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Edited Transcript of SFBS earnings conference call or presentation 20-Apr-20 9:15pm GMT

Q1 2020 ServisFirst Bancshares Inc Earnings Call

Birmingham Jun 9, 2020 (Thomson StreetEvents) -- Edited Transcript of ServisFirst Bancshares Inc earnings conference call or presentation Monday, April 20, 2020 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Davis S. Mange

ServisFirst Bancshares, Inc. - VP IR Accounting Manager

* Henry F. Abbott

ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer

* Thomas Ashford Broughton

ServisFirst Bancshares, Inc. - Chairman, President & CEO

* William M. Foshee

ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Graham Conrad Dick

Piper Sandler & Co., Research Division - Research Analyst

* Kevin Patrick Fitzsimmons

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

* Kevin William Swanson

Hovde Group, LLC, Research Division - Director & VP

* Tyler Stafford

Stephens Inc., Research Division - MD

* William Jefferson Wallace

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

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Presentation

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Operator [1]

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Good day, and welcome to ServisFirst Bancshares' First Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Davis Mange, Investor Relations Manager. Please go ahead.

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Davis S. Mange, ServisFirst Bancshares, Inc. - VP IR Accounting Manager [2]

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Thank you, Allie. Good afternoon, and welcome to our first 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'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 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'll turn the call over to Tom.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [3]

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David, thank you, and good afternoon, and welcome to everybody to our call. My comments will be a little bit longer than normal because these are interesting times we're in today with a pandemic. It seems like the first quarter was a long time ago. So much has happened over the course of the ensuing days.

I guess we talk a little bit about the pandemic. We activated our pandemic plan on March 2. I remember the first time we -- the regulators said we need to have a pandemic plan, I thought, well, that's about the silliest thing I've ever heard in my life. It turns out someone at the FDIC was right and I was wrong. And of course, we all thought that it was just going to be a bad flu season and there was a way to make it through. And I've always believed that we give all the employees a free flu shot, and we're not going to have a flu epidemic. It was sort of my plan, but plans get -- go awry bit here during a pandemic.

But what we found really is we had an excellent plan. Thanks to our Chief Risk Officer, Mark McVay, we had an excellent plan. Our focus has been on employee safety, employee and customer safety are -- #1 is employee safety. #2 is customer safety.

What we found is that a branch-light, technology-heavy business model works very well during the pandemic. Our business model was made for a pandemic. It's one of our original CEOs who said he's -- I'm so happy I'm managing 1 office instead of the 34 branches at my old bank I used to work with. So it is much easier to only manage.

We have some-22 offices, and in many cases, we -- obviously, doing it like most people, we've gone the drive-in only. We have very limited in-person contact. We are rotating -- a number of our people are rotating -- we're 50% work from home, where possible. We're all today in this conference room, a large conference company, this larger conference room than normal so that we can all be socially distant, 6 feet apart.

Also, our second focus has been on serving our clients and our community's needs. And we received very positive feedback from all of our clients. I'll go into a little bit more detail. Sort of our stance, when you're facing an unknown threat, you want to be as conservative as possible. And that's what we've tried to do in every case of how we've managed the business since March 2. We've tried to be as conservative as possible. Certainly, it don't change anything. We don't need to change and try to serve our customers' needs. That has been our total focus, is serving employees, keeping employees safe and serving our clients' needs.

Henry Abbott is our Chief Credit Officer. He's going to talk in a few minutes a little bit more about our asset quality focus and give you a lot of details on that. We put a deck out this afternoon. I think all the analysts have it. It's on our website, the supplemental deck, and it's on the SEC website as well. It's not a very big deck as I'm glad to say.

I remember when I was a young credit analyst at AmSouth Bank, and I went in an executive officer's office, and he handled me a credit file that was about 6 inches thick. I still remember it. It was a department store called CityStore out of New York. Obviously, I don't remember what, if it was a Shared National Credit or we had a direct relationship. And I stared at that thick credit file, and the executive said, Tom, you need to understand that the quality of credit is inversely related to the thickness of the credit file. He said a very good company has a very thin file. So I'm glad to say that we are a good company, and we have a thin deck that we posted out there today with a little bit more information Henry will go over in a few minutes.

But I want to give a few high-level comments on asset quality. Henry is going to talk about the loan categories that are of interest to investors. We will -- we'd say that we -- everybody says they underwrite better than other banks. Everybody says that. Of course, we say that, but everybody says that. We do have minimal consumer exposure. Less than 1% of our portfolio is consumer.

