Georgia Lo – Vice President-Legal and Corporate Affairs Pin Tai – Chief Executive Officer and President Heng Chen – Executive Vice President and Chief Financial Officer.

Matthew Clark – Piper Jaffray Aaron Deer – Sandler O’Neill Lana Chan – BMO Capital Markets Chris McGratty – KBW Gary Tenner – D.A. Davidson.

Good afternoon, ladies and gentlemen and welcome to the Cathay General Bancorp’s First Quarter 2017 Earnings Conference Call. My name is Sherry 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 of Cathay General Bancorp..

Thank you, Sherry and good afternoon everyone. Here to discuss the financial results today are Mr. Pin Tai, our Chief Executive Officer and President; 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, 2016 at item 1A in particular and in the 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 development or events, except as required by law.

This afternoon Cathay General Bancorp issued its earnings release outlining its first quarter 2017 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. And now I will turn the call over to our Chief Executive Officer and President, Mr. Pin Tai..

Thank you, Ms. Georgia and good afternoon. Welcome to our 2017 first quarter earnings conference call. This afternoon, we reported net income of $48.9 million for the first quarter of 2017, a 6% increase when compared to a net income of $46.2 million for the first quarter of 2016.

Diluted earnings per increased 7% to $0.61 per share for the first quarter of 2017 compared to $0.57 per share for the same quarter a year ago. In the first quarter of 2017, our gross loans, excluding loans held for sale, grew by $164 million to $11.4 billion or an increase of 6% on an annualized basis.

The increase in loan for the first quarter of 2017 resulted primarily from residential and commercial mortgage loans, which grew by $140 million, or 23% annualized, and $121 million or 8% annualized respectively. Commercial loans decreased by $96 million, or 17% annualized. We did anticipate organic loan growth in 2017 to be around 7% to 8%.

For the first quarter of 2017, our total deposits decreased $87 million to $11.6 billion as we reduced broker and wholesale deposits. However, our core deposit grew $147 million or 7% annualized.

We are happy to announce that on March 20, 2017, the Federal Reserve Board approved our application to acquire SinoPac Bancorp, the parent of Far East National Bank. The acquisition remains subject to receipt of Taiwan regulatory approvals and the satisfaction of customary conditions.

We believe that these acquisitions will increase our 2017 earnings per share by over 2% assuming a closing by the end of June. With that I will turn the floor over to our Executive Vice President and CFO, Heng Chen, who discuss the first quarter 2017 financials in more detail..

Thank you, Pin and good afternoon everyone. For the first quarter, we announced net income of $48.9 million, or $0.61 per share. Our net interest margin was 3.49% in the first quarter of 2017 as compared to 3.42% in the first quarter of 2016 and 3.36% in the fourth quarter of 2016.

In the first quarter of 2017, interest recoveries and prepayment penalties added 3 basis points to the net interest margin compared to 8.5 basis points for the fourth quarter of 2016 and 9 basis points for the first quarter of 2016.

In January 2017, $200 million of structural repos for the average rate of 5% matured and improved the net interest margin for the first quarter by 10 basis points. Non-interest income during the first quarter of 2017 was $6.7 million.

Non-interest expense increased by $315,000, or 0.6%, to $51.9 million in the first quarter of 2017 when compared to $51.6 million in the same quarter a year ago.

For the first quarter of 2017, amortization of investments in affordable housing and alternative energy investments increased $2.1 million offset by a $1.1 million decrease in salary and employee benefit expenses and a $1 million decrease in the reserve for off balance sheet commitments when compared to the same quarter a year ago.

The effective tax rate for the first quarter of 2017 was 29.5%. Income tax expense for the first quarter of 2017 was reduced by $2.6 million in benefits from the distribution of restricted stock units and exercises of stock options. We hope to complete an investment in the solar tax credit fund during the second quarter.

Assuming completion of the investment, our full-year 2017 effective tax rate would be about 27.5% excluding the one-time tax adjustments in the first quarter of 2017. The second quarter effective tax rate would reflect the year-to-date catch up to the new full-year effective tax rate.

We expect solar tax credit amortization expense of about $6 million per quarter for the second through fourth quarters of 2017. At March 31, 2017, our Tier 1 leverage capital ratio increased to 11.77% as compared to 11.57% at December 31, 2016.

Our Tier 1 risk weighted capital ratio increased to 14.06% from 13.85% at December 31, 2016 and our total risk-based capital ratio increased to 15.14% from 14.97% at December 31, 2016. Our ratio significantly exceeded well capitalized minimum ratios under all the regulatory guidelines.

