may give rise to a concentration of credit risk. The guidance under this FSP is effective for interim and annual periods ending after December 19, 2005 and for loan products that are determined to represent a concentration of credit risk, disclosure requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, should be provided for all periods presented.  The adoption of this FSP did not have a significant impact on the Company’s consolidated financial statements.

Economic Conditions, Government Policies, Legislation, and Regulation

The Company’s profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on our interest-earning assets, such as loans extended to our clients and securities held in our investment portfolio, will initially comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on the Company and the Bank cannot be predicted.

The Company’s business is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System, or the “FRB”. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on the Company cannot be predicted.

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From time to time, legislation is enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers, such as recent federal legislation permitting affiliations among commercial banks, insurance companies and securities firms. The Company cannot predict whether any potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. In addition, litigation and investigations have been initiated by some state authorities that assert certain state laws are not preempted by federal law and therefore such state laws apply to federally chartered banks and thrifts. If changes result from these actions, federally chartered banks like ours could be subject to additional regulation and compliance costs. See “Item 1. BUSINESS - Supervision and Regulation.”

Supervision and Regulation

General

The Company and the Bank are extensively regulated under both federal and certain state laws. This regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of stockholders of the financial institution. Set forth below is a summary description of the material laws and regulations which relate to our operations. The description is qualified in its entirety by reference to the applicable laws and regulations.

The Company

As a bank holding company, the Company is subject to regulation and examination by the FRB under the Bank Holding Company Act of 1956, as amended, or the “BHCA”. The Company is required to file with the FRB periodicreports and such additional information as the FRB may require. The FRB’s bank holding company rating system emphasizes risk management and evaluation of the potential impact of nondepository entities on safety and soundness.

The FRB may require us to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of our banking subsidiary. The FRB also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, we must file written notice and obtain FRB approval prior to purchasing or redeeming our equity securities. Further, we are required by the FRB to maintain certain levels of capital. See “Capital Standards.”

The Company is required to obtain prior FRB approval for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior FRB approval is also required for the merger or consolidation of the company and another bank holding company.

The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to our subsidiaries. However, subject to prior FRB approval, we may engage in any, or acquire shares of companies engaged in, activities that the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company may also engage in these and certain other activities pursuant to our election of financial holding company status.

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It is the policy of the FRB that each bank holding company serve as a source of financial and managerial strength to its subsidiary bank(s) and it may not conduct operations in an unsafe or unsound manner. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both.

The Company is also a bank holding company within the meaning of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Financial Institutions (the “DFI”).

Financial Holding Companies

Bank holding companies that elect to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities without prior FRB notice or approval that are determined by the FRB to be financial in nature or are incidental or complementary to activities that are financial in nature. “Financial in nature” activities include:

·   lending, exchanging, transferring, investing for others, or safeguarding financial assets other than money or securities;

·   providing any device or other instrumentality for transferring money or other financial assets;

·   arranging, effecting or facilitating financial transactions for the account of third parties;

·   securities underwriting;

·   dealing and market making;

·   sponsoring mutual funds and investment companies;

·   insurance underwriting and agency sales;

·   merchant banking investments; and

·   activities that the FRB, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

In order to elect or retain financial holding company status, all of a bank holding company’s depository institution subsidiaries must be well capitalized, well managed, and, except in limited circumstances, be in satisfactory compliance with the Community Reinvestment Act, or the “CRA”. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company. A bank holding company that is not also a financial holding company can only engage in banking and such other activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Company elected to become a financial holding company on July 17, 2000 and is currently in compliance with the financial holding company election requirements.

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The Bank

As a California chartered bank, the Bank is subject to primary supervision, periodic examination, and regulation by the DFI. In September 2004, the Bank became a member bank of the Federal Reserve System and the FRB replaced the Federal Deposit Insurance Corporation, or the “FDIC” as the Bank’s primary federal regulator. If, as a result of an examination of the Bank, the DFI or the FRB should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the DFI and the FRB. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to cause the termination of the Bank’s FDIC deposit insurance, which for a California chartered bank would result in a revocation of the Bank’s charter.

The DFI also possesses broad powers to take corrective and other supervisory actions to resolve the problems of California state-chartered banks. These enforcement powers include cease and desist orders, the imposition of fines, the ability to take possession of a bank and the ability to close and liquidate a bank.

 Any changes in federal or state banking laws or the regulations of the banking agencies could have a material adverse impact on the Company, the Bank and our operations. For example, in January 2006, the federal banking agencies jointly issued proposed guidance for banks and thrifts with high and increasing concentrations of commercial real estate (“CRE”), construction, and development loans. The implementation of these guidelines in final form could result in increased reserves and capital costs for banks and thrifts with “CRE concentration.” Management believes that the Bank’s CRE portfolio as of December 31, 2005 does not have the risks associated with high CRE concentration due to mitigating factors, including low loan-to-value ratios, adequate debt coverage ratios and a wide variety of property types.

 Because Californiapermits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank can form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries, but also expanded financial activities to the same extent as a national bank. However, in order to form a financial subsidiary, the Bank must be well-capitalized and would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank to conduct directly within the bank. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in underwriting insurance (other than credit life insurance), issue annuities or engage in real estate development or investment or merchant banking. Presently, none of the Bank’s subsidiaries are financial subsidiaries.

 Federal Home Loan Bank System

 The Bank is a member of the Federal Home Loan Bank of San Francisco (the “FHLB”). Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As a FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2005, the Bank was in compliance with the stock requirements and our investment in FHLB capital stock totaled $45.7 million.

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Federal Reserve System

The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking and non-personal time deposits). At December 31, 2005, the Bank was in compliance with these requirements. As a member of the FRB of San Francisco, the Bank is required to own capital stock in the FRB. At December 31, 2005, the Bank’s investment in FRB capital stock totaled $12.3 million.

Interstate Banking and Branching

Banks have the ability, subject to certain state restrictions, to acquire by acquisition or merger branches outside their home states. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets.

Securities Registration

The Company’s securities are registered with the Securities and Exchange Commission, or the “SEC,” under the Exchange Act of 1933 and file periodic reports under the Exchange Act of 1934. As such, the Company is subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act.

The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses accounting oversight and corporate governance matters, including:

·   required executive certification of financial presentations;

·   increased requirements for board audit committees and their members;

·   enhanced disclosure of controls and procedures and internal control over financial reporting;

·   enhanced controls on, and reporting of, insider trading;

·   increased penalties for financial crimes and forfeiture of executive bonuses in certain circumstances; and

·   the prohibition of accounting firms from providing various types of consulting services to public clients and requiring accounting firms to rotate partners among public client assignments every five years.

This legislation and its implementing regulations resulted in increased costs of compliance, including certain outside professional costs. The Company incurred implementation cost of approximately $900 thousand during the year ended December 31, 2004 as a result of implementing the regulations related to this legislation.

 Dividends and Other Transfers of Funds

Dividends from the Bank constitute the principal source of income to the Company. A FRB policy statement on the payment of cash dividends states that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the FRB may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” See “Prompt Corrective Action and Other Enforcement Mechanisms” below.

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The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $229.2 million at December 31, 2005. In addition, the Bank’s regulators have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.

Capital Standards

The federal banking agencies have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk to 100% for assets with relatively high credit risk.

The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater risk. Under the capital guidelines, a banking organization’s total capital is divided into tiers. “Tier I capital” consists of (1) common equity, (2) qualifying noncumulative perpetual preferred stock, (3) a limited amount of qualifying cumulative perpetual preferred stock and (4) minority interests in the equity accounts of consolidated subsidiaries (including trust-preferred securities), less goodwill and certain other intangible assets. Qualifying Tier I capital may consist of trust-preferred securities, subject to the FRB’s final rule adopted March 4, 2005, which changed the criteria and quantitative limits for inclusion of restricted core capital elements in Tier I capital. “Tier II capital” consists of hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock that does not qualify as Tier I capital, a limited amount of the allowance for loan and lease losses and a limited amount of unrealized holding gains on equity securities. “Tier III capital” consists of qualifying unsecured subordinated debt. The sum of Tier II and Tier III capital may not exceed the amount of Tier I capital.

The risk-based capital guidelines require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier I capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier I capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier I capital to total assets must be 3%.

A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels. As discussed above, the Company is required to maintain certain levels of capital, as is the Bank. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital” for information regarding the regulatory capital guidelines as well as the Company’s and the Bank’s actual capitalization as of December 31, 2005.

The risk-based capital guidelines are based upon the 1988 capital accord of the international Basel Committee on Banking Supervision. A new international accord, referred to as Basel II, which emphasizes internal assessment of credit, market and operational risk; supervisory assessment and market discipline in determining minimum capital requirements, currently becomes mandatory in 2008 only for banks with over $250 billion in assets or total on-balance-sheet foreign exposure of $10 billion or more. Alternative capital requirements are under consideration by the U.S. federal banking agencies for smaller U.S. banks which may be negatively impacted competitively by certain provisions of Basel II.

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Prompt Corrective Action

Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall within any undercapitalized category. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios:

·   “well capitalized;”

·   “adequately capitalized;”

·   “undercapitalized;”

·   “significantly undercapitalized;” and

·   “critically undercapitalized.”

The regulations use an institution’s risk-based capital, leverage capital and tangible capital ratios to determine the institution’s capital classification. An institution is treated as well capitalized if its total capital to risk-weighted assets ratio is 10.00% or more; its core capital to risk-weighted assets ratio is 6.00% or more; and its core capital to adjusted total assets ratio is 5.00% or more. At December 31, 2005, the Company’s and the Bank’s capital ratios exceed these minimum percentage requirements for well capitalized institutions.

An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.

Safety and Soundness Standards

In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators and/or state regulations for state banks, for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized - without the express permission of the institution’s primary regulator.

The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.

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Premiums for Deposit Insurance

Through the Bank Insurance Fund, or “BIF”, and the Savings Association Insurance Fund, or “SAIF”, the FDIC insures our customer deposits up to prescribed limits for each depositor. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required.

The assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. Due principally to continued growth in deposits, the BIF is nearing its minimum ratio of 1.25% of insured deposits as mandated by law. If the ratio drops below 1.25%, it is likely the FDIC will be required to assess premiums on all banks. Any increase in assessments or the assessment rate could have a material adverse effect on earnings, depending on the amount of the increase. Furthermore, the FDIC is authorized to raise insurance premiums under certain circumstances.

