Welcome to Cathay General Bancorp's Fourth Quarter 2016 Earnings Conference Call. My name is Vicky 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, Vicky and good afternoon. 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 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 as 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 development or events, except as required by law. This afternoon Cathay General Bancorp issued an earnings release outlining its fourth 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 Chief Executive Officer, Mr. Pin Tai.

Thank you, Monica and good afternoon. I'm pleased to be with you on my first earnings conference call as CEO. I want to express my appreciation to Mr. Dunson Chen, who transitioned to Executive Chairman [indiscernible] on October 3, 2016 and continues to be of great assistance in ensuring a seamless transition. This afternoon we reported net income of $48 million for the fourth-quarter of 2016, a 15.8% increase when compared to a net income of $41.4 million for the fourth quarter of 2015. Diluted earnings per share increased 17.6% to $0.60 per share for the fourth quarter of 2016, compared to $0.51 per share for the same quarter a year ago. In the fourth-quarter of 2016, our gross loans excluding loans held for sale grew by $191 million to $11.2 billion. The loan growth for 2016 was $1 billion, representing an increase of 10.2% for the year. The increases in loans for 2016 resulted primarily from residential and commercial mortgages which grew by $512 million or 26.5% and $484 million or 9.1% respectively. And construction loans grew by $107 million or 24.1%. Commercial loans decreased by $69 million or 3%. We anticipate ultimate loan growth in 2017 to be around 7% to 8%. For the fourth quarter, our total deposits increased $736 million to $11.7 billion, compared to our third-quarter. For 2016, total deposits grew by $1.2 billion or 11.1%. Deposit growth for 2016 resulted primarily from non-interest-bearing demand deposits and NOW deposits which grew by $445 million or 21.9% and $264 million or 27% respectively. Money market deposits also grew by $293 million or 15.4%. We increased the dividend for the fourth-quarter 2016 to $0.21 per share, from $0.18 per share for the third quarter of 2016, reflecting the growth in earnings during 2016. The transaction to acquire Sinopac Bancorp, the parent of Far East National Bank, continues to progress and we're optimistic it could be completed before the end of the first quarter. As previously discussed in our July 8 conference call, after the completion of our acquisition of Sinopac Bancorp, we will apply to our bank regulators to merge Far East National Bank with Cathay Bank. We continue to believe that this acquisition will increase our 2017 [indiscernible] this year by over 3%. With that I'll turn the call over to our Executive Vice President and CFO Heng Chen to discuss the fourth-quarter 2016 financials in more detail.

Thank you, Pin and good afternoon, everyone. For the fourth quarter we announced net income of $48 million or $0.60 per share. Our net interest margin was 3.36% in both the third and fourth quarters of 2016 and 3.3% in the fourth-quarter of 2015. In the fourth quarter of 2016 interest recovery and prepayment penalty added 8.5 basis points to the net interest margin compared to 3 basis points for the third-quarter of 2016 and 5 basis points for the fourth-quarter of 2015. In January 2017, $200 million of structural repos with the average rate of 5% have matured and would improve the net interest margin by 15 basis points on a run rate basis. Noninterest expenses remain unchanged at $53.5 million in the fourth-quarter of 2016, when compared to 2015. For the fourth-quarter of 2016 amortization of investments in affordable housing and alternative energy partnerships decreased $5.4 million, offset by a $3.9 million increase in salary and employee benefit expenses and a $1 million accrual for the reserve for off balance sheet commitments when compared to the same quarter a year ago. The effective tax rate for the fourth-quarter of 2016 was 25.4%. The effective tax rate includes an impact of the utilization of low income housing tax credits and alternative energy tax credits. Income tax expense for the fourth-quarter of 2016 was reduced by $0.7 million in benefits from the exercise of stock options. We expect the 2017 effective tax rate to be about 27% before the benefit of any excess tax gain from implementation of accounting standards update 2016-9 improvements to employee share-based payment accounting. At December 31, 2016 our Tier 1 leveraged capital ratio decreased to 11.57%, as compared to 11.95% at December 31, 2015. Our Tier 1 risk-based capital ratio decreased to 13.85% from 14.03% a year ago and our total risk-based capital ratio decreased to 14.7% from 15.2% a year ago. Our ratios significantly attained well capitalized minimum ratio under all the regulatory guidance. At December 31, 2016 our common equity Tier 1 capital ratio was 12.84%. Net recoveries for the fourth-quarter of 2016 were $1 million or 0.04% of average loan. Net charge-offs were $5 million in the third-quarter 2016 and $8.1 million in the fourth-quarter of 2015. There were no loan loss provisions taken in the fourth-quarter or third-quarter of 2016, as compared to a reversal of $3 million for the fourth-quarter of 2015. Our non-accruals increased by 12% or $5.3 million during the fourth quarter to $49.7 million or 0.44% of period end loan, as compared to the third-quarter of 2016.

