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, 2007, of Cathay General Bancorp ("Bancorp") and its wholly-owned subsidiary Cathay Bank (the "Bank" and, together, the "Company" or "we", "us," or "our").

Recent Developments

There have been significant disruptions in the U.S. and international financial system during the period covered by this report. As a result, available credit has been reduced or ceased to exist. The availability of credit, confidence in the entire financial sector, and volatility in financial markets has been adversely affected. The U.S. government, the governments of other countries, and multinational institutions have provided vast amounts of liquidity and capital into the banking system.

In response to the financial crises affecting the overall banking system and financial markets in the United States, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was enacted to provide up to $700 billion to the United States Department of Treasury ("U.S. Treasury") to purchase mortgages, mortgage backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On October 14, 2008, under the authority of EESA, the U.S. Treasury announced the Troubled Asset Relief Program ("TARP") Capital Purchase Program. Under this program, the U.S. Treasury will purchase up to $250 billion of senior preferred shares from qualified U.S. financial institutions. The general terms of the senior preferred investment include:

· senior preferred shares will pay cumulative compounding dividends at a rate of 5 percent per year for the first five years, and thereafter at a rate of 9 percent per year;

· senior preferred shares are non-voting, other than class voting rights on matters that could adversely affect the shares;

· senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred shares may only be redeemed with the proceeds from one or more qualified equity offerings;

· in conjunction with the purchase of senior preferred shares, the U.S. Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred amount based on the date of investment. Exercise price on warrants shall be the market price of the participating institutions' common stock based on the date the U.S. Treasury accepts the financial institution's application to participate in the program and uses a 20-trading day trailing average;

· common stock dividends cannot be increased for three years while the U.S. Treasury is an investor unless preferred stock is redeemed, has been transferred to third parties, or consent from the U.S. Treasury is received;

· participating institutions must also adopt the U.S. Treasury's standards for executive compensation and corporate governance, for the period during which the U.S. Treasury holds equity issued under this program.

The terms of this Capital Purchase Program could reduce investment returns to participating banks' shareholders by restricting dividends to common shareholders, diluting existing shareholders' interests, and restricting capital management practices. Although both the Company and its banking subsidiary meet all applicable regulatory capital requirements and remain well capitalized, the Company has applied for participation in the Capital Purchase Program.

Federal and state governments could pass additional legislation responsive to current credit conditions. As an example, the Company could experience higher credit losses because of federal or state legislation or regulatory action that reduces the principal amount or interest rate under existing loan contracts. Also, the Company could experience higher credit losses because of federal or state legislation or regulatory action that limits the Bank's ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

The Federal Deposit Insurance Corporation ("FDIC") insures deposits at FDIC insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for bank failures, in which case the FDIC would take control of failed banks and ensure payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. In such case, the FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund, including requiring riskier institutions to pay a larger share of the premiums. An increase in premium assessments would increase the Company's expenses. The EESA included a provision for a temporary increase in the amount of deposits insured by FDIC to $250,000 until December 2009. On October 14, 2008, the FDIC announced a new program - the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance coverage on funds in non-interest bearing transaction deposit accounts not otherwise covered by the existing temporary deposit insurance limit of $250,000. All eligible institutions will be covered under the program for the first 30 days without incurring any costs. After the initial period, participating institutions will be assessed an annualized 10 basis point surcharge on the additional insured deposits. The behavior of depositors in regard to the level of FDIC insurance could cause the Bank's existing customers to reduce the amount of deposits held at the Bank, and or could cause new customers to open deposit accounts at the Bank. The level and composition of the Bank's deposit portfolio directly impacts the Bank's funding cost and net interest margin. As a result of these measures, it is likely that the premiums the Bank pays for FDIC insurance will increase, which would adversely affect net income. The impact of such measures cannot be assessed at this time.

The actions described above, together with additional actions announced by the U.S. Treasury and other regulatory agencies continue to develop. It is not clear at this time what impact, EESA, TARP, other liquidity and funding initiatives of the U.S. Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to effect the U.S. banking industry and the broader U.S. and global economies, which will have an affect on all financial institutions, including the Company.

Critical Accounting Policies

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

Accounting for the allowance for credit losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading "Accounting for the Allowance for Loan Losses" in the Company's annual report on Form 10-K for the year ended December 31, 2007.

Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any "other-than-temporary" impairment to our investment securities. The judgments and assumptions used by management are described under the heading "Investment Securities" in the Company's annual report on Form 10-K for the year ended December 31, 2007.

Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading "Income Taxes" in the Company's annual report on Form 10-K for the year ended December 31, 2007.

Under SFAS No. 142, Goodwill and Other Intangibles, goodwill must be allocated to reporting units and tested for impairment. The Company tests goodwill for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting-unit level utilizing an independent valuation. The Company then completes "step one" of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion above) with the recorded book value (or "carrying amount") of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and "step two" of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit's goodwill to the "implied fair value" of that goodwill. The implied fair value of goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value.

In connection with obtaining the independent valuation, management provides certain data and information that is utilized by the third party in its determination of fair value. This information includes forecasted earnings of the Company at the reporting unit level. Management believes that this information is a critical assumption underlying the estimate of fair value.

HIGHLIGHTS

· Third quarter earnings of $6.9 million decreased $27.1 million, or 79.7%, compared to the same quarter a year ago.

· Fully diluted earnings per share was $0.14, a 79.1% decrease from the same quarter a year ago.

· Return on average assets was 0.25% for the quarter ended September 30, 2008, compared to 0.73% for the quarter ended June 30, 2008, and compared to 1.46% for the same quarter a year ago.

· Return on average stockholders' equity was 2.71% for the quarter ended September 30, 2008, compared to 7.66% for the quarter ended June 30, 2008, and compared to 14.45% for the same quarter a year ago.

· Gross loans increased by $171.6 million, or 2.3%, for the quarter to $7.5 billion at September 30, 2008, from $7.3 billion at June 30, 2008.

· Total deposits increased by $107.1 million, or 1.6%, for the quarter to $6.8 billion at September 30, 2008, from $6.7 billion at June 30, 2008.

Income Statement Review

Net Income

Net income for the third quarter of 2008 was $6.9 million, or $0.14 per diluted share, a $27.1 million, or 79.7%, decrease compared with net income of $34.0 million, or $0.67 per diluted share for the same quarter a year ago. Return on average assets was 0.25% and return on average stockholders' equity was 2.71% for the third quarter of 2008 compared with a return on average assets of 1.46% and a return on average stockholders' equity of 14.45% for the third quarter of 2007.

Financial Performance

                                          Third Quarter 2008      Third Quarter 2007

Net income                               $         6.9 million   $        34.0 million
Basic earnings per share                 $                0.14   $                0.68
Diluted earnings per share               $                0.14   $                0.67
Return on average assets                                  0.25 %                  1.46 %
Return on average stockholders' equity                    2.71 %                 14.45 %
Efficiency ratio                                         53.92 %                 37.46 %

Net Interest Income Before Provision for Credit Losses

Net interest income before provision for credit losses decreased to $73.6 million during the third quarter of 2008, a decline of $6.2 million, or 7.8%, compared to the $79.8 million during the same quarter a year ago. The decrease was due primarily to the decline in the net interest margin which was partially offset by strong growth in loans and investment securities.

The net interest margin, on a fully taxable-equivalent basis, was 2.88% for the third quarter of 2008. The net interest margin decreased 6 basis points from 2.94% in the second quarter of 2008 and decreased 81 basis points from 3.69% in the third quarter of 2007. The decrease in the net interest margin from the prior year primarily resulted from the lag in the downward repricing of certificates of deposit following the decreases in the prime rate, a change in the mix of investment securities, and the increase in the borrowing rate on our long term repurchase agreements. The decrease in the net interest margin from the second quarter primarily resulted from the increase in the borrowing rates on securities sold under agreements to repurchase and other borrowed funds.

For the third quarter of 2008, the yield on average interest-earning assets was 5.70% on a fully taxable-equivalent basis, and the cost of funds on average interest-bearing liabilities equaled 3.21%. In comparison, for the third quarter of 2007, the yield on average interest-earning assets was 7.34% and cost of funds on average interest-bearing liabilities equaled 4.24%. The interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, decreased 61 basis points to 2.49% for the quarter ended September 30, 2008, from 3.10% for the same quarter a year ago, primarily due to the reasons discussed above.

