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Edited Transcript of PFBC earnings conference call or presentation 23-Apr-20 6:00pm GMT

Q1 2020 Preferred Bank Earnings Call

LOS ANGELES Apr 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Preferred Bank earnings conference call or presentation Thursday, April 23, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. Czajka

Preferred Bank - Executive VP & CFO

* Li Yu

Preferred Bank - Chairman, CEO & Corporate Secretary

* Nick Pi

Preferred Bank - Executive VP & Chief Credit Officer

* Wellington Chen

Preferred Bank - President & COO

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Conference Call Participants

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* David Pipkin Feaster

Raymond James & Associates, Inc., Research Division - Research Analyst

* Gary Peter Tenner

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

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

* Timothy Norton Coffey

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

* Tony Rossi

Financial Profiles, Inc. - SVP

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Presentation

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Operator [1]

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Good day, and welcome to the Preferred Bank First Quarter 2020 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Tony Rossi of Financial Profiles. Mr. Rossi, the floor is yours, sir.

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Tony Rossi, Financial Profiles, Inc. - SVP [2]

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Thanks, Mike. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2020.

With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Nick Pi. Management will provide a brief summary of the results, and then we will open up the call to your questions.

During the course of this conference call, statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks, uncertainties and other factors relating to Preferred Bank's operations and business environment, all of which are difficult to predict and many of which are beyond the control of Preferred Bank.

For a detailed description of these risks and uncertainties, please refer to the SEC required documents the Bank files with the Federal Deposit Insurance Corporation or FDIC. If any of these uncertainties materialize or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in these statements. Preferred Bank assumes no obligation to update such forward-looking statements.

At this time, I'd like to turn the call over to Mr. Li Yu. Please go ahead.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [3]

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Thank you very much. Good morning, ladies and gentlemen. The events in the first quarter 2020 is truly astonishing. But I am very pleased to report that for the quarter, Preferred Bank's net income was $16.2 million or $1.08 per share. Although this seems to be a little less than the previous quarter, but that is really because that we decided to build up our credit reserve and make a big provision in the quarter.

On the net interest income basis, our net interest income for the quarter is better than previous quarter and the same quarter last year. For the quarter, deposit grew $103 million. Loan growth was $168 million. A big portion of the loan growth is coming from customers' increased drawdown of their unused credit line, which we estimated to be between $100 million to $120 million. Part of this drawdown credit line of funds stayed with the Bank, so which also helped the deposit growth.

At quarter end, we estimated the available credit line for customer drawdown is a little bit over $400 million, but many of those credit line is under a borrowing-based formula. So the actual amount is probably between $300 million to $350 million. And as of March 31, we have on-balance sheet liquidity of $720 million, and we have off-balance sheet liquidity of another $650 million. So we can satisfy if need should arise.

For the quarter, our net interest margin actually improved a little bit from previous quarter. This is very welcome news as we all know that the first quarter had rather large federal rate cuts. These rate cuts has drastically changed the interest sensitivity of the Bank. As of March 31, 14.9% of loans are fixed rate loans. 19.4% of the loans are floating rates without floor, and 65.7% of the loans are floating rate with floor. Of those floating rates with floor, all but $28 million or 1% are rates, okay, operating at the floor right now.

So with the continuation of high -- I mean, repricing of our TCD portfolio downwards, we feel that our net interest margin has hit the bottom on March 18, and gradually improving from that point and on.

Recently -- our first quarter efficiency ratio was 34.9%. Recently, S&P Global issued a study of ranking that for all the banks between $3 billion to $10 billion, they ranked Preferred Bank #1 in the nation for efficiency ratio. Okay? With this, our cost control and the gradually improving net interest margin, we feel our operating metrics are favorable. Well, for whatever it is worth, that S&P also rates us #1 overall in the nation.

There are no sign of credit deterioration at this point in time, but we know the nation is currently entering into a recession stage. And our lifestyle has changed at least for a extended period of time. The recovery may be slow. Okay. So with this in mind, we decided to build up our credit reserve. First step is to adopt the CECL, which increased at a reserve for $8 million. Next step was providing $5.3 million loan loss provision for the first quarter.

At this point of time, all 13 branches of our bank is operating for business. Observing the stay-at-home order, 45% of our staff is working from home. We are able to handle the customers' needs through increased usage of digital banking. Our loan activity was able to handle the many deferment request by our customers and was able to handle the first phase of the PPP program requests. We are gearing up today and going forward for the second phase of PPP and upcoming Main Street lending program.

