Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
x
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2008
 
OR
 
o
  
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  0-18630
 
CATHAY GENERAL BANCORP 
(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.)
     
777 North Broadway, Los Angeles, California
  
90012
(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 R  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer R            Accelerated filer ¨ 
Non-accelerated filer  ¨  (Do not check if a smaller reporting company)          Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨ No R
 
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, 49,416,526 shares outstanding as of April 30, 2008.
 
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
1ST QUARTER 2008 REPORT ON FORM 10-Q
TABLE OF CONTENTS

4
     
Item 1.
FINANCIAL STATEMENTS (Unaudited)
4
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
41
Item 4.
CONTROLS AND PROCEDURES
42
     
PART II – OTHER INFORMATION
42
     
Item 1.
LEGAL PROCEEDINGS
42
Item 1A.
RISK FACTORS
42
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
43
Item 3.
DEFAULTS UPON SENIOR SECURITIES
43
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
43
Item 5.
OTHER INFORMATION
44
Item 6.
EXHIBITS
44
     
SIGNATURES
45
 
2
 
Forward-Looking Statements
 
In this quarterly Report on Form 10-Q, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. These forward-looking statements may include, but are not limited to, such words as "believes," "expects," "anticipates," "intends," "plans," "estimates," "may," "will," "should," "could," "predicts," "potential," "continue," or the negative of such terms and other comparable terminology or similar expressions. Forward-looking statements are not guarantees. They involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties and other factors include, but are not limited to adverse developments or conditions related to or arising from: 
 
 
·
deterioration in asset or credit quality;
 
·
acquisitions of other banks, if any;
 
·
fluctuations in interest rates;
 
·
expansion into new market areas;
 
·
earthquake, wildfire or other natural disasters;
 
·
competitive pressures;
·
legislative and regulatory developments; and
 
·
general economic or business conditions in California and other regions where the Bank has operations.
 
These and other factors are further described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, (at Item 1A in particular) its reports and registration statements filed with the Securities and Exchange Commission (“SEC”) and other filings it makes in the future with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, we caution readers not to place undue reliance on any forward-looking statements, which speak to the date of this report. The Company 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.
 
The Company’s filings with the SEC are available to the public at the website maintained by the SEC at http://www.sec.gov, or by requests directed to Cathay General Bancorp, 777 North Broadway, Los Angeles, California 90012, Attn: Investor Relations (213) 625-4749.
 
3
 
PART I – FINANCIAL INFORMATION
 
Item 1. FINANCIAL STATEMENTS (Unaudited)

CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
March 31, 2008
  
December 31, 2007
  
% change
  
   
(In thousands, except share and per share data)
      
Assets
              
Cash and due from banks
  
$
115,171
  
$
118,437
    
(3
)
Short-term investments
    
3,670
    
2,278
    
61
  
Securities purchased under agreements to resell
    
305,000
    
516,100
    
(41
)
Long-term certificates of deposit
    
-
    
50,000
    
(100
)
Securities available-for-sale (amortized cost of $2,438,702 in 2008 and $2,348,606 in 2007)
    
2,451,549
    
2,347,665
    
4
  
Trading securities
    
93
    
5,225
    
(98
)
Loans
    
6,918,849
    
6,683,645
    
4
  
Less: Allowance for loan losses
    
(67,428
)
  
(64,983
)
  
4
  
Unamortized deferred loan fees, net
    
(10,020
)
  
(10,583
)
  
(5
)
Loans, net
    
6,841,401
    
6,608,079
    
4
  
Federal Home Loan Bank stock
    
66,473
    
65,720
    
1
  
Other real estate owned, net
    
16,699
    
16,147
    
3
  
Affordable housing investments, net
    
97,730
    
94,000
    
4
  
Premises and equipment, net
    
82,706
    
76,848
    
8
  
Customers’ liability on acceptances
    
31,191
    
53,148
    
(41
)
Accrued interest receivable
    
42,197
    
53,032
    
(20
)
Goodwill
    
319,285
    
319,873
    
(0
)
Other intangible assets, net
    
34,324
    
36,097
    
(5
)
Other assets
    
35,418
    
39,883
    
(11
)
                     
Total assets
  
$
10,442,907
  
$
10,402,532
    
0
  
                     
Liabilities and Stockholders’ Equity
                    
Deposits
                    
Non-interest-bearing demand deposits
  
$
768,419
  
$
785,364
    
(2
)
Interest-bearing deposits:
                    
NOW deposits
    
254,198
    
231,583
    
10
  
Money market deposits
    
712,503
    
681,783
    
5
  
Savings deposits
    
332,182
    
331,316
    
0
  
Time deposits under $100,000
    
1,164,561
    
1,311,251
    
(11
)
Time deposits of $100,000 or more
    
3,056,641
    
2,937,070
    
4
  
Total deposits
    
6,288,504
    
6,278,367
    
0
  
                     
Federal funds purchased
    
37,000
    
41,000
    
(10
)
Securities sold under agreements to repurchase
    
1,580,162
    
1,391,025
    
14
  
Advances from the Federal Home Loan Bank
    
1,189,287
    
1,375,180
    
(14
)
Other borrowings from financial institutions
    
20,629
    
8,301
    
149
  
Other borrowings for affordable housing investments
    
19,654
    
19,642
    
0
  
Long-term debt
    
171,136
    
171,136
    
-
  
Acceptances outstanding
    
31,191
    
53,148
    
(41
)
Minority interest in consolidated subsidiary
    
8,500
    
8,500
    
-
  
Other liabilities
    
92,388
    
84,314
    
10
  
Total liabilities
    
9,438,451
    
9,430,613
    
0
  
Commitments and contingencies
    
-
    
-
    
-
  
Stockholders’ Equity
                    
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued
     -     -     -  
Common stock, $0.01 par value, 100,000,000 shares authorized,
                    
53,589,915 issued and 49,382,350 outstanding at March 31, 2008 and
                    
53,543,752 issued and 49,336,187 outstanding at December 31, 2007
    
536
    
535
    
0
  
Additional paid-in-capital
    
483,132
    
480,557
    
1
  
Accumulated other comprehensive loss, net
    
7,445
    
(545
)
  
