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, 2008, of Cathay General Bancorp ("Bancorp") and its wholly-owned subsidiary Cathay Bank (the "Bank" and, together, the "Company" or "we", "us," or "our").

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, 2008.

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, 2008.

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, 2008.

Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill recorded and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading "Goodwill and goodwill impairment" in the Company's annual report on Form 10-K for the year ended December 31, 2008.

HIGHLIGHTS

• Nonaccrual loans down 6% - Total nonaccrual loans decreased by 6%, or $22.6 million, to $360.5 million at September 30, 2009 compared to $383.1 million at June 30, 2009.

• Total accruing delinquent loans down 50% - Total loans delinquent 30 days or more and still accruing interest decreased by 50% to $79.3 million at September 30, 2009 compared to $158.2 million at June 30, 2009.

• Increase in net interest margin - Net interest margin for the third quarter of 2009 increased to 2.65% from 2.49% for the second quarter of 2009.

• Allowance for credit losses strengthened - Total allowance for credit losses increased to $194.4 million, or 2.73%, of total loans at September 30, 2009 compared to 2.42% of total loans at June 30, 2009.

• Capital strengthened - During the months of September 2009 and October 2009, the Company raised $107.4 million in additional capital through the sale of 3.5 million shares of common stock in its at-the-market capital offering and 8.7 million shares of common stock in its public offering.

Statement of Operations Review

Net (Loss)/Income

Net loss attributable to common stockholders for the three months ended September 30, 2009 was $21.8 million, a $28.7 million income decrease, compared to net income attributable to common stockholders of $6.9 million for the same period a year ago. Loss per share for the three months ended September 30, 2009, was $0.43 compared to earnings of $0.14 per diluted share for the same period a year ago due primarily to increases in the provision for credit losses, lower net interest income and higher provision for OREO write-downs.

Return on average stockholders' equity was negative 5.58% and return on average assets was negative 0.60% for the three months ended September 30, 2009, compared to a return on average stockholders' equity of 2.71% and a return on average assets of 0.25% for the same period of 2008

Financial Performance



                                                 Third Quarter 2009           Third Quarter 2008
Net (loss)/income                               $     (17.7) million         $        6.9 million
Net (loss)/income available to common
stockholders                                    $     (21.8) million         $        6.9 million
(Loss)/basic earnings per common share          $              (0.43 )       $               0.14
(Loss)/diluted earnings per common share        $              (0.43 )       $               0.14

Net Interest Income Before Provision for Credit Losses

Net interest income before provision for credit losses decreased to $72.5 million during the third quarter of 2009, a decline of $1.1 million, or 1.5%, compared to $73.6 million during the same quarter a year ago. The decrease was due primarily to the increases in interest expense paid for securities sold under agreements to repurchase.

The net interest margin, on a fully taxable-equivalent basis, was 2.65% for the third quarter of 2009. The net interest margin increased 16 basis points from 2.49% in the second quarter of 2009, and decreased 23 basis points from 2.88%, on a fully taxable-equivalent basis, in the third quarter of 2008. The decrease in net interest margin from the prior year primarily resulted from increases in non-accrual loans and the increase in the borrowing rate on our long term repurchase agreements and other borrowed funds. The majority of our variable rate loans contain interest rate floors, which help limit the impact of the recent decreases in the prime interest rate.

For the third quarter of 2009, the yield on average interest-earning assets was 4.82%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities equaled 2.48%, and the cost of

interest bearing deposits was 1.80%. In comparison, for the third quarter of 2008, the yield on average interest-earning assets was 5.70%, on a fully taxable-equivalent basis, cost of funds on average interest-bearing liabilities equaled 3.21%, and the cost of interest bearing deposits was 2.84%. 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 15 basis points to 2.34% for the third quarter ended September 30, 2009, from 2.49% for the same quarter a year ago, primarily due to the reasons discussed above.

The cost of deposits, including demand deposits, decreased 33 basis points to 1.62% in the third quarter of 2009 compared to 1.95% in the second quarter of 2009 due primarily to growth in core deposits and decreased 89 basis points from 2.51% in the third quarter of 2008 due partly to decrease in market rates and partly to growth in core deposits.

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,                             2009                                           2008
                                                             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                           $  1,428,143      $  17,104          4.75 %    $  1,606,864      $  21,171          5.24 %
Residential mortgage                            838,268         11,059          5.28           772,460         10,983          5.69
Commercial mortgage                           4,142,771         62,858          6.02         4,126,133         68,364          6.59
Real estate construction loans                  782,817          8,390          4.25           898,728         13,247          5.86
Other loans and leases                           19,972            177          3.52            21,633            240          4.41

