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For the transition period from ____________________________to _________________________________

Commission file number                                                        0-18630                                                                 

(Exact name of registrant as specified in its charter)

                      Delaware                                                                                          95-4274680                          

        (State of other jurisdiction of incorporation                                                     (I.R.S. Employer

                    or organization)                                                                                    Identification No.)

(Address of principal executive offices)                                                                     (Zip Code)

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

                                                                                                                                                                    ;         

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

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

Common stock, $.01 par value, 49,918,722 shares outstanding as of October 31, 2004.

PART I - FINANCIAL INFORMATION *

Item 1. FINANCIAL STATEMENTS (Unaudited) *

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) *

Business *

Merger with GBC Bancorp and Related Acquisition Reserves *

Basis of Presentation *

Recent Accounting Pronouncements *

Financial Derivatives *

Stock Split and Increase in Dividend *

Earnings per Share *

Stock-Based Compensation *

Commitments and Contingencies *

Regulatory Matters *

Regulated Investment Company *

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS *

Critical Accounting Policies *

Income Statement Review *

Financial Condition Review *

Asset Quality Review *

Capital Resources *

Capital Adequacy Review *

Liquidity *

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK *

Market Risk *

Financial Derivatives *

Item 4. CONTROLS AND PROCEDURES *

PART II - OTHER INFORMATION *

Item 1. LEGAL PROCEEDINGS *

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS *

Item 3. DEFAULTS UPON SENIOR SECURITIES *

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS *

Item 5. OTHER INFORMATION *

Item 6. EXHIBITS AND REPORTS ON FORM 8-K *

SIGNATURES *

Cathay General Bancorp (the "Bancorp") is the holding company for Cathay Bank (the "Bank"), five limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc., (together the "Company" or "we", "us," or "our"). The Bancorp also owns 100% of the common stock of three statutory business trusts created for the purpose of issuing capital securities. The Bank was founded in 1962 and offers a wide range of financial services. The Bank now operates twenty branches in Southern California, nine branches in Northern California, one branch in Washington State, three branches in New York State, two branches in Massachusetts, and one branch in Houston, Texas, plus representative offices in Hong Kong and Shanghai, China. As part of its post-merger integration plans to efficiently serve its customers, the Bank closed six branches in April 2004 and closed three additional branches in Southern California in October 2004. In addition, the Bank's subsidiary, Cathay Investment Company maintains an office in Taiwan. The Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located.

As of the close of business on October 20, 2003, Cathay Bancorp, Inc. completed its merger with GBC Bancorp and its subsidiary, General Bank (the "GBC merger"), pursuant to the terms of the Agreement and Plan of Merger dated May 6, 2003. As a result of the merger, Cathay Bancorp, Inc. issued 6.75 million shares of its newly issued common stock, and paid $162.4 million in cash, including $7.2 million paid during 2004, for all of the issued and outstanding shares of GBC Bancorp common stock. In addition, Cathay Bancorp, Inc's name was changed to Cathay General Bancorp. The results of GBC Bancorp's operations have been included in the Company's consolidated financial statements since October 20, 2003. The return on assets and return on equity after the merger with GBC Bancorp are lower than in previous periods, due in part to the increases in assets and stockholders' equity as a result of the GBC merger.

Reserves for estimated lease termination costs of $1.3 million and severance and contract termination costs of $1.3 million were established as purchase price adjustments for the October 20, 2003, merger with GBC Bancorp. Through September 30, 2004, approximately $0.8 million of these costs have been incurred and paid. During 2004, goodwill was decreased due to a decrease of $1.1 million of income taxes payable upon finalization of GBC Bancorp's tax return for 2003, increased by $0.4 million as a result of an adjustment to the premium assigned to fixed rate loans to reflect estimated prepayments and increased $0.3 million as a result of the increase in the reserve for estimated lease termination costs as a result of more precisely determining the General Bank branches which were closed and several other smaller adjustments. The net impact of these adjustments was a reduction in goodwill of $0.7 million.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Certain reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. For further information, refer to the audited consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 2003.