(1,466
)
Retained earnings
    
639,079
    
617,108
    
4
  
Treasury stock, at cost (4,207,565 shares at March 31, 2008 and at December 31, 2007)
    
(125,736
)
  
(125,736
)
  
-
  
Total stockholders’ equity
    
1,004,456
    
971,919
    
3
  
Total liabilities and stockholders’ equity
  
$
10,442,907
  
$
10,402,532
    
0
  
 
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
 
4

CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

   
Three months ended March 31,
  
   
2008
  
2007
  
   
(In thousands, except share and per share data)
  
INTEREST AND DIVIDEND INCOME
          
Loan receivable, including loan fees
  
$
117,025
  
$
114,179
  
Securities available-for-sale - taxable
    
28,506
   
21,815
  
Securities available-for-sale - nontaxable
    
366
   
599
  
Federal Home Loan Bank stock
    
753
   
509
  
Agency preferred stock
    
716
   
164
  
Federal funds sold and securities purchased under agreements to resell
    
6,480
   
3,802
  
Deposits with banks
    
454
   
786
  
               
Total interest and dividend income
    
154,300
   
141,854
  
               
INTEREST EXPENSE
              
Time deposits of $100,000 or more
    
31,868
   
31,152
  
Other deposits
    
17,235
   
17,987
  
Securities sold under agreements to repurchase
    
14,625
   
5,717
  
Advances from Federal Home Loan Bank
    
12,121
   
11,781
  
Long-term debt
    
2,849
   
1,976
  
Short-term borrowings
    
412
   
489
  
               
Total interest expense
    
79,110
   
69,102
  
               
Net interest income before provision for credit losses
    
75,190
   
72,752
  
Provision for credit losses
    
7,500
   
1,000
  
               
Net interest income after provision for credit losses
    
67,690
   
71,752
  
               
NON-INTEREST INCOME
              
Securities gains, net
    
-
   
191
  
Letters of credit commissions
    
1,440
   
1,292
  
Depository service fees
    
1,272
   
1,346
  
Other operating income
    
3,812
   
3,055
  
               
Total non-interest income
    
6,524
   
5,884
  
               
NON-INTEREST EXPENSE
              
Salaries and employee benefits
    
17,859
   
16,977
  
Occupancy expense
    
3,283
   
2,768
  
Computer and equipment expense
    
2,244
   
2,225
  
Professional services expense
    
2,385
   
1,728
  
FDIC and State assessments
    
291
   
259
  
Marketing expense
    
1,017
   
901
  
Other real estate owned (income) expense
    
(17
)
  
244
  
Operations of affordable housing investments, net
    
825
   
944
  
Amortization of core deposit intangibles
    
1,752
   
1,765
  
Other operating expense
    
2,317
   
2,418
  
               
Total non-interest expense
    
31,956
    
30,229
  
               
Income before income tax expense
    
42,258
   
47,407
  
Income tax expense
    
14,959
   
17,441
  
Net income
    
27,299
   
29,966
  
               
Other comprehensive gain, net of tax
    
       
Unrealized holding gains arising during the period
    
8,154
   
4,500
  
Less: reclassification adjustments included in net income
    
164
   
(183
)
Total other comprehensive gain, net of tax
    
7,990
   
4,683
  
Total comprehensive income
  
$
35,289
  
$
34,649
  
               
Net income per common share:
              
Basic
  
$
0.55
  
$
0.58
  
Diluted
  
$
0.55
  
$
0.57
  
               
Cash dividends paid per common share
  
$
0.105
  
$
0.090
  
Basic average common shares outstanding
    
49,346,285
   
51,684,754
  
Diluted average common shares outstanding
    
49,531,531
   
52,295,229
  
 
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
 
5
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Three Months Ended March 31
  
   
2008
  
2007
  
   
(In thousands)
      
Cash Flows from Operating Activities
          
Net income
  
$
27,299
  
$
29,966
  
Adjustments to reconcile net income to net cash provided by operting activities:
              
Provision for credit losses
    
7,500
    
1,000
  
Provision for losses on other real estate owned
    
-
    
210
  
Deferred tax liability
    
1,628
    
3,411
  
Depreciation
    
1,075
    
1,091
  
Net gains on sale of other real estate owned
    
-
    
(7
)
Net gains on sale of loans
    
(51
)
  
(61
)
Proceeds from sale of loans
    
1,165
    
888
  
Originations of loans held for sale
    
(1,105
)
  
(813
)
Write-downs on venture capital investments
    
-
    
418
  
Gain on sales and calls of securities
    
-
    
(183
)
Decrease in fair value of warrants
    
13
    
28
  
Other non-cash interest
    
8
    
117
  
Amortization of security premiums, net
    
241
    
569
  
Amortization of other intangible assets
    
1,790
    
1,797
  
Excess tax short-fall (benefit) from share-based payment arrangements
    
226
    
(420
)
Stock based compensation expense
    
1,830
    
2,033
  
Gain on sale of premises and equipment
    
-
    
24
  
Increase/(decrease) in accrued interest receivable
    
10,835
    
(5,067
)
Decrease in other assets, net
    
9,993
    
676
  
(Decrease)/increase in other liabilities
    
(2,113
)
  
8,985
  
               
Net cash provided by operating activities
    
60,334
    
44,662
  
               
Cash Flows from Investing Activities
              
(Increase)/decrease in short-term investment
    
(1,392
)
  
854
  
Decrease/(increase) in long-term investment
    
50,000
    
(50,000
)
Decrease/(increase) in securities purchased under agreements to resell
    
211,100
    
(150,000
)
Purchase of investment securities available-for-sale
    
(626,393
)
  
(559,976
)
Proceeds from maturity and call of investment securities available-for-sale
    
582,795
    
121,038
  
Proceeds from sale of investment securities available-for-sale
    
-
    
86,175
  
Purchase of mortgage-backed securities available-for-sale
    
(128,389
)
  
-
  
Proceeds from repayment and sale of mortgage-backed securities available-for-sale
    
81,650
    
36,798
  
Purchase of Federal Home Loan Bank stock
    
-
    
(15,248
)
Net increase in loans
    
(241,086
)
  
