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Edited Transcript of CATY earnings conference call or presentation 19-Apr-17 10:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Cathay General Bancorp Earnings Call

Los Angeles Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Cathay General Bancorp earnings conference call or presentation Wednesday, April 19, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Georgia Lo

* Heng W. Chen

Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment

* Pin Tai

Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Christopher McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst

* Lana Chan

BMO Capital Markets Equity Research - MD and Senior Equity Analyst

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

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Presentation

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Operator [1]

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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. (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.

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Georgia Lo, [2]

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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 statement to reflect future developments 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 would turn the call over to our Chief Executive Officer and President, Mr. Pin Tai.

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Pin Tai, Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank [3]

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Thank you, 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 share 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 increases in loans 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 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 approval and the [ satisfaction ] of customer recondition -- conditions. We believe that this acquisition 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, to discuss the first quarter 2017 financials in more detail.

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [4]

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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 recovery 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 structured repos with an average rate of 5% matured and improved the net interest margin for the first quarter by 10 basis points.

Non-interest income in 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 and 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 onetime tax adjustments in the first quarter of 2017. The second quarter effective tax rate will reflect a 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. All ratios 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 0 for the fourth quarter of 2016. Our nonaccrual 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.

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Pin Tai, Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matthew Clark with Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [2]

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Maybe just, first, on the margin. Obviously, I think you telegraphed the benefit from the maturing debt fairly well. And I'm 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.

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Pin Tai, Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank [3]

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On the interest side -- or the loan side, the new loans that we are underwriting now all have an interest rate slightly higher than our existing portfolio. For example, residential mortgage, we are underwriting at a rate that's higher than the existing 4.43%. And for the commercial real estate loans for fixed rate, I think we are underwriting slightly above 5%, so which is higher than existing, about 4.63%. And for commercial loan, we are underwriting at around 4%, which is slightly higher than existing rate of about 3.91%.

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [4]

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Yes. And then, Matt, so let me -- Matthew, let me cover the, kind of, the second quarter outlook. We think we're going to pick up 3 basis points from the full quarter effect of a $200 million of the structured repos. And then in early -- in July, there's another $50 million that will mature. That said, about -- the interest rate's about 3%, so we think we'll pick up a couple of basis points there. And (inaudible) we have some wholesale deposits which are maturing in Q2, so we think we'll pick up 1 or 2 basis points from that. And then, lastly, on the deposits, you can see there's almost no movement in our deposit rates compared to the fourth quarter. And so far in the second quarter, we haven't increased our deposit 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 floors, so we think we'll have some positive momentum from future increases in prime.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [5]

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Got it. That's a great color. And then on the loan growth outlook, any change to your full year guidance?

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Pin Tai, Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank [6]

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No, we're still keeping around 7% to 8%.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [7]

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

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [8]

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Oh, yes. Well, yes. It's -- we're in the process of trying to complete one, hopefully in a few weeks. But the size, is a little bit smaller than last year and the expense we think now, it's only going to be $6 million a quarter, in part because some of the amortization -- or some of the amortization will slide over into 2018 based on this specific investment and our partner in this investment with us. And so that's why our guidance for the effective tax rate is up from 27% to 27.5%.

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Operator [9]

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Our next question comes from Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [10]

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Heng, sticking with the theme on the tax rate with the guidance, what if you do get this particular deal completed as expected this quarter, what kind of true-up do you anticipate? Where do you expect the effective rate to be in the second quarter?

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [11]

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Well, I think, looking at -- this is just a guess, maybe around 20% in Q2. So there will be a pick-up on a year-to-date basis.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [12]

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Right. Okay. And then I did note that the [ deposit cash ] 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 on some of these funds? What kind of pricing increase do you expect over and above what you're currently paying on your CD rates?

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [13]

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I think, Aaron, it's going to be pretty modest. We have -- we can access the State of California deposits and we paid them off in the second half of last year. And those are 3 basis points over 3-month or 6-month treasuries. And so because of our excess liquidity position, we haven't passed that market. So they're good for about $50 million a quarter. So that's the first place. And then the second place would be broker's CDs. And right now, we would tend to fund that using the 6-month broker CDs, and those will be about 90 basis points. So it's not far from our average CD rate.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [14]

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Okay. And then how about on the long side with the volume of residential mortgages you put in, can you talk a little bit about -- can you give 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 the any resets there and how that will affect your asset sensitivity as you continue to build that book.

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [15]

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Yes. Aaron, yes, first, we don't offer any 30-year fixed rate loans. So the longest we'll go out in terms of fixed rate would be 15-year fixed rate mortgages. And surprisingly, the bulk of our loan originations are in the 3/1 ARMs, and those -- the rate is close to 4.75% 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's very strong, and we had, I believe, a record origination in that sector in the first quarter.

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Operator [16]

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

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Lana Chan, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [17]

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Just a follow-up on the commercial real estate and the resi mortgage growth. Are you seeing the strength coming from any market in general, either California or New York? Is this trend coming from more one market than the other?

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Pin Tai, Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank [18]

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Well, in New York, we can see the pipeline is kind of not as strong as before. California market seems to be going strong.

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Lana Chan, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [19]

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Okay. And in terms of, if I look at your resi mortgage concentration or exposure as a percent of total loans moving up to about 23% now, do you have sort of an internal limit about how much you're willing to grow that portfolio to?

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Pin Tai, Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank [20]

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

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Operator [21]

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(Operator Instructions) Your next question comes from Chris McGratty of KBW.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [23]

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Yes, Chris, 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 the exact timing. So until that's done, we don't know whether -- we're, putting it differently, we're 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 fit our focus and our relationship strategy.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [24]

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Okay, very helpful. Heng, if I have you on the balance sheet kind of the 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 from 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 of into the next few quarters?

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [25]

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Well, yes, I think, we're trying to keep that in -- 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 at about 2.2 And so it's relatively short, but we have plenty of sources for liquidity that's off balance sheet.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [26]

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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 you remind if there's a -- I believe there's low income amortization on top of that. And if so, what would that number be for the next few quarters?

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [27]

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

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Operator [28]

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And our next question comes from Gary Tenner with DA Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [29]

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Heng, I just wanted to ask you. You made the point that, now, all your loans or most of your loans are [ through ] floors. Is that -- was it the March rate hike that got you there? Or will there be more -- a greater benefit from the March rate hike in the second quarter than we saw in the first quarter from the December rate hike?

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [30]

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Oh, it was the March rate hike. So...

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [31]

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Okay. So modest impact here and then, as you've said, subsequent rate hikes will have a greater impact.

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Heng W. Chen, Cathay General Bancorp - CFO, Principal Accounting Officer, EVP, Treasurer, CFO of Cathay Real Estate Investment Trust, CFO of Cathay Bank, EVP of Cathay Bank and VP of Cathay Real Estate Investment [32]

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Right. Yes.

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Operator [33]

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

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Pin Tai, Cathay General Bancorp - CEO, President, CEO of Cathay Bank, President of Cathay Bank and Director of Cathay Bank [34]

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

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Operator [35]

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