We're just so pleased that the banking industry and us become part of the solution this time. The dark days of our nation will be over soon, I hope. And we are committed to be a factor, a contributor to our recovery.

Thank you very much. I'm ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from David Feaster of Raymond James.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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I just wanted to start on the provision. Could you maybe just talk a bit about some of the factors in the model that drove the $5.3 million provision for the pandemic? And then maybe as those -- as the economic outlooks have seemingly deteriorated further in the second quarter, maybe how you think about additional reserve build going forward?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [3]

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Well, we would, obviously, ask Nick to answer your first question. For your second question, you and I can jointly answer that, right?

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [4]

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Sure. Yes. David, this is Nick speaking. And our CECL model covers mainly 3 portions. The first portion is quantitative side. We use PDLG model to figure out the quantitative side, and also we use flex factor to provide reasonable and supportive forecast for the future 12 months and also with the 6 months of revision period. And also, the second part is the qualitative side, we have 9 different factors. Definitely, a few factors reflect the current macro and the microeconomic situation. So -- and also the third-party's individual evaluation on those problem loans. So as of March 31, we adjust up our qualitative side as well as flex factor on the quantitative side to reflect the current pandemic situation. So in the $5.3 million reserve in Q1, I would like to see that around 71% is really the pandemic situation related.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [5]

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Okay. David, to answer your second question, you see that we, most probably every quarter, I mean, we will review the situation and look at the economic condition and also, obviously, look at our loan portfolio and most probably will be continuous increase to our reserve. You see, with all those deferments, okay, all the so-called affected loans so far is deferred for 6 months. That is generally in the early part of, I mean, October. And therefore, on that portfolio, any weakness at all will probably show up in late fourth quarter, early first quarter next year. So you wouldn't have a real reading on the situation. You can only judge by general situation of the economy, of the activities by doing prudent things, but we decided to continuously beef up our reserve.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Okay. That is very helpful. And then just on the margin, I mean you guys have done a phenomenal job managing the margin. And I appreciate the color on the proportion of fixed rate and variable rate loans at floors. But just taking now into consideration and looking at -- just reading kind of in between the lines in your commentary and the press release, it kind of sounds like there could be some pressure here in the second quarter and then maybe improve after that over the remainder of the year?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [7]

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You see, there are 3 other factors. Ed will add on more detail to it. There are 3 factors other than the pure interest rate and margin. First factor is payoffs, loan payoffs or loan paid, all loan gets paid off. They usually -- those loans carry a higher rate. Second factor, the new loan at the rate or the coupon rate of floor rate is. Third factor is competition situation for deposits, okay? There's only second factor we can control, which is we control our margin for the new loans, which is -- and I can say that it's an expansion situation compared to previously. But the first and third factor, we cannot control. But seems to be the payoff for the first quarter is slowing down, okay? But -- so therefore, we are generally more optimistic as compared to previously. But the exact calculation of that is difficult.

Ed, you want to add on to that?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [8]

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Yes. No, I think you've said it all. I think with the slowdown in the payoffs, that's going to help keep the -- maintain the margin in addition to what you already talked about in terms of the CDs repricing. When this thing first hit in mid-March, we saw kind of a considerable spike in CD rates across the board, competition and everywhere. Since then, it's come down about 40 to 50 basis points in the last month or so. So that certainly bodes well for us going forward with the CD portfolio continuing to reprice. If we don't get pressure on the asset side, I think it's safe to say we'll probably see some expansion later in Q2 and Q3.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Okay. That's extremely helpful. Last one from me. Loan growth is really strong, even exclusive of the drawdowns in C&I. I guess, what are you hearing from your clients? What's the pulse of your clients? And how do you think about -- or I guess, how has C&I drawdowns been early in the second quarter in that -- the $350 million that you mentioned that were remaining? And just general thoughts on loan growth in your pipeline going forward.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [10]

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Okay. I will turn it to Wellington to answer that question.

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Wellington Chen, Preferred Bank - President & COO [11]

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All right, Dave. This is Wellington. That's, obviously, looking at our loan pipeline has slowed down. And because borrowers or customers are more careful about what they acquire and what type of projects they want to take on. At the same time, internally, we are being -- due to COVID-19 factor, we are taking extra caution and being even more selective, what type of the customer, the type of loan that we want to get into right now. Last thing we want to do is to book a new loan and then have to do the payment deferment.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [12]

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So just to answer part of your question about the drawdown, as I've stated in the press release, as of today, the drawdown ever since the beginning of April is in slowdown.