The preparation of the consolidated financial statements in accordance with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The most significant estimate subject to change relates to the allowance for loan losses.

 In March 2004, the FASB issued Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". This EITF describes a model involving three steps: (1) determine whether an investment is impaired, (2) determine whether the impairment is other-than-temporary, and (3) recognize any impairment loss in earnings. The EITF also requires several additional disclosures for cost-method investments. In September, the FASB approved the deferral of the effective date for EITF No. 03-1 until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance.

The Company enters into financial derivatives in order to mitigate exposure to interest rate risks related to its interest-earning assets and interest-bearing liabilities. The Company recognizes all derivatives on the balance sheet at fair value. Fair value is based on dealer quotes or quoted prices from instruments with similar characteristics. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company's financial statements.

On March 21, 2000, the Company entered into an interest rate swap agreement with a major financial institution in the notional amount of $20.0 million for a period of five years. The interest rate swap was for the purpose of hedging the cash flows from a portion of our floating rate loans against declining interest rates. The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at September 30, 2004, had a remaining term of approximately two quarters. At September 30, 2004, the fair value of the interest rate swap was $0.5 million, exclusive of accrued interest. Amounts to be paid or received on the interest rate swap are reclassified into earnings upon the receipt of interest payments in the underlying hedged loans, including amounts totaling $0.2 million that were reclassified into earnings during the quarter ended September 30, 2004. The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to reclassify into earnings within the next six months is approximately $0.4 million.

Stock Split and Increase in Dividend

On August 19, 2004, the Company's Board of Directors approved a two-for-one stock split of the Company's common stock, in the form of a 100% stock dividend, paid on September 28, 2004, to stockholders of record on September 13, 2004. Share and per share numbers for all periods presented reflect the two-for-one stock split that became effective on September 28, 2004. On October 1, 2004, the Company's Board of Directors approved a 29% increase in the common stock dividend from $0.07 to $0.09 per share payable on October 22, 2004, to stockholders of record on October 13, 2004.

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings.

For the three months and nine months ended September 30, 2004, options to purchase an additional 2.5 million shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. For the three months ended September 30, 2003, all options to purchase shares of common stock were included in the computation of diluted earnings share. For the nine months ended September 30, 2003, 0.2 million shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

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

Prior to 2003, the Company used the intrinsic-value method to account for stock-based compensation. Accordingly, no expense was recorded in periods prior to 2003. In 2003, the Company adopted prospectively the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation," as amended by FASB Statement No. 148, "Accounting for Stock-Based Compensation - - Transition and Disclosure, an Amendment of FASB Statement No. 123," and began recognizing the expense associated with stock options granted starting in 2003 using the fair value method, which resulted in charges to salaries and employee benefits for the third quarters of 2004 and 2003 of $798,000 and $97,000, respectively. For the nine months ended September 2004 and 2003, the compensation expense associated with stock options granted was $2.3 million and $291,000, respectively. Stock-based compensation expense for stock options is calculated based on the fair value of the award at the grant date, and is recognized as an expense over the vesting period of the grant. The Company uses the Black-Scholes option pricing model to estimate the value of granted options. This model takes into account the option exercise price, the expected life, the current price of the underlying stock, the expected volatility of the Company's stock, expected dividends on the stock, and a risk-free interest rate. Since compensation cost is measured at the grant date, the only variable whose change would impact expected compensation expense recognized in future periods for these grants is actual forfeitures.

Under SFAS No.123, the weighted average per share fair value of the options granted during the nine months of 2004 and the full year 2003 was $6.80 and $5.56, respectively, on the date of grant. Fair value under SFAS No.123 is determined using the Black-Scholes option pricing model with the following assumptions:

If the compensation cost for all awards granted under the Company's stock option plan had been determined using the fair value method of SFAS No. 123, the Company's net income and earnings per share for the three months and the nine months ended September 30, 2004, and 2003, would have been reduced to the pro forma amounts indicated in the table below.

In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit, and financial guarantees. Those instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying unaudited condensed consolidated statements of financial condition. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any.

