Hello, and welcome to the ServisFirst Bancshares’ Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Davis Mange of Investor Relations. Please go ahead.

Thank you, Amy. Good afternoon and welcome to our second quarter earnings call. I’m Davis Mange, Investor Relations Manager. Leading today’s call will be Tom Broughton, our CEO; and Bud Foshee, our CFO. They’ll open with a brief overview of the quarter and then take your questions. I’ll now cover our forward-looking statements disclosure and then we’ll get started. Some of the discussion 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 or 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’ll now turn the call over to Tom Broughton.

Thank you, Davis, and good afternoon to all. I will cover a few highlights of the quarter and then turn it over to Bud to do a few of financial highlights as well. And first of all, the loan growth was pretty good for the quarter, an annualized growth rate of 18% for the quarter. Loans were impacted by one of our top five borrowers. So we also had the sale of a couple of other companies as well that impacted our borrowings during the quarter. So those were lower than we would have seen otherwise, if not for the sale of those companies, but that’s - certainly the deposit growth was strong for the quarter at 26% annualized. From a pipeline standpoint, we are not - I guess that we’re off a little bit from the peak at March 31, but still above, far above of where we were anytime in previous history, except last September. So remember, September was very high, and then June was off a little bit. We had a fair amount of closings during the month of June from our pipeline. So we expect it to rebuild that from there. From a loan growth standpoint by market, it was pretty broad-based for many of our markets. From a dollar standpoint, the biggest growth was in Nashville, Birmingham, Mobile, Charleston, Dothan, Tampa and Pensacola. So you can see it was covered at a large number of markets. From a percentage growth standpoint, certainly we were led by Nashville, Charleston, Mobile and Birmingham. From a deposit growth standpoint, again it was pretty broad-based but it was led by the dollar amount by Birmingham, Nashville, Huntsville, Charleston and Mobile. So we’re seeing strong growth throughout our footprint. Bud will talk about asset quality in a minute, which is still strong. We had primarily one credit we charged off in the - the end of a credit in the second quarter, which primarily one credit. Other than that, we had benign charge-offs. From a production standpoint, we have same number of producers at June 30 that we had at March 31. The composition is slightly different. Our production, number of producers was up 18% year over year from that standpoint and the same as the end of March 31. We are focusing more now on banker productivity than we had certainly in the past. And we’re taking a closer look at efficiency in every region and department. We’re asking all of our regional CEOs to try to be more efficient and reach some minimum thresholds of outstandings in loans and deposits for each of our production personnel. So we are going to take a harder look at that as we go down the road in terms of efficiency of our bankers. So I’m going to turn it over to Bud now to - you may have a question or two about our change in accounting treatment as well. So I’ll let Bud get started.

Thank you, Tom. Good afternoon. Our net interest margin decreased by 6 basis points in the second quarter. Our excess liquidity increased by $116 million in the second quarter. From an average growth standpoint, second quarter loans grew $182 million, deposits $208 million and fed funds purchased correspondents $64 million. And our net growth in the second quarter, loans was $198 million, deposits $328 million and fed funds purchased correspondents decreased by $77million. Very good credit quality. Nonperforming loans to total loans was 0.11%, that was 0.15% in March. And nonperforming assets to total assets was 0.17% and that was 0.20% at March of 2016. Second quarter net charge-offs, annualized average loans was 18 basis points. Tom mentioned that most of that was one credit, that’s $1.1 million that was already fully impaired. Tax rate, we had the early adoption of Accounting Standard 2016-09, which deals with the exercise of stock options. Previously, that had been recorded straight to equity and with new accounting standard you record that to the income statement. So we did an early adoption of that standard. Part of that credit went back to the first quarter. That was $2.3 million, which reduced taxes. In the second quarter we recorded $1.3 million. So the tax rate in the second quarter was 28.6% and year-to-date that’s 26.3%. And then, ORE expenses $41,000 in the second quarter, and they were $449,000 in the first quarter. And that’s it for my summary.

From the standpoint of the stock option expense credit, most of you on the call know that a big part of our business model was [hiring same-store] [ph] bankers and extending stock options. So we’ve over time have had a fair amount of dilution from stock options. Most notably, since our IPO two years ago we’ve had exercise of stock options that impact. So this adoption of this new accounting standard is mandatory next year; it is optional this year. Certainly it helps offset a little bit going forward of the stock option dilution that we had because of our business model. We have also - I guess, at current stock price as we have some $12 million in future tax credits that will be - we certainly can’t - just like loan losses you can’t predict when those will occur. But over the next few years we’ll have $12 million in future tax savings, tax credits that will come into play. And certainly, if the stock price goes up, the credits grow and the dollar amount goes up. So that is the amount that we have at current stock price today. So typically, again I said you can’t predict. People exercise options either when they have money or they might do it when - if a stock price dips or like we did certainly in the first quarter there was fair amount of - it was a dip and then people exercised options. And also people would exercise if they are running out of time or as I think this stock price will never go down again, and it will only go up. So there are so many variables in there. You really can’t predict, other than you know that if the stock price dips that people will exercise…

Yes, Amy, if you can, please open the floor.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. First question comes from Brad Milsaps with Sandler O’Neill.

