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ServisFirst Bancshares Inc (NASDAQ:SFBS)
Q2 2020 Earnings Call
Jul 20, 2020, 5:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the ServisFirst Bancshares Second Quarter Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

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

Davis Mange -- Investor Relations

Good afternoon and welcome to our second 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 the 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.

Thomas Ashford Broughton -- President and Chief Executive Officer

Thank you, Davis and good afternoon. Thank you for joining our call. I'll talk a little bit about -- I'm going to give you a brief overview of the second quarter. It was a historic quarter in many -- many aspects and many regards. And the first and most obvious thing that struck me about the financial statement is we ended the quarter with the highest level of liquidity that we've ever had in the Company and by far the most improvement in any one quarter with $1.5 billion in new deposits. We did close over $1 billion in PPP SBA loans to almost 5,000 borrowers. We have seen the market share reports and among the loans greater than $150,000 ServisFirst had a number one market share in both the State of Alabama and in Birmingham. I usually don't make self congratulatory statements on this call and let results speak for themselves. But we do think that is a good sign for the future and that we have strong relationships with the owner managed privately held companies in the State of Alabama and of the rest of our footprint. So we think there is good opportunity to grow our bank with those opportunities that we see there.

Also from a historic standpoint, it was the largest decline in line utilization in any quarter with a decline from 49% to 40% line utilization, which -- that is the huge amount of drop we saw attributed a lot of to the paydowns to the PPP -- from the PPP facilities, loans to the borrowers lines as well as I think people have just been conservative and cautious in paying down their line where they are able. So it shows the strength of our Company. That in turn led -- essentially led to a decline in loans of about $275 million that we would have had additional loan growth in the quarter of $275 million if we're not seeing that decline in line utilization. Most of our PPP income in the quarter was offset by one-time expenses. Bud will be talking about that in a few minutes.

We did see a good bit of improvement in all of our asset quality metrics in the quarter with reductions of both NPAs and very low past dues. Henry Abbott is going to discuss a good bit more in terms of the asset quality in a few minutes. I know that's a topic certainly during the pandemic and the recession we have had over the last few months.

Talking about loan deferrals, that's obviously a subject of huge interest today. Our loans deferrals peaked at the end of May at $1.248 billion. Those deferrals as of July 15th have fallen over 90% to a current level of $127 million. We expect further declines from there over the next several weeks. So we feel good about where we are. Henry Abbott and then I as well can address any questions you have about loan deferrals and our future policy.

Our 90-day loan pipeline, that is down about 20% from the first quarter, which is certainly something you would expect to see given the COVID-19. I think a lot of people hit the pause button on projects. We are seeing more moving forward over the last few weeks. So I think it will improve.

Our total pipeline, including loans greater than 90 days, is consistent with the March 31 end of the quarter. So we think we will see it get back to normal over the next couple of months. We did make additional loan loss provision in the quarter that would put us in line with our CECL model. So we can talk about that as you -- additionally -- questions that you have.

And also of note that our loan loss reserve and equity exceeded $1 billion for the first time in our history for the first half. So we're certainly proud of that to reach that milestone.

I was now going to ask Henry Abbott, if he will give us an update on the effects of pandemic on certain industries and general credit quality update? Henry.

Henry Abbott -- Chief Credit Officer

Thank you, Tom. The Bank's loan portfolio has continued to perform well in the second quarter despite the economic impacts of COVID-19. At the end of the quarter past due decreased by $2.8 million from the first quarter and nonperforming assets decreased by roughly $12.7 million. Past due to total loans were 13 basis points and NPAs were 26 basis points for the quarter. This 30% decrease in NPAs was primarily driven by a settlement being reached on our largest nonperforming asset. I'm pleased to say we have no more exposure related to that credit and part of our second-quarter charge-offs were related to exiting it. As a reminder, from prior comments, the Bank has a well-diversified loan portfolio in both geography and industry classifications. Our portfolio is granular and we have no major concentrations within industry codes.