The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit insurance for one or more of the Company’s subsidiary depository institutions could have a material adverse effect on the Company’s earnings, depending on the collective size of the particular institutions involved.

All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds, commonly referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rate for the fourth quarter of fiscal 2005 was 1.34 basis points for each $100 of assessable deposits. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC’s insurance funds and do not vary depending on a depository institution’s capitalization or supervisory evaluations.

The enactment in February, 2006, of the Federal Deposit Insurance Reform Act of 2006, or the “FDIRA”, provides, among other things, for the merger of the BIF and the SAIF into the Deposit Insurance Fund; future inflation adjustment increases in the standard maximum deposit insurance amount of $100,000; the increase of retirement account coverage to $250,000; changes in the formula and factors to be considered by the FDIC in calculating the FDIC reserve ratio, assessments and dividends, and a one-time aggregate assessment credit for depository institutions in existence on December 31, 1996 (or their successors) which paid assessments to recapitalize the insurance funds after the banking crises of the late 1980s and early 1990s. The FDIC is to issue regulations implementing the provisions of FDIRA. At that time it is uncertain what effect FDIRA and the forthcoming regulations will have on the Bank.

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Loans-to-One Borrower Limitations

With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time (including the obligations to the bank of certain related entities of the borrower) may not exceed 25% (and unsecured loans may not exceed 15%) of the bank’s shareholder equity, allowance for loan losses, and any capital notes and debentures of the bank.

Extensions of Credit to Insiders and Transactions with Affiliates

The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to:

·   a bank’s or bank holding company’s executive officers, directors and principal shareholders (i.e., in most cases, those persons who own, control or have power to vote more than 10% of any class of voting securities),

·   any company controlled by any such executive officer, director or shareholder, or

·   any political or campaign committee controlled by such executive officer, director or principal shareholder.

Loans and leases extended to any of the above persons must comply with loan-to-one-borrower limits, require prior full board approval when aggregate extensions of credit to the person exceed specified amounts, must be made on substantially the same terms (including interest rates and collateral) as, and follow credit-underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with non-insiders, and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, Regulation O provides that the aggregate limit on extensions of credit to all insiders of a bank as a group cannot exceed the bank’s unimpaired capital and unimpaired surplus. Regulation O also prohibits a bank from paying an overdraft on an account of an executive officer or director, except pursuant to a written pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or a written pre-authorized transfer of funds from another account of the officer or director at the Bank. California has laws and the DFI has regulations which adopt and also apply Regulation O to the Bank.

The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B and FRB Regulation W on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of any affiliates. Such restrictions prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in any affiliate are limited, individually, to 10.0% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20.0% of the Bank’s capital and surplus. Some of the entities included in the definition of an affiliate are parent companies, sister banks, sponsored and advised companies, investment companies whereby the Bank’s affiliate serves as investment advisor, and financial subsidiaries of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law and the supervisory authority of the federal and state banking agencies. See “Item 1. BUSINESS - Supervision and Regulation - Prompt Corrective Action and Safety and Soundness Standards.

USA PATRIOT Act

The USA PATRIOT Act of 2001 and its implementing regulations significantly expanded the anti-money laundering and financial transparency laws. Under the USA PATRIOT Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships, as well as additional enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions, foreign customers and private banking customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:

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·   to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

·   to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

·   to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and

·   to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

Under the USA PATRIOT Act, financial institutions are required to establish and maintain anti-money laundering programs which include:

·   the establishment of a customer identification program;

·   the development of internal policies, procedures, and controls;

·   the designation of a compliance officer;

·   an ongoing employee training program; and

·   an independent audit function to test the programs.

The Bank has adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act. Material deficiencies in anti-money laundering compliance can result in public enforcement actions by the banking agencies, including the imposition of civil money penalties and supervisory restrictions on growth and expansion. Such actions could have serious reputation consequences for the Company andthe Bank.

Consumer Protection Laws and Regulations

Examination and enforcement by the bank regulatory agencies for non-compliance with consumer protection laws and their implementing regulations have become more intense in nature. The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.

Privacy policies are required by federal banking regulations which limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to those rules, financial institutions must provide:

·   initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates;

·   annual notices of their privacy policies to current customers; and

·   a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties.

These privacy protections affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

In addition, state laws may impose more restrictive limitations on the ability of financial institution to disclose such information. California has adopted such a privacy law that among other things generally provides that customers must “opt in” before information may be disclosed to certain nonaffiliated third parties.

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The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, or “FACT Act”, requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and gives consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. In connection with FACT Act, financial institution regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations. A consumer’s election to opt out would be applicable for at least five years.

The Check Clearing for the 21st Century Act, or “Check 21”, facilitates check truncation and electronic check exchange by authorizing a new negotiable instrument called a “substitute check,” which is the legal equivalent of an original check. Check 21 does not require banks to create substitute checks or accept checks electronically; however, it does require banks to accept a legally equivalent substitute check in place of an original. In addition to its issuance of regulations governing substitute checks, the Federal Reserve has issued final rules governing the treatment of remotely created checks (sometimes referred to as “demand drafts”) and electronic check conversion transactions (involving checks that are converted to electronic transactions by merchants and other payees).

The Equal Credit Opportunity Act, or “ECOA”, generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.

The Truth in Lending Act, or “TILA”, is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.

The Fair Housing Act, or “FH Act”, regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.

The Community Reinvestment Act, or “CRA”, is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” In its last examination for CRA compliance, as of May 3, 2004, the Bank was rated “satisfactory.”

The Home Mortgage Disclosure Act, or “HMDA”, grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. The Federal Reserve Board amended regulations issued under HMDA to require the reporting for 2004 of certain pricing data with respect to higher priced mortgage loans. The expanded 2004 HMDA data is being reviewed by federal banking agencies and others from a fair lending perspective. We do not expect that the HMDA data reported by the Bank will raise material issues regarding the Bank’s compliance with the fair lending laws.

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The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. Typically, however, predatory lending involves at least one, and perhaps all three, of the following elements:

·   making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation (“asset-based lending”)

·   inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”)

·   engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.

FRB regulations aimed at curbing such lending significantly widen the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, or “HOEPA”, a federal law that requires extra disclosures and consumer protections to borrowers. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid.

The Real Estate Settlement Procedures Act, or “RESPA”, requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties.

Due to heightened regulatory concern related to compliance with the FACT, ECOA, TILA, FH Act, CRA, HMDA, HOEPA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.

Proposed Guidance on Nontraditional Mortgage Products

On December 20, 2005, the federal banking agencies issued for comment proposed guidance on residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest, including “interest only” mortgage loans, and “payment option” adjustable rate mortgages where a borrower has flexible payment options, including payments that have the potential for negative amortization. While acknowledging that innovations in mortgage lending can benefit some consumers, the federal banking agencies in their joint press release stated their concern that these and other practices described in the guidance can present unique risks that institutions must appropriately manage. The proposed guidance states that management should (1) assess a borrower’s ability to repay the loan, including any balances added through negative amortization, at the fully indexed rate that would apply after the introductory period, (2) recognize that certain nontraditional mortgages are untested in a stressed environment and warrant strong risk management standards as well as appropriate capital and loan loss reserves, and (3) ensure that borrowers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice. It is uncertain at this time whether guidance will be adopted in final form and, if adopted, whether and to what extent final guidance may differ from the proposal and what effect the final guidance may have on financial institutions originating such residential mortgage products, including the Bank.

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Employees

 East West does not have any employees other than officers who are also officers of the Bank. Such employees are not separately compensated for their employment with the Company. As of December 31, 2005, the Bank had a total of 1,078 full-time employees and 59 part-time employees and the Agency had a total of 14 full-time employees. None of the employees are represented by a union or collective bargaining group. The managements of the Bank and Agency believe that their employee relations are satisfactory.

Available Information

 The Company also maintains an internet website at www.eastwestbank.com. The Company makes its website content available for information purposes only. It should not be relied upon for investment purposes.

 We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements for its annual shareholder meetings, as well as any amendments to those reports, as soon as reasonably practicable after the Company files such reports with the Securities and Exchange Commission. The Company’s SEC reports can be accessed through the investor information page of its website. None of the information contained in or hyperlinked from our website is incorporated into this Form 10-K. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including the Company.

Executive Officers of the Registrant

 The following table sets forth the executive officers of the Company, their positions, and their ages. Each officer is appointed by the Board of Directors of the Company or the Bank and serves at their pleasure.

Name	Age (1)	Position with Company or Bank
Dominic Ng	47	Chairman of the Board, President, and Chief Executive Officer of the Company and the Bank
Wellington Chen	46	Executive Vice President and Director of Corporate Banking Division of the Bank
K.Y. Cheng	53	Executive Vice President and Director of International Trade Banking
Donald S. Chow	55	Executive Vice President and Director of Commercial Lending of the Bank
Robert L. Dingle, Jr.	54	Executive Vice President and Chief Information Officer of the Bank
Agatha Fung	46	Executive Vice President and Head of International Banking of the Bank
Julia S. Gouw	46	Executive Vice President and Chief Financial Officer of the Company and the Bank

Douglas P. Krause	49	Executive Vice President, General Counsel, and Secretary of the Company and the Bank
Michael W. Lai	55	Executive Vice President, Northern California, of the Bank
William J. Lewis	62	Executive Vice President and Chief Credit Officer of the Bank
David L. Spigner	45	Executive Vice President and Chief Strategic Officer of the Bank
Andy Yen	48	Executive Vice President and Director of Business Banking of the Bank

________________

(1)   As of February 28, 2006

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Dominic Ng serves as Chairman, President and Chief Executive Officer of East West Bancorp, Inc. and East West Bank. Prior to taking the helm of East West in 1992, Mr. Ng was President and Chief Executive Officer of Seyen Investment, Inc. and before that spent over a decade as a CPA with Deloitte & Touche LLP. Mr. Ng serves on the Boards of Directors of the Federal Reserve Bank of San Francisco, Los Angeles Branch, the Board of Directors of Mattel, Inc., the Board of Trustees of the Asia Society, and the Board of Governors of the Bowers Museum.