Hey, good evening, guys.

Hey, Brad.

Good evening, Brad.

Tom, maybe back to your comments around efficiency; obviously, you guys run a very efficient shop; it sounds like, most of what you’re talking about is aimed at getting more out of your existing producers. I’m curious if you could expand on that a little bit. And then, secondly, I know one of your big challenges this year was getting into new markets, up and running, as those would provide a little bit of a headwind out of the gate. I’m kind of curious kind of where you are, are you - where you thought you’d be sort of at the halfway point in terms of how much money you’re either losing or making, or just any update on your progress there and kind of when you expect to turn a corner in any of those markets if that’s changed.

Yes, probably from a loss standpoint, we’re probably under where we projected. Bud, I don’t want to misstate, but I feel certain that we are…

I agree, yes, little under.

In probably every market, we’re probably a little bit better than where we thought we were, Brad. I think a lot of our efficiency comes because we don’t have many branches. It’s not that that we’re fabulously efficient in the back-office, because we’re probably pretty average in that respect. So it’s purely because we don’t have - we only have 19 offices and we’re on [$5.78 billion bank,] [ph] so that’s one thing. But from the standpoint of just efficiency of our - we had our Directors’ meeting in May and we got to go to get all of our production people up to a minimum size of their loan and deposit portfolio, and so we got long way to go to get there. And it’s not in just in our new markets, I mean, there’s certainly - probably Birmingham, we have as much potential to improve in Birmingham as any of our other markets. We have - a couple of our smaller markets are the most efficient that we have. So that’s what we mean by that. And just in terms of it was time to people - focus on production, Brad, I think is - we don’t necessarily - and we continue to look for new people. I don’t want to say that we’re not adverse to hire new people, because we certainly continue to look at hiring new people. We just want to get everybody as productive as possible in the company.

How much capacity, if you can put a number to it, you think you have with your existing base producers?

Bud, the number in May it was around - if we got everybody up to minimum number that we are talking about it’d be some $600 million larger than we are today. But looking at it in real simple terms, we have 122 producers and they all brought in $10 million in loans and $10 million in deposits. That’s $1.2 billion in growth annually, so that’s not asking a whole lot.

No, absolutely.

The potential is there, so that’s something we’re focused on, it’s trying to help everybody be more productive and give them all the tools to be more productive as we go forward.

Okay, now that’s helpful. And then just one follow-up, Bud, where would you - I know that it sounds like there is going to be a lot of movement with the tax rate, but sort of a core number, would you still expect to be kind of in that low 30s type tax rate going forward, 33% or so…?

33% is a good number. Yes, without any additional credits, should be 33%.

Okay, great. Thank you, guys.

Thank you.

They had a - another variable there, Brad, is when we buy a store tax credit that also can have a large effect on our tax rate as it did in the fourth quarter of last year and like our tax rate dropped significantly, because of the historical tax credits. But that’s just another complexity that we add to the equation here.

The next question is from Tyler Stafford at Stephens.

Hey, good afternoon, guys.

Hey, Tyler.

Afternoon, Tyler.

Hey, congrats on the good quarter. I wanted to start on loan growth. And it looks like the C&I book was up pretty strong this quarter, north of 20% annualized. I was wondering if you guys were seeing any material change in the utilization rates out of the C&I book or is that just fairly steady and the growth is still primarily from new credits and relationships.

From the utilization standpoint, it’s staying pretty steady. It was 46.8% at June and 46.9% at the end of March. So it’s staying right in that range.

Okay.

Yes, that’s an interesting question, Tyler, because I thought J.P. Morgan’s had substantial loan growth in the C&I book in the quarter, and then you would tend to think that’s in their committed lines with higher line utilization there. But ours has been steady. It improved as the recession ended and it’s been pretty static for the last few quarters. Bud, hasn’t it confirm…

It has, right.

Okay. And then, Tom, can you frame up for us just in terms of the size of that top-five borrower that paid off for that credit that paid off during the quarter?

Yeah, it was about - it varied between $20 million to $25 million borrowings on consistent basis. It was a seasonal borrower, but that’s - well, we have to have new customers all the time. And the seller of that company, he’ll be - he’ll own another company next year. So he’ll be back at it.

Sure, okay. Hey, and then, Bud. Just a question on the margin and the liquidity balance we should be expecting to see in 3Q. Could we see a slight NIM expansion next quarter off from lower liquidity?

I wish I could predict that, because we talked about that in the first quarter and we increased even more in the second quarter. So it’s not like we are not growing loans. Loans grew $200 million for the quarter and for the year loans have grown $323 million. And we just had a very good year so far from the deposit standpoint. So I hope - we always hope it’s going to improve, but liquidity is just hard to forecast right now.

