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 June 30, 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 
or organization) 
  
(I.R.S. Employer 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 o
 
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, 49,472,308 shares outstanding as of July 31, 2008.
 
1
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
2ND QUARTER 2008 REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION
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
21
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
46
 Item 4. CONTROLS AND PROCEDURES
47
   
PART II - OTHER INFORMATION
47
   
 Item 1. LEGAL PROCEEDINGS
47
 Item 1A.RISK FACTORS
47
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
49
 Item 3. DEFAULTS UPON SENIOR SECURITIES
49
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
49
 Item 5. OTHER INFORMATION
50
 Item 6. EXHIBITS
50
   
 SIGNATURES
52
 
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: 
 
 
·
the impact of any goodwill impairment that may be determined;
 
·
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)

   
June 30, 2008
  
December 31, 2007
  
% change
  
   
(In thousands, except share and per share data)
      
Assets
              
Cash and due from banks
  
$
114,270
  
$
118,437
    
(4
)
Short-term investments
    
6,408
   
2,278
   
181
 
Securities purchased under agreements to resell
    
150,000
   
516,100
   
(71
)
Long-term certificates of deposit
    
-
   
50,000
   
(100
)
Securities available-for-sale (amortized cost of $2,566,135 in 2008 and
                    
$2,348,606 in 2007)
    
2,533,353
   
2,347,665
   
8
 
Trading securities
    
75
   
5,225
   
(99
)
Loans
    
7,327,724
   
6,683,645
   
10
 
Less: Allowance for loan losses
    
(84,856
)
  
(64,983
)
  
31
 
Unamortized deferred loan fees, net
    
(10,165
)
  
(10,583
)
  
(4
)
Loans, net
    
7,232,703
   
6,608,079
   
9
 
Federal Home Loan Bank stock
    
65,825
   
65,720
   
0
 
Other real estate owned, net
    
29,077
   
16,147
   
80
 
Affordable housing investments, net
    
103,795
   
94,000
   
10
 
Premises and equipment, net
    
88,699
   
76,848
   
15
 
Customers’ liability on acceptances
    
30,988
   
53,148
   
(42
)
Accrued interest receivable
    
45,984
   
53,032
   
(13
)
Goodwill
    
319,285
   
319,873
   
(0
)
Other intangible assets, net
    
32,588
   
36,097
   
(10
)
Other assets
    
58,865
   
39,883
   
48
 
                     
Total assets
  
$
10,811,915
  
$
10,402,532
    
4
 
                     
Liabilities and Stockholders’ Equity
                    
Deposits
                    
Non-interest-bearing demand deposits
  
$
818,776
  
$
785,364
    
4
 
Interest-bearing deposits:
                    
NOW deposits
    
261,005
   
231,583
   
13
 
Money market deposits
    
732,410
   
681,783
   
7
 
Savings deposits
    
334,328
   
331,316
   
1
 
Time deposits under $100,000
    
1,424,692
   
1,311,251
   
9
 
Time deposits of $100,000 or more
    
3,170,831
   
2,937,070
   
8
 
Total deposits
    
6,742,042
   
6,278,367
   
7
 
                     
Federal funds purchased
   
81,000
   
41,000
   
98
 
Securities sold under agreements to repurchase
    
1,550,000
   
1,391,025
   
11
 
Advances from the Federal Home Loan Bank
    
1,116,713
   
1,375,180
   
(19
)
Other borrowings from financial institutions
    
10,000
   
8,301
   
20
 
Other borrowings for affordable housing investments
    
19,577
   
19,642
   
(0
)
Long-term debt
    
171,136
   
171,136
   
-
 
Acceptances outstanding
    
30,988
   
53,148
   
(42
)
Minority interest in consolidated subsidiary
    
8,500
   
8,500
   
-
 
Other liabilities
    
87,270
   
84,314
   
4
 
Total liabilities
    
9,817,226
   
9,430,613
   
4
 
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,
                    
53,626,663 issued and 49,419,098 outstanding at June 30, 2008 and
                    
53,543,752 issued and 49,336,187 outstanding at December 31, 2007
    
536
   
535
   
0
 
Additional paid-in-capital
    
485,762
   
480,557
   
1
 
Accumulated other comprehensive loss, net
    
(18,998
)
  
(545
)
  
3,386
 
Retained earnings
    
653,125
   
617,108
   
6
 
Treasury stock, at cost (4,207,565 shares at June 30, 2008
                    
and at December 31, 2007)
    
(125,736
)
  
(125,736
)
  
-
 
Total stockholders’ equity
    
994,689
   
971,919
   
2
 
Total liabilities and stockholders’ equity
  
$
10,811,915
  
$
10,402,532
    
4
 
                     
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
              
4
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS)/INCOME
(Unaudited)
 
   
Three months ended June 30,
  
Six months ended June 30,
 
 
  
2008
  
2007
  
2008
 
2007
  
   
(In thousands, except share and per share data)
 		          
INTEREST AND DIVIDEND INCOME
                  
Loan receivable, including loan fees
  
$
110,850
  
$
118,737
  
$
227,875
  
$
232,916
  
Investment securities- taxable
    
28,426
   
24,439
   
56,932
   
46,254
 
Investment securities- nontaxable
    
324
   
583
   
690
   
1,182
 
Federal Home Loan Bank stock
    
928
   
541
   
1,681
   
1,050
 
Agency preferred stock
    
592
   
174
   
1,308
   
338
 
Federal funds sold and securities
                         
purchased under agreements to resell
    
2,915
   
3,965
   
9,395
   
7,767
 
Deposits with banks
    
27
   
1,254
   
481
   
2,040
 
 
                          
Total interest and dividend income
    
144,062
   
149,693
   
298,362
   
291,547
 
 
                          
INTEREST EXPENSE
                          
Time deposits of $100,000 or more
    
28,304
   
31,900
   
60,172
   
63,052
 
Other deposits
    
15,184
   
18,684
   
32,419
   
36,671
 
Securities sold under agreements to repurchase
    
14,917
   
7,544
   
29,542
   
13,261
 
Advances from Federal Home Loan Bank
    
11,323
   
11,677
   
23,444
   
23,458
 
Long-term debt
    
2,010
   
2,899
   
4,859
   
4,875
 
Short-term borrowings
    
210
   
492
   
622
   
981
 
                           
Total interest expense
    
71,948
   
73,196
   
151,058
   
142,298
 
 
                          
Net interest income before provision for credit losses
    
72,114
   
76,497
   
147,304
   
149,249
 
Provision for credit losses
    
20,500
   
2,100
   
28,000
   
3,100
 
 
                          
Net interest income after provision for credit losses
    
51,614
   
74,397
   
119,304
   
146,149
 
 
                          
NON-INTEREST INCOME
                          
Securities gains, net
    
2,333
   
-
   
2,333
   
191
 
Letters of credit commissions
    
1,376
   
1,435
   
2,816
   
2,727
 
Depository service fees
    
1,175
   
1,037
   
2,447
   
2,383
 
Other operating income
    
4,291
   
3,690
   
8,103
   
6,745
 
 
                          
Total non-interest income
    
9,175
   
6,162
   
15,699
   
12,046
 
 
                          
NON-INTEREST EXPENSE
                          
Salaries and employee benefits
    
16,408
   
16,886
   
34,267
   
33,863
 
Occupancy expense
    
3,242
   
3,107
   
6,525
   
5,876
 
Computer and equipment expense
    
1,932
   
2,553
   
4,176
   
4,777
 
Professional services expense
    
3,095
   
2,543
   
5,480
   
4,271
 
FDIC and State assessments
    
1,545
   
261
   
1,836
   
520
 
Marketing expense
    
848
   
904
   
1,865
   
1,805
 
Other real estate owned expense
   
641
   
17
   
624
   
261
 
Operations of affordable housing investments , net
    
1,696
   
1,444
   
2,521
   
2,388
 
Amortization of core deposit intangibles
    
1,722
   
1,767
   
3,474
   
3,531
 
Other operating expense
    
2,625
   
2,803
   
4,942
   
5,222
 
 
                          
Total non-interest expense
    
33,754
    
32,285
    
65,710
    
62,514
  
 
                          
Income before income tax expense
    
27,035
   
48,274
   
69,293
   
95,681
 
Income tax expense
    
7,804
   
17,693
   
22,763
   
35,134
 
Net income
    
19,231
   
30,581
   
46,530
   
60,547
 
                           
Other comprehensive loss, net of tax
                      
Unrealized holding losses arising during the period
    
(20,427
)
  
(8,111
)
  
(12,273
)
  
(3,611
)
Less: reclassification adjustments included in net income
    
6,016
    
(18
)
  
6,180
    
(201
)
Total other comprehensive loss, net of tax
    
(26,443
)
  
(8,093
)
  
(18,453
)
  
(3,410
)
Total comprehensive (loss)/income
  
$
(7,212
)
$
22,488
  
$
28,077
  
$
57,137
  
 
                          
Net income per common share:
                          
Basic
 
$
0.39
  
$
0.60
  
$
0.94
  
$
1.18
  
Diluted
  
$
0.39
  
$
0.60
  
$
0.94
  
$
1.17
  
 
                          
Cash dividends paid per common share
  
$
0.105
  
$
0.105
  
$
0.210
  
$
0.195
  
Basic average common shares outstanding
    
49,389,522
   
50,558,218
   
49,367,903
   
51,118,374
 
Diluted average common shares outstanding
    
49,429,348
   
51,158,029
   
49,480,439
   
51,723,487
 
               
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
              
5
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Six Months Ended June 30
  
   
2008
  
2007
  
   
(In thousands)
  
Cash Flows from Operating Activities
          
Net income
 
$
46,530
  
$
60,547
  
Adjustments to reconcile net income to net cash provided by operting activities:
              
Provision for credit losses
   
28,000
   
3,100
 
Provision for losses on other real estate owned
   
-
   
210
 
Deferred tax (benefit) liabilities
   
(10,632
)
  
1,182
 
Depreciation
    
2,139
   
2,150
 
Net gains on sale of other real estate owned
   
-
   
(29
)
Net gains on sale of loans held for sale
    
(87
)
  
(65
)
Proceeds from sale of loans held for sale
   
1,919
   
934
 
Originations of loans held for sale
   
(1,814
)
  
(855
)
Purchase of trading securities
    
-
   
(5,000
)
Write-downs on venture capital investments
   
-
   
268
 
Write-downs on impaired securities
    
5,830
   
-
 
Gain on sales and calls of securities
   
(8,163
)
  
(191
)
Decrease in fair value of warrants
   
26
   
41
 
Other non-cash interest
   
1
   
147
 
Amortization of security premiums, net
   
841
   
944
 
Amortization of intangibles
    
3,538
   
3,594
 
Excess tax short-fall / (benefit) from share-based payment arrangements
    
237
   
(450
)
Stock based compensation expense
   
3,838
   
3,791
 
Gain on sale of premises and equipment
   
(21
)
  
(9
)
Decrease / (Increase) in accrued interest receivable
   
7,047
   
(12,460
)
(Increase) /decrease in other assets, net
   
(2,517
)
  
6,356
 
Increase in other liabilities
   
8,315
   
11,896
 
Net cash provided by operating activities
   
85,027
   
76,101
 
Cash Flows from Investing Activities
              
Increase in short-term investments
   
(4,130
)
  
(8,648
)
Decrease / (Increase) in long-term investment
   
50,000
   
(50,000
)
Decrease/ (Increase) in securities purchased under agreements to resell
    
366,100
   
(204,000
)
Purchase of investment securities available-for-sale
   
(1,503,846
)
  
(559,976
)
Proceeds from maturity and call of investment securities available-for-sale
   
