ServisFirst Bancshares Inc (SFBS) 2020 Q3 法說會逐字稿

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

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

Good afternoon, and welcome to our third quarter earnings call. We will have Tom Broughton, our CEO; Bud Foshee, our CFO; and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we'll take your questions.

I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update them.

With that, I'll turn the call over to Tom.

Thank you, Davis, and good afternoon. As a backdrop to -- for our call today, I'll give you update on our -- where we see the economy. We've seen a really nice rebound in the economy in the last several months. One helpful thing is the Southeast United States has never had to shut down just like many areas of our country and has not had the social unrest problems in many areas. So it is now fully reopened. Unemployment rates on average in the Southeast are under 7%, which is much lower than most of the country. So we're fortunate in that regard. We're not seeing many issues even in affected industries, and we'd attribute that partly to softer and shorter shutdowns in the economy. We've also seen that well-run businesses adapt to a new environment, and that is what we have seen even in industries that have been affected by the -- highly affected by the pandemic. We did have one client that had a 100% revenue loss due to COVID and the company was restructured in the quarter. Henry will talk a little bit more about that in a minute.

Let's talk about our loan pipeline level. It sort of hit a low at the end of the last quarter. And it's now back at record levels, up 40% over last quarter. So we are seeing a nice rebound in loan demand since mid-July. The pipeline has more small close in spending in large part due to our bankers' efforts in the PPP program and assisting customers of other banks, and we're starting to see those customers transition their banking over to us now from their former bank. Many projects are moving ahead where we -- both we and the client hit the pause button during the early part of the pandemic. The multifamily and industrial commercial real estate loan demand does seem very robust.

We do -- there are significant lags in growth of outstandings -- loan outstandings with the construction loans, so we have a pretty good backlog of construction loans that will ramp up over the next few quarters. The C&I line utilization is still at historically low levels. And over the past quarter, you describe the loan demand, C&I loan demand as fairly tepid. It has improved significantly at the end of the quarter. And we are -- part of the reason we had low line utilization continuing is, I think, is the PPP loan proceeds and I think also, we have customers that still have low inventories as their supply chains are still not rebuilt from the early days of the pandemic.

So all in all, we would expect pretty solid loan growth over the next few quarters with construction loan advances, organic growth and expected line utilization increase.

Talk a minute about expenses and expense cuts, and I see a lot in the industry written about how the -- all the banks need to look for expense cuts due to tighter margins and lower loan demand. We do try to constantly look for expense savings, which is why one reason we have one of the lowest efficiency ratios in the industry. While we do have a small branch network, the pandemic has proven to us even our bank can be more efficient with our branch network, and we see opportunities to reduce staffing in the future. We do see opportunities in core processing for expense savings plus additional outsourcing. One thing I'll say about expenses: You can cut expenses to improve profitability, but it will not help you reach prosperity. So our focus will always be on revenue growth.

On the deposit side. We continue to see strong deposit inflows, which we attribute in large part to our strong performance in the PPP program. And again, many of these are strong owner-managed companies with limited borrowing needs that will be good core deposits in the future.

We are asked constantly about mergers, and we are open to the right acquisition opportunity. While many might make economic sense, a few are a good cultural fit, and most that we would see out there have a large legacy branch network, which would not be a good fit with ServisFirst. We are generating excess capital, and we'll look at acquisitions on a selective basis. I will say this: I think if you make a lot of acquisitions, you will, over time, become a very mediocre bank. So that's something we would like to avoid. Our Board will continue to also look at enhancing our dividend on an annual basis.

I'll now call on Henry Abbott to give a credit update.

Thank you, Tom. I'm pleased with many aspects of how our bank's loan portfolio performed in the third quarter and throughout the pandemic. For the quarter, we continued to see a significant decrease in deferrals as they burned off and those clients who were in a deferral return to normal payments. As of 9/30, we had roughly $28 million of loans that were on some form of a deferral. This represents a 92% decrease from the prior quarter end, when we had $342 million in loans on deferrals. Throughout the pandemic, overwhelming majority of deferrals granted were principal-only deferrals. At the same time, as those deferrals burned off, our past due loans were only $9.3 million, which is the lowest we've had in over 3 years. We have not seen a significant rise in past due credits as noted by past dues to total loans being only 11 basis points.

