ServisFirst Bancshares, Inc.

Good day and welcome to Service First Bancshares' first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchstone phone. To withdraw your question, please press star, then 2. 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.

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 Service First assumes no duty to update them. With that, I'll turn the call over to Tom.

Tom Davis, thank you, and good afternoon, and welcome to everybody to our call. My comments will be a little bit longer. The normal, because these are interesting times we're in today with a pandemic. You know, it seems like the first quarter was a long time ago. So much has happened, you know, over the course of the ensuing days. I guess we talk a little bit about the pandemic. We activated our pandemic plan on March 2nd. 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. Turns out somebody at the FDIC was right and I was wrong. Of course, we all thought that it was just going to be a bad flu season, that 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 go awry a bit here during the pandemic. But What we found, really, is that we had an excellent plan, thanks to our Chief Risk Officer, Mark Mulvey. We had an excellent plan. Our focus has been on employee safety, employee and customer safety. Number one is employee safety. Number two is customer safety. What we found is that a branch-like, technology-heavy business model works very well during a pandemic. Our business model was made for a pandemic. It's one of our regional CO cities. I'm so happy and I'm managing one 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 like most people. We've gone to 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, large conference room, this larger conference room than normal, so that we can all be socially distant, six feet apart. Also, our second focus has been on serving our clients and our community's needs, and we've We've received very positive feedback from all of our clients. I'll go into a little bit more detail. Sort of our stance, you know, 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 2nd. We've tried to be as conservative as possible. Certainly 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, a supplemental deck, and it's on the SEC website as well. Not a very thick deck, 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 six inches thick. I still remember it was a department store called City Stores out of New York. Obviously, I don't remember whether 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 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're 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 it in a few minutes. But I want to give a few high-level comments on asset quality. Henry's going to talk about the loan categories that are of interest to investors. We will would say that 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, you know, for example, if you've got some B apartments that, you know, 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. You know, I don't, you can hear anything you want to hear about what economists are saying that's going to happen to the economy over the next, I've been looking, if anybody's got a list of economists that have gotten rich from doing accurate forecasts, I wish somebody would email me the list that's on this call today. I'd love to have that, but I don't know of any. If there's a list, I'd like to know. I will say that charge-offs, you know, it's just common sense to tell you they're going to be elevated a bit, you know, over the next, you know, I don't think anytime soon. You know, I remember during the 2008 recession, what was cratering was home builders, you know, AD&C. We had some so bad, they started cratering 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. You know, this isn't like that. We've had It's been very calm with the customers. I think some have asked for loan extensions, and Henry's going to cover that in more detail. But yeah, I've kind of been surprised at who've asked for the loan extensions. It's 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. We don't expect any long-term credit issues or repayment issues from most of those sort of people. And the last thing I 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 deal. So they're in our footprint for the most part, and we feel really good about our customer base. Going to talk about deposit growth for a minute. We've seen really solid deposit growth in the first quarter. and more. 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 in the big banks, how there, you know, a lot of credit usage surged. In fact, our line utilization was exactly the same at March 31 as it was at December 31, within, you know, like 48.8 versus 48.2. So there'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. Commercial customers will call and say, well, they read the interest rates have dropped and they want to know if 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 costs have gone up. So we straighten them out from that standpoint that 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 that's going to 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 pre-tax, pre-provision 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. You know, we've had a lot of questions in the past about, you know, why don't you buy your stock back? I always answer, well, I've read a lot of studies and insiders never know when's the best time to buy stock back. The stock can always get cheaper. So you'd feel foolish if you bought it back at a higher price. We've gotten the questions about what are you going to do with all your excess capital? And I always say, well, you know, 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 bank stocks may get, bank prices may 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'm just going to talk for a minute about the Triple P program paycheck. It's a tongue twister to me. I call it the Triple P SBA program. You know, I've never been, we've never had a big, we've done SBA loans and certainly we want to meet our CRA, you know, 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, you know, 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. You know, 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'd made when the Democrats were in office. So I got enough of that business pretty quickly and didn't want to decide that 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 Schaebacher is one of our executive officers here in Birmingham, ramped up our program, did an outstanding job. We made about six months' worth of loans in two weeks' period of time. I think it was a little over 3,300 loans totaling $914 million that we have closed and funded. in the Triple P program in round one. I understand, I think round two is probably coming over the next few days, possibly. It's been an interesting time. We had people working, you know, 24-7 except for Easter Sunday, trying to get all these loans booked and funded. In very few cases, we, excuse me, we had a few that we didn't get done. It typically was Just because our clients had not given us all the information. Everybody has all the information they've given to us. We might have, I think we just made a mistake on maybe two or three 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 and I'm proud of what they've done to get those loans closed. As we put in our slide deck, 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 mentioned earlier, it's been strong. If we need any additional funding, we will go to the We've filled out the paperwork for the Triple P loan facility at the Fed if that's necessary, but I'm not at all sure that we'll need to do that. Due to the high demand, we did focus on existing clients, and we made an attempt first to prioritize the smallest clients first, thinking that they would need the help. You know, 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. You know, I kind of learned that, you know, during a pandemic, everything costs more, except all the catering we did for our employees. We were catering as many as three 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 costs 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 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. When you started, we only had maybe what we call seats at the SBA. We had three 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. I think we ramped up over the course of a few days from three seats to eight seats to 19 seats to 29 seats, and we got it done. All 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, it'll be a little noisy in the second quarter for the analysts to decipher in terms of all that. We will keep a reserve knowing that, you know, 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.