We initially took a three-month approach to deferrals and are assessing future deferrals proactively to assess the borrowers' current financial status. At the end of May, we had roughly 15% of our portfolio on some form of a deferral. By comparison, at July 15th, as Tom mentioned, we were down to $127 million in loans, roughly 75 units. We had some clients in severely COVID impacted industries who needed additional deferrals and we have and will continue to underwrite their ability to repay the debt in the current operating environment. To date, we have granted roughly $60 million in second deferrals. As documented by this trend, it is our expectation that the overwhelming majority of our clients who had the deferral will or have already returned to normal payments.

Slide deck we have posted highlights some of the comments I'm about to make in more detail, as laid out on Slide 4. We are not a large hotel lender, as noted by hotels being less than 2% of our loan portfolio. The majority of our hotels are flagged and none are oriented toward conventions or resort style accommodations. Over 83% of our hotel portfolio is not on a deferral and none are currently on the watch list. Restaurant exposure is noted as less than 3% of our portfolio. Retail CRE consists of $270 million in loans or 3.5% of the loan portfolio. The average loan size is less than $2 million in this segment and are to well-established borrowers that we have long-standing relationships with. We continue to proactively assess our loan portfolio in these more COVID impacted industries as well as others to ensure we're taking appropriate measures as necessary.

As referenced by Tom in prior comments, we've seen an uncharacteristic drop in commercial line utilization. It is my speculation that this is driven by PPP loans helping provide our borrowers additional liquidity and this decrease in utilization helps show the continued strength in our commercial loan portfolio. We're continuing to utilize our proven incurred loss methodology for calculating our ALLL and delayed CECL implementation. However, with second quarter we increased our loan loss reserve to support the reserve as provided by our CECL model. It is our intent to continue to run parallel models. As of 6/30 our reserve was 1.10% as is, but when excluding PPP loans, we're actually at 1.26%.

Thomas Ashford Broughton -- President and Chief Executive Officer

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Thanks, Tom. Good afternoon. Net interest margin for the second quarter was 3.32% versus 3.58% for the first quarter. Adjusting for the average PPP loan balances of $886 million, PPP interest income and $2.6 million in PPP loan fees, the net interest margin was 3.47%. Also adjusting for the increase in average fed funds sold balance of $358 million in the second quarter, the net interest margin was 3.44%. The remaining net deferred -- PPP deferred fees are $28.9 million. That breaks down into fees of $31.1 million and deferred FASB 91 expenses related to the PPP loans of $2.2 million.

As far as future improvement to our interest expense, we have CD maturities for the remainder of 2020, $247 million. The average rate is 1.67% [Phonetic]. And we expect majority of these CDs to reprice at 0.70% or below and we are also reviewing our special rate DDAs. Another factor, we have $50 million of brokered CDs that mature in August and the rate on those CDs is 1.67% [Phonetic]. And a reminder, we have no accretion income related to acquisitions.

Liquidity, Tom touched on this. Fed funds sold, when we started funding the PPP loans in April, was $600 million and the funds, excess funds at the end of June were $1.44 billion. For our non-interest income, we added six new banks in the second quarter through the American Bankers Association Credit Card Referral Program. Credit card income, the net income, was $1.4 million in the second quarter versus $1.7 million in the first quarter. The spend on our purchase cards decreased by $4 million in the second quarter and the spend on the business credit cards decreased by $9 million. And we think this -- the majority of that's related to the COVID.

Merchant services fee income, the income in 2020 so far is $234,000. We expect that to improve because year-to-date 2019 was $249,000 and we have two officers that are dedicated to selling this service. Mortgage banking income, it was up $1 million for the quarter. It's $2.1 million in the second quarter versus $1.1 million in the first quarter.

Also, we purchased a LIBOR cap, a one-month LIBOR cap, in the second quarter, $300 million notional amount. The mark-to-market adjustment in the second quarter was negative $252,000. The strike price for that cap is 0.50%. A reminder, we do not sell any government guaranteed loans to generate noninterest income.

Noninterest expense, the PPP expenses for the quarter were $3.2 million. $2.5 million of that was bonuses and over time. ORE expenses for the quarter increased $703,000 and that had to do with updated appraisals on two credits. Total producers were down, net of six producers. Year to date, we had 139 at the end of 2019 and 133 at the end of June. Total employees were down four. We had 506 at the end of 2019 and 502 at the end of June.

