Good evening, everyone. Thank you for holding and welcome to the ServisFirst Bancshares’ Second Quarter Earnings Call. [Operator instructions] And please do note that today’s event is being recorded. I would now like to turn the conference over to Director of Investor Relations, Davis Mange. Please go ahead..

Thanks, William. Good afternoon and thank you for joining our second quarter earnings call. I am Davis Mange, Investor Relations Manager. Leading today’s call will be Tom Broughton, our CEO and Bud Foshee, our CFO. They will open with some second quarter highlights and we’ll then open the floor for few questions.

I will now cover our forward-looking statements disclosure and then we can get started. Some of the discussions in today’s earnings call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, giving our expectations and predictions of future financial or business performance or conditions.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties which change over time. Actual results may differ materially from any projections shared today. So, please refer to our most recent 10-K and 10-Q filings for a more complete description of factors which could influence such projections.

Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update forward-looking statements. I will now turn the call over to Tom Broughton..

Thank you, Davis, and good afternoon to all on the call. Thank you for joining us. I’ll cover a few highlights quickly before turning over to Bud Foshee to discuss a few financial items. And I think after Bud does his – covers the financials, I’ll come back and talk about credit trends, credit quality a bit since that usual question comes up.

So, first of all, we are pleased with the loan growth in the quarter that was at a 4% rate or 16% annualized. Loan growth was very strong in the first quarter, strong in the second quarter, so we are pleased there.

From a deposit growth standpoint, it’s reverted to our seasonal pattern that we have had most years where we have had negative outflow in the first quarter and then we have – it picks back up in the following quarters and again also we tried to have disciplined deposit pricing, we had a large temporary deposit that we let go in the first quarter and continue to be – try to be disciplined within our deposit pricing.

From our loan pipeline standpoint, at the end of the quarter, it was consistent with a level of the – at the end of the first quarter, which is pretty strong. So, we see a good pipeline of loan activity across all of our markets. From a loan growth standpoint in the quarter, we saw the strongest growth in our newer markets plus Dothan, Alabama.

On a year-over-year basis, it has been strong and all of our footprint really no change there. From a quarterly deposit growth standpoint, Nashville and Atlanta had largest growth for the quarter, and on a year-over-year basis, Mobile, Nashville, through Austin, Atlanta and Birmingham all had very strong growth on a year-over-year basis.

From a production headcount standpoint, it was down by two at the end of the quarter. We hired four new producers in the quarter to replace 4 and we had two people that moved to support roles from production roles, and we continued to stress we are trying to grow the productivity of our producers rather than growing the headcount of our producers.

We still think there is a great deal of capacity within the existing staff to add to our production. Bud, I am going to turn it over to you to talk on the financial numbers now..

Thanks, Tom. Good afternoon. First, on our net interest margin, we improved by 24 basis points in the second quarter, increased to 3.77. Our excess liquidity decreased by $321 million. Average loans went up by $319 million in the second quarter and then prime changed June 15th, and I won’t go over those rate changes.

It’s really three different categories. We had $1.052 billion of loans that had immediate reset dates, so it is with our prime or LIBOR based loans. We had a $168 million of loans whose rate went up. They were at their floor rates. So when the rate increased in June, the rate went up on that $168 million.

Then we have loans that the rate changes on the 15th of month, which was the date we changed from and that was $310 million of loans, so that increased our margin by $168,000 in June. So in July, we expect another increase of $275,000, once all of the loans that reset mid-June, we will have a full month’s accrual on those in July.

We have $41 million in loans where the rate changes on the first of the month and those rates will now be above their floor rate. Then we have prime and LIBOR based loans of $593 million, whose rate will change on the first day of the month, July 1.

Let’s see, deposit costs went up by 4 basis points in the second quarter, went from 0.60 to 0.64 and that’s interest bearing – total interest bearing deposits. Efficiency ratio, we improved at 36.23 in the second quarter, or 37.58 in the first quarter.

Most of the increase had – or improvement had to do with the margin improving that was where the primary cause of our efficiency ratio improvement. Credit quality, non-performing loans to total loans 0.21, it was 0.23 at March and non-performing assets to total assets was 0.23 at June and that was 0.27 at March 31.