Thank you, Tom. And looking at the service first. I'm cautiously optimistic as the economy reopens. In reviewing 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, and lines of credit. We have very low exposure to SNICs, as they represent only $65 million in current balances on a total loan portfolio of $7.5 billion, which is less than 1%. The SNICs 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 non-performing 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. 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 non-owner-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 relief. We have taken a three-month approach to these deferrals and 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 five of the PowerPoint presentation, we lay out the industries of these deferrals. Given the uncertainty with the financial impact of COVID-19, we've chose to retain our proven incurred loss methodology for calculating our A-triple-L and delayed CECL implementation. With that, I'll turn it over to Bud.

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. Time to talk about our strong growth for loans in the first quarter. We grew $307 million. Deposits grew $302 million. Our variable rate loans were $3.1 million at March 31st, 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 31st balance sheet, our consolidated margin was 3.64. Also, our total deposit cost was 0.55 as of March 31st. For the future NEM, we expect it to remain north of 3.60 in the second quarter, exclusive of Triple P 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 bags, Alabama munis with an A or better underlying credit rating, treasuries, agencies, banks, senior, and sub-debt. And the average life of the portfolio is 3.4 years. For non-interest income, we added 70 banks in the first quarter through our American Bankers Association credit card referral program. Mortgage banking income, slow in the first two months. And then in March, we had fee income of $525,000. A lot of it had to do with the two Fed rate cuts in March. Also, a reminder, we do not sell any government guaranteed loans to generate non-interest income. For non-interest expense, our ORE expenses increased 498,000. That was due to updated appraisals on two credits. Payroll taxes increased by 318,000, primarily related to incentives that we paid in January. And our 401 contribution match increased 229,000 related to incentives. Net producers had five that left in the first quarter, and we added three. And as we mentioned in our fourth quarter call, we'll 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 31st, so we had a very good ratio. Our year-to-date 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 stock option credits of $772,000. We project the tax rate for the remainder of 2020 to be 22%. And that concludes my comments, and I'll turn it back over to Tom. 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 that 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 banks. 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 anything. You know, new request involves credit. We certainly, deposit accounts is pretty simple. Anything involves credit, we're stress testing any new loan request in light of the current economic conditions. You know, 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 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, a page on digital banking opportunities. We're seeing much greater adoption today than ever before of scanners. Take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, you can press star then 2. Our first question will come from Kevin Fitzsimmons with DA Davidson.

Hey, good evening, guys. Hey, Kevin. I recognize up front 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 pre-tax, pre-provision profitability you had and whether Did you entertain the thought of using even more of that to be aggressive more than you even thought what you can see now just to try to get more of it in the rear view mirror? That's a long-winded way of saying how should we think about provisioning going forward?