I know that there are areas of interest, obviously, restaurants, hotels and things, but you just don't -- a recession causes problems with weak players in every industry. It does not matter what industry it is. You're going to be -- for example, if you've got some big apartments that are not well underwritten, and they've got a lot of tenants that lose their jobs, you're going to have some problems with something like that. So it does expose all weak players in all industries.

I don't -- you can hear anything you want to hear about what economists are saying that it's going to happen to the economy over the next few quarters. I've been looking -- if anybody's got a list of economists that have gotten rich from doing accurate forecast, I wish somebody would e-mail me the list of this on this call today. I'd love to have that, but I don't know of any. And if there's a list, I'd like to know.

I will say that charge-offs -- just common sense would tell you they're going to be elevated a bit over the next -- I don't think anytime soon. I remember during the 2008 recession, what was cratering was homebuilders, AD&C. In fact, ours, we had some so bad, they started to crater in 2007. We were ahead of the recession. But I remember they'd come in, and they'd kind of say you need to make us a large unsecured loan or we're going to throw you the keys. So we'd say, well, hand us the keys, and they'd hand you the keys and walk out. This isn't like that. We've had -- it's been very calm.

The customers, I think, they -- some have asked for loan extensions. And Henry is going to talk about -- cover that in more detail. But yes, I'm kind of a bit surprised that who've asked for the loan extensions is people that are in really strong financial shape. I think just a lot of them are being conservative. It's mainline churches who are not reliant on the collection plate for their revenue. Most of the money is sent by check or by automatic debit. Dentists, other medical professionals, endodontists, dermatologists, those sort of people have all asked for extensions as well. So I don't -- we don't expect any long-term credit issues or repayment issues in most of those sort of people, so.

And the last thing I'd say on asset quality is we're not a deal bank. We're a relationship bank. We know our customers well. We don't have deals all over the United States with some random deals. So they're in our footprint for the most part, and we feel really good about our customer base.

I was going to talk about deposit growth for a minute. We've seen really solid deposit growth in the first quarter. And year-to-date, our liquidity continues to grow. We have not seen a surge in line usage. We don't have any of those type of customers. You read about it, the big banks, had their -- a lot of credit usage surge. In fact, our line utilization was exactly the same at March 31 as it was at December 31, within like 48.8% versus 48.2%. So it's almost no change there whatsoever. We did see very strong deposit growth during the last recession from customers looking for a good strong bank, and we see this is shaping up to be much the same.

Talking about loan pricing. Bud's going to talk about our margin improvement in a minute. But loan pricing today is much more rational than it was just a few weeks ago. We have made the decision to implement minimum pricing in early March. So our minimum pricing has been strengthened a good bit. It is sort of interesting. So the commercial customers will call to say they -- well, they read the interest rates have dropped, and they want to know that they can -- we can redo their loan at a lower rate. Well, no. The only borrower whose borrowing cost has dropped is the United States government, and almost everybody else, including most countries in the world, their borrowing cost have gone up. So we straightened out them out on -- from that standpoint, that there's not -- we're not in the business of cutting rates. So I might be surprised. People might go back to doing silly things a little quicker than I think, but I don't think we're going to see any margin pressure in the immediate future. I think customers today are more focused on access to credit. The cost is low. It's still low. And I think it's going to be -- remain the same for at least the balance of the year.

I was going to talk a minute about profitability. We put in our press release that our first quarter pretax, preprovision return on assets was 2.49% in the first quarter, which is obviously one of the best in the industry. Our dividend payout has been in the mid-20% range of earnings.

We've had a lot of questions in the past about why don't you buy your stock back. So I always answer that while we read a lot of studies, insiders never know when is the best time to buy stock back. The stock can always get cheaper, so you'd feel foolish if you'd bought it back at a higher price.

We've got the questions about what are you going to do with all your excess capital. And I always say, well, it might be nice to have one of these days. And also we've gotten questions about why we don't buy -- why we haven't been buying banks with all our excess capital. And our answer has always been that banks' stocks may get -- bank prices might get cheaper at some point. So I'm very happy we don't have to do any goodwill impairment assessments today on any banks we bought. And I'm also happy that we don't have to wonder about the asset quality of the banks we just bought. So our policies have served us well when a pandemic hits.