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

            Interest-Earning Assets and Interest-Bearing Liabilities

Three months ended September
30,                                              2008                                        2007
                                               Interest       Average                     Interest       Average
Taxable-equivalent basis         Average       Income/        Yield/         Average      Income/        Yield/
(Dollars in thousands)           Balance       Expense      Rate (1)(2)      Balance      Expense      Rate (1)(2)
Interest Earning Assets
Commercial loans               $  1,606,864   $   21,171            5.24 % $ 1,320,611   $   27,110            8.14 %
Residential mortgage                772,460       10,983            5.69       622,793        9,769            6.27
Commercial mortgage               4,126,133       68,364            6.59     3,560,243       68,869            7.67
Real estate construction
loans                               898,728       13,247            5.86       768,117       17,801            9.19
Other loans and leases               21,633          240            4.41        26,688          376            5.59
Total loans and leases (1)        7,425,818      114,005            6.11     6,298,452      123,925            7.81
Taxable securities                2,484,473       27,575            4.42     1,769,245       25,127            5.63
Tax-exempt securities (3)            47,938          868            7.20        55,217          921            6.62
Federal Home Loan Bank Stock         64,228        1,004            6.22        50,297          639            5.04
Interest bearing deposits             8,941           42            1.87        71,843        1,248            6.89
Federal funds sold &
securities purchased under
agreements to resell                188,522        2,899            6.12       371,413        7,615            8.13
Total interest-earning
assets                           10,219,920      146,393            5.70     8,616,467      159,475            7.34
Non-interest earning assets
Cash and due from banks              82,102                                     84,176
Other non-earning assets            724,950                                    639,999
Total non-interest earning
assets                              807,052                                    724,175
Less: Allowance for loan
losses                              (90,162 )                                  (65,902 )
 Deferred loan fees                 (10,527 )                                  (11,584 )
Total assets                   $ 10,926,283                                $ 9,263,156

Interest bearing
liabilities:
Interest bearing demand
accounts                       $    268,802   $      382            0.57   $   233,116   $      755            1.28
Money market accounts               760,679        3,466            1.81       699,679        5,610            3.18
Savings accounts                    337,538          261            0.31       342,971          873            1.01
Time deposits                     4,708,290       39,217            3.31     3,935,125       47,305            4.77
Total interest-bearing
deposits                          6,075,309       43,326            2.84     5,210,891       54,543            4.15

Federal funds purchased              39,842          206            2.06        22,863          279            4.84
Securities sold under
agreements to repurchase          1,550,000       15,174            3.89     1,041,577        9,865            3.76
Other borrowings                  1,157,430       11,785            4.05       978,759       11,475            4.65
Long-term debt                      171,136        2,030            4.72       171,136        3,182            7.38
Total interest-bearing
liabilities                       8,993,717       72,521            3.21     7,425,226       79,344            4.24
Non-interest bearing
liabilities
Demand deposits                     788,028                                    774,513
Other liabilities                   134,035                                    129,855
Stockholders' equity              1,010,503                                    933,562
Total liabilities and
stockholders' equity           $ 10,926,283                                $ 9,263,156
Net interest spread (4)                                             2.49 %                                     3.10 %
Net interest income (4)                       $   73,872                                 $   80,131
Net interest margin (4)                                             2.88 %                                     3.69 %

(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.

(2) Calculated by dividing net interest income by average outstanding interest-earning assets

(3) The average yield has been adjusted to a fully taxable-equivalent basis for certain securities of states and political subdivisions and other securities held using a statutory Federal income tax rate of 35%

(4) Net interest income, net interest spread, and net interest margin on interest-earning assets have been adjusted to a fully taxable-equivalent basis using a statutory Federal income tax rate of 35%

The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

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

                                           Three months ended September 30,
                                                       2008-2007
                                                Increase (Decrease) in
                                              Net Interest Income Due to:
                                     Changes in      Changes in
     (Dollars in thousands)             Volume           Rate        Total Change

     Interest-Earning Assets:
     Loans and leases                      19,664         (29,584 )         (9,920 )
     Taxable securities                     8,619          (6,171 )          2,448
     Tax-exempt securities (2)               (128 )            75              (53 )
     Federal Home Loan Bank Stock             198             167              365
     Deposits with other banks               (658 )          (548 )         (1,206 )
     Federal funds sold and
     securities purchased under
     agreements to resell                  (3,137 )        (1,579 )         (4,716 )
     Total increase in interest
     income                                24,558         (37,640 )        (13,082 )