(112,624
)
Purchase of premises and equipment
    
(4,709
)
  
(3,111
)
Proceeds from sales of premises and equipment
    
-
    
10
  
Proceeds from sale of other real estate owned
    
-
    
918
  
Net increase in investment in affordable housing
    
(4,450
)
  
(3,581
)
Acquisition, net of cash acquired
    
-
    
(3,655
)
               
Net cash used in investing activities
    
(80,874
)
  
(652,402
)
               
Cash Flows from Financing Activities
              
               
Net increase/(decrease) in demand deposits, NOW accounts, money market and saving deposits
    
37,257
    
(8,177
)
Net (decrease)/increase in time deposits
    
(27,120
)
  
3,445
  
Net increase in federal funds purchased and securities sold under agreement to repurchase
    
185,137
    
301,300
  
Advances from Federal Home Loan Bank
    
1,111,107
    
1,108,000
  
Repayment of Federal Home Loan Bank borrowings
    
(1,297,000
)
  
(848,000
)
Cash dividends
    
(5,181
)
  
(4,676
)
Issuance of long-term debt
    
-
    
45,000
  
Proceeds from other borrowings
    
20,629
    
-
  
Repayment of other borrowings
    
(8,301
)
  
-
  
Proceeds from shares issued to Dividend Reinvestment Plan
    
616
    
576
  
Proceeds from exercise of stock options
    
356
    
1,031
  
Excess tax (short-fall) benefits from share-based payment arrangements
    
(226
)
  
420
  
Purchase of treasury stock
    
-
    
(26,874
)
               
Net cash provided by financing activities
    
17,274
    
572,045
  
               
Decrease in cash and cash equivalents
    
(3,266
)
  
(35,695
)
Cash and cash equivalents, beginning of the period
    
118,437
    
132,798
  
               
Cash and cash equivalents, end of the year
  
$
115,171
  
$
97,103
  
               
Supplemental disclosure of cash flow information
              
Cash paid during the period:
              
Interest
  
$
352,878
  
$
68,683
  
Income taxes
  
$
5,691
  
$
3,462
  
Non-cash investing and financing activities:
              
Net change in unrealized holding gains (loss) on securities available-for-sale, net of tax
  
$
7,990
  
$
4,683
  
Adjustment to initially apply FASB Interpretation 48
  
$
-
  
$
(8,524
)
Adjustment to initially apply EITF 06-4
  
$
(147
)
      
Transfers to other real estate owned
  
$
262
  
$
373
  

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
6
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Business

Cathay General Bancorp (the “Bancorp”) is the holding company for Cathay Bank (the “Bank”), six limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc. The Bancorp also owns 100% of the common stock of five 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. As of March 31, 2008, the Bank operates twenty one branches in Southern California, ten branches in Northern California, nine branches in New York State, three branches in Illinois, three branches in Washington State, two branches Texas, one branch in Massachusetts, one branch in New Jersey, one branch in Hong Kong, and a representative office in Shanghai and in Taipei. Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).

2. Acquisitions and Investments
 
We continue to look for opportunities to expand the Bank’s branch network by seeking new branch locations and/or by acquiring other financial institutions to diversify our customer base in order to compete for new deposits and loans, and to be able to serve our customers more effectively. At the close of business on March 30, 2007, the Company completed the acquisition of New Jersey-based United Heritage Bank (“UHB”) for cash of $9.4 million. As of March 30, 2007, UHB had $58.9 million in assets and $4.3 million in stockholders’ equity.
 
The acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” The assets acquired and liabilities assumed were recorded by the Company at their fair values as of March 31, 2007:

   
United Heritage Bank
  
 
    
(In thousands)
 
Assets acquired: 
        
Cash and cash equivalents
 
$
5,745
  
Securities available-for-sale
   
14,305
  
Loans, net
   
38,036
  
Premises and equipment, net
   
432
  
Goodwill
   
3,575
  
Core deposit intangible
   
410
  
Other assets
   
2,161
  
         
Total assets acquired
   
64,664
  
         
Liabilities assumed:
       
Deposits
   
54,166
  
Accrued interest payable
   
9
  
Other liabilities
   
1,089
  
Total liabilities assumed
   
55,264
  
Net assets acquired
 
$
9,400
  
 
        
Cash paid
 
$
9,400
  
 
7
 
No loans acquired as part of the acquisition of UHB were determined to be impaired and therefore no loans were within the scope of Statement of Position (SOP) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. In addition, the estimated other costs related to the acquisition were recorded as a liability at closing when allocating the related purchase price. The purchase price allocation is still preliminary and subject to final determination and valuation of the fair value of assets acquired and liabilities assumed.
 
For each acquisition, we developed an integration plan for the consolidated company that addressed, among other things, requirements for staffing, systems platforms, branch locations and other facilities. The established plans are evaluated regularly during the integration process and modified as required. Merger and integration expenses are summarized in the following primary categories: (i) severance and employee-related charges; (ii) system conversion and integration costs, including contract termination charges; (iii) asset write-downs, lease termination costs for abandoned space and other facilities-related costs; and (iv) other charges. Other charges include investment banking fees, legal fees, other professional fees relating to due diligence activities and expenses associated with preparation of securities filings, as appropriate. These costs were included in the allocation of the purchase price at the acquisition date based on our formal integration plans. 
 
As of March 31, 2008, goodwill was $319.3 million, a decrease of $588,000 compared to December 31, 2007 due to a reversal of accrued penalties of $528,000 as a result of the settlement with the California Franchise Board for a claim related to GBC Bancorp’s 2001 California tax return and a tax refund of $60,000 related to New Asia Bancorp’s 2006 tax year. Merger-related lease liability was $557,000 as of March 31, 2008, with cash outlays of $49,000 for the three months ended March 31, 2008.

3. Basis of Presentation

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, 2008. 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, 2007.

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.
 
8
 
4. Recent Accounting Pronouncements
 
SFAS No. 141, “Business Combinations (Revised 2007).” SFAS 141R replaces SFAS 141, “Business Combinations,” and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, “Accounting for Contingencies.” SFAS 141R is expected to have a significant impact on the Company’s accounting for business combinations closing on or after January 1, 2009.
 