Total loans and leases (1)                    7,211,971         99,588          5.48         7,425,818        114,005          6.11
Taxable securities                            3,385,904         31,589          3.70         2,484,473         27,575          4.42
Tax-exempt securities (3)                        18,590            257          5.48            47,938            868          7.20
Federal Home Loan Bank Stock                     71,819            149          0.82            64,228          1,004          6.22
Interest bearing deposits                        57,297            119          0.82             8,941             42          1.87
Federal funds sold & securities
purchased
under agreements to resell                      104,946             35          0.13           188,522          2,899          6.12

Total interest-earning assets                10,850,527        131,737          4.82        10,219,920        146,393          5.70

Non-interest earning assets
Cash and due from banks                         127,493                                         82,102
Other non-earning assets                        840,826                                        724,950

Total non-interest earning assets               968,319                                        807,052
Less: Allowance for loan losses                (183,000 )                                      (90,162 )
Deferred loan fees                               (9,206 )                                      (10,527 )

Total assets                               $ 11,626,640                                   $ 10,926,283


Interest bearing liabilities:
Interest bearing demand accounts           $    310,047      $     312          0.40      $    268,802      $     382          0.57
Money market accounts                           967,839          3,751          1.54           760,679          3,466          1.81
Savings accounts                                338,053            182          0.21           337,538            261          0.31
Time deposits                                 5,175,066         26,602          2.04         4,708,290         39,217          3.31

Total interest-bearing deposits               6,791,005         30,847          1.80         6,075,309         43,326          2.84

Federal funds purchased                             163              1          0.45            39,842            206          2.06
Securities sold under agreements to
repurchase                                    1,556,343         16,555          4.22         1,550,000         15,174          3.89
Other borrowings                                957,558         10,662          4.42         1,157,430         11,785          4.05
Long-term debt                                  171,136          1,067          2.47           171,136          2,030          4.72

Total interest-bearing liabilities            9,476,205         59,132          2.48         8,993,717         72,521          3.21

Non-interest bearing liabilities
Demand deposits                                 783,799                                        788,028
Other liabilities                               101,772                                        125,535
Total equity                                  1,264,864                                      1,019,003

Total liabilities and equity               $ 11,626,640                                   $ 10,926,283

Net interest spread (4)                                                         2.34 %                                         2.49 %

Net interest income (4)                                      $  72,605                                      $  73,872

Net interest margin (4)                                                         2.65 %                                         2.88 %

(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,
                                                                      2009-2008
                                                                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                                       (3,150 )           (11,267 )            (14,417 )
Taxable securities                                      8,912              (4,898 )              4,014
Tax-exempt securities (2)                                (440 )              (171 )               (611 )
Federal Home Loan Bank Stock                              105                (960 )               (855 )
Deposits with other banks                                 112                 (35 )                 77
Federal funds sold and securities purchased
under agreements to resell                               (893 )            (1,971 )             (2,864 )

Total increase in interest income                       4,646             (19,302 )            (14,656 )


Interest-Bearing Liabilities:
Interest bearing demand accounts                           53                (123 )                (70 )
Money market accounts                                     855                (570 )                285
Savings accounts                                            1                 (80 )                (79 )
Time deposits                                           3,563             (16,178 )            (12,615 )
Federal funds purchased                                  (115 )               (90 )               (205 )
Securities sold under agreements to
repurchase                                                 64               1,317                1,381
Other borrowed funds                                   (2,129 )             1,006               (1,123 )
Long-term debts                                            -                 (963 )               (963 )

Total increase in interest expense                      2,292             (15,681 )            (13,389 )

Changes in net interest income                  $       2,354        $     (3,621 )     $       (1,267 )

(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 $76.0 million for the third quarter of 2009 compared to $93.0 million for the second quarter of 2009 and compared to $15.8 million in the third 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, 2009. The provision for credit losses represents the charge 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, including unfunded commitments. The following table summarizes the charge-offs and recoveries for the periods as indicated:

                                            For the three months ended         For the nine months ended
                                                  September 30,                      September 30,
(In thousands)                                2009              2008             2009             2008
Charge-offs:
Commercial loans                         $       27,492    $        6,796   $       49,657    $       8,917
Construction loans- residential                  13,126             3,230           58,535            8,239
Construction loans- other                         1,966                -            10,734               -
Real estate loans                                12,094               172           26,550              554
Real estate- land loans                           3,865                -             7,599              339
Installment and other loans                          -                 -                 4               -

Total charge-offs                                58,543            10,198          153,079           18,049

Recoveries:
Commercial loans                                    219             1,067              523            1,634
Construction loans- residential                     598                -               772               83
Construction loans- other                            -                 -                 1               -
Real estate loans                                    46                                 46
Real estate- land loans                             685                -               686               -
Installment and other loans                           2                 4               19               16

Total recoveries                                  1,550             1,071            2,047            1,733

Net Charge-offs                          $       56,993    $        9,127   $      151,032    $      16,316

Total charge-offs of $58.5 million for the third quarter of 2009 included $13.1 million of charge-offs on twelve residential construction loans, $2.0 million of charge-offs on commercial property construction loans, $10.6 million of charge-offs on commercial real estate loans, $27.5 million on 25 commercial loans, $1.5 million charge-offs on residential mortgage loans, and $3.8 million of charge-offs on land loans. Net loan charge-offs increased from $56.0 million in the second quarter of 2009 to $57.0 million in the third quarter of 2009 and compared to $9.1 million in the third quarter of last year. Net loan charge-offs remained high in the third quarter as a result of the continuing weak economy.