I was going to talk for a minute about the PPP program. Paycheck -- it's a tongue twister for me. I call it the PPP SBA program. I've never been -- we've never had a big -- we've done SBA loans. And certainly, we want to meet our CRA commitment, Community Reinvestment Act commitment, to small businesses in our communities, and that's very important to us. And that's why we do SBA loans, but we've never looked at SBA loans as a line of business. I know a lot of banks, the way they made it through the recession is they would do a lot of SBA loans and sell off the guaranteed portion and book the profit, and that's what kept them alive. I learned pretty early in my career I didn't want to be a big SBA lender. Typically, what I'd see is when the Democrats were in office, they'd want us to make a lot of SBA loans. And then when the Republicans came in office, they would try to figure out how to void the guarantees on the loans we made when the Democrats were office. So I got enough of that business pretty quickly and didn't want to -- decided that was not something we wanted to do.

Despite having said that, we decided to participate in the program to support our customers and our communities that need the support. Paul Schabacker, who's one of our executive officers here in Birmingham, ramped up our program, did an outstanding job. We made about 6 months' worth of loans in 2 weeks' period of time. I think it was pretty 3,300 -- a little over 3,300 loans totaling $914 million that we have closed and funded. In the PPP program in round 1. I understand -- yes, I think round 2 is probably coming over the next few days, possibly.

It's been an interesting time. We have people working 24/7, except for Easter Sunday, trying to get all these loans booked and funded. In very few cases, we -- we had a few that we didn't get done. It typically was just because our clients didn't have -- had not given us all information. Everybody has all the information they've given to us, we might have -- I think we just made a mistake on maybe 2 or 3 that we didn't get done. But anyway, I'm very proud of our team.

One thing that's interesting is I think our production -- our loan officers have a greater appreciation today for our credit and operations people than ever before. It's truly been a team effort, and I'm proud of what they've done to get those loans closed. As we put in our slide deck, the -- we expect the vast bulk of those loans to be forgivable loans, and we will -- they will be off our books. We expect them to be off our books before the end of the second quarter. If we need -- liquidity, as I've mentioned earlier, has been strong. If we need any additional funding, we will go to the Fed [and excess] that we've filled out the paperwork for the PPP loan facility at the Fed, if that's necessary. But I'm not at all assured we'll need to do that.

Due to the high demand, we did focus on existing clients, and we did not -- we made an attempt, first, to prioritize the smallest clients first, thinking that they would need the help. But we just ended up -- we just did it randomly and in terms of -- that's the only way it worked, is to do it in that manner.

The expenses are quite high. I kind of learned that during a pandemic, everything costs more except all the catering we did for our employees. We were catering as many as 3 meals a day for a lot of our employees for a good chunk of the time. And that's the only thing we got a good deal on because the restaurants all needed business right now. But everything else cost a lot of money. So we do expect that the program will be profitable in the second quarter. And we think it will make a nice addition to our loan loss reserve in the second quarter with what -- the net profit above. We paid a lot of overtime, and we paid a lot of incentive pay in terms of, I call it, piece rate. We paid piece rate fees to get a lot of this done over the course of a 24-hour period.

We had -- you couldn't -- when we started, we only had a maybe -- what we call seats at the SBA, we had 3 seats when we first started inputting loans. We tried to get as many seats as we could, but we just didn't get them approved by the SBA. So I think we ramped up over the course of a few days from 3 seats to 8 seats, to 19 seats, to 29 seats, and we got it done. All of these loans have been closed, funded. They were all signed by DocuSign. We got them all done.

At the end of the day, besides our overtime and incentive pay that we'll pay, we'll -- it will be a little noisy in the second quarter for the analyst to decipher in terms of all that. And we will keep a reserve, knowing that my thoughts on, if any, issues down the road, we're going to keep a reserve for any contingencies on those type of loans.

I'm going to ask Henry Abbott now to talk a little bit more about asset quality. Henry?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [4]

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Thank you, Tom. In looking at the ServisFirst footprint, I'm cautiously optimistic as the economy reopens and viewing heat maps and other data points that lay out impacted COVID-19 areas thus far, the majority of our markets are in low-impacted areas. We're not in the Northeast or some more heavily concentrated COVID-19-impacted communities. No one is immune to the broad impacts of the pandemic, but we should be well positioned as our markets reopen.