757,496
   
219,204
 
Proceeds from sale of investment securities available-for-sale
   
59,756
   
86,187
 
Purchase of mortgage-backed securities available-for-sale
    
(337,007
)
  
-
 
Proceeds from repayment and sale of mortgage-backed securities available-for-sale
   
807,564
   
73,359
 
Purchase of Federal Home Loan Bank stock
    
-
   
(15,248
)
Redemption of Federal Home Loan Bank stock
   
1,575
   
326
 
Net increase in loans
   
(665,174
)
  
(387,899
)
Purchase of premises and equipment
   
(12,179
)
  
(4,705
)
Proceeds from sales of premises and equipment
    
21
   
608
 
Proceeds from sale of other real estate owned
   
-
   
1,717
 
Net increase in investment in affordable housing
   
(6,254
)
  
(4,488
)
Acquisition, net of cash acquired
   
-
   
(3,655
)
Net cash used in investing activities
   
(486,078
)
  
(857,218
)
Cash Flows from Financing Activities
             
Net increase in demand deposits, NOW accounts, money market and saving deposits
   
116,473
   
136
 
Net increase in time deposits
   
347,202
   
112,431
 
Net increase in federal funds purchased and securities sold under agreement to repurchase
   
198,975
   
468,102
 
Advances from Federal Home Loan Bank
   
1,823,533
   
1,863,000
 
Repayment of Federal Home Loan Bank borrowings
   
(2,082,000
)
  
(1,678,000
)
Cash dividends
   
(10,366
)
  
(10,047
)
Issuance of long-term debt
   
-
   
65,000
 
Proceeds from other borrowings
   
20,629
   
19,000
 
Repayment of other borrowings
   
(18,930
)
  
(10,000
)
Proceeds from shares issued to Dividend Reinvestment Plan
   
1,249
   
1,228
 
Proceeds from exercise of stock options
   
356
   
1,341
 
Excess tax (short-fall)/benefits from share-based payment arrangements
    
(237
)
  
450
 
Purchases of treasury stock
   
-
   
(71,508
)
Net cash provided by financing activities
   
396,884
   
761,133
 
Decrease in cash and cash equivalents
   
(4,167
)
  
(19,984
)
Cash and cash equivalents, beginning of the period
   
118,437
   
132,798
 
Cash and cash equivalents, end of the year
 
$
114,270
  
$
112,814
  
               
Supplemental disclosure of cash flow information
              
Cash paid during the period:
              
Interest
 
$
159,352
  
$
134,909
  
Income taxes
 
$
35,229
  
$
27,375
  
Non-cash investing and financing activities:
              
Net change in unrealized holding loss on securities available-for-sale, net of tax
 
$
(18,453
)
$
(3,410
)
Cumulative effect adjustment as result of adoption of FASB Interpretation No. 48
          
Adjustment to initially apply FASB Interpretation 48
  
$
-
  
$
(8,524
)
Adjustment to initially apply EITF 06-4
  
$
(147
)
      
Transfers to other real estate owned
 
$
12,560
  
$
373
  
Loans to facilitate the sale of other real estate owned
 
$
-
  
$
3,360
  
Loans to facilitate the sale of fixed assets
  
$
-
  
$
1,940
  
               
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 June 30, 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
 
Assets acquired:
  
(In thousands)
 
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
  
 
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.
 
7
 
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 June 30, 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 $509,000 as of June 30, 2008, with cash outlays of $49,000 for the three months and $97,000 for the six months ended June 30, 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 and goodwill impairment.
 
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.
 
SFAS No. 162, “The Hierarchy of General Accepted Accounting Principles” SFAS 162 states that business entity itself is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. This statement makes the GAAP hierarchy explicitly and directly applicable to preparers of financial statements. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect a material impact on its consolidated financial statements from adoption of SFAS 162. 
 
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 an 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 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
 
FASB Staff Positions (“FSP”) Accounting Principles Board Opinions (“APB”) Issue No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” APB 14-1 requires issuers of convertible debt that may be settled wholly or partly in cash to account for the debt and equity components separately. The APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect a material impact on its consolidated financial statements from adoption of APB 14-1. 

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 June 30,
  
For the six months ended June 30,
  
(Dollars in thousands, except share and per share data)
  
2008
  
2007
  
2008
  
2007
  
Net income
  
$
19,231
  
$
30,581
  
$
46,530
  
$
60,547
  
 
                  
Weighted-average shares:
                  
Basic weighted-average number of common shares outstanding
    
49,389,522
    
50,558,218
    
49,367,903
    
51,118,374
  
Dilutive effect of weighted-average outstanding common shares equivalents
                  
Stock Options
    
39,826
    
595,656
    
112,129
    
600,061
  
Restricted Stock
    
0
    
4,155
    
407
    
5,052
  
Diluted weighted-average number of common shares outstanding
    
49,429,348
    
51,158,029
    
49,480,439
    
51,723,487
  
 
                  
Average shares of stock options with anti-dilutive effect
    
4,795,057
    
1,448,872
    
4,237,868
    
1,450,074
  
Earnings per share:
                  
Basic
  
$
0.39
  
$
0.60
  
$
0.94
  
$
1.18
  
Diluted
  
$
0.39
  
$
0.60
  
$
0.94
  
$
1.17
  
 
11
 
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 June 30, 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, 20% each vested on November 20, 2006 and on November 20, 2007, and an additional 20% would vest on November 20, 2008, 264,694 shares granted on May 22, 2005, of which 40% vested on November 20, 2005, 20% each vested on November 20, 2006 and on November 20, 2007, and an additional 20% would vest on November 20 2008, 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.
 
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 options granted starting from 2005. Option compensation expense totaled $3.4 million for the six months ended June 30, 2008, and $3.5 million for the six months ended June 30, 2007. For the three months ended June 30, option compensation expense totaled $1.8 million for 2008 and $1.6 million for 2007. Stock-based compensation is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $14.1 million at June 30, 2008, and is expected to be recognized over the next 2.7 years.
 
The weighted average per share fair value on the date of grant of the options granted was $7.33 during the first quarter of 2008. There were no options granted in 2007 and in the second quarter 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:
 
   
Six months ended
  
   
June 30, 2008
  
Expected life- number of years
    
6.4
  
Risk-free interest rate
    
3.09
%
Volatility
    
30.04
%
Dividend yield
    
1.20
%
 
12
 
 
No stock options were exercised during the second quarter of 2008. Cash received from exercises of stock options totaled $356,000 from 18,906 exercised shares during the six months ended June 30, 2008 and $1.3 million from 78,236 exercised shares during the six months ended June 30, 2007. Cash received from exercises of stock options totaled $219,000 from 9,370 exercised shares for the three months ended June 30, 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. The fair value of stock options vested during the second quarter of 2008 was $108,000 compared to $108,000 for the second quarter of 2007. Aggregate intrinsic value for options exercised was $108,000 during the six months ended June 30, 2008, and $1.3 million during the six months ended June 30, 2007. The aggregate intrinsic value for options exercised was zero during the second quarter of 2008 and $98,000 during the second quarter of 2007. The table below summarizes stock option activity for the first two quarters of 2008:
 
       
 
  
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
  
Granted
   
-
   
-
             
Forfeited
   
(4,822
)
  
33.53
             
Exercised
   
-
   
-
             
                           
Balance at June 30, 2008
   
5,222,968
 
$
27.72
    
6.1
 
$
28
  
                           
Exercisable at June 30, 2008
    
3,423,919
  
$
26.69
    
5.2
 
$
28
  
 
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At June 30, 2008, 1,532,314 shares were available under the Company’s 2005 Incentive Plan for future grants. The following table shows stock options outstanding and exercisable as of June 30, 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
   
0.2
    
2,000
 
 
10.63
 
  
92,836
   
1.6
    
92,836
 
 
11.06
   
10,240
   
1.5
    
10,240
 
 
11.34
   
10,240
   
4.5
    
10,240
 
 
15.05
   
130,488
   
2.6
    
130,488
 
 
16.28
   
156,056
   
3.7
    
156,056
 
 
17.29
   
10,240
   
3.5
    
10,240
 
 
19.93
   
336,844
   
4.6
    
336,844
 
 
21.09
   
10,240
   
2.5
    
10,240
 
 
22.01
   
406,674
   
2.6
    
406,674
 
 
23.37
   
689,200
   
9.7
    
-
 
 
24.80
   
888,816
   
5.4
    
703,072
 
 
28.70
   
525,600
   
5.6
    
420,200
 
 
32.26
   
40,000
   
6.0
    
32,000
 
 
32.47
   
245,060
   
6.7
    
196,048
 
 
33.54
   
264,694
   
6.9
    
211,755
 
 
33.81
   
3,000
   
7.0
    
1,800
 
 
36.24
   
414,230
   
7.6
    
165,692
 
 
36.90
   
315,026
   
7.6
    
126,410
 
 
37.00
   
644,484
   
6.6
    
387,284
 
 
38.26
   
12,000
   
7.8
    
4,800
 
 
38.38
   
15,000
   
6.4
    
9,000
 
       
5,222,968
   
6.1
    
3,423,919
 
 
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 June 30, 2008:
 
   
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 $354,000 for the six months ended June 30, 2008, and $326,000 for the six months ended June 30, 2007. For the three months ended June 30, non-vested stock compensation expense was $177,000 for 2008 and $177,000 for 2007. Unrecognized stock-based compensation expense related to non-vested stock awards was $414,000 at June 30, 2008, and is expected to be recognized over the next 7 months.
 
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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 June 30, 2008:

       
Weighted-Average
  
       
Remaining Contractual
  
   
Units
  
Life (in years)
 
Balance at December 31, 2007
 
-
 
-
 
           
Granted
   
82,291
   
3.0
 
Forfeited
   
(741
)
      
               
Balance at June 30, 2008
   
81,550
   
2.6
 
 
 
The compensation expense recorded related to restricted stock units above was $82,000 for the three months ended and $109,000 for the six months ended June 30, 2008. Unrecognized stock-based compensation expense related to restricted stock units was $1.5 million at June 30, 2008, and is expected to be recognized over the next 4.6 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 operating activity and financing activity. The following table summarizes the tax benefit (short-fall) from share-based payment arrangements:

   
For the three months ended June 30,
  
For the six months ended June 30,
  
(Dollars in thousands)
  
2008
  
2007
  
2008
  
2007
  
(Short-fall)/Benefit of tax deductions in excess of
                  
grant-date fair value
  
$
(11
)
$
30
  
$
(237
)
$
450
  
Benefit of tax deductions on
                         
grant-date fair value
    
11
   
48
   
282
   
91
 
Total benefit of tax deductions
  
$
-
  
$
78
  
$
45
  
$
541
  
 
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 June 30, 2008, the Company had three outstanding long-term resale agreements totaling $150.0 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, $100.0 million are callable as of June 30, 2008 and another $50.0 million are callable in August, 2008. 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.
 
Securities purchased under agreements to resell were $150.0 million at a weighted average interest rate 7.10% at June 30, 2008, compared to $516.1 million at a weighted average interest rate of 7.44% at December 31, 2007.
 
15
 
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 $2.8 million for the second quarter of 2008 and $9.2 million for the first six months of 2008 compared to $3.9 million for the same quarter a year ago and to $7.3 million for the first six months of 2007.  
 
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:

(In thousands)
  
At June 30, 2008
  
At December 31, 2007
  
Commitments to extend credit
  
$
2,157,951
  
$
2,310,887
  
Standby letters of credit
    
60,784
   
62,413
 
Other letters of credit
    
78,037
   
71,089
 
Bill of lading guarantees
    
714
   
323
 
Total
  
$
2,297,486
  
$
2,444,712
  
 
As of June 30, 2008, $26.0 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.
 