Wellington Chen serves as Executive Vice President and Director of Corporate Banking Division. Prior to joining the Bank in 2003, Mr. Chen was Senior Executive Vice President of Far East National Bank (Far East), heading up their Commercial Banking and Consumer Banking groups. He also served on the Board of Directors of Far East. Mr. Chen began his career with Far East in 1986 where he held a variety of branch and credit management positions. Prior to that, Mr. Chen spent three years with Security Pacific National Bank where he began his banking career as an asset-based lending auditor. Mr. Chen serves on the Board of Directors of the Pasadena Tournament of Roses Foundation.

K. Y. Cheng serves as Executive Vice President and Director of International Trade Banking. Prior to joining the Bank in 1999, Mr. Cheng was the general manager of the Pacific Rim Business Division at Union Bank of California. Mr. Cheng has over 25 years of experience in banking and has focused his career on international, corporate and correspondent banking. He has also held positions at Wells Fargo Bank, First Interstate Bank and Mitsui Manufacturing Bank. He serves as Vice Chairman of the Board of the International Bankers Association of California and Chairman of the Board of the National Association of Chinese American Bankers. He also serves as Executive Director of the Los Angeles Economic Development Corporation and is a member of the Pacific Council on International Policy.

Donald S. Chow serves as Executive Vice President and Director of Commercial Lending of East West Bank. Mr. Chow joined the Bank in 1993 as First Vice President and Commercial Lending Manager and was promoted to Senior Vice President in 1994. Mr. Chow has over 30 years of experience in commercial lending. Before joining the Bank, Mr. Chow was First Vice President and Senior Credit Officer for Mitsui Manufacturers Bank, from 1987 to 1993, and prior to that spent over 14 years with Security Pacific National Bank where he held a number of management positions in the commercial lending area.

Robert L. Dingle, Jr. serves as Executive Vice President and Chief Information Officer of East West Bank. Prior to joining East West in November 2005, Mr. Dingle held CIO positions at IndyMac Bank, Resource Bancshares, First Union and Directors Mortgage. He also worked with Booz, Allen & Hamilton and Southwest Bancshares. Mr. Dingle has over 25 years of experience in the financial services industry.

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Agatha Fung serves as Executive Vice President and Head of International Banking of East West Bank.  In October 2005, Ms. Fung joined East West from CITIC International Financial Holdings in Hong Kong where she held positions as Head of Business Banking of CITIC Ka Wah Bank and Chief Executive Officer and Executive Director of HKCB Finance. Ms. Fung has over 20 years of banking experience and has also held senior management positions at Standard Chartered Bank and Citibank in both Hong Kong and Tokyo.

Julia S. Gouw serves as Executive Vice President and Chief Financial Officer of East West Bancorp, Inc. and East West Bank.  Ms. Gouw joined the Bank in 1989 as Vice President and Controller and was promoted to her current position in 1994. She was ranked among the top ten bank CFOs in the nation by U.S. Banker in January 2006.  Prior to joining East West, Ms. Gouw spent over five years as a CPA with KPMG LLP. She serves on the Board of Visitors of the UCLA School of Medicine and chairs the Executive Advisory Board of the Iris Cantor-UCLA Women’s Health Center. Ms. Gouw is also on the Board of Directors of Huntington Memorial Hospital.

Douglas P. Krause serves as Executive Vice President, General Counsel and Secretary of East West Bancorp, Inc. and East West Bank. Prior to joining the Bank in 1996 as Senior Vice President, Mr. Krause was Corporate Senior Vice President and General Counsel of Metrobank, from 1991 to 1996. Prior to that, Mr. Krause was with the law firms of Dewey Ballantine, and Jones, Day, Reavis and Pogue where he specialized in financial services.  Mr. Krause also serves on the governing boards of the Port of Los Angeles and of the Alameda Corridor Transportation Authority; he is the chairman of the Audit Committees of both Commissions.  Mr. Krause is also a member and subcommittee chair of the UCC Committee of the California Bar Association.

Michael W. Lai serves as Executive Vice President of East West Bank’s Northern California operations. Mr. Lai has over 25 years of experience in banking and has held a number of senior management positions. Before joining the Bank in 2000, Mr. Lai managed several private investments and provided consulting services to various financial institutions related to business organization and financing issues. Prior to that, Mr. Lai served as President, Chief Executive Officer and Director of United Savings Bank from 1994 to 1996, and as Senior Vice President, Chief Credit Officer and Director from 1991 to 1994. Mr. Lai has also worked in various management capacities for financial institutions located in New York and Hong Kong.

William J. Lewis serves as Executive Vice President and Chief Credit Officer. Mr. Lewis joined the Bank in 2002 with over 30 years of experience in banking, including a number of senior management positions.  He was Executive Vice President and Chief Credit Officer of PriVest Bank from 1998 to 2002 and held the same positions with Eldorado Bank from 1994 to 1998. Prior to this, Mr. Lewis was with Sanwa Bank for over 12 years where he administered a 35 branch region.  Before that, Mr. Lewis spent 13 years with First Interstate Bank where he held a variety of branch and credit management positions.

David L. Spigner serves Executive Vice President and Chief Strategic Officer. Prior to joining the Bank in April 2004, Mr. Spigner served as Managing Principal of Strategic Business Management, a management consulting practice of which the Bank was a client. His career includes eight years in management consulting, five of which he worked for Deloitte & Touche LLP. He served as President and Chief Executive Officer of Lil Tots, LLC for five years and prior to that spent three years as President of Seyen Trading Inc.

Andy Yen serves as Executive Vice President and Director of Business Banking Division of East West Bank. Mr. Yen joined the Bank in September 2005 through its merger with United National Bank. Before being promoted to President of UNB in 2001, Mr. Yen was the Executive Vice President from 1998 to 2000; and Senior Vice President from 1992 to 1997, overseeing both the operations and lending functions of UNB. Mr. Yen also served as a member of the Board of Directors of UNB from 1992 to 2005. Mr. Yen has over 20 years experience in commercial and real estate lending and also held positions at Tokai Bank of California and Trans National Bank before he joined UNB.

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ITEM 1A. RISK FACTORS

Risk Factors That May Affect Future Results

 In addition to other information contained in this Annual Report, the following discusses certain factors which may affect the Company’s financial results and operations and should be considered in evaluating the Company:

 Our California business focus and economic conditions in California could adversely affect our operations. The Company’s operations are located primarily in California. As a result of this geographic concentration, the Company’s results depend largely upon economic conditions in this area. A deterioration in economic conditions or a natural or manmade disaster in the Company’s market area could have a material adverse impact on the quality of the Company’s loan portfolio, the demand for its products and services, and its financial condition and results of operations.

 Changes in market interest rates could adversely affect our earnings. The Company’s earnings are impacted by changing interest rates. Changes in interest rates impact the level of loans, deposits and investments, the credit profile of existing loans, the rates received on loans and investment securities, and the rates paid on deposits and borrowings. Significant fluctuations in interest rates may have a material adverse effect on the Company’s financial condition and results of operations.

 We are subject to government regulations that could limit or restrict our activities, which in turn could adversely impact our operations. The financial services industry is subject to extensive federal and state supervision and regulation. Significant new laws or changes in existing laws may cause the Company’s results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company and a material change in these conditions could have a material adverse impact on the Company’s financial condition and results of operations.

 Failure to manage our growth may adversely affect our performance. The Company’s financial performance and profitability depends on our ability to manage our recent growth and possible future growth. In addition, any future acquisitions and our continued growth may present operating and other issues that could have an adverse effect on our financial condition and results of operations.

 Competition may adversely affect our performance. The banking and financial services businesses in the Company’s market areas are highly competitive. The Company faces competition in making loans, attracting deposits, and promoting its other products and services. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers. The results of the Company in the future may differ depending on the nature or level of competition.

 If a significant number of borrowers, guarantors and related parties fail to perform as required by the terms of their loans, we will sustain losses.  A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Company has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance, and diversifying the Company’s credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Company’s results of operations.

23

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company currently neither owns nor leases any real or personal property. The Company uses the premises, equipment, and furniture of the Bank. The Agency also currently conducts its operations in one of the administrative offices of the Bank. The Company is currently reimbursing the Bank for the Agency’s use of this facility.

Due to current growth and future anticipated needs, we entered into a new lease in 2004 for the relocation of the Bank’s corporate headquarters. The new headquarters consist of 88,000 square feet of office space at 135 North Los Robles Avenue, Pasadena, California. This lease expires in 2020. The move to the new facility was completed in February 2006. Additionally, in February 2006, we entered into a 10 year lease for 41,000 square feet of office space in El Monte, California. This facility will house our credit administration and loan servicing departments.

All other significant administrative locations, with the exception of the space currently occupied by the Agency and the Northern California administrative office, are owned by the Bank. Additionally, the Bank owns the buildings and land at 9 of its retail branch offices. For other locations, lease expiration dates range from 2006 to 2021, exclusive of renewal options. The Company believes that its existing facilities are adequate for its present purposes. The Company believes that, if necessary, it could secure alternative facilities on similar terms without adversely affecting its operations.

At December 31, 2005, the Bank’s consolidated investment in premises and equipment, net of accumulated depreciation and amortization, totaled $38.6 million. Total occupancy expense, inclusive of rental payments and furniture and equipment expense, for the year ended December 31, 2005, was $15.1 million. Total annual rental expense (exclusive of operating charges and real property taxes) was approximately $7.0 million during 2005.

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor the Bank is involved in any material legal proceedings. The Bank, from time to time, is party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. After taking into consideration information furnished by counsel to the Company and the Bank, management believes that the resolution of such issues would not have a material adverse impact on the financial position, results of operations, or liquidity of the Company or the Bank.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There was no submission of matters to a vote of security holdersduring the fourth quarter of the year ended December 31, 2005.

24

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 Market Information

 East West Bancorp, Inc. commenced trading on the NASDAQ National Market on February 8, 1999 under the symbol “EWBC.” The following table sets forth the range of sales prices for the Company’s common stock for the years ended December 31, 2005 and 2004. All sales prices have been adjusted to reflect the two-for-one stock split that became effective on or about June 21, 2004.