Capital, Bank's Tier 1 leverage ratio was 9.90% at June 30th. And then tax update, quarter-to-date tax rate for 2020 is 20.95%, 21.22% without stock option tax credits of $136,000. Second quarter of 2019, it was 20.74%. 21.15% without stock option credits of $186,000. Year-to-date, 2020 is 19.95%; 21.26% without stock option credits of $1.2 million. And then year-to-date 2019 it was 20.15%; 21.23% without stock option credits of $958,000. Objected rate [Phonetic] for the remainder this year is 22%.

This concludes my comments and I'll turn the program back over to Tom.

Thomas Ashford Broughton -- President and Chief Executive Officer

Bud, thank you. Just a few things before we take questions. And one thing I'd like to comment on is from a standpoint of economic improvement we've seen, it greatly exceeded any -- I think almost any economist expectations. I would agree with most of them that are currently thinking that we're going to need a couple of -- two or three years to get back to full employment economy. And I do think the community banks in our country will play a major role in helping us create the jobs necessary to get back to full employment. And I think also -- I think the political mood is such that they recognize that the community banks are necessary in our country whether you're a Democrat or Republican, and I think they recognize that at this point in time.

As I said last quarter, we do see significant opportunity for growth on the other side of this pandemic. From a liquidity standpoint, I was fully expecting that we would need to draw on our PPP liquidity facility of fed by the second or third week of April. And meanwhile our liquidity has improved by $1.5 million in the quarter, which my hope was that certainly that the PPP money would prove to be much like hurricane money for banks that have been affected by hurricanes. I sort of call it hurricane money because of -- the money comes in and it might change hands but it still stays in the banking system and stay -- hopefully stays in our bank where one -- our customers might have gotten the money, they paid it to their employees, they paid it to other vendors. Those vendors put the money back in the bank. So we continue to enjoy those deposits, at least for the time being.

We do think having high liquidity with excellent credit quality will position us well as we go forward the rest of this year and 2021. We'll be glad to answer any questions you have. Thank you.

Questions and Answers:

Operator

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

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey. Good evening, everyone.

Thomas Ashford Broughton -- President and Chief Executive Officer

Hey. How are you, Kevin? [Speech Overlap]

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

I'm good. I'm good. Listen, I'll probably start out with a very top-level one. On PPP, it's obviously very lumpy and it affects several different areas in terms of average balances, the origination fees and maybe when you touch on that, Bud. I think last quarter you guys had talked about maybe that flowing through the noninterest income line. But it looks like it's flowing through the margin line like the other banks.

And then, in -- and then in terms of the impact to the margin. Just if you're looking out over the next few quarters, how should we be modeling PPP if you were us? Thanks.

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

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

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Kevin, I don't have the form yet. We couldn't apply for forgiveness today if we wanted to. We do have a positive carry on these loans. So we're not -- again, we thought our liquidity would be such that we will be into the fed window by now, but we haven't touched it and are looking for home for liquidity trying to find investments to buy instead. So let's say they come out with it in August and we start the forgiveness process and September we apply. So then you're -- they've got 60 days to pay if it might come. It might come as early as October, but it might come as late as November-December as well before.

And we underwrote -- the idea behind 100% of our loan that we own -- PPP loans is that they would all be forgivable loans. So we may end up with some small amount of money, but I can't imagine it would be more than $20 million, $30 million, $40 million of money left out in PPP loans after the forgiveness period. Does that give you a good enough answer, Kevin, or a good [Speech Overlap]?

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Yeah, yeah, because it's going to -- well, today from when we started funding the PPP the liquidity is up $1 billion. We are $1.6 billion today in excess funds and we were $600 million when we started. [Speech Overlap]

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Yeah, I mean when these PPP loan proceeds that are clearly still in our bank runoff is a good question. I don't -- certainly don't have the answer, Kevin. It's my first pandemic.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Thank you.

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Thank you.

Operator

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

Brad Milsaps -- Piper Sandler -- Analyst

Hey. Good evening, guys.