Okay, okay.

Just very good deposit growth.

Maybe on that same vein, well, just one last one for me. The securities balances, those have been coming down the last two quarters. Should that continue to come down just in terms of the dollar amount of the securities book?

Yes, we’d be lucky to stay even. They’re just not of - rates have dropped so much. We really don’t see that muni deals, mortgage backs or full extensive. We’re just trying to see if it might be little bit of a market pullback before jump in, buy a lot of securities.

Okay.

But I’d say, at best we’ll probably keep that balance that even.

Okay. Thanks, guys, I appreciate it.

[Operator Instructions] The next question is from William Wallace of Raymond James.

Good evening, guys.

Hey, Wally.

Hey, Wally.

Maybe a quick follow-up on just the liquidity question, understand when your deposits are growing as they are, it’s a good problem to have. But your fed funds purchased are up $200 million year-to-date. Is there any strategy that you could utilize to maybe use some excess liabilities to take some liquidity off the balance sheet or you need the fed funds?

From a net growth standpoint, fed funds purchased for the correspondents actually decreased in the second quarter. On average…

I’m talking about the average balances, sorry.

Yeah, yeah, they decreased $77 million for the quarter. So again, I guess that’s why it’s so hard to gauge liquidity. You got all these different components and it is hard to tell which one is going to significantly drop or increase on a quarterly basis.

Wally, if we would stretch for capital at all, yeah, we would start rationalizing some decision making from that standpoint. But we are not stretched for - we still got very, very ample capital to support the balance sheet. And we kind of keep thinking one of these days rates go up, maybe the regulators are right, maybe there’ll be some runoff in deposits. I don’t think so, but they might be right. I can’t say they are not going to be right. Certainly, we never disagree with the regulator. So to that point we continue to build excess liquidity. And we don’t think it hurts anything. We think it gives us a lot of flexibility of planning for the future.

Okay, thanks. You mentioned in the press release professional fees were up because of accrual related to legal. I assume that’s related to Tampa. Are you fully accrued now for that lawsuit and could you give us an update on the lawsuit if possible?

From an accrual standpoint, yeah, we’ve accrued up to our insurance coverage limit, so there will be no more expense from our standpoint - Tom, I don’t believe we really…

Yeah, Wally, I don’t - I can’t comment on pending litigation. It’s not a smart thing to do that. But we do have another lawsuit and something we inherited, but sort of our policy is if somebody says, we’re going to accrue - we will have to pay $100 in legal fees in the next year. My thought is go ahead and accrue that $100 right now. If we know, we are going to spend it then we need to accrue it and account for it. So there were a couple of lawsuits, a couple of matters of pending litigation that is just - that we fully accrued. We think we fully accrued for anything we might have to pay or settle or in any fashion thereof, if that makes sense now.

Yeah, that’s helpful. And what was the dollar amount in the quarter that was accrued towards that reserve?

For both was about $290,000.

Okay. And then, my last question is maybe if you could just give an update on growth in your newest markets, are you own track ahead or behind? And just kind of I’m approaching it from the thought point of when you guys might think about the next market?

Well, I guess, we’ve got a pretty long runway in the markets we’re in right now. And we think we’ve had some opportunities recently. And we decided to pass on a couple of opportunities just because we feel like we are pretty busy. We are getting great growth now in Nashville. This is our third year in Nashville. You tend to hit your striding in third market in a market. Mobile is hitting their stride. They are doing very well from that standpoint. And then, of course the newest markets are Atlanta, Charleston and Tampa Bay. And we think, typically they lose money in the first year, they breakeven the second year and they make some money. They don’t make 2% return on asset in the third year, but they will make a little bit of money, 0.5% ROA the third quarter is sort of what our model is. And so we are completely on track and probably ahead of - slightly ahead of budget in most of those markets and we feel good about where we are. But we think those - these new markets we’ve entered are big markets. It is not easy, I mean, if it was easy everybody would do it. I’m not suggesting it’s easy to go to some of these large markets. It’s a lot of different than going to - we opened in Dothan, Alabama, and pretty much in a couple of months everybody knows who we are. And that’s not same in Tampa Bay, Florida, so certainly it’s longer runway to be successful in a bigger market.

So in a couple of prior conference calls, you’ve suggested that you are not - you’d like to continue to invest and grow in the markets that you are in. You’re not really aggressively looking to enter a new market this year. Is that still a fair characterization or are you guys actively looking into new markets?

I think it is, Wally. We are not dying to enter a new market this year. I mean, we certainly would, but we wouldn’t rule that out, but we are not dying to, that is a fair way to put it.

Okay. Okay, thanks, Tom. I appreciate it. That’s all I have.

Thank you, Wally.

Thank you.

[Operator Instructions] As there are no additional questions, this concludes our question-and-answer session and the conference call. Thank you for attending today’s presentation. You may now disconnect.