     Interest-Bearing Liabilities:
     Interest bearing demand
     accounts                                 100            (473 )           (373 )
     Money market accounts                    445          (2,589 )         (2,144 )
     Savings accounts                         (14 )          (598 )           (612 )
     Time deposits                          8,049         (16,137 )         (8,088 )
     Federal funds purchased                  138            (211 )            (73 )
     Securities sold under
     agreements to repurchase               4,940             369            5,309
     Other borrowed funds                   1,903          (1,593 )            310
     Long-term debts                            -          (1,152 )         (1,152 )
     Total increase in interest
     expense                               15,561         (22,384 )         (6,823 )
     Changes in net interest
     income                          $      8,997    $    (15,256 ) $       (6,259 )

(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

(2) The amount of interest earned on certain securities of states and political subdivisions and other securities held has been adjusted to a fully taxable-equivalent basis, using a statutory federal income tax rate of 35%.

Provision for Loan Losses

The provision for credit losses was $15.8 million for the third quarter of 2008 compared to $2.2 million for the third quarter of 2007 and $20.5 million for the second quarter of 2008. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at September 30, 2008. The provision for credit losses represents the charge or credit against current earnings that is determined by management, through a credit review process, as the amount needed to establish an allowance that management believes to be sufficient to absorb credit losses inherent in the Company's loan portfolio.

Non-Interest Income

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), gains (losses) on loan sales, wire transfer fees, and other sources of fee income, was $8.4 million loss for the third quarter of 2008, a decrease of $17.3 million compared to the non-interest income of $8.9 million for the third quarter of 2007. The decrease in non-interest income primarily resulted from the "Other-than-temporary impairment" charge of $27.8 million on agency preferred stock, which had a carrying value of $2.5 million after the impairment write-down, which was partially offset by net gains of $12.5 million from sale of agency mortgage backed securities.

Letters of credit commissions decreased $157,000, or 9.7%, to $1.5 million in the third quarter of 2008 from $1.6 million in the same quarter a year ago, primarily due to decreased international transactions as a result of the slowdown in the economy.

Gains from sale of premises and equipment decreased $2.7 million compared to the third quarter of 2007 because the year ago quarter included a gain from the sale of a former bank branch building in September 2007. Other operating income increased $992,000, or 30.1%, to $4.3 million in the third quarter of 2008 from $3.3 million in the same quarter a year ago, primarily due to higher gains from foreign currency and exchange transactions of $1.6 million, which amount was partially offset by a $275,000 reduction in official check rebate commissions and a $235,000 reduction in wealth management commissions compared to the third quarter of 2007.

Non-Interest Expense

Non-interest expense increased $2.0 million, or 5.9%, to $35.2 million in the third quarter of 2008 compared to $33.2 million in the same quarter a year ago. The efficiency ratio was 53.92%, or 37.80% excluding the $27.8 million pre-tax impairment charge, compared to 37.46% for the same period a year ago, and 41.52%, or 38.74% excluding the $5.8 million pre-tax impairment charge for the second quarter of 2008.

Federal Deposit Insurance Corporation ("FDIC") and State assessments increased to $1.3 million in the third quarter of 2008 from $284,000 in the same quarter a year ago as a result of the utilization of the remaining credit for prior years' FDIC insurance premiums in March 2008. Professional service expense increased $1.0 million, or 42.8%, primarily due to increases in information technology consulting expenses of $518,000, appraisal expenses of $217,000 and legal expenses of $213,000. Other real estate owned ("OREO") expense increased $1.2 million due to a $1.3 million write-down on the Company's Texas apartment foreclosure. Expense from operations of affordable housing investments increased $300,000, or 11.8%, to $2.8 million compared to $2.5 million in the same quarter a year ago as a result of adjustments to estimated losses and additional investments in affordable housing projects.

Offsetting the above described increases were decreases of $584,000 in computer and equipment expense due primarily to the decrease in software license fees as a result of the Company's new data processing contract, $517,000 in salaries and employee benefits as a result of lower current year bonus accrual, $253,000 in recruiting and education expenses, and $201,000 in litigation expenses in the third quarter of 2008 compared to the same quarter a year ago.

Income Taxes

. . .