That's an interesting question, Kevin. Obviously, if we thought we needed more money We would have put more money in there. The clear answer is if we felt necessary to do that, we would have done so. Again, we like our customer base. We feel good about our customer base. 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. You know, it takes a 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 Triple P. And they're estimating a little on the high side. And I 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 requests and you average those in with some very large ones that might be $2 million, $5 million, that sort of thing, you get some 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 able to hide. But we think we'll have an opportunity. to make anything we think we'll need, we can do most of it in the second quarter, Kevin. 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 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?

You know, we had a couple of bank holding company loans close. They were pretty good size, you know, good solid companies. We had a marine oil and gas company 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 exposures. Not the vast part, but the biggest one is a vessel that's leased on a long-term lease to a major oil company. Those probably three credits distorted the numbers upwards, Kevin, if that makes any sense.

Okay, that's great. Thanks, guys. That's it for me.

Our next question comes from Tyler Stafford with Stevens.

Hey, good afternoon, guys. Hey, Doug.

Hey, Doug.

Hey, 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 impact What does the qualitative factor add to the allowance and reserve bill this quarter?

I don't know if we have that specific amount in front of us. We'd have to go back and look.

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

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

Yes. Early in the quarter, Thomas and Tom, obviously early in the quarter the difference you know first of all we look at CECL two or three different ways but we start from the stance if you're going to be as conservative as possible you don't change anything that you don't need to change we got enough going on and what we've had going on is this SBA Triple P program and it's been kept us extremely busy and then we've had all their you know requests for you know people looking for loan extensions because the regulators announced to the world that they could have them so we had our hands full you know primarily with triple P loans but you know so we look at it on a couple different ways first of all don't change anything you don't need to change early in the quarter the difference between the two models was negligible as of because of the deteriorating economy due to COVID-19 at the end of the quarter We've put in another $8 million due to the COVID-19, you know, on the CECL models. It's not a meaningful, you know, not really a meaningful amount. And so, you know, 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, you know, CECL at some point. If you already adopted this, 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 new.

Yep. Okay. So if you had adopted CECL, the incremental 331 provision would have been an additional $8 million?

Yes.

Okay. All right, got it, thanks. 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?

Go ahead, Ian.

Yeah, so as of 3-31, total balances deferred was $574 million, and that was about 5% or less than 5% of our customers in terms of units. So $575 million. That's at the end of the quarter.

Perfect.

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

Okay. All right, thanks for that. 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 none of those balances on the watch list.

I mean, we are selective with our hotel lending. You know, we're traditionally looking at low loan-to-value type hotels. You know, at this time, none had been downgraded, and, you know, all were performing loans at the end of the court, and all still are.

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

Not every day, but in many cases we did. That's the only thing we got a good deal on was the catering. We ran 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.

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

Thank you, Tyler.

Our next question comes from Graham Dick with Piper Sandler.

Hey, guys. Good evening. I'm on for Brad tonight. Hey, Graham. 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 That segment is initially quick service or way towards casual dining.

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

Okay, great. That's very helpful. And then kind of following up with the loan growth question, you know, 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 you know loan growth at the other end of this thing maybe is there a light at the end of the tunnel do you think you you might be able to get close to picking up where you left off or you expect to take uh some time to ramp back up to that that low double-digit rate you guys had in 2019?

We we see an abundance of loan opportunities Graham in spite of the fact that you know our people we we've taken them all off the road we're not making calls 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'd 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, you know, we can, again, we can see, you know, 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 there were just literally a couple of months ago.

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

I would say, Graham, a lot of people have hit the pause button on projects, which is just kind of common sense. If you've got a project underway, a lot of people have hit the pause button for a few months just to let the dust out a little bit.

Our next question comes from Kevin Swanson with Hovde Group.

Hey, guys. Hey, Kevin. Hey, Kevin. Obviously, the multiple in the stock has held up well compared to others. And, you know, 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. You know, 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 of thinking around being an acquirer? Now that the multiple seems to be stronger on a relative basis and kind of where you guys sit.

