ServisFirst Bancshares, Inc. (SFBS) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the ServisFirst Bancshares Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Davis Mange, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to our second quarter earnings call. We'll have Tom Broughton, our CEO; Bud Foshee, our CFO; and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we'll take your questions. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today, due to factors described in most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update them. With that, I will turn the call over to Tom.

Thank you, Davis, and good afternoon. Thank you for joining our call. I'll talk a little bit about -- I'll give you a brief overview of the second quarter. It was a historic quarter in many, many aspects and many regards, and the first and most obvious thing that struck me about financial statement is we ended the quarter with the highest level of liquidity that we've ever had in the company, and by far the most improvement in any one quarter with $1.5 billion in e-deposits. We did close over $1 billion in PPP SBA loans for almost 5,000 borrowers. We have seen the market share reports, and among the loans greater than $150,000, ServisFirst had a number one market share in both [half] ph] the State of Alabama and in Birmingham. I usually don't make self congratulatory statements on this call, and let results speak for themselves, but we do think that is a good sign for the future, and that we have strong relationships with the owner-managed privately-held companies in the State of Alabama in the rest of our footprint. So, we think there's good opportunity to grow our bank with those opportunities that we see there. Also from a historic standpoint, it was the largest decline in line utilization in any quarter with the decline from 49% to 40% line utilization, which -- that is the huge amount of drop, we saw attributed a lot of it to the pay downs from the PPP facilities, loans to the borrowers lines as well as, I think people have just been conservative and cautious to pay down their lines, where they are able. So, it shows the strength of our company. That in turn essentially led to decline in loans of about $275 million that we would have had additional loan growth in the quarter of $275 million if we're not seeing that decline in line utilization. Most of our PPP income in the quarter was offset by one-time expenses. Bud will be talking about that in a few minutes. We did see good bit of improvement in all our asset quality metrics in the quarter with reductions of both NPAs and very low past dues. Henry Abbott is going to discuss a good bit more in terms of asset quality in a few minutes. I know that's a topic certainly during the pandemic and the recession we've had over the last few months. Talking about loan deferrals, that's obviously a subject of huge interest today. Our loans deferral peaked at the end of May at $1.248 billion. Those deferrals as of July 15 have fallen about over 90% to a current level of $127 million. We expect further declines from there over the next several weeks. So, we feel good about where we are. Henry Abbott and I as well can address any questions you have about loan deferrals in our future policy. Our 90-day loan pipeline is down about 20% from the first quarter, which is certainly something you would expect to see, given the COVID-19, I think a lot of people hit the pause button on projects. We are seeing more moving forward over the last few weeks. So, I think it'll improve. Our total pipeline including loans greater than 90-days is consistent with the March 31 end of the quarter. So, we think we'll see it get back to normal over the next couple of months. We did make additional loan loss provision in the quarter. They would pull us in line with our CECL model. So, we can talk about that as additionally questions that you have. Also of note, there are loans, loan loss reserve in equity exceeded $1 billion for the first time in our history for the first time. So, we're certainly proud of that to reach that milestone. I was now going to ask Henry Abbott if he'll give us an update on the effects of pandemic on certain industries in general, credit quality update. Henry?

