Monica Chen - Head of IR Dunson Cheng - Executive Chairman Pin Tai - President and CEO Heng Chen - EVP and CFO.

Aaron Deer - Sandler O'Neill & Partners Lana Chan - BMO Capital Markets Chris McGratty - KBW Nate Race - Piper Jaffray Gary Tenner - D.A. Davidson.

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Third Quarter 2016 Earnings Conference Call. My name is Letif [ph] and I'll be your coordinator for today. [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 Monica Chen, Investor Relations for Cathay General Bancorp..

Thank you, Letif [ph], and good afternoon. Participating in this call today are Mr. Dunson Cheng, our Executive Chairman; Mr. Pin Tai, our President 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, 2015, 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 maybe required by law. This afternoon, Cathay General Bancorp issued an earnings release outlining its third quarter 2016 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 Executive Chairman, Mr. Dunson Cheng..

Thank you, Monica, and good afternoon everyone. Welcome to our 2016 third quarter earnings conference call. On August 19, the Company announced my retirement as President and CEO of the Company and as CEO of Cathay Bank. Effective September 30, 2016, Mr.

Pin Tai has been appointed by the Board of Directors to succeed me in this position, while I continue to serve as Executive Chairman of both Company and Cathay Bank Board of Directors. Mr.

Pin Tai has served as President of Cathay Bank since April 2015, prior to which he served as General Manager of the New York Region, Executive Vice President and General Manager of the Eastern Region, Deputy Chief Lending Officer and Chief Lending Officer.

With over 34 years of banking experience, of which 17 years were with Cathay Bank, he is well-qualified to take on this new responsibility, which has made the transition easier to implement. Before discussing our third quarter performance, I would like to introduce Mr. Pin Tai to say a few words..

Thank you, Dunson, and good afternoon everyone. It has been a great pleasure to have been able to work with Dunson and the other members of management during my tenure with Cathay Bank, and I'm honored to have been given the opportunity to serve and to lead the Company going forward.

So much has been accomplished during Dunson's leadership, and I look forward to building on these strong foundations. I welcome the opportunity to discuss our financial results with you in the future earnings conference calls. I would now turn the floor back to Dunson to discuss our third quarter 2016 performance..

Thank you, Pin. This afternoon we reported net income of $46.1 million for the third quarter 2016, a 19.8% increase when compared to net income of $38.5 million for the third quarter 2015. Diluted earnings per share increased 23.4% to $0.58 per share for the third quarter of 2016, compared to $0.47 per share for the same quarter a year ago.

The increase in net income compared to the same quarter a year ago is primarily due to a decrease of $11.7 million in amortization of investments in alternative energy partnerships. Also in the third quarter 2016, our total loans increased $487 million to $11 billion, compared to second quarter 2016, or an increase of 18.5% on an annualized basis.

That compared to 6% growth in the second quarter. The reason for the unusually high loan growth are cyclical [ph]. One is that some of the new loans to be booked in the second quarter were delayed to the third quarter. Another is that we took over a group of loans totaling $51 million made to one of our existing customers in other company.

Thirdly, we purchased a pool of residential [ph] mortgages including $40 million of qualified TRA [ph] single-family mortgages. Our year-to-date loan growth was $847 million or 11.1% annualized.

When compared to the second quarter, the net increase in loans resulted primarily from commercial real estate and residential loans that grew by $230 million or 15.4% annualized and $183 million or 30% annualized, respectively. In construction loans, it grew by $33 million or 27.7% annualized.

Commercial loans increased by $61 million or 11% annualized, reversing the decline in trend the weakness in the first half of the year. We expect the total loan growth to be about 6% in the fourth quarter, and for the entire year of 2016 to be about 9% to 10%.

For the third quarter of 2016, our total deposits increased $468 million or 4.5% to $10.9 billion, due to primarily an increase in our time deposits of $276 million and money market deposits of $64 million, compared to the second quarter 2016. Our core deposits also grew $226 million or 10.7% annualized in the third quarter.