The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment agreement. These commitments generally have fixed expiration dates and the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the borrowers. Letters of credit, including standby letters of credit and bill of lading guarantees, are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing these types of instruments is essentially the same as that involved in making loans to customers.

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

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

As previously disclosed, in the fourth quarter of 2003, the California Franchise Tax Board (FTB) announced its intent to list certain transactions that in its view constitute potentially abusive tax shelters. Included in the transactions subject to this listing were transactions utilizing regulated investment companies (RICs) and real estate investment trusts (REITs). As part of the notification indicating the listed transactions, the FTB also indicated its position that it intends to disallow tax benefits associated with these transactions. As also previously disclosed, in December 2002, the Company decided to deregister its regulated investment company and, in February 2003, the Company completed such deregistration. The Company had created the regulated investment company for the purpose of raising capital.

The Company believes that the tax benefits recorded in the three prior years with respect to its regulated investment company were appropriate and fully defensible under California law in effect at the time the tax benefits were recorded. The Company had relied on the existing California tax law related to regulated investment companies and on an outside tax opinion in creating this subsidiary. While the Company continues to believe that the tax benefits realized in previous years were appropriate, the Company deemed it prudent to participate in the Voluntary Compliance Initiative - Option 2, requiring payment of all California taxes and interest on these disputed 2000 through 2002 tax benefits, and permitting the Company to claim a refund for these years while avoiding certain potential penalties. The Company retains potential exposure for assertion of an accuracy related penalty should the FTB prevail in its position, in addition to the risk of not being successful in its refund claims for taxes and interest. As of September 30, 2004, the Company reflected a $12.3 million net state tax receivable for the years 2000, 2001, and 2002 after giving effect to reserves for loss contingencies on the refund claims, or an equivalent of $8.0 million after giving effect to Federal tax benefits. Although the Company believes its tax deductions related to the regulated investment company were appropriate and fully defensible, there can be no assurance of the outcome of its refund claims, and an adverse outcome on the refund claims could result in a loss of all or a portion of the $8.0 million net state tax receivable after giving effect to Federal tax benefits.

The following discussion is given based on the assumption that the reader has access to and has read the Annual Report on Form 10-K for the year ended December 31, 2003, of Cathay General Bancorp ("Bancorp") and its wholly-owned subsidiary Cathay Bank (the "Bank" and together the "Company" or "we", "us," or "our").

The statements in this report include forward-looking statements regarding management's beliefs, projections, and assumptions concerning future results and events. These forward-looking statements may, but do not necessarily, include words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "may," "will," "should," "could," "predicts," "potential," "continue" or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, adverse developments, or conditions related to or arising from:

• the Company's ability to integrate its operations after its recent merger with GBC Bancorp and to realize the benefits of that merger;
• demographic changes;
• fluctuations in interest rates;
• inflation;
• competition;
• war and terrorism;
• general economic or business conditions in California and other regions where Cathay Bank has operations such as the impact of the California budget deficit;
• changes in business strategy, including the formation of a real estate investment trust (REIT) and the deregistration of its registered investment company (RIC);
• and legislative and regulatory developments such as the potential effects of recently enacted California tax legislation and the subsequent Franchise Tax Board announcement on December 31, 2003 regarding the taxation of REITs and RICs; and of the memorandum of understanding between Cathay Bank and the Federal Deposit Insurance Corporation relating to the Bank's compliance with certain provisions of the Bank Secrecy Act.

These and other factors are further described in Cathay General Bancorp's Annual Report on Form 10-K for the year ended December 31, 2003, its reports and registration statements filed (including those filed by GBC Bancorp prior to the merger) with the Securities and Exchange Commission ("SEC") and other filings it makes in the future with the SEC from time to time. Cathay General Bancorp has no intention and undertakes no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events.

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

Critical Accounting Policies

The discussion and analysis of our consolidated financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading "Allowance for Loan Losses."