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Operator [13]

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And next, we have Steve Moss with B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [14]

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I just -- I want to follow up just in terms of the CECL assumptions. Just wondering, if -- in particular, if you could give just color as to like what you were thinking for like the unemployment inputs and perhaps just GDP inputs as well? And how we -- how should we think about reserve -- the loan loss provision for the second quarter relative to the first?

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [15]

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Steve, this is Nick again. We -- on our Q side, qualitative side, we do link with those macro economy situation, but we are not directly reflect to our reserve because of some of the unemployment or whatever. We are not really have that many of consumer loans. We're not directly impact, maybe indirectly. However, we do have flex factor as well as Q factors under the external economy situation. We base on those. And we have a different scale: low, moderate, severe and extremely high, different levels to make our reserve requirements.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [16]

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Okay. And then just as we think about the provision here for the second quarter, I mean, likely to see obviously more reserve build. Just kind of like, do you think it's reasonable just to assume the first quarter level? Just any color around that would be helpful.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [17]

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Actually, it's very hard to judge at this point in time. But you can believe it that we have determined to be on the more prudent side going forward today. I mean equally as this quarter, including a big change in the economic assumption, okay? Next quarter, whether economic assumption will be so drastically changed or not, we have to see what the situation carries, okay? But we -- on the general section, we decided to build.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [18]

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Okay. And then in terms of the -- just on the funding side, Ed, I think you said 40 basis points lower from -- for CD rates. Just wondering what exactly that rate is, if you just refresh my memory here for that?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [19]

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Well, I'm just talking in generalities. What we see in our market, Steve, we saw 1-year CDs spike up to around 110, 115 when this first broke, when the lockdown first happened. And I think that was around mid-March because I think there was a general sense that banks were -- all banks were going to go out and get liquidity because all the lines were going to start getting drawn. Well, that abated. That really didn't happen. That, whatever you want to call it, panic or whatever you want to call it, abated. And so now we're seeing 1 year in the 65 to 70 basis point range. So...

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Operator [20]

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And the next question we have will come from Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [21]

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Wanted to try to get a better handle on the kind of intra-quarter workings on the margin and how to think about it going forward. Given the expansion in the quarter, is it fair to assume that the margin actually expanded still more than that over the first couple of months over the year before then falling below that number towards the end of March?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [22]

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Yes, obviously, okay, that's the case. Ed, do you want to add on to that?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [23]

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Yes. January, February were probably just slightly north of the 370 number, and then we didn't get the drastic cuts until middle of March, and then the final one, I believe, on March 18. And so the effect was certainly muted within the first quarter. But we were in a situation where deposit costs were continuing to decline, and then asset yields were holding steady. And then, of course, middle of March, asset yields fall down. And so what we saw was the benefit of January and February, as you said, with a decline in March in terms of the overall margin.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [24]

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Okay. So again, to follow on that then. The second quarter, we'll see the full quarter's impact over the March cuts. And even though you had the expansion for the full quarter in the first quarter, second quarter should likely be the bottom and then beginning to get offset by lower funding costs. Is that fair?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [25]

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Yes. Look, general pattern is that way, Gary.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [26]

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I'm sorry?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [27]

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Generally, that's the pattern.

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Operator [28]

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(Operator Instructions) Next, we have Tim Coffey of Janney.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [29]

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In the release, you said that you were offering deferrals mostly to the hotel and restaurant portfolio through the end of March. I'm wondering into April, did you expand the criteria of who you might offer deferments to?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [30]

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Why don't -- who wants to answer that? Nick, do you want to answer that?

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [31]

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Sure. Just to give you a little bit more color regarding our total deferred payment request as of today, total, we have requests from borrower in a number of loans, 43. And total amount is around 203 -- $239 million. So among those requests, some of them is request for interest-only, some of them request for principal deferring. And also a portion of the request is for deferring both principal and interest, okay? And for the hotel portion, I would like to see a more -- specifically, on the special purpose, hotel is part of them. Special purpose is $148 million, around 28% of our hotel portfolio at this time.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [32]

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Okay. And the deferments, you said were 6-months terms?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [33]

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We are offering 3 months to start. And then we have, I mean, provided another 3 months later on as an option, okay? So yes, they are started to have some deferral other than the hotels, namely in the -- I mean, in the retail area. And we also see some apartments, okay, smaller apartments, complexes having that -- started to have that deferral request. Demand is usually insignificant or usually happen -- mostly happens in the New York area where the loan amount is like $1 million or $2 million, okay, have few tenants that cannot pay.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [34]

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And remind me again, how much of the multifamily portfolio is in New York?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [35]

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We -- I don't know what's in New York at this point. Nick, you have it?

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [36]

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I don't have a breakdown for that. I only have the total numbers.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [37]

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Okay. All right, not a problem. And then where are you on the PPP program? I know that you mentioned in the press release that you were starting to accept applications. I'm wondering if you had any numbers on how many have been approved for funding before the funds ran out and how many you might have in the pipeline right now.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [38]

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Okay. Wellington will take the question. Yes.

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Wellington Chen, Preferred Bank - President & COO [39]

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Tim, this is Wellington. As you know that we were not SBA-approved lender going into the first round. So because we have a obligation really to take care of our customers, so we went ahead and contract a third-party processor to take the application and process our customer. And as well about over a week, a little bit more than a week into the PPP program, we finally got SBA approval after PPP lender. So from thereon, we also started internal processing. Unfortunately, we only had a little bit less than a day really to take care of the application internally along. So for the -- so we all gear up for the second round. And right now, looking at a total app, we're looking at just under about 300 altogether, total application between us and the third parties.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [40]

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And the question is, how much has been so-called the fund -- approved for funding? And how much is additional thing that's likely happening?

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Wellington Chen, Preferred Bank - President & COO [41]

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Yes. Approved for funding -- how much approved for funding is 40 applications. And in additional loans in the queue ready for second round is about 250.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [42]

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Okay. And do you have any dollar amounts on the 40 that were approved for funding?

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Wellington Chen, Preferred Bank - President & COO [43]

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Yes. On the 40, it's about $24 million.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [44]

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Okay. Would you think the average application on the other 250 would be about the same?

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Wellington Chen, Preferred Bank - President & COO [45]

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It will be lower, a little lower than the average. Because we have -- because of 40 applications, so if you have a one big-sized loan approved, this kind of skew the average.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [46]

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Right. Yes. And then just on your appetite to hold these on the balance sheet, I can't imagine it's all that big, given that there -- what the yield is. So would you kind of look to resolve them as quickly as you possibly can?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [47]

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Yes, we've obviously that -- #1 thing is that we like to service our customer. Whenever a request come in, we immediately try to process that. That is why the reasoning that we engage a third-party processor, let them earn all the fees to process for our customers in the beginning. So we think we can handle all that. We don't have that many requests at this point in time, although they are continually coming. I don't think the fee income will be so materially changing the second quarter picture that much. And I don't think the net interest margin here, that greatly affected in the second quarter because of their proportion, okay? If you -- although it's only 1%, that's only affected net interest income.

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [48]

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Tim, to add on to that -- yes, to add on to that, Tim, I think in terms of the size, we'll probably hold them on the balance sheet and then try to get them work with our customer, help our customer to get these taken care of, starting in June.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [49]

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Okay. And if I can, what is the fee to the third-party processor? Is it...

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [50]

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And on the fee, we're on 0.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [51]

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I'm sorry. What's that?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [52]

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We have 0 fee income. They earn all the fee income. Now we...

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [53]

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Okay. Got it.

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [54]

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For the ones they did. Yes.

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Operator [55]

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And next, we have a follow-up from Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [56]

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I actually just had a follow-up on the PPP question. I guess I was a little confused. Of the loans that the third-party processor went through the application process for, will those still be on your balance sheet? Or those are going to be not even through Preferred Bank ultimately?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [57]

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Yes. Those will be on our balance sheet, Gary.

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Operator [58]

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Well, I'm showing no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to the management team for any closing remarks.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [59]

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Well, thank you very much for joining our earnings conference. This is truly a very, very challenging quarter for everyone, okay? So -- and right now, I join every one of you, hoping everybody -- everyone staying healthy and safe and hope that our country gets better soon. Okay. Thank you.

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Operator [60]

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And we thank you, sir, to the rest of the management team also for your time today. Again, the conference call is now concluded. Thank you, again, everyone. Take care, and have a great day. At this time, you may disconnect your lines.