We have a well-diversified loan portfolio in both geography and industry classifications, the portfolio is granular, and we don't have any major concentrations within industry codes. We've always prided ourselves on being a well-rounded commercial and industrial, or C&I, bank versus a bank that focuses on CRE transactions or has targeted industry calling officers. Greater than 55% of our loan portfolio is to C&I operating companies, and this is through owner-occupied real estate loans, equipment loans lines of credit. We have very low exposure to SNCs as they represent only $65 million in current balances on a total loan portfolio of $7.5 billion, which is less than 1%. The SNCs we are involved in are because we have a direct relationship with those borrowers.

To date, we've had no major downgrades within the portfolio as a result of COVID-19. At the end of the quarter, past dues decreased by $7 million from year-end and nonperforming assets decreased by $3 million from year-end. As Tom mentioned, we have a slide deck on the website, and I'll cover some of that in more detail here.

Page 4 lays out areas of interest to investors. We're not a large hotel lender, and hotels only constitute roughly 2% of our portfolio. And the overwhelming majority of those are flagged hotels, and none are oriented towards conventions or resort-style accommodations. Restaurant exposure is noted at less than 3% of our portfolio. Oil and gas is less than 1% of our portfolio. Retail CRE consists of $267 million in loans, which is 3.5% of our loan portfolio. These CRE loans are to well-established borrowers who we have long-standing relationships with -- at this bank. The average loan size in this segment is less than $2 million. Our AD&C portfolio to capital is 55%, which is well under the regulatory guideline of 100%. Our income-producing portfolio, which is nonowner-occupied commercial real estate, is 236% of our capital, which is well under the regulatory guidance of 300%. Within our income-producing commercial real estate portfolio, we don't have any major market concentrations, the highest one being Alabama that accounts for just under 10% of our loan portfolio.

Given the guidance from regulators and FASB, we've agreed to provide COVID-related deferrals to clients who have requested some form of payment release. We have taken a 3-month approach to these deferrals and we will assess future deferrals in the coming months. Of the deferrals requested, the vast majority have been principal-only relief and the borrowers are continuing to make monthly interest payments.

On Page 5 of the PowerPoint presentation, we lay out the industries of these deferrals. Given the uncertainty with the financial impact of COVID-19, we chose to retain our proven incurred loss methodology for calculating our ALLL and delayed CECL implementation.

With that, I'll turn it over to Bud.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [5]

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Thank you, Henry. Good afternoon. First, our net interest margin. Our margin increased from 3.47% in the fourth quarter to 3.58% in the first quarter. Tom had talked about our strong growth for loans in the first quarter. We grew it $307 million. Deposits grew $302 million. Our variable-rate loans were $3.1 million (sic) [$3.1 billion] at March 31, and $1.2 billion of those loans were at their floor rate or 40% of our total variable-rate loans at the end of March.

Based on our March 31 balance sheet, our consolidated margin was 3.64%. Also, our total deposit cost was 0.55% as of March 31. For the future NIM, we expect it to remain north of 3.60% in the second quarter, exclusive of PPP loans. A reminder, we have no accretion income related to acquisitions. There were no other major income or expense items that impacted the first quarter earnings.

Liquidity. Our investment portfolio is 8.5% of our total assets. The portfolio is available for any liquidity needs. We have a very vanilla portfolio: government agency, mortgage backed, Alabama munis with an A-or-better underlying credit rating, treasuries, agencies, bank senior and sub debt. And average life of the portfolio is 3.4 years.

For noninterest income, we added 70 banks in the first quarter through our American Bankers Association credit card referral program. Mortgage banking income, slow in first 2 months, and then in March, we had fee income of $525,000. A lot of it had to do with the 2 Fed rate cuts in March. Also, a reminder, we do not sell any government-guaranteed loans to generate noninterest income.

For noninterest expense, our ORE expenses increased $498,000. That was due to updated appraisals on 2 credits. Payroll taxes increased by $318,000, primarily related to incentives that we paid in January. And our 401(k) contribution match increased $229,000 related to incentives. Net producers had 5 that left in the first quarter, and we added 3. And as we mentioned in our fourth quarter call, we have a new expense control initiative for 2020. We'll continue to look at our costs, working with our vendors to control that, but you're going to see the impact of that in 2021 as opposed to 2020.

Our loan loss provision. Our first quarter net charge-offs were $4.8 million, $3.7 million of which was loans that were previously impaired, and we continue to be proactive with our problem credits.

Capital. Our bank Tier 1 leverage ratio was in excess of 10% at March 31. So we had a very good ratio. Taxes, our year-to-date tax credit -- tax rate for 2020 was 18.8%, 21.3% without the stock option tax credits in the first quarter of $1.1 million. The 2019 year-to-date rate was 19.5% and 21.3% without the stock option credits of $772,000. We project the tax rate for the remainder '20 to be 22%.