As it relates to deferrals and past dues, we've not seen any major swings within our COVID-impacted industries, hotels, restaurants and retail CRE. As discussed in the past, these segments on a stand-alone basis each make up between 1.5% and 3.5% of our total loan portfolio, and the investment slide deck posted on our website provides this data in more detail. We had one performing hotel loan of roughly $2.7 million added to the watch list and one oil and gas customer with exposure of roughly $3.6 million added as well. No hotels are currently on a deferral and less than 1%, only $1.5 million, of our restaurant portfolio is on a deferral. We have a well-diversified portfolio from an asset class and geography perspective, and we continue to diligently monitor and take proactive actions as appropriate. Nonperforming assets were $33.5 million for the quarter, which is down from the prior year-end 2019 as well as from the first quarter of 2020, but this is an increase of roughly $5 million from the prior quarter end.

I'm proud to say our nonperforming assets to total assets were 29 basis points at quarter end, which is lower than the majority of our peer banks and less than our results were at 2018 and 2019, when they were 41 and 50 basis points, respectively. While our asset quality continues to remain strong, we were proactive with one large charge-off, which elevated net charge-off in the third quarter. Credit expenses for the quarter were roughly $11.5 million. This is an increased amount specifically related to one severely COVID-impacted borrower, which represents 63% of our total credit expense for the quarter. The borrower's in a line of business within the transportation industry that is dramatically impacted by COVID and the revenues have basically been reduced to 0. The borrower had a viable business prior to COVID, but needs the economy to continue to reopen before they can return to full-scale operations.

At this time, we feel we have taken appropriate steps to mark the loan and don't anticipate any future large charges of this nature on this relationship. We continue to spend a great deal of time on credit servicing activities, which should help identify elevated risk pockets and enable us to mitigate future credit expenses. Tom, I'll pass it back to you.

Thank you. I'm going to call on Bud Foshee now to give a financial update for the quarter.

Thanks, Tom. Our net interest margin for the third quarter was 3.14%, and it was 3.32% in the second quarter. If you exclude the average PPP loan balances of $1.05 billion and the interest income and loan fees related to PPP of $6.6 million, the margin was 3.25%. Then also, if you exclude the increase in our average Fed funds sold of $610 million, the margin was 3.33%. The remaining PPP deferred fees at the end of September are $25.3 million. CD maturities for the remainder of 2020 are $127 million. The average rate is 1.33% on those CDs. We expect the majority of these CDs to reprice at 0.50% or below. Additional cuts post these CD rates occurred on October 16. With these rate cuts and repricing, we'll see an annual expense reduction of $1.1 million.

Quarter-to-date cost of funds has decreased this year. It was $1.14 billion in the first quarter, $0.69 billion in the second quarter and $0.58 billion in the third quarter.

Rate cuts on September 11 will reduce annual interest expense by $5.5 million. Additional cuts post the money market rates occurred on October 16. Those cuts will reduce expense on an annual basis by $360,000.

At quarter end, deposit costs, total deposits were 0.34%. Interest-bearing DDA cost was 0.32%, and total interest-bearing deposits was 0.47%.

The holding company is in process of refinancing sub debt issues. It will close on October 21. The total debt is $34.75 million. The annual savings from the refinance will be $348,000. We have submitted 45 PPP loans to SBA for forgiveness. The total loan amount is $42.7 million. Three of those loans have been forgiven that total $143,000. A reminder, we have no accretion income related to acquisitions.

Liquidity. Our Fed funds was $600 million when we started funding PPP loans in April. Funds were $1.55 billion at the end of September. Our noninterest income -- credit card income was $1.8 million for the third quarter versus $1.4 million in the second quarter.

The spend on our purchase cards increased $4.5 million in the third quarter, business credit cards increased $9 million and consumer increased $1.3 million. Total spend for the third quarter of 2020 was $151 million versus $135 million in the third quarter of 2019. Spend is back to prepandemic levels, except for business credit cards.

Merchant service fee income year-to-date is $397,000 versus $299,000 year-to-date 2019, and we have 2 officers dedicated to selling that service. Mortgage banking income, $2.5 million in the third quarter versus $2.1 million in the second quarter. Also, we purchased $300 million notional amount of a 1-year LIBOR cap in the second quarter. The mark-to-market adjustment for the third quarter was a negative $343,000 and strike price is 0.50%.

A reminder, we don't sell any government-guaranteed loans to generate noninterest income.