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, together with a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and requires a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. Market participant assumptions include assumptions about the risk, the effect of a restriction on the sale or use of an asset, and the effect of a nonperformance risk for a liability. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements. See Note 14- “Fair Value Measurements” for more information. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company does not expect a material impact on its consolidated financial statements from adoption of SFAS 157-2.
 
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits a business entity to choose to measure financial instruments and certain other items at fair value to mitigate volatility in reported earnings caused by measuring financial instruments differently without having to apply complex hedge accounting provisions. The fair value option may be applied instrument by instrument, is irrevocable and is applied only to entire instruments. Following the initial fair value measurement date, a business entity shall report unrealized gains and losses on financial instruments for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not elected the fair value option for any of its existing assets or liabilities. The adoption of SFAS 159 did not have an impact on the Company’s consolidated financial statements.
 
9
 
SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51.” SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 is effective for the Company on January 1, 2009, and is not expected to have a significant impact on the Company’s financial statements.
 
SAB No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB No. 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments,” and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The guidance in SAB 109 is applied on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 did not have a significant impact on the Company’s consolidated financial statements.
 
SAB No. 110, “Certain Assumptions Used in Valuation Methods.” SAB No. 110 continues to allow companies, under certain circumstances, to use the simplified method beyond December 31, 2007. It is appropriate to use the simplified method under SAB 110 when an entity does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Based on SAB 110 and SAB 107, the Company has estimated the expected life of its stock options based on the average of the contractual period and the vesting period and has consistently applied the simplified method to all options granted in 2005, in 2006, and in the first quarter of 2008. There were no options granted in 2007.
 
Emerging Issues Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.” EITF 06-4 requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, “Employer’s Accounting for Postretirement Benefits Other Than Pensions.” The Company adopted EITF 06-4 effective as of January 1, 2008, and charged a $147,000 cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2008.
 
10
 
5. Earnings per Share
 
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.
 
Outstanding stock options with anti-dilutive effect were not included in the computation of diluted earnings per share. The following table sets forth basic and diluted earnings per share calculations and the average shares of stock options with anti-dilutive effect:

   
For the three months ended March 31,
  
(Dollars in thousands, except share and per share data)
  
2008
  
2007
  
Net income
  
$
27,299
  
$
29,966
  
               
Weighted-average shares:
              
Basic weighted-average number of common shares outstanding
    
49,346,285
    
51,684,754
  
Dilutive effect of weighted-average outstanding common shares equivalents
              
Stock Options
    
184,432
    
604,514
  
Restricted Stock
    
-
   
5,961
  
Restricted Stock Units
    
814
    
-
 
Diluted weighted-average number of common shares outstanding
    
49,531,531
    
52,295,229
  
               
Average shares of stock options with anti-dilutive effect
    
3,680,678
    
1,451,290
  
Earnings per share:
              
Basic
  
$
0.55
  
$
0.58
  
Diluted
  
$
0.55
  
$
0.57
  

6. Stock-Based Compensation
 
In 1998, the Board adopted the Cathay Bancorp, Inc. Equity Incentive Plan. Under the Equity Incentive Plan, as amended in September, 2003, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock, for up to 7,000,000 shares of the Company’s common stock on a split adjusted basis. In May 2005, the stockholders of the Company approved the 2005 Incentive Plan which provides that 3,131,854 shares of the Company’s common stock may be granted as incentive or non-statutory stock options, and/or restricted stock units, or as non-vested stock. In conjunction with the approval of the 2005 Incentive Plan, the Bancorp agreed to cease granting awards under the Equity Incentive Plan. As of March 31, 2008, the only options granted by the Company under the 2005 Incentive Plan were non-statutory stock options to selected bank officers and non-employee directors at exercise prices equal to the fair market value of a share of the Company’s common stock on the date of grant. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events) except options granted to the Chief Executive Officer of the Company for 245,060 shares granted on March 22, 2005, of which 30% vested immediately, 10% vested on November 20, 2005, and an additional 20% would vest on November 20, 2006, 2007, and 2008, respectively, 264,694 shares granted on May 22, 2005, of which 40% vested on November 20, 2005, and an additional 20% would vest on November 20, 2006, 2007, and 2008, respectively, and 100,000 shares granted on February 21, 2008, of which 50% would vest on February 21, 2009, and the remaining 50% would vest on February 21, 2010. If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards. Stock options are typically granted in the first quarter of the year. There were no options granted in 2007. The Board of Directors of the Company was in the process of reviewing the relative merits of granting restricted stock or restricted stock units either in place of or in combination with stock options. As a result, the Company deferred the granting of any stock option awards until 2008. The Company expects to issue new shares to satisfy stock option exercises and the vesting of restricted stock units.
 
11
 
Stock-based compensation expense for stock options is calculated based on the fair value of the award at the grant date for those options expected to vest, 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. The Company estimates the expected volatility based on the Company’s historical stock prices for the period corresponding to the expected life of the stock options. Based on SAB 107 and SAB 110, the Company has estimated the expected life of the options based on the average of the contractual period and the vesting period and has consistently applied the simplified method to all option granted starting from 2005. Option compensation expense totaled $1.6 million for the three months ended March 31, 2008, and $1.9 million for the same quarter a year ago. Stock-based compensation is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $16.0 million at March 31, 2008, and is expected to be recognized over the next 3.0 years.
 