Thank you, Tom. The Bank's loan portfolio has continued to perform well in the second quarter despite the economic impact of COVID-19. At the end of the quarter, past dues decreased by $2.8 million from the first quarter, and non-performing assets decreased by roughly $12.7 million. Past due to total loans were 13 basis points, and NPAs were 26 basis points for the quarter. This 30% decrease in NPAs was primarily driven by a settlement being reached on our largest non-performing asset. I'm pleased to say we have no more exposure related to that credit, part of our second quarter charge-offs were related to exiting it. As a reminder from prior comments, the bank has a well diversified loan portfolio in both geography and industry classifications. Portfolio is granular, and we have no major concentrations within industry credit codes. We initially took a three-month approach to deferrals, and are assessing future deferrals proactively to assess the borrower's current financial status. At the end of May, we had roughly 15% of our portfolio on some form of a deferral. By comparison, at July 15, as Tom mentioned, we were down to $127 million in loans, roughly 75 units. We had some clients in severely COVID-impacted industries who needed additional deferrals, and we have and will continue to underwrite their ability to repay the debt in the current operating environment. To date, we've granted roughly $60 million in second deferrals, as documented by this trend, it is our expectation that the overwhelming majority of our clients who had the deferral will or have already returned to normal payments. Slide deck we have posted highlight some of the comments I'm about to make in more detail. As laid out on slide four, we're not a large hotel lender as noted by hotels being less than 2% of our loan portfolio, the majority of our hotels are flagged, and none are oriented towards conventions or resort style accommodations. Over 83% of our hotel portfolio is not on a deferral, and none are currently on the watch list. Restaurant exposure is noted at less than 3% of our portfolio. Retail CRE consists of $270 million in loans, or 3.5% of the loan portfolio, the average loan size is less than $2 million in this segment and are to well-established borrowers that we have longstanding relationships with. We continue to proactively assess our loan portfolio in these more COVID-impacted industries, as well as others to ensure we're taking appropriate measures as necessary. As referenced by Tom in prior comments, we've seen an uncharacteristic drop in commercial line utilization. It is my speculation this is driven by PPP loans, helping provide our borrowers additional liquidity, and this decreasing utilization helped show the continued strength in our commercial loan portfolio. We're continuing to utilize our proven incurred loss methodology for calculating our ALLL and delayed CECL implementation. However, with second quarter, we increased our loan loss reserve to support the reserve as provided by our CECL model, and it is our intent to continue to run parallel models. As of 6/30, our reserve was 1.10 as is, but when excluding PPP loans were actually at a 1.26%.

Thank you, Henry. Bud Foshee is now going to give a financial update, Bud?

Thanks, Tom. Good afternoon. Net interest margin for the second quarter was 3.32% versus 3.58% for the first quarter. Adjusting for the average PPP loan balances of $886 million, PPP interest income and $2.6 million in PPP loan fees, the net interest margin was 3.47. Also adjusting for the increase in average Fed funds sold balance of $358 million in the second quarter the net interest margin was 3.44%. The remaining net deferred PPP deferred fees are $28.9 million. That breaks down into fees of $31.1 million and deferred FASB 91 expenses related to the PPP loans of $2.2 million. As far as future improvement to our interest expense, we have CD maturities for the remainder of 2020 at $247 million. The average rate is 1.67. We expect majority of these CDs to re-price at 0.7% or below, and we are also reviewing our special rate DAs, another factor we have $50 million of brokered CDs that mature in August, and the rate on those CDs is 1.67, and a reminder, we have no accretion income related to acquisitions. Liquidity, Tom touched on this, Fed funds sold when we started funding the triple PPP loans in April was $600 million, and the excess funds at the end of June were $1.44 billion. For our non-interest income, we added six new banks in the second quarter through the American Bankers Association credit card referral program. Credit card income, the net income was $1.4 million in the second quarter versus $1.7 million in the first quarter. The stand on our purchase cards decreased about $4 million in the second quarter, and the span on the business credit cards decreased by $9 million, and we think majority of that's related to the COVID. Merchant services fee income, the income in 2020 so far is $234,000. We expect that to improve, because year-to-date 2019 was $249,000, and we will have two officers that are dedicated to sell into service. Mortgage banking income, it was up $1 million for the quarter. It's $2.1 million in the second quarter versus $1.1 million in the first quarter. Also we purchased a LIBOR cap, [one more level of cap] [ph] in the second quarter, $300 million notional amount, the mark-to-market adjusted in the second quarter was negative $252,000. The strike price for that cap is 0.50%. Reminder, we do not sell any government guaranteed loans generate non-interest income. Non-interest expense; the PPP expenses for the quarter were $3.2 million. $2.5 million of that was bonuses and overtime. ORE expenses for quarter increased $703,000, and that had to do with the updated appraisals own to credits. Total producers were down, net of six producers year-to-date. We had 139 at the end of 2019, and 133 at the end of June. Total employees were down four, we had 506 at the end of 2019, and 502 at the end of June. Capital banks Tier 1 leverage ratio was 9.90% at June 30, and then tax update, quarter-to-date tax rate for 2020 is 20.95, 21.22 without stock option tax credits of $136,000. Second quarter of 2019, it was 20.74, 21.15 without stock option credits of $186,000. Year-to-date 2020 is 19.95, 21.26 without stock option credits of $1.2 million, and then year-to-date 2019 it was 20.15, 21.23 without stock option credits of $958,000. Projected rate for the remainder of this year is 22%. This concludes my comments, and I'll turn the program back over to Tom.

Bud, thank you. Just a few things before we take questions, and one thing I'd like to comment on is from a standpoint of economic improvement we've seen it greatly exceeded any, I think almost any economist's expectations. I would agree with most of them that are currently thinking that we're going to need a couple two or three years to get back to full employment economy, and I do think the community banks in our country will play a major role in helping us create the jobs necessary to get back to full employment, and I think also, I think the political mood is such that they recognize that the community banks are necessary in our country, whether you're Democrat or Republican, I think they recognize that it at this point in time. It's actually our last quarter we do see significant opportunity for growth on the other side of this pandemic. You know, from a liquidity standpoint, I was fully expecting that we would need to draw on our PPP liquidity facility at the Fed by the second or third week of April, and meanwhile, our liquidity has improved by $1.5 million in the quarter, which my hope was that certainly that the PPP money would prove to be much like hurricane money for banks that have been affected by hurricanes, I call it, "Hurricane money," because the money comes in and it might change hands, but still stays in the banking system, and so it hopefully stays in our bank. For one, our customers might have gotten the money, they paid employees like they did to other vendors; those vendors put the money back in the bank. So, we continue to enjoy those deposits at least for the time being. We do think with having high liquidity with excellent credit quality will position as well as we go forward the rest of this year, and in 2021. And we'll be glad to answer any questions you have. Thank you.

[Operator Instructions] And our first question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.

Hey, good evening everyone.

Hi. How are you, Kevin?

I'm good. I'm good. Listen, I'll probably start out with a very top level one. On PPP, it's obviously very lumpy and it affects several different areas in terms of average balances, the origination fees, and maybe when you touch on that, Bud, I think last quarter you guys had talked about maybe that flowing through the non-interest income line, but it looks like it's flowing through the margin line like the other banks, and then in terms of the impact of the margin, just if you're looking out over the next few quarters, how should we be modeling PPP if you were us? Thanks.

Yes, final guidance on the accounting for that came out in June, and also we have set it up to be deferred over the 24-month term. So, we'll accrete that into income over the 24-month term. So, it's $1.3 million a month that we accrete. It would be $1.1 million a month after you net out the deferral for the deferred FASB expense. Is that what you're looking for, kind of a monthly or quarterly totals?

Yes, that is helpful, I guess Bud, are you -- what would you be expecting in terms of the forgiveness, and these fees hitting in a lump sum fashion, like we -- it seemed like we were all thinking about a quarter ago that we would wake up in third or fourth quarter and you have these loans getting forgiven, and it's coming at a lump sum fashion?

Yes, I think we're still waiting on final guidance on that from SBA. If I had to take a guess, I would say, probably November, I would think before all that settled and we get our funds back from SBA on that, but that's just a guess. Maybe Tom, I don't…

Kevin, I don't have the form yet. We couldn't apply for forgiveness today if we wanted to. We do have a positive carry on these loans, so we're not. Again, we thought our liquidity would be such that we'd be into the Fed window by now, but we haven't touched it, and are looking for home for liquidity trying to find investments to buy instead. So, let's say that they come out with it in August, and we start the forgiveness process, and September we apply, so then they've got 60 days to pay us, it might come, it might come as early as October, it might come as late as November-December as well before, and we underwrote, the idea behind 100% of our loan that we - PPP loans is that they would all be forgivable loan. So, we may end up with some small amount of money, but I can't imagine it would be more than $20 million, $30 million, $40 million of money left out in PPP loans after the forgiveness period. Does that give you a good enough answer, Kevin, or…

Yes, I guess the simplistic way to think about it is that as we're entering 2021, the PPP balances are gone off the balance sheet, the origination fees are mostly realized depending on how we model that in, and then maybe if you could just touch on the margin, I know last quarter, you said you hope the core margin would stay about the level of March, which I think was 3.60, and I know we have lumpiness from PPP, but I guess the excess liquidity was the big drag there on the 3.60 versus the 3.44. Is that how to think about that?

Yes, yes, because it's gone up well today from when we started funding the PPP, the liquidity is up $1 billion, we are $1.6 billion today and excess funds over $600 million when it started.

And Bud, would the thought process there be that as PPP winds off, that excess liquidity winds off as well, and you see shrinkage -- net, some shrinkage to the balance sheet from that, but your percentage margin would go up in turn?

Yes, the biggest key is increase in our loan production. We've spent a lot of time in the second quarter on the PPP loans, and we know we have to increase loan production. So, it really depends on the loan production side more than anything. What happens to liquidity was -- or I would think so, right, I mean that's kind of what we're hoping for.

Yes, I mean when these PPP loan proceeds that are clearly [indiscernible] is a good question, I certainly don't have the answer, Kevin, it's my first pandemic.

Mine too. I took enough time. Thank you very much.

Thank you.

Thank you.

Our next question comes from Brad Milsaps of Piper Sandler. Please go ahead.

Hi, good evening, guys.

Hey, Brad. Good afternoon.

Hey. Tom, you guys had some nice improvement in non-performing loans, looks like the deferrals are headed in the right direction. Just curious you guys could talk about maybe criticized or classified loan trends that kind of might be going on in the background, it sounds like you're really pretty encouraged about the credit outlook as best as you can tell, but just any trends there would be helpful?

Yes, I think we've added one significant credit this quarter, it's not on the list of credits we highlighted in the slide deck, but it is clearly affected by COVID-19, it’s a specialty transportation company, that is going to have issues until like we get behind the pandemic, get a vaccine. So, that's probably the number one credit that we've added. And Henry, would you add anything else to that statement?

No, I mean I think we're assessing the portfolio, but that's been the one big item that's been impacted that can take longer to come back.

But there's no big change in the level of criticized and classified loans from June 30 from March 31?

I wouldn't say any outside of that one credit, no material figures.

Got it, got it, okay. And then, Bud, just kind of wanted to quickly follow-up on expenses. You had the $2.5 million in bonuses that were paid in the second quarter that presume wouldn’t be there in the third, but then I just wanted to confirm the FAS 91 costs that you expect, I think $2.2 million going forward, you note, $2.4 million [until the] [ph] second quarter. Did you get the benefit of all those deferred costs in the second quarter, or is that the piece the $200,000 or so that's going to accrete in over the 24 months? Just want to make sure I'm kind of clear on the puts and takes of the expense line item this quarter.

Yes, I know, we took $2.4 million as a credit, $2.4 million as a credit against salaries and benefits, and then that plus the fee accretion all that nets to the interest income, but that will go against the margin once that accretes or amortizes backed in income over 24 months.

No, you've got between the two, you had $28.9 million net between the fees and the deferral, and that $28.9 would have 22 months left to accrete into income.

Understood, but the FAS 91 that you incurred in the second quarter that essentially offset the bonus payment, so in other words in the third quarter you're going to stay relatively flat?

Yes, right, you had that $2.5 million of expense offset by the $2.4 million into deferral in salaries and benefits.

Okay, got it.

Does Brad have a net number, the net income number? Net income number is $1.4 million of PPP in the second quarter.

I think what he termed that is 2.5 and bonuses and overtime minus what you deferred in FASB, in salaries.

I thought you are trying to arrive at an answer, and I thought I'll help him get there. Sorry.

Yes, yes. That's helpful. And then the difference, I think you said $4.1 million in fees this quarter, or $2.6 million in fees and $4.1 million in total, the difference would be the coupon and the fees, is that right?

No. So, we took $2.6 million in fees. So, $1.3 million a month is what we defer from a fee stance.

Okay, got it. All right, I may follow-up with you, but thanks very much, I appreciate it.

Okay.

I'm confused. So, you might see a slip, Brad.

Yes, I will follow with you offline.

I will just tell deferral business is very confusing. I look it as a very straight bar, we took almost $5 million of the PPP money into income and then we had expenses that offset it, and we had $1.8 million pre-tax, and you take taxes out we had $1.4 million net income for the quarter of PPP. Now this is after, we thought we had a clear understanding of how that we could take all the PPP fee income in the second quarter, but obviously that changed on us. We cannot change their opinion on what we thought was their opinion. It's not a typical origination fee. We don't look at it as - I didn't think it should be characterized as a typical origination fee.

Yes, I guess the best way -- going forward, you'll have gross $3.3 million a quarter and net defer off the fees and the deferred FASB, so that will come into income each month. Your expense side goes away. All the PPP expenses were recorded in the second quarter. So, going forward, you'll have that $3.3 million that shows up in the margin until those loans pay out.

Got it, got it. Understood. So, about $3.3 million a quarter, each quarter, assuming they get to that -- yes, I'm with you. Okay. Thanks, guys. I really appreciate it.

Thank you, Brad.

Our next question comes from Arjun Tuteja of Jarislowsky, Fraser. Please go ahead.

Good evening, guys.

Hi, Arjun. How are you?

Very well, very well. I have a couple of questions. The first one is on competition. Are you guys seeing competition pull back mainly the big banks which usually tend to in these times and sometimes those give opportunities for someone like us to grow using that dynamic play out?

Yes, we are different especially, primarily one thing is multifamily construction projects that they are pulling back and the pricing has strengthened. In fact, we've seen pricing strengthened across the board during the pandemic in every area. We're not seeing the intense price competition that we saw prior to the pandemic. You still see some, there're some people that had gotten the memo. Yes, the world changed a bit, a few banks, typically smaller banks that haven't gotten the memo, the world has changed. So we're seeing competition pullback, we do see, we did a lot of PPP loans for customers of other banks during the pandemic with an understanding that we would, they would move their bank into us, and we've also had a lot of companies contact us that were unhappy with the bank. They did their PPP loan through their bank but they want to go through the forgiveness period with their old bank before they change banks, which is certainly understandable, I would do that myself. So, we do see opportunities there, Arjun.

Okay, okay, that's helpful. And I guess it's good that pricing is getting better because the Fed rate cuts, I mean the better pricing can offset that a little bit to follow-back to have a good margin. My second question is on our losses, so I've got pleasantly surprised, but I'm also little confused, so help me understanding this, when I look at your provision line, I don't see a recession in U.S., but when I look at provisions which the big banks are taking or other peers which we have, they're taking big provisions. So I'm curious, is this are bank specific that we have a tighter credit? Or is it because of the segment of the customer we are in, that segment is just stronger, and I'm not talking about just COVID related losses, which are in hotels and restaurants. I'm just talking about losses, which happened in the recession, which we don't even see today, but that will model out and say that if I see myself going through a recession, I expect the certain number of losses, and I don't know which customer will go bankrupt, but I'm just going to provision it right now and keep it there. So helping understanding where do we -- what do we think about that?

You're asking a good question. We certainly don't -- you know, I don't -- I can't speak to other banks and their provision, but we're not in a lot of heavily affected industries to a great degree. Certainly we have minimal energy exposure in our restaurant and hotel exposure is certainly we have probably a little bit more than he won't right now, but we certainly have well managed exposure in those industries. I've maintained since the pandemic started, that the customers that are going to suffer are not necessarily ones in the affected industries. They're going to be the weak customers in every industry, and I think that's playing out is people who are the weak players are not doing well, and as I said in last call, it's in my surprise that J.C. Penney got in financial trouble, no, because they were -- I think the peak of their -- you know, as rate title was when I was in grade school, and I'm 65 years old, so it's been a long time since they've been a viable company. So we think we've adequately -- we are providing for more than our model calls for, we're matching our CECL model in terms of provision. We don't have a lot of consumer exposure. We don't have any energy exposure. And those are certainly two areas where you see some big revisions, Bob. The best I can tell from some of the larger banks now look at their financial statements, their quarterly financials, and I don't know, Henry, would you add any -- Henry Abbott, our Chief Credit Officer, if you could add anything to that?

Yes, thank you.

Clarence Pouncey, our Chief Operating Officer.

I mean, I'd say that if you look at what we reserved in the second quarter of 2019, and roughly $5 million, in this quarter, we put in $10 million. So I mean we've doubled from where we were a year ago. So, we're certainly reserved, and as Tom mentioned, we put more than our model, and as my comments were earlier, where I could in PPP 1.25, 1.26 on a reserve, so we think we're adequately reserved before we have.

Clarence Pouncey?

I would just say that we're not a leveraged lender. We don't have any leverage loans. We're very small position of Shared National Credit. So, companies that we know without a footprint that we know leadership and we have the positive relationship with, it's around $50 million of Shared National Credits. So, a low position they are relative to the loan portfolio.

Does that…

Thank you. Yes, that helps. Thank you very much.

Thank you.

Our next question comes from William Wallace of Raymond James. Please go ahead.

Thanks. Good evening, guys.

Hi, Wally.

Hi. So, I was surprised at how well your deferrals have improved, and if I'm reading the table on slide five correctly, it would appear that the majority of your deferrals are coming off before the deferral period is even over. Am I reading that correctly?

Go ahead, Henry.

No, I mean, they're not coming off before the deferral period is over. So, no, I wouldn't agree with that statement, but once someone has through their three months of no payments, we are then taking them off deferral unless we're in discussions with them regarding the second deferral. So, the table should show that progression decreasing based on the fact that that next payment due from that borrower would be a full payment, which would be owed.

Oh, okay, got you. So, are you in conversation with all these customers that you feel confident that the $1 billion or so in loans that that are coming off deferral between now and the middle of August are actually going to pay. Are those conversations ongoing?

We've had over -- yes, we've had over a billion come off…

Come off.

We're down $127 million as of July.

So I [multiple speakers] yes, what's the difference?

Slide deck at $140 million or $145 million and that was an early draft and it got out there but the actual number, not much difference, but was $127 million in July, this thing's still on deferral. Okay, keep going, Wally.

Well, I guess I'm looking at the 531 balance of $1.248 billion, which was 45 days from July 15. So I guess, I'm trying to figure out is how so much has come off. So, these guys that are off or all due before August 15, is that…

Give him some wide points, Henry.

So, for instance, if someone started deferral on April 5, okay, so they didn't make an April 5 payment because they were on deferral, once again the vast majority of these were principal only, so they continue to make interest payments, but if someone was on a deferral for April 5, May 5, June 5, and then they make their July 5 payments, they're off deferral, and in reality, they're off deferral after that June 5.

Yes, okay.

Payment become June 6, their net payment is a true payment. So they're out of a deferral become June 6 if their payment was due on June 5, and we then deferred principle or if it was a full payment deferral.

Yes. So, is it fair to say then they came off before they were -- they could have not paid the June payment or the July payment, right. This was a 90-day deferral?

If they were off of this report, that means that their next payment owed is a full payment or interest, whatever it was, but [multiple speakers]

Yes, go ahead, Wallace.

Okay. Well, so, all of that one -- whatever billion has made their payment since their deferral admit period ends. They are officially not going to go get 180-day.

Overwhelming majority, yes.

I would add that a number of customers, fairly significant number got approved for deferral and then continue to make their payments.

Were they counted into these numbers?

They will count as deferral.

Okay. Okay, fair enough. If a loan does go -- if a customer does go to a 180-day deferral period, well, you have to downgrade that loan?

We're certainly -- anyone who is asking for a second deferral. It's not an automatic downgrade, but at the same time it's something we're looking very hard at, and in most cases it would be downgraded at that point in time, but we're taking it on case-by-case basis and evaluating repayment.

Okay.

In some cases, there might be asking for a second deferral because of liquidity position, you know, some of the medical providers and that sort of thing that have claimed their business fall off, but we feel pretty comfortable, most of them will resume normal operations here, and you can only put off-putting in a [indiscernible] so long. So, we say, those returning to normal, Wally.

Okay, thank you. And then, when we had the last conference call, and it seems like in your prepared remarks, Tom that the credit has held up better than you would have anticipated. In the last call I read what you guys were saying as the accelerated loan fees from the PPP would be used to build the reserves to account for the economic environment. Do you still anticipate that you would be building your reserves aggressively over the coming couple of quarters or given what you're seeing? Do you think that's now you're more likely to book those fees as these ones are forgetting into?

I still take the posture today that it'll be -- we're probably the vast majority that I would expect to add loan loss reserve just for the unknown in the future. While I don't know exactly how -- I think it's too early to declare victory. So when we get that money we'll probably defer the vast bulk of it into the loan loss reserve.

Okay, thank you. That's very helpful. So, it's been kind of an interesting couple of months to see the, how the headlines have shifted from all is fine to all is not so fine as it relates to the spread of the disease, and now you're seeing states starting to slow down the reopening process, and you operate in some markets that are seeing some pretty significant growth in the disease, and some of the states that you operate in are starting to change their opening schedule. I'm curious, it's early, I understand. But I'm curious if you have an early read on how that's impacting your customer base in some of those markets that you operate in that are kind of seeing more severe spread.

?:

No, I mean I agree with Tom, and that they've already had to make their changes to their business model to adapt, and whether they thought things were going to get better quicker or not is a different story, but they've already kind of had to right-size what they were doing at some level, and you know, now well, things are changing a little bit, they had already made their changes until I think most of the businesses are continuing to perform adequately.

Okay, great. And then just one kind of just to maybe put some dollars to an earlier question around the expense line, so netting out the deferred expense adjustment and the bonuses, it sounds like if we just use the GAAP number for the expense of $28.8 million, that's probably a good baseline. So, to work off of in our models and assuming that statement is true, what is ServisFirst doing to manage expenses and investments et cetera in light of some potential pressures that could be coming down the pipe?

Well, we've already been doing it, Wally. We have been capping salary increases for this year. It won't bear a lot of fruit this year, but it'll bear fruit next year. Certainly headcount control, we're looking hard at everybody and every department trying to cap expenses where possible. Certainly terrible contributions, anything that's controllable, we're trying to control with -- you know, as closely as we can. Obviously there is a lot of noise right now with the PPP expenses, and everybody that we asked to, we needed help from PPP or vendors, they saw us coming and I charged a big price, and we think all of our PPP expenses are behind us, except for we are dependent in one class action lawsuit, of agent fees or number of them around the country, and we're dependant along with a number of banks on the case of Pensacola, Florida.

Yes. So, putting that together, it sounds like you're saying that you think there is probably some room for some improvement on the expense line?

Yes, we do, and we're proud that our efficiency ratio got 32% this quarter, which we think is probably one of the better in the industry, so -- but as far as absolute, you know, the expenses don't look good after this quarter from obviously, you know what the answer is.

Yes. Okay. Thanks, guys. That's all I had. I appreciate your time.

Our next question comes from Kevin Swanson of Hovde Group. Please go ahead.

Hi, guys.

Hi, Kevin.

Hi.

I think most of the questions are answered, and I think we covered quite a bit here, but just wanted to -- couple quick follow-ups. The pandemic results kind of pushing the balance sheet over $10 billion, post-COVID where do you kind of see that sticking out in regards to the go-forward basis, and does it change any kind of your longer-term expansion plans?

Yes, I was thinking someone was going ask that question. The hurricane money, as I call it, you know, is it here to stay, how much of it here to stay? Well, we fall back below $10 billion, I probably don't think so. We'll come under large bank supervision after two quarters of what we really already have. Our examiner teams have been preparing us for over a year now to become a large bank, and certainly in the control of how they manage us, and how they regulate us. So, we think we're getting close to where they need us to be from that standpoint, but I know I didn't answer all your questions, I missed something in there, Kevin, what was it?

Oh, does it change any of your longer term expansion plans?

No. We're still talking to people, but right now during the pandemic, most people are looking to make a change, as you might imagine, people are -- you know, from a performance standpoint, we don't have a large -- we're talking to one group, a pretty good sized group of production people actively right now, but usually we'll have three or four we're talking to at any given time, most of them don't work out, but we usually have three or four, we're talking two at a time. So, I would say activities off a little bit from that standpoint, and of course, you know, first few weeks of the pandemic we weren't looking to make any big changes in our business plan or business model, we were taking care of our client, focused really on taking care of our clients, i.e. number one before we do anything else.

Thanks. I appreciate M&A has not been on the radar for a while in terms of, I guess, the priority list, but it seems like your guys currency has held up quite a bit better than most out there, and maybe there're some banks that aren't surviving through the process as well. Did those conversations heat up at all, or is it still obviously organic first?

Well, we will be willing to [indiscernible] where the economy is going. Our sales, I don't know how Henry could -- the due diligence on the loan portfolio very well today of another bank, I don't think he would -- won't relish the thought of doing that. So, probably we need a little bit more time for a little clarity for the dust to settle, Kevin.

Yes, that makes sense. Yes, appreciate it. And then maybe just one final one, I think maybe last time we spoke there was some idea that the PPP loans would be sold off, and I think we've seen a few banks do that, take that option. Is it still under consideration, or is it seem like you're going to hold these through kind of the whole period now?

We thought that there would be a forgiveness process. Again, we thought we would be as the Fed liquidity window by the second or third week of April, and then we'd be out of money and have minimal liquidity in the bank instead of record levels for liquidity. So, you know, and we thought that the SBA forgiveness process would be much farther all than it is today. They don't even have a form designed yet. They say they're coming with a form in the next few weeks. So, we thought that we had a timeline, where we would have all the loans forgiven and off the books by the end of June. So, I guess, perhaps, I was naive in dealing with the government to think that we would have that sort of a patient timeline in terms of forgiveness, but we had a timeline worked out where the loans, the customers would have earned, the payroll would have been done, they could have applied for forgiveness by the second or third week of June, we would have them tendered, and we've had customers, a lot I ask and say, "Hey, we'd like to get this done." We say, "Well, there's not a form," just because they send us their forgiveness form doesn't mean its forgiven, it's not forgiven until the SBA repays us the money with interest, and I have 60 days to do so. So the companies would like to get it off their balance sheet, but now we still see the vast bulk of these loans, but again, considering the fact that we do have a positive carry every month on these loans, I mean, 1% is not much, but it's better than 10 bps we earned at the Fed per annum. So, it's 10 times [at a mile] [ph], so -- and we've not been rushing out about a lot of new investments, right now. We kind of want to see where this liquidity settles, the hurricane money, how much of the stakes, how much of it leaves. So, there are a lot of unknowns. I think most banks with any given a lack of clarity in the economy, keeping large liquidity makes a lot of sense, and it presents us with a lot of options on the other side of this in terms of our ability to make acquisitions to grow. We'll be able to do what we want to do, and we think there'll be a lot of opportunities for the bank on the other side of this. So, we're still extremely optimistic. We just don't have the timeline of when the pandemic is going to be over. I don't know how to answer that question.

I appreciate it. Yes, I appreciate it. That's great. Thanks a lot for the questions.

Thank you.

This concludes our question-and-answer session. The conference has concluded as well. Thank you for attending today's presentation and you may now disconnect.