Our second quarter annualized net charge-offs to average loans was 25 basis points in the second quarter and 24 basis points in the first quarter, and non-performing assets decreased. There were $14.9 million at June 30 and there were $17.2 million at March 31. ORE also decreased. ORE was $3.9 million at June, $5.1 million at March 31.

ORE expenses were very low, $57,000 from second quarter versus $76,000 from first quarter. Our tax rate for the second quarter of 29.2%, without the stock option credits, the rate was 33.3%. In the first quarter, the rate was 26.1% and 33% without the stock option credit.

And then our year-to-date tax rate is 27.6%, 33.1% without the stock option credit. And I will turn it back over to Tom for the credit discussion..

On the expense growth in the second quarter, Bud, in terms of half the headcount, was it not in – all in Tampa Bay..

Yes. From a salary standpoint, Tampa had 11 new hires in the second quarter, so that – I am sorry, some of those happened in the first quarter and second quarter, but they have added 11 people to their staff in 2017, but yes, we moved into a permanent office in Tampa Bay in Hillsborough County.

From a standpoint of credit quality, people who are, all of you analysts ask what are the trends, what do you see from the standpoint of deterioration and from any industry standpoint we don’t see any at this point in time.

Actually both the charge-offs in the second quarter were both – were two contractors, both in different industries, but they were both contractors.

Interesting thing is contractors are doing better than they have done since 2010 as a group, so there is not the deterioration in those two was isolated to those two just lack of good business practices actually rather than any industry trends or concerns. We still haven’t seen any turn down in any particular industry. We are certainly watching.

We added one TDR in the second quarter. There is a commercial credit unrelated to any particular industry and it’s a credit.

As all of you know, the TDR rules are very specific on when you have to call a if you renegotiate the payment of – any payment so you have to pretty much call it a TDR with the current rules we have, they are very stringent and so we chose to put it in the TDR bucket. We didn’t chose to, it’s just needed to be in the TDR bucket.

So from that standpoint we don’t see any deteriorating industries at this point in time, but work certainly on the look out to see if we see anything. So we will be happy to answer any questions that anyone has. We feel pretty good about where we are. And I will turn it back over to Davis..

William, if you want to connect us to Wally, we will get started..

Yes sir, we will now begin the question-and-answer session. [Operator Instructions] And it looks like our first questioner today is going to be William Wallace with Raymond James. And please go ahead with your question..

Good afternoon guys, how are you?.

Hi Wally..

Hi Wally..

So maybe first question is kind of talk about the earning asset mix, it looks like you deployed and I believe you mentioned in the prepared remarks you have deployed a significant amount of liquidity in the quarter, are you running at what you consider kind of an ideal asset mix now, earning asset mix?.

I will – so from an excess liquidity standpoint, we are comfortable with 3% of assets which is about where we were at the end of June, so that’s kind of a minimum, so we feel comfortable with that range..

And then when you or – when you speak of excess liquidity, are you including shortly-dated securities or just cash on hand?.

Cash on hand, part of that’s a federal reserve and part of it is that is hedge [ph] funds with correspondence..

Okay.

And then in your prepared remarks when you were speaking of the – all the loan balances that are experiencing pricing up due to the shift in prime, were you – it sounds like you were giving interest income dollars at first and then you shifted to balances that were being impacted or did I just totally mishear what you were saying?.

Well, I guess let get back over, for June immediate reset, and that was a $1.052 billion in loans.

Wally, do you want the numbers or the dollars, you want loan income or…?.

The interest income dollars that we will see, that’s great if you have it handy, otherwise just tell me the balances and I could calculate it?.

Yes. So for June, with the change in prime on June 15, that added $168,000 to the margin. And then in July, it will increase by another $275,000, one with everything that changed in June you will have full month and then we had loans that re-priced on July 1, so you get that also..

So that’s the 275,000 were the loans that priced up on July 1?.

No, it includes the loans, in other words in June you only got half a month’s interest income. So in July….

So $275,000 is the full month impact?.

It would increase by another $275,000. Yes, in other words, it increased by yes, little confusing, a lot of components..

And then so what’s the balance of loans that resets July 1?.

I would say the ones that reset on July 1 that went above the floor rate, that’s $41 million. And then other loans that reset on the first month LIBOR and prime was $593 million..

