Georgia Lo - IR Dunson Cheng - Chairman and CEO Heng Chen - EVP and CFO.

Julianna Balicka - KBW Lana Chan - BMO Capital Markets Aaron Deer - Sandler O'Neill Joe Morford - RBC Capital Markets.

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's Third Quarter 2015 Earnings Conference Call. My name is Andrew and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session.

[Operator Instructions] Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations for Cathay General Bancorp..

Thank you, Andrew and good afternoon. Here to discuss the financial results today are Mr. Dunson Cheng, our Chairman of the Board and Chief Executive Officer, and Mr. Heng Chen, our Executive Vice President and Chief Financial Officer.

Before we begin, we wish to remind you that the speakers of this call may make forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 concerning future results and events, and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially.

These risks and uncertainties are further described in the Company's annual report on Form 10-K for the year ended December 31, 2014, at Item 1A in particular, and in other reports and filings with the Securities and Exchange Commission from time to time.

As such, we caution you not to place undue reliance on such forward-looking statements which speak only as of the date of this presentation. We undertake no obligation to update any forward-looking statements or to publicly announce any revision of any forward-looking statements to reflect future developments or events except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its third quarter 2015 results. To obtain a copy, please visit our website at www.cathaygeneralbancorp.com. After comments by management today, we will open up this call for questions. I will now turn the call over to our Chairman of the Board and CEO, Mr. Dunson Cheng..

Thank you, Georgia. Good afternoon and welcome to our 2015 third quarter earnings conference call. This afternoon, we reported net income of $38.5 million for the third quarter of 2015, a 7.2% increase when compared to a net income of $35.9 million for the third quarter of 2014.

Diluted earnings per share increased 4.4% to $0.47 per share for the third quarter of 2015, compared to $0.45 per share for the same quarter a year ago. In the third quarter of 2015 and with the completion of the Asia Bank acquisition, our total loan grew $538 million to $10.04 billion.

Excluding the $418 million of loans from Asia Bank, the loan growth was $116 million, representing an increase of 5% on an annualized basis. For the first nine months of 2015 and again excluding the loan from Asia Bank, we had loan growth of $708 million or 11% annualized.

The increase in the third quarter came from residential mortgages, which grew by 101 million, construction loan by 34 million and CRE loans by 26 million. Commercial loans decreased by 41 million as a result of several large loan payoffs. We continue to see our loan growth in 2015 to be about 10%.

For the quarter of 2015, our total deposits excluding the 421 million of deposits from Asia Bank, increased 479 million to 10.2 billion. This represents an increase of 5.1% quarter-over-quarter or 20% on an annualized basis. The increase in deposits [which relating] to our CD promotions and the [raise] during the third quarter.

On July 31, 2015 we closed the acquisition of Asia Bank shares with the issuance of 2.6 million shares of current stock and a cash payment of $57 million. Assistance [conversion] occurred over the weekend of August 31.

We expect that our higher lending limit and broader range of lending products will result in stronger loan growth for our new colleagues on Asia Bank.

During the third quarter of 2015, we completed the repurchase of the remaining 622,500 shares at a total cost of 18.1 million or $29 [indiscernible] per share under our November 2007 1 million shares stock repurchase program. On August 31, 2015 we announced a new 2 million shares stock repurchase program.

During the month of September 2015, we repurchased 1.08 million shares at the cost of $32.6 million or $30.05 per share. We expect to buyback our stock from time-to-time in the property markets based on our capital levels and our stock price.

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen to discuss the third quarter 2015 financials in more detail..

Thank you, Dunson and good afternoon everyone. For the third quarter, we announced net income of $38.5 million or $0.47 per share. Our net interest margin was 3.36% in the third quarter of 2015, compared to 3.51% in the second quarter of 2015 and 3.31% for the third quarter of 2014.

In the third quarter of 2015, interest recoveries and prepayment penalties added 5 basis points to the net interest margin versus 9 basis points in the second quarter of 2015 and 9 basis points in the third quarter of 2014.

We also received a special dividend from the Federal Home Loan Bank, which increased net interest margin by 4 basis points in the second quarter. Non-interest income during the third quarter 2015 was $9.2 million.