Thomas Ashford Broughton -- President and Chief Executive Officer

Hey, Brad.

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Good afternoon.

Brad Milsaps -- Piper Sandler -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Yeah. We -- I think we've added one significant credit this quarter that it is a -- it is not on the list of credits we highlighted in the slide deck, but it is clearly affected by COVID-19, especially transportation company that's going to have issues until like we get behind the pandemic and get a vaccine. So that's probably the number one credit that we've added.

And, Henry, would you add anything else to that statement?

Henry Abbott -- Chief Credit Officer

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

Brad Milsaps -- Piper Sandler -- Analyst

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

Henry Abbott -- Chief Credit Officer

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

Brad Milsaps -- Piper Sandler -- Analyst

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Yeah. We took $2.4 million as a credit -- $2.4 million as a credit against salaries and benefits. And then that plus the fee accretion, all that is a -- all that nets to the interest income. That will go against the margin once that accretes or amortizes back into income over 24 months.

So you got a net of [Speech Overlap] -- yeah, now what you've got -- between the two you had $28.9 million net between the fees and the deferral and that $28.9 million would have 22 months left to accrete into income.

Brad Milsaps -- Piper Sandler -- Analyst

Understood. But the FAS 91 that you incurred in the second quarter, that essentially offset the bonus payment. So in other words in the third quarter --

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Oh, right. [Speech Overlap] Yeah.

Brad Milsaps -- Piper Sandler -- Analyst

I think, you're going to stay -- you're going to stay relatively flat [Speech Overlap].

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Right. Yeah. Yeah $2.5 million of expense offset by the $2.4 million and the deferral in salaries and benefits.

Brad Milsaps -- Piper Sandler -- Analyst

Okay, got it.

Thomas Ashford Broughton -- President and Chief Executive Officer

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Well, I think what is -- Tom that is the $2.5 million and bonuses and over time minus what you deferred and FASB and salary [Speech Overlap].

Thomas Ashford Broughton -- President and Chief Executive Officer

I thought maybe he was trying to arrive at an answer and I thought I'd help him get there. Sorry.

Brad Milsaps -- Piper Sandler -- Analyst

Yeah, yeah. No -- yeah, yeah. That's helpful. And then the difference, I think you said $4.1 million in fees this quarter or $2.6 million in fees and $4.1 million in total. The difference would be the coupon and the fees, is that right?

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

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

Brad Milsaps -- Piper Sandler -- Analyst

Okay. Okay. Got it. All right. I may follow up with you, but -- thanks a lot. I appreciate it.

Thomas Ashford Broughton -- President and Chief Executive Officer

Okay.

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

I'm confused. So if you -- you might see a [Indecipherable].

Brad Milsaps -- Piper Sandler -- Analyst

Yeah, yeah, I'll follow-up with you offline.

Thomas Ashford Broughton -- President and Chief Executive Officer

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

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

Brad Milsaps -- Piper Sandler -- Analyst

Got it, got it. Understood. So about $3.3 million a quarter until --

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Yeah, each.

Brad Milsaps -- Piper Sandler -- Analyst

If they -- yeah, each quarter, assuming they get to -- yeah, I am with you. Okay. Thanks, guys. I really appreciate it.

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Thank you, Brad.

Operator

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

Arjun Tuteja -- Jarislowsky Fraser -- Analyst

Good evening, guys.

Thomas Ashford Broughton -- President and Chief Executive Officer

Hey, Arjun. How are you?

Arjun Tuteja -- Jarislowsky Fraser -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Yes, we are in different -- especially primarily one thing is our multifamily, construction projects they are pulling back and the pricing has strengthened. In fact, we've seen pricing strengthen across the board during the pandemic at every area. We're not seeing the intense price competition that we saw prior to the pandemic. You still see some. There are some people that haven't gotten the memo yet that the world changed a bit, a few banks, typically smaller banks that haven't gotten the memo on the world has changed. So -- but we are seeing competition pullback.

We do see -- we did a lot of PPP loans for customers of other banks during the pandemic with the understanding that we would -- they would move their bank into us. And we've also had a lot of companies contact us that we are unhappy with the buying. They did their PPP loan through their old bank, but they want to go through the forgiveness period with their old bank before they change banks, which is certainly understandable. I would do that myself. So we do see opportunities there, Arjun.