	2005				2004
	High		Low		High		Low
First quarter	$	42.29	$	34.86	$	28.05	$	24.45
Second quarter		37.29		30.68		31.13		26.55
Third quarter		38.43		32.09		37.25		29.70
Fourth quarter		38.88		31.57		43.68		33.40

  The foregoing reflects information available to the Company and does not necessarily include all trades in the Company’s stock during the periods indicated. The closing price of our common stock on February 28, 2006 was $37.69 per share, as reported by the Nasdaq National Market.

Issuance of Common Stock

 On September 7, 2005, we issued 3,138,701 shares of common stock at a price of $34.00 in conjunction with the acquisition of UNB.

Holders

 As of February 28, 2006, 56,674,229 shares of the Company’s common stock were held by approximately 1,247 shareholders of record.

Dividends

 We declared and paid cash dividends of $0.05 per share during each of the four quarters of 2004 and 2005. We also declared a dividend of $0.05 per share in the first quarter of 2006. Refer to “Item 1. BUSINESS - Supervision and Regulation - Dividends and Other Transfer of Funds” for information regarding dividend payment restrictions.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes presented elsewhere herein.

	2005			2004			2003			2002			2001
Summary of Operations:	(In thousands, except per share data)
Interest and dividend income	$	411,399		$	252,070		$	178,543		$	167,288		$	183,695
Interest expense		131,284			52,897			35,232			48,979			83,348
Net interest income		280,115			199,173			143,311			118,309			100,347
Provision for loan losses		15,870			16,750			8,800			10,200			6,217
Net interest income after provision for loan losses		264,245			182,423			134,511			108,109			94,130
Noninterest income		29,649			30,371			31,081			23,364			20,260
Noninterest expense		123,533			91,461			75,932			62,657			61,790
Income before provision for income taxes		170,361			121,333			89,660			68,816			52,600
Provision for income taxes		61,981			43,311			30,668			20,115			13,730
Income before cumulative effect of change in
accounting principle		108,380			78,022			58,992			48,701			38,870
Cumulative effect of change in accounting principle, net of tax (1)		-			-			-			788			(87	)
Net income	$	108,380		$	78,022		$	58,992		$	49,489		$	38,783
Basic earnings per share (2)	$	2.03		$	1.54		$	1.23		$	1.05		$	0.84
Diluted earnings per share (2)	$	1.97		$	1.49		$	1.19		$	1.00		$	0.81
Dividends per share (2)	$	0.20		$	0.20		$	0.20		$	0.14		$	0.06
Average number of shares outstanding, basic (2)		53,454			50,654			48,112			47,192			46,066
Average number of shares outstanding, diluted (2)		55,034			52,297			49,486			49,260			48,108
At Year End:
Total assets	$	8,278,256		$	6,028,880		$	4,055,433		$	3,321,489		$	2,825,303
Loans receivable, net		6,724,320			5,080,454			3,234,133			2,313,199			2,132,838
Investment securities available-for-sale		869,837			534,452			445,142			531,607			323,099
Deposits		6,258,587			4,522,517			3,312,667			2,926,352			2,417,974
Federal Home Loan Bank advances		617,682			860,803			281,300			34,000			104,000
Stockholders' equity		734,138			514,309			361,983			302,117			244,415
Shares outstanding (2)		56,519			52,501			48,857			47,764			46,752
Book value per share (2)	$	12.99		$	9.80		$	7.41		$	6.33		$	5.23
Financial Ratios:
Return on average assets		1.55	%		1.57	%		1.64	%		1.63	%		1.47	%
Return on average equity		18.27			17.86			18.12			18.29			17.73
Dividend payout ratio		9.88			12.93			16.31			12.87			7.13
Average stockholders' equity to average assets		8.48			8.77			9.04			8.92			8.26
Net interest margin		4.22			4.24			4.26			4.14			4.02
Efficiency ratio (3)		36.53			35.64			38.57			39.64			45.07
Asset Quality Ratios:
Net chargeoffs to average loans		0.08	%		0.12	%		0.06	%		0.11	%		0.21	%
Nonperforming assets to year end total assets		0.36			0.10			0.16			0.37			0.20
Allowance for loan losses to year end total gross loans		1.01			0.99			1.20			1.50			1.28

____________

(1)   In 2002, this figure represents the remaining balance of negative goodwill at December 31, 2001. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. 

(2)   Prior period amounts have been restated to reflect the 2 for 1 stock split on June 21, 2004.

(3)   Represents noninterest expense, excluding the amortization of intangibles and investments in affordable housing partnerships, divided by the aggregate of net interest income before provision for loan losses and noninterest income.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West Bancorp, Inc. and its subsidiaries, or the “Company”. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the accompanying notes presented elsewhere herein. Information related to share volume and per share amounts have been adjusted to reflect the two-for-one stock split that became effective on or about June 21, 2004.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. All our significant accounting principles are described in Note 1 of our consolidated financial statements presented elsewhere herein and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Some of our accounting principles require significant judgment to estimate values of either assets or liabilities. In addition, certain accounting principles require significant judgment in applying complex accounting principles to individual transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements.

The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact net income.

 Investment Securities

The classification and accounting for investment securities are discussed in detail in Note 1 of the consolidated financial statements presented elsewhere herein. Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities generally must be classified as held-to-maturity, available-for-sale, or trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management’s intentions with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities flow directly through earnings during the periods in which they arise, whereas for available-for-sale securities, they are recorded as a separate component of stockholders’ equity (accumulated other comprehensive income or loss) and do not affect earnings until realized. The fair values of our investment securities are generally determined by reference to quoted market prices and reliable independent sources.

We are obligated to assess, at each reporting date, whether there is an “other-than-temporary” impairment to our investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income. We examine all individual securities that are in an unrealized loss position at each reporting date for other-than-temporary impairment. Specific investment level factors we examine to assess impairment include the severity and duration of the loss, an analysis of the issuers of the securities and if there has been any cause for default on the securities and any change in the rating of the securities by the various rating agencies. Additionally, we reexamine the financial resources and overall ability the Company has and the intent management has to hold the securities until their fair values recover.

27

Aside from the corporate debt security that was determined to be impaired, resulting in a $60 thousand writedown during the first quarter of 2005, we did not have any other investment securities that were deemed to be “other-than-temporarily” impaired as of December 31, 2005. Investment securities are discussed in more detail in Note 5 to the Company’s consolidated financial statements presented elsewhere herein.

 Allowance for Loan Losses

Our allowance for loan loss methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experience, delinquency and chargeoff trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements and borrowers’ sensitivity to quantifiable external factors including commodity and finished good prices as well as acts of nature (earthquakes, floods, fires, etc.) that occur in a particular period. Qualitative factors include the general economic environment in our markets and, in particular, the state of certain industries. Size and complexity of individual credits, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in our methodologies.

During the third quarter of 2005, we enhanced our migration analysis methodology by increasing the number of risk-rated loan pools from six to eighteen categories and extending the loss horizon from five to thirteen years. A more detailed discussion of this enhanced methodology can be found in “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations—Allowance for Loan Losses.” As we add new products, increase the complexity of our loan portfolio, and expand our geographic coverage, we will continue to enhance our methodologies to keep pace with the size and complexity of the loan portfolio. Changes in any of the factors cited above could have a significant impact on the loan loss calculation. We believe that our methodologies continue to be appropriate given our size and level of complexity. This discussion should also be read in conjunction with the Company’s consolidated financial statements and the accompanying notes presented elsewhere herein including the section entitled “Loans and Allowance for Loan Losses.”

 Loan Sales

We routinely sell, and occasionally securitize, residential mortgage loans to secondary market investors. When mortgage loans are sold, we generally retain the right to service these loans and we may retain residual and other interests, which are considered retained interests in the sold or securitized loans. The gain on sale recorded on these loans depends, in part, on our allocation of the previous carrying amount of the loans to the retained interests. Previous carrying amounts are allocated in proportion to the relative fair values of the loans sold and the interests retained. The fair values of retained interests are estimated based upon the present value of the associated expected future cash flows taking into consideration future prepayment rates, discount rates, expected credit losses, and other factors that impact the value of the retained interests.

We may also record mortgage servicing assets, or “MSA”, when the benefits of servicing are expected to be more than adequate compensation to a servicer. The Company determines whether the benefits of servicing are expected to be more than adequate compensation to a servicer by discounting all of the future net cash flows associated with the contractual rights and obligations of the servicing agreement. The expected future net cash flows are discounted at a rate equal to the return that would adequately compensate a substitute servicer for performing the servicing. In addition to the anticipated rate of loan prepayments and discount rates, other assumptions such as the cost to service the underlying loans, foreclosure costs, ancillary income and float rates are also used in determining the value of the MSAs. Mortgage servicing assets are discussed in more detail in Notes 1 and 11 to the Company’s consolidated financial statements presented elsewhere herein.

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Overview

2005 was a year of both record earnings and strategic acquisitions for East West Bank. We achieved our ninth year of record earnings, achieving record net interest income, net earnings and earnings per share in 2005. Since our initial public offering in 1998, our net income has increased six-fold, from $18.0 million in 1998 to $108.4 million in 2005. The significant increase in our net income over the past several years was driven primarily by the steady annual growth in net interest income derived from our lending and deposit gathering activities. Other factors contributing to this achievement include our ability to balance rapid growth with sound underwriting standards resulting in sustained strong asset quality; our steadfast focus on controlling operating expenses which have favorably impacted our efficiency ratios; and our consistent ability to effectively integrate operations and maximize returns from past acquisitions.

During 2005, we completed another successful acquisition—our largest acquisition to date. United National Bank was headquartered in San Marino, California and provided community banking services through eleven branches, with eight located in Southern California, two in Northern California and one in Houston, Texas. As of the transaction closing date of September 6, 2005, UNB had total assets of $946.9 million, net loans of $665.0 million, and total deposits of $865.1 million. We were able to successfully integrate all of UNB’s systems into our infrastructure shortly after the closing of the transaction. The acquisition added several thousand deposit customers to our existing customer base, generating additional lending and deposit opportunities for the Company. The acquisition resulted in total goodwill of $99.5 million and core deposit premium of $15.0 million.