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

[Operator Instructions]. Your first question comes from the line of Aaron Deer with Sandler O'Neill and Partners. Your line is now open.

I guess first of all, Pin, maybe if you could give us some better detail on your expectations for 2017. You mentioned 7% to 8% loan growth. Can you talk about what types of loans in terms of the different loan categories you expect to book and if there's any geographic strength that you're anticipating?

We're still expecting a strong pipeline in residential mortgage and commercial real estate. We're right now have [indiscernible] lending in specialized industries. So probably we'll expand -- we'll see higher growth towards the second half of 2017, all for our loan growth target is about 7% to 8%.

Okay. And then it seemed like one of the highlights of the quarter is certainly the deposit growth. Can you talk about if there's anything specific that helps to drive those gains in terms of promotions or -- and then what your expectations are on that side of the balance sheet heading into the new year?

Yes as we said the deposit growth really tremendous in the last quarter of last year and primarily most of the deposit comes from Chinese investor or Chinese immigrant. People are expecting it to depreciate so probably that is just one of the drivers. And each year we haven't seen a slowdown yet, really, so it's difficult at this time what's going to happen with the U.S.-China relationship.

And then just one other thing, in the fourth quarter we had increase of $150 million in public deposits and that is leaving in the first quarter.

Okay, is that like California State CDs, is that was that is?

It's from the Midwest.

Your next question is from the line of Chris McGratty with KBW. Your line is now open.

Just a quick question on the balance sheet kind of following up on Aaron's question. With the security portfolio kind of coming in as a proportion of the balance sheet, is it about the level -- is it a billion three or 10% of earnings? Is that about where you'd expect to need to maintain the level of liquidity going forward or do you see material changes either way?

Chris, this is Heng Chen. Actually we're trucking $1.2 billion as the base level of security. So we sold $100 million of treasuries at a small loss in January. We really want to be positioned to higher interest rates and on the treasuries we were getting on average about 60 basis points and by selling them, these are 18 month treasuries, we would get more just leaving them in the fed right now. We're to be positioned for higher interest rates and so we're going to need more -- where we can we'll leave our short-term liquidity at the fed rather than put it in the securities.

Just on the point of the margin, it looks like most -- most like your peers, you had a FHLB dividend. Was that around $1 million for the quarter, a special?

The special is about $600,000.

Okay. So if I think about that -- I think you said there was some -- that plus prepayments was around 8 basis points? Did I hear that right?

Yes, eight and half, yes.

Okay. And then you've got the benefit of the debt maturing or having matured, so I guess for a starting point for the margin, maybe help us with the first quarter, if you don't mind?

Well it's maybe between 3.4 and 3.5.

Okay.

February's a short month, so yes we get a couple basis point benefit from February.

Maybe as a follow-up, given what rates have done, the current [indiscernible] I presume you're getting somewhat better pricing on real estate. Is that the case? Have you seen any kind of movements in lending money prices over the past maybe three months?

Yes, our new residential mortgage in originates [indiscernible] existing average rates on the portfolio, it is about 4.32% and commercial mortgage loans have an average [indiscernible] of 4.65% and our new fixed-rate CLU loan I think originate slightly above 5%, so it's higher than the existing portfolio rate. And for C&I loans, our new loans are around 4% which is slightly above our current year [indiscernible] non-loan portfolio review for the fourth quarter of 2016.

Okay, great. Maybe just the last one and then I can step back. The expense line or the amortization of the tax credits, Heng, can you -- maybe I missed it in your prepared remarks, but what's the expectation for this year in terms of that line item that was around $40 million bucks last year?