Our transaction to acquire Far East National Bank is moving forward as expected. We filed our acquisition with the Federal Reserve Board at the end of September. While the merger remains subject to regulatory approvals and customary closing and conditions, as of today we still anticipate closing in the first half of 2017.

With that, I'll turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the third quarter 2016 financials in more details..

Thank you, Dunson, and good afternoon everyone For the third quarter we announced net income of $46.1 million or $0.58 per share. Our net interest margin was 3.36% in the third quarter 2016, as compared to 3.37% for the third quarter of 2015 and 3.38% for the second quarter of 2016.

In the third quarter of 2016, interest recoveries and prepayment penalties added 3 basis points to the net interest margin, compared to 4 basis points for the second quarter of 2016 and 5 basis points for the third quarter of 2015.

In January 2017, $200 million of structured repos at 5% will mature and would improve the net interest margin by 13 basis points on a run rate basis. Non-interest income during the third quarter of 2016 was $8.8 million.

Non-interest expenses decreased by $6.8 million or 12% to $50.7 million in the third quarter of 2016, as compared to $57.5 million in the same quarter a year ago. The decrease was mainly due to a decrease of $11.7 million in amortization of investments in alternative energy partnerships.

We do not expect to record any amortization expense during the fourth quarter of 2016 related to alternative energy partnerships. The effective tax rate for the third quarter of 2016 was 25.5% due to additional low-income housing tax credits, and we expect that the effective tax rate for the fourth quarter of 2016 would be approximately 27%.

At September 30, 2016, our tier 1 leverage capital ratio decreased to 11.91%. Our tier 1 risk-based capital ratio decreased to 13.7%. And the total risk-based capital ratio decreased 14.78%, as compared to December 31, 2015.

Our ratios significantly exceed these well-capitalized minimum ratios under all of the regulatory guidelines at September 30, 2016. Our common equity tier 1 capital ratio was 12.64%. Net charge-offs for the third quarter of 2016 were $5 million or 0.19% of the average loans.

Net charge-offs were $2.1 million in the third quarter of 2015 and $6.5 million in the second quarter of 2016. Our gross loan loss recoveries during the third quarter of 2016 was $2.9 million and our gross charge-offs were $7.9 million.

Our loan loss reversal was zero million for the third quarter 2016 compared to $1.3 million for the third quarter 2015 and $6.5 million for the second quarter of 2016. Our non-accrual loans decreased by 14.9% or $7.7 million during the third quarter to $44.4 million, or 0.4% a period [ph] in loans as compared to the fourth quarter of 2015..

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

[Operator Instructions] Our first question comes from the line of Aaron Deer of Sandler O'Neill & Partners. Your question please..

Hi. Good afternoon everyone..

Hi, Aaron..

The -- I guess my first question has to do with the loan for the customer that just took over on the other banks, really I guess maybe four questions related to that.

One would be, what prompted the move? The second would be, what type of credit would -- was this? The third, was there any premium or discounts on the loan taken? And then, what is your total exposure now to this customer?.

Yeah, this is Dunson Cheng. We acquired the loans from a company that [inaudible] of the business. It's -- actually this company is leading the banking business in general, right, so. And secondly, the $51 million are all CRE loans. The premium was we paid par 0.25, so, 100.25.

And then as to the total balance, this is one of our very best customers, and we generally don't discuss customer totals. [Inaudible] within our bank lending limit..

Okay, very good.

I guess, along the lines of your kind of internal limits, can you talk about where your commercial real estate concentration limit was at September 30th and where that corresponds relative to your capital ratios and kind of what the internal target is, which I think is 400% if I recall correctly?.

Yeah. We, Aaron, we don't have that information just. We, you know, we have -- in the process of preparing the call report. So at the end of June, my recollection was it was 302%, so I think with this growth, probably, you know, a few percentage higher than that..

Okay. And then lastly, the -- you guys had very nice trends in the non-accruals and OREO coming down, but I saw that TDRs ticked up a bit. I was wondering if there was anything behind that that you can talk about..

Nothing really -- yeah..

Nothing really outstanding. I believe there were three loans in the range of about a couple of million dollars that we felt appropriate to include in that category..