And that concludes my comments, and I'll turn it back over to Tom.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [6]

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Thank you, Bud. I'll finish -- before we take questions, I'll finish by saying that we do see a lot of opportunities on the horizon. We see a lot of opportunities with customers that had an unsatisfactory experience at their existing bank. Some large banks and some regional banks and you might guess with some of the people that put caps on how much they were going to do, and they have a very unsatisfactory experience there with their existing bank. So we are in the process of onboarding some new customers. We see a lot more opportunity down the road.

We are mindful of the current economic conditions with any new request that involves credit. We certainly -- the deposit accounts is pretty simple, being -- with anything involves credit, we're stress testing any new loan request in light of the current economic conditions.

In summary, I really like where we are today. The positives far outweigh the negatives. We have the capacity to bring on a lot of new clients, and we intend to thrive, not survive, through this pandemic. And we've shown we can adapt to a new environment and do very well.

So we also have got a chart out there on -- a page on digital banking opportunities. We're seeing much greater adoption today than ever before of scanners as well as mobile banking. So our business model is working very well given the current conditions.

We'll now turn it over to take questions. Davis?

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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 Kevin Fitzsimmons with D.A. Davidson.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [2]

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I recognize upfront how fluid this is and all the uncertainty, but can you give us any idea how you think about further reserve building off of this quarter as we look forward in the next few quarters? Because I'm just interested how that debate went amongst you all in terms of -- you made reference to the very strong pretax, preprovision profitability you had and whether -- would -- did you entertain the thought of using even more of that to be aggressive more than you even thought what you could see now just to try to get beyond -- get more of it in the rearview mirror. And just -- that's a long-winded way of saying, how should we think about provisioning going forward?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [3]

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That's an interesting question, Kevin. We -- obviously, if we thought we needed more money, we would have put more money in there. Now that's -- the clear answer is if we felt necessary to do that, we would have done so.

So again, we like our customer base. We feel good about our customer base. I mean, obviously, there's going to be some pain with some of the restaurants, for example. Restaurants and hotels have some pain. But we listed for you our existing balances. On the watch list on that deck, we've had no downgrades as a result of COVID-19. It takes time for things to play out.

But again, by the way, I've seen some analysts estimating what the fees are going to be on the PPP, and they're estimating a little on the high side. And I'd say I even hesitate to give our average because an average is not a good number. It is misleading because when you have a lot of $2,000 and $10,000 loan request and you average those in with some very large ones that might be $2 million, $5 million, that sort of thing, you get some -- it gives a strange average that people are trying to run off of. I know that's not what you asked, Kevin. I just mentioned that for all the analysts on the call. Everybody seems to be a little high. But we think we'll have an opportunity to make -- anything we think we'll need, we can do in -- most of it in the second quarter, Kevin.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [4]

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Okay. Great. One quick follow-up. On the subject of loan growth, it was very strong this quarter. And I know -- I think traditionally, in past years, the loan growth has been on the light side and early in the year, and then it really kicks in the back half of the year. And you mentioned that it really wasn't a surge in people drawing the lines. So was it just more of the PPP loans being on the books? Was it just pent-up loan demand from last quarter? Anything to attribute that to?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [5]

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I could -- we had a couple back, holding company loans closed that were a pretty good size, good, solid companies. We had a marine, oil and gas customer payoff, and they went permanent in the fall, and they came back in with another vessel with us this quarter, which is the vast part of our oil and gas exposure is one -- not the vast part, but the biggest one is a vessel that's leased on a long-term lease to a major oil company. So -- but those probably 3 credits distorted the numbers upwards, Kevin, if that makes any sense.

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Operator [6]

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Our next question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [7]

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I had a question also, to start, on the allowance. And I saw in the release that you added a new pandemic qualitative factor to the allowance. How much did that new pandemic qualitative factor add to the allowance in reserve build this quarter?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [8]

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Yes, this is Bud. I don't know if we have that. Henry and I both sitting here, I don't know if we have that specific amount in front of us. We'd have to go back and look.

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Tyler Stafford, Stephens Inc., Research Division - MD [9]

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Okay. That's fine.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [10]

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But other factors also played into it, like GDP growth, change in -- prime continuing to decrease. I mean there were other factors also that drove it.