Non-interest expense increased by $14.9 million or 35% to $57.5 million in the third quarter of 2015, compared to $42.6 million in the same quarter a year ago.

The increase was mainly due to a $13.8 million increase in amortization of investments in affordable housing and alternative energy partnerships, a $1.1 million increase in professional service expenses and $1.3 million increase in OREO expenses in the third quarter of 2015.

The conversion of Asia Bank Cathay's data processing system commenced on August 24. We incurred approximately $2 million in merger and integration charges during the third quarter. We expect amortization of alternative energy partnerships to decrease from $13.4 million in the third quarter to approximately $8 million in the fourth quarter of 2015.

The effective tax rate for the third quarter of 2015 was 23.9%, which includes a catch-up adjustment to reflect the lower effective tax rate for the full year of 2015, resulting from a lower forecast for full year pre-tax income. We expect that effective tax rate for the fourth quarter of 2015 will be around 27%.

At September 30, 2015, our tier 1 leverage capital ratio decreased to 12.24%, our tier 1 risk-based capital ratio decreased to 13.98%, and our total risk-based capital ratios decreased 15.25% as compared to December 31, 2014. Our ratios significantly exceeded well-capitalized minimum ratios under the regulatory guidelines.

At September 30, 2015, our common equity tier 1 capital ratio was 12.89%. Net charge-offs for the third quarter of 2015 were $2.1 million, or 0.09% of average loans compared to net charge-offs of $0.5 million in the second quarter of 2015 and net recoveries of $5.2 million in the same quarter a year ago.

Our gross loan loss recoveries during the third quarter 2015 were $1.3 million and our gross charge-offs were $3.1 million. Our loan loss reversal was $1.25 million for the third quarter of 2015, compared to 2.15 million for the second quarter of 2015 and 5.1 million for the third quarter of 2014.

Our non-accrual loans increased by 7.9% or 5.2 million in the third quarter to 71.2 million or 0.71% of period-end loans as compared to the second quarter of 2015..

Thank you, Heng. We will now proceed to the question-and-answer portion of the call..

Ladies and gentlemen, we are ready to open the lines up for your questions. [Operator Instructions] And our first question or comment comes from the line of Julianna Balicka with KBW. Your line is now open..

So I have a couple of questions and I’ll step back. When maybe on the expenses your salary expense went down quarter end and also I’m sorry, the decline in your expenses in terms of salaries and also professional expenses.

Actually yes, so the decline in your salary expense, can you talk about there was a stock-based compensation in the second quarter that did not come through in the third quarter or can you talk more about what’s going on there?.

Yes, actually, this is Heng Chen. The biggest component is bonus accruals as in the second quarter our net income was or our EPS was $0.56. And so because that was a much higher percentage for such a strong quarter, we had much higher bonus accrual and then we also had a more optimistic forecast of how the year was going to go in terms of net income.

So basically in the second quarter, we are going to go above our internal budget and we accrued extra bonus to reflect that. And secondly there was about 700,000 more of FICA in the second quarter than in the third quarter. We paid our 2014 bonuses in the middle of April 2015.

So that’s should allow FICA and then once the officers are over the limit then the FICA is much less for the rest of the year..

And so in terms of where just should go for next quarter salaries and expenses given the bonus accruals part.

Where do you think that we should be paying this for the run rate or into 4Q remaining for the full year ’16 whatever makes more sense?.

Well, yes. I think the fourth quarter, the bonuses will probably be a $1 million higher bonus accrual in the third quarter. And then that would be a pretty good run rate for 2016, because my goal is to fully accrual the bonuses for 2015 in 2015 and in the first quarter, we had about $1 million catch up for 2014 bonuses..

Okay, okay. See you don’t want to have that happen again..

Right, right. So a higher salary number for this year should be reflects growth into next year, if you think dollar amount..

Okay. And in your answer and then in your remarks you referenced a decreased expectation for net income for this year.

Is it just simply related to merger cost for Asia Bank or is there something else changed in your outlook for the linked quarter?.

I think for loan growth, it was slower at the end of the second quarter we were annualized were 11% and we didn’t raise -- we were cautious and didn’t raise guidance at that time and with the number of like the commercial loans bought again in the third quarter.

So we’re more cautious and then we thought there might have been a prime increase in September and so now we probably don’t think anything will happen till Q1 next year..