Okay. Very good. Thanks for taking my questions guys..

Great. Thank you..

Thank you. Our next question comes from the line of Lana Chan of BMO Capital Markets. Your question please..

Hi, good afternoon..

Hi..

Could you give us any guidance on the tax amortization and tax rate for next year, Heng?.

Yeah. It would be about the same amount. It's -- the total amount for the year I believe was $27 million for 2016. And so we would expect to do that. And in terms of the pattern, we think there'll probably be nothing in Q1, then maybe $15 million or $20 million in Q2, then the remaining in Q3..

Okay.

And it looks like the full-year tax rate for 2016 will be about 28%, so, similar in 2017?.

Yeah. Now in 2016 we have, I believe, $4.3 million of deferred tax asset write-off related to stock options in the first quarter. So that will not recur.

So we, you know, I think -- what are we budgeting? Are we budgeting 27-1/2?.

Yeah, something --.

For next year..

Okay.

And anything unusual to call out in the expense line items, like I guess personnel was up lower than expected and then the other expense line was higher than expected, was there anything unusual in those items?.

Yes, Lana. In aggregate we had a legal settlement with a borrower, from many years ago, that we finalized. And we also have legal fees to a different borrower. That's been fully charged off. So in total there's at least $2 million of unusual or higher-than-normal expenses..

Okay, helpful, thank you. And last question was on gross charge-offs this quarter.

Anything -- could you give us more color on what drove the gross charge-offs?.

Yeah, it's -- there's two. The largest one was almost $4 million, thereabout. That was -- or $3 million or $4 million. And that was fully reserved for. And that, if you note, that we have a loan that's one loan for $4.7 million that was held for sale. So that relates to that particular loan. And that sale closed a few days ago.

So, and then we had a credit of $2-1/2 million from a middle-market customer that was just a credit surprise, that was a full charge-off. It was not a non-accrual at June 30th, and once we've identified the problem, it was a full charge-off. So, hopefully last one will be unusual.

But I mean, for those reasons, you know, we think that, in the fourth quarter, we're going to look at net charge-offs to see whether we need a provision or not, depending on the amount of net charge-offs and loan growth..

Okay. Thank you..

Sure..

Thank you. Our next question comes from Chris McGratty of KBW. Your line is open..

Good afternoon. Thanks for taking the question..

Hi, Chris..

Hey, how's it going? I just wanted to follow up on the amortization question, just to make sure I've got the full numbers. I think you said year to date is around $27 million, but there are two pieces, [inaudible] income and the energy, right? So year to date was roughly $35 million, $36 million.

I'm thinking about next year, the $27 million, that should be grossed up by a couple of million a quarter for the other amortization, right?.

Yeah. The loan capacity, we continue to invest on that, both for the CRE benefit as well as the financial return. So right now the run rate is about $4 million a quarter for that expense. It will probably go up to $4.5 million a quarter next year..

Okay. So the fourth quarter will just have the $4 million from that, is that the right -- okay..

Yes..

I wanted to go back on the balance sheet a little bit. You guys are obviously preparing for the closing of the acquisition and you -- and very strong loan growth.

How should we be thinking about the, call it, a $1.3 billion of securities from here? Should we be assuming flat balances kind of growth or kind of remixing once the structured repos come off?.

Yes. I think we're targeting a minimum of at least $1.2 billion of securities. And on the structured repos, we have some cash at the Fed that we would use to pay most of that off. But we had been, in terms of remixing our securities portfolio from MBS to callable agencies and treasuries..

Okay. Okay. That's helpful. Maybe the next one is on the reserve. It's obviously come down quite a bit as you worked through some of these credits.

But approaching 1% with the growth you're having, is the expectation that the provision will flip positive in the next quarter or so?.

It's possible. It depends on net charge-offs..

Okay. Okay, great. And then I just want to make sure I heard you on the loan growth. You said 9% to 10%. Was that for -- was that for next year or was that for --.

That's for this year, Chris. That's for this year..

Perfect. That's for the rest of this year.

So, how should we be thinking about next year? Similar rate of growth?.