16
 
9. Securities Sold Under Agreements to Repurchase
 
Securities sold under agreements to repurchase were $1.6 billion with a weighted average rate of 3.83% at June 30, 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.
 
At June 30, 2008, included in long-term transactions are twenty-three repurchase agreements totaling $1.2 billion that were callable but which had not been called. Six fixed-to-floating rate repurchase agreements of $50.0 million each have variable interest rates currently at a range from 3.50% to 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 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 maturity in 2012.
 
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. Treasury securities, U.S. government agency security debt, and mortgage-backed securities with a fair value of $1.6 billion as of June 30, 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 $258.5 million to $1.1 billion at June 30, 2008 from $1.4 billion at December 31, 2007. Non-puttable advances totaled $416.7 million with a weighted rate of 3.96% and puttable advances totaled $700.0 million with a weighted average rate of 4.42% at June 30, 2008. The FHLB has the right to terminate the puttable transaction at par at each three-month anniversary after the first put date. FHLB advances of $300.0 million at a weighted average rate of 4.31% were puttable as of June 30, 2008. The remaining puttable FHLB advances of $400.0 million at a weighted average rate of 4.50% are puttable at the second anniversary date in 2009.  
 
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 June 30, 2008, the per annum interest rate on the subordinated debt was 3.90% 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.
 
17
 
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 June 30, 2008, junior subordinated debt securities totaled $121.1 million with a weighted average interest rate of 4.93% 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.
 
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. In June 2008, the Company received a notice from the FTB indicating that the FTB intends to deny the Company’s claim for refund for its 2000 through 2002 tax years.
 
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.
 
18
 
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 six months of 2008. At June 30, 2008, 622,500 shares remain under the Company’s November 2007 repurchase program.
 
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 securities, agency preferred stock, and U.S. treasury securities, 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.
 
19
 
 
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 does not record equity investment at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to equity investment are recorded 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 and non-recurring basis at June 30, 2008:
 
(In thousands)
  
Fair Value Measurements Using
  
Total at
  
Assets
  
Level 1
  
Level 2
  
Level 3
  
Fair Value
  
On a Recurring Basis
                  
Securities available-for-sale
  
$
692,814
  
$
1,840,539
  
$
-
  
$
2,533,353
  
Trading securities
    
75
   
-
   
-
   
75
 
Warrants
    
-
   
-
   
117
   
117
 
On a Non-recurring Basis
                          
Impaired loans
    
-
   
18,448
   
4,289
   
22,737
 
Equity investment
    
1,868
   
-
   
-
   
1,868
 
Total assets
  
$
694,757
  
$
1,858,987
  
$
4,406
  
$
2,558,150
  

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $117,000 at June 30, 2008, compared to $125,000 at December 31, 2007. The fair value adjustment of $8,000 was included in other operating income during the first six months of 2008.

15. Goodwill and Goodwill Impairment

The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  Accounting standards require management to estimate the fair value of each reporting unit in making the assessment of impairment at least annually.  
 
20

As a result of ongoing volatility in the financial services industry, the Company’s market capitalization has decreased to a level below book value as of June 30, 2008. The Company engaged an independent valuation firm to compute the fair value estimates of each reporting unit as part of its impairment assessment.  The independent valuation utilized two separate valuation methodologies and applied a weighted average to each methodology in order to determine fair value for each reporting unit.  

The impairment testing process conducted by the Company begins by assigning net assets and goodwill to its three reporting units- Commercial Lending, Retail Banking, and East Coast Operations.  The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary.  If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment.  Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill.  The implied fair value of goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill.  This adjusted goodwill balance is the implied fair value used in step two.  An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with obtaining the independent valuation, management provided certain data and information that was utilized by the third party in its determination of fair value.  This information included forecasted earnings of the Company at the reporting unit level.  Management believes that this information is a critical assumption underlying the estimate of fair value.  

The valuation as of June 30, 2008, indicated that the fair value for the Retail Banking and East Coast Operations, the only two reporting units with allocated goodwill, exceeded their carrying amounts.   Consequently, no goodwill impairment charge was recorded as of June 30, 2008. While management uses the best information available to estimate future performance for each reporting unit, future adjustments to management’s projections may be necessary if conditions differ substantially from the assumptions used in making the estimates.
 
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.
 
21
 
Accounting for the allowance for credit losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading “Accounting for the Allowance for Loan Losses” in the Company’s annual report on Form 10-K for the year ended December 31, 2007.
 
Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any “other-than-temporary” impairment to our investment securities. The judgments and assumptions used by management are described under the heading “Investment Securities” in the Company’s annual report on Form 10-K for the year ended December 31, 2007.
 
Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading “Income Taxes” in the Company’s annual report on Form 10-K for the year ended December 31, 2007.
 
Under SFAS No. 142, Goodwill and Other Intangibles, goodwill must be allocated to reporting units and tested for impairment. The Company tests goodwill for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting-unit level utilizing an independent valuation. The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion above) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary.  If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment.  Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill.  The implied fair value of goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill.  This adjusted goodwill balance is the implied fair value used in step two.  An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value.

In connection with obtaining the independent valuation, management provided certain data and information that was utilized by the third party in its determination of fair value.  This information included forecasted earnings of the Company at the reporting unit level.  Management believes that this information is a critical assumption underlying the estimate of fair value.  
 
22

HIGHLIGHTS

·
Second quarter earnings of $19.2 million decreased $11.4 million, or 37.1%, compared to the same quarter a year ago. Included in the results was a non-cash after-tax charge of $3.4 million, or $0.07 per diluted share, for “other-than-temporary impairment” on agency preferred securities. Earnings for the second quarter of 2008 excluding the $3.4 million impairment charge decreased $8.0 million, or 26.1%, compared to the same quarter a year ago.
·
Fully diluted earnings per share was $0.39, a 35.0% decrease from the same quarter a year ago. Fully diluted earnings per share excluding the $3.4 million impairment charge was $0.46, a 23.3% decrease from the same quarter a year ago.
·
Return on average assets was 0.73% for the quarter ended June 30, 2008, compared to 1.07% for the quarter ended March 31, 2008 and compared to 1.40% for the same quarter a year ago. Return on average assets excluding the $3.4 million impairment charge was 0.86% for the quarter ended June 30, 2008.
·
Return on average stockholders’ equity was 7.66% for the quarter ended June 30, 2008, compared to 10.99% for the quarter ended March 31, 2008, and compared to 13.13% for the same quarter a year ago. Return on average stockholders’ equity excluding the $3.4 million impairment charge was 9.01% for the quarter ended June 30, 2008.
·
Gross loans increased by $408.9 million, or 5.9%, for the quarter to $7.3 billion at June 30, 2008, from $6.9 billion at March 31, 2008.
·
The provision for credit losses was $20.5 million for the second quarter of 2008 compared to $2.1 million for the second quarter of 2007 and $7.5 million for the first quarter of 2008. The Company increased its provision for credit losses to provide adequate allowance for credit losses due to growth in loans and increases in problem loans.
·
Total deposits increased by $453.5 million, or 7.2%, for the quarter to $6.7 billion at June 30, 2008, from $6.3 billion at March 31, 2008.
·
The Company’s total risk-based capital ratio increased to 11.02% at June 30, 2008 compared to 10.88% at March 31, 2008, as the Company remained well capitalized for both periods.

Income Statement Review

Net Income
 
Net income for the second quarter of 2008 was $19.2 million, or $0.39 per diluted share, a $11.4 million, or 37.1%, decrease compared with net income of $30.6 million, or $0.60 per diluted share for the same quarter a year ago. Return on average assets was 0.73% and return on average stockholders’ equity was 7.66% for the second quarter of 2008 compared with a return on average assets of 1.40% and a return on average stockholders’ equity of 13.13% for the second quarter of 2007.
 
23

Financial Performance
 
   
Second Quarter 2008
  
Second Quarter 2007
  
           
Net income
  
$
19.2 million
  
$
30.6 million
  
Basic earnings per share
  
$
0.39
  
$
0.60
  
Diluted earnings per share
  
$
0.39
  
$
0.60
  
Return on average assets
    
0.73
%
  
1.40
%
Return on average stockholders’ equity
    
7.66
%
  
13.13
%
Efficiency ratio
    
41.52
%
  
39.06
%

Net Interest Income Before Provision for Credit Losses
 
Net interest income before provision for credit losses decreased to $72.1 million during the second quarter of 2008, a decline of $4.4 million, or 5.7%, compared to the $76.5 million during the same quarter a year ago. The decrease was due primarily to the decline of the net interest margin which was partially offset by strong growth in loans and investment securities.
 
The net interest margin, on a fully taxable-equivalent basis, was 2.94% for the second quarter of 2008. The net interest margin decreased 22 basis points from 3.16% in the first quarter of 2008 and decreased 84 basis points from 3.78% in the second quarter of 2007. The decrease in the net interest margin from prior quarters was primarily the result of a lag in the downward repricing of certificates of deposit to follow the decreases in the prime rate, a change in the mix of investment securities, and the increase in the borrowing rate on our long term repurchase agreements.
 
For the second quarter of 2008, the yield on average interest-earning assets was 5.86% on a fully taxable-equivalent basis, and the cost of funds on average interest-bearing liabilities equaled 3.34%. In comparison, for the second quarter of 2007, the yield on average interest-earning assets was 7.39% and cost of funds on average interest-bearing liabilities equaled 4.22%. 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 65 basis points to 2.52% for the quarter ended June 30, 2008, from 3.17% for the same quarter a year ago, primarily due to the reasons discussed above.
 
24
 
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 June 30,
  
2008
  
2007
  
 
  
 
  
Interest
  
Average
  
 
  
Interest
  
Average
  
Taxable-equivalent basis
  
Average
  
Income/
  
Yield/
  
Average
  
Income/
  
Yield/
  
(Dollars in thousands)
  
Balance
  
Expense
  
Rate (1)(2)
  
Balance
  
Expense
  
Rate (1)(2)
  
Interest Earning Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
Commercial loans
  
$
1,524,313
  
$
20,436
    
5.39
%
$
1,267,840
  
$
25,876
    
8.19
%
Residential mortgage
    
718,525
   
10,210
   
5.68
   
596,757
   
9,308
   
6.24
 
Commercial mortgage
    
4,004,076
   
66,591
   
6.69
   
3,400,833
   
65,893
   
7.77
 
Real estate construction loans
    
851,136
   
13,354
   
6.31
   
719,031
   
17,343
   
9.67
 
Other loans and leases
    
24,478
   
259
   
4.26
   
26,497
   
317
   
4.80
 
Total loans and leases (1)
    
7,122,528
   
110,850
   
6.26
   
6,010,958
   
118,737
   
7.92
 
Taxable securities
    
2,475,628
   
28,426
   
4.62
   
1,734,645
   
24,439
   
5.65
 
Tax-exempt securities (3)
    
60,781
   
1,313
   
8.69
   
66,206
   
1,137
   
6.89
 
Federal Home Loan Bank Stock
    
65,879
   
928
   
5.67
   
50,165
   
541
   
4.33
 
Interest bearing deposits
    
5,188
   
27
   
2.09
   
68,177
   
1,254
   
7.38
 
Federal funds sold & securities purchased
                          
under agreements to resell
    
177,445
   
2,915
   
6.61
   
216,646
   
3,965
   
7.34
 
Total interest-earning assets
    
9,907,449
   
144,459
   
5.86
   
8,146,797
   
150,073
   
7.39
 
Non-interest earning assets
                          
Cash and due from banks
    
82,581
           
88,781
         
Other non-earning assets
    
655,057
           
629,234
         
Total non-interest earning assets
    
737,638
           
718,015
         
Less: Allowance for loan losses
    
(73,568
)
          
