Cathay General Bancorp (CATY)

How it makes money

Like most regional banks, Cathay earns most of its money from the spread between what it charges on loans and what it pays on deposits. In 2025 net interest income was $742.5 million, up 10.1% from $674.1 million in 2024, with a net interest margin of 3.30% against 3.04% in 2024; fee and other income added just $75.4 million. Funding comes almost entirely from customer deposits — average interest-bearing deposits were 98.3% of average interest-bearing liabilities — so the cost of time deposits, money-market and savings accounts drives profitability as much as loan yields do. The loan book is the engine: gross loans were 52.4% commercial real estate, 29.0% residential mortgage and 15.8% commercial at year-end 2025. Fee income is a mix of depository service charges, letters of credit commissions, wire and safe-deposit fees, wealth-management and foreign-exchange fees, gains on loan sales and marks on equity securities — the last of which makes the line lumpy: the 35.5% jump in 2025 came largely from a $14.9 million unrealised gain on equity securities. The bank also invests in affordable-housing and renewable-energy partnerships, which lower the tax bill: the effective tax rate was 19.2% in 2025 and 9.9% in 2024.

The 10-K describes a community franchise, not a structural advantage. Cathay concentrates on markets with a high density of Chinese-American individuals and businesses, staffs its branches with Mandarin, Cantonese and Vietnamese speakers and maintains a Hong Kong branch and offices in Beijing, Shanghai and Taipei — a relationship network that is genuinely hard for a generic competitor to copy branch by branch, and which management itself frames as the reason it can underwrite credit in these niches. But the product is money: the bank competes for the same commercial-real-estate borrowers and the same deposits as everyone else, has no pricing power over either, and its own filing calls this focus a concentration of risk rather than a protection. A 3.30% net interest margin and a 10.87% return on average equity in 2025 are respectable regional-bank numbers, not evidence of a durable edge.

Demand for what Cathay sells moves with the credit cycle and with the price of money. Loan growth depends on small and mid-sized businesses borrowing and on commercial-property owners buying, building and refinancing; when rates rise or California property values wobble, both stop, and the same downturn that slows new lending also raises losses on the old book. The margin is rate-driven too: the 2025 improvement to 3.30% came mainly from cheaper time deposits rather than from better loan yields. Deposits behave cyclically in their own way — in 2025 money-market balances grew 12.7% and savings 19.8% as customers chased yield, which is the kind of mix shift that squeezes a bank's funding cost. Fee income is too small (roughly a tenth of net interest income) to steady the result, and part of it is equity-market marks, which makes it a swing factor rather than a cushion.

Key risks

• The loan book is largely secured by real estate — The company states that its loan portfolio is largely secured by real estate and that a downturn in the real-estate market may adversely affect results. Commercial real estate alone was 52.4% of gross loans at December 31, 2025, and residential mortgages a further 29.0%.
• Geographic and asset-class concentration — Cathay lists 'Concentration of risk increases the potential for significant losses' among its material risks. It operates mainly in California markets with a concentration of Chinese-American individuals and businesses, and says this leaves it exposed to a focused downturn: deterioration in California economic, housing or real-estate conditions would raise credit losses disproportionately. It also warns that regulators scrutinise banks with high commercial-real-estate exposure and may require more capital than would otherwise be expected.
• Interest-rate risk — The company discloses that its business is subject to interest-rate risk and that fluctuations in rates could reduce net interest income. It also lists inflation and deflation as factors that may adversely affect financial performance.
• Credit losses may exceed the allowance — Two separate risk factors cover this: the company may have to make additional provisions and charge off further loans, and the allowance for credit losses is only an estimate of expected losses — actual losses above that estimate would hit results and capital.
• Liquidity and the soundness of other banks — The filing warns that liquidity risk could impair the ability to fund operations and jeopardise financial condition, and separately that the soundness of other financial institutions could adversely affect Cathay. It also flags that a goodwill impairment would produce a charge against earnings and reduce stockholders' equity.
• Exposure to conditions in Asia — Among its market and economic risks the company lists that adverse conditions in Asia and elsewhere could adversely affect the business — consistent with a franchise that has a Hong Kong branch, representative offices in Beijing, Shanghai and Taipei, and loan clients in Hong Kong.
• Information systems, third parties and regulation — Operational risk factors include failures, interruptions or security breaches of information systems; increasing regulatory attention on the use of third-party vendors; failure to comply with the Community Reinvestment Act and fair-lending laws, which could lead to material penalties; and changes in accounting standards or tax laws. The company also notes that returns on its tax-advantaged affordable-housing and alternative-energy investments may not materialise as anticipated.

The filing does not disclose a top-customer percentage, and states that the Company has no specific industry concentration and that there were no loan concentrations to multiple borrowers in similar activities exceeding 10% of total loans as of December 31, 2025 or 2024. The concentration that matters here is geographic and by asset class, not by counterparty: most business is with clients in high-density Asian-populated areas of Southern and Northern California, New York City, Dallas and Houston, Seattle, Boston, Chicago, Nevada, New Jersey and Rockville, Maryland, plus loan clients in Hong Kong, and about 47.9% of the Bank's residential mortgages were on properties located in California.