At March 31, 2017, our common equity Tier 1 capital ratio was 13.05%. Net charge-offs for the first quarter of 2017 were 923,000 or 0.03% of average loans. Net recoveries were $6.1 million in the first quarter of 2016 and $1 million in the fourth quarter of 2016.

Our loan loss reversal was $2.5 million for the first quarter of 2017 compared to $10.5 million for the first quarter of 2016 and zero for the fourth quarter of 2016. Our non-accrual loans decreased by 3.5% or $1.7 million during the first quarter to $48 million or 0.42% of period end loans, as compared to the fourth quarter of 2016..

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

Thank you. Ladies and gentlemen, we are ready to open the lines up for your question. [Operator Instructions] Our first question comes from Matthew Clark with Piper Jaffray..

Good afternoon..

Hi, Matt..

Hi, Matt..

Maybe just first on the margin, obviously, I think your telegraph said the benefit from the maturing debt fairly well.

And I am just curious how you’re thinking about the margin going forward as it relates to new business on the asset side and pressure on deposits from here?.

On the interest side, on the loan side, the new loans that we are underwriting now all have interest rate slightly higher than our existing portfolio.

For example residential mortgage, we are underwriting at rates higher than our existing 4.43% and for the commercial real estate loans for fixed rate, I think we are underwriting slightly above 5%, which is higher than existing about 4.63%.

And for commercial loan, we are underwriting at around 4%, which is slightly higher than our existing rate of around 3.91%..

Yeah. And then Matt, so let me cover – Matthew, let me cover the kind of the second quarter outlook. We think we’re going to pickup 3 basis points from the full quarter effect of $200 million of the structural repos and then in early in July those another $50 million that will mature that said about the interest rates about 3%.

So we think we will keep pick up a couple basis points there and that we have some wholesale deposits, which were maturing in Q2, so we think will pick up one or two basis points from there. And then lastly, on the deposits, you could see there is almost no movement in our deposit rate compared to the fourth quarter.

And so far in the second quarter we haven’t increased our deposits pricing at all. We’re at 98% loan-to-deposit ratio, and our target is at 100% or around there. So we have some room for further optimization of our balance sheet. And then lastly, almost all our loans are above the floor.

So we think we’ll have some positive momentum from future increases in prime..

Got it. That’s great color. Thank you.

And then just on the loan growth outlook any change here full year guidance?.

No, we’re still keeping around 7% to 6%..

Okay.

And then on the – how should we think about the tax credit amortization schedule from here any material changes or not?.

Well, it’s we’re in the process of trying to complete one hopefully in a few weeks.

But the size, as well as it is smaller than last year and the expense, when we think now it’s only be $6 million a quarter in part because some of the amortization or – some of the amortization will slide over into 2020 [ph] based on this specific event and our partner is and that’s in this investment with us.

And so that’s why our guidance with effects of tax rate is up from 27% to 27.5%..

Okay. Okay, thank you..

Yes, thank you..

Thank you..

Thank you. Our next question comes from Aaron Deer with Sandler O’Neill..

Hey good afternoon everyone..

Hi Aaron..

Heng sticking on the team with tax rate, with the guidance if you do get this trick of the deal completed as expected this quarter, what kind of true up do you anticipate? Where do you expect this active rates to be in the second quarter?.

Well I think looking at this is just a guess, maybe around 20% in Q2. So what we have just picked up on a year-to-date basis. .

Right, okay. And then I did note that the deposit cards held steady.

And it sounds like you feel like you can hold off for a little while, yet with the loan growth outlook that you have at some point obviously you’re going to need the funding to support that what do you anticipate when you do have to start going to market to draw some of these funds, what kind of pricing increase do you expect over an above what you are currently paying on your CD rates?.

I think Aaron it’s going to be pretty modest. We could access the state of California deposit and we paid them off in the second half of last year. And those are three basis points over three-month or six-month treasuries. And so because of our excess liquidity position we haven’t passed landmark yet. So they are good for about $50 million a quarter.

So that’s for first place. And then the second place would be broker’s CDs. And right now, we would tend to fund using the six-month broker CDs and those would be about 90 basis points. So it’s not far from our average CD rates. .

Okay. And help out on the one side with the volume of residence mortgages put down, can you talk a little bit about you gave some color on the rates there.