Additionally, on December 23, 2005, we signed a definitive agreement to acquire Standard Bank, a federal savings bank headquartered in Monterey Park, California. Standard Bank provides banking services to the community through six branches in the Los Angeles metropolitan area. At December 31, 2005, Standard Bank had total assets of $922.6 million net loans of $500.3 million and total deposits of $747.0 million. Under the terms of the agreement, the shareholders of Standard Bank will receive consideration of two times book value, or approximately $204 million. The shareholders of Standard Bank will receive a minimum of 65% and up to 100% of the merger consideration in shares of East West Bancorp common stock. The acquisition is expected to close in the first quarter of 2006, subject to requisite regulatory approvals. The impact of this acquisition to 2006 earnings is expected to be approximately $0.02 per share.

Net income surpassed the $100 million mark for the first time during 2005, totaling $108.4 million for the year, a 39% increase from $78.0 million, earned during 2004. On a per diluted share basis, we earned $1.97, or a 32% increase from $1.49 per diluted share earned during 2004. Our return on average assets in 2005 was 1.55%, compared to 1.57% in 2004 and return on average equity was 18.27% in 2005, compared to 17.86% in 2004. Management expects net income per diluted common share for 2006 to be approximately 14% higher than in 2005 based on a projected loan growth of 15% to 17% and deposit growth of approximately 14% to 16%. Our earnings projection for 2006 also assumes a stable or marginally increasing interest rate environment and continued operating efficiency.

29

Net interest income increased 41% to $280.1 million during 2005, compared with $199.2 million during 2004. The increase in net interest income is predominantly due to continued loan growth and steady increases in interest rates by the Federal Reserve during 2005 partially offset by notable increases in market interest rates paid on our deposits and borrowings. Our net interest margin decreased 2 basis points to 4.22% during 2005, compared to 4.24% during 2004. Assuming a stable or marginally increasing interest rate environment during 2006, we anticipate the net interest margin for 2006 to be in the range of 4.15% to 4.25%.

Noninterest income decreased 2% to $29.6 million during 2005 from $30.4 million in the prior year, primarily due to lower net gain on sales of fixed assets in 2005. During 2004, we recorded gains from the disposition of fixed assets in the amount of $3.0 million compared to $52 thousand recorded in 2005. The decrease in gain on sales of fixed assets was partially offset by an increase in net gain on investment securities available-for-sale, which increased 90% to $4.3 million in 2005. The increase in net gain on investment securities available-for-sale was due to improved market conditions. Additionally, we experienced growth in branch fees and letters of credit fees primarily due to overall increases in our asset and deposit base.

As a result of our continued expansion during 2005, total noninterest expense increased 35% to $123.5 million in 2005, compared with $91.5 million for the prior year. This increase is primarily driven by a 37% increase in compensation and employee benefits and a 39% increase in occupancy and equipment expenses. The increases in both compensation and occupancy expense can be attributed to the recent acquisitions of United National Bank during the year and Trust Bank in late 2004. Furthermore, we continued to add relationship and operational personnel during the year to enhance and support our loan and deposit growth. Despite the sizable increase in overall expenses, our efficiency ratio, which represents noninterest expense (excluding the amortization of intangibles and investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income, only increased 2% to 36.53% during 2005, compared to 35.64% during 2004. We believe this to be a reflection of our ability to efficiently and effectively utilize our resources and operating platform to support our continuing growth. Due to the overall growth of the Bank and the recent relocation of our corporate headquarters, we anticipate noninterest expenses for 2006 to increase by 20% to 25%, but expect our efficiency ratio to remain in the 36% to 38% range.

Total consolidated assets at December 31, 2005 increased 37% to $8.28 billion, compared with $6.03 billion at December 31, 2004. A 32% growth in gross loans was the primary driver of this increase. Excluding the impact of the UNB acquisition as well as loan sales and securitizations, organic loan growth was 25%, or $1.29 billion, during 2005. We attribute overall loan growth to the expansion of relationships throughout California, the addition of seasoned and skilled banking professionals, and increased loan origination volume from our branch network. We estimate loan growth in 2006 to be 15% to 17%, reflecting the core rate of growth in the Bank’s lending markets, the addition of new client relationships, and the utilization of additional lending programs and products.

Total average assets increased 40% to $7.00 billion in 2005, compared to $4.98 billion in 2004, due primarily to average loan growth. Total average loans grew to $5.89 billion during 2005, an increase of 41% over the prior year. All loan sectors experienced double-digit growth year-over-year. This increase in average loan growth was driven largely by increases in commercial real estate and residential multifamily loans. Total average deposits rose 37% during 2005 to $5.18 billion, compared to $3.78 billion in 2004. We experienced gains in all deposit categories during 2005, with the most significant contributions coming from time, money market and noninterest bearing demand deposits.

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Total nonperforming assets were $30.1 million, or 0.36% of total assets at December 31, 2005, compared with $5.9 million, or 0.10% of total assets, at December 31, 2004. The allowance for loan losses totaled $68.6 million at December 31, 2005, or 1.01% of outstanding total loans. Net loan chargeoffs totaled $4.7 million, or 0.08% of average loans, during 2005, compared with $5.1 million, or 0.12% of average loans, during 2004. We anticipate our overall asset quality to remain sound throughout 2006. We project that nonperforming assets will continue to be below 0.50% of total assets and that net chargeoffs will remain below 0.35% of average loans in 2006.

We continue to be well-capitalized under all regulatory guidelines with a Tier I risk-based capital ratio of 9.0%, a total risk-based capital ratio of 11.2%, and a Tier I leverage ratio of 8.1% at December 31, 2005. During 2005, we raised $20.6 million in additional regulatory capital through the issuance of trust preferred securities in a trust preferred offering. Trust preferred securities currently qualify as Tier I capital for regulatory purposes. We also issued $75.0 million in subordinated debt through a private placement transaction. Subordinated debt qualifies as Tier II capital for regulatory purposes. The net proceeds from the trust preferred and subordinated debt offerings were used to partially fund the acquisition of UNB and also to support the continued growth of the Bank.

Results of Operations

Net income for 2005 totaled $108.4 million, compared with $78.0 million for 2004 and $59.0 million for 2003, representing an increase of 39% for 2005 and 32% for 2004. On a per diluted share basis, net income was $1.97, $1.49 and $1.19 for 2005, 2004 and 2003, respectively. The increases in net earnings during both 2005 and 2004 are primarily attributable to higher net interest income, partially offset by higher operating expenses and higher provision for income taxes.

Our return on average total assets declined to 1.55% in 2005, compared to 1.57% in 2004 and 1.64% in 2003, while the return on average stockholders’ equity increased to 18.27% in 2005, compared with 17.86% in 2004 and 18.12% in 2003.

Table 1: Components of Net Income

	Year Ended December 31,
	2005			2004			2003
	(In millions)
Net interest income	$	280.1		$	199.2		$	143.3
Provision for loan losses		(15.9	)		(16.8	)		(8.8	)
Noninterest income		29.7			30.4			31.1
Noninterest expense		(123.5	)		(91.5	)		(75.9	)
Provision for income taxes		(62.0	)		(43.3	)		(30.7	)
Net income	$	108.4		$	78.0		$	59.0
Return on average total assets		1.55	%		1.57	%		1.64	%
Return on average stockholders' equity		18.27	%		17.86	%		18.12	%

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Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest earned on loans, investment securities and other earning assets less the interest expense on deposits, borrowings and other interest-bearing liabilities. Net interest income in 2005 totaled $280.1 million, a 41% increase over net interest income of $199.2 million in 2004.

Total interest and dividend income during 2005 increased 63% to $411.4 million compared with $252.1 million during 2004, primarily due to a 41% growth in average earning assets combined with increased yields on all categories of earning assets. The net growth in average earning assets was fueled by a 41% growth in average loans, increasing to $5.89 billion in 2005, from $4.17 billion in 2004. Increases in all deposit categories, FHLB advances, repurchase agreements, and long-term debt funded the growth in average earning assets.

Total interest expense during 2005 increased 148% to $131.3 million compared with $52.9 million a year ago. The increase in interest expense during 2005 is primarily attributable to higher rates paid on all categories of deposits and borrowings. The increased volume of average time deposits, money market accounts, FHLB advances, and long-term debt also contributed significantly to higher interest expense in 2005 compared to 2004.

Net interest margin, defined as net interest income divided by average earning assets, remained relatively stable, decreasing 2 basis points to 4.22% during 2005, from 4.24% during 2004. The overall yield on earning assets increased 83 basis points to 6.19% in 2005, from 5.36% in 2004, due to several consecutive Federal Reserve interest rate increases during 2005. Similarly, our overall cost of funds in 2005 increased by 105 basis points to 2.55%, compared to 1.50% for 2004. The combined impact of an increasing interest rate environment and increased competition in the deposit market were the primary drivers of our increased cost of funds during 2005. To help fund our loan growth during 2005, we increased our utilization of time deposits and FHLB advances, further contributing to the overall increase in our cost of funds for the year. We also continue to rely heavily on noninterest-bearing demand deposits as a significant funding source, with average noninterest-bearing demand deposits increasing 22% to $1.16 billion during 2005, compared with $950.9 million during 2004.

Comparing 2004 to 2003, our net interest margin decreased 2 basis points to 4.24% in 2004, compared to 4.26% in 2003 primarily due to a 40% growth in average earning assets. In 2004, our overall yield on earning assets increased 5 basis points to 5.36%, from 5.31% in 2003, due to Federal Reserve interest rate increases during the second half of 2004 as well as the higher proportion of loans to total average assets during 2004 relative to 2003. Our overall cost of funds also increased 5 basis points to 1.50% during 2004, compared to 1.45% during 2003, in response to the increasing interest rate environment. Our increased reliance on FHLB advances and time deposits accounted for the majority of the increase in our cost of funds during 2004.