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 $10.3 million for the third quarter of 2009, an increase of $18.7 million compared to the non-interest loss of $8.4 million for the third quarter of 2008. The increase in non-interest income was primarily due to net securities losses in 2008 of $15.3 million. In the third quarter of 2009, net gains on sales of agency mortgage-backed securities were $2.9 million compared to a $27.8 million other-than-temporary impairment charge on agency preferred stock which was partially offset by net gains of $12.5 million from sales of agency mortgage-backed securities in the same quarter a year ago. In the third quarter of 2009, the Company sold an aircraft owned through a leveraged lease and recorded a $3.3 million gain included in other operating income. Offsetting the above gains were losses of $1.3 million from interest rate swap agreements, a decrease of $1.0 million from foreign exchange and currency transaction commissions, and $328,000 from higher write-downs of venture capital investments.

Non-Interest Expense

Non-interest expense increased $3.8 million, or 10.8%, to $38.8 million in the third quarter of 2009 compared to $35.0 million in the same quarter a year ago. The efficiency ratio was 46.87% in the third quarter of 2009 compared to 53.69% for the same period a year ago due to the securities losses recorded in the prior year.

OREO expense increased $2.9 million to $4.1 million in the third quarter of 2009 from $1.2 million in the same quarter a year ago primarily due to higher OREO provision and expense resulting from increased OREO activities.

FDIC and State assessments increased $3.2 million to $4.5 million in the third quarter of 2009 from $1.3 million in the same quarter a year ago due to a higher assessment rate. Occupancy expense increased $606,000 primarily due to increases in depreciation expense of $782,000 primarily related to our new administrative offices at 9650 Flair Drive, El Monte which opened in January 2009, which were partially offset by lower rental expense of $206,000. Professional service expense increased $284,000, or 8.3%, primarily due to increases in credit appraisal expenses, legal expenses, and collection expenses.

Offsetting the above described increases were decreases of $2.0 million in salaries and employee benefits and decreases of $1.4 million expense from operations of affordable housing investments. Salaries and employee benefits decreased primarily due to a $665,000 decrease in option compensation expense, a $556,000 decrease in bonus accruals, and a $331,000 decrease in salaries. Expense from operations of affordable housing investments decreased as the result of an expense reversal of $494,000 to the prior year's estimated losses in the third quarter of 2009 compared to additional expense adjustment of $577,000 in the same quarter a year ago.

Income Taxes

The effective tax rate was 51.7% for the third quarter of 2008 and 27.9% for the full year 2008. The tax benefit for the third quarter of 2009 resulted from the pretax loss for the quarter and the utilization of low income housing tax credits.

Year-to-Date Statement of Operations Review

Net loss available to common stockholders for the first nine months of 2009 was $44.4 million, an $97.8 million, or 183%, decrease compared to net income available to common stockholders of $53.4 million for the same period a year ago. Loss per share was $0.89 compared to earnings of $1.08 per diluted share for the same period a year ago due primarily to increases in the provision for loan losses, lower net interest income and higher provision for OREO write-downs. The net interest margin for the nine months ended September 30, 2009, decreased 38 basis points to 2.61% compared to 2.99% for the same period a year ago.

Return on average stockholders' equity was negative 3.35% and return on average assets was negative 0.37% for the nine months ended September 30, 2009, compared to a return on average stockholders' equity of 7.09% and a return on average assets of 0.67% for the same period of 2008. The efficiency ratio for the nine months ended September 30, 2009 was 46.66% compared to 44.00% for the same period a year ago.

The 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 rates, the net interest spread and the net interest margins are as follows:

            Interest-Earning Assets and Interest-Bearing Liabilities



Nine months ended September 30,                             2009                                           2008
                                                            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                          $  1,506,915      $  53,190          4.72 %    $  1,538,657      $  65,866          5.72 %
Residential mortgage                           815,939         32,324          5.28           722,149         31,290          5.78
Commercial mortgage                          4,130,418        188,574          6.10         3,980,427        202,127          6.78
Real estate construction loans                 862,781         27,559          4.27           853,477         41,766          6.54
Other loans and leases                          20,763            585          3.77            24,063            831          4.61

Total loans and leases (1)                   7,336,816        302,232          5.51         7,118,773        341,880          6.42
Taxable securities                           3,174,308         94,104          3.96         2,404,666         84,507          4.69
Tax-exempt securities (3)                       20,234            954          6.30            58,690          3,730          8.49
Federal Home Loan Bank stock                    71,800            149          0.28            65,283          2,685          5.49
. . .