Well the tax credits were only $27 million and I think we also have affordable housing, so we hope to be able to sign a deal by the end of March, so the amortization this year, assuming a same sized investment last year was a $35 million investment, the amortization would be about $25 million and we're going to try to have that be spread out more evenly over the Q2 to Q4.

Okay. So 25 and then on top of that would be the affordable, will that run rate continue to the same degree it was in --

I guess it's going to be a little bit higher, because we've wrapping that up and it's giving us a higher tax credits below the line, so we would suggest you use 4.5 million per quarter for affordable housing by itself.

[Operator Instructions]. Your next question comes from the line of Lana Chan with BMO Capital Markets. Your line is now open.

Could you talk about the personnel expenses this quarter? How much of that was accrual related and how we should think about that going forward?

Lana, I think this year we've under-accrued the bonus by between $1 million and $2 million for the last two years and this year we want to try to make sure we don't have it under-accrued going into 2017. So compared to the prior quarters, the extra bonus accrual would be around $2 million, $2.5 million more than Q3.

Okay. And then if I look at overall expense growth in 2016 excluding all the amortization noise that was about 9% year-over-year? Is that something that we should be thinking about in terms of similar kind of growth rate for 2017?

Well we're still working on the budget. That 2016 loan expense growth, a lot of that reflects Asia Bank. We had five months of Asia Bank in 2015 and then we had seven months in 2016. So in terms of our budgets we're hoping that we get some operating leverage, so we're talking about a 4% expense increase year-over-year and then maybe net NI increase of 8% or a little higher.

And just one last question in terms of the margin outside of the structured repo benefit, do you expect to see margin benefit from the December rate hike that we just had?

Yes, we only had half a month of that and so our interest rate simulation model forecast that for 25 basis point increase in prime, we'll get about $5 million a year increase in net interest income. But we're hopeful we can get more of that because that assumes that our money market accounts, for example, reprice quickly with the increases in prime and we're going to try hold; pull back at least for the next -- for this last increase, as well as the next prime increase. So we think we'll do better than our model, so maybe we'll do maybe a 25 basis point increase in prime will give us $6 million or $7 million in NRI [ph].

We have a follow-up question from Aaron Deer with Sandler O'Neill and Partners. Your line is now open.

Just a couple of quick follow-ups. One, Heng, I think you guided for 27% tax rate. Did you say that does or does not include the impact of the new option exercising accounting methodology?

It does not. So you could actually end up being below the 27%. Yes. Yes. And that's excluding Far East, they don't have a lot of tax cred investments so incrementally their tax rate is going to be a little higher than us, but all those numbers are excluding Far East, yes.

Okay. And then lastly, you guys have taken some security gains from time to time in recent quarters. With AOCI down I suspect that your unrealized -- not an unrealized loss position, sounds like you took some losses here in the first quarter. What are your thoughts on taking additional gains in the quarters ahead?

We have in equity securities almost $10 million of unrealized gains, so we're not sure when we'll take them, it depends -- it's in Fanny, Freddie preferred stock which still has rallied quite a bit with the new administration and the other one is a relationship customer and we're just going to hold onto it unless it looks like the stock price has really peaked.

Your next question comes from the line of Gary Tenner with D.A. Davidson. Your line is now open.

Heng, I apologize if I missed you going through this but in terms of the amortization of the affordable housing and alternative energy tax credits, my recollection is that I think the alternative energy tax credits would come in a little lumpier, if not the other one. Could give us an idea of quarter by quarter how you think that trend will be? And should we mirror the income tax benefit on the same line or should I be a little more straight line?

The affordable housing is about $4.5 million per quarter and then the solar tax credit amortization is about $25 million, $26 million and we're trying to -- we're hopeful it'll be more spread out over Q2 through Q4. And then the effective tax rate, that's at 27% or so and that, assuming we sign our deal by the end of March, our new solar investment, that would be the rate for all four quarters.

Okay, so it'd be a little bit of a mismatch quarter by quarter then between the two--

That's right.

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 quarterly earnings release stage and wishing everyone a happy Chinese new year.

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