Noninterest expense. For the year, total producers were down 5. We had 134 producers at the end of September. Total employees are down 9 from year-end 2019, 496 employees at September 30. We talked about expense control in our previous calls, so totals on [due] for noninterest expense had been adjusted for any PPP expenses, the FASB 91 deferral related to PPP loan originations and ORE expenses. So for the first quarter, that total was $27.2 million; the second quarter, $26.4 million; and third quarter, $26.2 million.

Capital. The bank's Tier 1 leverage ratio was 8.78% at the end of September.

Also, earnings retention. We're paying $0.175 a quarter dividend, but our earnings retention for the quarter was 78.2%, and year-to-date, we're at 76.2%. Taxes. For the third quarter, the rate was 20.3%. For the third quarter of 2019, it was 20.2%. Year-to-date 2020, that rate is 20.1%. And year-to-date 2019, the rate was 20.2%.

That concludes my comments. And I'll turn the program back over to Tom.

Thank you, Bud, and thank both of you for the reports. As you can see, we had really solid financial performance in the quarter and also a very strong performance from a credit quality standpoint. There were a lot of questions early on in the pandemic about loan deferrals, and this will put that question to bed for us. We won't have to talk about loan deferrals again.

So we'll be happy to answer questions you might have. Starting right now. Thank you.

(Operator Instructions) And our first question today will come from Kevin Fitzsimmons with D.A. Davidson.

Appreciate all the detail you all provided. Just a couple follow-ups here. I noticed the allowance ratio, despite the charge-off, which looks like it's emanating from one lumpy loan in a particular industry, like you described, but the allowance ratio largely was stable to even slightly down. So based on what you see here, Tom, would you -- do you think you're at peak reserve level in terms of having to build that reserve further, not including whatever you may do when you retroactively adopt CECL, but just thinking about the next 2 or 3 quarters, whether the days of -- the lion's share of reserve build, you think, is behind you?

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

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

Yes. Yes, the hardest thing to predict is going to be the liquidity. I mean we're at $1.6 billion at the end of September. We've been at the $1.5 billion, $1.6 billion level for a while. Thus -- I mean for the margin to increase, that's really got to change. And loan production did pick up in the third quarter, but just that will have to pick up more. Or a lot of the PPP income -- I mean, I'm sorry, lower PPP funds that customers got that money is still sitting here. So it's hard to forecast when they're going to spend that. Plus, like Henry pointed out, line utilization is still down. So we're waiting on that to turn around, but wouldn't really give a good answer on margin improvement, I think.

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

Yes, you can say that again, about the model again, so I definitely feel that.

Yes.

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

Yes. And this is purely a guess, but I'm guessing that of the remaining fees that we accrue 25% of them in the fourth quarter or take them in income and then 75% of them come in the first quarter of next year, of course, it seems they're not paying the large loans yet. They're paying the very small loans. Those 3 loans totaling $145,000, those are probably the 3 smallest loans that we -- there have been a couple of business sales that we've turned those in, and some of those are larger, 1 was $8 million. I know that has not been paid. So it's interesting. We're trying to do all the due diligence necessary to make sure that we don't lose our SBA guarantee. And I read a statistic the other day that fintechs only process 15% of PPP loans, and the vast bulk of the fraud situations uncovered so far are all at the fintechs. So I think it bodes well for the traditional community banks that know their customer, and we look hard at who the customers are. But I think that's a -- that would be my guess, Kevin. And that's purely a guess on my part.

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

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

Yes. We're -- Bud, in terms of -- I'll let you answer the question on the -- the new loan rates are in line with our existing portfolio.

Yes. Most of, I would say, new loans are probably [4% to 4.25%], somewhere in that range, probably close to [4%].

So from the standpoint of -- and no loan pipelines are not perfect predictors of future loan growth, Brad, I'm always the first to say that, and I'll say it again. But predicted -- what we see in the loan pipeline from a C&I side is a lot of smaller credits that are coming on as a result of our efforts on the PPP loan front, and they are new customers to the bank, and they're pretty small, but that's fine. There's just a lot of them. And that adds up to a substantial amount of money, I think, over the next couple of quarters and then our construction loan draws that we expect are in future quarters that's well over $300 million on loans that are already closed.