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The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the years ended December 31, 2005, 2004 and 2003:

Table 2: Summary of Selected Financial Data

	Year Ended December 31,
				2005								2004								2003
						Average								Average								Average
	Average					Yield			Average					Yield			Average					Yield
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		.
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Short-term investments	$	8,554			275		3.21	%	$	54,739		$	639		1.17	%	$	139,985		$	1,830		1.31	%
Securities purchased under resale agreement		15,961			1,118		7.00	%		-			-		-			-			-		-
Investment securities (1)(2)(3)		673,930			25,912		3.84	%		440,456			14,597		3.31	%		457,234			16,309		3.57	%
Loans receivable (1)(4)		5,886,398			381,327		6.48	%		4,170,524			235,385		5.64	%		2,754,620			159,910		5.81	%
FHLB and FRB stock		59,361			2,767		4.66	%		35,811			1,449		4.05	%		11,025			494		4.48	%
Total interest-earning assets		6,644,204			411,399		6.19	%		4,701,530			252,070		5.36	%		3,362,864			178,543		5.31	%
Noninterest-earning assets:
Cash and due from banks		110,264								89,857								80,643
Allowance for loan losses		(59,355	)							(44,273	)							(39,135	)
Other assets		301,472								232,913								196,093
Total assets	$	6,996,585							$	4,980,027							$	3,600,465
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Checking accounts		356,567			2,943		0.83	%	$	291,761		$	1,175		0.40	%	$	267,981			776		0.29	%
Money market accounts		710,562			15,785		2.22	%		416,548			4,797		1.15	%		224,951			1,710		0.76	%
Savings deposits		333,588			953		0.29	%		322,511			486		0.15	%		290,251			362		0.12	%
Time deposits less than $100,000		840,340			20,149		2.40	%		708,231			11,390		1.61	%		632,920			10,410		1.64	%
Time deposits $100,000 or greater		1,772,071			53,756		3.03	%		1,090,166			20,048		1.84	%		843,179			16,688		1.98	%
Federal funds purchased		45,190			1,767		3.91	%		3,028			61		2.01	%		3,044			47		1.54	%
FHLB advances		913,184			26,603		2.91	%		648,529			11,801		1.82	%		146,822			2,959		2.02	%
Securities sold under repurchase agreements		80,894			2,562		3.17	%		-			-		-			-			-		-
Long-term debt		104,770			6,766		6.46	%		39,857			3,139		7.88	%		21,161			2,280		10.77	%
Total interest-bearing liabilities		5,157,166			131,284		2.55	%		3,520,631			52,897		1.50	%		2,430,309			35,232		1.45	%
Nonnterest-bearing liabilities:
Demand deposits		1,162,159								950,890								796,800
Other liabilities		84,077								71,771								47,711
Stockholders' equity		593,183								436,735								325,645
Total liabilities and stockholders' equity	$	6,996,585							$	4,980,027							$	3,600,465
Interest rate spread							3.64	%							3.86	%							3.86	%
Net interest income and net interest margin				$	280,115		4.22	%				$	199,173		4.24	%				$	143,311		4.26	%

__________

(1) Includes amortization of premiums and accretion of discounts on investment securities and loans receivable totaling $(213) thousand, $1.6 million, and $1.9 million for the years ended December 31, 2005, 2004, and 2003, respectively. Also includes the amortization of deferred loan fees totaling $4.2 million, $2.8 million, and $1.2 million for the years ended December 31, 2005, 2004, and 2003, respectively.

 (2)   Average balances exclude unrealized gains or losses on available-for-sale securities.

 (3)   The yields are not presented on a tax-equivalent basis as the effects are not material.

 (4)   Average balances include nonperforming loans.

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Analysis of Changes in Net Interest Margin

Changes in our net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the years indicated. The total change for each category of interest-earning asset and interest-bearing liability is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). Nonaccrual loans are included in average loans used to compute this table.

Table 3: Analysis of Changes in Net Interest Margin

	Year Ended December 31,
	2005 vs. 2004									2004 vs. 2003
	Total			Changes Due to						Total			Changes Due to
	Change			Volume (1)			Rates (1)			Change			Volume (1)			Rates (1)
	(In thousands)
INTEREST-EARNING ASSETS:
Short-term investments	$	(364	)	$	(846	)	$	482		$	(1,191	)	$	(1,013	)	$	(178	)
Securities purchased under resale agreement		1,118			1,118			-			-			-			-
Investment securities		11,315			8,689			2,626			(1,712	)		(584	)		(1,128	)
Loans receivable, net		145,942			107,374			38,568			75,475			80,031			(4,556	)
FHLB and FRB stock		1,318			1,071			247			955			1,007			(52	)
Total interest and dividend income	$	159,329		$	117,406		$	41,923		$	73,527		$	79,441		$	(5,914	)
INTEREST-BEARING LIABILITIES:
Checking accounts	$	1,768		$	309		$	1,459		$	399		$	74		$	325
Money market accounts		10,988			4,744			6,244			3,087			1,924			1,163
Savings deposits		467			17			450			124			43			81
Time deposits less than $100,000		8,759			2,412			6,347			980			1,216			(236	)
Time deposits $100,000 or greater		33,708			16,536			17,172			3,360			4,469			(1,109	)
Federal funds purchased		1,706			1,598			108			14			-			14
FHLB advances		14,802			5,986			8,816			8,842			9,156			(314	)
Securities sold under repurchase agreements		2,562			2,562			-			-			-			-
Long-term debt		3,627			3,812			(185	)		859			1,599			(740	)
Total interest expense	$	78,387		$	37,976		$	40,411		$	17,665		$	18,481		$	(816	)
CHANGE IN NET INTEREST INCOME	$	80,942		$	79,430		$	1,512		$	55,862		$	60,960		$	(5,098	)

________

(1)Changes in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume.

Provision for Loan Losses

The provision for loan losses amounted to $15.9 million for 2005 compared to $16.8 million for 2004 and $8.8 million for 2003. Provisions for loan losses are charged to income to bring the allowance for credit losses to a level deemed appropriate by management based on the factors discussed under the “Allowance for Loan Losses” section of this report.

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Noninterest Income

Table 4: Components of Noninterest Income

	2005		2004		2003
	(In millions)
Letters of credit fees and commissions	$	8.59	$	7.98	$	7.12
Branch fees		7.45		6.99		7.23
Net gain on investment securities available-for-sale		4.29		2.26		1.95
Income from life insurance policies		3.20		2.99		3.29
Ancillary loan fees		2.47		2.80		2.48
Income from secondary market activities		1.58		1.95		6.06
Net gain (loss) on disposal of fixed assets		0.05		3.03		(0.17	)
Other operating income		2.02		2.37		3.12
Total noninterest income	$	29.65	$	30.37	$	31.08

Noninterest income includes all revenues earned from sources other than interest income. These sources include service charges and fees on deposit accounts, fees and commissions generated from trade finance activities and the issuance of letters of credit, ancillary fees on loans, net gain on investment securities available-for-sale, disposals of fixed assets, income from secondary market activities, and other miscellaneous noninterest-related revenues.

Noninterest income decreased 2% to $29.6 million during 2005 from $30.4 million in the prior year primarily due to lower gain on sales of fixed assets in 2005 partially offset by net gains on available-for-sale securities. During 2005, we recorded a gain on disposal of fixed assets in the amount of $52 thousand, compared to $3.0 million recorded in 2004. The gain on sale in 2004 resulted from the sale of three office buildings, including two corporate offices located in San Marino, California. These facilities were sold as part of our overall plan to expand and relocate our corporate offices to Pasadena, California.

Letters of credit fees and commissions, which represent revenues from trade finance operations as well as fees related to the issuance and maintenance of standby letters of credit, increased 8% to $8.6 million in 2005, from $8.0 million in 2004. Overall, the increase in letters of credit fees and commissions is due to a 42% increase in the volume of trade finance transactions, primarily export trade activities, during 2005 relative to 2004.

Branch fees, which represent revenues derived from branch operations, totaled $7.4 million in 2005, a 7% increase from $7.0 million earned in 2004. The increase in branch fees during 2005 is due to the overall growth of our deposit base, which increased 37% from 2004 based on the average deposit balance for the year.

Net gain on investment securities available-for-sale increased 90% to $4.3 million in 2005, compared with the $2.3 million recorded in 2004, due largely to more favorable market conditions. The gain on sale of investment securities during 2005 primarily resulted from the sale of U.S. Government sponsored enterprise mortgage-backed securities with a net carrying value of $127.0 million, which were sold for a gain of $3.7 million. Additionally, in 2005, we sold $113.7 million in securities acquired from UNB at a net gain of $178 thousand. Reflected in the net gain on investment securities during 2005 was an impairment writedown amounting to $60 thousand on a corporate debt security. Sales of investment securities during 2005 provided additional liquidity to sustain the increase in our loan production activity during the year, replacing lower yields on investment securities with higher yields on loans.

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Income earned on life insurance policies increased 7% to $3.2 million in 2005 from $3.0 million in 2004. The increase in income from life insurance policies in 2005 is primarily due to additional policies acquired or entered into during the year. In addition to $3.4 million in new life insurance contracts purchased during 2005, we also acquired insurance policies with a cash surrender value totaling $10.2 million related to our acquisition of UNB in September 2005. Approximately $1.3 million of these policies acquired through UNB were redeemed shortly after the acquisition primarily due to poor or inconsistent market performance. At December 31, 2005, the aggregate cash surrender value of the Company’s life insurance policies amounted to $82.2 million compared to $67.3 million at December 31, 2004.

Ancillary loan fees consist of revenues earned from the servicing of mortgages, fees related to the monitoring and disbursement of construction loan proceeds, and other miscellaneous loan income. Ancillary loan fees decreased 12% to $2.5 million in 2005, compared to $2.8 million in 2004.

Other noninterest income, which includes insurance commissions and insurance-related service fees, branch rental income, and income from operating leases, decreased 15% to $2.0 million in 2005, compared to $2.4 million in 2004. The decrease in other noninterest income is primarily due to the reduction in revenues generated from insurance commissions and insurance-related service fees which decreased 25% to $940 thousand in 2005, from $1.2 million in 2004. Also contributing to the decrease in noninterest income in 2005 was the loss of rental income from the sale of an office building in 2004.

Comparing 2004 to 2003, noninterest income decreased 2% to $30.4 million. The primary contributor to the decrease in noninterest income in 2004 was the decrease in revenues from secondary market activities of $4.3 million, or 76%. Also contributing to the decrease in noninterest income were the following: (1) a $245 thousand, or 3%, reduction in branch service-related fees due to lower fee structures resulting from competitive market pressures; (2) a $293 thousand, or 9%, decrease in income from life insurance policies due to lower overall rates paid on existing policies; and (3) a $749 thousand, or 24%, decrease in other operating income resulting from the expiration of certain revenue generating operating leases. Partially offsetting these decreases were (1) a $3.2 million, or 1914%, increase in net gain on disposal of fixed assets, resulting from the sale of three buildings in 2004; (2) an $856 thousand, or 12%, increase in letters of credit fees and commissions, resulting from higher volume of trade finance activities and additional issuances of standby letters of credit in 2004; (3) a $322 thousand, or 13%, increase in ancillary loan fees, primarily due to increased loan production volume; and (4) a $311 thousand, or 16%, increase in net gains on investment securities available-for-sale.