The weighted average per share fair value on the date of grant of the options granted was $7.33 during the first three months of 2008. The Company estimated the expected life of the options based on the average of the contractual period and the vesting period. The fair value of stock options has been determined using the Black-Scholes option pricing model with the following assumptions:
 
  
 
Three months ended
 
  
 
March 31, 2008
  
Expected life- number of years
    
6.4
  
Risk-free interest rate
    
3.09
%
Volatility
    
30.04
%
Dividend yield
    
1.20
%
 
Cash received from exercises of stock options totaled $356,000 from the exercise of 18,906 shares during the three months ended March 31, 2008, and $1.0 million from the exercise of 63,522 shares during the three months ended March 31, 2007. The fair value of stock options vested during the first quarter of 2008 was $4.8 million compared to $5.1 million for the first quarter of 2007. Aggregate intrinsic value for options exercised were $108,000 during the three months ended March 31, 2008, and $1.1 million during the three months ended March 31, 2007. The table below summarizes stock option activity for the quarter ended March 31, 2008:
 
12
 
           
Weighted-Average
  
Aggregate
  
       
Weighted-Average
  
Remaining Contractual
  
Intrinsic
  
   
Shares
  
Exercise Price
  
Life (in years)
  
Value (in thousands)
  
Balance at December 31, 2007
   
4,574,280
  
$
28.36
    
6.1
  
$
24,487
  
                           
Granted
   
689,200
    
23.37
              
Forfeited
   
(16,784
)
  
32.63
              
Exercised
   
(18,906
)
  
18.81
              
                           
Balance at March 31, 2008
   
5,227,790
  
$
27.72
    
6.4
  
$
2,901
  
                           
Exercisable at March 31, 2008
    
3,415,733
  
$
26.67
    
5.4
  
$
2,901
  
 
At March 31, 2008, 1,527,001 shares were available under the Company’s 2005 Incentive Plan for future grants. The following table shows stock options outstanding and exercisable as of March 31, 2008, the corresponding exercise prices, and the weighted-average contractual life remaining:

   
Outstanding
  
       
Weighted-Average
      
       
Remaining Contractual
  
Exercisable
  
Exercise Price
  
Shares
  
Life (in Years)
  
Shares
  
$
8.25
    
2,000
    
0.5
    
2,000
  
10.63
    
92,836
    
1.8
    
92,836
  
11.06
    
10,240
    
1.8
    
10,240
  
11.34
    
10,240
    
4.8
    
10,240
  
15.05
    
130,488
    
2.8
    
130,488
  
16.28
    
156,056
    
3.9
    
156,056
  
17.29
    
10,240
    
3.8
    
10,240
  
19.93
    
336,844
    
4.8
    
336,844
  
21.09
    
10,240
    
2.8
    
10,240
  
22.01
    
406,674
    
2.8
    
406,674
  
23.37
    
689,200
    
9.9
    
-
  
24.80
    
888,816
    
5.6
    
703,072
  
28.70
    
527,600
    
5.9
    
421,800
  
32.26
    
40,000
    
6.2
    
24,000
  
32.47
    
245,060
    
7.0
    
196,048
  
33.54
    
264,694
    
7.1
    
211,755
  
33.81
    
3,000
    
7.2
    
1,200
  
36.24
    
414,230
    
7.8
    
165,692
  
36.90
    
316,336
    
7.8
    
126,904
  
37.00
    
645,996
    
6.9
    
388,004
  
38.26
    
12,000
    
8.1
    
2,400
  
38.38
    
15,000
    
6.6
    
9,000
  
     
5,227,790
    
6.4
    
3,415,733
  
 
The Company grants non-vested stock to its Chairman of the Board, President, and Chief Executive Officer. The shares vest ratably over certain years if certain annual performance criteria are met. The following table presents information relating to the non-vested stock grants as of March 31, 2008:
 
13
 
   
Date Granted
  
   
January 25, 2006
  
January 31, 2007
  
Shares granted
    
30,000
    
20,000
  
Vested ratably over
    
3 years
    
2 years
  
Price per share at grant date
  
$
36.24
  
$
34.66
  
Vested shares
    
20,000
    
10,000
  
Non-vested shares
   
10,000
    
10,000
  

The stock compensation expense recorded related to non-vested stock above was $177,000 for the three months ended March 31, 2008, and $148,000 for the three months ended March 31, 2007. Unrecognized stock-based compensation expense related to non-vested stock awards was $0.6 million at March 31, 2008, and is expected to be recognized over the next 10 months.
 
In addition to stock options and restricted stock awards above, in February 2008, the Company also granted restricted stock units on 82,291 shares of the Company’s common stock to its eligible employees. On the date of granting of these restricted stock units, the closing price of the Company’s stock was $23.37 per share. Such restricted stock units have a maximum term of five years and vest in approximately 20% annual increments subject to employees’ continued employment with the Company. The following table presents information relating to the restricted stock units grant as of March 31, 2008:
 
       
Weighted-Average
  
       
Remaining Contractual
  
   
Units
  
Life (in years)
  
Balance at December 31, 2007
 
-
  
-
  
           
Granted
   
82,291
    
3.0
  
Forfeited
   
(250
)
      
               
Balance at March 31, 2008
   
82,041
    
2.9
  
 
The compensation expense recorded related to restricted stock units above was $27,000 for the three months ended March 31, 2008. Unrecognized stock-based compensation expense related to restricted stock units was $1.6 million at March 31, 2008, and is expected to be recognized over the next 4.9 years.
 
Prior to 2006, the Company presented the entire amount of the tax benefit on options exercised as operating activities in the consolidated statements of cash flows. After adoption of SFAS No. 123R in January 2006, the Company reports only the benefits of tax deductions in excess of grant-date fair value as cash flows from financing activity. The following table summarizes the tax benefit (short-fall) from share-based payment arrangements:
 
   
For the three months ended March 31,
  
(In thousands)
  
2008
  
2007
  
(Short-fall)/Benefit of tax deductions in excess of grant-date fair value
  
$
(226
)
$
420
  
Benefit of tax deductions on grant-date fair value
    
271
    
43
  
Total benefit of tax deductions
  
$
45
  
$
463
  
 
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7. Securities Purchased Under Agreements to Resell
 
Securities purchased under agreements to resell are usually collateralized by U.S. government agency and mortgage-backed securities. The counter-parties to these agreements are nationally recognized investment banking firms that meet credit requirements of the Company and with whom a master repurchase agreement has been duly executed. As of March 31, 2008, the Company entered into five long-term resale agreements totaling $250.0 million compared to nine long-term resale agreements totaling $450.0 million at December 31, 2007. The agreements have terms from seven to ten years with interest rates ranging from 7.00% to 7.15%. The counterparty has the right to a quarterly call. Among these agreements, $200.0 million are callable after the first three months and $50.0 million are callable after the first six months. When the callable term starts if certain conditions are met, there may be no interest earned for those days when the certain conditions are met. In addition to long-term agreements, the Company entered into a $55.0 million short term resale agreement at a rate of 3.65% that matured in April 2008.
 