Well, you know, we're in the process of doing our budget. I think it's really [inaudible] 7% [ph], the base is pretty [ph] high..

Okay. Thanks for taking the questions, appreciate it..

Thank you. Our next question comes from Matthew Clark of Piper Jaffray. Your question please..

Hey guys. It's actually Nate Race on for --.

Yeah, hi. Hi, Nate..

Just a quick question on loan price in the quarter.

Can you give us a sense of, excluding the loans that you purchased, kind of where you put the loans on the books in 3Q on a weighted average basis?.

Let me cover residential mortgage. You know, there's been a very slow drift in that. I think our linked quarter, that we lost 12 basis points on residential mortgage. So our average rate on residential mortgage is 4.35% this quarter, whereas in the second quarter it's 4.48%.

The average for commercial mortgage is 4.56%, and Pin can give us some color on new loans. I think they're generally --.

I think it's pretty -- holding pretty stable. We don't see any substantial increase or decrease..

Yeah. And then commercial, that's at 3.84% on average. And then lastly, real estate construction is 5.76%, so, I think that our new loans are probably close to those average rates..

Okay, got you.

And then, are you guys seeing any increased opportunities in the commercial real estate space from a pricing production standpoint given some of the regulatory pressures that maybe smaller banks are feeling more recently?.

Well, we are seeing quite a still consistent loan [inaudible]. However, we are being a quite conservative at this point because we don't know where the market is heading. So either we'll be declining those loan application or we'll increase our pricing, compensate for this [ph]..

Okay, thanks. And just the securities yield pressure in the quarter. Could you give us a sense of how much of that may have been related to premium amortization versus just reinvesting at lower rates/.

The premium amortization is not much. I don't have a - I think it's probably $1.8 million for the quarter. But it's in the rate already and it's - we're buying 15-year MBS, so we don't pay more than one or three for it, so the premium amortization is not -- it doesn't jump around for us..

Okay, great. I appreciate all the color..

Great. Thank you..

[Operator Instructions] Our next question comes from Gary Tenner of D.A. Davidson. Your line is open..

Thanks. Good afternoon..

Hi..

I had a follow-up question regarding just the progression on the housing partnership, alternative energy partnerships. Heng, you said $4.5 million per quarter next year for the affordable housing. On top of that $27 million for the energy partnerships between second and third quarter..

Yes..

Okay.

So, would the tax rate, the effective tax rate you're talking about at 27%, would that be higher in the first quarter until the alternative energy partnership pieces kick in in the second quarter, or should it be pretty straight line?.

It -- we -- it should be straight line. The only caveat is there's a pretty strict convention that, if we don't -- if we don't sign the investment agreement before March 31, then we can't reflect those tax credits in a full-year effective tax rate.

And then if we sign that agreement in the second quarter, then you'll see the tax rate drop on a catch-up basis. But our, you know, that happened to us in 2015, and to avoid noise like that, we're going to try hard to get our investment signed before March 31st..

Okay, fair enough. And then just -- I missed some of your introductory comments on loan growth. But the C&I growth sequentially, was that -- I assume that was to some degree trade finance oriented. Maybe you could comment on kind of what the pipeline for trade finance is indicating for the season..

I think you're exactly correct. Third quarter tends to be the quarter that most our trade customers withdraw on their line, to import inventory, and quite a bit of that is because of that. C&I's loan growth has been really challenging for us for the last three quarters. And the expectation is that will continue to be growing at a slower pace..

Do you have a sense of kind of how, you know, if you compare this year's trade finance, utilization rates and pipeline versus last year, what, you know, any sort of read from that in terms of demand and the economy?.

The demand is still quite timid, but I don't expect next year C&I loan would -- I think the first two, as I remember, the first two quarters of this year, our C&I loan dropped about $150 million or so, and the drop was caused by really some unusual circumstances.

And I believe that the current C&I portfolio should be stable, and look forward to slowly grow it back up again..

Very good. Thank you..

Thanks..

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

Thank you again for joining us for this call. And we look forward to speaking with you next quarter, I guess in January --.

In the new year..

In the new year. Thank you..

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