(65,426
)
        
Deferred loan fees
    
(10,396
)
          
(11,861
)
        
Total assets
  
$
10,561,123
          
$
8,787,525
          
 
                          
Interest bearing liabilities:
                          
Interest bearing demand accounts
  
$
253,559
  
$
365
    
0.58
 
$
233,260
  
$
753
    
1.29
 
Money market accounts
    
738,206
   
3,226
   
1.76
   
675,753
   
5,207
   
3.09
 
Savings accounts
    
337,512
   
275
   
0.33
   
353,562
   
887
   
1.01
 
Time deposits
    
4,452,317
   
39,622
   
3.58
   
3,683,089
   
43,737
   
4.76
 
Total interest-bearing deposits
    
5,781,594
   
43,488
   
3.03
   
4,945,664
   
50,584
   
4.10
 
 
                          
Federal funds purchased
    
37,720
   
210
   
2.24
   
34,780
   
464
   
5.35
 
Securities sold under agreements to repurchase
    
1,551,571
   
14,917
   
3.87
   
831,625
   
7,544
   
3.64
 
Other borrowings
    
1,134,448
   
11,323
   
4.01
   
982,126
   
11,705
   
4.78
 
Long-term debt
    
171,136
   
2,010
   
4.72
   
157,541
   
2,899
   
7.38
 
Total interest-bearing liabilities
    
8,676,469
   
71,948
   
3.34
   
6,951,736
   
73,196
   
4.22
 
Non-interest bearing liabilities
                          
Demand deposits
    
764,270
           
784,033
         
Other liabilities
    
110,921
           
117,443
         
Stockholders' equity
    
1,009,463
           
934,313
         
Total liabilities and stockholders' equity
  
$
10,561,123
          
$
8,787,525
          
Net interest spread (4)
            
2.52
%
          
3.17
%
Net interest income (4)
      
$
72,511
          
$
76,877
      
Net interest margin (4)
            
2.94
%
          
3.78
%
 
(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%
 
25
 
The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

Three months ended June 30,
  
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
    
19,720
   
(27,607
)
  
(7,887
)
Taxable securities
    
9,066
   
(5,079
)
  
3,987
 
Tax-exempt securities (2)
    
(100
)
  
276
   
176
 
Federal Home Loan Bank Stock
    
195
   
192
   
387
 
Deposits with other banks
   
(691
)
  
(536
)
  
(1,227
)
Federal funds sold and securities purchased
                    
under agreements to resell
    
(676
)
  
(374
)
  
(1,050
)
                     
Total increase in interest income
   
27,514
   
(33,128
)
  
(5,614
)
                     
Interest-Bearing Liabilities:
                    
Interest bearing demand accounts
    
61
   
(449
)
  
(388
)
Money market accounts
    
445
   
(2,426
)
  
(1,981
)
Savings accounts
    
(39
)
  
(573
)
  
(612
)
Time deposits
   
8,076
   
(12,191
)
  
(4,115
)
Federal funds purchased
    
36
   
(290
)
  
(254
)
Securities sold under agreements to repurchase
    
6,875
   
498
   
7,373
 
Other borrowed funds
   
1,662
   
(2,044
)
  
(382
)
Long-term debts
    
233
   
(1,122
)
  
(889
)
Total increase in interest expense
    
17,349
   
(18,597
)
  
(1,248
)
Changes in net interest income 
  
$
10,165
  
$
(14,531
)
$
(4,366
)
 
(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 $20.5 million for the second quarter of 2008 compared to $2.1 million for the second quarter of 2007 and $7.5 million for the first quarter of 2008. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at June 30, 2008. The provision for credit losses represents the charge or credit against current earnings that is determined by management, through a credit review process, as the amount needed to establish an allowance that management believes to be sufficient to absorb credit losses inherent in the Company’s loan portfolio. The following table summarizes the charge-offs and recoveries for the quarters as indicated:

   
For the three months ended June 30,
  
For the six months ended June 30,
  
(In thousands)
  
2008
  
2007
  
2008
 
2007
  
                   
Charge-offs:
                  
Commercial loans
  
$
1,870
  
$
2,712
  
$
2,121
  
$
5,742
  
Construction loans
    
879
   
-
   
5,009
   
190
 
Real estate loans
    
207
   
57
   
721
   
118
 
Installment and other loans
    
-
   
1
   
-
   
1
 
Total charge-offs
    
2,956
   
2,770
   
7,851
   
6,051
 
Recoveries:
                          
Commercial loans
    
380
   
302
   
567
   
2,773
 
Construction loans
    
83
   
190
   
83
   
190
 
Real estate loans
    
-
   
202
   
-
   
202
 
Installment and other loans
    
8
   
19
   
12
   
25
 
Total recoveries
    
471
   
713
   
662
   
3,190
 
Net Charge-offs
  
$
2,485
  
$
2,057
  
$
7,189
  
$
2,861
  
 
26
 
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 $9.2 million for the second quarter of 2008, an increase of $3.0 million, or 48.9%, compared to the non-interest income of $6.2 million for the second quarter of 2007. Net gains of $2.3 million from sale of securities were comprised of $8.16 million of gains from sales of agency mortgage backed securities which were partially offset by the $5.83 million “other-than-temporary impairment” charge on agency preferred stock, which had a carrying value of $30.3 million after the impairment write-down.
 
Depository service fees increased $138,000, or 13.3%, to $1.2 million in the second quarter of 2008 from $1.0 million in the same quarter a year ago, primarily due to the $111,000 increases in demand deposit account analysis charges.
 
Other operating income increased $601,000, or 16.3%, to $4.3 million in the second quarter of 2008 from $3.7 million in the same quarter a year ago primarily due to increases in commissions from foreign currency and exchange transactions of $1.6 million, which amount was partially offset by decreases in venture capital income of $405,000, and in wealth management commissions of $252,000.
 
Non-Interest Expense
 
Non-interest expense increased $1.5 million, or 4.6%, to $33.8 million in the second quarter of 2008 compared to $32.3 million in the same quarter a year ago. The efficiency ratio was 41.52% for the second quarter of 2008 compared to 39.06% in the year ago quarter and 39.11% for the first quarter of 2008.
 
Federal Deposit Insurance Corporation (“FDIC”) and State assessments increased to $1.5 million in the second quarter of 2008 from $261,000 in the same quarter a year ago as a result of the utilization of the remaining credit for prior years’ FDIC insurance premiums. Professional service expense increased $552,000, or 21.7%, primarily due to increases in information technology consulting expenses of $429,000 and appraisal expenses of $204,000. Other real estate owned expense increased $624,000 due to increases in other real estate owned transactions. Offsetting the above overall increases were decreases of $621,000 in computer and equipment expense due primarily to a decrease in software license fees, $478,000 in salaries and employee benefits as a result of lower current year bonus accrual, and $243,000 in recruiting, printing and supply, and travel expenses in the second quarter of 2008 compared to the same quarter a year ago.
 
Income Taxes
 
The effective tax rate was 28.9% for the second quarter of 2008, compared to 36.7% for the same quarter a year ago and 36.2% for the full year 2007. The lower effective tax rate for the second quarter of 2008 was due to a reduction during the second quarter in the projected taxable income for the remainder of 2008 and increases in low income housing tax credits in 2008 compared to 2007.
 
27
 
Year-to-Date Income Statement Review
 
Net income was $46.5 million, or $0.94 per diluted share for the six months ended June 30, 2008, a decrease of $14.0 million, or 23.2%, in net income compared to $60.5 million, or $1.17 per diluted share for the same period a year ago due primarily to increases in the provision for loan losses and the non-recurring “other-than-temporary impairment” charge. Net income excluding the $3.4 million impairment charge was $49.9 million, or $1.01 per diluted share for the six months ended June 30, 2008, a decrease of $10.6 million, or 17.6%, compared to the same period a year ago. The net interest margin for the six months ended June 30, 2008, decreased 75 basis points to 3.05% compared to 3.80% for the same period a year ago.
Return on average stockholders’ equity was 9.32% and return on average assets was 0.90% for the six months ended June 30, 2008, compared to a return on average stockholders’ equity of 13.00% and a return on average assets of 1.42% for the same period of 2007. Excluding the $3.4 million impairment charge, return on average stockholders’ equity was 9.99% and return on average assets was 0.96% for the six months ended June 30, 2008. The efficiency ratio for the six months ended June 30, 2008 was 40.31%, or 38.92% excluding the $5.8 million pre-tax impairment charge, compared to 38.76% 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:
 
28
 
Interest-Earning Assets and Interest-Bearing Liabilities
  
           
Six months ended June 30,
  
2008
  
2007
  
 
  
 
  
Interest
  
Average
  
 
  
Interest
  
Average
  
Taxable-equivalent basis
  
Average
  
Income/
  
Yield/
  
Average
  
Income/
  
Yield/
  
(Dollars in thousands)
  
Balance
  
Expense
  
Rate (1)(2)
  
Balance
  
Expense
  
Rate (1)(2)
  
Interest Earning Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
Commercial loans
  
$
1,504,179
  
$
44,695
    
5.98
%
$
1,251,015
  
$
50,859
    
8.20
%
Residential mortgage
    
696,717
   
20,307
   
5.83
   
586,058
   
18,162
   
6.20
 
Commercial mortgage
    
3,906,774
   
133,763
   
6.89
   
3,325,670
   
129,324
   
7.84
 
Real estate construction loans
    
830,603
   
28,519
   
6.90
   
709,495
   
33,938
   
9.65
 
Other loans and leases
    
25,291
   
591
   
4.70
   
27,836
   
633
   
4.59
 
Total loans and leases (1)
    
6,963,564
   
227,875
   
6.58
   
5,900,074
   
232,916
   
7.96
 
Taxable securities
    
2,364,324
   
56,932
   
4.84
   
1,657,107
   
46,254
   
5.63
 
Tax-exempt securities (3)
    
64,125
   
2,862
   
8.98
   
70,851
   
2,283
   
6.50
 
Federal Home Loan Bank stock
    
65,816
   
1,681
   
5.14
   
47,575
   
1,050
   
4.45
 
Interest bearing deposits
    
15,062
   
481
   
6.42
   
58,056
   
2,041
   
7.09
 
Federal funds sold & securities purchased
                          
under agreements to resell
    
298,560
   
9,395
   
6.33
   
217,151
   
7,767
   
7.21
 
Total interest-earning assets
    
9,771,451
   
299,226
   
6.16
   
7,950,814
   
292,311
   
7.41
 
Non-interest earning assets
                          
Cash and due from banks
    
83,766
           
91,324
         
Other non-earning assets
    
656,908
           
625,517
         
Total non-interest earning assets
    
740,674
           
716,841
         
Less: Allowance for loan losses
    
(69,937
)
          
(65,864
)
        
Deferred loan fees
    
(10,479
)
          
(12,046
)
        
Total assets
  
$
10,431,709
          
$
8,589,745
          
 
                          
Interest bearing liabilities:
                          
Interest bearing demand accounts
  
$
245,585
  
$
850
    
0.70
 
$
232,960
  
$
1,475
    
1.28
 
Money market accounts
    
719,879
   
7,067
   
1.97
   
671,130
   
10,272
   
3.09
 
Savings accounts
    
334,008
   
720
   
0.43
   
348,974
   
1,733
   
1.00
 
Time deposits
    
4,316,594
   
83,954
   
3.91
   
3,669,048
   
86,243
   
4.74
 
Total interest-bearing deposits
    
5,616,066
   
92,591
   
3.32
   
4,922,112
   
99,723
   
4.09
 
 
                          
Federal funds purchased
    
40,530
   
592
   
2.94
   
30,039
   
796
   
5.35
 
Securities sold under agreement to repurchase
    
1,555,454
   
29,542
   
3.82
   
724,616
   
13,261
   
3.69
 
Other borrowings
    
1,145,343
   
23,474
   
4.12
   
952,862
   
23,643
   
5.00
 
Junior subordinated notes
    
171,136
   
4,859
   
5.71
   
131,493
   
4,875
   
7.48
 
Total interest-bearing liabilities
    
8,528,529
   
151,058
   
3.56
   
6,761,122
   
142,298
   
4.24
 
Non-interest bearing liabilities
                          
Demand deposits
    
772,424
           
778,183
         
Other liabilities
    
126,566
           
111,154
         
Stockholders' equity
    
1,004,190
           
939,286
         
Total liabilities and stockholders' equity
  
$
10,431,709
          
$
8,589,745
          
Net interest spread (4)
            
2.60
%
          
3.17
%
Net interest income (4)
      
$
148,168
          
$
150,013
      
Net interest margin (4)
            
3.05
%
          
3.80
%
 
(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%.
 