Arjun Tuteja -- Jarislowsky Fraser -- Analyst

Okay. Okay. That's helpful. And I guess it's good that pricing is getting better because the fed rate cuts -- I mean the better pricing can offset that a little bit to follow back to have a good margin. My second question is on our losses. So I'm going to pleasantly surprised, but I'm also a little confused. So help me in understanding this. When I look at your provision line, I don't see a recession in US, but when I look at provisions which other big banks are taking or other peers which we have, they are taking big provisions. So I'm curious is this -- are bank specific that we have a tighter credit or is it because of the segment of the customer we are in that segment is just stronger?

And I'm not talking about just COVID-related losses which are in hotels and restaurants. I'm just talking about losses which happened in the recession, which we don't even see today, but that will [Phonetic] model out and say that if I see myself going through a recession, I expect a certain number of losses. And I don't know which customer will go bankrupt, but I'm just going to provision it right now and keep it there. So help in understanding where do we -- what do we think about that.

Thomas Ashford Broughton -- President and Chief Executive Officer

You're asking a good question. We certainly don't -- I don't -- I can't speak to other banks and their provision. But we're not in a lot of the heavily affected industries to a great degree. Certainly we have minimal energy exposure. Our restaurant and hotel exposure is certainly -- we have probably a little bit more than you want right now, but we certainly have well-managed exposure in those industries.

I've maintained since the pandemic started the customers that are going to suffer are not necessarily ones in the affected industry. They're going to be the weak customers in every industry. And I think that's playing out as people who are the weak players are not doing well. And as I said in last call, in my surprise at J. C. Penney got in financial trouble. No, because they were -- I think the peak of their -- as a retailer was when I was in a grade school and I'm 65 years old. So it's been a long time since they've been a viable company.

So we see -- we think we've adequately -- we are providing for more than our model calls for. We're matching our CECL model in terms of provision. We don't have a lot of consumer exposure. We don't have any energy exposure and those are certainly two areas where you're seeing some big provisions. But the best I can tell from some of the larger banks on look at their financial statements, their quarterly financials, and I don't know. Henry, would you add any -- Henry Abbott, our Chief Credit Officer, if you could add anything to that. Clarence Pouncey, our Chief Operating Officer.

Henry Abbott -- Chief Credit Officer

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Clarence, would you add anything?

Clarence C. Pouncey -- Executive Vice President and Chief Operating Officer

I would just say that we're not a leverage lender. We don't have any leverage loans. We have a very small position of shared national credits. Those are companies that we know with our footprint that we know leadership and we have deposit relationship with. It's around $50 million of shared national credits. So a low position there relative to the overall portfolio.

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Does that --

Arjun Tuteja -- Jarislowsky Fraser -- Analyst

Thank you. Yeah. That helps. Thank you very much.

Thomas Ashford Broughton -- President and Chief Executive Officer

Thank you.

Operator

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

William Wallace -- Raymond James -- Analyst

Thanks. Good evening, guys.

Thomas Ashford Broughton -- President and Chief Executive Officer

Hi, Wallace.

William Wallace -- Raymond James -- Analyst

Hi. So I was surprised at how well your deferrals have improved. And if I'm reading the table on Slide 5 correctly, it would appear that the majority of your deferrals are coming off before the deferral period is even over. Am I reading that correctly?

Thomas Ashford Broughton -- President and Chief Executive Officer

Go ahead, Henry.

Henry Abbott -- Chief Credit Officer

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

William Wallace -- Raymond James -- Analyst

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

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

We've had over -- we've had over $1 billion --

Thomas Ashford Broughton -- President and Chief Executive Officer

Come off.

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Come off. We're down $127 million as of July 15.

William Wallace -- Raymond James -- Analyst

[Speech Overlap]

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Look at the difference in slide deck, Wally.

William Wallace -- Raymond James -- Analyst

Yeah. What's the difference?

