CATY

Business Context and Reporting Period

Cathay General Bancorp (the "Bancorp") and its wholly-owned subsidiary, Cathay Bank, filed this Form 10-Q for the quarterly period ended March 31, 2010. The Bancorp operates a network of branches primarily in California, New York, and other select U.S. states, with international presence in Hong Kong, Shanghai, and Taipei. The reporting period reflects the impact of a weak economic environment, significant credit deterioration in the commercial real estate sector, and regulatory oversight.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Reversal: The Company reported a net loss of $29.8 million attributable to common stockholders, a significant deterioration from the $6.2 million net income reported in Q1 2009. This was driven primarily by a $37 million increase in the provision for credit losses and a $19 million decrease in securities gains.
• Credit Quality Deterioration: Non-performing assets increased 17.5% quarter-over-quarter to $413.1 million, driven by a $40.9 million increase in Other Real Estate Owned (OREO) and a $14.7 million increase in non-accrual loans. Net charge-offs rose to $63.1 million, up from $38.0 million in the prior year.
• Capital Strengthening: On February 1, 2010, the Bancorp raised $125.2 million through the sale of 15.0 million shares of common stock. This increased total risk-based capital ratio to 16.32% from 15.43% at year-end 2009.
• Interest Income/Expense: Net interest income increased to $74.7 million due to a decrease in interest expense on time deposits and brokered deposits, despite a decline in loan yields. The net interest margin improved to 2.72%.

Guidance, Outlook, and Risks

• Regulatory Oversight: The Bancorp and the Bank are subject to Memoranda of Understanding (MOU) with the Federal Reserve Bank of San Francisco, the FDIC, and the California Department of Financial Institutions. These agreements restrict dividends, capital distributions, and stock repurchases without prior approval. The Company must submit plans to reduce commercial real estate (CRE) concentrations, improve asset quality, and enhance stress testing.
• Commercial Real Estate Concentration: CRE loans represented 314% of total risk-based capital. The Bank has set an internal limit to reduce this to 300% by December 2011 and expects to achieve this by year-end 2010 through organic reduction.
• Dividend Policy: The Board reduced the common stock dividend to $0.01 per share. The Company does not expect to pay dividends exceeding this rate before Q4 2010 and anticipates no dividends from the Bank to the Bancorp in 2010.
• Asset Quality Risks: Management continues to monitor collateral-dependent loans. While many loans remain well-secured, declining real estate values in the market area pose a risk to the allowance for loan losses. The allowance for credit losses was increased to 3.47% of gross loans.

Investor Verification Checklist

• Regulatory Compliance: Verify the Company's progress in meeting the specific targets outlined in the MOUs with the Federal Reserve and FDIC, particularly regarding CRE concentration reduction and capital ratios.
• OREO Disposition: Monitor the rate of sales and write-downs for the $111.9 million in Other Real Estate Owned, as continued declines in property values could necessitate further provisions.
• Capital Adequacy: Confirm that the $125.2 million capital raise is sufficient to absorb future charge-offs without triggering additional regulatory enforcement actions.
• Dividend Restrictions: Review the terms of the MOUs to understand the specific constraints on future capital distributions and the timeline for potential relief.
• Impaired Loans: Assess the $359.6 million in impaired loans, specifically the $47.6 million loan to a borrower in bankruptcy, to evaluate potential loss severity.