29
 
Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)
   
Six months ended June 30,
  
 
  
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
    
38,936
   
(43,977
)
  
(5,041
)
Taxable securities
    
17,862
   
(7,184
)
  
10,678
 
Tax-exempt securities (2)
    
(234
)
  
813
   
579
 
Federal Home Loan Bank stock
    
450
   
181
   
631
 
Deposits with other banks
   
(1,384
)
  
(176
)
  
(1,560
)
Federal funds sold and securities purchased
                    
under agreements to resell
    
2,674
   
(1,046
)
  
1,628
 
                     
Total increase in interest income
   
58,304
   
(51,389
)
  
6,915
 
                     
Interest-Bearing Liabilities:
                    
Interest bearing demand accounts
    
77
   
(702
)
  
(625
)
Money market accounts
    
715
   
(3,920
)
  
(3,205
)
Savings accounts
    
(71
)
  
(942
)
  
(1,013
)
Time deposits
   
14,126
   
(16,415
)
  
(2,289
)
Federal funds purchased
    
227
   
(431
)
  
(204
)
Securities sold under agreement to repurchase
    
15,800
   
481
   
16,281
 
Other borrowed funds
   
4,398
   
(4,567
)
  
(169
)
Long-term debt
    
1,293
   
(1,309
)
  
(16
)
Total increase in interest expense
    
36,565
   
(27,805
)
  
8,760
 
Changes in net interest income 
  
$
21,739
  
$
(23,584
)
$
(1,845
)
 
(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%.
 
Balance Sheet Review

Assets
 
Total assets increased by $409.4 million, or 3.9%, to $10.8 billion at June 30, 2008, from year-end 2007 of $10.4 billion. The increase in total assets was represented primarily by increases in available- for-sale securities of $185.7 million, or 7.9%, and increases in loans of $644.1 million, or 9.6% offset by decreases of $366.1 million in reverse repurchase agreements.
 
Securities
 
Total securities were $2.5 billion, or 23.4%, of total assets at June 30, 2008, compared with $2.3 billion, or 22.6%, of total assets at December 31, 2007. The increase of $185.7 million, or 7.9%, was primarily due to purchases of U.S. Treasury securities of $657.1 million, U.S. government sponsored agency securities of $825.0 million, and mortgage-backed securities of $337.0 million offset by sales of mortgage backed securities of $622.0 million, by sales U.S. government sponsored agency securities of $55.0 million, by calls and pay-offs of investment securities of $929.7 million, and by increases in gross unrealized loss on securities available-for-sale of $31.8 million.
 
The net unrealized losses on securities available-for-sale, which represents the difference between fair value and amortized cost, totaled $32.8 million at June 30, 2008, compared to net unrealized losses of $941,000 at year-end 2007. The increase in unrealized losses on securities available-for-sale was caused by the changes in market interest rate, an increase in the spreads for non-agency mortgage backed securities, and corporate debt and the sales of agency mortgage backed securities for a $8.2 million gain during the second quarter of 2008. Net unrealized gains/losses in the securities available-for-sale are included in accumulated other comprehensive income or loss, net of tax, as part of total stockholders’ equity.
 
30
 
The average taxable-equivalent yield on securities available-for-sale decreased 98 basis points to 4.72% for the three months ended June 30, 2008, compared with 5.70% for the same period a year ago, as securities matured, prepaid, or were called and proceeds were reinvested at lower interest rates.
 
The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale, as of June 30, 2008, and December 31, 2007:
 
   
June 30, 2008
  
       
Gross
  
Gross
  
 
  
   
Amortized
  
Unrealized
  
Unrealized
  
 
  
   
Cost
  
Gains
  
Losses
  
Fair Value
  
   
(In thousands)
  
U.S. treasury entities
  
$
657,226
  
$
257
  
$
351
  
$
657,132
  
U.S. government sponsored entities
    
729,801
   
587
   
4,199
   
726,189
 
State and municipal securities
    
25,609
   
245
   
50
   
25,804
 
Mortgage-backed securities
    
878,052
   
725
   
11,685
   
867,092
 
Commercial mortgage-backed securities
   
6,119
   
-
   
179
   
5,940
 
Collateralized mortgage obligations
    
197,777
   
246
   
16,057
   
181,966
 
Asset-backed securities
   
484
   
-
   
55
   
429
 
Corporate bonds
    
35,383
   
-
   
2,264
   
33,119
 
Preferred stock of government sponsored entities
    
30,284
   
-
   
-
   
30,284
 
Trust preferred securities
    
5,400
   
-
   
2
   
5,398
 
 
                          
Total
 
$
2,566,135
  
$
2,060
  
$
34,842
  
$
2,533,353
  
 
   
December 31, 2007
  
       
Gross
  
Gross
  
 
  
   
Amortized
  
Unrealized
 
Unrealized
  
 
  
   
Cost
  
Gains
 
Losses
  
Fair Value
  
   
(In thousands)
  
U.S. government sponsored entities
 
$
532,894
  
$
1,735
  
$
19
  
$
534,610
  
State and municipal securities
   
33,657
   
388
   
24
   
34,021
 
Mortgage-backed securities
   
1,320,963
   
9,920
   
5,835
   
1,325,048
 
Commercial mortgage-backed securities
   
9,189
   
-
   
271
   
8,918
 
Collateralized mortgage obligations
   
215,015
   
89
   
3,867
   
211,237
 
Asset-backed securities
   
603
   
-
   
2
   
601
 
Corporate bonds
   
126,535
   
-
   
841
   
125,694
 
Preferred stock of government sponsored entities
   
34,750
   
403
   
2,785
   
32,368
 
Foreign corporate bonds
    
75,000
   
168
   
-
   
75,168
 
                         
Total
 
$
2,348,606
  
$
12,703
  
$
13,644
  
$
2,347,665
  
 
31
 
The following table summarizes the scheduled maturities by security type of securities available-for-sale, as of June 30, 2008:
 
   
June 30, 2008
  
       
After One
 
After Five
          
   
One Year
  
Year to
  
Years to
  
Over Ten
      
   
or Less
  
Five Years
  
Ten Years
  
Years
  
Total
  
   
(In thousands)
  
Maturity Distribution:
                      
U.S. treasury entities
  
$
518,149
  
$
138,983
  
$
-
  
$
-
  
$
657,132
  
U.S. government sponsored entities
    
1,086
   
724,603
   
500
   
-
   
726,189
 
State and municipal securities
    
1,584
   
9,117
   
12,315
   
2,788
   
25,804
 
Mortgage-backed securities (1)
    
1,752
   
17,134
   
111,112
   
737,094
   
867,092
 
Commercial mortgage-backed securities (1)
    
-
   
-
   
-
   
5,940
   
5,940
 
Collateralized mortgage obligations (1)
    
-
   
-
   
39,131
   
142,835
   
181,966
 
Asset-backed securities (1)
    
-
   
-
   
-
   
429
   
429
 
Corporate bonds
    
133
   
245
   
24,640
   
8,101
   
33,119
 
Preferred stock of government sponsored entities (2)
    
-
   
-
   
-
   
30,284
   
30,284
 
Trust preferred securities (2)
    
-
   
-
   
-
   
5,398
   
5,398
 
                                 
Total
 
$
522,704
  
$
890,082
  
$
187,698
  
$
932,869
  
$
2,533,353
  
 
Between 2002 and 2004, the Company purchased a number of collateralized mortgage obligations comprised of interests in non-agency guaranteed residential mortgages. At June 30, 2008, the remaining par value of these securities was $184.8 million which represents 7.0% of the fair value of securities available-for-sale and 1.7% of total assets compared to 7.7% of the fair value of securities available-for-sale and 1.8% of total assets at March 31, 2008. At June 30, 2008, the unrealized loss for these securities was $17.0 million which represented 9.2% of the par amount of these non-agency guaranteed residential mortgages. Based on the Company’s analysis at June 30, 2008, there was no “other-than-temporary” impairment in these securities due to the low loan to value ratio for the loan underlying these securities, the credit support provided by junior tranches of these securitizations, and the continued AAA rating of these securities.

In July 2008, several rating agencies downgraded the preferred stock ratings of Fannie Mae and Freddie Mac. As a result of these rating downgrades and other concerns about the financial condition of Fannie Mae and Freddie Mac, the Company recognized as of June 30, 2008, an other-than-temporary impairment loss of $5.8 million on its agency preferred stocks to write down the value of these securities to their respective market values as of June 30, 2008. As of June 30, 2008, the Company held Fannie Mae preferred stock with a carrying value of $15.4 million and Freddie Mac preferred stock with a carrying value of $14.9 million.

The Company has the ability and intent to hold the securities, including the non-agency collateralized mortgage obligation securities discussed above with unrealized losses of $17.0 million and $867.1 million of agency mortgage-backed securities at book value with unrealized losses of $11.7 million, for a period of time sufficient for a recovery of cost for those issues with unrealized losses.
 
32

The temporarily impaired securities represent 74.2% of the fair value of securities available-for-sale as of June 30, 2008. Unrealized losses for securities with unrealized losses for less than twelve months represent 1.0%, and securities with unrealized losses for twelve months or more represent 6.0% of the historical cost of these securities and generally resulted from increases in interest rates subsequent to the date that these securities were purchased. Except for one corporate bond issue with fair value of $133,000, all of these securities are investment grade, as of June 30, 2008. At June 30, 2008, 61 issues of securities had unrealized losses for 12 months or longer and 96 issues of securities had unrealized losses of less than 12 months. The table below shows the fair value, unrealized losses, and number of issuances as of June 30, 2008, of the temporarily impaired securities in the Company’s available-for-sale securities portfolio:

 
  
Temporarily Impaired Securities as of June 30, 2008
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Less than 12 months
  
12 months or longer
  
Total
  
 
  
Fair
  
Unrealized
 
No. of
  
Fair
  
Unrealized
 
No. of
  
Fair
  
Unrealized
 
No. of
  
 
  
Value
  
Losses
  
Issuances
  
Value
  
Losses
  
Issuances
  
Value
  
Losses
  
Issuances
  
 
  
(In thousands, except no. of issuances)
  
 
  
Description of securities
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
U.S. treasury entities
    
284,642
   
351
   
7
   
-
   
-
   
-
   
284,642
   
351
   
7
 
U.S. government sponsored entities
    
605,818
   
4,182
   
9
   
483
   
17
   
2
   
606,301
   
4,199
   
11
 
State and municipal securities
    
2,464
   
23
   
6
   
1,099
   
26
   
2
   
3,563
   
49
   
8
 
Mortgage-backed securities
   
639,106
   
7,522
   
66
   
136,820
   
4,163
   
26
   
775,926
   
11,685
   
92
 
Commercial mortgage-backed securities
   
-
   
-
   
-
   
5,940
   
179
   
1
   
5,940
   
179
   
1
 
Collateralized mortgage obligations
   
7,920
   
1,211
   
2
   
156,501
   
14,846
   
27
   
164,421
   
16,057
   
29
 
Asset-backed securities
   
385
   
55
   
1
   
44
   
1
   
1
   
429
   
56
   
2
 
Corporate bonds
   
32,741
   
2,255
   
4
   
378
   
9
   
2
   
33,119
   
2,264
   
6
 
Trust preferred securities
    
5,398
   
2
   
1
   
-
   
-
   
-
   
5,398
   
2
   
1
 
 
                                      
Total
 
$
1,578,474
  
$
15,601
    
96
 
$
301,265
  
$
19,241
    
61
 
$
1,879,739
  
$
34,842
    
157
 
 
Loans
 
Gross loans were $7.3 billion as of June 30, 2008, compared to $6.7 billion as of December 31, 2007, representing an increase of $644.1 million, or 9.6%.
 