Noninterest Expense

Table 5: Components of Noninterest Expense

	2005			2004			2003
	(In millions)
Compensation and employee benefits	$	53.67		$	39.13		$	31.84
Occupancy and equipment expense		15.06			10.86			10.31
Deposit-related expenses		8.45			4.91			3.89
Amortization of investments in affordable housing partnerships		6.47			7.43			6.68
Amortization of premiums on deposits acquired		3.91			2.22			1.99
Data processing		2.75			2.12			1.87
Deposit insurance premiums and regulatory assessments		1.00			0.80			0.72
Other operating expenses		32.22			23.99			18.63
Total noninterest expense	$	123.53		$	91.46		$	75.93
Efficiency Ratio (1)		36.53	%		35.64	%		38.57	%

_______

(1) Excludes the amortization of intangibles and investments in affordable housing partnerships.

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Noninterest expense, which is comprised primarily of compensation and employee benefits, occupancy and other operating expenses increased 35% to $123.5 million during 2005, compared to $91.5 million during 2004.

Compensation and employee benefits increased 37% to $53.7 million in 2005, compared to $39.1 million in 2004, primarily due to increased staffing levels resulting from the acquisition of UNB in September 2005 and the addition of relationship officers and operational personnel throughout the year. Also, we recorded a full year of compensation expense in 2005 related to the acquisition of Trust Bank in August 2004, compared to the partial year expense incurred in 2004. Moreover, the impact of annual salary adjustments and related cost increases for existing employees further contributed to the rise in compensation expense and employee benefits during 2005 as compared to the prior year.

Occupancy and equipment expenses increased 39% to $15.1 million during 2005, compared with $10.9 million during 2004. The increase in occupancy expenses can be attributed to additional rent expense from the combined fifteen branches acquired from Trust Bank and UNB. Additionally, we entered into a new lease agreement during the third quarter of 2004 for the relocation and expansion of our corporate headquarters, increasing rent, common area maintenance, and depreciation expenses.

Deposit-related expenses increased 72% to $8.5 million during 2005, compared with $4.9 million during 2004. Deposit-related expenses, which represent various business-related expenses paid by the Bank on behalf of its commercial account customers, are eventually recouped by the Bank through account analysis charges to individual customer accounts. The increase in deposit-related expenses is directly correlated to the growth in the volume of commercial deposit accounts during 2005.

The amortization of investments in affordable housing partnerships decreased 13% to $6.5 million in 2005, from $7.4 million in 2004. No additional investments in affordable housing partnerships were purchased during 2005 and total investments in affordable housing partnerships decreased to $31.0 million as of December 31, 2005, compared to $37.5 million as of December 31, 2004.

The amortization of premiums on deposits acquired increased 77% to $3.9 million during 2005, compared with $2.2 million in 2004. The increase in amortization expense is due to additional deposit premiums of $15.0 million recorded in connection with the acquisition of UNB in September 2005. Additionally, we recorded a full year of amortization expense in 2005 related to the acquisition of Trust Bank in August 2004, compared to the partial year expense incurred in 2004. Premiums on acquired deposits are amortized over their estimated useful lives.

Data processing expenses increased 29% to $2.7 million in 2005, compared with $2.1 million in 2004. The increase in data processing expenses is primarily due to increased transaction volume stemming from our overall growth, both internally and externally through acquisitions.

Deposit insurance premiums and regulatory assessments increased 24% to $996 thousand in 2005, compared to $802 thousand in 2004. Although there was a decrease in the SAIF annualized Financing Corporation, or “FICO”, average assessment rate to 1.39 basis points during 2005, compared with 1.51 basis points during 2004, deposit insurance premiums increased during 2005 as a result of the significant growth in the Bank’s assessable deposit base.

Other operating expenses include advertising and public relations, telephone and postage, stationery and supplies, bank and item processing charges, insurance expenses, legal, consulting and other professional fees, and charitable contributions. Other operating expenses increased 34% to $32.2 million in 2005, compared with $24.0 million in 2004. This increase in other operating expenses is largely due to expenses incurred to support our continued overall expansion, both organically and through acquisitions. Additionally, we amplified our advertising, public relations, and marketing efforts, incurring an additional $2.2 million in such expenses during 2005, relative to 2004, to enhance our overall image and visibility in the community and in the industry. This amount also includes our pledge of $1.0 million to the Bowers Museum of Cultural Art in Orange County, California for the creation of an art gallery focused on exhibits on Asian history and culture.

37

Comparing 2004 to 2003, noninterest expense increased $15.5 million, or 20%, to $91.5 million. The increase is comprised primarily of the following: (1) an increase in compensation and employee benefits of $7.3 million, or 23%, primarily due to the acquisition of Trust Bank in August 2004 as well as the impact of salary adjustments and related costs for existing employees; (2) an increase in occupancy expenses of $543 thousand, or 5%, reflecting additional rent expense from the four branches acquired from Trust Bank, additional expenses related to the relocation of the Company’s corporate headquarters, and higher computer and software related expenses associated with the upgrade of the Company’s hardware and related desktop operating system as well as the conversion of the Bank’s teller platform system during 2004; (3) an increase in deposit-related expenses of $1.0 million, or 26%, attributable to the growth in commercial deposit accounts; (4) an increase in amortization expense of real estate investments of $750 thousand, or 11%, reflecting the $16.1 million in additional affordable housing investment purchases made in 2004; (5) an increase in the amortization of premiums of acquired deposits of $226 thousand, or 11%, due to additional deposit premiums acquired in connection with the acquisitions of Trust Bank in 2004 and PBB in 2003; and (6) an increase in other operating expenses of $5.4 million, or 29%, due primarily to our continued overall growth and expansion, both organically and through acquisitions, as well as higher consulting and professional fees related to our implementation and compliance with the provisions of the Sarbanes-Oxley Act of 2002.

The Company’s efficiency ratio increased 2% to 36.53% in 2005, compared to 35.64% in 2004. Despite our continued expansion and growth, we have managed to sustain our operational efficiencies as a result of past and ongoing infrastructure investments compounded by a general company-wide effort to monitor overall operating expenses.

Provision for Income Taxes

The provision for income taxes increased 43% to $62.0 million in 2005, compared with $43.3 million in 2004. The increase in the provision for income taxes is primarily attributable to a 40% increase in pretax earnings during 2005. The provision for income taxes in 2005 also reflects the utilization of federal affordable housing tax credits totaling $5.6 million, compared to $5.9 million utilized in 2004. The 2005 provision reflects an effective tax rate of 36.4%, compared with 35.7% for 2004.

Comparing 2004 to 2003, the provision for income taxes increased 41% to $43.3 million in 2004, compared with $30.7 million in 2003. This increase is primarily attributable to a 35% increase in pretax earnings in 2004. The provision for income taxes in 2004 also reflects the utilization of affordable housing tax credits totaling $5.9 million, compared to $4.9 million utilized in 2003. The 2004 provision reflects an effective tax rate of 35.7%, compared with 34.2% for 2003.

As previously reported, the California Franchise Tax Board, or “FTB”, announced on December 31, 2003 that it is taking the position that certain tax deductions related to regulated investment companies will be disallowed pursuant to California Senate Bill 614 and California Assembly Bill 1601, which were signed into law in the fourth quarter of 2003. East West Securities Company, Inc., a regulated investment company, or “RIC”, formed and funded in July 2000 to raise capital in an efficient and economical manner was dissolved on December 30, 2002 as a result of, among other reasons, proposed legislation to change the tax treatments of RICs. The Fund provided state tax benefits beginning in 2000 until the end of 2002, when the RIC was officially dissolved. While the Company’s management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time, the Company has deemed it prudent to participate in the voluntary compliance initiative, or “VCI” offered by the State of California to avoid certain potential penalties should the FTB choose to litigate its recently announced position about the tax treatment of RICs for periods prior to enactment of the legislation described above and should the FTB be successful in that litigation.

38

Pursuant to the VCI program, we filed amended California income tax returns on April 15, 2004 for all affected years and paid the resulting taxes and interest due to the FTB. This amounted to an aggregate payment of $14.2 million for tax years 2000, 2001, and 2002. We continue to believe that the tax deductions are appropriate and, as such, we have also filed refund claims for the amounts paid with the amended returns. These refund claims are reflected as assets in the Company’s consolidated financial statements. As a result of these actions—amending our California income tax returns and subsequent related filing of refund claims—we retain our potential exposure for assertion of an accuracy-related penalty should the FTB prevail in its position, in addition to our risk of not being successful in our refund claim for taxes and interest. Our potential exposure to all other penalties, however, has been eliminated through this course of action.

The Franchise Tax Board is currently in the process of reviewing and assessing our refund claims for taxes and interest for tax years 2000 through 2002. Management is continuing to pursue these claims, to monitor developments in the law in this area, and to monitor the status of tax claims with respect to other registered investment companies.

Operating Segment Results

The Company has identified four principal operating segments for purposes of management reporting: retail banking, commercial lending, treasury, and residential lending. Although all four operating segments offer financial products and services, they are managed separately based on each segment’s strategic focus. While the retail banking segment focuses primarily on retail operations through the Bank’s branch network, certain designated branches have responsibility for generating commercial deposits and loans. The commercial lending segment, which includes commercial real estate, primarily generates commercial loans and deposits through the efforts of commercial lending officers located in the Bank’s northern and southern California production offices. The treasury department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk; the residential lending segment is mainly responsible for the Bank’s portfolio of single family and multifamily residential loans.

Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results. For more information about our segments, including information about the underlying accounting and reporting process, please see Note 24 to the Company’s consolidated financial statements presented elsewhere herein.