But I’m curious about how those are priced in terms of variable versus fixed and the timing of any resets there and that will affect your asset sensitivity as you continue to build that book?.

Yes, Aaron first we don’t offer any 30-year fixed-rate loan. So the longest we’ll go out in terms of fixed-rate would be 15-year fixed. And surprisingly, the bulk of our loan originations are in the 3/1 ARMs, and those the rate is close to 4% and 3.75%, plus some loan origination fees.

It’s a price above the market because of our client base of non-U.S. residents. And our pipeline is pretty strong. And we had, I believe, a record origination in that sector in the first quarter..

Sure. Okay thanks great. Thanks for taking my questions. .

Great thank you..

Our next question comes from Lana Chan with BMO Capital Markets..

Hi good afternoon..

Hi Lana..

Just to follow-up on the commercial real estate in the Resi mortgage growth, so you are seeing the strength coming from any market in general, either in California or in New York, is this trend coming from more [indiscernible] markets than the other..

Well the New York you can see the time line is not as strong as before. California market seems to growing strong. .

Okay. And in terms of when I look at your Resi mortgage concentration or exposure as a percentage of loans moving up to about 23% now.

Do you have sort of internal limits about how much you’re willing to grow that portfolio to?.

Well, internally, I think, we try to keep it at 30% so we still have a way to go..

Okay, that’s helpful. Thank you very much..

Thank you..

Thank you. [Operator Instructions] Our next question comes from Chris McGratty of KBW..

Hi good afternoon thanks for taking the questions.

I was wondering if you could opine on your capital management strategy now that the transaction has been approved whether you’re still looking at the M&A – future M&A opportunities, and what might the optimal balance sheet leverage that you’re comfortable taking the capital ratios down to?.

Yes Chirs this is Heng Chen. The Far East transaction will reduce our capital ratios by roughly 110 basis points. And the timing, we’re not certain because it’s out of our hands. It’s over in Taiwan with – between Bank SinoPac and the Taiwan regulators. This is kind of a unique transaction in Taiwan. So we are uncertain as to exact timing.

So until that’s done, we don’t know whether we’re putting it differently, we are concentrating on that. And then we would normally have a dividend increase in the fourth quarter. And then lastly, we would – we have some stock issuances for employee benefit plans and so forth so we would buy those back.

But in terms of M&A transactions, I mean, Pin and Dunson and myself, we’re always looking at them, but it has to be similar. It has to be our focus in our relationship strategy..

Okay very helpful. Heng, if I have you on the balance sheet kind composition of the securities portfolio, looking at it it’s about call it 10% of earning assets.

Is that about the level that you think is needed for a liquidity perspective? Or is there one way or another either a move in the percentage or a move in kind of the dollar amounts that we should be mindful off into the next quarters?.

Well, yes, I think, we’re trying to keep that as a constant dollar amount of about $1.2 billion. We have also about $400 billion of excess liquidity at the Fed so we view that as a securities portfolio equivalent. And then we have over $5 billion of borrowing capacity from the Federal Home Loan Bank.

So for us, it’s more off balance sheet liquidity rather than on balance sheet, particularly since we still think interest rates are going to go up and so we’re keeping the duration in our security portfolio about 2.2. And so it’s relatively short but we have plenty of sources for liquidity that’s off balance sheet..

Great. And then if I could sneak one more in. So if I heard the comments right about the amortization of the solar credit, that $6 million, are there – can your mind if there’s a – I believe this low income amortization on top of that.

And if so, what would that number be for the next few quarters?.

Well yes, the loan for housing is pretty much a good run rate in Q1. So it’s about $4.85 million. So there was no solar amortization in Q1. So you just past the $6 million on top of the $4.8 million, and that’s your Q2 run rate..

Great. Thank you very much for taking the questions..

Yes sure..

Thank you. And our next question come from Gary Tenner with D.A. Davidson..

Hi good afternoon. I just wanted to ask you, made a point that now, all your loans or most of your loans are first floors.

Is that – was it the March rate hike that got you there? Or will be more a greater benefit for the March rate hike in the second quarter than we saw in the first quarter from the December rate hike?.

It was the March rate hike. .

That’s – okay. .

Yes..

So modest impact here and then as you’ve said subsequent rate hikes will have a greater impact?.

Right, yes..

Okay thank you very much..

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

Thank you for joining us for this call, and we look forward to speaking with you in our next quarter earnings release date..

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may disconnect. Have a good day..