But we do see a number of multifamily projects. We see other commercial real estate projects, and we'll -- hopefully, we'll start seeing the line utilization come back up over the next few quarters. And as -- again, I think it's as much the lack of the ability to acquire product for our customers to rebuild their inventories. Their supply chains are just still broken from the pandemic, and they cannot refill their inventory buckets. So that's a good bit of our line utilization problem, I think, is due to that. So all of that gives me cause -- reason for optimism, Brad, in terms of our future outlook.

And just on the rates, Tom, have you guys -- with rates where they are, have you instituted sort of ServisFirst Prime this time around where you guys sort of are doing below a certain level? Just kind of curious, if you're doing that, if the market supports it.

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

Great. And then just wanted to follow up on your comments around expenses. And I know 6 or 9 months ago, you guys were talking about getting tighter on the expense front. You said on this call that you can't pave your way to prosperity. But just kind of curious. Some of those initiatives that you guys were talking about 9 months ago, are they kind of in the run rate? Or is that maybe still to come? Just kind of want to get a sense of kind of where you guys were with that.

Well, I mean like second and third quarter, I'm thinking like we're at $26 million -- if you strip out the PPP and the ORE, we're at $26.4 million in the second, $26.2 million in the third quarter. So we feel like that's a pretty good level. I mean we've essentially cut out salary increases for this year. And I know that's -- that will really come into play in 2021. So we feel like we're at a good level going forward, somewhere in that range for noninterest expenses. What we're saying is that is third quarter is good.

I think, Brad, I think you like for us forecasting the margin for an analyst, there's never been a worst time to forecast expenses either because there's so much noise in the numbers right now with the PPP loan expenses and things that we have that were totally unexpected, overtime pay incentives and that sort of thing that we're paying and should pay to our people for a job well done. So we see -- we have a number of initiatives that have begun -- not yet begun to pay off in terms of core process and expense and other outsource expenses that we see opportunity to control and bring those in terms of -- you heard the headcount reductions we've had, we think those will bear fruit in the future as we go forward. But of course, we're still hiring people. We hired a number this month, in the last month in 2 or 3 of our growth markets. So it will offset some of that.

(Operator Instructions) And our next question will come from Kevin Swanson with Hovde Group.

NPAs were up slightly after the higher charge-offs. But obviously, they're still below levels early this year. Could you provide any color on when you think NPAs might peak and if there was any specific credits added this quarter?

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

Kevin, with C&I credits, they always bounce around a little bit. If you chart back over the last 12 quarters, it will be up or down a time -- a quarter or 2 and then down and then up a time or 2 and then down. So they're in the range they've been. Again, most of our loan problems, I can go down the list with you and only one credit involved this quarter was, as far as I know, I think just one was COVID related, as we mentioned, the large write-down to rightsize that company. So nothing else is COVID related. One is an energy credit related to the energy industry, you get that. I guess that potentially is COVID-related as well. So it's a small oil and gas supplier.

So we can't give you much better answer than that other than we try to recognize problems as soon as they happen and be proactive. And we don't see a large backlog of potential problem assets in terms of, for example, the SBA made all the payments on 7(a) loans for 6 months, and that just ended. Well, we don't have a -- we're not a big SBA lender. But if I was a big SBA lender, I might be a bit worried that there was a big backlog of SBA loans that have been performing because the SBA made their payments and now, they don't have to make their own payment and they could pop up as potential problems in the next -- this quarter.

So from an industry standpoint, we'll know if there are problems in the 7(a) world over the next -- over this quarter. The SBA's 504 loans, we have a few of those that were on deferral, and we had to put them on deferral. Obviously, that was required. So we feel pretty comfortable with our SBA loan exposure. And we just don't see -- I read everything that everybody writes. The stimulus is going to expire, and this is going to happen and all this. But we don't have any really consumer-related exposure to speak of at all. So we just don't see the -- it is the tale of 2 economies. A lot of businesses are doing extremely well. And we only have one hotel that is on the watch list and none on deferral. So we just -- and this, the one -- as Henry said, one restaurant. So we just don't see potential problems out there at this point, Kevin.

That's great. And then kind of looking at the environment of lower rates for longer. Again, it's through your success of adding deposits and some of the liquidity -- excess liquidity. Is there any change in what the value of the relationship looks like considering some of the difficulty in the past to put that money to work?

Well, in terms of -- what's a core deposit worth today compared to a few years ago?

Yes. That's fair.