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Tyler Stafford, Stephens Inc., Research Division - MD [11]

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Maybe let me ask it this way. Do you have a good frame of reference we can think about for what the reserve build would have been if you had adopted CECL?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [12]

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Yes. Early in the quarter -- Tyler, this is Tom, obviously. Early in the quarter, the difference -- first of all, we look at CECL 2 or 3 different ways, but we start from the stance that if you're going to be as conservative as possible, you don't change anything that you don't need to change. We've got enough going up. And what we've had going on is this SBA PPP program, and it's been -- it kept us extremely busy. And then we've had all their requests, where people are looking for loan extensions because the regulators announced to the world that they could get -- have them. So we've our hands full primarily with PPP loans. But -- so we look at it on a couple of different ways. First of all, don't change anything you don't need to change. Early in the quarter, the difference between the 2 models was negligible.

As of -- because of the deteriorating economy due to COVID-19 at the end of the quarter, we had to put in another $8 million due to the COVID-19 -- on the CECL models. It's not a meaningful -- not really meaningful amount.

And so -- we also think there's some chance that, I'm told -- I don't know what Congress is going to do, but I'm told there's some chance that on a bipartisan basis they may decide to kill CECL at some point. If you already adopted, it's going to be a bit difficult to unwind it. So we thought the best thing to do was to just take a conservative stance and don't do anything.

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Tyler Stafford, Stephens Inc., Research Division - MD [13]

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Yes. Okay. So if you had adopted CECL, the incremental 3/31 provision would have been an additional $8 million?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [14]

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Yes.

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Tyler Stafford, Stephens Inc., Research Division - MD [15]

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Okay. All right. Got it. I appreciate the details in the release around the deferrals from COVID-19 and the major industries impacted. Do you just have what the total amount of loans that were deferred as of 3/31 were?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [16]

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Go ahead, Hen.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [17]

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Yes. So as of 3/31, total balances deferred was 700 -- excuse me, $574 million, and that was about 5% or less than 5% of our customers in terms of units. So $575 million as of the end of the quarter.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [18]

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And again, Tyler, this is in 80 different industries. And I look down the list, and most of the industries get down to -- there might be 1 million in each industry for the last 51, or 2 million of each industry is -- I don't look at those as vulnerable on the credit side for the most part. They're people being -- they're large mainline churches. Again, they're people being conservative. They think they're being conservative by asking for -- and we think we're a bit conservative because we didn't do any 6-month deferrals, and we only did 3 months of principal deferral.

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Tyler Stafford, Stephens Inc., Research Division - MD [19]

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Okay. All right. And then on the prior slide, just around the portfolios potentially impacted by the pandemic. I appreciate all the new disclosures and details here. I guess I was a little surprised that there were $0 of hotels and motels on the watch list. And I was wondering if you could maybe walk through why there would be no -- none of those balances on the watch list?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [20]

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I'd say we are selective with our hotel lending. We're traditionally looking at low loan-to-value type hotels. At this time, none had been downgraded and all were performing loans at the end of the quarter and all still are.

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Tyler Stafford, Stephens Inc., Research Division - MD [21]

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Okay. All right. That's helpful. And then maybe lastly, Tom, did I hear you say that you provided 3 meals a day for all of your employees?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [22]

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Not every day, but in many cases, we did. That's the only thing we got a good deal on, was the catering. But we did -- we were in here full time except for Easter Sunday. We were running. The first weekend we had to roll it out, we had to run as close to 24/7 as we could and...

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Tyler Stafford, Stephens Inc., Research Division - MD [23]

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Good on you for doing that. That's pretty great. That's all my questions.

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Operator [24]

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Our next question comes from Graham Dick with Piper Sandler.

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Graham Conrad Dick, Piper Sandler & Co., Research Division - Research Analyst [25]

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I'm on for Brad tonight. So kind of just following up on the portfolios you guys disclosed in the slide deck. Within restaurants, I know it's just under 3% of your total loans, but would you mind giving a little info on like the composition of that segment? Is it mostly quick service or weighted towards casual dining, I guess?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [26]

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This is Henry. So on a true loan balance perspective, $145 million of that $226 million is full service. Under that is in more limited service. So that represents another $60 million. And within that category, we did add bars as well. And so that's also another category. But breakdown is primarily full service and limited service under that.