Accounting for the merger with GBC Bancorp involves significant judgments and assumptions by management, which have a material impact on the carrying value of fixed rate loans and borrowings and the determination of core deposit intangible assets and goodwill. The judgments and assumptions used by management are described herein and in Note 2 to the Consolidated Financial Statements in the Company's annual report on Form 10-K for the year ended December 31, 2003.

• T hird quarter earnings increased $10.2 million, or 78%, compared to the same quarter a year ago.
• Fully diluted earnings per share reached $0.46 and increased 28% compared to the same quarter a year ago.
• Gross loans increased by $106.9 million, or 3%, primarily in commercial mortgage loans, from June 30, 2004.
• Deposits increased by $33.1 million, or 1% from June 30, 2004.
• Return on average stockholders' equity was 14.08% and return on average assets was 1.60% for the quarter ended September 30, 2004.
• Nonaccrual loans decreased $8.5 million from $26.7 million at June 30, 2004, to $18.2 million at September 30, 2004.
• Efficiency ratio of 36.85% for the third quarter of 2004.
• The Board of Directors approved a two-for-one stock split of the Company's common stock, in the form of a 100% stock dividend and on October 1 approved a 29% increase in the quarterly cash dividend from $.07 to $.09 a share to be paid on October 22, 2004.

Net income for the third quarter of 2004 was $23.2 million or $0.46 per diluted share, a 78.0% increase in net income compared with net income of $13.0 million or $0.36 per diluted share for the same quarter a year ago. Return on average stockholders' equity was 14.08% and return on average assets was 1.60% for the third quarter of 2004 compared with a return on average stockholders' equity of 16.55% and a return on average assets of 1.66% for the three months ended September 30, 2003.

FINANCIAL PERFORMANCE

Net interest income before provision for loan losses increased to $54.8 million during the third quarter of 2004, or 98.9% higher than the $27.6 million during the same quarter a year ago. The increase was due primarily to the merger with GBC Bancorp and strong growth in loans.

The net interest margin, on a fully taxable-equivalent basis, increased 11 basis points from 4.02% during the second quarter 2004 to 4.13% for the third quarter 2004. The net interest margin increased from 3.80% in the third quarter of 2003 to 4.13% in the third quarter of 2004, primarily as a result of increases in the prime rate, higher yields on investment securities, and interest collected from payoffs of several nonaccrual loans.

For the third quarter of 2004, the interest rate earned on our average interest-earning assets was 5.25% on a fully taxable-equivalent basis, and our cost of funds on average interest-bearing liabilities equaled 1.37%. In comparison, for the third quarter of 2003, the interest rate earned on our average interest-earning assets was 5.02% and our cost of funds on average interest-bearing liabilities equaled 1.47%.

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

The provision for loan losses was zero for both the second and third quarters of 2004 compared to $1.7 million for the third quarter of 2003. The provision for loan losses represents the charge against current earnings that is determined by management, through a credit review process, as the amount needed to maintain an allowance for loan losses that management believes should be sufficient to absorb loan losses inherent in the Company's loan portfolio. Total chargeoffs and recoveries for the third quarter of 2004 were $2.4 million and $2.5 million, respectively, compared to total chargeoffs and recoveries of $15,000 and $61,000, respectively, for the third quarter of 2003. Total net recoveries for the nine months in 2004 were $233,000 compared to net charge-offs of $124,000 for the nine months in 2003.

Non-interest income, which includes revenues from service charges on deposit accounts, letters of credit commissions, securities gains (losses), gains (losses) from loan sales, wire transfer fees, and other sources of fee income, was $4.7 million for the third quarters of both 2004 and 2003.

For the third quarter of 2004, the Company recorded net securities losses of $0.3 million compared to $1.7 million of net gains for the same quarter in 2003.

Letters of credit commissions increased $579,000, or 106.8%, from $542,000 in the third quarter of 2003 to $1.1 million in the third quarter of 2004. Comparing the third quarter of 2004 to the third quarter of 2003, depository service fees increased $542,000, or 39.1% and other operating income increased $822,000, or 73.6%. These increases were due primarily to the merger with GBC Bancorp.