Securities purchased under agreements to resell were $305.0 million at a weighted average interest rate 6.47% at March 31, 2008, compared to $516.1 million at a weighted average interest rate of 7.44% at December 31, 2007.
 
For those securities obtained under the resale agreements, the collateral is either held by a third party custodian or by the counter-party and is segregated under written agreements that recognize the Company’s interest in the securities. Interest income associated with securities purchased under resale agreements totaled $6.3 million for the first quarter of 2008 and $3.3 million for the same quarter a year ago.  

8. Commitments and Contingencies
 
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. These instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying condensed consolidated balance sheets. 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. The following table summarizes the outstanding commitments as of the dates indicated:
 
15
 
(In thousands)
  
At March 31, 2008
  
At December 31, 2007
  
Commitments to extend credit
  
$
2,214,874
    
$
2,310,887
  
Standby letters of credit
    
58,290
   
62,413
 
Other letters of credit
    
61,548
   
71,089
 
Bill of lading guarantees
    
260
   
323
 
Total
  
$
2,334,972
  
$
2,444,712
  
 
As of March 31, 2008, $19.8 million unfunded commitments for affordable housing investments were recorded under other liabilities compared to $19.2 million at December 31, 2007.
 
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 borrower. 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 instrument is essentially the same as that involved in making loans to customers.

9. Securities Sold Under Agreements to Repurchase
 
Securities sold under agreements to repurchase were $1.6 billion with a weighted average rate of 3.77% at March 31, 2008, compared to $1.4 billion with a weighted average rate of 3.57% at December 31, 2007. Seventeen floating-to-fixed rate agreements totaling $900.0 million are with initial floating rates for a period of time ranging from six months to one year, with the floating rates ranging from the three-month LIBOR minus 100 basis points to the three-month LIBOR minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.29% to 5.07%. After the initial floating rate term, the counterparties have the right to terminate the transaction at par at the fixed rate reset date and quarterly thereafter. Thirteen fixed-to-floating rate agreements totaling $650.0 million are with initial fixed rates ranging from 1.00% and 3.50% with initial fixed rate terms ranging from six months to eighteen months. For the remainder of the seven year term, the rates float at 8% minus the three-month LIBOR rate with a maximum rate ranging from 3.25% to 3.75% and minimum rate of 0.0%. After the initial fixed rate term, the counterparties have the right to terminate the transaction at par at the floating rate reset date and quarterly thereafter. In addition, there were two short term repurchase agreements totaling $30.2 million which matured on April 10, 2008, with a weighted average interest rate of 3.48% at March 31, 2008.
 
At March 31, 2008, included in long-term transactions are nineteen repurchase agreements totaling $1.0 billion that were callable but which had not been called. Two fixed-to-floating rate repurchase agreements of $50.0 million each have variable interest rates currently at 3.75% maximum rate until their final maturities in September 2014. Four floating-to-fixed rate repurchase agreements of $50.0 million each have fixed interest rates ranging from 4.89% to 5.07%, until their final maturities in January 2017. Ten floating-to-fixed rate repurchase agreements totaled $550.0 million have fixed interest rates ranging from 4.29% to 4.78%, until their final maturities in 2014. Two floating-to-fixed rate repurchase agreements of $50.0 million each have fixed interest rates ranging at 4.75% and 4.79%, until their final maturities in 2011. One floating-to-fixed rate repurchase agreement of $50.0 million has fixed interest rate at 4.83% until its final maturities in 2012.
 
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These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. government agency security debt and mortgage-backed securities with a fair value of $1.7 billion as of March 31, 2008, and $1.5 billion as of December 31, 2007.

10.Advances from the Federal Home Loan Bank
 
Total advances from the FHLB of San Francisco decreased $185.9 million to $1.2 billion at March 31, 2008 from $1.4 billion at December 31, 2007. Non-puttable advances totaled $489.3 million with a weighted rate of 3.42% and puttable advances totaled $700.0 million with a weighted average rate of 4.42% at March 31, 2008. The FHLB has the right to terminate the puttable transaction at par at the first anniversary date in the first quarter of 2008 and quarterly thereafter for $300.0 million of the advances, and on the second anniversary date in 2009 and quarterly thereafter for $400.0 million of the advances  
 
11. Subordinated Note and Junior Subordinated Debt
 
On September 29, 2006, the Bank issued $50.0 million in subordinated debt in a private placement transaction. This instrument matures on September 29, 2016 and bears interest at a per annum rate based on the three month LIBOR plus 110 basis points, payable on a quarterly basis. At March 31, 2008, the per annum interest rate on the subordinated debt was 3.80% compared to 5.93% at December 31, 2007. The subordinated debt was issued through the Bank and qualifies as Tier 2 capital for regulatory reporting purposes and is included in long-term debt in the accompanying condensed consolidated balance sheets.

The Bancorp established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing trust preferred securities to outside investors (Capital Securities). The trusts exist for the purpose of issuing the Capital Securities and investing the proceeds thereof, together with proceeds from the purchase of the common stock of the trusts by the Bancorp, in junior subordinated notes issued by the Bancorp. The five special purpose trusts are considered variable interest entities under FIN 46R. Because the Bancorp is not the primary beneficiary of the trusts, the financial statements of the trusts are not included in the consolidated financial statements of the Company. At March 31, 2008, junior subordinated debt securities totaled $121.1 million with a weighted average interest rate of 4.97% compared to $121.1 million with a weighted average rate of 7.13% at December 31, 2007. The junior subordinated debt securities have a stated maturity term of 30 years and are currently included in the Tier 1 capital of the Bancorp for regulatory capital purposes.
 
17
 
12. Implementation of FASB Interpretation No. 48
 
As previously disclosed, on December 31, 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). While the Company continues to believe that the tax benefits recorded in 2000, 2001, and 2002 with respect to its regulated investment company were appropriate and fully defensible under California law, the Company participated in Option 2 of the Voluntary Compliance Initiative of the Franchise Tax Board, and paid all California taxes and interest on these disputed 2000 through 2002 tax benefits, and at the same time filed a claim for 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.
 
The FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) which requires that the amount of recognized tax benefit should be the maximum amount which is more-likely-than-not to be realized and that amounts previously recorded that do not meet the requirements of FIN 48 be charged as a cumulative effect adjustment to retained earnings. As of December 31, 2006, the Company reflected a $12.1 million net state tax receivable related to payments it made in April 2004 under the Voluntary Compliance Initiative program for the years 2000, 2001, and 2002, after giving effect to reserves for loss contingencies on the refund claims. The Company has determined that its refund claim related to its regulated investment company is not more-likely-than-not to be realized and consequently, charged a total of $8.5 million, comprised of the $7.9 million after tax amount related to its refund claims as well as a $0.6 million after tax amount related to California Net Operating Losses generated in 2001 as a result of its regulated investment company, to the balance of retained earnings as of the January 1, 2007, effective date of FIN 48.
 
At the January 1, 2007, adoption date of FIN 48, the total amount of the Company’s unrecognized tax benefits was $5.5 million, of which $1.6 million, if recognized, would affect the effective tax rate. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. At January 1, 2007, the adoption date of FIN 48, the total amount of accrued interest and penalties was $1.7 million. In February 2008, the Company withdrew, with the agreement of the California Franchise Tax Board, a claim related to GBC Bancorp’s 2001 California tax return and reversed $0.5 million of accrued penalties with a corresponding decrease in goodwill. The amount of additional unrecognized tax benefits expected to be recognized during 2008 is not expected to be significant.
 
The Company’s tax returns are open for audits by the Internal Revenue Service back to 2004 and by the Franchise Tax Board of the State of California back to 2000. The Company is currently under audit by the California Franchise Tax Board for the years 2000 to 2004. During the second quarter of 2007, the Internal Revenue Service completed an examination of the Company’s 2004 and 2005 tax returns and did not propose any adjustments deemed to be material.
 
13. Stock Repurchase Program
 
On November 2007, the Company announced that its Board of Directors had approved a new stock repurchase program to buy back up to an aggregate of one million shares of the Company’s common stock following the completion of the stock repurchase program of May 2007. During 2007, the Company repurchased 2,829,203 shares of common stock for $92.4 million, or an average price of $32.67 per share. No shares were purchased during the first quarter of 2008. At March 31, 2008, 622,500 shares remain under the Company’s November 2007 repurchase program.
 
18
 
14. Fair Value Measurements

SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Company adopted SFAS 157 on January 1, 2008, and determined the fair values of our financial instruments based on the three-level fair value hierarchy established in SFAS 157. The three-level inputs to measure the fair value of assets and liabilities are as follows:

 
·
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
·
Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.
 
·
Level 3 – Unobservable inputs based on the Company’s own judgments about the assumptions that a market participant would use.

The Company uses the following methodologies to measure the fair value of its financial assets on recurring basis:
 
 
Securities available for sale- For certain actively traded trust preferred security and agency preferred stocks, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a level 1 measurement. The Company measures all other securities by using quoted market prices for similar securities or dealer quotes, a level 2 measurement. This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities and corporate bonds.
 
 
Trading securities- The Company measures the fair value of trading securities based on quoted market prices in active exchange market at the reporting date, a level 1 measurement.
 
 
Impaired loans- The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either current appraised value of the collateral, a level 2 measurement, or management’s judgment and estimation of value reported on old appraisal which is then adjusted based on recent market trends, a level 3 measurement.
 
 
Equity investment- The Company measures the fair value of equity investment based on quoted market prices in active exchange market at the reporting date, a level 1 measurement.
 
   
Warrants- The Company measures the fair value of warrants based on unobservable inputs based on assumption and management judgment , a level 3 measurement.
 
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis at March 31, 2008:
 
19
 
 
  
Fair Value Measurements Using
  
Total at
  
(In thousands)
  
Level 1
  
Level 2
  
Level 3
  
Fair Value
  
Assets 
                          
Securities available-for-sale
  
$
41,838
  
$
2,409,711
  
$
-
  
$
2,451,549
  
Trading securities
    
93
    
-
    
-
    
93
  
Impaired loans
    
-
    
7,430
    
18,268
    
25,698
  
Equity investment
    
1,868
    
-
    
-
    
1,868
  
Warrants
    
-
    
-
    
113
    
113
  
Total assets
  
$
43,799
  
$
2,417,141
  
$
18,381
  
$
2,479,321
  

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $113,000 at March 31, 2008, compared to $125,000 at December 31, 2008. The fair value adjustment of $12,000 were included in earnings in the first quarter of 2008.
 
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
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”).
 
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 credit 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.
 
20
 
HIGHLIGHTS

·
First quarter earnings decreased $2.7 million, or 8.9%, compared to the same quarter a year ago.
·
Fully diluted earnings per share was $0.55, decreasing 3.5% compared to the same quarter a year ago.
·
Return on average assets was 1.07% for the quarter ended March 31, 2008, compared to 1.23% for the quarter ended December 31, 2007 and compared to 1.45% for the same quarter a year ago.
·
Return on average stockholders’ equity was 10.99% for the quarter ended March 31, 2008, compared to 12.70% for the quarter ended December 31, 2007, and compared to 12.87% for the same quarter a year ago.
·
Gross loans increased by $235.2 million, or 3.5%, for the quarter to $6.9 billion at March 31, 2008, from $6.7 billion at December 31, 2007.
·
Non-accrual loans decreased from $58.3 million at December 31, 2007, to $48.6 million at March 31, 2008.

Income Statement Review

Net Income
 
Net income for the first quarter of 2008 was $27.3 million, or $0.55 per diluted share, a $2.7 million, or 8.9%, decrease compared with net income of $30.0 million, or $0.57 per diluted share for the same quarter a year ago. Return on average assets was 1.07% and return on average stockholders’ equity was 10.99% for the first quarter of 2008 compared with a return on average assets of 1.45% and a return on average stockholders’ equity of 12.87% for the first quarter of 2007.