Commercial mortgage loans increased $348.3 million, or 9.3%, to $4.1 billion at June 30, 2008, compared to $3.8 billion at year-end 2007. At June 30, 2008, this portfolio represented approximately 56.1% of the Bank’s gross loans compared to 56.3% at year-end 2007. Commercial loans increased $148.4 million, or 10.3%, to $1.6 billion at June 30, 2008, compared to $1.4 billion at year-end 2007. In addition, construction loans increased $61.3 million, or 7.7%, and residential mortgage loans increased $53.4 million, or 9.6%, during the second quarter of 2008.
 
33
 
The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated:
 
(Dollars in thousands)
  
June 30, 2008
  
% of Gross Loans
    
December 31, 2007
 
% of Gross Loans
 
% Change
  
Type of Loans
  
 
  
 
    
 
  
 
  
 
  
Commercial
  
$
1,584,280
    
21.6
%
  
$
1,435,861
    
21.5
%
  
10.3
%
Residential mortgage
    
609,132
   
8.3
     
555,703
   
8.3
   
9.6
 
Commercial mortgage
    
4,111,019
   
56.1
     
3,762,689
   
56.3
   
9.3
 
Equity lines
    
147,593
   
2.0
     
108,004
   
1.6
   
36.7
 
Real estate construction
    
860,490
   
11.7
     
799,230
   
12.0
   
7.7
 
Installment
    
11,145
   
0.2
     
15,099
   
0.2
   
(26.2
)
Other
    
4,065
   
0.1
     
7,059
   
0.1
   
(42.4
)
 
                                  
Gross loans and leases
  
$
7,327,724
    
100
%
  
$
6,683,645
    
100
%
  
9.6
%
 
                        
Allowance for loan losses
    
(84,856
)
        
(64,983
)
      
30.6
 
Unamortized deferred loan fees
    
(10,165
)
        
(10,583
)
      
(3.9
)
 
                        
Total loans and leases, net
  
$
7,232,703
        
$
6,608,079
        
9.5
%
 
Asset Quality Review
 
Non-performing Assets
 
Non-performing assets to gross loans and other real estate owned was 1.40% at June 30, 2008, compared to 1.25% at December 31, 2007. Total non-performing assets increased $19.3 million, or 23.1%, to $103.0 million at June 30, 2008, compared with $83.7 million at December 31, 2007, primarily due to a $14.7 million increase in non-accrual loans and a $12.9 million increase in OREO offset by a $8.3 million decrease in loans past due 90 days or more.
 
The following table sets forth the breakdown of non-performing assets by category as of the dates indicated:
 
(Dollars in thousands)
  
June 30, 2008
 
December 31, 2007
 
% Change
  
Non-performing assets
              
Accruing loans past due 90 days or more
  
$
960
  
$
9,265
    
(90
)
Non-accrual loans:
                    
Construction
   
26,727
   
29,677
   
(10
)
Land
    
22,282
   
6,627
   
236
 
Commercial real estate
    
11,512
   
13,336
   
(14
)
Commercial
    
8,186
   
6,664
   
23
 
Real estate mortgage
    
4,299
   
1,971
   
118
 
Total non-accrual loans:
  
$
73,006
  
$
58,275
    
25
 
Total non-performing loans
    
73,966
   
67,540
   
10
 
Other real estate owned
    
29,077
   
16,147
   
80
 
Total non-performing assets
  
$
103,043
  
$
83,687
    
23
 
Troubled debt restructurings
  
$
12,584
  
$
12,601
    
(0
)
                     
Total gross loans outstanding, at period-end
  
$
7,327,724
  
$
6,683,645
    
10
 
Non-performing assets as a percentage of gross loans and OREO
    
1.40
%
  
1.25
%
      
 
Non-accrual Loans
 
During the second quarter of 2008, total non-accrual loans increased by $24.4 million. The new non-accruals included two mixed use land loans in the Inland Empire totaling $13.2 million, a $6.6 million condo construction loan in Orange County for which a discounted payoff is expected in August, 2008, a $3.7 million commercial loan to a distributor, a $2.9 million single family residential mortgage in Los Altos, California, a $2.6 million land loan zoned for apartments in Seattle, Washington, other commercial real estate loans totaling $3.4 million, commercial loans totaling $1.3 million, and residential mortgage loans of $0.2 million. During the second quarter, charge-offs of non-accrual loans totaled $3.0 million including a $1.5 million charge-off to the principal related to the mixed use land loans in the Inland Empire and a $0.9 million charge-off related to the Orange County condo construction loan. At June 30, 2008, total residential construction loans were $429.0 million of which $18.7 million were in San Bernardino and Riverside counties in California and $20.6 million were in the Central Valley in California. Residential construction loans of $4.8 million in Central Valley were on non-accrual status as of June 30, 2008. At June 30, 2008, total land loans were $237.5 million of which $42.9 million were in San Bernardino and Riverside counties and $1.8 million were in Central Valley. Land loans of $13.2 million in Riverside County were on non-accrual status as of June 30, 2008.
 
34
 
At June 30, 2008, total non-accrual loans of $73.0 million were comprised of nine construction loans totaling $26.7 million, seven land loans totaling $22.3 million, fourteen commercial real estate loans totaling $11.5 million, fourteen commercial loans totaling $8.2 million and eight residential mortgage loans totaling $4.3 million. The $26.7 million of construction loans were comprised of a $6.6 million condo construction loan in Orange County, a $5.0 million town house construction loan in Los Angeles County, a $4.0 million construction loan in the Central Valley, a $3.2 million land development loan in Los Angeles County, a $2.6 million condo construction loan in Boston, Massachusetts, $2.6 million for a condo construction loan in San Diego County, a $1.4 million residential construction loan in Texas and two additional residential construction loans totaling $1.3 million. The $11.5 million of non-accrual commercial real estate loans were comprised of $2.3 million in loans secured by multi-family residences, a $2.2 million loan secured by a motel in Texas, a $2.1 million loan secured by an office building in San Jose, California, a $0.9 million loan secured by an office building in Texas, and $4.0 million in loans secured by industrial buildings, a retail store and a restaurant.
 
Non-accrual loans increased by $14.7 million, or 25.3%, to $73.0 million at June 30, 2008, from $58.3 million at December 31, 2007. The following table presents non-accrual loans by type of collateral securing the loans, as of the dates indicated:
 
   
June 30, 2008
  
 December 31, 2007
  
   
Real
     
 Real
      
   
Estate (1)
 
Commercial
 
 Estate (1)
  
Commercial
  
   
(In thousands)  
  
Type of Collateral
                   
Single/ multi-family residence  
  
$
30,151
  
$
99
  
$
26,916
  
$
163
  
Commercial real estate  
    
9,204
   
888
   
14,885
   
-
 
Land  
    
25,465
   
-
   
9,810
   
-
 
Personal property (UCC)  
    
-
   
6,676
   
-
   
6,487
 
Unsecured  
    
-
   
523
   
-
   
14
 
Total  
  
$
64,820
  
$
8,186
  
$
51,611
  
$
6,664
  
                           
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans.
 
35
 
The following table presents non-accrual loans by type of businesses in which the borrowers are engaged, as of the dates indicated:

   
June 30, 2008
  
December 31, 2007
  
   
Real
     
Real
     
   
Estate (1)
  
Commercial
  
Estate (1)
 
Commercial
  
   
(In thousands)
  
Type of Business
                  
Real estate development
  
$
60,367
  
$
734
  
$
48,794
  
$
-
  
Wholesale/Retail
    
154
   
6,597
   
845
   
1,318
 
Food/Restaurant
    
-
   
141
   
-
   
92
 
Import/Export
    
-
   
714
   
-
   
5,254
 
Other
    
4,299
   
-
   
1,972
   
-
 
Total
  
$
64,820
  
$
8,186
  
$
51,611
  
$
6,664
  
                           
(1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans.
  
 
Other Real Estate Owned
 
Other real estate owned (“OREO”) was $29.1 million at June 30, 2008 compared to $16.1 million at December 31,2007. OREO is comprised of nine properties, including a $11.6 million land zoned for apartments in Anaheim, California, a $9.3 million apartment building in Texas, a $6.8 million shopping center in Texas, and six other properties totaling $1.4 million.
 
Troubled Debt Restructurings
 
A troubled debt restructuring (“TDR”) is a formal restructure of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date.
 
Troubled debt restructurings, excluding those on non-accrual status, was comprised of five loans totaling $12.6 million at June 30, 2008, compared to four loans totaling $12.6 million at December 31, 2007. Included in troubled debt restructured loans at June 30, 2008, is an $11.1 million condominium conversion construction loan for a project in San Diego County where the interest rate has been reduced to 6.0%. At June 30, 2008, the restructured loans were performing under their revised terms.
 
Impaired Loans
 
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. The assessment for impairment occurs when and while such loans are on non-accrual, or the loan has been restructured. Those loans less than our defined selection criteria, generally the loan amount less than $100,000, are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. If the measurement of the impaired loan is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses.
 
36
 
The Company identified impaired loans with a recorded investment of $84.1 million at June 30, 2008, compared with $70.0 million at year-end 2007, an increase of $14.1 million, or 20.2%. The Company considers all non-accrual loans to be impaired.  At June 30, 2008, one troubled debt restructured loan of $11.1 million was impaired but still accruing. The following table presents impaired loans and the related allowance, as of the dates indicated:
 
   
At June 30, 2008
  
At December 31, 2007
  
   
(In thousands)
  
           
Balance of impaired loans with no allocated allowance
 
$
55,070
  
$
50,249
  
Balance of impaired loans with an allocated allowance
   
29,041
   
19,701
 
               
Total recorded investment in impaired loans
 
$
84,111
  
$
69,950
  
               
Amount of the allowance allocated to impaired loans
 
$
6,084
  
$
4,937
  
 
Loan Concentration
 
Most of the Company’s business activity is with customers located in the predominantly Asian areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; and Edison, New Jersey. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the secured collateral.
 
There were no loan concentrations to multiple borrowers in similar activities which exceeded 10% of total loans as of June 30, 2008, and as of December 31, 2007.
 
Allowance for Credit Losses
 
The Bank maintains the allowance for credit losses at a level that is considered to be equal to the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of allowance for loan losses and reserve for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify impaired and potential problem loans, and to permit periodic evaluation of impairment and the adequacy level of the allowance for credit losses in a timely manner.
 