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

The slide deck had $140 million or $145 million and that was early draft and it got out there, but the actual number is not much different. So $127 million in July 15 still on deferral. Keep going Wally.

William Wallace -- Raymond James -- Analyst

Well, I guess I'm looking at the $531 million balance of $1.248 billion which was 45 days from July 15. So I guess I'm trying to figure out just how so much has come up. So these guys are off for all due before 8/15. Is that --

Thomas Ashford Broughton -- President and Chief Executive Officer

Give him some white points, Henry.

Henry Abbott -- Chief Credit Officer

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

William Wallace -- Raymond James -- Analyst

Yeah. Okay.

Henry Abbott -- Chief Credit Officer

And it becomes June 6th, their next payment is the true payment. So they're out of a deferral come June 6th if their payment were due on June 5th.

William Wallace -- Raymond James -- Analyst

Right.

Henry Abbott -- Chief Credit Officer

And we then deferred principal or that was the full payment deferral.

William Wallace -- Raymond James -- Analyst

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

Henry Abbott -- Chief Credit Officer

If they were off of this report that means that their next payment owed is a full payment or interest whatever it was, but yeah.

Thomas Ashford Broughton -- President and Chief Executive Officer

And we all [Speech Overlap]

Henry Abbott -- Chief Credit Officer

Yeah, go ahead, Wally.

William Wallace -- Raymond James -- Analyst

Well -- so all of that $1 billion whatever has made their payment since their deferral at mid-period end, they are officially not going to go to 180 days.

Henry Abbott -- Chief Credit Officer

Overwhelming majority, yes.

Thomas Ashford Broughton -- President and Chief Executive Officer

And also, Wally, I'd also add -- I add that a number of customers, fairly significant number, got approval for deferral and then continued to make their payments.

William Wallace -- Raymond James -- Analyst

They -- were they counted in these numbers?

Thomas Ashford Broughton -- President and Chief Executive Officer

They were counted as deferral.

William Wallace -- Raymond James -- Analyst

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

Henry Abbott -- Chief Credit Officer

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

William Wallace -- Raymond James -- Analyst

Okay.

Thomas Ashford Broughton -- President and Chief Executive Officer

In some cases they might be asking for a second deferral because liquidity position, some of the medical providers and that sort of thing that have seen their business fall off, but we feel pretty comfortable most of them will resume normal operations here. And you can only put off putting in a new hip so long. So we see those returning to normal, Wally.

William Wallace -- Raymond James -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

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

William Wallace -- Raymond James -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Yeah, my take -- I'll ask Henry to -- and Clarence to chime in, but I don't see any significant deterioration from the pause reopenings in our --most of our -- if they're manufacturers in the construction business, they never -- they never slow down much. Some of the manufacturers do construction never slowed in the south like it did in the Northeast. So we were not -- we don't have a lot of exposure to -- obviously good business people figure out how to adapt to make money. A restaurant with a to-go business, some of them are -- many of them are cash flow positive and many of the fast food, fast casual are doing quite well. So I don't think there is a significant hitting the pause button on these states reopening. I don't see a big fall-off in economic activity.

Henry, do you, or Clarence?

Henry Abbott -- Chief Credit Officer

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

William Wallace -- Raymond James -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Well, we've already been doing it. While we could cap in salary increases for this year, we won't bear a lot of fruit this year, but it will bear fruit next year. Certainly head count control, we're looking hard at everybody and every department trying to cap expenses where possible. Certainly charitable contributions, anything that's controllable we're trying to control it as closely as we can. Obviously there's a lot of noise right now with the PPP expenses and everybody that -- everybody that we ask to -- we needed help from on PPP, our vendors, they saw us coming and they charged a big price. And we think all of our PPP fee expenses are behind us, except for we are defendant on one class action lawsuit on agent fees. There are a number of them around the country and we're defendant along with a number of other banks on a case in Pensacola, Florida.

William Wallace -- Raymond James -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

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

William Wallace -- Raymond James -- Analyst

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

Operator

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

Kevin Swanson -- Hovde Group -- Analyst

Hi, guys.

Thomas Ashford Broughton -- President and Chief Executive Officer

Hi, Kevin.