Right. And then final question on setback. In terms of your repurchases [indiscernible] the 1.7 million this quarter of shares you issued 2.6 million with the Asia Bank deal. What’s kind of your outlook for repurchases for next year other than just kind of keep going.

Do you have a target number that you want to reach per quarter or anything?.

Well, we hope to finish our remaining [1 million] shares by the latest by February of next year. And so that would make Asia Bank -- it will go from 2.5% accretive to 5.5% accretive.

Then as part of our long-term capital forecast, we think that at these current levels we'll probably buyback 2 million to 3 million shares a year for the next couple of years..

On top of the Bank Asia repurchase…..

That's right. And we have the capacity for that under the -- under the normal schedules -- bank holding companies can -- there's a certain amount of buyback that they can't complete without notice to the regulators..

And our next question or comment comes from the line of Lana Chan with BMO Capital Markets. Your line is now open..

Two questions, one on the C&I pay downs, can you talk about where they're coming from, what's driving that, is it some of the slowdown in China or is it pricing competition, like what do you think is driving that in near term?.

Lana this is Dunson Cheng. I think there's a couple of things. First of all, the pay down I think three or four of loans that we simply feel still comfortable in continuing our relationship. And those accounts were asked to [include our bank and five another land groups].

And I think that's one component and that is -- those are sort of one off events and the other phenomenon that we are observing in the third quarter is that our importers are less active in placing orders and they're more cautious and as such that the aligned usage was less than previous year.

And with regard to slowdown of China, it may have some effect on it, but because for us it's more we deal with mostly importers and if the demand is there I'd imagine that they would certainly go ahead and place their orders.

So, it's really difficult to know and so, I think those are some of the factors that contributed to the slowdown in C&I loans but in general for the last couple of years it's been very different to grow with C&I loans and one reason is that we just don't see that many new business formation and -- so at this point in time with the volatility, uncertainty in the marketplace and I -- we see our customers are being more cautious..

Thank you.

And just a follow up on that, the growth on the real-estate side which has been a great growth driver both for the commercial and residential mortgage, do you think that is -- that trend is sustainable into 2016 to at least help you maintain that kind of 10% annual growth rate?.

So at the present time we are still seeing strong pipeline in our [single lending] mortgages and my expectation that it should continue well into the 2016 and -- so, we feel that there's still some momentum behind the growth.

On the CRV side we are seeing quite a bit of request from construction loans and for the regular C&I's there are a lot of competition in the marketplace but however we still see our pipeline is pretty good and one thing that -- I say that slow us down is that when construction loan gets specialty housing, when the project is done -- it will get paid done pretty quickly.

So, in a sense that we are busy boking loans and on the other hand, we're being paid off..

[Indiscernible] one more question for Heng, on terms of the margin I know partly this quarter was -- the decline was driven by the excess liquidity with the deposit growth.

Would you expect some of that excess liquidity to be reimbursed at pretty shortly and -- with some bringing some more lease to the margin going into the fourth quarter?.

Probably not, we sold 75 million of MBS, it settled in late September and so that was to position for higher interest rates -- it's 15-year MBS, so the yield in a lower than 2%. And we're kind of reluctant to buy more MBS at this time.

Then in terms of the CD, we were successful in getting the loan to deposit ratio down to 98% but its increased or average cost of CD by 3 basis points from a second or third quarter, so that the fourth quarter impact of that will have a little bit more impact on the NIM in Q4. .

And our next question comes from the line of Aaron Deer with Sandler O'Neill. Your line is now open..

Good afternoon, everyone.

Just wanted a help on your comments regarding the slowdown in China and I'm just curious to get your perspective on the exposure that you have either in Hong Kong or Mainland China or to that extent your US based export customers and if there is any risk that you see in any of those portfolios?.

Aaron, as you know that, we really don't have large extent of exposure in China and most of the loans that we make that are related to China are tied to CRE in terms of financing the real estate development [indiscernible] so I will say that our exposure with China is very minimal.

We don't have any investment at all in China, the loans that we made to China are almost all to Chinese back helping them to finance their LTE's and things like that. So, we don't feel at this point in time, banking China is danger of a [big] problem.