In addition, our Board of Directors has established a written credit policy that includes a credit review and control system which it believes should be effective in ensuring that the Bank maintains an adequate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is adequate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectibility when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Bank’s control, including the performance of the Bank’s loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods. 
 
37
 
The allowance for loan losses was $84.9 million and the allowance for off-balance sheet unfunded credit commitments was $5.5 million at June 30, 2008, and represented the amount that the Company believes to be sufficient to absorb credit losses inherent in the Company’s loan portfolio. The allowance for credit losses, the sum of allowance for loan losses and for off-balance sheet unfunded credit commitments, was $90.4 million at June 30, 2008, compared to $69.6 million at December 31, 2007. The allowance for credit losses represented 1.23% of period-end gross loans and 122% of non-performing loans at June 30, 2008. The comparable ratios were 1.04% of gross loans and 103% of non-performing loans at December 31, 2007.
 
The following table sets forth information relating to the allowance for credit losses for the periods indicated:
 
   
For the six months ended
  
For the year ended
 
   
June 30, 2008
  
December 31, 2007
  
Allowance for Loan Losses
  
(Dollars in thousands)
  
Balance at beginning of period
 
$
64,983
  
$
60,220
  
Provision for credit losses
   
28,000
   
11,000
 
Transfers to reserve for off-balance sheet
              
credit commitments
    
(938
)
  
(107
)
Charge-offs :
              
Commercial loans
   
(2,121
)
  
(7,503
)
Construction loans
   
(5,009
)
  
(978
)
Real estate loans
   
(721
)
  
(1,570
)
Installment loans and other loans
   
-
   
(23
)
Total charge-offs
   
(7,851
)
  
(10,074
)
Recoveries:
              
Commercial loans
   
567
   
3,025
 
Construction loans
   
83
   
190
 
Real estate loans
   
-
   
265
 
Installment loans and other loans
   
12
   
32
 
Total recoveries
   
662
   
3,512
 
Allowance from acquisitions
   
-
   
432
 
               
Balance at end of period
  
$
84,856
  
$
64,983
  
               
Reserve for off-balance sheet credit commitments
              
Balance at beginning of period
 
$
4,576
  
$
4,469
  
Provision for credit losses/transfers
   
938
   
107
 
Balance at end of period
 
$
5,514
  
$
4,576
  
               
Average loans outstanding
             
during period ended
 
$
6,963,564
  
$
6,170,505
  
Total gross loans outstanding, at period-end
  
$
7,327,724
  
$
6,683,645
  
Total non-performing loans, at period-end
  
$
73,966
  
$
67,540
  
Ratio of net charge-offs to average
              
loans outstanding during the period
   
0.21
%
  
0.11
%
Provision for credit losses to average
              
loans outstanding during the period
   
0.81
%
  
0.18
%
Allowance for credit losses to
              
non-performing loans at period-end
   
122.18
%
  
102.99
%
               
Allowance for credit losses to
             
gross loans at period-end
   
1.23
%
  
1.04
%
 
Our allowance for loan losses consists of the following:

 
 • 
Specific allowance: For impaired loans, we provide specific allowances based on an evaluation of impairment, and for each criticized loan, we allocate a portion of the general allowance to each loan based on a loss percentage assigned. The percentage assigned depends on a number of factors including loan classification, the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral, charge-off history, management’s knowledge of the portfolio, and general economic conditions. During the third quarter of 2007, we revised our minimum loss rates for loans rated Special Mention and Substandard to incorporate the results of a classification migration model reflecting actual losses beginning in 2003.
  
38
 
 
 • 
General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan type and by identifying risk characteristics that are common to the groups of loans. The allowance is provided to each segmented group based on the group’s historical loan loss experience, the trends in delinquency and non-accrual, and other significant factors, such as national and local economy, trends and conditions, strength of management and loan staff, underwriting standards, and the concentration of credit. Beginning in the third quarter of 2007, minimum loss rates have been assigned for loans graded Minimally Acceptable instead of grouping these loans with the unclassified portfolio.
 
To determine the adequacy of the allowance in each of these two components, the Bank employs two primary methodologies, the classification migration methodology and the individual loan review analysis methodology. These methodologies support the basis for determining allocations between the various loan categories and the overall adequacy of the Bank’s allowance to provide for probable losses inherent in the loan portfolio. These methodologies are further supported by additional analysis of relevant factors such as the historical losses in the portfolio, trends in the non-performing/non-accrual loans, loan delinquencies, the volume of the portfolio, peer group comparisons, and federal regulatory policy for loan and lease losses. Other significant factors of portfolio analysis include changes in lending policies/underwriting standards, portfolio composition, and concentrations of credit, and trends in the national and local economy.
 
With these methodologies, a general allowance is for those loans internally classified and risk graded Pass, Special Mention, Substandard, Doubtful, or Loss based on historical losses in the portfolio. Additionally, the Bank’s management allocates a specific allowance for “Impaired Credits,” in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” The level of the general allowance is established to provide coverage for management’s estimate of the credit risk in the loan portfolio by various loan segments not covered by the specific allowance.
 
The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to the total average loans as of the dates indicated:
           
(Dollars in thousands)
  
June 30, 2008
  
December 31, 2007
  
       
Percentage of
     
Percentage of
 
       
Loans in Each
      
Loans in Each
  
       
Category
      
Category
  
       
to Average
      
to Average
  
Type of Loans:
  
Amount
  
Gross Loans
  
Amount
  
Gross Loans
  
Commercial loans
  
$
31,778
    
21.6
%
$
24,081
    
21.1
%
Residential mortgage loans
    
1,616
   
10.0
   
1,314
   
9.9
 
Commercial mortgage loans
    
28,960
   
56.1
   
26,646
   
56.4
 
Real estate construction loans
    
22,472
   
11.9
   
12,906
   
12.1
 
Installment loans
    
30
   
0.2
   
36
   
0.3
 
Other loans
    
-
   
0.2
   
-
   
0.2
 
Total
  
$
84,856
    
100
%
$
64,983
    
100
%
 
39
 
The allowance allocated to commercial loans increased to $31.8 million at June 30, 2008, from $24.1 million at December 31, 2007, due to increases in loans risk graded Substandard due in part to weakness in the economy. Non-accrual commercial loans were $8.2 million, or 11.2% of non-accrual loans at June 30, 2008, compared to $6.7 million, or 11.4% at December 31, 2007.
 
The allowance allocated to residential mortgage loans increased $302,000 from $1.3 million at December 31, 2007, to $1.6 million at June 30, 2008.
 
The allowance allocated to commercial mortgage loans increased from $26.6 million at December 31, 2007, to $29.0 million at June 30, 2008, due to growth in commercial mortgage loans and increases in loans risk graded Special Mention or Substandard due in part to the weakness in the economy. As of June 30, 2008, there were $33.8 million commercial mortgage loans on non-accrual status compared to $19.9 million at December 31, 2007. Non-accrual commercial mortgage loans comprised 46.3% of non-accrual loans at June 30, 2008, compared to 34.3% at December 31, 2007.
 
The allowance allocated to construction loans has increased from $12.9 million at December 31, 2007, to $22.5 million at June 30, 2008, due to growth in construction loans and increase in loans risk graded Substandard. The allowance allocated to construction loans as a percentage of total construction loans was 2.7% of construction loans at June 30, 2008 compared to 1.6% at December 31, 2007. At June 30, 2008, construction loans totaling $26.7 million were on non-accrual status which comprised 36.6% of non-accrual loans compared to $29.7 million, or 50.9% at December 31, 2007.
 
Deposits
 
At June 30, 2008, total deposits were $6.7 billion, an increase of $463.7 million, or 7.4%, from $6.3 billion at December 31, 2007. All types of deposits increased during the first six months of 2008. Time deposits of $100,000 or more increased $233.8 million, or 8.0%, and time deposits under $100,000 increased $113.4 million, or 8.7%. Non-interest-bearing demand deposits, interest-bearing demand deposits, and savings deposits comprised 31.9% of total deposits at June 30, 2008, time deposit accounts of less than $100,000 comprised 21.1% of total deposits, while the remaining 47.0% was comprised of time deposit accounts of $100,000 or more.
 
40
 
The following tables display the deposit mix as of the dates indicated:
 
   
June 30, 2008
  
% of Total
 
December 31, 2007
  
% of Total
  
Deposits
 
(Dollars in thousands)
  
Non-interest-bearing demand
 
$
818,776
    
12.1
%
$
785,364
    
12.5
%
NOW
   
261,005
   
3.9
   
231,583
   
3.7
 
Money market
    
732,410
   
10.9
   
681,783
   
10.8
 
Savings
   
334,328
   
5.0
   
331,316
   
5.3
 
Time deposits under $100,000
    
1,424,692
   
21.1
   
1,311,251
   
20.9
 
Time deposits of $100,000 or more
    
3,170,831
   
47.0
   
2,937,070
   
46.8
 
Total deposits
  
$
6,742,042
    
100.0
%
$
6,278,367
    
100.0
%
 
At June 30, 2008, brokered deposits which are included in time deposits under $100,000 increased $155.5 million to $788.1 million from $632.6 million at December 31, 2007.
 
Borrowings
 
Borrowings include Federal funds purchased, securities sold under agreements to repurchase, funds obtained as advances from the Federal Home Loan Bank (“FHLB”) of San Francisco, and borrowings from other financial institutions.
 
Federal funds purchased were $81.0 million with a weighted average rate of 2.75% as of June 30, 2008, compared to $41.0 million with a weighted average rate of 4.00% as of December 31, 2007.
 
Securities sold under agreements to repurchase were $1.6 billion with a weighted average rate of 3.83% at June 30, 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.
 
At June 30, 2008, included in long-term transactions are twenty-three repurchase agreements totaling $1.2 billion that were callable but which had not been called. Six fixed-to-floating rate repurchase agreements of $50.0 million each have variable interest rates currently at a range from 3.50% to 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 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.
 
41
 
Total advances from the FHLB of San Francisco decreased $258.5 million to $1.1 billion at June 30, 2008 from $1.4 billion at December 31, 2007. Non-puttable advances totaled $416.7 million with a weighted rate of 3.96% and puttable advances totaled $700.0 million with a weighted average rate of 4.42% at June 30, 2008. The FHLB has the right to terminate the puttable transaction at par at each three-month anniversary after the first put date. FHLB advances of $300.0 million at a weighted average rate of 4.31% were puttable as of June 30, 2008. The remaining puttable FHLB advances of $400.0 million at a weighted average rate of 4.5% are puttable at the second anniversary date in 2009.  
 
Long-term 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 June 30, 2008, the per annum interest rate on the subordinated debt was 3.90% 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 June 30, 2008, junior subordinated debt securities totaled $121.1 million with a weighted average interest rate of 4.93% 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.
 
42
 
Off-Balance-Sheet Arrangements and Contractual Obligations

The following table summarizes the Company’s contractual obligations to make future payments as of June 30, 2008. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.
 