And that’s on top of the $275,000 that’s you were talking about?.

No, all of those were included in that….

That included in the $275,000?.

Yes, yes..

Okay, alright. I apologize I just was….

No, it’s confusing to get all these numbers to get what you are….

But the impact of the rate hike is going to be from the second quarter – I mean the third quarter is going to be $275,000 a month, among the loans that are on the balance sheet?.

Correct. They will increase – there will be an increase in July’s margin..

Okay, great.

So Tom a question for you maybe could you just give an update on what you are seeing production wise in the Tampa market now, maybe pipeline or how that market has been growing?.

Yes. We have got a really -- I don’t have pipeline in front of me Wally, but we certainly have a robust pipeline in every month including Tampa. And so we feel really good. We just added staff and just we have a number of new production people have just joined us in the last 90 days.

So they are not certainly -- haven’t built a pipeline as yet, but we feel really good about where we are. There’s good opportunities down there..

So what do you kind of run way to breakeven in that market and how far do you think you are?.

I mean I would think of we are probably a year away..

Okay..

And we got ways to go Wally..

Sure, okay.

And then Tom are you breakeven or profitable now in all the other markets, the newer markets?.

We are in certainly Nashville, we achieved profitability. We are solidly profitable there. Now in the Charleston -- we are in Atlanta we were not in Charleston..

Okay.

And your closer in Charlseton than Tampa is that correct?.

Right, it’s certainly been open a good bit longer there..

How close do you think you could be to entering a new market, I know I mean obviously it’s not necessarily always your choice but…?.

Right, we have nothing pending to-date Wally that is imminent. We are certainly talking to people actively in two markets right now, and we think there is good opportunity, we are being really selective about where we go and who we go with.

As we see so much opportunity in our existing footprint, the option of the cheapest, the cheapest growth is going to be within our existing footprint today..

Right, okay..

Wally, I will e-mail you these numbers. I know it gets confusing between the dollar, let me – I will e-mail it to when we get off, so you could have them I will show – they will show the competition from June to July..

Sure.

The only reason I asked was just because the margin movement in the second quarter, a lot of it looks like it was just a shift in the earning asset mix from liquidity deployment, so what I am trying to figure out is how should I forecast margin from pricing benefits rather than earning assets shift moving forward?.

Yes. Also you had the – the prime increase in March which only had 15 days impact in the first quarter then you get a full impact. I think that added 7 basis points to the loan yield in the second quarter..

Yes. Okay, great. That’s very helpful. Yes. Well, I appreciate the color gentlemen and I will step out and let someone else ask the question..

Thank you, Wally..

And our next questioner today is going to be Nancy Bush with NAB Research. Please go ahead with your question..

Good afternoon gentlemen.

I have a question for you here on expenses, I mean your expense ratio got some help this quarter from the tailwind on the NIM and some other things, I mean are there any thoughts about sort of accelerating spending plans or adding to existing markets I mean you have got that opportunity here, could you just talk about expenses and your thoughts about managing them?.

Yes. Nancy, this is Tom. From the standpoint of we will hire all the good producers we can find is just our define, it sounds easy to when I reach people over in the long production office and hire some talent it’s hard to find. And really as you well know the best people don’t talk often are talking to recruiters on the phone.

So that’s problem adding to add them in that fashion. So we are always looking for people that we can source through friendships or other relationships that we have around the Southeast.

We continued to from a regulatory standpoint is not getting any easier and we have to continue to add people from a risk management standpoint upon standpoint that we are continuingly talking to people in that arena, so that don’t enhance revenues, but it will certainly – we have got to keep all that in order, so we look at those people as well.

So we think there is opportunity, but there certainly is lot of competition for talent in the Southeast and especially and you get in a pretty vibrant market and people are lot of bankers, lot of bankers looking to hire people around the Southeast today..

Yes.

I could when you mentioned competition for talent, could you just speak briefly I mean I look at the markets that you are in and the new markets you are in particularly Nashville, Atlanta, Charleston, I mean those are some of the most competitive markets in the region, can you just talk about the competitive environment there and how you guys are sort of making your mark in those markets?.