So I don't really see much exposure in China itself and we also have only a fixed quarters with China and that not be a problem for us..

Okay, that's helpful and then Heng on your guidance with respect to the tax credits and tax rates, that is the amortization of the tax credits, is the guidance that you gave for the fourth-quarter, is it reasonable to assume that those are decent numbers for 2016 as well or are there investments that you are making that could affect that going forward?.

Yes, so in terms of our existing investment that's 2016 amortization would be only 1 million throughout 2016 and we expect to make a similar size one here in early in the first-quarter and so the expense hopefully will -- it should be smoother throughout the 2016 rather than having a jump up so much here in Q3. .

Is it your expectation then that given the investments you should be looking at something close to I guess full year number of 30 million or so and amortization costs for 2016?.

Yes, it's close to the 25 million and then our tax rate because of the higher pretax income financial would be closer to 28% from the 27% for the fourth quarter..

Okay and then just one point on the non-performers, it looks like those ticked up just a little bit outside [C&I] is that something you picked up from the acquisition or is that just some turn in in your existing portfolio?.

Aaron, the different loan is on [our book] for several years and the customer [encounter] a financial problem and I think we just want to be safe and put it on non-approved,.

It's been liquidation, so that's try to collect the balance. .

And our next question or comment comes from the line of Joe Morford with RBC Capital Markets. Your line is now open. .

Good afternoon, everyone.

Everything has pretty well been exhausted at this point, I just thought I'd follow up on Lana, so just to confirm it sounds like the buyers for the margin is still downward a little bit in the fourth quarter and then from there Heng you are expecting a relatively stable outlook in 2016 or what's the early thought here?.

Joe, I think the margin will slow down a little bit most likely a couple of basis points but we do have a large -- probably 150 million of brokerage CDs and internet CDs that will mature in the next six months plus we're going to have loan growth, so in terms of -- I saw the first quarter is -- that's the 90-day quarter and because we have so much in terms of residential mortgage and MBS, back Q1 typically is -- the margin goes up by 8 to 10 basis points from the 33 six-day convention and so then going into the west -- I don't want to give good absolute percentage guidance on the margin, but it will improve in 2016..

[Operator Instructions]. And our next question are coming, comes from the line of Julianna Balicka with KBW. Your line is now open..

Yes, so what kind of rate are you now making use on originations at by loan category and also what kind of a rate are you now offering for new CDs and do you plan another CD campaign in the first quarter of ‘16 like what kind of rates are you thinking ahead of that?.

Well, Julia let me cover that, residential mortgage, we’re -- our new rates are very close to our average portfolio rates, so our new rates are probably [indiscernible] our portfolio rate I think are [455] or thereabout, CRE were about 4.6 and our new, our five-year fixed were pretty much there and then for C&I levels, I think we are -- I'm just doing this from memory including the low 4 and that our due loans are also free somewhere particularly for the ones with floor, the land construction that's a pretty healthy yield and so we don't see any margin pressure coming from construction loan.

So I guess to summarize we might see a [bleed] a couple of basis points per quarter in terms of lower overall loan yield but some point it should flatten out..

That's very good and what kind of rate are you offering CDs [indiscernible].

While the promotion for the two years for -- it was a 1.28 a lot of that money was one year which was I believe 0.9 for the over 100,000 but our normal CD rates, it’s about we’re at 60 basis points before concession for one year CD..

Got it and in terms of your charge-offs and recovery, is the price line of recovery still kind of in progress and with the charge-off this quarter with the $2 million, could you talk about that and give us a little more color?.

Yes, well we have a couple of good sized recoveries it’s hard to predict when they will come, hopefully one will happen in the first half of next year, in the next couple of years and so the charge-offs from the third quarter they were mostly centered in one level is the [indiscernible].

Okay..

[Indiscernible] C&I customer that we’ll try, that we’re the process of liquidating the outstanding loan..

And I have a question off the back, do you have any foreign currency translation losses in your numbers this quarter and then is the other income or other expenses?.

No, no we run a match book, in that -- it kind of under the [accrual] we originate foreign currencies transactions for our customers that we offset that the same day..

And thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks..

Well, thank you for joining us for this call. And we look forward to talking with you at our next quarterly earnings release. Thank you..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day..