Non-interest expense increased $10.8 million to $22.0 million in the third quarter of 2004 primarily due to the merger with GBC Bancorp. The efficiency ratio was 36.85% for the third quarter 2004 compared to 34.42% in the year ago quarter. Salaries and employee benefits increased $6.0 million or 91.8% from $6.5 million in the third quarter of 2003 to $12.5 million in the third quarter of 2004 due to the merger with GBC Bancorp and a $798,000 increase in compensation expense due to the amortization of compensation expense associated with stock options granted after the third quarter of 2003. Occupancy expense increased by $1.0 million or 92.1%, from $1.1 million in the third quarter of 2003 to $2.1 million in the third quarter of 2004, due primarily to the merger with GBC Bancorp. Computer and equipment expense increased $646,000 or 84.3% from $766,000 in the third quarter of 2003 to $1.4 million in the third quarter of 2004 due to the merger with GBC Bancorp. Professional services expense increased $822,000 or 91.2% from $901,000 in the third quarter of 2003 to $1.7 million in the third quarter of 2004 due to higher legal, consulting, and other professional expenses primarily as a result of the merger with GBC Bancorp. Amortization of core deposit intangibles increased by $1.3 million due to the merger with GBC Bancorp. Other operating expenses increased $690,000 or 109.5% due to the merger with GBC Bancorp.

Financial Condition Review

Assets

Total assets increased by $351.1 million to $5.9 billion at September 30, 2004, up 6.3% from year-end 2003 of $5.5 billion. The increase in total assets was due primarily to increases in loans and investment securities.

Total securities were $1.80 billion or 30.5% of total assets at September 30, 2004 compared with $1.71 billion or 30.8% of total assets at December 31, 2003.

The net unrealized gain on securities available-for-sale, which represents the difference between fair value and amortized cost, decreased to $7.8 million at September 30, 2004, compared with a net unrealized gain of $15.2 million at year-end 2003 primarily as a result of increases in interest rates and the maturity or sales of higher yielding securities. Net unrealized gains on the securities available-for-sale are included in accumulated other comprehensive income or loss, net of tax.

The average taxable-equivalent yield on taxable investment securities increased 48 basis points to 4.30% for the quarter ended September 30, 2004, compared with 3.82% during the same quarter a year ago, due to purchases of securities at higher interest rates during 2004 and significant amortization of securities premiums in the third quarter of 2003 as a result of high prepayments on mortgage backed securities.

The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale, as of September 30, 2004, and December 31, 2003:

The Company has the ability and intent to hold the impaired securities included in the table above for a period of time sufficient for a recovery of cost. The impaired securities represent 33.2% of the fair value of the Company's total investment securities. Unrealized losses on these securities generally resulted from changes in interest rates from the date that these securities were purchased. All of these securities are investment grade.

At September 30, 2004, equity securities included $20.3 million of preferred stock issued by the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. These issues of preferred stock are tied to various short term indexes ranging from the three-month LIBOR interest rate to the two year U. S. treasury rate. These securities have AA- credit ratings from the securities rating agencies and are callable by the issuer at par. At September 30, 2004, the unrealized loss on these securities totaled $4.8 million compared to $4.3 million at December 31, 2003, as a result of an increase in the spreads compared to U S Treasury securities for these securities. It is expected that these investments will increase in value as short term interest rates rise toward their long term average level if spreads do not increase.

In March 2004, the FASB issued Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". This EITF describes a model involving three steps: (1) determine whether an investment is impaired, (2) determine whether the impairment is other-than-temporary, and (3) recognize the impairment loss in earnings. The EITF also requires several additional disclosures for cost-method investments. In September, the FASB approved the deferral of the effective date for EITF No. 03-1 until such time as new guidance is issued and comes into effect.

At September 30, 2004, management believes the impairments detailed in the table above are temporary and, accordingly, no impairment loss has been recognized in the Company's unaudited condensed consolidated statement of income.

The following table summarizes the scheduled maturities by security type of securities available-for-sale as of September 30, 2004: