ServisFirst Bancshares, Inc. (SFBS) Q3 2020 Earnings Report, Transcript and Summary

Good day. And welcome to the ServisFirst Bancshares, Inc. Third Quarter Earnings Call. All participants will be in 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 ever to David Mange, Director of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to our third quarter earnings call. We will 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 will take your questions. I will 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 our 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, David, and good afternoon. As a backdrop to -- of our call today, I will give you an update on our -- how -- where we see the economy. We have seen a really nice rebound in the economy in the last several months. One helpful thing is the Southeast of the United States has never had to shut down just like many areas of our country and it’s not had the social unrest problems in many areas. So it is now fully reopened. Unemployment rates on average in the Southeast are under 7%, which is much lower than most of the country, so we are fortunate in that regard. We are not seeing many issues even in affected industries and I would attribute that partly to softer and shorter shutdowns in the economy. We have also seen that well run businesses adapt to a new environment and that is what we have seen even in industries that have been affected by the -- highly affected about the pandemic. We did have one client that had 100% revenue loss due to COVID and the company was restructuring the quarter. Henry will talk a little bit more about that in a minute. Let’s talk about our loan pipeline level, it sort of hit a low at the end of the last quarter and it’s now back at record levels, up 40% over last quarter. So we are seeing a nice rebound in loan demand since mid-July. The pipeline has more small closings spending in large part due to our banker’s efforts in the triple PPP program in assisting customers of other banks and we are starting to see those customers transition their banking over to us now from their former buying. Many projects are moving ahead where we -- both we and the client hit the pause button during the -- during early part of the pandemic. The multifamily and industrial commercial real estate loan demand does seem very robust. We do -- there’s significant lags in growth of outstandings -- loan outstandings with the construction loans, so we have a pretty good backlog of construction loans that will ramp-up over the next few quarters. The C&I line utilization is still at historically low levels and we able to past quarter, you describe loan demand, C&I loan demand is fairly tepid. It has improved significantly at the end of the quarter and we are -- part of the reason we have had low line utilization continuum is, I think is the PPP loan proceeds and I think also we have customers that still have low inventories, if their supply chains are still not rebuilt from the early days of the pandemic. So, all in all, we would expect a pretty solid loan growth over the next few quarters with construction loan advances, organic growth and expected line utilization increase. Let’s talk a minute about the expenses and the expense cuts and I see a lot in the industry written about how the -- all the banks need to look for expense cuts due to tighter margins and lower loan demand. We do try to constantly look for expense savings, which is why one reason we have one of the lowest efficiency ratios in the industry. While we do have a small branch network, the pandemic has proven us in our buy -- and even our buying can be more efficient with our branch network and we see opportunities to reduce staffing in the future. We do see opportunities in coal processing for expense savings plus additional outsourcing. One thing I will say about expenses, you can cut expenses to improve profitability, but it will not help you reach prosperity. So our focus will always be on revenue growth. On the deposit side, we continue to see strong deposit inflows, which we attribute in large part to our strong performance in the PPP program, and again, many of these are strong owner managed companies with limited borrowing and these that all make good core deposits in the future. We are asked constantly about mergers and we are open to the right acquisition opportunity. While many might make economic sense, a few are a good cultural fit and most that we would see out there have a large legacy branch network, which would not be a good fit with ServisFirst. We are generating excess capital and we will look at acquisitions on a selective basis. I will say this. I think if you make a lot of acquisitions, you will over time become a very mediocre bank, so that’s something we would like to avoid. Our Board continue -- we will continue to also look at enhancing our dividend on an annual basis. I will now call on Henry Abbott to give a credit update.

Thank you, Tom. I am pleased with many aspects of how our Bank’s loan portfolio performed in the third quarter and throughout the pandemic. For the quarter, we continued to see a significant decrease in deferrals as they burned off and those clients who are on a deferral returned to normal payments. As of 9/30, we had roughly $28 million of loans that were on some form of a deferral. This represents a 92% decrease from the prior quarter end when we had $342 million in loans on deferrals. Throughout the pandemic, the overwhelming majority of deferrals granted were principal-only deferrals. At the same time as those deferrals burned off, our past due loans were only $9.3 million, which is the lowest we have had in over three years. We have not seen a significant rise in past due credits, as noted by past due to total loans being only 11 basis points. As it relates to deferrals and past dues, we have not seen any major swings within our COVID-impacted industries, hotels, restaurants and retail CRE. As discussed in the past, these segments on a stand-alone basis each make up between 1.5% and 3.5% of our total loan portfolio, and the investment slide deck posted on our website provides this data in more detail. We had one performing hotel loan of roughly $2.7 million added to the watch list and one oil and gas customer with exposure of roughly $3.6 million added as well. The hotels are current owned and deferral and less than 1%, only $1.5 million of our restaurant portfolio is on a deferral. We have a well-diversified portfolio from an asset class and geography perspective and we continue to diligently monitor and take proactive actions as appropriate. Non-performing assets were $33.4 million for the quarter, which is down from the prior year-end 2019, as well as from the first quarter of 2020. But this is an increase of roughly $5 million from the prior quarter end. I am proud to say, our non-performing assets to total assets were 29 basis points at quarter end, which is lower than the majority of our peer banks and less than our results for 2018 and 2019 when they were 41 basis points and 50 basis points respectively. While our asset quality continues to remain strong, we were proactive with one large charge-off, which elevated net charge offs in the third quarter. Credit expenses for the quarter were roughly $11.5 million. This is an increased amount specifically related to one severely COVID-impacted borrower, which represents 63% of our total credit expense for the quarter. The borrower’s in a line of business within the transportation industry that has dramatically impacted by COVID and the revenues have basically been reduced to zero. The borrower had a viable business prior to COVID, but needs the economy to continue to reopen before they can return to full scale operations. At this time, we feel we have taken proper steps to mark the loan and don’t anticipate any future large charges of this nature on this relationship. We continue to spend a great deal of time on credit servicing activities, which should help identify elevated risk pockets and enable us to mitigate future credit expenses. Tom, I will pass back to you.

Thank you. I am calling Bud Foshee now to give a financial update for the quarter.

Thank you, Tom. Our net interest margin for the third quarter was 3.14%. It was 3.32% in the second quarter. To exclude the average PPP loan balances of $1.05 billion and the interest income and loan fees related PPP of $6.6 million, the margin was 3.25%. Then also, if you exclude the increase in our average Fed funds sold of $610 million, the margin was 3.33%. The remaining PPP deferred fees at the end of September are $25.3 million. CD maturities for the remainder of 2020 are $127 million. The average rate is 1.33% on those CDs. We expect the majority these CDs will reprice at 0.50% or below. Additional cut post the CD rates occurred on October 16th. With these rate cuts and repricing we will see an annual expense reduction of $1.1 million. A quarter-to-date cost of funds has decreased this year. It was 1.14% in the first quarter, $0.69 million in the second quarter and $0.58 million in the third quarter. Rate cuts on September 11th were reduced annual interest expense by $5.5 million. Additional cuts post the money market rates occurred October 16th. Those cuts were reduced expense on an annual basis by $360,000. At quarter end, deposit cost, total deposits were $0.34 million, interest bearing DDA cost was $0.32 million and a total interest bearing deposits was $0.47. The holding company is in process of refinancing one of the sub debt issues that will close on October 21st. The total debt is $34.75 million. The annual savings from the refinance $348,000. We had submitted 45 PPP loans to SBA for forgiveness. The total loan amount is $42.7 million. Three of those loans have been forgiven that total $143,000. A reminder, we had no accretion income related to acquisitions. Our liquidity -- our Fed funds sold was $600 million, when we started funding PPP loans in April, funds were $1.55 billion at the end of September. Our non-interest income, credit card income was $1.8 million for third quarter versus $1.4 million in the second quarter. For the spend amount purchase cards increased $4.5 million in third quarter, business credit cards increased $9 million and consumer increased $1.3 million. Our total spend for the third quarter of 2020 was $151 million versus the $135 million in the third quarter of 2019. Our spend is back to pre-pandemic levels except for business credit cards. Our merchant service and income year-to-date is $397,000 versus $299,000 year-to-date 2019 and we have two options dedicated to selling that service. Our mortgage banking income of $2.5 million in the third quarter versus $2.1 million in the second quarter. Also, we have purchased $300 million notional amount of a one-year LIBOR cap in the second quarter. The mark-to-market adjustment to the third quarter was a negative $343,000 and strike price is 0.50%. A reminder, we don’t sell any government guaranteed loans to generate non-interest income. Non-interest expense, for the year total producers were down five, we had 134 producers at the end of September. Total employees are down nine from year-end 2019, 496 employees at September 30th. We talked about expense control in our previous calls, so total loans [ph] for non-interest expense have been adjusted for any PPP expenses. The FASB 91 deferral related to PPP loan originations and/or expenses. So for the first quarter that total was $27.2 million, the second quarter $26.4 million and third quarter $26.2 million. Capital, the Bank’s Tier 1 leverage ratio was 8.78% at the end of September. Also earnings retention, we are paying $0.175 a quarter dividend, but our earnings retention for the quarter was 78.2% and year-to-date was 76.2%. Taxes for the third quarter, the rate was 20.3%, for third quarter 2019 it was 20.2%, year-to-date 2020 that rate is 20.1% and year-to-date 2019 the rate was 20.2%. That concludes my comments and I will turn it back over to Tom.

Thank you, Bud, and thank both of you for the reports. As you can see we had really solid financial performance in the quarter and also very strong performance from a credit quality standpoint, where there were a lot of questions early on in the pandemic about loan deferrals and this will put that question to bear for us. We won’t have to talk about loan deferrals again. So we will be happy to answer questions you might have starting right now. Thank you.

[Operator Instructions] And our first question today will come from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.

Hey. Good afternoon, guys. How are you?

Hey, Kevin.

Hi, Kevin.

Appreciate all the detail you all provided. Just a couple follow ups here, I noticed the allowance ratio, but -- despite the charge-off, which looks like it’s emanating from one lumpy loan in a particular industry like you described. But the allowance ratio largely was stable to even slightly down. So based on what you see here, Tom, would you -- do you think you are at peak reserve level in terms of having to build that reserve further, not including whatever you may do when you retroactively adopt CECL, but just thinking about the next two quarters or three quarters whether the days of the line of share of reserve belt you think is behind you? Thanks.

Yeah. Well, we are above CECL today. Our CECL model would call for our reserve to be about $3 million lower than it is today. So we are above CECL if that answers that question. Kevin, we -- I realize that, of course, nobody has the crystal ball. And I also would point out that the actual loan loss reserve levels is that you were a regulator of yourself is that always still a regulators. The best defense against losses is profitability. And we have profitability and that is the very best defense against any future loan losses. So we don’t see any reason to think that we need a substantially higher loan loss reserves today, or certainly, we would have provided for them during the quarter. We still do have a fairly large PPP loan fees that will, of course, who knows when the SBA will start paying loans that we have tended a few loans to the SBA Dublin, $45 million I paid three loans. Out of $45 million, Dublin $145,000, so it’s just not any money. So I don’t know when they will start and do that and when our customers will tender the loans to us for us to send them to the SBA. So I hope that answer your question, Kevin.

Yeah. That’s great, Tom. I appreciate that. Maybe just shifting gears, I know, Bud, you provided a lot of detail on rates coming down on the funding side and what was driving the margin compression this quarter. Can you, just from a more top level help us and how to view the likely trajectory of the margin going forward here over the next several quarters, whether you want to take that from the stated margin or whether you view it more as a core level, excluding some of the lumpy items that you described? Thanks.

Yeah. Kevin, the hardest thing to predict is a bit of liquidity. I mean we are $1.6 billion at the end of September. We have been at the $1.5 billion, $1.6 billion level for a while. That’s -- I mean for the margin to increase that’s really got to change. And loan production did pick up in the third quarter, but just that will have to pick up more or a lot of the PPP income, I mean, I am sorry, a lot of the PPP funds that customers got, that money is still sitting here. So it’s hard to forecast when they are going to spend that, plus, like, Henry pointed out, our line utilization is still down. So we are waiting on that to turn around for when we would really give a good answer on margin improvement I think.

Kevin, I can’t imagine there’s ever been a worse time for an analyst to try to run their models than right now. There’s just so many variables in there that none of us know the answer to in terms of liquidity. When the line utilization is going go back up, they are going to go back up. It’s just a matter of when. But that’s almost -- our loan draws -- our line draws are down well over $300 million since the pandemic began. So we see loans flowing back in and we see loans picking up. So that will certainly help a bit with the margin, but it would get us back to where we are used to. I don’t think it’s going to happen in time soon, Kevin.

Yeah. You can say that again about the model, it’s -- if you like.

Okay.

Yeah.

And then one last thing and I will get off is just you had mentioned earlier about the SBA repaying some of these forgiven loans in the process with that and all the uncertainty. So, I mean, is it fair to say, if we were assuming the bulk of the forgiveness impact to the margin running in fourth quarter. It’s now probably reasonable to push a lot of that out the first quarter. Do you think that’s reasonable?

Yeah. And this is purely a guess, but I am guessing that the remaining fees that we accrued 25% of them in the fourth quarter or take them in income and then 75% of them come in the first quarter of next year. Of course, that -- it seems they are not paying the large loans yet. They are paying the very small loans. Those three loans totaling $145,000, those probably the three smallest loans that we -- there have been a couple of business sales that we have turned those in and some of those are larger. One was $8 million. I know it has not been paid. So it’s interesting. We are trying to do all the due diligence necessary to make sure that we don’t lose our SBA guarantee and I read a statistic the other day that fintechs only processed 15% of PPP loans and the vast bulk of the fraud situations uncovered so far are all at the fintechs. So I think it bodes well for the traditional community banks that know their customer and we look at hard who the customers are. But I think that’s a -- that would be my guess, Kevin, and that’s purely a guess on my part.

Okay. I appreciate that. Thanks, guys. Have a good evening.

Thank you.

Thank you.

And our next question will come from Brad Milsaps with Piper Sandler. Please go ahead.

Hey. Good evening, guys.

Hi, Brad.

Hi, Brad.

Hey, Tom, you sounded pretty optimistic on loan growth. Just kind of curious if you give us a little bit more color kind of the magnitude of that’s kind of what you are seeing come back. I know you mentioned the pipeline was up maybe 40% above where it was. You talk a lot about pipelines and kind of those are sometimes not worth the paper to be written on. But just kind of curious kind of what you are thinking about pull-through rate and then where are those loans being originated at in terms of new rates coming out of the books?

Yeah. We are -- Bud, in terms of -- I will let you answer the question, the new loan rates are in line with our existing portfolio.

Yeah. Most of, I would say, new loans are probably 4% to 4.25%, somewhere that range. Probably close to 4%.

So, from the standpoint of -- the loan pipelines are not perfect predictors of future loan growth, Brad. I am always the first to say that and I will say it again. But predicted -- what we would see in the loan pipeline from a C&I side is a lot of smaller credits that are coming on as a result of our efforts on the PPP loan front and they are new customers to the Bank and they are pretty small, but that’s fine. There’s just a lot of them and that adds up to substantial amount of money I think over the next couple of quarters. And then our construction loan draws that we expect are in future quarters is well over $300 million of loans had already closed. But we do see a number of multifamily projects. We see other commercial real estate projects and we will -- hopefully, we will start seeing the line utilization come back up over the next few quarters as -- again, I think, it’s as much the lack of the ability to acquire product for our customers to rebuild their inventories. Their supply chains are just still broken from the pandemic and they cannot refill their inventory bucket. So that’s a good bit of our line utilization problem I think is due to that. So all of that gives me cause a reason for optimism, Brad, in terms of future outlook.

And just on the rates, Tom, have you guys, with rates where they are, have you instituted sort of ServisFirst prime this time around, where you guys sort of are going below a certain level, just kind of curious if you are doing that and if the market supports it?

We are, and of course, there are banks that are outliers and we just don’t participate in. We say we are a disciplined growth company that sets high standards for performance and the word discipline is right in there in that sentence. So we try to be disciplined and have more discipline than some of our other the Banks in the industry. So we will continue to do that.

Great. And then just wanted to follow up on your comments around expenses and I know six months or nine months ago, you guys were talking about getting tied around the expense front, you said on this call that you can’t pave your way to prosperity. But just kind of curious, some of those initiatives that you guys were talking about nine months ago. Are they kind of in the run rate or is that maybe still come, just kind of want to get a sense of kind of where you guys were with that?

Well, I mean, like, second quarter and third quarter, I think, we are at $26 million, if you strip out the PPP and the ORE, we are in $26.4 million in the second, $26.2 million in the third quarter. So we feel like that’s a pretty good level. I mean, we have essentially cut out salary increases for this year. Now I know that’s that will really come into play in 2021. So we feel like we are at a good level going forward, somewhere in that range for non-interest expense. Is that what you are saying, that is third quarter a good.

I think, Brad, I think, you -- like as far as forecasting the margin for an analyst, there’s never been a worse time to forecast expenses either, going -- because there’s so much noise in the numbers right now with the PPP loan expenses and things that we have that were totally unexpected, overtime pay incentives and that sort of thing that we are paying and should pay our people for a job well done. So we see -- we have a number of initiatives that have begun -- not yet begun to pay off in terms of core process and expense, and other outsource expenses that we see opportunity to control and bring those. In terms of you heard the headcount reductions we have had. We think those will bear fruit in the future as we go forward. But, of course, we are still hiring people. We hired a number this month and the last month and two or three of our growth markets. So it will offset some of that.

All right. Thanks. Thanks, Tom. Take it easy on us this weekend. Appreciate it.

All right. Thank you, Brad. Well, we need a rest after Georgia.

[Operator Instructions] And our next question will come from Kevin Swanson with Hovde Group. Please go ahead.

Hi, guys.

Hi, Kevin. How are you?

Hey. NPAs were up slightly after the higher charge off, but obviously, they are still below levels earlier this year. Could you provide any color on when you think NPAs might peak and if there is any specific credit debt at this quarter?

Yeah. In terms of when they might peak, I mean, I don’t want to speculate on that, but I mean, obviously we feel good about our asset quality. There was one large C&I credit that was added that helped drive that figure for the quarter an operating company and it was just one that’s a longtime customer that had been struggling and we felt appropriate to move it onto NPAs. But not -- I feel good about where we are going to end the year in terms of NPAs, but I don’t have a crystal ball.

Kevin, we are seeing our credits, they always bounce around a little bit. If you chart back over the last 12 quarters, it will be up or down a time a quarter or two and then down and then up a time or two and then down. So they are in the range they have been, again most of our loan problems, I can go down the list with you and only one credit involved this quarter was -- as far as I know, I think, just one is COVID-related, as we mentioned, the large write-down to right-size that company. So nothing else is COVID-related. One is an energy credit, related energy industry that -- you get that. I guess that potentially is COVID-related as well, so it’s a small oil and gas supplier. So we can’t give you much better answer than that other than we try to recognize problems as soon as they happen and be proactive. And we don’t see a large backlog of potential problem assets in terms of, for example, the SBA made all the payments on 7(a) loans for six months and that just ended. Well, we don’t have a large -- we are not a big SBA lender, but if I was a big SBA lender, I might be a bit worried that there was a big backlog of SBA loans that have been performing because the SBA made their payments and now they are going to have to make their own payment and they could pop up as potential problems in the next -- this quarter. So from an industry standpoint, we will know what their problems in the 7(a) world over the next -- over this quarter. The SBA’s 504 loans, we have a few of those. The loans are partly, we had to put them on deferral, obviously, that was required. So we feel pretty comfortable with SBA loan exposure. We just don’t see -- I read everything that everybody writes. The stimulus is going to expire and this is going to happen and all that. But we don’t have any really consumer-related exposure to speak of at all. So we just don’t see the -- it is the tale of two economies, a lot of businesses are doing extremely well. And we only have one hotel that’s on the watch list and none on deferral. So we just -- as Henry said one restaurant. So we just don’t see potential problems out there at this point, Kevin.

Thanks. That’s great. And then kind of looking at the environment of lower rates were longer against peer success of having deposits and some of the liquidity, excess liquidity, a lot of change in what the value of a relationship looks like considering some of the difficulty in the past to put that money to work?

Well, in terms of -- what’s the core deposit worth today compared a few years ago, we…

Yeah. That’s fair.

Yeah. I mean, certainly, I still think the core deposit relationship is the key relationship in a Bank and it’s not -- once I see the sell force as a percentage of book value? Well, they don’t have these core deposit relationships. They have just got a book of assets based on what they sold and no core relationships. I still think it will always be -- if you take a long view, yes, I would agree with you, the core deposit premiums are probably not what they are today compared to a couple of years ago. It’s funny, we were worried about liquidity back in February and today we have -- our liquidity is -- we have had $2 billion in deposit growth in the last 12 months. So it’s kind of unbelievable that the changes we have seen there, Kevin, all of us.

Yeah. Agreed. Thanks. And then maybe just a final one, prior to the pandemic there is quite a bit of potential from a lot of the M&A in your backyard. Could you give an update on some of the offensive moves? I know you -- in your prepared remarks, you mentioned the open to an acquisition, but just curious on maybe any color further on that or any -- some of the more kind of key acquisitions you guys have done in the past.

Yeah. We continue to hire producers. We hired a number of them this quarter that we were very excited about. We think they are key additions to the staff. They are production people looking and they are calling our people and calling us and calling me, saying, they are interested in making a move. So we think we are the best place for a banker to bring their customer base in and so we are excited about that. We certainly, obviously, we don’t see a lot of M&A activity right now. There’s nothing going on right now that, I think everybody wants to get the next few months behind us and then we will have total clarity on the -- I know what our credit quality is. I am not sure I know what everybody else’s credit quality is at this point in time, Kevin.

Okay. Great. Thanks, guys. Stay healthy.

Thank you.

Thank you.

And our next question will come from William Wallace with Raymond James. Please go ahead.

Thanks. Good evening, guys.

Hi, William. How are you doing?

So, Tom, maybe just kind of following up on the point that you were just making, you look at your deferrals relative to all the other banks that are operating in your markets and you are at if not near the best of the bunch as far as having the lowest amount of loans on deferral. I am curious if you have spent any time trying to discern what might differentiate the loan portfolio at ServisFirst relative to maybe some of your competition?

I don’t know why the other. We don’t have any companies that have been really heavily impacted by COVID. It’s all I can say is that -- is there -- we don’t have convention hotels and some of the sort of properties that not a lot of big retail properties. So, yeah, I just don’t know what they have on their books, I just know…

Yeah.

…what we have but.

And the hotels, I mean, what -- do you know what the occupancy rates have been in the portfolio and what the debt service coverage looks like for your hotel loans?

Our worst hotel is the one we have got on the watch list and it was the debt service of 0.9.

It’s below 1. I mean it’s still, if you look…

Quite low…

… at loan book.

…close to 1, the global coverage is more than good on debt service and it’s a 50% loan-to-value. I guess, we feel very confident about that property and that is worth. We could sell our note. We would sell our note for less than 4, let’s put it that way. We would not sell that loan at a discount. So we feel pretty good about our -- again the restaurant exposure, people adapt pretty well to the new environment that good business people do. We think we have a good. We don’t have a lot of heavily leveraged borrowers while in. There’s no safety for equity in the business. Clarence and I have talked about this earlier in the week. You look at a business that’s got a lot of debt, no equity, is a formula for disaster. But we don’t have a lot of highly leveraged companies. So I think that’s part of it and we have just shied away from that type of borrower.

Okay. In the loan that you charged off, was that charged-off, did you write off the entire balance, and if not, what’s remaining?

No. We did not write off the entire balance. Direct debt to that borrower remaining is roughly $13 million. As Tom alluded to, try to right-size the debt to get them through the other side of this pandemic that got a viable business that just -- the economy needs to reopen before they can get back on the road to full utilization so trying to move forward.

Is that loan -- was that loan in the NPA bucket in the second quarter or not because?

That loan…

Or not because…

That loan was not in the NPA bucket in the second.

And is it in now in the third quarter numbers or not?

No. No.

Okay.

We worked…

I guess there is.

We worked -- it’s a poster child for COVID while there’s one of those poster children for COVID. It’s a great company and just 100% revenue loss due to COVID. It will come back and we feel good. We have all the same collateral base that we have had before, good borrower, high quality person, this owner of the company and getting some family help to get through the pandemic. So we feel good about the company. It is the most…

So you don’t.

Go ahead.

And so what -- no. Sorry. Go ahead.

It’s the most heavily impacted COVID customer.

Yeah. And the amount charged-off, was that just to charge down to your estimate of the value of whatever collateral there is or was it a restructure or for what?

Yeah. You get down to the enterprise. The enterprise value closer to, you can’t say what’s the collateral were today, right? If you took that value, there’s not a big market for collateral when nobody’s using it, right? It’s kind of like what our real hotel loan-to-value, when I see a 50% loan-to-value, I don’t know. We had tried to sell the -- foreclose on the hotel to sell it. But I would suspect that loan to values are higher than we -- than it was when we underwrote the loans for all of this type of impact in the industries.

And just one last question, sort of circling back to that hotel portfolio, excluding the one on the watch list. What are you seeing? What’s happened with occupancy rates in the third quarter, say, from where we kind of troughed in April or so?

Yeah. So we are following up with most of our borrowers and getting star reports. And I think it really just depends on where they are. I mean, I think, across the Board, occupancies picked up, but it’s very market-specific on where those hotels might be and if they are down by the beach and by the coast, they have seen pickups due to the summer. But I mean, we are certainly getting debt service coverage and star reports on them quarterly to kind of understand the trend within that specific borrower.

Okay. Okay. Is -- do you have maybe a range of rates that you have seen? I know you guys operate in a handful of different metro markets around the Southeast, but just any color.

Yeah. I mean, I can get you more specific. But I mean, I think, it’s in the 50% range or so. Yeah, just slightly below 50% is my guess. It just depends.

Most of the hotel operators I talk to are very satisfied. Most of them are cash flowing and doing well, Wally. We just don’t have the big, highly leveraged borrowers, and again, I think, as Henry said, we start quoting loan to values, what is the value today of a hotel?

Yeah. Yeah. Yes.

Anybody with common sense knows it is not what it was before the pandemic. And certainly, I -- we don’t have any convention hotels and we are pleased about that, because I don’t know that we are ever going to see the level of conventions we had in the past. That’s certainly going to be a heavily -- it’s going to be like an airline. It’s going to be a while before they have a full come back.

Yeah. Agree.

So we like where we are.

Okay. And moving off to credit my last question just on the loan growth, did you say in your prepared remarks Tom that your pipeline is at record levels, did I hear that?

It is.

Yeah.

Yes. It is at the at the rec -- back at record levels.

And are you -- have you all adjusted any of your underwriting requirements, just kind of an utmost of caution around uncertainty, around pandemic or you feel like you were always conservative, so you are -- you don’t need to make adjustments?

We are doing additional stress testing on any potential borrower. Wally, it just makes sense to do. We sat around and talked about it, and our Florida banker said, let’s just take a very cautious approach to underwriting just like we did during the big recession down in Florida where every value was so heavily impacted. So we always try to underwrite. We pride ourselves on making the same decision through good times and bad, right? You -- whether the stock market is up or down, it doesn’t matter. We try to make the same decisions every day. But we have been -- from a look at a very hard credits from a pandemic-related standpoint to make sure that there’s not going to be any unforeseen consequences. Henry, is there anything you need to add?

No. I agree. I mean, just like you said looking at stress rates a little bit more in terms of occupancy on things and -- but, no, I mean, nothing. I thought it’s just kind of digging a little deeper on potential changes and vacancy and other things. We haven’t materially changed with them.

Okay. Thanks very much, guys. I appreciate it.

Thank you, Wally.

Thank you.

And this concludes our question-and-answer session, thus concluding today’s call. We would like to thank you for attending today’s presentation. And at this time, you may now disconnect your lines.