Retail Banking

Retail banking’s pre-tax income increased 115% to $65.4 million in 2005 from $30.4 million in 2004. Net interest income increased 77% to $138.2 million in 2005 from $78.2 million in 2004. Additionally, noninterest income for retail banking increased 9% to $15.7 million in 2005 from $14.5 million in 2004. These increases in both net interest income and noninterest income were primarily due to our overall growth, and were partially offset by an increase in noninterest expense of 31% to $65.3 million in 2005 from $49.8 million in 2004. The increase in noninterest expense is primarily a result of an increase in compensation and employee benefits of 27% to $31.7 million in 2005 from $24.9 million in 2004 and an increase in commercial deposit related expenses of 70% to $8.2 million in 2005 from $4.8 million in 2004. The increase in compensation and employee benefits is a result of increasing staffing levels due to the acquisitions of UNB and Trust Bank and the addition of relationship officers and operational personnel throughout the year. The increase in commercial deposit related expenses of $3.4 million is a result of the growth in volume of commercial deposit accounts we experienced during 2005.

39

Commercial Lending

Commercial lending’s pre-tax income increased 11% to $74.8 million in 2005 from $67.4 million in 2004. Net interest income increased 28% to $90.0 million in 2005 from $70.4 million in 2004. This increase in net interest income is primarily due to the growth of our commercial loans, including commercial real estate. The increase in net interest income was partially offset by a decrease in noninterest income and an increase in noninterest expense. Noninterest income for commercial lending decreased $1.8 million or 8% to $21.4 million in 2005 from $23.2 million in 2004. Noninterest expense increased $6.1 million or 33% to $24.8 million in 2005 from $18.7 million in 2004. The increase in noninterest expense is largely a result of an increase in compensation and employee benefits. Compensation and employee benefits increased 30% to $18.0 million in 2005 from $13.8 million in 2004. The increase in compensation and employee benefits is a result of increasing staffing levels due to the acquisitions of UNB and Trust Bank and the addition of relationship officers and operational personnel throughout the year.

Treasury

Treasury’s pre-tax income decreased 2% to $30.0 million in 2005 from $30.1 million in 2004. Net interest income decreased 8% to $27.6 million in 2005 from $29.9 million in 2004, while noninterest income for treasury increased 154% to $4.4 million in 2005 from $1.7 million in 2004. The decrease in net interest income is largely a result of increased market rates paid on borrowings, as compared to increases in interest earned on investment securities. The significant increase in noninterest income is a result of net gains on sales of investment securities, primarily mortgaged-backed securities. Additionally, noninterest expense increased 35% to $1.0 million in 2005 from $758 thousand in 2004. The increase in noninterest expense is largely a result of an increase in data processing of $212 thousand to $223 thousand in 2005 from $11 thousand in 2004.

Residential Lending

Residential lending’s pre-tax income decreased 12% to $14.4 million in 2005 from $16.5 million in 2004. Net interest income increased 13% to $19.9 million in 2005 from $17.7 million in 2004. The increase in net interest income is due to the growth in volume in single family and multifamily loans we experienced during the year and also reflects the impact of continued increases in interest rates. Noninterest income for residential lending remained unchanged at $4.4 million for 2005 and 2004. Noninterest expense increased 56% to $6.0 million in 2005 from $3.8 million in 2004. The increase in noninterest expense is primarily a result of an increase in compensation and employee benefits of 36% to $3.6 million in 2005 from $2.7 million in 2004. The increase in compensation and employee benefits is a result of the addition of loan officers and back office personnel throughout the year. Additionally, other noninterest expense increased 124% to $2.0 million in 2005 from $884 thousand in 2004, largely a result of increased guarantee fees related to loans securitizations.

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Balance Sheet Analysis

Total assets increased $2.25 billion, or 37%, to $8.28 billion during the year ended December 31, 2005. The increase in total assets was primarily attributable to a 32% growth in gross loans and a 63% increase in investment securities available-for-sale. Gross loans rose to a record $6.79 billion at December 31, 2005, compared to $5.13 billion at December 31, 2004. We attribute overall loan growth to the continued expansion of lending relationships with new customers as well as cross-selling to existing customers, increased loan origination volume from our branch network, and the addition of personnel to enhance and support loan and deposit growth. Additionally, the recent acquisition of UNB contributed to our loan growth, year-over-year. We were able to fund the increase in loans and available-for-sale securities through deposit growth totaling $1.74 billion, supplemented by increases in net borrowings of $173.4 million and long-term debt of $95.6 million.

Investment Securities Available-for-Sale

Income from investing activities provides a significant portion of our total income. We aim to maintain an investment portfolio with an adequate mix of fixed-rate and adjustable-rate securities with relatively short maturities to minimize overall interest rate risk. Our investment securities portfolio consists of U.S. Treasury securities, U.S. Government agency securities, U.S. Government sponsored enterprise debt securities, mortgage-backed securities, corporate debt, and U.S. Government sponsored enterprise equity securities. We currently classify our entire investment portfolio as available-for-sale, and accordingly, these securities are carried at their estimated fair values with the corresponding changes in fair values recorded in accumulated other comprehensive income, as a component of stockholders’ equity.

 Total investment securities available-for-sale increased 63% to $869.8 million as of December 31, 2005. Total repayments/maturities and proceeds from sales of available-for-sale securities amounted to $194.6 million and $251.9million, respectively, during 2005. Proceeds from repayments, maturities, sales, and redemptions were applied towards additional investment securities purchases totaling $458.7 million as well as funding a portion of loan originations made during 2005. We acquired investment securities with a net carrying value of $115.8 million through our acquisition of UNB in September 2005. The entire portfolio obtained from UNB was sold shortly after acquisition, for a net gain of $178 thousand. We recorded net gains totaling $4.3 million and $3.0 million on sales of available-for-sale securities during 2005 and 2004, respectively. At December 31, 2005, investment securities available-for-sale with a carrying value of $834.1 million were pledged to secure public deposits, FHLB advances, repurchase agreements, and for other purposes required or permitted by law.

During the first quarter of 2005, we recorded a $60 thousand impairment writedown on a corporate debt security held in our available-for-sale investment portfolio. The amortized cost of this security at the time of the writedown was $1.0 million. This security was subsequently sold in the second quarter of 2005 for an additional loss of $39 thousand.

Additionally, during the year ended 2005, we securitized $209.6 million of our multifamily loans through FNMA for liquidity and capital management purposes. All of the resulting securities were retained in our available-for-sale investment portfolio. The securitizations were accounted for as guaranteed mortgage securitizations which did not generate any gains or losses to operations.

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The following table sets forth the carrying values of investment securities available-for-sale at December 31, 2005, 2004 and 2003:

	At December 31,
	2005		2004		2003
	(In thousands)
U.S. Treasury securities	$	1,497	$	2,496	$	26,228
U.S. Government agency securities and U.S Government sponsored
enterprise debt securities		610,237		336,614		273,105
U.S. Government sponsored enterprise mortgage-backed securities		189,915		107,988		22,092
Other mortgage-backed securities		14,104		25,664		45,669
Corporate debt securities		17,812		18,288		30,050
U.S. Goverment sponsored enterprise equity securities		35,868		42,448		46,053
Residual interest in securitized loans		404		954		1,945
Total investment securities available-for-sale	$	869,837	$	534,452	$	445,142

The following table sets forth certain information regarding the carrying values, weighted average yields, and contractual maturity distribution, excluding periodic principal payments, of our investment securities available-for-sale portfolio at December 31, 2005:

Table 7: Yields and Maturities ofInvestment Securities Available-For-Sale

	Within						After One But					After Five But					After
		One Year					Within Five Years					Within Ten Years					Ten Years					Total
		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
		(Dollars in thousands)
U.S. Treasury securities		$	1,497		3.98	%	$	-		-		$	-		-		$	-		-		$	1,497		3.98	%
U.S. Government agency securities and U.S.
Government sponsored enterprise debt securities			380,991		3.44	%		209,460		3.74	%		19,786		4.97	%		-		-			610,237		3.59	%
Government sponsored enterprise
mortgage-backed securities			655		4.71	%		1		8.52	%		17,261		5.93	%		171,998		4.61	%		189,915		4.71	%
Other mortgage-backed securities			-		-			-		-			-		-			14,104		4.98	%		14,104		4.98	%
Corporate debt securities			-		-			7,829		5.13	%		-		-			9,983		4.90	%		17,812		5.00	%
U.S. Government sponsored enterprise equity securities			-		-			1,444		3.57	%		-		-			34,424		4.89	%		35,868		4.84	%
Residual interest in securitized loans			404		-			-		-			-		-			-		-			404		-
Total		$	383,547		3.43	%	$	218,734		3.78	%	$	37,047		5.40	%	$	230,509		4.69	%	$	869,837		3.94	%

Loans

We offer a broad range of products designed to meet the credit needs of our borrowers. Our lending activities consist of single family residential loans, multifamily residential loans, commercial real estate loans, construction loans, commercial business loans which include trade finance products, and consumer loans. Net loans receivable increased $1.64 billion, or 32% to $6.72 billion at December 31, 2005. The increase in loans during 2005 was funded primarily through growth in deposits, borrowings, and long-term debt.

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We experienced strong loan demand throughout 2005. Excluding the impact of $676.6 million in gross loans acquired from UNB in the third quarter of 2005, $209.6 million in loans securitized and $95.6 million in loan sales, organic net loan growth during 2005 amounted to $1.29 billion, or 25%, compared to year-end 2004. All categories of loans experienced double-digit growth during the year, with the commercial real estate, multifamily residential, and single family residential loan sectors contributing the largest dollar volume growth.

The organic growth in loans, excluding loans acquired from UNB, loans securitized and loans sold, is comprised of increases in single family residential loans of $274.1 million or 84%, multifamily residential loans of $282.4 million or 25%, commercial real estate loans of $309.1 million or 12%, construction loans of $214.1 million or 61%, commercial business loans of $132.2 million or 30%, trade finance loans of $54.9 million or 35%, and consumer loans, including home equity lines of credit, of $22.4 million or 12%.

The following table sets forth the composition of the loan portfolio as of the dates indicated:

Table 8: Composition of Loan Portfolio

	December 31,
	2005					2004					2003					2002					2001
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real estate loans:
Residential, single family	$	509,151		7.5	%	$	327,554		6.4	%	$	146,686		4.5	%	$	108,508		4.6	%	$	316,504		14.7	%
Residential, multifamily		1,239,836		18.3	%		1,121,107		21.8	%		809,311		24.7	%		628,303		26.8	%		377,224		17.5	%
Commercial and industrial real estate		3,321,520		48.9	%		2,556,827		49.8	%		1,558,594