 
  
Payment Due by Period
  
 
  
 
  
More than
  
3 years or
  
 
  
 
  
 
  
 
  
1 year but
  
more but
  
 
  
 
  
 
  
1 year
 
less than
 
less than
  
5 years
  
 
  
 
  
or less
  
3 years
  
5 years
  
or more
  
Total
  
 
  
(In thousands)
  
 
  
 
  
 
  
 
  
 
  
 
  
Contractual obligations:
  
 
  
 
  
 
  
 
  
 
  
Deposits with stated maturity dates
 
$
4,523,740
  
$
70,250
  
$
1,498
  
$
35
  
$
4,595,523
  
Federal funds purchased
   
81,000
   
-
   
-
   
-
   
81,000
 
Securities sold under agreements to repurchase (1)
   
-
   
100,000
   
50,000
   
1,400,000
   
1,550,000
 
Advances from the Federal Home Loan Bank (2)
   
50,000
   
296,413
   
770,300
   
-
   
1,116,713
 
Other borrowings
   
10,000
   
-
   
-
   
19,577
   
29,577
 
Long-term debt
   
-
   
-
   
-
   
171,136
   
171,136
 
Operating leases
   
6,752
   
8,641
   
5,719
   
4,495
   
25,607
 
 
                      
Total contractual obligations and other commitments
 
$
4,671,492
  
$
475,304
  
$
827,517
  
$
1,595,243
  
$
7,569,556
  
 
(1)
These repurchase agreements have a final maturity of 5-year, 7-year and 10-year from origination date but are callable on a quarterly basis after six months, one year, or 18 months for the 7-year term and one year for the 5-year and 10-year term.
(2)
FHLB advances of $700.0 million that mature in 2012 have a callable option. On a quarterly basis, $300.0 million are callable at the first anniversary date and $400.0 million are callable at the second anniversay date.
 
Capital Resources

Stockholders’ equity of $994.7 million at June 30, 2008, increased by $22.8 million, or 2.3%, compared to $971.9 million at December 31, 2007. The following table summarizes the activity in stockholders’ equity:
 
   
Six months ended
 
(In thousands)
  
June 30, 2008
  
Net income
  
$
46,530
  
Proceeds from shares issued to the Dividend Reinvestment Plan
    
1,249
 
Proceeds from exercise of stock options
    
356
 
Tax short-fall from stock-based compensation expense
    
(237
)
Share-based compensation
    
3,838
 
Changes in other comprehensive income
    
(18,453
)
Cumulative effect adjustment as a result of adoption of EITF No. 06-4
       
Accounting for Deferred Compensation and Postretirement Benefit
        
Aspects of Endorsement Split-Dollar Life Insurance Arrangements
    
(147
)
Cash dividends paid
    
(10,366
)
Net increase in stockholders' equity
  
$
22,770
  
 
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 six months of 2008. At June 30, 2008, 622,500 shares remain under the Company’s November 2007 repurchase program.
 
43
 
The Company declared a cash dividend of 10.5 cents per share for distribution in January 2008 on 49,342,991 shares outstanding, in April 2008 on 49,382,350 shares outstanding, and in July 2008 on 49,419,098 shares outstanding. Total cash dividends paid in 2008, including the $5.2 million paid in July, amounted to $15.6 million.
 
Capital Adequacy Review

Management seeks to maintain the Company's capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.
 
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. The subordinated debt was issued through the Bank and qualifies as Tier 2 capital for regulatory reporting purposes.
 
The Bancorp established five special purpose trusts 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 junior subordinated debt of $121.1 million as of June 30, 2008, were included in the Tier 1 capital of the Bancorp for regulatory capital purposes.
 
Both the Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements as of June 30, 2008. In addition, the capital ratios of the Bank place it in the “well capitalized” category which is defined as institutions with a Tier 1 risk-based capital ratio equal to or greater than 6.0%, total risk-based ratio equal to or greater than 10.0%, and Tier 1 leverage capital ratio equal to or greater than 5.0%.
 
44
 
The following table presents the Bancorp’s and the Bank’s capital and leverage ratios as of June 30, 2008, and December 31, 2007:
 
     
Cathay General Bancorp 
    
Cathay Bank 
  
(Dollars in thousands)    
June 30, 2008 
    
December 31, 2007 
    
June 30, 2008 
    
December 31, 2007 
  
     
Balance 
    
% 
    
Balance 
    
% 
    
Balance 
    
% 
    
Balance 
    
% 
  
Tier 1 capital (to risk-weighted assets)
  
$
800,638
    
9.38
 
$
755,431
    
9.09
 
$
786,779
    
9.23
 
$
750,698
    
9.04
 
Tier 1 capital minimum requirement
    
341,389
    
4.00
    
332,384
    
4.00
    
340,996
    
4.00
    
332,014
    
4.00
  
Excess
  
$
459,249
    
5.38
 
$
423,047
    
5.09
 
$
445,783
    
5.23
 
$
418,684
    
5.04
 
 
                                  
Total capital (to risk-weighted assets)
  
$
940,074
    
11.02
 
$
874,056
    
10.52
 
$
927,149
    
10.88
 
$
870,257
    
10.49
 
Total capital minimum requirement
    
682,778
    
8.00
    
664,768
    
8.00
    
681,991
    
8.00
    
664,027
    
8.00
  
Excess
  
$
257,296
    
3.02
 
$
209,288
    
2.52
 
$
245,158
    
2.88
 
$
206,230
    
2.49
 
 
                                  
Tier 1 capital (to average assets)
                                  
- Leverage ratio
  
$
800,638
    
7.83
 
$
755,431
    
7.83
 
$
786,779
    
7.71
 
$
750,698
    
7.79
 
Minimum leverage requirement
    
408,883
    
4.00
    
385,812
    
4.00
    
408,326
    
4.00
    
385,269
    
4.00
  
Excess
  
$
391,755
    
3.83
 
$
369,619
    
3.83
 
$
378,453
    
3.71
 
$
365,429
    
3.79
 
 
                                  
Risk-weighted assets
  
$
8,534,730
      
$
8,309,598
      
$
8,524,888
      
$
8,300,343
      
Total average assets (1)
  
$
10,222,074
        
$
9,645,310
        
$
10,208,158
        
$
9,631,720
        
 
(1)
The quarterly total average assets reflect all debt securities at amortized cost, equity security with readily determinable fair values at the lower of cost or fair value, and equity securities without readily determinable fair values at historical cost. 
 
Liquidity

Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, federal funds purchased, securities sold under agreements to repurchase, and advances from the Federal Home Loan Bank (“FHLB”). At June 30, 2008, our liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was at 15.7% compared to 15.8% at year-end 2007.
 
To supplement its liquidity needs, the Bank maintains a total credit line of $304.0 million for federal funds with six correspondent banks, and master agreements with brokerage firms for the sale of securities subject to repurchase. The Bank is also a shareholder of the FHLB of San Francisco, enabling it to have access to lower cost FHLB financing when necessary. As of June 30, 2008, the Bank had an approved credit line with the FHLB of San Francisco totaling $1.6 billion. The total credit outstanding with the FHLB of San Francisco at June 30, 2008, was $1.1 billion. These borrowings are secured by loans and securities.
 
Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities sold under agreements to repurchase, and unpledged investment securities available-for-sale. At June 30, 2008, investment securities available-for-sale at fair value totaled $2.5 billion, with $2.4 billion pledged as collateral for borrowings and other commitments. The remaining $98.9 million was available as additional liquidity or to be pledged as collateral for additional borrowings.
 
Approximately 98% of the Company’s time deposits are maturing within one year or less as of June 30, 2008. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect that the outflow will be minimal and can be replenished through our normal growth in deposits. Management believes the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs.
 
45
 
The Bancorp obtains funding for its activities primarily through dividend income contributed by the Bank and proceeds from the issuance of securities, including proceeds from the issuance of its common stock pursuant to its Dividend Reinvestment Plan and the exercise of stock options. Dividends paid to the Bancorp by the Bank are subject to regulatory limitations. The business activities of the Bancorp consist primarily of the operation of the Bank with limited activities in other investments. Management believes the Bancorp’s liquidity generated from its prevailing sources is sufficient to meet its operational needs.
 
 
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk
 
We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments.
 
Although the modeling is very helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rates changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.
 
We have established a tolerance level in our policy to define and limit interest income volatility to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level in our policy to value the net economic value of our portfolio of assets and liabilities to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. At June 30, 2008, the market value of equity exceeded management’s 15% limit for a hypothetical upward rate change of 200 basis points. Management intends to take steps over the remainder of the year to reduce this exposure.
 
46
 
The table below shows the estimated impact of changes in interest rate on net interest income and market value of equity as of June 30, 2008:
 
 
  
 
  
 
  
Net Interest
  
Market Value
  
 
  
Income
  
of Equity
 
 
  
Volatility (1)
  
Volatility (2)
  
Change in Interest Rate (Basis Points)
  
June 30, 2008
  
June 30, 2008
  
+200
    
-5.0
    
-16.4
  
+100
    
-2.5
    
-7.6
  
-100
    
-3.4
    
5.2
  
-200
    
-8.0
    
1.3
  

(1)
The percentage change in this column represents net interest income of the Company for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios.
(2)
The percentage change in this column represents net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios.
 
Item 4. CONTROLS AND PROCEDURES.
 
The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
There has not been any change in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II - OTHER INFORMATION
 
Item 1. LEGAL PROCEEDINGS.
 
The Bancorp’s wholly-owned subsidiary, Cathay Bank, is a party to ordinary routine litigation from time to time incidental to various aspects of its operations. Management is not aware of any litigation that is expected to have a material adverse impact on the Company’s consolidated financial condition, or the results of operations.
 
Item 1a. RISK FACTORS.

There is no material change from risk factors as previously disclosed in the registrant’s 2007 Annual Report on Form 10-K in response to Item 1A to Part I of Form 10-K.
 
47
 
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
 
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Number of Shares (or Units) Purchased
(b) Average Price Paid per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 (April 1, 2008 - April 30, 2008)
0
$0
0
622,500
Month #2 (May 1, 2008 - May 31, 2008)
0
$0
0
622,500
Month #3 (June 1, 2008 - June 30, 2008)
0
$0
0
622,500
Total
0
$0
0
622,500
 
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 six months of 2008. At June 30, 2008, 622,500 shares remain under the Company’s November 2007 repurchase program.
 

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.
 
48

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

The annual meeting of stockholders of Cathay General Bancorp was held on April 21, 2008. The proposals considered and the voting results are as follows:

Proposal 1: Election of three Class III directors to serve until the 2011 annual meeting of stockholders and their successions have been elected and qualified.

   
Votes FOR
  
% FOR
  
WITHHELD
  
               
Patrick S.D. Lee
    
41,033,894
    
98.72
%
  
531,213
  
                     
Ting Y. Liu
    
41,210,721
    
99.14
%
  
354,386
  
                     
Nelson Chung
    
41,222,079
    
99.17
%
  
343,028
  
 
Other directors whose terms of office continued after the meeting:
 
Term ending in 2009 (Class I)  Term ending in 2010 (Class II)
   
Michael M.Y. Chang Kelly L. Chan
Anthony M. Tang Dunson K. Cheng
Thomas G. Tartaglia Thomas C.T. Chiu
Peter Wu  Joseph C.H. Poon
 
Proposal 2: Stockholder proposal requesting that the Board of Directors take action to eliminate classification of terms of the Board.
 
Votes FOR
% FOR
AGAINST
ABSTAIN
14,963,066
51.48%
8,440,105
5,659,014

 
Item 5. OTHER INFORMATION.

Not applicable.

Item 6. EXHIBITS.
 
(i)
Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(ii)
Exhibit 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(iii)
Exhibit 32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(iv)
Exhibit 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
49
 
SIGNATURES
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
   
Cathay General Bancorp
(Registrant)
   
Date: August 11, 2008
By: /s/ Dunson K. Cheng
.
Dunson K. Cheng
Chairman, President, and
Chief Executive Officer
   
 
Date: August 11, 2008
By: /s/ Heng W. Chen
 
Heng W. Chen
Executive Vice President and
Chief Financial Officer
   
 
 
 
50