Yes. I mean, certainly, I still think the core deposit relationship is the key relationship in a bank. And it's not what [CIT to sell forward] as a percentage of book value. What they don't have is core deposit relationships. They've just got a book of assets that they sold, so -- and no core relationships. So I still think it will always be -- if you take a long view, yes, I would agree with you, core deposit premiums were probably not where they are today compared to a couple of years ago. It's funny that we were worried about liquidity back in February. And today, we have -- our liquidity is -- we've had $2 billion in deposit growth in the last 12 months. So it's kind of unbelievable, the changes we've seen there, Kevin, all of us.

Yes, I agree. And then maybe just a final one. Prior to the pandemic, there was quite a bit of potential from a lot of the M&A in your backyard. Maybe any update on some of the offensive moves? I know you -- in your prepared remarks, you mentioned you're open to an acquisition. But just curious on maybe any color further on that or any -- some of the more kind of team acquisitions you guys have done in the past?

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

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

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

I don't know, Wally, other than that we don't have any companies that have been really heavily impacted by COVID is all I can say is that our -- we don't have convention hotels and some of the sort of properties that -- not a lot of big retail properties. So yes, I just don't know what they have on their books. I just know what we have. But…

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

Our worst hotel is the one we've got on the watch list. I think what's the debt service coverage, 0.9?

It's below 1, but I mean it's still -- but if you look at…

Close to 1, the global coverage is more than good on debt service, and it's a 50% loan-to-value. I guess we feel very confident about that property and that is worth -- that we can sell -- we wouldn't sell our loan for less than par, let's put it that way. We would not sell that loan at a discount. So we feel pretty good about our -- again, the restaurant exposure, people adapt pretty well to a new environment, the good business people do. And we think we have a good -- we don't have a lot of heavily leveraged borrowers, while there's no substitute for equity in a business. Clarence and I were talking about this early in the week. You look at a business that's got a lot of debt and no equity, it's a formula for disaster. We don't have a lot of highly leveraged companies. So I think that's part of it. And we just shied away from that type of borrower.

Okay. In the loan that you charged off, was that charged off? Did you write off the entire balance? And if not, what's remaining?

No, we did not write off the entire balance. Direct debt to that borrower remaining is roughly $13 million. As Tom alluded to, try to rightsize the debt to get them through the other side of the pandemic. They got a viable business that just kind of needs to reopen before they can get back on the road to full utilization to try to move forward…

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

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

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

No.

No, no. We worked that for -- it's a foster child for COVID, Wally. It's one of those foster children for COVID. It's a great company and just 100% revenue lost during COVID, and it will come back. And we feel good. We have all the same collateral base that we've had before, good borrower, high-quality person that's owner of the company. So -- and getting some family help to get through the pandemic. So we feel good about the company. And it's our most heavily -- go ahead.

It's your what? No, sorry, go ahead.

It's our most heavily impacted COVID customer.

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

Yes. If you get down to the enterprise, the enterprise is valued closer to -- you can't say what's the collateral worth today, right? If you took that value, there's not a big market for collateral when nobody is using it, right? It's kind of like what are our real hotel loan to values. When I said, it's a 50% loan-to-value, I don't know, we had tried to sell before closing down the hotel to sell it. But I would suspect that loan to values are higher than we -- than it was when we underwrote the loans for all of these types of impacted industries.

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

Yes. So we're following up with most of our borrowers and getting STAR reports. And I think it really just depends on where they are. I mean I think across the board, occupancy has picked up, but it's very market-specific on where those hotels might be. And if they're down by the beach and by the coast, they've seen pickups due to the summer. But I mean, we're certainly getting debt service coverage and STAR Reports on them quarterly to kind of understand the trends within that specific borrower.

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

Yes. I mean, I'd get you more specifics, but I mean, I think it's in the 50% range or so, yes, just slightly below 50% is my guess. It just depends.

But the hotel operators I've talked to are very satisfied. Most of them are cash flowing and doing well, Wally. We just don't have the big, highly leveraged borrowers. And again, I think [as -- I think you feel in yourself] you start quoting loan to values. What is the value today of a hotel, all right?

Yes.

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

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

It is. Yes. It is. It's at -- back at record levels.

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

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

No, I agree. I mean, just like you said, looking at stress rates a little bit more in terms of occupancy on things. And -- but no, I mean, nothing outside of just kind of digging in a little deeper on potential changes in vacancy and other things, we haven't materially changed what we're doing.

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