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Graham Conrad Dick, Piper Sandler & Co., Research Division - Research Analyst [27]

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Okay. Great. That's very helpful. And then kind of following up with the loan growth question. It's obviously going to be relatively on pause for the time being while you guys are working through PPP and COVID continues to kind of pause client activity. But how do you guys think about loan growth at the other end of this thing? Maybe is there a light at the end of the tunnel? Do you think you might be able to get close to picking up where you left off? Or do you expect to take some time to ramp back up to that low double-digit rate you guys had in 2019?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [28]

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We see an abundance of loan opportunities, Graham, in spite of the fact that our people -- we've taken them all off the road. We're not making calls. I think we obviously took them off airlines pretty early on compared to -- and we were on the conservative side. We had a lot of gnashing of teeth around the company when we told people they get off the road and once they got off an airline, don't come to the office for 14 days. We took a very conservative approach.

But we see an abundance of loan opportunities out there, and we feel like we can be as -- we could -- again, we can see -- strengthen our loan pricing. We see better opportunities there in terms of where we are because there are certainly less banks that are able to make loans today than they were just literally a couple of months ago.

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Graham Conrad Dick, Piper Sandler & Co., Research Division - Research Analyst [29]

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Got it. Great. That's really helpful. That's it for me today, guys. Thank you, guys, very much, and congrats on the quarter.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [30]

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Yes. I would say, Graham, to answer your -- a lot of people have hit the pause button on projects, which is just kind of common sense, that if you've got a project underway, a lot of people have hit the pause button for a few months just to let some of the dust settle a little bit.

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Operator [31]

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Our next question comes from Kevin Swanson with Hovde Group.

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Kevin William Swanson, Hovde Group, LLC, Research Division - Director & VP [32]

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Obviously, the multiple in the stock has held up well compared to others. And despite your guys' strength this quarter and kind of the outlook, it looks like there are definitely some banks who don't come out of this unscathed. Prior to COVID, you guys set up well organically with all the M&A going on in your backyard and some of the hiring you've done. But is there any change in thinking around being an acquirer now that the multiple seems to be stronger on a relative basis on kind of where you guys sit?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [33]

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We want to -- obviously, we want to get on the other side of the dust storm, Kevin, and -- but obviously, it's much more interesting today than it was just literally a few weeks ago. The prices are substantially better, I would think, than if people are even -- once M&A starts back up, which might be -- it might be 6 months. I mean I would guess it would be 6 months before we see any activity. But certainly, we'll be willing to entertain it at the lower level of pricing that we see today.

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Kevin William Swanson, Hovde Group, LLC, Research Division - Director & VP [34]

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Okay. And then my last one is appreciating the significant uncertainty, like you mentioned, remains. Have you guys thought about any changes to kind of credit structure and underwriting policies given what we've learned so far on the impact? Kind of, obviously, it changed quite a bit after the Great Recession. But just curious if this has kind of refreshed any kind of credit process in your mind.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [35]

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Well, again, we're going -- any new request, we're focused on our existing clients, and that's who we should be focused on today. But on a new request, we're putting an extra step, stress test on it. As one of our executives, Greg Bryant, in Tampa said, that's what we did during 2008 to 2012 in Florida as we put an extra test, stress test, on any loan request. So it makes perfect sense.

So we -- now we -- I've always said we need to make the same loan decision in when the stock market is going up 5,000 points or going down 5,000 points. We need to be emotionless on making a good, sound underwriting decision, and it shouldn't vary at all. So the same underwriting standards apply, and we want to deal with good people and good-quality people.

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Operator [36]

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Our next question comes from William Wallace with Raymond James.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [37]

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On CECL real quick, the decision to delay it. Were you guys delaying and operating under the assumption that when you do adopt that you're going to have to go back and restate your results?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [38]

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Well, I mean we -- this is Bud. Yes. I mean we know we will have to restate once we implement. If that comes to pass in 2020, we will have to do that.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [39]

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And what kind of expense does it add to go back and do that? Is that a -- [is it a substantial contribution]?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [40]

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Well, I mean we're doing parallel. I mean we're doing our incurred loss and CECL. We'll do that each quarter. So...