You know 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 you know just literally a few weeks ago the prices are you know substantially better that I would think then you know if people are even Once M&A starts back up, which might be, you know, it might be six months. You know, I mean, I would guess it would be six months before we see any activity. But certainly, we'd be willing to entertain it at the lower level of pricing that we see today.

Okay, thanks. And I know that last one is, you know, 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 and the impact? You know, 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.

Well, again, we're going, you know, any new request, you know, we're focused on our existing clients and that's who we should be focused on today. But on any new request, we're putting an extra stress test on it. As one of our executives, Greg Bryan in Tampa said, that's what we did during 2008 to 2012 in Florida is we put an extra stress test on any loan request. So it makes perfect sense. I've always said we need to make the same loan decision When the stock market's gone up 5,000 points or gone down 5,000 points, we need to be emotionless on making a good sound underwriting decision and it shouldn't vary at all. So, you know, the same underwriting standards apply and we want to deal with good people and good quality people.

Okay, great. Thanks, guys. Thank you.

Our next question comes from William Wallace with Raymond James.

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

Well, 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.

And what kind of expense does it add to go back and do that? Is that an expensive question?

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

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

Right, right.

Okay. On the expense side, is there any way – there was a lot of commentary in your preamble, Tom, about the expenses being pretty hard to – Gage, 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?

Yeah, the expenses in general are trending down. I mean, we expect to see, you know, all our expense initiatives, we expect to see most results in the We're more glad than ever we put in some expense controls, given the current economic environment. But I just meant it's just going to be a little noisy. We'll have a heightened expense in a number of categories because of the Triple P program. Now, having said that, it's still going to be a profitable program, Wally. But it'll be a little bit of margin distortion. And when we talk about margin, we exclude out any effect from the You know, taking $914 million in loans that earn 1%, exclude that from the margin. This way we're going to look at it and think you want to look at it that way as well.

Yeah. Okay. And that's probably a good segue to think about the 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, would you suggest that we'd be better off modeling closer to that 1% range, or do you think No, I've seen people at midpoint in the 3% range.

I've seen, yeah, I've seen people modeling as much as four or something, you know, three and a half to four, which seemed a little high to me. I don't know what those banks, you know, you know, it runs the gamut. We got 2,000, we got a million 2,000 and 10,000 dollar loan requests, and those customers, they need the help. You know, they need it more than people with the big money. So we're, those people are just as important to us as the is a big customer. But, yeah, I think you're on track, Wally, with three range. Okay. Okay.

And then my last question on the loan deferrals, I believe you gave the number 574 at 331. Would you be willing to share what that number is today?

Sure, Henry.

Yeah, today, through part of last week, I guess I'd say through April 14th, the number is $988 million through, I guess, through the first half of April.

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

I think it's 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 make 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. Okay.

On PPP Part 2, which looks like it could be a possibility, how many applications have you received that you 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 can take advantage of should there be a Part 2?

It's not a huge, Wally. We got most of them You know, 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. And, of course, we've added loans to the pipe since then from people that are not our, you know, we, again, prioritize our existing clients, but then we've added clients from other banks trying to help, you know, people that had a bank. Some banks didn't participate in, you know, the program, and you find out, you know, it's kind of amazing to me, but We're trying to help people.

Okay. I'll step out. Appreciate the responses. Thank you.

Thank you, Wally.

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

Hey, thanks for taking the follow-up. Just one more quick one for me on the margin. I appreciate the The 2Q outlook of relatively stable and the 331 total deposit cost. Do you have what the spot loan yield rates were at 331 as well?

No. I want to say it was 460, but I will email it to you.

Okay. But the expectation is with, I think it was 55 basis points of total deposit costs. At 331, the total margin in the second quarter ex-PPP should be 360-ish. Is that what you said?

Yeah, we still think exclusive of PPP, we'd still be at 360. Yeah, what I've got is the total loan yield for March, but that's before all the repricing and Fed cuts and all that. So I'll I'll have to find out what the yield was at the end of March. I'll email it to you. I'll email that to everybody.

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

Yeah, no, it will be impressive if you guys can hold the margin flat in 2Q after 150 bits of cuts in March. So that will be impressive to see then. Thanks, guys.

Thank you.

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.