Yes. People that are interested in maybe cash compensation probably aren’t the best fit with us, there are lot of banks that they are the best fit with. We are looking for people that want to build their career here and build some equity with time.

So those were the people that we focus on Nancy that are we think are aligned with our corporate culture and values and there are a number of those around. There are a lot of people that aren’t, they are not interested in that sort of thing. So they – we would see a lot of people I guess that are more the mercenary type in the market.

And they are – you can look at the resume you have seen [indiscernible]. They move from bank to bank quite often. And we just really don’t have any interest in those people. We look for people that are interested in making a permanent career move to join us. So we know what our – we know the kind of people we want. We know what our sweet spot is.

We usually made them through friends or friends of friends in that fashion. So certainly you are there in Atlanta that’s certainly a very competitive market for talent and certainly you know people that bankers there that have had four or five stops and they are not all like me, so they have been – I get around over there in Atlanta, so..

They do ensure that as well, so just want I mean you said that you would hire four new producers in the quarter to replace four were those four who selected out or were selected out or again was that kind of normal in normal turn?.

That’s probably pretty normal in the size we are today to have that much whatever reason it’s either one good fit from their standpoint or our standpoint. Some of them just realize they were not a good fit they chose to make a career change. So this is pretty normal from that standpoint.

You typically add people at the end of the first quarter somewhere in there or when you have taken a team, but the people we have added this past quarter they were all in four different markets for example four individuals, selected markets..

Okay, thank you..

You are welcome..

[Operator Instructions] And we do have another questioner today, it is Kevin Swanson with the Hovde Group. Please go ahead with your question..

Hey, guys.

How is it going?.

Hi Kevin..

I just wanted to ask quickly about the loan to deposit ratio, it’s coming just under 100% now. I think in the past calls you mentioned that as kind of be in the top side, where you guys might be comfortable at obviously with continued strong loan growth.

Was that number still stick and if you maybe you are looking to lower that level at any deposit-related initiatives going forward?.

Kevin, it’s Bud. We are still comfortable that level a little bit higher. We still look at the centralized purchase with our corresponding growth, it’s really part of core deposits. That has decreased. I think the correspondence have had some difficulty keeping deposits like everybody has, but I mean, it’s still a good number.

I think it was around $300 million at the end of June. So we look at that as a primary funding source also in addition to our total deposits. I think I don’t know if it’s everybody in our size, but I think most banks are probably net borrowers and there has been very few days when we have been a net borrower, our 12-year history.

We have never had that main liquidity issues. This is one of our lower points being the 3% of assets at the end of the quarter. Deposits are just a little bit harder by this year than years past..

Okay, thanks.

And you have seen any competitors at all raising their deposit rates or do you think the kind of in general people are holding firm despite the rate hike?.

Yes. From what we are seeing, on their core rates, base rates, they are pretty well how to study. Everybody is always running a special of some kind, but I think we haven’t really seen increases in their base rates with any of that. We have had three rate increases since December and everybody is pretty well held steady..

Okay, thanks. That’s helpful. And then just shifting gears maybe to asset quality quickly, obviously, it looks like it’s continuing to improve.

Was there anymore color you could give on what type of credits was in the TDR just specifically? And then anything maybe you are seeing specifically in C&I loans maybe market-to-market, I know you mentioned overall it seems pretty solid, but maybe if there is anything specifically in the faster growing markets?.

Yes. Kevin, it was a manufacturing company that just have some difficulties, but it is a manufacturing company that has some additional C&I companies. They just have some issues from – it was really – strong sales and strong gross profit. And it’s a company we think will fix itself.

C&I credits always say they get in the ditch fast and they get out of the ditch fast. You typically – when you get a problem with A, B and C credit, they are getting a ditch and stay there forever. It seems like we had to mull through the recession that stayed in the ditch.

So, we would rather have – if we have to have one have a problem, we would rather have it be a traditional C&I credit. They tend to self correct much more quickly. Then – it’s a pretty good size company. It’s a good size company with good sales and good gross profit margins just have working capital issue..

Okay, thanks. That’s all I had..

Thank you, Kevin..

Thanks..

Ladies and gentlemen, this concludes today’s question-and-answer session and today’s conference call. Thank you for attending today’s presentation and you may now disconnect your lines..