Kevin Swanson -- Hovde Group -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Yeah. I was afraid somebody was going to ask that question. The hurricane money, as I call it, is it here to stay? How much of it is here to stay? Will we fall back below $10 billion? I probably don't think so. We will come under large bank supervision after two quarters of -- we really already have. We've been -- our examiner teams have been preparing us for over a year now to become a large bank and certainly in the control of how they managers and how they regulate us. So we think we are getting close to where they need us to be from that standpoint. But I know I didn't answer all your question. I missed something in there, Kevin, what was it?

Kevin Swanson -- Hovde Group -- Analyst

Does it change any of your longer-term expansion plans?

Thomas Ashford Broughton -- President and Chief Executive Officer

No, we're still talking to people, but right now during the pandemic, most people aren't looking to make a change as you might imagine. People are, from an evolving [Phonetic] standpoint, we don't have a large -- we're talking to one group, a pretty good sized group of production people actively right now. But easily will have three or four where we are talking to in any given time. Most of them don't work out, but we usually have three or four we're talking to at a time. So I would say activity is off a little bit from that standpoint.

And of course we -- first few weeks of the pandemic we weren't looking to make any big changes in our business plan, our business model. We were taking care of our client -- focused really on taking care of our clients, a, number one before we do anything else.

Kevin Swanson -- Hovde Group -- Analyst

Thanks. I appreciate M&A is not been on the radar for a while in terms of I guess the priority list. But it seems like you guys' currency has held up quite a bit better than most out there and maybe there is some banks that aren't surviving through the process as well. Does that -- do those conversation cease help at all or is it still obviously organic first?

Thomas Ashford Broughton -- President and Chief Executive Officer

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

Kevin Swanson -- Hovde Group -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

We thought that there would be a forgiveness process. Again, we thought we would be in the fed liquidity window by the second or third week of April and then we'd be out of money and have minimal liquidity in the bank instead of record levels for liquidity. So -- and we thought that the SBA forgiveness process would be much farther off than it is today. They don't even have a form designed yet. They say they're coming with a form in the next few weeks. So, we thought that we had a timeline where we would have all the loans forgiven and off the books by the end of June.

So, I guess, perhaps, I was naive in dealing with the government to think that we would have that sort of efficient timeline in terms of forgiveness, but we had a timeline worked out where the loans, the customers would have earned, the payroll would have been done, they could have applied for forgiveness by the second or third week of June, we would have them tendered, and we've had customers, a lot I ask and say, "Hey, we'd like to get this done." We say, "Well, there's not a form," just because they send us their forgiveness form doesn't mean it's forgiven, it's not forgiven until the SBA repays us the money with interest, and I have 60 days to do so.

So the companies would like to get it off their balance sheet, but now we still see the vast bulk of these loans, but again, considering the fact that we do have a positive carry every month on these loans, I mean, 1% is not much, but it's better than the 10 bps we we're earning at the fed per annum. So, it's 10 times that amount, so -- and we've not been rushing out about a lot of new investments, right now. We kind of want to see where this liquidity settles, the hurricane money, how much of it sticks, how much of it leaves. So, there are a lot of unknowns.

I think most banks with any -- given the lack of clarity in the economy, keeping large liquidity makes a lot of sense. And it presents us with a lot of options on the other side of this in terms of our ability to make acquisitions to grow. We'll be able to do what we want to do and we think there'll be a lot of opportunities for the bank on the other side of this. So, we're still extremely optimistic. We just don't have the timeline now of when the pandemic is going to be over. I don't know the answer to that question.

Kevin Swanson -- Hovde Group -- Analyst

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

Thomas Ashford Broughton -- President and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Davis Mange -- Investor Relations

Thomas Ashford Broughton -- President and Chief Executive Officer

Henry Abbott -- Chief Credit Officer

William M. Foshee -- Executive Vice President, Treasurer, Secretary and Chief Financial Officer

Clarence C. Pouncey -- Executive Vice President and Chief Operating Officer

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Arjun Tuteja -- Jarislowsky Fraser -- Analyst

William Wallace -- Raymond James -- Analyst

Kevin Swanson -- Hovde Group -- Analyst

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