Financial Performance

   
First Quarter 2008
  
First Quarter 2007
  
           
Net income
  
$
27.3 million
  
$
30.0 million
  
Basic earnings per share
  
$
0.55
  
$
0.58
  
Diluted earnings per share
  
$
0.55
  
$
0.57
  
Return on average assets
    
1.07
%
  
1.45
%
Return on average stockholders’ equity
    
10.99
%
  
12.87
%
Efficiency ratio
    
39.11
%
  
38.44
%
 
Net Interest Income Before Provision for Credit Losses
 
Net interest income before provision for credit losses increased to $75.2 million during the first quarter of 2008, $2.4 million, or 3.4%, higher than the $72.8 million during the same quarter a year ago. The increase was due primarily to the strong growth in loans and investment securities offset by the impact of the decline in the net interest margin.
 
The net interest margin, on a fully taxable-equivalent basis, was 3.16% for the first quarter of 2008. The net interest margin decreased 27 basis points from 3.43% in the fourth quarter of 2007 and decreased 67 basis points from 3.83% in the first quarter of 2007. The decrease in the net interest margin from prior quarters was primarily as a result of the lag in the downward repricing of certificates of deposit.
 
21
 
For the first quarter of 2008, the yield on average interest-earning assets was 6.46% on a fully taxable-equivalent basis, and the cost of funds on average interest-bearing liabilities equaled 3.80%. In comparison, for the first quarter of 2007, the yield on average interest-earning assets was 7.44% and cost of funds on average interest-bearing liabilities equaled 4.27%. 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 to 2.66% for the quarter ended March 31, 2008, from 3.17% 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:
 
22
 
 

Interest-Earning Assets and Interest-Bearing Liabilities
    
     
Three months ended March 31,
  
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
  
$
1,484,044
  
$
24,259
    
6.57
%
$
1,234,003
  
$
24,983
    
8.21
%
 Residential mortgage
    
674,909
   
10,097
   
5.98
   
575,240
   
8,855
   
6.16
 
 Commercial mortgage
    
3,809,473
   
67,172
   
7.09
   
3,249,671
   
63,431
   
7.92
 
 Real estate construction loans
    
810,071
   
15,165
   
7.53
   
699,853
   
16,595
   
9.62
 
 Other loans and leases
    
26,102
   
332
   
5.12
   
29,192
   
315
   
4.38
 
Total loans and leases (1)
    
6,804,599
   
117,025
   
6.92
   
5,787,959
   
114,179
   
8.00
 
Taxable securities
    
2,250,823
   
28,506
   
5.09
   
1,578,706
   
21,815
   
5.60
 
Tax-exempt securities (3)
    
69,668
   
1,549
   
8.94
   
75,549
   
1,148
   
6.16
 
Federal Home Loan Bank Stock
    
65,753
   
753
   
4.61
   
44,957
   
509
   
4.59
 
Interest bearing deposits
    
24,885
   
454
   
7.34
   
47,822
   
786
   
6.67
 
Federal funds sold & securities purchased under agreements to resell
    
419,675
   
6,480
   
6.21
   
217,662
   
3,802
   
7.08
 
 Total interest-earning assets
    
9,635,403
   
154,767
   
6.46
   
7,752,655
   
142,239
   
7.44
 
Non-interest earning assets
                                      
Cash and due from banks
    
85,002
               
93,895
             
Other non-earning assets
    
658,758
               
621,767
             
 Total non-interest earning assets
    
743,760
               
715,662
             
Less: Allowance for loan losses
    
(66,305
)
              
(66,308
)
            
 Deferred loan fees
    
(10,563
)
              
(12,233
)
            
 Total assets
  
$
10,302,295
              
$
8,389,776
              
                                       
Interest bearing liabilities:
                                      
Interest bearing demand accounts
  
$
237,611
  
$
485
    
0.82
 
$
232,656
  
$
723
    
1.26
 
Money market accounts
    
701,552
   
3,841
   
2.20
   
666,454
   
5,065
   
3.08
 
Savings accounts
    
330,504
   
445
   
0.54
   
344,336
   
845
   
1.00
 
Time deposits
    
4,180,871
   
44,332
   
4.26
   
3,654,859
   
42,506
   
4.72
 
 Total interest-bearing deposits
    
5,450,538
   
49,103
   
3.62
   
4,898,305
   
49,139
   
4.07
 
                                       
Federal funds purchased
    
43,341
   
382
   
3.54
   
25,244
   
332
   
5.33
 
Securities sold under agreements to repurchase
    
1,559,336
   
14,625
   
3.77
   
616,418
   
5,717
   
3.76
 
Other borrowings
    
1,156,238
   
12,151
   
4.23
   
923,273
   
11,938
   
5.24
 
Long-term debt
    
171,136
   
2,849
   
6.70
   
105,156
   
1,976
   
7.62
 
 Total interest-bearing liabilities
    
8,380,589
   
79,110
   
3.80
   
6,568,396
   
69,102
   
4.27
 
Non-interest bearing liabilities
                                      
Demand deposits
    
780,579
               
772,268
             
Other liabilities
    
142,210
               
104,798
             
Stockholders' equity
    
998,917
               
944,314
             
 Total liabilities and stockholders' equity
  
$
10,302,295
              
$
8,389,776
              
Net interest spread (4)
                
2.66
%
              
3.17
%
Net interest income (4)
        
$
75,657
              
$
73,137
        
Net interest margin (4)
                
3.16
%  
              
3.83
%
 
(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:

23

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

Three months ended March 31,
  
2008-2007
  
   
Increase (Decrease) in
  
   
Net Interest Income Due to:
  
(Dollars in thousands)
  
Changes in
Volume
  
Changes in
Rate
  
Total Change
  
               
Interest-Earning Assets:
                    
Loans and leases
    
19,311
   
(16,465
)
  
2,846
 
Taxable securities
    
8,831
   
(2,140
)
  
6,691
 
Tax-exempt securities (2)
    
(96
)
  
497
   
401
 
Federal Home Loan Bank Stock
    
242
   
2
   
244
 
Deposits with other banks
   
(407
)
  
75
   
(332
)
Federal funds sold and securities purchased
                    
under agreements to resell
    
3,203
   
(525
)
  
2,678
 
Total increase in interest income
   
31,084
   
(18,556
)
  
12,528