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [41]

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So you have all the results right there, so theoretically, it shouldn't be too expensive?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [42]

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Right, right.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [43]

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Okay. On the expense side, is there any way -- there's a lot of commentary in your preamble, Tom, about the expenses being pretty hard to gauge and generally being up. Can you maybe just help us get a sense of what we might be looking at for the next couple of quarters on a run rate basis, understanding that, I guess, this quarter will be higher given the PPP activity?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [44]

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Yes. The expenses, in general, are trending down. I mean we expect to see -- all our expense initiatives, we expect to see most results in the second half of 2020 and 2021. And so we're certainly -- we're more glad than ever. We put in some expense controls given the current economic environment. But I just mean it's just going to be a little noisy. We'll have actually heightened expense in a number of categories because of the PPP program. Now having said that, it's still going to be a profitable program, Wally.

So it -- but it will be a little bit of margin distortion. And when we talk about margin, we exclude out any effect from the PPP -- take the $914 million of loans that earn 1% and exclude that from the margin is the way we're going to look at it and think you'll want look at it that way as well.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [45]

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Yes. Okay. And that's probably a good segue to think about the fees related to PPP. I understand that when you've got a few loans that are bigger in that 1% fee range versus a ton of loans that are smaller in that 5% range, are we -- would you suggest that we'd be better off modeling closer to that 1% range? Or do you think that maybe that midpoint in the 3% range might be...

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [46]

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I've seen -- yes, I've seen people modeling as much as 4% or something. 3.5% to 4% would seem a little high to me. So I don't know what those banks -- it runs a gamut. We got a $2,000 -- we got a $1 million, $2,000 and $10,000 loan request. And those customers, they need the help. They need it more than people with the big money. So we're -- they're -- those are probably important -- just as important to us as the big customers. Those are -- but yes, I think you're on track, Wally, with the 3% range.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [47]

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Okay. Okay. And then my last question on the loan deferrals. I believe you gave the number of $574 million at 3/31. Would you be willing to share what that number is today?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [48]

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Sure.

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [49]

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Yes. Today...

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [50]

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Or today, is it...

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [51]

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Through part of last week, I guess. I'd say, through April 14, the number is $988 million through -- I guess, through the first half of April. So...

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [52]

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Okay. And I mean, are you continuing to see a pretty high volume of requests coming through?

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Henry F. Abbott, ServisFirst Bancshares, Inc. - Senior VP & Chief Credit Officer [53]

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I think it slowed down and in part now that people have some PPP funds. As Tom said, we were able to accommodate the overwhelming majority of our customers. So they now have some more capital to the payments on loans. I think the volume has slowed down. Whether that's related to them getting PPP money or our bankers working on PPP loans at the same time, I can't tell you, but it is slowing.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [54]

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Okay. On PPP part 2, which looks like it could be a possibility. How many applications have you received that you didn't -- weren't able to get through before they ran out of money? In other words, how much do you already have in the pipeline that you could take advantage of should there be a part 2?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [55]

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It's not huge, Wally. We got most of them knocked out, but it's in the $20-odd million range, I think, is the loans that we had in the pipe when it shut down. Of course, we've added loans to the pipe since then from people that are not our -- we, again, prioritize our existing clients. But then we've added clients from other banks, trying to help people that had a bank -- some banks didn't participate in the program, and you find out, it's kind of amazing to me. But anyway, we're trying to help people.

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Operator [56]

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Our next question is a follow-up from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [57]

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Just one more quick one for me on the margin. I appreciate the 2Q outlook of relatively stable in the 3/31 total deposit cost. Do you have what the spot loan yield rates were at 3/31 as well?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [58]

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No. Tyler, I want to say it was 4.60%, but I will e-mail it to you.

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Tyler Stafford, Stephens Inc., Research Division - MD [59]

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Okay. But the expectation is with -- I think it was 55 basis points of total deposit costs at 3/31, the total margin in the second quarter ex PPP should be 3.60%-ish. Is that what you said?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [60]

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Yes. I mean we still think, exclusive of PPP, we'll still be at 3.60%. Yes, what I've got is the total loan yield for March, so that's before all the repricing and Fed cuts and all that. So I'll have to find out what the yield was at the end of March. I'll e-mail it to you. I'll e-mail that to you, buddy.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [61]

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And again, Tyler, where our goal is to strengthen loan price, and it's going to take time. I mean it doesn't happen -- certainly, we'll have an opportunity in May, June renewal season. And then obviously, we have more 2-year lines of credit than we used to in the old days. So we see opportunity to strengthen loan pricing.

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Tyler Stafford, Stephens Inc., Research Division - MD [62]

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Yes. No, it will be impressive if you guys can hold the margin flat in 2Q after 150 bps of cuts in March. So that will be impressive to see then.

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Operator [63]

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This will conclude our question-and-answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.